Penny Stocks Face NASDAQ Delisting : Trading: Some local companies might not meet criteria scheduled to be implemented next year, including a minimum share price of $1.
Dan Pasquini, president of tiny Agoura Hills-based Fortune Petroleum Corp., is worried. Not only has Fortune’s stock been trading at a mere 62 cents a share recently, compared with a high of about $3 a share in early 1989, but Pasquini must also face the possibility of Fortune’s stock being dropped from the NASDAQ trading network.
That’s because the National Assn. of Securities Dealers Automated Quotations system, or NASDAQ, a computerized system that provides brokers and dealers with price quotations for securities traded on the over-the-counter stock market, has proposed tough new financial requirements that will apply to about 40% of the 4,500 stocks in its system.
A handful of San Fernando Valley-area companies now trading on NASDAQ might not meet the proposed criteria, which are scheduled to be implemented July 1, 1991, and include a minimum stock price of $1 a share.
The approximately 1,900 stocks that will be forced to comply with the new requirements, or face delisting, are generally smaller companies that are considered the lower tier of the entire NASDAQ system. The other 2,600 stocks that trade on NASDAQ are called National Market System stocks and are already subject to much stiffer requirements than the other NASDAQ stocks. There are no rule changes proposed for National Market System stocks.
The latest requirements are an attempt by NASDAQ to give the stocks trading on its network a better image by flushing out “penny stocks”--so-called because they trade for less than $1 a share. The proposals are under review by the Securities and Exchange Commission, which must give the go-ahead to any changes in stock-listing rules.
Those stocks removed from NASDAQ would be relegated to less visible regional stock exchanges, or the obscure world of thinly traded over-the-counter stocks called the “pink sheets.” That would make it tougher for investors to trade in the stocks because prices on pink-sheet stocks have only recently begun to be computerized, newspapers don’t publish their prices, analysts generally don’t follow these stocks and few companies make markets in them. A market maker is a securities dealer who is registered with the National Assn. of Securities Dealers and stands ready to buy blocks of a particular stock at publicly quoted prices.
So if any local companies are dropped from NASDAQ trading, it would probably be harder for their stock prices to recover. If their stock prices remain low, the option of selling more stock to raise money for corporate expansion, acquisitions or even just to continue operating the company would be virtually closed to them.
A crucial requirement for most companies involves maintaining a stock price of at least $1 per share. NASDAQ would put a company on notice if its per-share price falls below $1 for 10 consecutive days. The company would be given a grace period of 90 days for its stock to bounce back to $1.
NASDAQ, however, loosened the proposed rule changes last week by specifying that stocks under $1 would be allowed to remain on NASDAQ if the companies have a net worth (roughly equal to assets minus debt) of at least $2 million, and if the market value of all shares totals $1 million or more.
But that exception to the $1 stock requirement still would not be enough to keep some companies from falling off NASDAQ. Fortune Petroleum, for instance, doesn’t meet either the net worth or the market value test.
If a stock meets the $1 benchmark, the company still must meet other requirements, including a total asset value of at least $2 million, compared with the current $750,000; net worth of $1 million, compared with a $375,000 minimum under current rules.
Another change is that the market value of the shares in public hands must total at least $200,000 (there is no current minimum market value requirement).
If the new rules are approved, it would also be tougher for companies to get on NASDAQ. To qualify, companies would need a stock price of at least $3 a share, $4 million in assets, a net worth of $2 million, a market value of the shares owned by the public of $1 million and two market makers. The new entry rules would take effect immediately after SEC approval.
A few local concerns, such as Perceptronics Inc., a Woodland Hills maker of computer trainers and simulators for the military, are near the $1-per-share cutoff for being removed from NASDAQ trading. Perceptronics stock is now trading at about $1.875 a share.
But Gershon Weltman, Perceptronics’ chairman, said he hasn’t lost any sleep because of the new rules. “I haven’t given any extra thought to it,” Weltman said. “My focus is on running the company and improving profits.”
One thing he might worry about, though, is that some investors are thinking of selling stocks that might not qualify for NASDAQ listing. Boniface Zaino, a portfolio manager at Trust Co. of the West, said he recommends that investors sell stocks that might be delisted “unless you’re very confident that the prospects of the company are about to improve.”
That’s what concerns Jerry Jahn, executive vice president of SFE Technologies, a San Fernando electronics company that has foundered since losing its biggest customer in 1985 and has been further hurt by foreign competition. SFE’s shares trade at a paltry 22 cents each. “The thing I don’t like is that if sometime . . . next year we have healed our company, it will be much more difficult to get back on” NASDAQ, Jahn said.
The National Assn. of Securities Dealers says it is making an effort to keep removed stocks from falling into a nether world of non-trading by creating an “OTC Electronic Bulletin Board.” This electronic screen, which debuted in June, lists pink-sheet stocks not eligible for NASDAQ, giving brokers access to up-to-the-minute price information.
But the potential damage goes beyond the availability of this information to brokers and investors, said Robert Flaherty, editor of OTC Review magazine. “The image of these stocks is they aren’t good enough for NASDAQ,” he said, adding that many of the companies “are probably smaller than some of the restaurants you eat in and they are weak companies.”
Some executives, such as Martin Greenwald, chairman of Image Entertainment Inc. of Chatsworth, hope their company’s stock price will rise past $1 a share by year-end simply because investors will place more value in the company. Although Image’s stock trades at about 80 cents a share and the company has yet to report an annual profit, its sales of laser video disks have been growing rapidly.
“But that doesn’t make me any less crazed” about the new listing rules, Greenwald said. He has considered a reverse stock split if Image’s stock fails to hit $1 a share. A reverse split would boost the per-share price while reducing the number of shares outstanding.
Such strategies, however, can backfire. Common wisdom in the stock market says reverse stock splits hurt more than help because prices tend to fall back to post-split levels anyway--and with fewer shares outstanding, trading is further inhibited.
Lenny Smith, chairman of American Pacific Mint Inc., a Woodland Hills precious metals trading company with an erratic earnings history, sees another option. “We might choose to go private,” he said, meaning he and his executives might buy back the company’s shares from the public. With American Pacific’s thinly traded stock hovering at about 30 cents a share, “there have been very few benefits to this company from being public,” he said.
Pasquini at Fortune Petroleum said he’s looking for a merger partner in the oil and gas business because the combined concerns might have enough financial muscle to escape delisting. Even if Fortune ends up being acquired by a larger company, he said, that would be better than being delisted from NASDAQ.
PROPOSED STOCK LISTING REQUIREMENTS
The National Association of Securities Dealers has proposed more stringent financial requirements for companies that want to be listed on its important computerized stock price network. Listed below are some of the new proposals, which if approved by the Securities and Exchange Commission, will take effect next year.
To Keep its Listing on NASDAQ
Current Proposed Minimum Minimum Stock Price* None $1 a share Total Corporate Assets $750,000 $2 million Corporate Net Worth** $375,000 $1 million Public Float of Stock 100,000 shares 100,000 shares Total Market Value of Stock None $200,000 Number Shareholders 300 300
For a Company to Gain Entry on NASDAQ
Current Proposed Minimum Minimum Stock Price None $3 a share Total Corporate Assets $2 million $4 million Corporate Net Worth** $1 million $2 million Public Float of Stock 100,000 shares 100,000 shares Total Market Value of Stock None $1 million
* If a stock falls below $1 for 10 consecutive trading days, it would have 90 days to get back to $1. Also, a stock under $1 would not be delisted if the company’s net worth is at least $2 million and the market value of its stock is $1 million. ** Roughly equal to assets minus debts
Source: NASDAQ
