Chalk it up to the high costs for a tiny company to trade on the public markets.
Lake Forest-based MAI Systems Corp. recently pulled the plug on its stock listing on the over-the-counter stock exchange. The move still needs regulatory approval.
The company, which provides software and services for the hotel industry, recorded about $20 million in sales last year. It’s been publicly traded since the mid-1990s, according to filings with the Securities and Exchange Commission.
Though MAI would lose a key source of raising money,selling stock,and possibly cut its visibility by going private, the move will “relieve it of the costs, administrative burdens and competitive disadvantages associated with operating a public company,” the company said in a release.
MAI said its audit fees rose 27% last year to $211,000, according to regulatory filings. Audit fee hikes increasingly have been tied to the cost of complying with the 2002 Sarbanes-Oxley accounting reform, which was created in the wake of scandals that hit Enron Corp. and others.
“(Going private) is an important step in the company’s future,” Chief Executive Brian Kretzmer said in a statement. “It allows the company to focus more time and energy on the growth and prosperity of our business and less on the reporting and compliance requirements of a public company.”
Executives with MAI couldn’t be reached for comment.
Cutting costs is key for MAI. The company reported that it owed more money than it had in assets at the end of the third quarter, though it “believes it will generate sufficient funds from operations to obtain additional financing to meet its operating and capital requirements for at least 12 months.”
The software maker’s financial results improved in the third quarter. MAI swung to a profit of $367,000, versus a loss of $58,000 a year earlier. Sales grew 15% to $5.6 million during the period.
Sarbanes-Oxley requirements have pushed some companies,especially ones with less than $100 million in sales,to give up on the public markets and “go dark,” meaning they don’t have to file reports with the SEC.
Audits for small-cap companies cost $1 million on average in 2004, up 84% from a year earlier, according to a survey by Milwaukee-based law firm Foley & Lardner LLP.
Some 70% of respondents said that Sarbanes-Oxley affected administrative expenses “a great deal,” up from 54% a year ago, according to the survey, which was released in summer.
“It’s a topic being discussed in boardrooms today,” said Richard Stagg, an attorney that focuses on public company issues at Snell & Wilmer LLP in Phoenix. “It’s the subject of many conferences.”
A few other local companies have exited the public markets in the past year.
SafeGuard Health Enterprises Inc., a provider of dental and vision insurance, went dark last year. The Aliso Viejo-based company cited Sarbanes-Oxley and other costs.
Yorba Linda-based netGuru Inc., which provides document-management software, among other things, has made moves to exit the public markets.
The company earlier this year sold off nearly 70% of its business, a unit called Research Engineers International, to Exton, Pa.-based Bentley Systems Inc., a privately held software company.
At the time of the announcement in July, netGuru Chief Operating Officer Santanu Das said the cost of compliance under Sarbanes-Oxley was too burdensome.
A decision is expected before the end of the year on whether netGuru’s remaining business will go private, said Chief Financial Officer Bruce Nelson.
Sarbanes-Oxley could get tougher for small companies if Section 404 is expanded to cover all public companies. Under Section 404, larger publicly traded companies must extensively document their internal accounting controls. The process can be laborious and expensive, though easier for large companies to manage financially than it would be for tiny ones.
Section 404 mostly has applied to companies with more than $100 million in annual revenue. But regulators are looking at applying the rules to smaller companies in the next year or so.
Small companies could have a champion in new SEC Chairman Chris Cox, a former Republican lawmaker out of Newport Beach, who has said he wants to ease the reporting requirements on small companies.
Despite the complaints about Sarbanes-Oxley, Bill Steele, a principal at Deloitte Consulting LLP in Costa Mesa, said the regulations are just part of the decision to go private.
“I do not see a significant number of public companies that choose to go private solely because of the costs of Sarbanes-Oxley,” Steele said. “It may accelerate the decision, but it’s not the cause of the decision.”
The access to capital as a public company is a huge advantage to executives looking to expand operations,but it has its cost, he said.
“Public capital extracts a high price from an organization,” he said.
If a company doesn’t want that high price, it often will go dark,not private, Snell & Wilmer’s Stagg said.
In going dark, a company reduces the number of outstanding shareholders to less than 300 through a reverse split, thereby terminating the registration of its common stock and reporting obligations.
When a company goes truly private, there are more legal hoops to jump through,and concerns from shareholders who want the company to stay public, Stagg said.
The SEC is looking at tightening the rules for going dark after receiving complaints from institutional investors, he said.
It’s not clear if MAI went private or dark. The company did a reverse split that left it with less than 300 shareholders, but later said in the announcement that the move would let it be a “private company.”
The company noted some traders may exchange its shares on the Pink Sheets, but not on a “automated quotation system operated by a national securities association.”
The Pink Sheets lists bid and ask prices for stocks that aren’t listed on any other exchange.
