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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission File Number 1-11152
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INTERDIGITAL COMMUNICATIONS CORPORATION
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-1882087
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
781 Third Avenue, King of Prussia, Pennsylvania 19406
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 610-878-7800
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $.01 Per Share
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(Title of class)
Securities registered pursuant to Section 12(g) of the Act:
$2.50 Cumulative Convertible Preferred Stock,
Par Value $.10 Per Share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
On March 6, 1998, the aggregate market value of the Registrant's Common
Stock, $.01 par value, held by non-affiliates of the Registrant was
approximately $201,434,767.
On March 6, 1998, there were 48,243,554 shares of the Registrant's Common
Stock, $.01 par value, outstanding.
Documents Incorporated by Reference
Portions of the Registrant's definitive proxy statement to be filed in
connection with the annual meeting of shareholders to be held in 1998 are
incorporated by reference into Items 10 through 13 hereof.
PART I
Item 1. BUSINESS
General. InterDigital Communications Corporation ("InterDigital"), a public
corporation incorporated in the Commonwealth of Pennsylvania, develops and
markets advanced digital wireless telecommunications systems using proprietary
technologies for voice and data communications. In conjunction with its
technology development, InterDigital has developed an extensive body of
technical know-how and a broad patent portfolio related to those technologies
and related product embodiments. InterDigital offers its customers, licensees
and alliance partners what it believes is unique access to both time division
multiple access ("TDMA") and Broadband Code Division Multiple Access(TM)
("B-CDMA"(TM)) proprietary digital wireless technology.
Strategy. InterDigital's strategic objective is to be a leading-edge
provider of wireless access technology. InterDigital believes achieving that
position will enable it to deliver sustainable earnings growth through licensing
revenues and product sales.
To accomplish this, InterDigital plans to penetrate the wireless local loop
market with B-CDMA technology and products, capitalizing on its expertise in air
interface technology and maximizing opportunities for sales of wireless local
loop components and products through its own efforts and the sales efforts of
strategic partners. InterDigital also intends to explore strategic opportunities
to continuously upgrade and strengthen its technology for a possible range of
extended applications, including packet data and mobile communications.
An important feature of InterDigital's strategy and current course of
conducting business is its alliance program, under which InterDigital is
aligning, or seeking to align, itself with key companies in the
telecommunications industry. Through its alliance program, InterDigital's
objectives are to (i) bolster its on-going efforts to develop its B-CDMA air
interface technology, initially as to wireless local loop applications with
possible later extension to mobile and other applications, (ii) spread the
commercialization of B-CDMA-based products (including InterDigital's proprietary
TrueLink(TM) wireless local loop product embodiment), and (iii) generate
licensing revenues through the B-CDMA product sales and marketing activities of
InterDigital's alliance partners and licensees.
In December 1994, InterDigital initiated the alliance program by entering
into an integrated series of agreements with Siemens Aktiengesellschaft
("Siemens") covering UltraPhone(R) system marketing and product development,
B-CDMA technology development, patent licensing and other areas of cooperation.
InterDigital broadened its alliance relationships when it effected a series of
agreements with Samsung Electronics Co., Ltd ("Samsung") in February 1996. The
Samsung agreements cover B-CDMA technology development, patent licensing,
product development, technology transfer and other areas of cooperation. In
March 1998, InterDigital entered into its third alliance with Alcatel Espana
("Alcatel") covering B-CDMA technology development, patent licensing, product
development, technology transfer, standards support and other areas of
cooperation. (See "- Alliance Agreements".)
InterDigital's strategy is forward looking in nature and, as such, is
inherently subject to risks and uncertainties. The successful commercial
development and deployment of B-CDMA-based products, and the development of
recurring sales and licensing revenues is dependent upon many factors, some of
which are detailed elsewhere in this Form 10-K, such as technological
achievement, the continued validation of the theories upon which the new
technology is being designed, the continued validity of InterDigital's patents,
the continued availability of debt, equity or alliance partner funding
sufficient to support an increasing level of efforts over several years and,
ultimately, market acceptance of the resultant products. Other factors which
could cause actual results to differ materially from those which InterDigital
seeks to achieve are detailed elsewhere in this "Business" section and in
"Management's Discussion and Analysis of Financial Position and Results of
Operations - Overview and Statement Pursuant to the Private Securities
Litigation Reform Act of 1995".
