From: Linda (joelinda1@home.com)
Date: Tue Dec 12 2000 - 14:26:59 PST
[Adam, remember this one? An example of the very real difficulties
that several Nasdaq-listed companies currently face.
Linda]
http://interactive.wsj.com/articles/SB976572795488611390.htm
December 12, 2000
How Wavo's Example Shows Peril In Nasdaq Decline for Tech Stocks
By MYLENE MANGALINDAN
Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- The Nasdaq Stock Market's plunge has backed
some of its listed companies into a tough spot. For two executives
of Wavo Corp., that spot is a few feet from a cheery 18-foot
Christmas tree here in the lobby of the St. Regis Hotel.
Behind an ornate door just off the lobby are three Nasdaq officials,
whom the Wavo pair are waiting to meet for a hearing to determine
whether their company's stock will be booted off the Nasdaq
National Market. Wavo's offense: Its stock has traded too low, for
too long.
"You know that saying that life comes down to a few moments?" muses
one of the men, Michael Coffin, Wavo's chief executive. He breathes
in deeply, and then sighs. "Well, this is one of them."
It's a moment facing a lot of Nasdaq companies this holiday season.
Scores, including some onetime technology highfliers, now trade at
belowa dollar a share. If they stay that low for 30 consecutive
trading days, the companies are thrown into a murky process that
may lead to a delisting of their shares. So far this quarter,
Nasdaq has ousted 41 stocks for failure to maintain a minimum price,
compared with 15 in the entire first quarter, when technology stocks
were still booming. The electronic dealer market also drops companies
for failure to meet its other requirements, involving such things as
the independence of directors and minimum levels of capital and assets.
Last Wednesday, drkoop.com Inc. said it had received a delisting
warningletter from Nasdaq because its shares traded below $1
for 30 days. Other erstwhile Web stars on which the clock is ticking:
Webvan Group Inc., theglobe.com Inc., Mortgage.com Inc., Beyond.com.
In the last 30 days, 198 companies, on average, have traded below
$1 a share, according to Wilshire Associates. Of those stocks, 128
have traded below $1 for 30 days or more, the firm says.
Nasdaq delisting is not a death sentence. For one thing, companies
can regain their listing, as did Hybrid Networks Inc., a cable-modem
equipment maker. But delisted stocks usually slip into the financial
limbo of the OTC Bulletin Board, an electronic market operated
by Nasdaq's parent, the National Association of Securities
Dealers. Sometimes they tumble still lower to the so-called pink
sheets, where trading is even less active. Many investors won't go
near these stocks. Just the possibility of a Nasdaq delisting is
enough to spook many investors, bankers and potential business
partners, making it harder for a company to go about its daily
business.
Since June 27, the first day Wavo stock closed below $1, the Phoenix
digital media company has struggled intensely to head off this fate.
The delisting threat was so serious that the 40-year-old Mr. Coffin,
who became president in August, postponed his wedding plans to deal
with it. Seeking both to raise its stock price and convince Nasdaq
of its underlying financial strength and prospects, Wavo has reduced
its payroll repeatedly, sold off assets, narrowed its product focus
and taken a range of other steps.
Now, time is running short. This hotel meeting will determine whether
its efforts satisfy Nasdaq, or at least are close enough to win some
extra time. There is an air of mystery as to what happens behind
these doors. Nasdaq says that delisting isn't just a matter of where
the price is today. In a hearing, the Nasdaq officials want to
establish that the company has a viable business plan, with enough
financial resources in place that it won't collapse, and that it
trades actively enough so that the stock won't be vulnerable to
manipulation.
Mr. Coffin glances down at the faux gifts under the hotel Christmas
tree, wrapped in festive blue and gold ribbons. "So, are these
presents consolation prizes when they send you out?" he asks
gloomily.
"Hope it's a case of Scotch," responds Doug Reich, Wavo's general
counsel. The two stand silently staring at the presents.
A woman approaches. It's Katherine Roberson, a Nasdaq staff attorney,
who escorts the men toward the doors of the State Salon.
Wavo never flew as high as the likes of Webvan and theglobe.com, but
it was a promising start-up when it went public in October 1994. Its
version of XML, or extensible markup language, lets publishers
translate original content into digital form so it can be sent to the
Web, radio, television or satellite. Among its customers are Reuters
Holdings PLC, Chase Manhattan Corp. and Dow Jones & Co., publisher of
The Wall Street Journal and WSJ.com.
By early 1996, Wavo's stock was trading at 75% above the
initial-offering price of $11. And Wavo, despite having only about
$22 million of annual revenue and zero profits, began behaving like a
company that had arrived. In 1996, it spent $500,000 sponsoring a
race-car driver, two-time Indianapolis 500 winner Arie Luyendyk. In
1998, it took a luxury box at the America West arena so executives
could cheer the Phoenix Suns.
