Compact Computing Company (CCC) was formed in 1993 by Mike Ling and Joe Parker. The two were previously employees at Intercontinental Computer Corporation. Mike and Joe believed that they could develop a portable computer that could provide satisfactory performance at a relatively low price. They started the new company with their combined savings and personal borrowings ($70,000 from Mike, $80,000 from Joe). CCC was incorporated on July 1, 1993. 70,000 shares with a par value of $1 were issued to Mike, while 80,000 shares were issued to Joe. A local bank agreed to provide a line of credit.
The company had no revenues in 1993 or 1994. Expenses (consisting of research related expenditures and depreciation on buildings and equipment) totaled $170,000 in 1993 and $400,000 in 1994. The company was able to remain in existence only because a venture capitalist known to Joe invested $450,000 in the firm in 1994, in exchange for 250,000 shares. However, by the end of the year, the company was able to develop a prototype for their portable computer that showed considerable promise.
In 1995, the company made its first sales. Net income for the year amounted to $50,000.
Compact Computing Company went public in 1996. In anticipation of the offering, the company issued a 10-for-1 stock split in January. In early February, the company offered 8 million shares to the public at a price of $5 per share. Total costs of the issue, including investment banker’s fees, amounted to $4 million. All the offered shares were purchased, and the price of the shares rose to $7 by the end of the day on which they were issued. 1996 was a good year for operations. Net income amounted to $2.4 million. At the end of the year, the company declared a dividend of 2 cents per share. The dividend was paid in early 1997.
The company’s stock performed impressively in the first half of 1997. The price reached a high of $15 in September. Shortly thereafter, however, the market crashed, and CCC’s stock traded as low as $4. Earnings for 1997 amounted to $6 million.
In 1998, Intercontinental Computer Corporation offered to acquire all of the company’s stock for $20, at a time that the stock was trading at $11. CCC rejected the offer, but decided to buy back 2 million shares. The total cost of the share purchases, which were made over several months, amounted to $30 million. To help pay for the purchase, on July 1, the company issued 250,000, 10 percent cumulative, convertible preferred shares at par ($100) to a group of private investors. Each preferred share was convertible into four shares of common stock at any time after the end of 1998.
Net income in 1998 was $10 million. Because of a tight cash position, dividends on common shares were omitted. The company wanted to declare a 10 percent stock dividend, but was informed by its auditors that the balance in retained earnings was insufficient for this purpose. At the time, CCC’s common stock was trading at $18.
1999 net income was $16 million. A dividend of $1.20 per share was declared on . . .
- For each year in the life of the company, describe the key financial decisions that were made and speculate, where appropriate, about the underlying reasoning.
- Prepare a statement showing CCC’s stockholders’ equity account balances at the end of each year, starting from the incorporation of the company, and showing the impact of each of the decisions that you described in answering Question 1.
- What were earnings per share for each year?
- What is the book value of the company’s stock on December 31, 2002?
- Why was the company unable to declare a 10 percent stock dividend in 1998?