1
Products. InterDigital's current commercial product (based on TDMA
technology) is the UltraPhone system, a radio telephone system providing
businesses and households access to basic telephone service through a wireless
local loop. In January 1998, InterDigital announced that it had restructured its
operations to more fully concentrate on the commercialization of its B-CDMA
technology. As part of that restructuring, InterDigital plans to curtail its
level of spending relating to the re-engineering and next generation development
efforts on the UltraPhone system. Despite such reorientation, InterDigital
continues to market the UltraPhone product in selected markets around the world
as an optimal solution to rural telecommunications needs.
InterDigital has also started to market its new TrueLink wireless local
loop product based on InterDigital's proprietary B-CDMA technology. InterDigital
commercially launched the TrueLink product in March 1998 and expects field
trials of the system to occur during 1998 in urban and suburban or close-in
rural environments.
Licensing. InterDigital Technology Corporation ("ITC"), a wholly-owned
subsidiary, and InterDigital, together, variously offer non-exclusive, royalty
bearing patent, technology and know-how, and trademark licenses to
telecommunications manufacturers that manufacture, use or sell, or intend to
manufacture, use or sell, equipment that utilizes InterDigital's extensive
portfolio of TDMA, Code Division Multiple Access ("CDMA") and other patented
technologies. InterDigital believes that, through ITC's patent portfolio, and
InterDigital's TDMA and B-CDMA research and development capabilities and
resultant know-how, both it and ITC are positioned to take advantage of the
present evolution in wireless telecommunications to digital technology from
analog technology and the future evolution from digital narrow band services to
the broader offerings supported by digital broadband services. ITC implemented a
comprehensive patent licensing strategy during 1993. These efforts have resulted
in patent license agreements with a total of thirteen entities as of December
31, 1997, and the recognition of $67.7 million, $28.7 million and $6.0 million
of licensing revenue in 1995, 1996 and 1997. (See "- Technology and Patent
Licensing" and Item 3. "Legal Proceedings".)
Other. Since its inception, InterDigital has expended substantial sums to
develop its proprietary and patented technologies and establish and upgrade the
patent portfolio owned by ITC, to develop and commercialize products delivering
the advantages afforded by its technologies and to establish a market for those
products. InterDigital had an accumulated deficit of $196.8 million as of
December 31, 1997.
B-CDMA Technology and Product Development
General. InterDigital and its alliance partners are developing a new air
interface technology and embodying products based on InterDigital's patented
B-CDMA technology and other proprietary technologies. The initial phases of the
development effort are oriented towards commercial deployment of wireless local
loop products with performance and cost characteristics applicable to a market
segment distinct from InterDigital's UltraPhone system. These applications
include urban deployment in both developed and developing countries of systems
providing high quality voice, high-speed data transfer and multi-media
capabilities. It is InterDigital's expectation that the initial B-CDMA wireless
local loop product will evolve in successor generations to a more cost-effective
product platform and has the inherent design potential to include limited
mobility, handset functionality, portability and eventually Personal
Communication System ("PCS") applications. InterDigital defines "True PCS(TM)"
services as the ability to provide a broad range of communications services to
individual users through bandwidth on demand, including Integrated Services
Digital Network ("ISDN") and multi-media capabilities in a mobile format.
InterDigital has applied its proprietary B-CDMA technology in the
architecture of its TrueLink wireless local loop product. Unlike conventional
multiple access systems which utilize radio sharing techniques based on division
of available bandwith into narrow channels and/or time slots, B-CDMA technology
distributes multiple, simultaneous conversations and/or data transmissions
across a broad segment of radio spectrum. The TrueLink product provides
subscribers with access to the public switched telephone network, on demand, for
voice, data, facsimile, ISDN, and video/multimedia services.
2
The TrueLink system implements a transparent wireless infrastructure which
offers telecommunications services in a point-to-multipoint network. It consists
of four major network elements: the radio carrier station ("RCS"), the remote
network terminal ("RNT"), the radio distribution unit ("RDU"), and the Access
Integrator ("AI"). The RCS, the functional base station, connects to the public
switched telephone network through either the RDU or the local telephone
company's central office via terrestrial links. The RCS transmits to the RNT,
which is located on the subscribers' premises and provides the subscriber line
interface to telephone equipment. The RCS transmission to the RNT replaces the
traditional wireline. Finally, the AI provides administrative and maintenance
functions for the system. The TrueLink system is particularly suited for urban
and suburban environments.
