January 15, 2001, 9:45 AM PST Evictions Loom for Nasdaq Stocks As their share prices fizzle, hundreds of new-economy companies suddenly find themselves at risk of being booted off the exchange. By Cory Johnson Of all the documents Jana Wilson fed into the paper shredder earlier this month, one was destroyed with particular satisfaction. It was a one-page fax from the Nasdaq stock exchange, dated Nov. 9, informing the Garden.com (GDEN) chief financial officer that her company would be delisted that is, removed from the Nasdaq. "When you're told you're being kicked off, it kind of bums you out," said Wilson, as she packed her office things into boxes, preparing for Garden.com's liquidation. "I was glad to get rid of that letter I really don't want it haunting me any further." But for an alarming array of new-economy companies, the nightmare is just beginning. An investigation by The Standard has revealed that hundreds of companies no longer meet the Nasdaq's basic requirements for listing on the exchange, falling into jeopardy of being delisted. At imminent risk: the survival of more than 5 percent of the stocks on the Nasdaq national market. Nasdaq officials decline to acknowledge which, or even how many, member companies have received such warnings. But The Standard asked FactSet Data Systems to compile a list of companies that no longer meet the Nasdaq's standards. The result is startling. According to FactSet, 257 companies have fallen below the Nasdaq's listing standards in the last six weeks alone. But this may be just the tip of the iceberg. Another study by San Francisco investment bank Epoch Partners reveals that 38 more companies are just days away from such a fate. The Nasdaq's listing standards can be arcane, and the secretive nature of the delisting process makes it even more confounding. Struggling companies are not automatically kicked off the exchange. But when Nasdaq-listed companies fail to meet two complicated sets of criteria, they can be delisted. This was far from the minds of new-economy companies as they rushed to file IPOs; in recent years, the Nasdaq welcomed these young firms with open arms. But as the stock market has melted down over the last few months, many of these companies have seen their share prices tumble. And as they burned through IPO cash, they had little left by way of tangible assets. The upshot: As the market fell, the stocks dipped below the Nasdaq's minimums. Of all the complicated requirements, the most damning is the $1 rule. "If a company's share price is below $1 for 30 consecutive business days," says Nasdaq spokesman Wayne Lee, "we will properly notify the company that it is not in compliance." That's the dreaded fax. Essentially, it's like getting kicked out of an apartment; first comes the eviction notice, then the actual eviction follows 90 trading days later, though that can be delayed by appeals and hearings. To stave off getting the boot, a company must hoist its stock price back above $1 and keep it there for 10 days. And it has only 90 days to meet this hurdle. This struggle happens behind closed doors: The Nasdaq doesn't let the public know when these notices go out, and the firms aren't terribly forthcoming either. The Standard called hundreds of companies; several acknowledged receiving a warning letter from Nasdaq. But the response of Tickets.com (TIXX) was more typical: "Discussions we may or may not have had with Nasdaq are between the two entities," said investor relations representative Randall Oliver. "There is no obligation to disclose the content of any discussions that may have taken place." Since these warnings can preclude an actual delisting, the Nasdaq insists the warnings are a private matter. "The Nasdaq is entrusted with the authority to maintain the quality and the public confidence in the market," says Lee. "Do you have any idea what would happen to public confidence if we were to print a list like this? Put yourself in the shoes of an investor in these stocks. This could do serious damage to these share prices." THE BIG BOARD PICTURE Although 5 percent is a substantial chunk of the Nasdaq, it's not unprecedented. Over the last decade, the Nasdaq has lost, on average, 12.7 percent of its listings each year. (The Nasdaq's official tally is not limited to delistings; it also includes companies that merge or are bought out.) In recent years, however, the Nasdaq has been able to replenish itself with a new crop of IPOs. But given the overwhelming weakness in the current market, observers say it's unlikely that the IPO market will come back in any significant way. "This was an overinvestment story," says John Skeen, director of portfolio strategy at Banc of America Securities. "There was too much money chasing the opportunity. There were too many IPOs. There were too