Slumping Firms Face Nasdaq Delisting.

Being Dropped from Exchange Could Restrict Tech Companies' Access to Capital

Several local public companies -- all in the tech sector -- have been notified by the Nasdaq National Market that their stocks are about to be delisted for falling below the $1-per-share minimum requirement.

Such a move is widely viewed by analysts as a death knell, because the companies can lose access to public capital and then would have a much harder time raising needed funds privately.

Nonetheless, Nasdaq has started the clock ticking for J2 Global Communications Inc., Merisel Inc., ARTISTdirect Inc. and DrKoop.com Inc., all of which have seen their stocks trading for less than $1 a share for more than 30 days.

Other L.A.-based firms at risk of being delisted include Advanced Aerodynamics and Structures Inc., Netcurrents Inc., eToys Inc. and USSearch.com Inc.

Companies are not legally required to publicly disclose having received a delisting warning letter, and none of them would confirm receiving the warning, and Nasdaq doesn't let the public know when the notices go out.

But an analysis of various L.A. companies' stock performance and interviews with executives from poor-performing companies revealed the wave of Nasdaq notifications.

The vast majority of the companies that were notified or are in danger of being notified are tied to the Internet and have seen their stock prices plummet since the tech wreckage began piling up last spring. If or when the letter arrives, delisting could be the last gasp of air from their deflating Internet bubble.

And while analysts agree that delisting isn't the end, it is a cold brush with the Grim Reaper.

"For the most part, they're going to hell," said analyst Bryant Riley, president of investment research firm B. Riley & Co. "You can't raise money as easily. It's hard to get investors to buy stock that isn't listed. Even the banks get scared. Across the board, the perception is negative."

According to Riley, the bylaws of most mutual funds and hedge funds do not permit ownership of stocks not listed on Nasdaq or another of the major exchanges.

"It's a tough row to hoe for these companies," said Pacific Growth Equities analyst Mark Mulcahy. "If they get delisted, they're going to lose any and all Wall Street interest because they basically drop from the radar."

Nasdaq blows the whistle when companies fail to meet two sets of complex criteria, the most prominent of which is the $1-per-share minimum rule. If a company's share price remains below $1 for 30 consecutive business days, Nasdaq typically notifies the company that it is not in compliance and risks being delisted.

A warning letter is sent and the company is delisted 90 days later, unless it can elevate its share price to above $1 for 10 consecutive trading days.

Nasdaq spokeswoman Judith Inosanto said that while the Nasdaq is "the market that encourages high growth and entrepreneurship," it is also "primarily focused on investor protection and ensuring that standards are high."

According to one study, 257 Nasdaq-listed companies, or more than 5 percent of those listed on Nasdaq, currently do not meet the criteria and are at risk of being delisted.

Delisting is not, however, just a new-millennium phenomenon. Over the last decade, the Nasdaq has lost, on average, nearly 13 percent of its listed companies each year. The tally, however, also includes companies that have been merged or bought.

For local companies like J2 Global Communications, the warning letter is a call to arms. The company, a provider of Internet-based messaging and communications services, is undertaking the most popular, quick-fix method to dodge delisting: a reverse stock split.

"I want to be on the offensive, because we have a business model that works and we're successfully transitioning from a startup to a business," said Scott Turicchi, J2's executive vice president of corporate development. "We considered several options, but the most prudent is the reverse stock split. Our No. 1 issue in making that decision was our employees and their morale."

The terms of the reverse split have yet to be approved by J2 shareholders. Shares of J2 as of last week were trading at around 75 cents apiece, down from a 52-week high of $6.75 last March.

J2 reported a net loss of $5.9 million (16 cents per share) for the third quarter ended Sept. 30, compared to a loss of $3.8 million (14 cents per share) in the like year-earlier quarter. Third-quarter revenues were $3.3 million vs. $2 million in the third quarter of 1999.