Marketing. InterDigital and its alliance partners have started to market
the new B-CDMA-based wireless local loop products. InterDigital's B-CDMA
technology was demonstrated in Hannover, Germany at the CEBIT telecommunications
show in March 1997 and its TrueLink system was unveiled for commercial launch at
the CEBIT show in March 1998. InterDigital expects field trials of the TrueLink
product to occur during 1998. During 1997, InterDigital had approximately $1.1
million of sales related to the TrueLink product. These sales included B-CDMA
ASICs (Application Specific Integrated Circuits) and B-CDMA components sold to
alliance partners for their integration into pre-production products.
Competition. A number of companies, many of which are substantially larger
and have substantially greater financial, technical, marketing and other
resources than InterDigital, sell or may introduce products which will be
competitive with InterDigital's (and its alliance partners') B-CDMA products. In
addition, in situations where a potential customer's needs for local loop
services favors deployment of wireless technologies, there are many existing and
announced terrestrial and satellite -based delivery systems that may be
considered. Other manufacturers offer competitive analog and digital wireless
local loop systems. Fixed analog and digital cellular systems are also offered
to provide service in the local loop. Competitive CDMA technologies are
currently being deployed as wireless local loop and cellular applications. At
least one company is offering add-on modules which are promoted as having the
capability of converting cellular systems into wireless local loop systems.
Various consortiums have been announced with the intention of providing
satellite based services, in some cases in conjunction with the deployment of
new terrestrial infrastructure. When fully deployed, some satellite systems may
be directly competitive with InterDigital's (and its alliance partners' B-CDMA
technology-based) products. InterDigital believes that, if it and its alliance
partners can enter the market ahead of certain of its competitors, its
competitive position will be enhanced. While InterDigital believes that its
development efforts are likely to give it and its alliance partners this
competitive advantage, there can be no assurance that InterDigital will be able
to accomplish its goal, either by maintaining its commercialization schedule or
otherwise. Further, competitors may be further along in their development
efforts than InterDigital is fully aware.
InterDigital believes that its B-CDMA technology has several advantages as
compared to other currently available or developing digital wireless
technologies in these applications:
o Robust Radio Signal. The B-CDMA radio signal is expected to have
extremely high immunity to interference and multipath fading because
the radio signal is spread over a larger bandwidth (typically 7-15 Mhz
at 3.5 and 5 Mhz intervals) than that utilized by other technologies
(typically 1-5 Mhz). In addition, the advanced digital signal
processing techniques employed in InterDigital's B-CDMA technology
implementation are expected to allow a greater portion of a degraded
signal to be recovered.
o Simplified Network Planning. InterDigital's B-CDMA technology allows
nearly all available radio frequencies to be utilized in each cell
site. This simplifies frequency planning and the process of cell site
planning and network expansion as compared to other digital wireless
technologies.
o Bandwidth on Demand. InterDigital expects that its B-CDMA technology
will allow operators to offer services supported by bandwidth on
demand to their customers. This means that customers can, through a
single air interface, readily access a full range of services from
basic telephony through ISDN.
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o System Design Flexibility. The B-CDMA air interface technology is
being designed to allow product implementations capable of utilizing
virtually any currently available voice coding technology. (These
technologies utilize varying rates of data transfer, which affects
service quality and system capacity). This is expected to allow
product developers and operators the ability to balance the competing
demands of system capacity and service quality. InterDigital expects
that systems utilizing its B-CDMA technology will have higher capacity
capabilities at comparable service quality levels as compared to
systems utilizing other technologies.
o Privacy. InterDigital believes that CDMA technologies (both broadband
and narrowband) allow more secure transmission than other wireless
technologies currently available, making intentional or accidental
eavesdropping extremely difficult with commercially available
technology.
B-CDMA Business Strategy. The wireless local loop market can be segmented
in two fundamental ways: system service area and sophistication of service
features. InterDigital and its alliance partners expect to deploy B-CDMA
products in urban and suburban settings, in commercial and residential
applications for voice, data, facsimile, ISDN, and video/multimedia services.
InterDigital expects that the B-CDMA product will compete with many of the
products with which the UltraPhone product has competed (see "- The UltraPhone
System Competition and Market") and against other current and future products,
some of which purport to offer many of the advantages of InterDigital's B-CDMA
technology. InterDigital believes that international demand will be related to
the significant worldwide need for additional telephone services, particularly
in developing countries which are planning significant infrastructure
development and where there are significant numbers of persons not presently
served, or served by antiquated systems. Additionally, trends in the
privatization of traditional government owned and operated telecommunications
organizations are expected to increase demand for wireless systems.
