Shareholders sound off

The Portland, Ore., electrician isn’t happy with the Ozark-based company’s recent setbacks or the unavailability of Chairman and CEO John Gott, but he’s confident SLS will rebound from stock prices now hovering near 20 cents a share after peaking at $4.30 in December 2003.

Beasley is still a firm believer in the high-quality sound systems and patented ribbon-driver loudspeakers manufactured by SLS, which began trading on the American Stock Exchange a year ago, but he said the company has “clammed up” in recent months.

SLS officials, who responded to Springfield Business Journal’s questions through Chicago attorney Jeffrey Mattson, believe shareholders bailed out when revenue from a foray into the big-box retail market failed to meet their expectations.

“Management is happy for those who made money on SLS stock and feels bad for those who have lost money on SLS stock,” Mattson wrote in an e-mail, noting that Gott – the company’s single largest shareholder with more than 5 million direct and indirect shares as of Jan. 31, according to Securities and Exchange Commission filings – has incurred the same losses. Gott earned $137,000 in 2005 compensation, according to Yahoo! Finance.

Despite high-profile endorsements and pilot programs that landed the company’s Q-Line home theater system in hundreds of Wal-Mart and Best Buy stores, SLS has yet to turn a profit – a fact that has frustrated shareholders mercilessly criticizing the company on Internet message boards.

SLS continues to post record quarterly revenues but not enough to offset its losses. For the first half of 2006, SLS reported a $5.3 million net loss in operations and a net loss of $7 million to common stockholders. Third-quarter results were not yet available.

Shareholder Beasley thinks SLS failed to capitalize on key opportunities, but he’s most dismayed by the company’s lack of communication with restless shareholders.

“In my opinion, I think they just had plans to go real big, and I don’t think they were adequately funded,” he said. “I don’t think they took a serious look at the funding needed to make a big splash in the marketplace.”

A shareholder’s journey

Beasley first learned of SLS through an e-mail alert and later a stock CD promoting the company.

Strong sales, work on a digital amplification technology and a push to sell the Q-Line system – endorsed by music producer Quincy Jones – in Radio Shack stores led Beasley to invest in SLS in 2004, when the company posted $2.3 million in revenue. In 2003, Sting also signed an endorsement deal.

Beasley initially bought 4,500 shares for $10,000 and has since increased his holdings to almost 50,000 shares for a total investment of about $65,000.

Soon after Beasley invested in SLS, the company launched pilot programs in Wal-Mart and Best Buy stores. And in June, SLS products were prominently featured on the season finale of “The Apprentice,” a reality show starring real estate mogul Donald Trump.

SLS also has a three-year contract with TV producer Mark Burnett – an agreement that earned its products a Top 10 Nielsen rating for placement on the reality show “Rock Star: Supernova,” according to Mattson.

The exposure impressed Beasley, who was poised for the payoff. But it never came.

SLS stock declined sharply this year. In early September, shares bottomed out at 14 cents apiece.

For months, SLS shareholders have been engaged in an active online debate about the company’s direction. Many have suggested SLS didn’t take necessary steps to ensure that store displays were effective and that salespeople were knowledgeable about the company’s speaker technology.

Gott and a company consultant handled the Wal-Mart pilot project, while Gott and former SLS president Steve Lamar, who resigned in June, managed the Best Buy account, according to Mattson.

“Wal-Mart did not permit demonstrations or advertising and they do not have salespersons in their stores,” he wrote.

“As a result, Wal-Mart was not a good outlet for these products. At Best Buy, SLS provided all of the sales education … allowed.”

A Wal-Mart spokeswoman said the company doesn’t comment on pilots, but Best Buy confirmed the Q-Line system is being discontinued at more than 600 stores after the initial orders sell out. A Best Buy spokesman said he couldn’t release the number of units sold.

“As a shareholder who was brought into the company based on these projects … you hope the CEO would step forward and explain,” Beasley said.

“But once it fell through, they clammed up, and you don’t hear anything from them.”

Beasley said he and fellow shareholders want to know what went wrong and if Gott is standing by comments he made to SBJ in March that SLS could hit $1 billion in sales by 2011.

“John still believes in that potential but makes no predictions about whether or not the company will be able to achieve that potential,” Mattson wrote.

One former SLS shareholder, Springfield architect Geoffrey Butler of Butler, Rosenbury & Partners, said he’s glad he sold his stock five years ago. Butler said he liked SLS’ products but opted for more traditional investments, such as real estate.

Buying shares in a company like SLS can be a “roller-coaster type of deal,” said Butler, who reminded that there’s more to a company than its stock value.

“Stock price has little to do with the reality of business,” he said. “You can be doing great stuff and your stock is in the tank.”

A different approach

In September, SLS publicized a vendor agreement with The Nationwide Marketing Group, the country’s largest consumer electronics buying group.

SLS consumer product lines are now being sold to more than 2,700 independent retailers in more than 7,000 U.S. locations. The sound systems are flying off the shelves, said Mike Decker, vice president of electronics for North Carolina-based Nationwide.

“We know that once our member gets the product, it’s sold,” he said. “Our membership loves the product.”

Decker said sales are highest at 1,200 electronics retailers, where consumers are experiencing the company’s highly touted sound quality through interactive displays and theater rooms. SLS has had no problems meeting the demand for reorders, he added.

“They do what they say they’re going to do,” Decker said.

In a news release about the Nationwide agreement, Gott said SLS learned how to best reach consumers by testing its products in Best Buy stores and noted that sales usually occurred when products were “displayed correctly” and consumers were allowed to test sound quality.

The Nationwide announcement came just two weeks after SLS learned that net losses had jeopardized its AMEX listing. SLS was supposed to file a compliance plan with AMEX by Sept. 27, but the company publicly announced it would file the plan one day after the deadline.

The 18-month plan must include specific milestones, quarterly financial projections and details related to any strategic initiatives, according to AMEX listing guidelines.

If the plan is accepted, SLS may remain listed, but the company would be subject to incremental review to ensure progress. If AMEX rejects the plan, delisting proceedings would begin.

If SLS is delisted, its common stock may be quoted on either the Nasdaq Over-The-Counter Bulletin Board or on Pink Sheets. Before SLS stock was listed on AMEX in October 2005, it was quoted on the bulletin board for four years.

Bob Wyatt, director of the Breech School of Business Administration at Drury University, said SLS might need to remain listed to further its growth. The company plans to introduce new products in 2007, according to Mattson.

“Almost always when you are in an expansionary mode, you have a need for capital,” Wyatt said. “And it’s easier to buy and sell stock that’s publicly traded than do it in a private offering.”

SLS appears to enjoy some attributes of public trading and despise others, said Beasley, who’s looking forward to hearing from Gott at the SLS annual shareholders meeting. The meeting – originally scheduled for June 30 and then canceled – hasn’t been rescheduled. The board of directors is considering dates, the SLS attorney said.