Email to IDCC's Directors re share dilution sent on Feb. 17, 2003 as follows:
Mr. Campagna,
I had previously estimated the dilution from options and warrants to be about 28% over the prior three years for which we have data: 1999, 2000, and 2001. I am writing this email to correct that previous error and to set the record straight. From a previous email to you dated Jan. 21 as follows:
….”The outstanding options and warrants of 12m combined with 2.5m already exercised in the last three years is an earnings dilution of 28% based on 52m outstanding shares before the 2.5m exercised options. This dilution % does not even include any option grants for 2002.”
The problem with the above analysis brought to light by further personal research is that I only factored in stock options exercised during the last three years, but did not factor in stock warrants that had been exercised, nor did I factor in the restricted stock exercised or outstanding. When I adjust for these additional factors, I calculate a dilution factor of 39% over the last three years rather than 28%. This is injustice to the outside shareholders.
IDCC’s issued shares were 48.4 million at 12/31/98. Three years later IDCC’s issued shares were exactly 6m more at 54.4 million as of 12/31/01. The exercising of stock options accounted for 2.6m, but that was just part of the story. The remainder of the increase over the last three years came from insiders exercising stock warrants amounting to 2.2m shares and from issuing restricted shares to insiders amounting to 800,000. The final 400,000 additional issued shares came from employee stock purchase plans of 300,000 and the conversion of preferred into common of 100,000.
The amount of future dilution through common stock equivalents outstanding at 12/31/01 is composed of 10.6m in stock options, 1.4m in stock warrants, and .7m of restricted stock shares = 12.7m additional future common shares. The total dilution affect since 12/31/98 therefore includes 6m of actual exercised/issued shares and 12.7m of outstanding equivalents for a total of 18.7m shares divided by 48.4 million beginning issued shares at 12/31/98 = 39% dilution increase in just over the three years of 1999, 2000, and 2001.
We already know that some of the outstanding options did get exercised in 2002, as well as some more of the restricted stock got issued in 2002. However, this has already been picked-up and included in the previous dilution calculations as outstanding at 12/31/01. But the outside shareholders still do not know how many additional stock options got granted in 2002, and we won’t know until the 10K is published. Additional option grants in 2002 will only add to the previously calculated dilution percentage. Over 5m options were granted in 2001 alone. Dilution will cost the outside common shareholder tremendously in the future through decreased earnings per share, and thus lower stock prices.
I believe that the top executives at IDCC are already getting far above reasonable cash compensation in salaries and bonuses from a small-cap company for their efforts. This is their job and what they are paid to do. The outside stockholders, who are investing their cash at the prevailing market prices, are the ones who are taking all the risks with this company. For that risk, our only compensation is through the future stock price appreciation, if the company pays no dividend. And that future stock price appreciation should not be tremendously reduced through dilution by those who take no risk through options/warrants/restricted stock, and have already received overly generous cash compensation.
Have you and the other directors done anything illegal in this matter? NO. Have you and the other directors done things that are unfair and unjust to the outside shareholder in this matter? My opinion is a resounding YES. I am still upset with IDCC directors’ lack of dialogue on this issue and other shareholder concerns. Therefore, I will probably greatly cut back on my personal time and energy devoted to this stock. However, I would still welcome any dialogue from you or the other directors on any of these matters, if you so choose.
Sincerely,
Ronny Marchman, CPA
AI