Backlog. There were no orders on backlog for the TrueLink product at
December 31, 1997. To the extent orders are receive during 1998, they are not
expected to be substantial.
Production of Proprietary Products. InterDigital plans to rely primarily on
its alliance partners for the initial production of its TrueLink wireless local
loop product. The existing agreements with the alliance partners provide a broad
framework for such activities but specific production agreements have not been
negotiated. There can be no assurance that, in the future, InterDigital will be
able to negotiate such contracts or maintain OEM procurement contracts, either
at all or on terms favorable to InterDigital. In addition, InterDigital entered
into an agreement with Texas Instruments, Inc. to manufacture InterDigital's new
integrated chip. InterDigital anticipates that, in the future, such chips may be
marketed and sold to differing markets by either Texas Instruments or by
InterDigital.
Technical Standards. InterDigital has and continues to be active in the
ongoing standards setting process for third generation mobile products and
wireless local loop products sponsored by certain standards setting bodies.
InterDigital plans to pursue in the U.S., and to work with Siemens and Alcatel
on the international front, in proposing a standard which incorporates elements
of B-CDMA technology in third and fourth generation applications. InterDigital
will also, through its alliance partners, seek to establish the critical mass
which would allow B-CDMA technology to be considered a defacto standard, where
appropriate.
The UltraPhone System
General. The UltraPhone telephone system is an advanced digital
telecommunications system, based on TDMA technology, which is designed to
provide wireless local loop telephone service as an alternative to conventional
wireline systems. It offers greater flexibility and ease of installation than
conventional wireline-based systems and is designed to provide high transmission
quality, capacity and spectrum efficiency to large numbers of users over a broad
region. Utilizing InterDigital's patented TDMA and other proprietary
technologies, the UltraPhone telephone system enables its users, which have
historically consisted primarily of local Telephone Operating Companies
("TELCOs"), to offer communication services in places where the cost of, or time
required for, installing, maintaining or upgrading conventional wireline
4
telephone service supports selection of the UltraPhone system. For these
reasons, the UltraPhone telephone system is particularly well-suited for rural
areas of developing countries. Sales of UltraPhone systems accounted for
approximately 20%, 47% and 86%, respectively, of the total revenues of
InterDigital during 1995, 1996 and 1997. Through December 31, 1997, InterDigital
has sold over 351 UltraPhone systems worldwide, with aggregate UltraPhone
product revenue totaling over $205 million.
The UltraPhone system consists of an advanced digital radio central network
station (the "Base Station") serving individual or clustered subscriber units
(the "Subscriber Stations") omni-directionally covering a radius of up to
approximately 40 miles from the Base Station (depending upon the terrain). The
Base Station consists of a radio carrier station and a central office terminal
that connects to the public switched telephone network through the local
telephone company's central office. The Base Station is configured in a standard
cabinet with rack-mounted digital cards and is designed for automatic,
unattended operation with low maintenance requirements. Each Base Station is
modularly expandable through the addition of new radio channel elements to serve
up to 896 separate Subscriber Stations.
The UltraPhone Subscriber Station, which includes a radio with an integral
power amplifier, digital circuit card assembly and other components, is
installed at or near the subscriber's location. Standard telephone instruments
(including multiple extension phones and ancillary instruments such as answering
machines, facsimile transmission machines and data modems) are attached to the
Subscriber Station by means of standard telephone wiring or telephone jacks. A
small antenna located at the Subscriber Station establishes the radio link with
the Base Station. The Subscriber Station is powered by standard AC or DC
electrical power and has optional battery back-up for power outages. The
Subscriber Station is available in several standard configurations, including a
single line, fixed unit and a multiple-line fixed unit offered in a 64-line
version. InterDigital has also developed a rapidly deployable and transportable
version of the fixed UltraPhone Base Station which is designed to provide high
quality and private telephone communications in cases of natural disaster,
tactical military situations, emergencies and other temporary circumstances.
