Does anyone know if companies are required to disclose information about anti dilutive shares? I’m looking at 10-Qs for blackstone, fortress, and OCH Ziff and all these companies have massive amounts of anti-dillutive shares being excluded from their EPS calculations. Obviously if these securities are on the edge of becoming dillutive, it would have a large effect on their EPS figures, but I haven’t been able to find any information on this in their filed statements. For example, if there are a large batch of warrants outstanding, at what stock price do they become profitable at?
GAAP only requires disclosure of dilutive effects.
They do not have to disclose the strike prices in the Q, but you will find it in the K.
I don’t think so. Take a 10K or 10Q for any company and do a search for the word. Don’t quite follow your last point. I would think that one would use the treasury stock method to measure the dilutive effect of options and warrants in that: 1) only when the market price is greater than the excercise price; and 2) the proceeds from the exercise of options/warrants are assumed used to buy back common shares at average market price. will the options/warrants be considered dilutive. The fact that these securities are close to being dilutive is not a guarantee that the event will come to pass. My understanding is that measuring dilution is a trigger event and not a forward looking exercise.
aldford Wrote: ------------------------------------------------------- > GAAP only requires disclosure of dilutive effects. In fact, you don’t even have to offset dilutive with the anti-dilutive.
sid3699 Wrote: ------------------------------------------------------- > The fact that these securities are close to being > dilutive is not a guarantee that the event will > come to pass. My understanding is that measuring > dilution is a trigger event and not a forward > looking exercise. What I’m getting at is this. Take two scenarios: 1) Company has tons of long-term warrants that are one penny out of the money 2) Company has tons of warrants on the verge of expiration and are so far out of the money there’s almost zero chance they will ever be exercised. Now even in case 1 you can’t say for sure the warrants will ever convert, but it’s sure a lot more likely and should be factored into your valuations. In case 2 you can ignore the warrants all together in your valuation. The problem is how can you even know what situation you’re facing as a potential shareholder? The above companies had about 3 times the amount of anti-dilutive shares as they did common shares outstanding. How you factor in these phantom shares is going to make a huge difference in any share valuation.
I know exactly what you are looking for, IARdude, and I was under the impression that it was required disclosure in the 10-K. It turns out I was wrong and it is merely “recommended”. In my prior career as an auditor I never had a public company client who did not disclose a detailed breakdown in the 10-K (in the stock-based compensation footnote). If they were not voluntarily disclosing it, I would have urged them to do so and I can’t imagine that my bosses would have allowed them to get away with it if they refused. It is obviously critically important information if you think a stock has big upside but has a big share overhang at some level.
IARdude Wrote: > What I’m getting at is this. Take two scenarios: > > 1) Company has tons of long-term warrants that are > one penny out of the money > > 2) Company has tons of warrants on the verge of > expiration and are so far out of the money there’s > almost zero chance they will ever be exercised. > > Now even in case 1 you can’t say for sure the > warrants will ever convert, but it’s sure a lot > more likely and should be factored into your > valuations. In case 2 you can ignore the warrants > all together in your valuation. The problem is how > can you even know what situation you’re facing as > a potential shareholder? The above companies had > about 3 times the amount of anti-dilutive shares > as they did common shares outstanding. How you > factor in these phantom shares is going to make a > huge difference in any share valuation. This is exactly the reason why there is not one solution in valuation. Valuation is an exercise at one point in time based on forward looking analysis. The assumptions I use today can change tomorrow or you may have a whole different set of assumptions alltogether. No one can say for sure “my valuation is correct and yours is wrong” as long as the assumptions used are sound. In your example, you could factor the warrants, that are deep in the money, in your valuation or you could not. Either way, the exercise is at a point in time with assumptions that outline your future outlook.
This conversation is a little confusing: 1) We’re talking about dilutive securities, not anti-dilutive securities, right? 2) There are warrants (converts, etc) and employee stock options which are accounted for differently. Tobias, I think, is talking about employee stock options. 3) Many of the former class of securities have lots of public info available as there are public filings about them. Details on that are not my gig.
