Companies 'go dark' to cut compliance costs
By JAN NORMAN
The Orange County Register
Anacomp in San Diego has been publicly traded since the 1970s. But later this month, the data-services provider will "go dark."
In January, Anacomp deregistered its shares with the Securities and Exchange Commission.
The process of deregistering is called "going dark," because afterward the company no longer has to disclose much financial information.
Technically, the shares can still be bought and sold. They're listed on the "pink sheets," the National Quotation Bureau's list of daily quotes for companies not listed on any stock exchange.
Anacomp estimates the move will save the money-losing technology firm $3.2 million over the next two years, primarily in costs for complying with the Sarbanes-Oxley Act, which tightened accounting standards in response to the Enron and WorldCom scandals.
Since that regulatory law passed in 2002, hundreds of publicly traded companies, including several in Orange County, have taken this step, which is simpler and cheaper than buying out shareholders and going private. Hundreds more could soon follow, says attorney Thomas Magill, partner at Gibson, Dunn & Crutcher LLP in Irvine, who assisted Anacomp in going dark.
Proponents say that going dark saves qualified companies money and their executives time.
Opponents of the practice say that it leaves investors holding shares that are harder to sell - and have significantly lower prices.
If opponents have their way, the SEC will tighten the criteria for going dark to prevent many companies that are now eligible from taking this step. The SEC is considering a petition by Stephen Nelson, a White Plains, N.Y., lawyer who represents institutional investors who seek to restrict this practice. The petition says some companies avoid public disclosure of their finances by going dark "under circumstances suggesting manipulation of the capital markets."
Relatively few public companies can go dark. To qualify, they can have no more than 300 holders of record, a figure that is far below what most public companies have. Holders of record, which are different from shareholders, include brokerage firms that hold shares on behalf of hundreds of shareholders.
Companies with fewer than 500 record holders and less than $10 million in assets are also eligible.
Magill says the companies mostly likely to benefit from going dark have a handful of shareholders who own most of the company, have no analyst following, have relatively little trading activity and don't intend to sell more stock.
Among the Orange County companies that have gone dark since Sarbanes-Oxley passed are:
OnCURE Medical Corp., Newport Beach owner of 12 radiation cancer-treatment centers, in 2003. Its share price went from around $15 in mid-2003 to between 15 cents and $1.20 recently.
Procom Technology, a data storage manufacturer in Irvine, also in 2003. Its shares have risen from less than $1 to around $1.80 in recent days.
Troy Group Inc., a Santa Ana check-printing equipment maker, filed on Feb. 3 to go dark. The company had recently ended a contentious bid to take the company private.
All three made statements at the time of filing similar to that of OnCURE: "The company incurs significant accounting, legal and administrative costs that are associated with the SEC's reporting requirements. We believe that these cost savings will have a positive impact on the company's results of operations."
That can be a powerful incentive.
"Boards of directors have to look at the $1 million cost of complying with Sarbanes-Oxley - and that's for a small company," Magill says. "There goes substantially all of their earnings, and shareholders get nothing other than a report of compliance."
In Anacomp's case, most of its savings will be in audit costs it would have to pay to comply with SEC reporting requirements, especially for Sarbanes-Oxley, says Chief Financial Officer Linster Fox. Other savings are for consultants, executives' and directors' liability insurance, attorneys and two employees whose sole jobs were SEC compliance.
Attorney fees for deregistering a company run about 10 percent to 25 percent of first-year savings, Moloney estimates.
Most of Anacomp's shareholders are sophisticated, institutional investors intending to maintain their investment a long time, says general counsel Paul Najar. By cutting its costs and focusing management's attention on running the company, the shareholder value can increase in many ways, including using the savings to buy other companies or sell the entire company at a higher price because of improved financials.
Not all shareholders of deregistering companies like the move. Wynnefield Capital, which owns stock in New York steel-bar maker Niagara Corp., recently placed an ad in The Deal, a magazine that focuses on mergers and acquisitions, claiming that shareholders had lost $100 million since its deregistration announcement. Shares had traded at $8.95 the day of the announcement Dec. 31, drifted as low as $7.40 on Feb. 14 and recovered, trading at $9 on March 31.
A study of 298 companies that deregistered with the SEC or delisted from one of the exchanges found that the average decline in share value was 10 percent.
"Shareholders are left holding a stock that has not only been delisted from a major exchange but about which little if any public information is produced and is inherently less liquid," said the report by Andras Marosi and Nadia Massoud at the University of Alberta.
Anacom's share price dropped to $17.28 from an average of $18.13 before the deregistration announcement, Najar says.
But share price alone is not a good measure of a good investment, says Magill's partner James Moloney, who used to work at the SEC. "I tell (directors and executives) to look at where they are going instead of looking at short-term (stock) price cuts."
Moloney and Magill say they get calls all the time from other companies seeking advice about going dark. They estimate 50 California companies, including well-known names like the Smart and Final wholesale grocery chain, may meet the criteria that would let them go dark, if they decided to.
"I argue that they're not really going dark," Magill says. "Anacomp, for example, will put its financials on its Web site."
Magill dismisses the notion that companies that go dark are dishonest while those listed on stock exchanges - and therefore subject to more public reporting - are honest.
"Does anyone want to argue, after WorldCom and Enron, that all public companies are honest? I don't think so."