Competition and Market. The UltraPhone product competes with wireline and
wireless systems which provide basic telephone service in developing nations. It
has competed with many of the products that InterDigital expects its TrueLink
product to compete with. (See "- B-CDMA Technology and Product Development
Competition"). The UltraPhone system has been deployed in applications ranging
from remote rural to dense urban areas, but is generally utilized and
differentiates itself from competitive products by generally being more cost
effective in rural applications where its service features are required. Other
technologies, including wireline based systems and wireless systems with smaller
service areas than the UltraPhone system, are generally more cost effective and
may provide more advanced features in dense urban applications where the
UltraPhone system is not typically marketed. Microwave-based wireless systems
with larger service areas than the UltraPhone system and which have data
transfer capability up to 64 Kilobits per second, are generally more cost
effective than the UltraPhone system in more remote rural applications where the
UltraPhone system is also not typically marketed.
Intense price competition exists in the market in which the UltraPhone
system competes. Historically, InterDigital has marketed the UltraPhone system
at sales prices which generated little, if any, margin. Absent significant cost
reduction, which InterDigital is not currently undertaking, margins are not
expected to improve. In addition, InterDigital expects that its ability to
generate profit margin from UltraPhone sales will be further hampered by the
Asian economic crisis, which InterDigital believes has affected its customers
and potential customers ability to undertake costly infrastructure projects. On
the other hand, the UltraPhone system offers its potential customers a proven
product which demonstrates reliability and high quality.
UltraPhone Business Strategy. InterDigital's UltraPhone Business Strategy
is to market to niche markets where the potential for profit exists through
strategic partners and a small direct sales force.
InterDigital's strategy had previously been to solidify its customer base
and penetrate additional market segments by reducing UltraPhone system costs,
increasing the system's capabilities and enhancing its
5
features. InterDigital introduced higher speed facsimile and data communications
capabilities during 1996 and has designed product options for new frequencies of
operation. Due to the restructuring of operations to concentrate on the
commercialization of B-CDMA, InterDigital is not currently pursuing additional
UltraPhone product redesign efforts.
InterDigital believes that the UltraPhone product can be competitive in
selected markets around the world, and intends to concentrate on those niche
opportunities where the potential exists to win profitable contracts.
InterDigital also intends to continue to service, but not emphasize, the United
States market to the extent that the UltraPhone system meets specified
requirements. From time to time, InterDigital may pursue partnerships with other
telecommunications companies to promote large, multi-year infrastructure program
orders of the UltraPhone system. InterDigital's objectives in forming such
partnerships would be, among others, to (i) combine applicable expertise and
buying power to affect cost reductions in the delivered UltraPhone systems, and
(ii) provide local businesses and governments with economic incentives, as well
as solidify InterDigital's competitive position in a particular market by
responding to any local requirements for in-country sourcing or labor
utilization. There can be no assurance that InterDigital will be able to form
any such partnerships or secure any such orders.
Sales by Geographic Area. Product revenues by geographic area are as
follows (in thousands):
1995 1996 1997
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Domestic $ 2,685 $ 1,958 $ 1,253
Foreign 13,896 23,016 42,601
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$16,581 $24,974 $43,854
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Major Customers. During 1995, InterDigital's Indonesian customer (PT.
Telekomunikasi Indonesia) and its Russian customer (Lukoil-Langepasneftegas)
accounted for 37% and 20%, respectively of product revenues. During 1996,
InterDigital's Philippine customer (Philippine Long Distance Telephone Company)
and its Indonesian customer accounted for 56% and 16% of product revenues,
respectively. In 1997, InterDigital's Indonesian and Philippine customers
represented 75% and 7% of total product revenues, respectively. All of such
customer sales represented sales of the UltraPhone product. During 1997,
InterDigital began shipping prototype units of the TrueLink product to Siemens.
These shipments totaling $1,063,000 are recorded in product revenues as such
alliance partner is purchasing these units on a cost plus profit basis.
Backlog. On May 16, 1997 InterDigital signed a contract with Myanma Posts
and Telecommunications, ("MPT") valued at $250 million which is currently not
included in backlog. The contract amount includes UltraPhone and B-CDMA systems,
infrastructure equipment and services, as well as capital costs for a
manufacturing facility to be built in Myanmar. Implementation of the ministerial
details of the contract is subject to certain Myanmar government approvals as
well as financing. InterDigital expects to begin production under the contract
once MPT has secured acceptable financing, initial funding is received and all
ministerial governmental approvals are received. There can be no assurance that
any of these events will occur. (See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operation - Results of Operations
- - Backlog".) Accordingly, shipments during the first half of 1998 may not occur
and, if they do, will not be significant. There were no significant additional
orders in backlog at December 31, 1997. At December 1996, InterDigital's backlog
of orders for UltraPhone telephone equipment and services was $37.1 million
which included $32 million from InterDigital's Indonesian customer.
