More Struggling Companies Slipping Off Nasdaq’s List


For a troubled small company, it can nail the coffin shut. It’s called a delisting--meaning the company’s stock is removed from the market it trades on--and it’s a growing risk for an increasing number of small companies.

Tougher listing rules adopted this year by the Nasdaq Stock Market, the home of most smaller publicly traded companies, and the broad market’s plunge since spring have led to a record number of Nasdaq delistings.

Pushed off the major Nasdaq market, a small stock can quickly become almost invisible to most investors. That is why resentment among delisted firms--many of them young California companies--runs high, particularly over Nasdaq’s strict new listing standards.

Nasdaq officials, however, say the new requirements are making the market safer for investors by removing the highest-risk shares from the field.


This year’s Nasdaq delisting tally has already passed the previous record of 719 set in 1988, according to preliminary data from the National Assn. of Securities Dealers, which operates the electronic Nasdaq market. Last year’s tally was the second-highest since 1988, with 717 delistings.

Through September, 638 companies were delisted from Nasdaq, according to NASD data. And during October, 97 more companies were delisted, according to Times research and data from the NASD’s Web site (, bringing the estimated year-to-date total to 735.

“The listing standards in place today go right at the heart of investor protection,” said Patrick Campbell, Nasdaq’s chief operating officer. “It was very important to us to increase the standards to maximize the integrity of the Nasdaq market, given its place in the world’s financial system. Nasdaq continues to attract and retain very high-quality companies.”

Under the new requirements, a small company can be delisted if its stock drops below $1 for more than 30 days, it has a market capitalization of less than $5 million or it has capital reserves of less than $4 million. Many firms that are delisted fall into at least two of these categories.

California firms delisted in recent months include Vyrex Corp., a La Jolla-based biopharmaceutical firm; Showscan Entertainment Inc., a Culver City entertainment media firm; Hypermedia Communications Inc., a San Mateo-based publisher of a news magazine dedicated to multimedia technology; Thinking Tools Inc. of San Jose, a year-2000 software specialist; and Marina del Rey-based software firm Quarterdeck Corp.

Last week, troubled Grand Havana Enterprises Inc., a Los Angeles-based operator of private cigar clubs in Beverly Hills, New York and Washington, was delisted.

Like most stocks pushed off the Nasdaq National Market or Nasdaq Small-Cap Market, Grand Havana now trades on the OTC Bulletin Board. Although the Bulletin Board is an electronic marketplace, it is essentially unregulated. Most companies that trade there have little analyst coverage.

That has given the Bulletin Board a shaky reputation as the home of tiny stocks many brokers and investors won’t touch.


“Obviously we are very disappointed that Nasdaq did not react favorably to our request for additional time to implement a plan to achieve compliance,” said Harry Shuster, Grand Havana president.

Grand Havana failed to meet the minimum bid and market value requirements set by the NASD. The company’s stock, which trades under the symbol PUFF, has stayed below $1 a share all year and was quoted at 6.25 cents on Friday.

The company was known as United Restaurants until 1997, when it changed its name and focus to jump on the cigar craze just as it was peaking, analysts said.

And it didn’t help that in May, securities regulators charged Biltmore Securities and two top executives of the Fort Lauderdale, Fla., brokerage with fraudulently selling United Restaurants stock warrants that netted them $2.1 million in profit. The NASD charged that the executives failed to disclose they were selling their own warrants even as they were recommending that their customers buy them. A lawyer for the men said they denied the allegations and intend to fight them. Biltmore took United Restaurants public in 1994.


At Vyrex, which specializes in drugs to treat diseases associated with aging, executives called the firm’s Nasdaq delisting on Oct. 22 “tragic.” Vyrex, which went public at $6.50 a share in 1996, plunged below $1 this year. The company also didn’t meet market cap minimums, executives said.

“I feel it was unfair,” said Sheldon Hendler, company founder and chairman. He believes his company should be given a break. “We’re trying to do some wonderful science here,” he said.

Shares of Showscan, which specializes in movie-like attractions shown in high-tech theaters, dropped below $1 in March and have stayed there all year, with the company’s market cap now under the $5-million threshold.

W. Tucker Lemon, a general counsel for the firm until recently, said it was no surprise when Showscan got the NASD notification letter saying its stock price and market cap were too low.


Executives originally planned to fight the move at a Sept. 10 hearing but decided it was hopeless, and the stock was delisted Sept. 16.

“Ultimately, we didn’t even appear at the hearing, given that we were missing on several counts,” said Lemon, who still serves as a consultant to Showscan. “I hope we will be able to get back on Nasdaq one day. [Otherwise] It’s harder for your shareholders and investors to find out information about you.”

Under previous rules, it might have taken longer for Nasdaq to consider delisting a firm like Showscan, and a company could have pushed its case longer. But now the numbers game can be too tough.

While some companies complain, peers serving on review boards say the tighter rules protect investors.


Two Southern Californians recently agreed to serve as business representatives for the NASD, which puts together panels to review each delisting case and make delisting decisions. Former Ernst & Young partner Samuel P. Bell, head of Los Angeles Business Advisors, a group of chief executives from local companies, began attending delisting hearings six months ago.

“By raising the bar a bit, the NASD has increased the number of companies they are looking at,” Bell said. “It’s very, very positive. There are some hard-luck stories, people caught in the process of getting financings or something. But the paramount concern is protecting the marketplace.”

William Simon, national managing partner with accounting giant KPMG Peat Marwick, also participates in the review hearings.

Fred Roberts, head of Los Angeles investment bank F.M. Roberts & Co. and a former chairman of the NASD, also serves on panels that determine whether a company will be delisted. “In general, this is good for investors--anything that raises the standards is good for them,” Roberts said.


The NASD adopted the minimum-share-price rule because “penny stocks,” or those under $5, can be particularly vulnerable to manipulation by unscrupulous traders and stock promoters.

When a company is not in compliance with Nasdaq’s standards, it is notified in a letter from the NASD, which many executives liken to getting an audit notice from the Internal Revenue Service.

If a company wants to challenge such an action, executives can request a hearing before regulators to explain how they plan to boost capital levels or share price.

One survival tactic is a “reverse split,” by which a company exchanges one new share for, say, each 10 shares outstanding. Although that can boost the stock price, it does not change the company’s fundamental financial picture. Hence, reverse splits are often seen as a red flag for investors.


Even after being hit with the body blow of a delisting, some executives are still hopeful they can make it back to Nasdaq eventually.

“We’re going to make it no matter what,” said Hendler of Vyrex, who believes his company will be traded on a major exchange one day. “This company started with three people and we’ll keep going with three people.”

Debora Vrana covers investment banking and the securities industry for The Times. She can be reached by e-mail at