many companies that shouldn't have been public, and now the market is taking care of that." But one place where the rout isn't on is the venerable New York Stock Exchange. Critics have long charged the NYSE with being stodgy, and its listing standards as too lofty. But the current market environment has the NYSE looking like a calm port in the storm. "The problem is that when these companies drop below the listing standard, sometimes they're just too far gone to pull up," says Thomas Rathjen, the New York Stock Exchange's western division VP and a former executive at the Nasdaq. "So yes, getting into the NYSE is a pretty significant hill to climb, but once you're up there, well, you're going to have fewer companies fail on the NYSE than you would on Nasdaq." Rathjen, whose job is to sell the NYSE to large technology companies, says that the rampant Nasdaq delisting is making his job a lot easier. "I think we are perceived by many as a safe haven during times of trouble," he adds. "So I think there is a higher level of receptivity to our story these days." NO WAY OUT So how can companies fight delisting? The reverse stock split is the most dramatic, immediate method to fight delisting. PlanetRx.com (PLRX) tried it. On Dec. 1, the company said it would convert every eight shares into one share. The effect should have increased the share price eightfold. But by the time shareholders approved the deal, the stock was trading at 13 cents. When the reverse split took effect, the stock instantly dropped from $1 to 53 cents. PlanetRx scheduled a hearing with the Nasdaq to appeal the delisting, but announced in mid-January that it wouldn't even show up for the hearing the company had run out of defenses and opted not to press its case. Companies that are kicked off the Nasdaq national market have a number of options, few of them good. According to analysts, the bylaws of most mutual funds and hedge funds do not permit ownership of stocks not listed on the major exchanges. So there are few buyers for delisted stocks. Those companies can join the OTC Bulletin Board, a lesser exchange set up by the National Association of Securities Dealers, where penny stocks abound. Failing that, they can even fall to the Pink Sheets, a thinly traded exchange where share prices are quoted on printed, pink sheets distributed among certain Wall Street firms. Many new-economy companies might try to make it on their own as privately held concerns. And over time, these damaged goods can reapply for a Nasdaq listing. But it's rare that such companies regain the trust of the Street. Another strategy to fight delisting is for a company to buy back its shares in the market, hoping to shore up the price. But that assumes companies have a pile of cash lying around. If that cash is spent buying back shares, it's not available to pay employees, develop new products, pay salespeople or keep the business running. Of course, many of these businesses are barely running as it is. The fact that the stocks are even worth pennies is a wonder to many on Wall Street. "The music has stopped, but people are still dancing," says J. Carlo Cannell, of the San Francisco-based Cannell Capital hedge fund. Cannell is an expert in small stocks, and expects few of these stocks to survive. "The fact that these things have any market cap at all is what's crazy they're in their grave, the earth has been thrown on top of them, and yet someone still thinks the stock is worth a few pennies. They won't for long." Elinor Abreu, Meredith Alexander, Lessley Anderson, Blair Clarkson, Jen Davis, Miguel Helft and Lisa Shuchman contributed to this story. __________________________________________________________________ BEHIND THE DATA In compiling this list, FactSet researchers applied the Nasdaq National Market's continued listing criteria. That standard (www.nasdaq.com/about/nnm1 .stm) flags companies that fail to meet one of two sets of criteria. The first: net tangible assets of $4 million; public float of 750,000; a $5 million market value of public float; a $1 bid price, 400 shareholders and two market makers. Failing that, a company must meet the second criteria; market capitalization greater than $50 million or total assets and revenue of $50 million each; public float over 1.1 million, market value of public float over $15 million, a $5 bid price, 400 shareholders and four market makers. If this logic seems tricky, you're right. For example, a stock price below $1, failing Standard One, can't possibly pass Standard Two, which requires a $5 stock price. "It might seem complicated,'' says FactSet's Michael Altmeier. "But once you plug in the Nasdaq's criteria, there's really not much to it." C.J. _______________________________________________ Crashlist website: http://website.lineone.net/~resource_base