Production. InterDigital assembles, integrates and tests the UltraPhone
Subscribers and Base Stations using component parts manufactured by various
suppliers to InterDigital's specifications. In most but not all instances,
component parts could be purchased from several different sources. InterDigital
believes that by contracting component part manufacturing to third parties,
InterDigital gains significant flexibility to change product designs and avoids
capital intensive manufacturing investments. Should InterDigital's
relationship with any of its suppliers cease in the future, InterDigital
believes that alternative sources of the various component parts are available,
although such an event would likely have an adverse impact on
6
shipments to its customers and support activities. In certain instances,
critical component parts for the UltraPhone system are purchased from single
sources thereby making InterDigital dependent upon those sources. In addition,
InterDigital has entered into a technology transfer agreement under which
Samsung is licensed to produce UltraPhone systems and may thereby become a
potential supplier to InterDigital.
Technical Standards and Market Acceptance. The UltraPhone system is
required to meet conditions promulgated by international, domestic or regional
organizations or financing agencies, and to comply with country-specific type
acceptance or certification standards. An organization jointly owned by the Bell
regional holding companies develops and publishes compliance standards which
have been adopted as either compulsory or elective benchmarks by the Bell
regional holding companies and other United States TELCOs. In addition to these
and additional organization recommendations and technical or acceptance
standards which may be applicable, an international set of quality standards has
been promulgated, generally for future implementation, by the International
Standardization Organization.
InterDigital has, in the past, been able to comply with all technical and
acceptance standards necessary to consummate sales and intends, in the future,
to take such steps as are prudent and necessary, depending upon the
circumstances, to meet technical and other standards prescribed by UltraPhone
system customers or applicable to orders received.
Product Development; Engineering Services
As of February 28, 1998, InterDigital employed approximately 90 people as
part of its B-CDMA technology development, and additionally utilizes the efforts
of outside engineering resources and engineering contributions from its
partners. InterDigital's second and third phases of B-CDMA technology
development and product commercialization may require substantially more
technical and administrative support and will require additional marketing
resources and higher levels of sustained efforts for the next several years.
InterDigital presently expects that, after completion of its planned Version 3.0
product, its alliance partners will increasingly seek to differentiate their
B-CDMA product from each others' through separate proprietary development
efforts and that InterDigital will thereby substantially devote its engineering
efforts to technology development with productization taking on a lesser role in
its engineering activities. The recruitment of personnel with technical
expertise in CDMA development is highly selective and competitive. While
InterDigital believes that it will be able to attract and retain such highly
qualified personnel, the failure to do so could hamper the B-CDMA development
effort.
As of February 28, 1998, InterDigital employed approximately 23 people and
engaged additional outside resources as part of its TDMA engineering and
UltraPhone system development projects. Due to the restructuring of operations
to focus on B-CDMA technology development and production, InterDigital has begun
to transition some of this engineering resource to its B-CDMA development
activities.
InterDigital has expensed $9.7 million, $21.6 and $24.2 million during
1995, 1996 and 1997, respectively, related to all of its development efforts for
both TDMA and B-CDMA based product development. InterDigital has taken some
measures to increase the efficiency of its B-CDMA engineering efforts through
common management and integration of the engineering teams. InterDigital intends
to attempt to satisfy its increasing need for engineering resources through,
among other things, further alliance relationships.
Alliance Agreements
Siemens. On December 16, 1994, InterDigital entered into a Master Agreement
and a series of four related agreements as elements of an integrated transaction
establishing a broad based marketing and technology alliance with Siemens. These
agreements were amended in February 1996 in connection with the Samsung
alliance, and again in March 1998 in connection with the Alcatel alliance. (See
"- Alliance Agreements" below).
As partial consideration for the rights and licenses granted by InterDigital,
Siemens agreed to pay $20 million, of which $15.1 million was paid in cash, with
the remaining payment offset against payments due to Siemens from InterDigital
in conjunction with the Samsung alliance. In accordance with accounting
7
requirements, InterDigital recognized the $20 million of revenue over the
contract performance period due to the combined nature of the contracts. In
1995, 1996 and 1997, InterDigital recognized $13.6 million, $4.8 million and
$1.6 million, respectively of the revenue under this agreement based on the
progress of the completed work.
