InterDigital Inc (IDCC)

[blueskywaves]

The people complaining about dilution don't sound too credible because they can't relate dilution to shareholder value creation. The reason that they can't relate dilution to shareholder value creation is that they don't have proper perspective. The lack of perspective often produces emotional arguments. People who use emotional arguments tend to take things personally when confronted with facts and useful context.

This $475 study of 1,500 companies from the Investor Responsibility Research Center should help provide that perspective. Note that only 9 companies out of 1,500 companies -- 488 S&P 500, 389 S&P 400 Mid-Cap, 581 S&P 600 Mid-Cap -- in this study have ZERO dilution.

The important thing to remember is that IDCC has created more shareholder value in the last 2 years than at least 95% of the companies in this study and IDCC will probably create more shareholder value in the next 2 year than 95% of the companies in this study. Yet IDCC's dilution rate falls within the middle of the pack of its technology peers and can hardly be called excessive by anyone with a modicum of intellectual honesty especially when one relates its dilution rate to its market cap creation rate before and after the 3/14/03 settlement.

That inexplicable failure to relate IDCC's dilution to its market cap creation rate within the context of the worst downturn in IT history is just plain demagoguery. And stupid. Period.

Underwater Options Push Total Potential Dilution to New Heights

WASHINGTON, D.C. – Results from IRRC’s study, Stock Plan Dilution 2003: Overhang from Stock Plans at S&P Super 1,500 Companies indicate that top corporations once again expanded their use of equity incentives last year. Findings show that outstanding underwater stock options contributed significantly to rising potential dilution levels.

The recently released study annually measures the overhang disclosed by companies in the S&P 500, MidCap, and SmallCap indices—a total of 1,458 companies that held annual meetings between Jan. 1 and Aug. 31, 2001 were examined for the latest analysis.

IRRC extracted the most recent figures and calculated each company’s overhang by dividing the sum of outstanding stock option grants, plus shares reserved for future awards, by the number of total common shares outstanding. Overhang is one way that shareholders gauge the potential dilution to their holdings from the equity being transferred to employees via stock incentive programs. This year’s study found the following:

Potential dilution from equity incentives continues to rise. Average overhang among all study companies is 15.7 percent as of 2002, up from 14.1 percent the prior year. The median level also jumped—to 14.8 percent from 14.1 percent in 2001.

The most significant increase occurred at S&P 500 companies, where average overhang surged by almost two percentage points, from 13.7 percent to 15.4 percent (the median level rose from 12.8 percent to 13.7 percent in that index).

In the MidCap index, average dilution as measured by overhang is 16.7 percent, up from 15.6 percent in 2001 (the median level increased from 13.7 percent to 14.3 percent).

SmallCap companies, which historically have relied most heavily on stock-based compensation, continue to post the highest potential dilution levels. Average overhang among S&P SmallCap companies is 17.7 percent, up from 16.9 percent in 2001.

Technology continues to lead the pack

IRRC also analyzed the study companies according to 10 economic sectors. Benchmarks were determined for peer groups based on a combination of economic sector and market capitalization.

Technology companies are once again at the top of the dilution ladder, with average overhang of 24.4 percent. This is up from 20.8 percent the previous year.

Utility and Energy companies, on the other hand, continued their historically low dilution levels, reporting, on average, equity incentive shares that constitute just above 8 percent of total outstanding common stock, the lowest overhang in the latest study.

Shareholder opposition to new funding dips slightly

While total dilution continues to be a key factor for investors deciding how to vote on stock incentive plans, the average level of shareholder opposition to stock plan proposals decreased slightly last year, to about 22 percent, versus 23 percent in 2001. This is likely due to the fact that dilution levels for the actual proposals being voted on were more moderate in 2002— 5.4 percent compared with 5.7 percent in 2001— although high levels of underwater options continued to push many companies’ total overhang up. This year's voting results do reveal investors' continued dissatisfaction with excessive dilution levels, however: Companies with overall overhang higher than 30 percent faced strong shareholder opposition, averaging 34 percent.

Extraordinary dilution levels also spreading

Along with continuously rising average dilution levels, the number of companies with relatively high dilution levels continues to increase as well. Fifty-three of the companies we analyzed had total overhang of more than 40 percent. This is up from 37 companies in 2001. In most cases, this extraordinary potential dilution is generated by automatic share replenishment (“evergreen”) features in company stock plans.

At the top of this year’s total potential dilution list is Roxio, an information technology company with a market capitalization of approximately $94 million and total dilution of 87.5 percent. The company maintains an option plan with a replenishment feature that annually adds to the available pool of funds a number of shares equal to the lesser of 6 percent of the outstanding common shares or 4 million shares. The share replenishment feature is responsible for over 60 percent of the company’s total dilution.

Other companies with high overhang—all concentrated in the technology industry—include Broadcom (85.5 percent), Actel (77.9 percent), Siebel Systems (77.1 percent), Triarc (73.3 percent), and Nvidia (70.3 percent). All of these companies except Siebel Systems and Triarc have deployed evergreen plans.

“Evergreen plans clearly have a significant impact on shareholder dilution,” says study author and IRRC Project Manager Annick Dunning, “and shareholders have grown wary of them.” Facing stiff investor criticism, the number of companies with evergreen plans has leveled out recently. In 2002, 156 evergreen plans were in place among the 1,458 study companies (10.7 percent), compared to 139 evergreen plans in 2001 (11.4 percent), and 134 in 2000 (11.6 percent.).

At the opposite end of the spectrum, nine study companies had zero dilution. These companies rely solely on salary and annual and long-term cash incentive compensation, which results in a zero dilution level.

Run rates on the rise

Companies also continued recent trends of granting more stock incentives each year, IRRC found, based on the 1- and average 3-year “run-rates” calculated for each study company (“run rate” refers to the total grants made in the designated period, divided by the number of outstanding common shares). Companies granted slightly more options in fiscal 2001 than they did on average over the last three fiscal years. Technology companies granted by far the most options in the past year. The run rate of Technology companies is with 5.7 percent more than 5 times the grant rate of Utility companies that have with 1.1 percent the smallest grant rate of all industries.

IRRC extracted the data on dilution from stock plans from company proxy statements, annual reports and 10K forms. The study includes:

488 S&P 500 companies

389 S&P 400 MidCap companies, and

581 S&P 600 SmallCap companies.

The new study details the specific factors contributing to each company’s overhang level. It also includes analysis by peer groups, as well as separate chapters dealing with non-shareholder approved stock plans, option repricing, evergreen programs and stock purchase plans. Stock Plan Dilution 2003: Overhang from Stock Plans at S&P Super 1,500 Companies can be purchased for $475. To order a copy, visit our online Bookstore at www.irrc.com.

For more than 25 years, IRRC has been the leading source of high quality, impartial information on corporate governance and social responsibility issues affecting investors and corporations worldwide. Today, IRRC provides research, software products and consulting services to nearly 500 clients including institutional investors, corporations, law firms and other organizations.

http://www.irrc.com/press_releases/03252003_Underwater.html