2 Small Firms Find It’s Expensive to Sell Stock : Offerings: Universal Self Care and MRV Communications raise about $5 million each but underwriting fees take 20% of the proceeds.
Taking advantage of investors’ appetite for small stocks, a pair of obscure companies in the region turned to Wall Street earlier this month for capital, each raising about $5 million. But in both cases, underwriters’ fees and other expenses ate up 20% of the proceeds, a figure analysts said was high and undercut the value of the deal to investors.
One firm, Universal Self Care Inc., a Van Nuys retailer of medical products for diabetics, has never been profitable. For its fiscal year ended June 30, Universal lost $1 million on revenue of $4.5 million, according to the company’s prospectus. Universal sells insulin, syringes and sugar-free food through its five SugarFree Centers in Southern California, pharmacies and mail-order shipments.
The second company--MRV Communications Inc. in Chatsworth--makes semiconductor laser devices and fiber-optic products to transmit information on telecommunications systems. Since its founding in July, 1988, the company has grown impressively. Its earnings tripled to $465,000 in the nine months ended Sept. 30, compared to a year earlier, and revenue doubled to $3.2 million compared with the same period in 1991.
Jim Collins, a stock analyst and editor of OTC Insight, a newsletter published in San Francisco, advises that public offerings in which underwriters get much more than 10% of the proceeds should raise a yellow flag.
Although there are no rules for underwriter compensation, an analysis of 402 initial public offerings last year by the National Assn. of Securities Dealers showed that in offerings of $5 million, underwriters received 12% of the gross proceeds on average.
MRV raised $5.1 million by taking the company public. But its prospectus shows that after underwriting discounts, commissions and other expenses related to the offering, MRV’s net proceeds were only $4.1 million.
Similarly, Universal Self Care raised $4.75 million. But $474,500 was deducted for underwriting discounts and another $467,350 went for unspecified offering expenses, leaving $3.8 million in net proceeds, its prospectus showed.
In recent weeks, Collins said, there have been a dozen or more public offerings of smaller companies each day. Wall Street has been strongly pushing smaller-company stocks because their shares have outperformed larger issues in the last few months.
James Linesch, Universal’s chief financial officer, said a small, struggling company often has difficulty finding an underwriter and must pay high fees. “That’s the only way we could do it,” he said.
Universal’s lead underwriter was Westfield Financial Corp. in New York, which had never represented a company in a public offering.
MRV officials declined comment on its public offering and referred calls to their underwriter, Thomas James Associates in New York. However, Thomas James officials could not be reached for comment.
Both Thomas James and Westfield sold units rather than common shares of stock--MRV at $12 per unit, and Universal at $9.13. In both cases, each unit consisted of three shares of common stock and two warrants that can later be redeemed for additional shares of common stock.
An MRV warrant holder, for example, can buy one share of common stock at $5 per share within 30 months of the offering, and at $6 per share for the following 30 months. On Monday, MRV’s common stock, which is listed on NASDAQ, closed at $5.75 a share.
Although such warrants are intended to be sweeteners, “it feeds on the greed of buyers,” Collins said. As a result, if many warrants are exercised, he said, the stock price could become devalued quickly because more shares would be in the market.
Despite these risks, the ultimate test for investors, of course, is whether the company is successful. Universal plans to use some of the money it raised to expand its retail outlets outside California. The company said in its prospectus that it hopes to be profitable in 1994.
MRV, meanwhile, plans to use much of its proceeds to research new products. MRV’s competitors include such giants as NEC and Mitsubishi. But the market for fiber optics is expected to grow, enhancing MRV’s chances.
