2002 Annual report tidbits:
The exercise of an option results in a cash infusion, a tax deduction and dilution.
To illustrate, out of a total outstanding pool of 10,462,000 stock options, 7,702,000 options were exercisable as of 12/31/2002 at a weighted average exercise price of $12.14. That's a potential cash infusion of $93.5M.
IDCC also has $138M in NOL (net operating loss) carryforwards, nearly half of which can be attributed to tax deductions related to previous option exercises. Under the current rules, the exercise of options will also increase IDCC's deferred tax asset, which will come in handy in reducing IDCC's tax burden now that it's starting its very profitable growth stage.
IDCC has 1,878,000 options left available for grant under the current plans. It also has 222,000 warrants convertible to common stock at an average exercise price of $6.22. Lastly, IDCC also has a restricted stock program with 2.58M shares still available from an authorized 3.5M shares.
Restricted stock issued went from 813k shares in 2001 to 915k shares in 2002 or less than 13%. If I am correct that these warrants and restricted stock are generally reserved for management and outside consultants then it is worth noting that the number of restricted stock issued only increased by 13% in 2002. Is that excessive? Royalty income increased by 170% and the stock increased by 50%!!!
Nearly 90% of IDCC's outstanding option pool of 10,472,000 is in the money. The average size of each employee's option package is nearly 35k with a 10-year vesting period.
1,878,000 options available for grant covers around 54 average-sized option packages. Adding 5M more options to the pool would allow IDCC room to budget 115 more average-sized option packages (read: employees) or a total of 169 packages.
IDCC had 300 employees as of 12/31/2003. During the last 7 years its headcount has ranged from 126 to 319 as it scrambled to recover from the 1995 Motorola debacle. Now that it is starting its growth stage, it does not appear to be excessive for IDCC to budget for 169 additional employees in advance using its current 2002 300-employee headcount as a baseline. That's only a 56% increase in headcount for a company that we all hope will grow sales in excess of 10% or 20% per annum for the next 4 years at least.
Using an estimated $150M in 2003 sales as a baseline and assuming sales growth of 10% per year, IDCC would need a higher headcount to support $311M in sales in 4 years, or more than double 2003 sales. Using an estimated $200M in 2003 sales as a baseline and assuming sales growth of 20% per year, IDCC would need a higher headcount to support $415M in sales in 4 years, or again, more than double 2003 sales. The caveat here of course is that royalty-driven sales growth will require different staffing requirements (LESS) than product-driven sales growth (MORE).
Like I said, a small wireless company with healthy sales prospects and a very flexible cost structure like IDCC stands to benefit the most from the accounting rule changes next year since the rule change in early 2004 will most likely lead to a MIGRATION OF SCARCE WIRELESS TECHNICAL TALENT away from large wireless companies with relatively flat sales, inflexible cost structures and increasingly mediocre option programs. Already, you're starting to see more tech companies prepare for the 2004 rule changes by slashing headcount and issuing less options and more salaries to its employees.
What a shame it would be if IDCC can not take full advantage of this migration of scarce technical talent because of the short-sightedness of some sad sacks, er, shareholders.<G>!