I think, Joey, Tobias is asking WHAT IF the current securities (options or warrants which are anti-dilutive) are very close to becoming dilutive? How would/should the valuation look like in such scenarios?
I know what antidilutive securities mean in theory, but I’m having trouble understanding what an example of an antidilutive security would be. It’s a stock that can be converted to debt? Warrants in the money that might go out of the money?
Any security that has the potential to convert to common stock can be anti-dilutive. Eg: it is an anti-dilutive conversion if outstanding warrants are assumed to be exercised in order to acquire shares of common stock at a higher price than the market price of the stock.
bchadwick Wrote: ------------------------------------------------------- > I know what antidilutive securities mean in > theory, but I’m having trouble understanding what > an example of an antidilutive security would be. > It’s a stock that can be converted to debt? > Warrants in the money that might go out of the > money? From some earlier post I made: There are anti-dilution provisions in lots of convertible securities that make them maybe anti-dilutive but the classic example is convertible preferred stock which may be either dilutive or anti-dilutive. So lets say that there are 100,000 shares of common and 100,000 shares of convertible preferred each convertible into 1 share of common. EPS = $1 without conversion. Dividends on preferred = $1.50 EPS after conversion = (100K + 150K)/200K = $1.25 EPS without conversion = $1 Thus the convertible preferred is antidilutive.
OK, I see how the math works, but why would someone be interested in converting those preferred shares? Even at a 100% dividend payout, you’d be getting smaller cash flows ($1 or $1.25, vs $1.50) with greater uncertainty down the line. I suppose it only makes sense to convert the preferred shares if you think there will be substantial capital growth in the common stock over and above the dividend payments. But unless the convertibility provision expires, wouldn’t you just wait until the common stock had appreciated, and then convert? If you do that, then it’s dilutive again.
- Dilutive vs Anti-dilutive doesn’t have anything to do with whether or not they are actually converted. The converts are anti-dilutive now. 2) If earnings grow those converts can becme dilutive. 3) If the dividend on the common grows, at some point it may make sense to convert. 4) Some converts are mandatory converts or there is a conversion expiration date. In both cases, you need to convert.
sid3699 Wrote: ------------------------------------------------------- > This is exactly the reason why there is not one > solution in valuation. Valuation is an exercise at > one point in time based on forward looking > analysis. The assumptions I use today can change > tomorrow or you may have a whole different set of > assumptions alltogether. No one can say for sure > “my valuation is correct and yours is wrong” as > long as the assumptions used are sound. > > In your example, you could factor the warrants, > that are deep in the money, in your valuation or > you could not. Either way, the exercise is at a > point in time with assumptions that outline your > future outlook. That’s the problem though, I’m not saying I need some crystal clear picture of all outcomes, but I need SOME information. I have no idea what warrants are out of the money, in the money, about to expire, or even if I’m dealing with warrants at all. Maybe it’s convertible preferred stock? I have no idea. At this point I haven’t found ANY information other than the maximum number of shares that may be converted into existence at some point in time. Absent any more information, all I could see is taking a super conservative (and arbitrary) approach and assume a high rate of expected share conversions. Obviously this means assigning a lower valuation than is probably justified.
JoeyDVivre Wrote: ------------------------------------------------------- > 2) If earnings grow those converts can becme > dilutive. > 3) If the dividend on the common grows, at some > point it may make sense to convert. > 4) Some converts are mandatory converts or there > is a conversion expiration date. In both cases, > you need to convert. Exactly, so to model future conversions (and thus EPS dilution) you’d need to have some information about these securities to estimate the likelyhood of conversion. When there is a large amount of potentially dilutive securities (in this case 3x more than common shares issued!) this estimation becomes even more critical.
The excercise price as well as the conversion ratio must be disclosed somewhere. Are you saying this is the information you cannot find? Am quite positive such information is disclosed somewhere in the Qs and Ks- MD&A section may be?