The company claims its calculation of earnings per share is based on the assumption of complete dilution through exercises of stock options and convertible preferred shares. Assuming all possible dilutive actions concerning shares are taken, the EPS results presented will occur.
In January 1996, 992,061 shares of preferred stock were sold for a total of $3.5m, equating to a cost of only $3.50 per share. Given Versatility’s IPO in December of the same year, it appears that those investors who were allowed to purchase shares in the preferred offering were given a fantastic deal, seeing as the December IPO converted all preferred shares into common shares at a 1:1 ratio. Considering the Statement of Cash Flows, it seems that the preferred stock offering in January 1996 may have been geared toward benefitting insiders. The offering price of $3.50 was too low compared to $15 per share in the December IPO. Besides the offering price being too low, the number of shares issued, 992,061 is an awful peculiar and odd number that suggests the share offering was geared around flexibility to participants. The company may have needed cash to finance its operations, however this plight is fueled by an unacceptably high A/R balance, seen at 4/30/06. I also feel that it is no coincidence that the company recorded a software impairment charge of $829k in 1996, dragging down earnings for that year and positioning 1997 earnings to appear as a grand success of growth and financial management at Versatility. I have no doubt that as FY 1997 was shaping up to be a great year for Net Income, the Versatility IPO fetched a whopping $15 per share, thereby further exaggerating the preferred share offering earlier in 1996.
Other posts on the Versatility, Inc. case study:
Versatility, Inc. Case Study, Cash Flows
Versatility, Inc. Case Study, Preferred Stock
Versatility, Inc. Case Study, Mortgage Guaranty
Versatility, Inc. Case Study, IPO Initial Public Offering
Versatility, Inc. Case Study, Accounts Receivable
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