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Technology Stocks : THQ,Inc. (THQI) -- Ignore unavailable to you. Want to Upgrade?

To: Bleeker who wrote (7451)	8/5/1998 5:38:00 PM
From: Jeff Lins	Read Replies (1) \| Respond to of 14266

Regarding Dilution: For Primary EPS, the Convertible security may be dilutive; this would depend on whether the security passes the "effective yield test", and would therefore be considered a common stock equivalent. But rather than worry about that, we will assume that it is not an equivalent, and therefore will certainly include it in FULLY DILUTED EPS. It will be done using the "if-converted" method. This is where the calculation adds additional shares to weighted average shares outstanding, but also adds back the cost of interest (net of tax) to net income. As a side note, because you add back the interest it is possible for a convertible to be "antidilutive", where the interest saved per share exceeds the original earnings per share. But that ain't gonna happen :) For those wondering about strike prices and such, this is something that will be applied to options/warrants. IF the strike price is below the market price, the effect is dilutive. For example, an option with a strike of 5 and market value of 10. That option will be exercised, and we get 5 bux, and issue a share. Then we take the proceeds, go to market and buy back the stock. Except that 5 bux only buys us half a share. So now there is an extra half share outstanding. This is known as the treasury stock method and is a real pain in the ass. :) Now a key to this is "what is market price" and the answer is usually "price at the beginning of the period/year." Though if the options are in the money for a substantial amount of time, average stock price is used as opposed to beginning of period, and fully diluted will use the worse of the average or most recent market closing price. And so things can get a bit wacky if your stock price is floating about. This can be seen at TDFX, where the total shares outstanding for Q2 was lower than expected, because full dilution was not necessary, and even previously in the money options may have been disrupted by the low closing and average prices during the quarter. In the case of AKLM, it is possible that their debt was issued at such a low rate, and with such favorable conversion terms, that it was considered a common stock equivalent, and hence included in Primary EPS, which could be why you didn't see it under diluted EPS. Also, the stock has had its ups and downs, and this could have played with weighted shares outstanding. I have NOT looked at it, and so please do not think that this is a depiction of AKLM's debt. SOrry if that seemed long and rambly. This EPS stuff can be a bear, and hard to explain (hell, do I even understand it???) Would be nice if someone out there can give this a stamp of approval, or point out where I erred. Thanks, Jeff