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Think lousy financial results, layoffs and business turmoil are bad? If you're a struggling, publicly-held competitive DSL provider, the worst may not yet be over.
Hard-pressed service providers whose stocks plummeted during the past year are flirting with prices so low that they could be de-listed by the Nasdaq market. That's a potential coup de grace for businesses already squeezed by the capital markets.
"Once you're removed from a Nasdaq national listing, it makes raising funds incredibly tough," says Merrill Lynch analyst Ken Hoexter.
Technology and telecom-related stocks heavily populate the 5,100 issues that trade on the Nasdaq, the National Association of Securities Dealers Automated Quotation system.
It includes such competitive DSL providers as NorthPoint Communications Group Inc., DSL.net Inc., Rhythms NetConnections Inc, Network Access Solutions Corp. and FirstWorld Communications Inc. that saw share prices plunge below $1 a share in 2000. Leading DLEC Covad Communications Inc. also saw its stock crater last year, but its shares stubbornly have remained above $1.
While recent rallies have pushed the shares of some higher, they still remain in dangerous territory. Shares of San Francisco-based NorthPoint were among the worst performing U.S. stocks last year, falling from a 52-week high of $34.75 in January to 25 cents on Dec. 27. It was the late November news that Verizon Communications was pulling the plug on its plan to invest $1.3 billion in NorthPoint that pushed the DSL company's share price below $1-the critical point for a Nasdaq listing. The stock finally nudged above $1 in mid-January.
Having its stock de-listed is probably the least of the worries at NorthPoint, which is struggling to survive, says analyst Charles Pluckhahn, who follows the DSL industry for Stephens Inc., a Little Rock-based investment bank. A NorthPoint attorney told a San Francisco state judge on Jan. 3 the company was at the "brink of disaster" and in a "life-or-death" situation unless it was allowed to pursue a lawsuit seeking more than $1 billion in damages from Verizon, according to news reports.
But to companies already fighting for their business lives, de-listing carries a loss of prestige in the investment community's eyes. It lumps the de-listed with highly speculative penny stocks.
"At that point, you're no longer dealing with investors. You're dealing with speculators," Hoexter says.
To remain listed on Nasdaq's national market, a company must have net tangible assets of $4 million and a minimum bid price of at least $1, or a price of $5 with no net tangible asset requirement. If a stock fails to trade at that level for 30 consecutive business days, Nasdaq's automatic tracking system notifies an analyst, who sends the company a deficiency letter. The company has 90 days to get its stock back in compliance for at least 10 days, says Mark Gunderson, spokesman for the stock market.
Rhythms and FirstWorld, both based in Colorado, Network Solutions of Herndon, Va., and New Haven, Conn.-based DSL.net all saw their stock prices sag below a dollar in late December. All have since risen above the benchmark, but continue to hover near the $1 level.
"Dsl.net has enough cash to limp along probably for another year," says Pluckhahn, who hasn't recommended buying the stock for some time.
Rhythms said on Dec. 22 that it was seeking additional funding, but its current cash position, combined with recent vendor equipment financing, should cover its operational needs through 2001.
A week later, Moody's Investors Service Inc., a credit rating company, downgraded $1.08 billion of Rhythms' debt. It says the DSL provider needs to raise more than $1 billion in new funding before it begins to generate positive cash flow, or EBITDA (earnings before taxes, depreciation and amortization.) Given the decline in investor sentiment for the DLEC sector, it may be difficult for Rhythms to access public funding markets, Moody's says.
There's also no indication that Rhythms' private equity partners, including Hicks Muse Tate and Furst, Microsoft Corp., WorldCom Inc. and Cisco Systems Inc., will provide additional money.
For companies facing de-listing, possible solutions include initiating a share buyback program or a reverse stock split. Either would reduce the number of shares outstanding and possibly boost the value of each.
But share price alone isn't the only criteria Nasdaq has for maintaining a listing. Other factors require staying in compliance with all corporate governance standards; timely filing of periodic reports to the Securities and Exchange Commission; having at least two companies making a market trading the stock, and a minimum of 400 shareholders owning at least 100 shares each. The market value of a company's float, or tradable shares outstanding, must remain above $1 million.
Nasdaq spells out details of its requirements for listing stocks on its national and small cap markets on its Web site, www.nasdaqnews.com.
Companies that receive a notice of proposed de-listing have seven days to issue a press release advising the public of the notice from Nasdaq. The company can request a hearing, either with oral arguments or in writing, to present its plan to achieve sustained, long-term compliance with all applicable criteria. The process of de-listing a stock can take up to seven months if the problem involves deficiencies in the bid price and market value of the public float.
A stock that is de-listed generally is eligible for trading over the counter or through the so-called pink sheets. But both carry significantly lower profiles and are less liquid markets than the larger Nasdaq markets.
And at this point, those are characteristics the DLECs just don't need.
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