Replies to post #100515 on InterDigital Inc (IDCC)

[rmarchma]

Corp_Buyer re new LTI Plan and Bonus Plan

First the Long-Term Incentive Plan initiated 4/1/04 is different from IDCC's Annual Bonus Plan as amended on 9/30/04. So don't use the term LTI Bonus, because this would commingle the two separate compensation plans. However, they are similar in that both of these plans compensates IDCC employees with both Cash and with RSUs. The LTI Plan covers executives, managers, and administrative personnel, which compose about one third of IDCC's workforce or approximately 100 people. However, the Annual Bonus Plan covers all of IDCC's employees.

The LTI plan is composed of cash incentives and RSU incentives, with more being awarded through the RSU incentive portion than through the cash incentive portion. If you are trying to look at the total value of the LTI incentives per year, rather than the amount actually recorded into expense each year, then I will answer your question with a yes.

The total value of the cash incentive and RSUs granted for the nine months of 2004 under the LTI Plan was $9.5m ($2.9m cash and $6.5m total value of the RSU grant). At this point we are really not sure of the total value of the cash incentives and RSUs granted for 2005 under the LTI Plan, but I would estimate from limited data available, that it could be around $16m. We will have a much better handle on the 2005 LTI Plan cost and total value when the first quarter 10Q is published.

IDCC still has an Annual Bonus Plan, and it was amended on 9/30/04. Although the plan is for all IDCC employees, it is still heavily weighted toward the executives and managers. The new LTI Plan did not supersede the Bonus Plan, it is in addition to the Bonus Plan. The Annual Bonus plan primarily provides Cash bonuses, but up to 30% of the Bonus could be paid with RSUs. I have seen no data regarding the total cost of the Annual Bonus Plan.

It appears that the RSUs that were granted on 1/1/05 were for the LTI Plan, whereas the RSUs that were granted on 2/28/05 were for the Annual Bonus Plan. The Annual Bonus for a given year is normally paid to the employees between February 15 and March 31 of the following year, according to the amended plan document. The insiders were receiving about 20% of the number of RSUs in the February 28 Bonus compared to the number of RSUs received in the January 1 LTI Plan. However only a maximum of 30% of the Annual Bonus can be in the form of RSUs.

Olddog found IDCC's amended Annual Bonus Plan and provided the following link:

http://www.sec.gov/Archives/edgar/data/354913/000119312505067076/dex1066.htm

It is very disturbing to me that compensation is spiraling out of control at IDCC. The cost of the new LTI Incentive compensation plan will be a lot more than initially thought, plus it is dilutive to the shareholders to boot and will further beget additional insider selling. There were 370,000 RSUs granted in 2004 in conjunction with the LTI Plan, and I don't know how many were granted in conjunction with the Annual Bonus Plan. I estimate that there was probably around 470,000 RSUs granted in 2005 in conjunction with just the LTI Plan. This does not include the RSUs granted under the Annual Bonus Plan, or the RSUs granted to the Directors for their compensation.

It is appalling to me that the executives and managers are getting a double dose of additional compensation through both the LTI Plan and the Annual Bonus Plan. I was hoping that the LTI Plan would have superseded the Annual Bonus Plan, at least for those covered under the LTI Plan. Also I thought it was very bad timing by IDCC to initiate new compensation plans when they did, ie before the resolution of the Nokia and Samsung arbitrations and before 3G licenses are secured with the tier 1 manufacturers.

It just appears that IDCC is bound and determined to richly reward themselves no matter what. This excessive compensation at IDCC begins with and is instigated by Harry Campagna. I firmly believe that the starting point and best way to improve IDCC is to completely rid the company of Mr. Campagna.

[Danny Detail]

Corp .. This is a two part question:

1. Tom Carpenter upgraded IDCC yesterday to a buy from a long-term buy. If you were Tom what would you do now given your apparent conclusion that the compensation costs at IDCC are even more excessive and outrageous than you thought before. Would you say nothing or issue a downgrade? If it is the latter would it be to long-term buy, hold or sell (or any other rating of your personal preference) and what would your target price be?

2. Given that you are not Tom Carpenter and are not saddled with his past history of investment ratings and target prices for IDCC, imagine instead that you are a sell-side analyst who is about to initiate coverage of IDCC on Monday, what investment rating and target price would accompany your initial report and why?

TIA,
Brad Schaaf AKA Danny Detail

[olddog967]

Corp-Buyer: As you say, you are trying to calculate the value of the LTIP grants, not annual expense. However, the only available information as to grant amounts was the statement that for the first program starting Apr 2004, about 370,000 shares valued at $6.5 million were awarded. All the rest of the dollar information that has been provided by IDCC, and upon which we have been making calculations, pertained to expenses.

As stated in the 10-K, IDCC is using accelerated amortization to calculate the expense charge for the RSU grants. Accelerated amortization of RSU grants is a new accounting procedure, and I am trying to get more information on it. However, from what I have found, it is obvious that the procedure results in much higher first year costs than straight amortization. In an example of the expense calculation of a grant with a four year vesting period, instead of the normal 25%/year expense charge, using accelerated amortization results in a first year charge of 52%. Therefore it is obvious that trying to extrapolate grant values from annual expense charges can result in a distorted picture. I would say we need more information than is currently available, before we start claiming what the LTIP grant amounts are and what they cover.


The foregoing is my basic point, but I would also like to point out that your statement concerning bonus payment for prior years performance is incorrect.

“* Bonus Granted in 2004 (for 2003 performance) = $9M ?
* Bonus Granted in 2005 (for 2004 performance) = $16M ?”

While the annual performance bonus is based on the prior year’s goals and performance, the LTIP payouts are based on future performance, The initial bonus granted in April 2004 covers performance during the period from April 2004 through December 2005, while the grants given in January 2005 cover the 3 year program cycle from January 2005 through December 2007. As noted, the amounts can change based on actual future performance.

“We expect that the expenses associated with the performance-based cash incentive and RSUs will each increase by between $4 million to $5 million in 2005 as we accrue expenses for both the final year of the initial measurement period (April 2004 through December 2005) and begin the first year of the first three year measurement period under our long term compensation programs. However, the amount recorded may change dependant upon our future expectations to attain performance targets.

It should also be noted that this is not an annual progam. After the first three year cycle starts in January 2005, the next one should start in January 2007.

“Program Cycle. The Program operates in cycles (the “Program cycle”). The first Program cycle began on April 1, 2004 and will end on December 31, 2005. Subsequent Program cycles are intended to be overlapping three-year cycles, beginning January 1, 2005 and recurring every other year thereafter.”

IMO all this shows that while IDCC has put out a lot of information about the program, it has mostly been in the legalese of SEC reports. For the average stockholder who is not a compennsation expert or a CPA with related experience, what is needed is a simpler explanation of how the program and its accounting works.