Merisel, an El Segundo-based distributor of computer hardware and software to resellers, is also taking the reverse stock split approach. The company has decided to undertake a 1-for-10 reverse split in which shareholders will receive one share of newly issued common stock for each 10 shares of pre-existing common stock.

Merisel's stock was hovering at around 25 cents a share last week, down from a 52-week high of $3.69 in March.

The company reported a net loss of $57.5 million (72 cents per share) for the third quarter ended Sept. 30, compared to a loss of $17.6 million (22 cents per share) in the like year-earlier quarter. Third-quarter revenues were $399.5 million vs. $1.1 billion in the third quarter of 1999.

Merisel is also altering its business model to reach profitability, according to spokesman Timothy Jensen. The company let 200 employees go in December and will begin focusing on software licensing while winding down its unprofitable distribution business.

ARTISTdirect, the L.A.-based operator of more than 125 music-related Web sites, acknowledged that it has received a warning letter from Nasdaq, but officials declined to comment. Instead, the company issued a statement saying only that it "intends to take proactive steps to remain listed on Nasdaq."

Shares of ARTISTdirect were trading at around 75 cents apiece last week. The company's share price has fallen 90 percent since its March 28, 2000 IPO, when it debuted at $12 per share.

ARTISTdirect reported a net loss of $17.1 million (45 cents per share) for the third quarter ended Sept. 30, compared with a loss of $26 million ($1.28 per share) in the like year-earlier quarter. Third-quarter revenues were $5.6 million vs. $2.75 million in the third quarter of 1999.

To fight its delisting, DrKoop CEO Richard Rosenblatt proposed a reverse stock split, but that proposal was shot down by the company's board. Now, Rosenblatt said, the Santa Monica health care Web site is exploring licensing its content as well as several offline opportunities, which he hopes will lift the share price.

Last week, DrKoop stock was trading at around 45 cents a share, down from a 52-week high of $17.12 last February.

DrKoop reported a net loss of $57.9 million ($1.60 per share) for the third quarter ended Sept. 30, down from a loss of $20.6 million (68 cents per share) in the like year-earlier quarter. Third-quarter revenues were $2.1 million vs. $2.9 million in the third quarter of 1999.

Re-listing is difficult

Other options are available to the warned.

The companies can join the OTC Bulletin Board, an exchange set up by the National Association of Securities Dealers, where less-than-a-buck stocks abound. They can also turn to the so-called Pink Sheets, where share prices are quoted on printed, pink sheets and distributed among certain Wall Street firms.

Some companies can try to make it on their own as privately held concerns. Over time, they can become eligible to re-apply for a Nasdaq listing. But it's rare for companies to regain that trust once they've fallen off the radar, according to analysts.

Another strategy is for companies to buy back shares on the open market, which can shore up the price. Of course, to make that work, companies must have plenty of cash available.

While the Nasdaq's delisting warning letters are kept private, once the ax finally falls, stock delistings are published on the Nasdaq Web site. Also, companies receiving delisting notifications are required within seven days to issue a press release explaining the reasons for the delisting.

"But there's usually no way back from delisting," Riley said.

When asked if there were bargains to be found in the cadre of potential delistees, Riley was not bullish.

"We don't play in that space," he said. "There is a possible bargain there. Maybe they don't have a problem with their balance sheet and will make a comeback. But the majority of companies are there because they're in a lot of trouble."

                              Bottom Dwellers
                        Some local Nasdaq companies
                    that are at risk of being delisted.
                         Jan. 31   IPO    %
Company                   Close   Price Change
NetCurrents Inc.          $0.41  $32.00 -98.7%
EToys Inc.                 0.31   20.00 -98.5
Merisel Inc.               0.22    5.00 -95.6
Dr. Koop.com Inc.          0.47    9.00 -94.8
ARTISTDirect Inc.          0.70   12.00 -94.2
Advanced Aerodynamics      0.34    5.00 -93.2
J2 Global Communications
Inc.                       0.78    9.50 -91.8
US Search.com Inc.         0.88    9.00 -90.2
Source: Business Journal Research