Under the UltraPhone OEM Purchase Agreement, Siemens is obligated to
purchase its requirement of wireless local loop products for certain specified
applications from InterDigital on an OEM basis through December 1999. Certain
affiliates of Siemens have also been granted the right, but are not obligated,
to purchase products from InterDigital on an OEM basis under the agreement.
Under the TDMA/CDMA Development Agreement, Siemens is providing technical
assistance to InterDigital in the commercialization and deployment of
InterDigital's B-CDMA technology. Under the agreement, as amended, InterDigital
grants to Siemens certain royalty-bearing licenses under B-CDMA technology
created under the B-CDMA development project. Siemens is obligated to pay to
InterDigital a royalty on all Siemens sales of B-CDMA equipment world-wide which
incorporate B-CDMA ASICs or otherwise incorporate B-CDMA know-how. Siemens also
grants back to InterDigital certain royalty-free licenses under Siemens
technology useful in connection with the B-CDMA development project.
Prior to the amendments, certain of these licenses granted to Siemens were
exclusive. As part of the Samsung transaction, Siemens, in exchange for certain
mutual consideration, agreed to amend its exclusive rights, permitting
InterDigital to grant licenses to Samsung under B-CDMA know-how created under
the B-CDMA development project. As part of the Alcatel transaction, Siemens, in
exchange for certain consideration, among it a reduction in the running royalty
rate on Siemens sale of B-CDMA equipment, agreed to convert its exclusive
licenses to non-exclusive licenses. Siemens also has the option to purchase
B-CDMA ASICs and products from InterDigital. InterDigital, among other things,
maintains the right to sell ASIC chips to other telecommunications manufacturers
and/or license certain specified non-ASIC specific technology and know-how
embodied in the B-CDMA systems, together with ASIC applications know how. Under
the Patent License Agreement, InterDigital has granted Siemens a non-exclusive,
world-wide, paid-up, perpetual license for the life of InterDigital's TDMA and
B-CDMA patents, and Siemens has granted InterDigital a reciprocal,
non-exclusive, world-wide, paid-up, perpetual license for the life of Siemens
TDMA and CDMA patents.
Samsung. On February 9, 1996, InterDigital entered into a series of
agreements with Samsung and amended its agreements with Siemens, continuing the
implementation of its alliance strategy. Under the various agreements, Samsung
made up-front payments to InterDigital in excess of $35 million (of which
approximately one-half constituted royalty prepayments), less applicable
withholding taxes. All payments from Samsung were received by June 30, 1996. In
July 1996, InterDigital made, via offset certain payments to Siemens, which in
turn, committed to provide additional technical assistance to InterDigital. (See
Note 4 of the Notes to Consolidated Financial Statements.) The net up-front
amount received by InterDigital, after giving effect to the receipt of certain
exemptions from Korean Service Withholding Tax granted by the Korean Ministry of
Information and Communications, was approximately $29 million. Samsung is also
obligated to provide engineering manpower for the development of InterDigital's
B-CDMA technology.
Samsung has received from InterDigital royalty-bearing licenses covering
InterDigital's TDMA and B-CDMA patent portfolio, its UltraPhone and B-CDMA
technologies and is licensed to use certain InterDigital trademarks. The
agreements give Samsung the right to manufacture and sell privately labeled
UltraPhone systems.
InterDigital recognized $23 million of the Samsung payments as revenue
during 1996 and $2.8 million as revenue during 1997. The balance of the revenue
of $6.2 million is expected to be recognized through fiscal 1999, the expected
date of completion of the applicable development effort.
Alcatel. On March 12, 1998, InterDigital entered into an Agreement with
Alcatel covering B-CDMA technology development, CDMA patent licensing, trademark
licensing, product development, technology transfer, standards support and other
areas of cooperation. Under the terms of the Agreement, Alcatel will be licensed
under InterDigital's B-CDMA patents and know-how as well as certain InterDigital
trademarks.
8
Alcatel will purchase its requirements of B-CDMA ASICs from either InterDigital
or InterDigital's designated vendor for embedding into certain wireless
platforms developed and marketed by Alcatel. In addition, Alcatel agreed to pay
a technology transfer and services fee valued at approximately $25 million. Of
this fee, $5.4 million was paid in March 1998. An additional $12.6 million is
expected to be paid in the 1998-1999 time frame, based on the achievement of
certain product development and commercialization milestones. The remaining fee
is expected to be paid in conjunction with purchases of B-CDMA ASICs through
December 31, 2003. As part of the transaction, Alcatel was also granted an
option to purchase $22 million in InterDigital common stock on terms and
conditions to be negotiated. The exercise of this option may be dependent on the
receipt of certain InterDigital corporate approvals.
