Delisting A Stock Isn't A Death Knell

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By Jerry Knight
Monday, May 23, 2005

Champagne corks pop to celebrate initial public offerings, when companies sell stock to the public for the first time, but there are no ceremonies to mark the other end of the corporate life cycle, when a company's stock is delisted.

Delisting doesn't call for a funeral. Delisted stocks usually don't die. Some companies go private by buying out all of their shareholders. Most others go the purgatory of the Pink Sheets, a nearly unregulated nethermarket for trading stocks of companies that aren't registered with the Securities and Exchange Commission and aren't listed on the Nasdaq Stock Market, the New York Stock Exchange or any other market.

Companies usually are delisted because they no longer qualify under stock market rules, and they typically exhaust every legal remedy to try to keep that from happening. But two local firms recently did what was once unthinkable: voluntarily deciding to delist their stock, drop off the exchange where the shares traded and end registration of their shares.

For shareholders of Sherwood Brands Inc., a Rockville candy company, delisting proved to be a disaster that wiped out 50 percent of their stock value overnight.

But delisting barely took a nick out of the stock of S&K Famous Brands Inc., a chain of moderately priced men's stores based in Richmond.

The radically different results of their delisting decisions make Sherwood and S&K case studies of a process that is becoming more common among smaller public companies.

Last year, two tiny local companies went this route -- Industrial Bank of Washington, a minority-owned bank whose stock, like that of many small banks, did not trade much, and MicroLog Corp., a Germantown software company whose revenue has dwindled to $5 million a year.

Sherwood and S&K are much bigger businesses. Sherwood took in $46 million last year, racking up a $4 million loss. S&K rang up $189 million in sales last year and made $3.1 million.

Executives of the companies say pretty much the same thing: The advantages of being a public company are outweighed by the cost of complying with increasingly complex regulations. In particular, they cite Sarbanes-Oxley, the federal law written after corporate accounting scandals that tightens oversight of corporate operations.

The Sarbanes-Oxley law has become a target of business executives who say it is regulatory overkill that costs American business billions of dollars a year in auditing and local fees. The measure's co-sponsor, Maryland's Democratic Sen. Paul S. Sarbanes, says the measure addresses serious abuses and it is the lawyers and accountants who have gone overboard.

Whoever is at fault, the costs are real.

"We know at a minimum we'll be saving $300,000 annually" by delisting, said S&K's chief financial officer, Robert E. Knowles. "We had been falling into a group of companies that saw a substantial portion of their bottom line going to complying with Sarbanes-Oxley," he said. That $300,000 represents roughly 10 percent of S&K's profit last year.


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© 2005 The Washington Post Company

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