Here's the information on the convertible preferred shares. It's a bit messy, but these things usually are. IMHO it doesn't represent major dilution, but judge for yourself.
There are 5 classes, A, B, C, D, E.
2800 shares of A, convertible to common at 8 to 1
1360 shares of B, 13 to 1
1200 shares of C, 16 to 1
8600 shares of D, 22 to 1
2500 shares of E, 36 to 1
All convertible no later than the end of fy 1999. Doing the math, I get a total of 338,480 shares. I think these are included in the 4.8M shares outstanding number. If not the number would go to about 5.2M shares.
There's more. According to the balance sheet as of the end of the 2nd quarter of the fy (Feb 19, 1996), there are $535,000 of convertible debentures outstanding. These pay about 10%, and were created in exchange for some of the preferred. The conversion rates are as follows. Half of the amount is convertible at the rate of 8 shares for every $25. The other half is convertible at the rate of 13 shares for every $25.
Doing the math here: the potential is for an additional 85,600 shares if the stock's price is above roughly $3/share. Also for an additional 139,100 shares if the stock's price is above roughly $2/share. The time limit on converting these debentures is 5 years.
Maximum dilution then would occur only if the stock stays above $3/share (already quite a bit above current level), and would amount to, on the worst case assumption, 563,100 shares, or 11.7%.
Given their very strong financial position, growth rate, and growth prospects, these numbers are not worrisome, imho. Also, by comparison to other startups the numbers are unusually good, from what I've seen. Most of the startup companies I've seen are loaded with debt and have dilution prospects much much higher -- often 50-100% or even more.
What's your take?
Regards,
-DT
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