Sub-Dollar Stocks Get a Reprieve, but the Gallows Still Beckon

Finally, battered Internet companies got a break. But will the reprieve help them survive?

The Nasdaq recently said it would relax one of its delisting rules to help stabilize the market during the current economic uncertainty. Normally, the Nasdaq would begin the process of removing a stock if it had been trading for less than $1 for 30 consecutive trading days.

The decision to suspend this rule until Jan. 2 of next year offers some breathing room for 370 issues, including familiar Internet stocks like CMGI, Broadvision, Purchasepro.com, Drugstore.com, Barnesandnoble.com, Verticalnet and Looksmart.

In theory, the extension creates an opportunity for the stocks of these companies to rise above a dollar again. But it's not clear that faltering companies will be able to improve their business fundamentals so quickly.

"It's a good decision, but it's not really a significant decision," says Joseph Smith, managing director of the structured finance group at Ladenburg Thalmann & Co. "It gives these companies a little longer to stabilize their operations. But a three- or four-month period is probably not sufficient in this economy."

The temporary reprieve is "probably not enough to make an unprofitable company profitable," Smith adds.

The Top of Heap... The priciest of Nasdaq stocks trading under $1
Company	Ticker	Industry	Price*
Gadzoox Networks	ZOOX	Phone/Network Equipment	99 cents
SED International Holdings	SECX	Office Technological Equipment (Wholesale)	99
Spectrum Signal Processing	SSPI	Computer Equip	99
Cylink Corp	CYLK	Software	98
Quigley Corp	QGLY	Pharmaceuticals	98
Miller Exploration Co	MEXP	Oil and gas	97.5
Broadvision Inc	BVSN	Software	97
Apropos Technology Inc	APRS	Computer Systems	96
Lexar Media	LEXR	Computer Storage	96
Select Comfort Corp	SGSS	Furniture Makers	96
* Closing price as of October 3. Source: FactSet Research Systems.

What's Left to Restructure?

In fact, given the drop-off in consumer and business demand, it's questionable whether any company could do much to improve its business in the upcoming months. The vast majority of struggling Nasdaq members already have spent months restructuring and paring costs.

A large part of that strategy has been laying people off. Since December 1999, when Internet companies first started reducing their staffs, 132,296 jobs have been lost, says John Challenger, CEO of outplacement firm Challenger Gray and Christmas. "Companies have cut every ounce of fat they can," he adds. "[Now] when they do make cuts, they're cutting into muscle."

Indeed, because so many people at Internet-related companies have already been laid off, the momentum of job losses has slowed dramatically. In September, 2,986 jobs were lost -- far below the peak of 17,554 layoffs announced last April.

Survival of the Weakest of the Weak

Though it would be difficult at this point for companies to fire more employees, sharp cost-cutting has helped some Internet firms stay afloat. Indeed, such drastic measures could be a deciding factor in their ultimate survival, analysts say.

For example, Drugstore.com (DSCM Quote), one of the Nasdaq stocks trading under $1, got a jump on restructuring its business by announcing its first round of layoffs back in January 2000. The online pharmacy and health information site also recently hired a new CEO. The company's aggressive strategy to revamp its management and conserve cash puts it in a better position than some other Internet companies, says Allyson Rodgers, an analyst for Wells Fargo Van Kasper, which hasn't done any investment banking for the company. Drugstore.com lowered its cash burn rate from about $35 million a quarter over a year ago to around $12 million now, says Rodgers.

But other bargain-bin stocks may be forced to sell their business in order to keep operating, says David Kathman, a stock analyst at Morningstar. For example, Cyberian Outpost, the online computer and electronics store, had been trading at 36 cents on the Nasdaq when it announced it would be acquired by California retail chain Fry's Electronics. Fry's also agreed to buy the assets of electronics e-tailer Egghead.com, which was delisted in August, after last trading at 30 cents.

Online retailer Buy.com was in the process of being delisted when its founder simply decided to take it private. The company's stock last closed at 15 cents in mid-August.

Companies with rich parents have slightly better prospects. For example, Barnesandnoble.com (BRSN Quote), which recently closed at 84 cents, has two powerful stakeholders: the Barnes and Noble retail chain and media conglomerate Bertelsmann, each of which owns about 40% of the company. The online bookseller could either secure additional funding from its parents or simply fold itself back into the retail chain, onlookers speculate.

But in the current climate, most Nasdaq stocks now trading under $1 will find it difficult to obtain extra money. Analysts are pushing their predictions of economic recovery even farther into the future and, as a result, financiers don't know when they would see a return on their investments. "If stocks are still listed [on the Nasdaq], they're still probably eligible for a shelf registration," says Smith. "But if nobody wants the stock, it's not going to help them."

And the Bottom of the Heap... The cheapest Nasdaq stocks trading for under $1
Company	Ticker	Industry	Price*
Industrial Holdings	IHIIW	N/A	5 cents
Verado Holdings	VRDO	Wireless Communications	7
Frontline Capital Group	FLCG	Computer Systems	8
Allied Riser Communications	ARCC	Online Information	8
IAsiaworks	IAWK	Online Information	8
Motient Corp	MTNT	Wireless Communications	9
Indigo	INDGW	N/A	9
Corecomm Ltd	COMM	Telecommunications	9
Entrada Networks	ESAN	Phone/Network Equipment	10
Realco Inc	RLCOW	N/A	10
* Closing price as of October 3. Source: FactSet Research Systems.

He says higher profiles could help a handful of ailing companies. "There are dot-coms, software stocks, biotech companies that still don't have revenues, but have 30,000 shareholders and 58 chat boards. There are stocks that trade [on volume of] half a million or a million a day, even at prices around a dollar or below." Some of those companies might find it easier to make a case for more financing, Smith adds.

Yet companies that do receive last-minute injections of cash often get them on unfavorable terms. "The only way many of these companies could get funding is through some sort of a deal that would be disadvantageous to them, [like] vulture funding," says Morningstar's Kathman. Consider MarchFirst, whose stock was priced at 31 cents when trading was halted last spring. The company received funding from Francisco Partners, which basically took over the board, Kathman says. But MarchFirst was ultimately liquidated and sold off to pay creditors.

Amid a deteriorating economy, the outlook for under-$1 stocks has grown worse. "If at this point they're in such dire straits, a few extra months of being on the Nasdaq isn't likely to turn them around," says Kathman. "I'm not saying it won't help anybody, but in most cases, it may just prolong the agony."