VARL Dilution.
Ok, time to clear up the confusion surrounding VARL's diluted earnings per share calculations. I know many of us are trying real hard to get our hands around this with quips and favorite sayings, but the facts are as follow (From the 10Qs and 10K no less!):
1) In 1999 VARL approved 500,000 shares to cover year 2000 option grants. NOTE that these shares were to have a ten-year life, vest in five years, with no ability for employees to derive ANY value for the first year (after the first year an employee could access 20% of the shares granted if they wanted to and the options were in the money).
Many of you will recall that I was "surprised" by 150,000 to 200,000 shares coming on the books at the end of 1999. The reason was this: EVENTHOUGH THE 500,000 SHARES WERE OF NO VALUE TO ANYONE AND COULD NOT BE ACCESSED, arcane accounting rules (thus my oversight) dictate that 160,000 of those 500,000 shares must be accounted for in the diluted share count. The "reasoning" behind this is that if the company would be taken over those shares would in all probability become vested as part of the deal. So, as you can see, the "surprise" at the end of 1999 really was not a surprise at all - it was merely the result of nonsensical accounting rules coming into play and basic oversight by analysts and individuals.
2) The nutty market environment is to blame for the rapid rise in the diluted share count in q1 2000. Really. I know many of you would like to believe that there is some conspiracy (folks on SI please disregard this conspiracy stuff, I am speaking to the YAHOOS who have been quoting my posts) involved here, but there is not.
Because the stock rose so rapidly in the latter half of q4 1999 many of you have acknowledged that the reason for the increase in diluted shares was that more option related shares became "in the money". Thank you for agreeing with this. As a matter of fact (check the filings folks):
565,000 shares were granted in 1999.
788,000 shares were exercised in 1999 (due to the rapid price appreciation in the latter half of q4)
29,000 shares were forfeited.
On January 1, 1999 there were 1,959,000 option related shares outstanding.
On December 31, 1999 there were 1,707,000 option related shares outstanding.
In other words if the stock had not risen so rapidly in November and December 1999, the diluted shares outstanding calculation would not have taken as many shares into account. So, as you can plainly see all the momentum folks are the folks to blame (OH GOODY! A NEW CONSPIRACY TO FOLLOW - go right along fellas). In all seriousness, the way dilution is calculated further magnified the impact in q1 2000 as you will see below.
3) As we all know (unless you have been under a rock, or worrying too much about conspiracies), for the majority of q1 2000 the share price, on average, was relatively high - which as you just learned brought more shares into "circulation". That is why we had the kick up in the diluted shares.
Some of you are aware of a fellow I respect by the name of Teddy. Like his father he is a bean counter who does great research (the term due diligence has become meaningless - especially in the manner it is used on these boards). He is the type of guy that prepares himself for potential negative "events" when he looks at taking a position in a security. Teddy, as I did, would have ACTUALLY read all the SEC docs available for VARL and known in advance that the dilution would be higher than q4 1999 because ALL THE NUMBERS WERE AVAILBLE FOR HIM TO SEE. So, those of you out there that claim to have done great "due diligence" on VARL, but seemed so shocked about the dilution number that you have started to blame management for it should be ashamed. You have failed yourself as well as your mothers. Come on and take some responsibility for your own actions.
Anyway, those are my thoughts on this non-issue. By the way, the only "solution" to this is the stock price going back down to the high single digits, or waiting a year for the diluted shares to work their way through the comps. I guess in a way, this is my kind of environment. I get to buy the shares from malcontents that think they are entitled to 25% gains year after year. This and I know that the intrinsic value of the company and its prospects continue to brighten day by day.
It seems to me that you folks have to make a decision. Either become long term investors looking to take part in a great company, or get out of the kitchen. It is apparently too hot for many of you. |
