NETZERO—NetZero Dip Below Dollar Puts Nasdaq Listing at Risk

Until last week, NetZero, a Westlake Village-based Internet service provider, was trading at less than a dollar per share. That went on for three weeks. The news was noted by many including company officials who have seen an increasingly aggressive Nasdaq purge dot-coms from its stock index for falling below the $1 per share mark. Officials from NetZero, reputed to be the first free ad-supported Internet service provider, would not comment on their stock price struggles, but some observers say the company’s performance is not unique among new media firms. Henry Blodget, an analyst with Merrill Lynch & Co., said the company’s woes are part of the tech sector’s general weakness that devastated Nasdaq last year. “It’s the overall tech market and the dwindling ad revenues that has the company scrambling to stay ahead,” Blodget said, noting that the company counts on ad sales for much of its revenue. With the seeming domino effect of dot-com firms going by the wayside last year, NetZero, like others, felt the brunt of investor nervousness, Blodget said. The company saw its stock price go from a 52-week high of $36 3/8 last February to $1.65 last Friday. NetZero’s net revenue figures remained flat through much of 2000, with costs increasing each quarter. Net revenue for the quarter ending Sept. 30 reached $16.5 million with expenses topping $21.3 million. Its available cash for the same period shrank to $132 million from $201 million in June. Along with news of some recent acquisitions, the company has stayed in the headlines with a December lawsuit against fellow free Internet service provider Juno Online Services, Inc., claiming the company violated NetZero’s patent for a floating advertisement window. Juno has counter-sued, claiming NetZero infringed on a patent of its own. Both suits are pending. While NetZero officials would not discuss their plans to bolster the stock price, company Chairman Mark Goldston said he is optimistic about the company’s direction and potential growth. “We have recently experienced phenomenal member growth as many of our competitors have closed their doors,” Goldston said, “and we remain committed to providing free Internet access to the vast majority of consumers who use the Internet recreationally and on a limited basis.” After one of Nasdaq’s most miserable years in a decade, the index is trying to return some of its mid-1990s luster by booting out once-high flying stocks that have hit the skids and landed in seeming penny stock hell. Pets.com, best known for its babbling sock puppet in television commercials, was among those facing delisting when it abruptly pulled the plug on its operation in November. Others companies that have seen hard times include E-stamp, which closed up shop late last year, and Quepasa.com, a web portal targeted to Latinos that chose to go out of business rather than be delisted after Nasdaq threatened to boot it off its index. In a move meant to bolster the company’s efforts, NetZero last week added Western International Media founder Dennis Holt to its board of directors. Holt replaces original NetZero investor and Idealab Chairman Bill Gross who left earlier this month. Goldston said Holt’s expertise in the telecommunications and new media fields will help the company move forward. Headed downhill NetZero’s stock price has been steadily heading south since June, hitting an all-time low last month when it dipped below $1 for the first time and remained there until Jan. 12. It closed that day at $1.13 after spending three weeks below the magic $1 mark. Under Nasdaq rules, there are two reasons why a company would be delisted: – A company’s stock price would fall below $1 for 30 consecutive days. Moreover, if a company’s stock price moves above the $1 mark after more than 30 straight days below that price, it must remain above a dollar for at least 10 straight days or off it goes. – Alternately, a company with a market cap of less than $50 million can be delisted if its stock falls below $5. Companies have a choice as to which criteria is more suitable. According to Nasdaq rules, companies must have a share price over $1, a minimum $4 million in tangible assets, and at least 750,000 publicly traded stock shares, with corporate officers or others owning more than 10 percent of the company’s stock. Companies must have at least 400 shareholders and two so-called market makers, or brokerage firms, trading in the company’s stock. Mark Gunderson, a spokesman for Nasdaq, said delisted companies may find themselves on the OTC Bulletin Board, generally not listed in most newspapers. Nasdaq is the only major stock market with a minimum stock price requirement. Tom Wyman, an analyst with J.P. Morgan Securities, said delisted companies lose much of their credibility, status and even analyst coverage. Many large brokerage firms refuse to provide financing for delisted companies. “It’s hard for a company to recover from that and they usually don’t,” he said. Delisting, however, is not immediate, but a rather long and protracted process that allows companies a chance to save themselves. Targeted companies are sent a so-called “deficiency notice,” giving them 90 days to comply with Nasdaq regulations. If after 90 days, a company fails to meet minimum requirements, a hearing process takes place that could run for another 90 days, giving the company up to six months where it can remain below $1, Gunderson said. To avoid delisting, companies in the past have done reverse stock splits, where the company asks shareholders to turn in their shares in return for fewer shares at a higher value, thus reducing the number of outstanding shares and boosting their individual value. “It’s a way for companies to get around these rules when they are not really changing the way they do business,” Wyman said. In September, for instance, Reston, Va.-based custom CD retailer MusicMaker underwent a 10-for-1 reverse stock split to boost its stock’s value, then around 50 cents a share. The plan worked and the struggling net firm avoided delisting but, earlier this month, its board of directors agreed to cease operations and liquidate its assets, citing a tough market. While NetZero’s stock price is back above $1, it is not out of the woods yet. “Anytime a stock price falls below $5, a red flag goes up,” Wyman said.