How does IDCC calculate weighted average diluted shares?
From the fourth quarter press release, IDCC had 53.6m weighted average outstanding shares–Basic, and 57.9m weighted average outstanding shares-Diluted. The reported dilution was thus an extra 4.3m shares in the fourth quarter of 2002. The dilution is due to IDCC having Net Income in 2002, and is coming from “common stock equivalents”. These would include outstanding/unexercised options and warrants, which are in-the-money, ie the weighted average stock price of IDCC is greater than the exercise price. My problem is that I don’t understand how the extra 4.3m diluted shares were calculated. My calculations come out more. Before I get to my calculations, a little background info is in order.
From page 40 of the 10K as follows:
For the years ended December 31, 2001 and 2000, all options and warrants were excluded from the computation of diluted earnings per share (EPS) as a result of a net loss reported in each period. For the year ended December 31, 2000, options to purchase 1.0 million shares were excluded from the calculation of diluted EPS before the cumulative effect of change in accounting principle, because the exercise prices of the options were greater than the weighted-average market price of our Common Stock during the period and, therefore, their effect would have been anti-dilutive. For the year ended December 31, 1999, options and warrants to purchase approximately 1.6 million shares of Common Stock were excluded from the computation of diluted EPS because their effect was anti-dilutive.
From page 46 of the 10K as follows:
The following table summarizes information regarding the stock options
Outstanding at December 31, 2001 (in thousands, except for per share amounts):
Range of Number Weighted Average
Exercise Prices Outstanding Exercise Price
$ 0.01 - 5.31 757 $ 4.71
$ 5.38 - 5.44 1,372 5.43
$ 5.50 - 7.69 1,181 6.42
$ 7.69 - 8.81 541 8.19
$ 8.88 - 9.60 2,047 9.58
$ 9.63 - 10.75 1,149 10.37
$10.86 - 12.40 1,357 11.89
$12.43 - 18.13 1,066 15.10
$18.25 - 37.00 439 24.74
$39.00 - 39.00 655 39.00
$ 0.01 - 39.00 10,564 $ 11.67
(Note: the total number of outstanding/unexercised options at 12/31/01 is 10.6m, with a weighted average remaining contract life of the options is 9.1 years and a weighted average exercise price of $11.67)
From page 47 of the 10K as follows:
Common Stock Warrants
As of December 31, 2001, we had various warrants outstanding to purchase 1.4 million shares of Common Stock at exercise prices ranging from $2.50 to $9.65 per share, with a weighted average exercise price of $5.51 per share. As of December 31, 2001, all of these warrants were currently exercisable. These warrants expire in various years through 2004. The exercise price and number of shares of Common Stock to be obtained upon exercise of certain of these warrants are subject to adjustment under certain conditions.
Therefore as of 12/31/01, IDCC had 10.6m outstanding/unexercised stock options and 1.4m outstanding stock warrants for a total of 12m common stock equivalents. The next calculation is the weighted average outstanding common stock equivalents, which are now in-the-money during the fourth quarter. The first step is to calculate the weighted average market price of IDCC stock during the fourth quarter.
I looked at the closing price of IDCC stock during each of the 64 trading days during the fourth quarter. I added up all 64 days of closing prices = $890.63 and then divided by the 64 trading days = $13.91 calculated weighted average of IDCC’s market price during the fourth quarter. From the above information on options and warrants, I calculate that the in-the-money options and warrants that were below this $13.91 average market price = at least 9.8 million shares. The 9.8m in-the-money diluted shares included all 1.4m outstanding warrants and a minimum of 8.4m outstanding options, which I calculated by adding up the number of outstanding options from the exercise price ranges through $12.40. I did not include any outstanding options from the $12.43 to $18.13 range in the above chart, although there were probably some within that range which were less than $13.91 and thus in the money. I just have no idea how many. I also did not include any outstanding options from the last two exercise ranges from $18.25 - $39.00, as these are clearly not in the money.
Thus I don’t understand how IDCC came up with the additional 4.3 million as the diluted shares, when I come up with almost an additional 10 million as the diluted shares. Can an accountant or anyone else explain what I am missing and what is causing this discrepancy? Is there some additional averaging going on because some of the options and warrants were in the money part of the fourth quarter, and not in the money for part of the fourth quarter? The lowest closing price of IDCC during the fourth quarter was $8.83, which occurred during the first week of October.
AI
