Friday, December 14, 2007

The Door Slams Shut

Bang! That is the sound of the door of stock registration slamming shut behind Harold’s Stores, Inc. (HLDI: OTC/PK). Last week Harolds filed a Form 15 with the SEC - the official notice to deregister its common stock.

Unlike some companies that have slunk away in the night leaving shareholders behind without even a forwarding address, Harolds was right up front with its plans to retreat to the private realm. The deregistration action was taken after a shareholder approval of a reverse split that effectively reduced the number of shareholders below the magic number of 300 that allows voluntary deregistration. Of course, the outcome of the vote was never in doubt since ownership is concentrated in the hands of a four person investor group that owns 91% of the outstanding shares.

Harolds, an upscale men’s and women’s clothing store chain, has been bleeding red in the past three years, but still has substantial operations in Texas. In the trailing twelve months ending September 2007, the company reported a net loss of $10.0 million on $84.1 million in sales. For the last three years sales have been declining and the stock price has followed. Apparently, Harolds’ leadership decided the expense of remaining public - at least $1.0 million annually counting listing fees, lawyers, auditors, etc - was no longer a “mission critical” expense.

So what are shareholders to do when a company goes private? Of course, their ownership is still intact. It is just that their shares are no longer liquid. It takes quite a bit of work to find a buyer (or seller) and execute a transaction.

Shareholders can get help from several new private equity markets that cropped up earlier this year. In May 2007,
Goldman Sachs launched it GSTRuE for trading unregistered equity securities over-the-counter. Bear Stearns has its Best Markets and Nasdaq named its private equity exchange Portal.

Unfortunately, Bear Stearns’ Best Markets appears open only to institutions and individual investors qualified by net worth and income. Both the Goldman and Nasdaq platforms are restricted to institutional investors. That is because the financial wizards at these big houses were not thinking about serving the likes of Harolds shareholders. They are trying to stay in the loop with the vast sums of money being siphoned off the public capital markets by private equity funds as these funds buy up public companies and take them private.

Accountability and transparency are two more problems shareholders have when they own stock in a company that has been deregistered. Once a stock is deregistered the company is no longer obligated to file quarterly or annual financial reports with the SEC. Private company shareholders usually have rights to inspect corporate books and records, but that is difficult to execute unless the shareholder is a financial expert and has the resources to make such an inspection.

Harolds closed one door in an effort to keep the doors on its stores open. For the sake of its shareholders - there were 182 of them when the Form 15 was filed - I hope the board room door is still open as well.

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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