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 firstname.lastname@example.org.