Delisting A Stock Isn't A Death Knell

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.

Knowles stressed that S&K did not "go private."

"We intend to remain a public company" and will continue to issue regular financial reports, he said last Thursday. That day, S&K reported that its first-quarter sales grew 9 percent, to $55.6 million, and profit jumped 40 percent, to $2.5 million from $1.8 million in the comparable period a year earlier.

A company whose stock has been delisted generally can't raise capital by selling more shares, but Knowles said that should not be a problem because "we have the option to look at debt." At today's interest rates, he noted, businesses can borrow money for considerably less than the return that investors expect to earn on the stock of a small company.

Under federal securities laws, companies that have fewer than 300 shareholders do not have to register with the SEC or have their stock listed on an exchange. S&K met that standard. Insiders own about one-third of its shares.

When Industrial Bank decided to delist last year, it had to buy back the shares of numerous small investors, many of whom owned only a handful, to get below the 300-investor threshold.

Some Industrial Bank investors were rankled by the decision. Knowles said S&K sought to avoid any backlash by talking to investors in advance, which is probably why the market did not react much.

"Our shareholders are very sophisticated," he said. "They understand what it takes to comply [with Sarbanes-Oxley and other regulations] and they don't seem to have a problem'' with delisting. The company, in fact, warned shareholders that the price of the stock might be hurt by delisting, but so far the harm has been minimal.

S&K's stock was trading in the $17 to $17.50 range before the delisting was announced and closed unchanged Friday at $15.60, a loss of about 10 percent since the company's move.

On the other hand, the stock of Sherwood Brands took a major hit. The stock traded between $2.50 and $4 early this year, but after delisting plunged to $1 a share, where it has stayed.

"That's the consequence we didn't anticipate," acknowledges Amir Frydman, president of Sherwood and the son of company founder Uziel Frydman.

He said the candy company decided to delist "for the same reason anybody else is doing a delisting" -- the high cost of Sarbanes-Oxley. Like S&K, Sherwood will continue to issue financial reports to shareholders, Frydman said.

The Frydman family owns about 55 percent of Sherwood's stock, according to SEC filings. More important, Uziel Frydman holds 1 million shares of Class B stock, which have seven votes per share, compared with one for the company's regular stock. As a result, he alone has 70 percent of the votes in corporate elections. Add in shares owned by his son and a daughter, and Sherwood is pretty much a family business with a small number of outside investors.

Under those circumstances, there's no good reason for Sherwood to be a public company and -- based on past performance -- not much reason for investors to buy the stock.

As the company's own reports disclose, if you bought $100 worth of Sherwood shares back in July 1998, your investment had dwindled to $43 as of last summer. Your investment was down to about $20 after delisting.

On paper, the Frydman family's holdings also have lost much of their value, but they control the company and earn substantial paychecks, according to the company's most recent proxy statement.

Uziel Frydman made $473,900 in 2004 as chairman, Amir Frydman collected $408,607 as president and his mother, Ilana, was on the payroll as a "non-executive employee" making $162,000 a year.

Ilana Frydman also owned a company called Lana LLC that loaned Sherwood $2 million at 16.575 percent interest.

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