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."