Wavo hit a rough patch in October 1998, when customer growth didn't
meet expectations, and its stock slid to below $3.50. But it
introduced a music retail Web site, hitched a ride on investors'
appetite for Internet stocks, and climbed back to above $8 by
March 9 of this year.
Then, trouble. Caught in the tech-stock downdraft that began right
after that, Wavo shares plummeted 65% in two months. At first, its
executives were confident it would rebound along with the
market. But as the stock approached $1 in May and June, they began
to worry. Mr. Reich and Chief Financial Officer Ken Swenson pulled
out the Nasdaq rulebook and began studying the delisting section.
On June 27, Wavo shares closed below $1 for the first time, at 91
cents. There was no message from Nasdaq, but executives knew
the clock had started running. Over the next 30 trading days, the
company scrambled to shore up its business. It moved to narrow its
technologies so it could focus on promoting and marketing one or
two products.
As the money guy, Mr. Swenson also had to come up with some financing
alternative. The company had tapped the public markets for private
stock financing four times already. He started polling Wavo's
technology partners to see if any would be interested in taking
some assets off Wavo's hands.
Other things started to go wrong. An employee exodus quickened as
stock options granted at much higher prices became worthless.
Mr. Reich got rid of a display of Wavo's stock price in the corner
of his personal computer; he couldn't stand to see it drop. "It
was like a heavy finger pressing down on the 'sell' button," he says.
"As we watched our price go down, we kept thinking when it plateaued
out that we'd reach the bottom. But it never really reached the
bottom."
On Aug. 8, exactly 30 trading days after the shares first slipped
below $1, Mr. Reich stepped out of his office to find a fax that had
arrived. It was atwo-page form letter from Nasdaq officials, formally
warning the company that it had failed to comply with the market's
trading requirements. "We didn't even have the grace of an overnight
delivery," Mr. Reich says grimly. "It came a day before we were
expecting it."
Wavo's stock that day closed at 62.5 cents.
The letter said Wavo would be given 90 days to get its stock price up
above $1 for 10 straight trading days. "However, if the Company is
unable to demonstrate compliance with the Rule on or before
Nov. 6, 2000," the letter declared, "its common stock will be
delisted at the opening of business on Nov. 8, 2000."
Meanwhile, Wavo had been busy interviewing candidates for president.
Founder David Deeds, who held the CEO title, had allowed a string of
presidents to run the company, the latest of whom left for family
reasons. Wavo chose Mr. Coffin, who had worked at PG&E Corp.'s
former energy-services unit and at a business-to-business
Internet firm, and who had a reputation for turning around troubled
businesses. He later became chief executive as well.
The task before him was to get the stock price above $1 for a
sustained period. Wavo complied with another key Nasdaq
requirement: having $4 million in net tangible assets. While the
price and asset tests are the ones most likely to trip up companies,
say securities lawyers, Nasdaq also requires companies to show they
have 750,000 shares not held by insiders; a market value of at least
$5 million less any shares held by insiders; 400 holders of at least
100 shares each; and two brokerage firms that make a market in the
stock. Wavo's market cap is above $6 million. Investment institutions
own about 5% of its stock.
Nasdaq tightened its listing requirements in 1997 to gain more
credibility, and many weaker companies left in the two years that
followed. The New York Stock Exchange also considers delisting
if a company's stock price closes below $1 a share for 30
consecutive trading days. But some of the NYSE's requirements are
stiffer, such as market capitalization of $50 million or an average
market cap of $15 million over 30 days.
Wavo was burning through $1.5 million a month. It was down to less
than $2 million in cash from its last financing in 1999. When the
company had 39 trading days left -- out of the original 90 -- to
get its stock price up, Mr. Coffin began slashing costs and dumping
assets he didn't consider essential to survival. He sold
satellite-delivery assets for $14.5 million in September, eliminating
40 employees. A month later, he closed the unprofitable music site
and fired its 19 employees.
The day the music site closed, the stock closed at 59.4 cents.
With a delisting threatened, little indignities crept into the
company's daily business dealings and cast a pall over Wavo. One of
its marketing consultants raised his rates by one-third, a move Mr.
Coffin suspects was because the delisting issue raised a question of
whether Wavo would be able to pay its bills later. A computer vendor
retracted its bulk discount, and again, Mr. Coffin assumes the
delisting risk was behind the move. "Instead of dealing with A-tier
companies, you end up dealing with vultures," he says. "You're just
not as important to them because they don't want to be associated
with you. When you're down, people will step on you."
Meanwhile, Mr. Coffin began to suspect that short-sellers were
targeting Wavo's stock. He tried to smoke out some investors he
suspected of short-selling but failed.
On Oct. 23, the stock fell to 41 cents.
