Tuesday, December 11, 2007

A Rush to the Exit

From time to time I hear anecdotally of shareholder abuse through delisting and deregistration actions. It is a topic that gets little attention, probably because the companies are small and the shareholders mostly individuals.

Last week HEI, Inc. (HEII: Nasdaq)
took the first steps to voluntarily delist its stock from trading on the Nasdaq Capital Market. It is the SEC’s Form 25 that does the job and it is expected that December 14, 2007 will be the last day of trading for HEI shares on the Nasdaq. After that shareholders and investors will need to go to the Pink Sheets to see if a broker dealer has put up a quotation for the shares.

HEI’s recent SEC filings and press releases suggest the move is motivated by a need to save the money associated with listing expenses. It also appears that financial reports - 10Ks and 10Qs - will be suspended for some additional savings.

HEI is in the electronics manufacturing business - and things have not been good. The company lost $5.7 million on $38.4 million in sales in the fiscal year ending August 2007 (technically September 1, 2007). HEI’s radio frequency identification (RFID) business was sold off at the end of the fiscal year for a pre-tax profit of $1.7 million. The stock has followed fundamentals, declining from $1.50 a year ago to $0.56 today.

Litigation with a former CEO over breach of contract and other alleged transgressions against the company probably has not helped inspire investor confidence either. Although there is little to reveal investor sentiment - no trail of activist investor filings with the SEC; no chat room exchanges among disgruntled shareholders.

However, I do not image there are many happy campers among the 282 holders of the 9.5 million HEI shares. There was no shareholder vote on the matter, just a perfunctory Form 25 filing with apparently no advance notice - at least through an SEC filing - that management was entertaining a delisting action.

That being said, shareholders could have been cued to the possibility of delisting. The company had received a non-compliance notice from Nasdaq in early September 2007. The closing bid price of HEI shares had fallen below $1.00 for over 30 days. Nasdaq is sensitive about this item. Apparently insiders decided not to take advantage of the 180 calendar-day grace period to try to regain compliance.

A Form 15 filing could be next - although this is a highly speculative statement on my part. Form 15 deregisters the stock entirely and turns the public company into a very private company. HEI is in a position to do this since it has less than 300 shareholders.

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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