Firms Struggle to Rebound as Stock Prices Fall Toward $1
Philip Haines, chairman of the troubled computer components maker Digitext in Thousand Oaks, describes the feeling he gets when he thinks about the plunge in Digitext’s stock: “Terror.”
He has reason to feel terrified. Digitext’s stock has fallen from its all-time high of $15.38 in October, 1986, to less than it costs for a cup of coffee: It traded at 44 cents a share as of Friday’s close. That means investors, who once valued the company at about $39 million, now figure it’s worth less than $2.2 million.
What happens to a company when its stock plunges so much that it’s worth only pennies?
Several San Fernando Valley companies are finding out: along with Digitext, the San Fernando-based electronics components manufacturer SFE Technologies, and Tandon, a Moorpark computer company, are in bad shape financially and their shares have plummeted so far that they are worth only about a dollar or less.
Tandon’s Fall
Many tiny, relatively obscure companies start out as penny stocks. A company like Tandon, however, was an established concern with a history of sales and earnings when it went public in 1981.
But Tandon has fallen on hard times in recent years--it lost $11.9 million in the first six months of this year--and its stock has sunk too. As of Friday, Tandon’s stock closed at $1.06 per share.
These unintended penny stock companies face more problems because a low stock market valuation means it is harder for a firm to raise money for acquisitions, internal expansion and product development. It also means once-valuable employee stock options plans aren’t worth so much anymore.
The reason companies go public in the first place is to raise capital to keep their businesses growing. But now these companies are caught in a Catch-22. They need money to keep their businesses going and, they hope, stage a comeback. But because their shares aren’t worth much, the stock market is all but lost as a way to raise money, said Scott Stapf, director of investor education for the North American Securities Administrators Assn., a Washington-based trade group.
Interest Dwindles
And when a stock slumps, the investment community loses interest. Companies may no longer have any financial analysts touting their stocks. For example, Datametrics, Tandon and Trio-Tech have all lost analyst coverage. Lawrence Harris, an analyst at Bateman Eichler, Hill Richards in Los Angeles, said he stopped following Datametrics, a Chatsworth defense supplier, a year ago “because of an erosion of earnings.”
And if the stock price drops low enough, newspapers may stop running its daily prices. Trading falls to anemic levels.
Barry Hall, who became chairman and chief executive of the Camarillo electronics manufacturer California Amplifier in March, has experienced first hand all the problems of running a company with a tiny stock price. California Amplifier’s stock fell from a high of $17.38 a share in 1984 to $1.25 as of Friday’s close, the result of manufacturing and marketing problems with its microwave products.
“When your stock is worth a buck, you have to give away a lot more of the company to do those things. At that point, it isn’t worth it,” he said.
Hall has had to postpone plans to expand California Amplifier’s product line by acquiring the rights to products developed by others. “There are always opportunities,” he said, “but basically, we’ve had to ignore them.”
Expansion Delayed
Haines, who took control of Digitext in July, said the company has also had to forgo training facilities for its computer-aided instruction programs, as well as investing in new technologies. Digitext began shipping its only product, a computerized shorthand keyboard used by court reporters, in June. The company has been developing the product since 1983 but has suffered numerous production problems.
Haines said he’s discovered another unwelcome byproduct of the stock’s descent: “You wind up with a lot of mad shareholders.”
And you get mad bondholders, like Thomas Revy, managing director of Froley, Revy Investment Co. in Los Angeles, who bought bonds that are convertible into stock of Audiotronics, a North Hollywood firm that makes audiovisual products. He bought the bonds when Audiotronics’ stock was trading at $2.63 a share. It closed Friday at $1.38.
“If we could sell it, we’d sell it, take our loss and move on,” Revy said. “But there’s not much of a market for the bonds. We’re stuck like a fly on flypaper.”
Another nagging fear for executives of companies that have become penny stocks is that they will no longer qualify to be listed on one of the major exchanges or on the National Assn. of Securities Dealers’ (NASDAQ) over-the-counter market. A concern must maintain assets of $750,000 to continue to qualify for trading on NASDAQ. Digitext, with assets of less than $1.2 million as of June 30, is close to hitting that threshold.
If a company drops below the $750,000 mark, it could be relegated to the “pink sheets”--home to thousands of tiny companies with thinly traded shares over-the-counter that are virtually ignored by large investors and financial analysts. Investors can only learn their prices by calling brokers who deal in the stock.
Many struggling companies have brought in new management to try to turn things around. Camarillo-based computer software manufacturer Alpharel; Trio-Tech, a San Fernando electronics firm, as well as Audiotronics, California Amplifier, Datametrics, Digitext, SFE Technologies and Tandon have all had management changes recently.
Factor of Mismanagement
The connection is not lost on Frederick Moran, president of the Greenwich, Conn., investment firm Moran & Associates, which follows SFE Technologies. SFE “is a penny stock because it has been mismanaged,” Moran said.
The new managements have slashed costs and tried to raise money by various means. Digitext, for instance, cut its work force in half. California Amplifier and Terminal Data sold the buildings that house their businesses. SFE sold a division that makes quartz electronic devices and used the money to help keep it from defaulting on loans.
For these companies, the major task is to earn their way out of obscurity. “We have to show sustained earnings over a period of time and regain the faith of investors,” Hall said.
California Amplifier has shifted to a new market--making satellite dish components--and things have started to improve. The company reported income of $79,000 in the quarter that ended Aug. 31, following a string of losses.
Without the alternative of selling stock to the public to raise cash, these companies have turned to other means, such as selling stock in private transactions to investors.
Private Sales
California Amplifier, for example, last year made a private placement of 240,000 shares, or 6% of the company’s total, to a director of the company. Datametrics, which once traded at $5.25 a share but now sells for just $1.38, recently sold a large interest in the company to two venture capital firms.
Of course, there is also the possibility that any of these firms could be taken over and a few of them have indicated they might be looking for a buyer.
Audiotronics said recently it was in discussions with various parties about a possible business combination or acquisition. Tandon hired the investment firm Bear, Stearns & Co. to explore its financial options, a move that often signals a leveraged buyout or other type of acquisition.
But often the only interest a penny stock receives, Stapf said, is from investors who specialize in buying risky stocks. “There is a whole group of investors who refer to themselves as contrarians, who buy stock at rock-bottom prices with the assumption that there’s nowhere to go but up,” he said.
UNINTENDED PENNY STOCKS These struggling local companies once saw their stocks trading at higher prices, but lately the shares have been relegated to the ranks of “penny stocks.” The firms now face more problems because a low stock valuation means it is harder for them to raise money for expansion and new-product development.
All-Time High Current Company Industry Stock Price Stock Price* Alpharel Software $11.25 (6-4-87) $0.50 Audiotronics Audiovisual $11.50 (11-25-80) $0.69 Calif. Amplifier Electronics $17.38 (3-16-84) $1.25 Datametrics Electronics $5.25 (5-9-86) $1.38 Digitext Electronics $15.38 (10-28-86) $0.44 SFE Tech. Electronics $23.63 (6-24-83) $0.31 Tandon Computers $35.25 (7-21-83) $1.06 Terminal Data Electronics $16.50 (6-6-83) $1.94 Trio-Tech Electronics $17.75 (2-15-85) $0.94
* Closing price Oct. 6, 1989