It was time for a bold step. With two weeks left before automatic
delisting, Wavo called its Nasdaq regional representative for
guidance. Mr. Coffin said Wavo had decided to do a reverse
1-for-8 stock split to pump the shares above $1. The representative
advised against it. Nasdaq considers reverse splits an artificial
means of inflating a stock, he told Mr. Coffin. Moreover, companies
that try them often simply watch their prices slide back down to the
old level.
Mr. Coffin dropped the idea. His only option left was to request a
Nasdaq hearing, which would buy another four weeks. A hearing would
allow the company to appeal for an even longer extension, as
long as 90 more days, to comply with listing requirements. At a
hearing, executives might confidentially describe dealings with
an investment bank or efforts to sell the company. Most companies
in Wavo's position opt for hearings, which are kept private. Nasdaq
doesn't disclose which companies are involved in the delisting process,
a spokesman says, because "if word gets out that they're in that
process, that could devastate their share prices still further."
So on Halloween, Wavo requested a panel hearing, postponing the
Nov. 8 automatic delisting. The hearing would be Nov. 30.
Wavo executives spent November compiling a presentation and
trying to improve their business.
But setbacks continued. An investment from a prospective technology
partner fizzled. Then, a week before the hearing, Wavo's auditors
resigned.
The day before Thanksgiving, Mr. Coffin received a faxed copy of a
memo from Nasdaq's listing agent, who monitors companies' compliance
with Nasdaq requirements. She had summarized Wavo's business plan for
the hearing panelists. Mr. Coffin's eye was drawn to the Nasdaq staff
recommendation at the bottom: "Staff does not believe that the Company
provided a definitive plan evidencing its ability to sustain compliance
over an extended period of time with the continued listing
requirements."
The day before the panel hearing, Wavo dismissed 28 more people,
including the entire marketing staff. Mr. Coffin had just enough time
to lay off his assistant, after asking her to make a change in his
flight schedule. Then he rushed to the airport for his Washington
rendezvous with Nasdaq.
Hearing day. Mr. Coffin and Mr. Reich follow Ms. Roberson, the Nasdaq
lawyer, into the hotel conference room, where two Nasdaq officials are
set to grill them on the company's compliance actions and the
executives will lay out their plan, including such moves as selling
more assets or even a controlling stake. The Nov. 30 meeting is
closed to others. Thirty-seven minutes later, Ms. Roberson pushes
open the doors, signaling the end of the hearing.
Grabbing a taxi for the flight back to Arizona, Messrs. Coffin and
Reich begin to replay the meeting out loud. "Did you see when they
asked if there were any changes to the record and we pointed out the
financing?" Mr. Coffin says. "That was a three-point field goal."
"Did you see one of them raise his eyebrows?" asks Mr. Reich.
"Yeah," says Mr. Coffin, "the body language was favorable." But he
also recalls Ms. Roberson saying, "While the panel is sympathetic,
it has a higher priority of maintaining the integrity of
Nasdaq, not only for existing shareholders but future purchasers
of stock."
The Nasdaq lawyer said the company would be told within two weeks
whether it gets an extension to raise its stock price, adding that
if they are denied, they can appeal and request another hearing.
Back in Phoenix, and optimistic about the outcome, Mr. Coffin makes
plans for his postponed wedding. It will be a small ceremony on the
beach in La Jolla, Calif., on Dec. 7.
On Dec. 6, he is in the office, busily wrapping up business in
preparation for his nuptials. His packed suitcases are with him.
His ride to the airport is supposed to arrive in 15 minutes. Then
the telephone rings. It is Nasdaq's Katherine Roberson.
"Katie, is this the phone call I've been dreading?" Mr. Coffin asks.
"Yes, it is," she says. Wavo will be delisted at the start of business
the next day. A fax confirms her news. "The Panel was of the
opinion," it says, "that the Company failed to present a definitive
plan which will enable it to evidence compliance with all requirements
for continued listing on the Nasdaq National Market within a
reasonable period of time and to sustain compliance with those
requirements over the long term period."
Mr. Coffin sits still for a moment, speechless. Then, moving quickly,
he assembles his management team and floats the idea of an appeal.
Wavo's lawyers advise that its chances would be slim, and the idea is
dropped.
Calling the airline to postpone his flight, he sits down at the
computer to compose a news release announcing the delisting of
Wavo's stock. Then he types a brief message to the company's
remaining employees.
"I decided that this was not the hill to die on," he says. "If I
had more time and more money, I'd fight the decision on behalf of
shareholders. Now, I need to conserve my ammo for the battles
I'm sure I can win."
Mr. Coffin heads into the founder's spacious corner office, yanks
two Corona beers out of the refrigerator, and slumps on
the leather couch for a few minutes of reflection. Then he heads to
the airport and buys a first-class ticket to San Diego and his
wedding.
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