Versatility, Inc. Case Study, IPO Initial Public Offering

A company goes public to raise funds it plans to use in stimulating internal growth of sales. The company’s MD&A focuses on the “Versatility CallCenter” as a major feature of the company’s sales success to date. Footnote 3 to the 10-Q is suggesting that at least part of the servicing of this product will be discontinued. This seems to be a stunt to future revenue growth. More concerning, however, is the forgiveness of accounts receivable. The company mentioned in its 10-K dated 4/30/1997 that almost $3.0m of customer accounts were more than 90 days delinquent and that the company did not intend to extend those payment terms again once they came due. What this “forgiveness” of accounts suggests is that the company wishes to continue booking sales from those same delinquent customers. Also, the basis on which those receivables were originally derived may be questionable, and also may have something to do with the pending litigation discussed in the legal proceedings.

To justify the IPO price, Versatility likely emphasized a few key financial statement items. First, yearly revenue was growing by around 50% per year in the two years preceding the IPO. Next, earnings per share appeared to be climbing from 1996 to 1997 thanks to a well-time write-off of capitalized software. Warning signs of potential problems (of material amounts) included: the detail about legal proceedings, the forgiveness of accounts receivable, the write-off of capitalized software, the large negative value for cash from operations, and the rapid rise in the accounts receivable balance compared to growth in sales.

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