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Technology Stocks : Citrix Systems (CTXS) -- Ignore unavailable to you. Want to Upgrade?

To: G.F. who wrote (6677)	6/13/1999 1:01:00 PM
From: Chuzzlewit	Read Replies (1) \| Respond to of 9068

GF, the trigger for conversion is the price of the stock, and only the price of the stock. The accounting treatment is entirely irrelevant if it does not address this central issue. Suppose, for example, that the stock were selling at $60 per share, and that eps were $1. Assume the bond has a market value of $400 and is convertible into 7 shares of stock and appreciates at the rate of 5.25% per annum. Let us assume that the bond has a book value of $400 as well. Let us also assume a statutory tax rate of 35%. Earnings from the conversion of the bond will be .65 X 400 x 5.25% = $13.65. On a per share basis we would have earnings of $1.95. Under Peter's reading of the FASB accounting treatment this would not count as part of the fully diluted earnings because $1.95 per share is greater than $1 per share (i.e., earnings would not be diluted by conversion). Yet the conversion of the debenture is likely if a date certain had been set under the terms of the debenture agreement. In reality, the probability is that no conversion will take place until the bond holder is forced to convert. The practical issue here is that for a small company like Citrix, it will either prosper and do quite well, or it will cease to exist. In the former case the bonds will be converted, while in the latter case it won't matter what the bondholders do. In point of fact, there is a second form of dilution that occurs, and that has to do with eps growth rates. This kind of dilution is always present for a growth company. Think of it this way: CTXS is forecasted to have eps growth well in excess of 30% per annum for the foreseeable future. But the non-converted bond has a growth rate that is capped at 5.25%. That means that conversion of the bond will decrease the eps growth. That's why I think it prudent to simply assume that the issuance of the bond was in fact a sale of equity. TTFN, CTC