The Agreement provides that InterDigital and Alcatel will work together to
develop enhanced wireless packet data handling capabilities for B-CDMA
technology and establishes a framework for joint development of third generation
applications based on B-CDMA technology. The Agreement also states that Alcatel,
with the support of InterDigital and InterDigital's other alliance partners,
will take an active role in promoting the adoption by the leading worldwide
standards bodies for wireless local loop standards and the incorporation of
principal elements of B-CDMA technology in to third and fourth generation mobile
applications standards.
Technology and Patent Licensing
General. InterDigital's patents, patent applications and rights to file
patent applications on certain future inventions are owned by ITC, a
wholly-owned subsidiary of InterDigital Patents Corporation ("Patents Corp."), a
wholly-owned subsidiary of InterDigital. ITC currently holds approximately 96
United States and approximately 301 foreign patents relating specifically to
digital wireless radiotelephony technology (both TDMA and CDMA) which expire at
various times beginning in 2004 and ending in 2018. ITC also has approximately
38 other patents, both in the United States and in foreign countries, and has
filed approximately 67 United States and approximately 221 foreign patent
applications relating primarily and variously to the CDMA and TDMA technologies.
ITC's patents have effective terms of up to 20 years from the date of their
first filing.
In high technology fields characterized by rapid change and engineering
distinctions, the validity and value of patents are often subject to complex
legal and factual challenges and other uncertainties. Accordingly, ITC's patent
claims are subject to uncertainties which are typical of patent enforcement
generally. If any such third party successfully asserts that certain of
InterDigital's patent claims are not valid or do not cover their products,
InterDigital's licensing potential and revenues could be adversely affected. In
addition, in the normal course of business, third parties have asserted, and may
assert in the future, that InterDigital is engaged in the infringing use of a
third party's patents or proprietary technology. If any such third party
successfully asserts that InterDigital is engaged in any such infringing use,
InterDigital may be required to contest the validity of such patents or
proprietary technology, to acquire licenses to use the patented or proprietary
technology and/or to redesign InterDigital's products to avoid further
infringement. The cost of enforcing and protecting the patent portfolio or
defending InterDigital against infringement claims can be significant.
Patent Licensing Activities. ITC has undertaken a comprehensive licensing
program, the ultimate objective of which is the realization of licensing
revenues from its patent portfolio. ITC generally seeks to license its patents
on reasonable terms and conditions, including reasonable royalty rates. ITC
believes that making its patented digital wireless technologies available to
third parties will provide a potentially significant source of revenue. In 1990,
the initial digital cellular telephone standard known as IS-54 employing TDMA
technology was jointly adopted by the Telecommunications Industry Association
("TIA") and Electronics Industry Association ("EIA") as an interim standard. ITC
believes that, in many instances, licenses for certain of its patents are
required in order for third parties to manufacture and sell digital cellular
products in compliance with the TIA/EIA/IS-54-B Cellular System Dual-Mode Mobile
Station-Base Station Compatibility Standard (the "IS-54-B Standard") and the 800
MHz Cellular System, TDMA Radio Interface, Dual-Mode Mobile Station - Base
Station Compatibility Standard (the "IS-136 Standard"). In addition,
InterDigital believes that in many instances licenses under its patents are
required in order for third parties to manufacture and sell equipment in
compliance with certain other TDMA-based standards currently in use worldwide.
Those standards include but are not limited to the Global System for Mobile
9
Communication ("GSM"), the Japanese Digital Cellular Standard ("JDC"), Digital
Enhanced Cordless Telephone ("DECT") and Personal Handyphone System ("PHS").
Currently, numerous manufacturers supply digital cellular equipment conforming
to such standards.
At December 31, 1997, ITC had granted non-exclusive, non-transferable,
perpetual, worldwide, royalty-bearing licenses to use certain TDMA patents (and
in certain instances, technology) to Hughes Network Systems ("HNS"), American
Telephone & Telegraph Company, Siemens AG, Matsushita Electric Industrial Co.
Ltd., Sanyo Electric Co., Ltd., Pacific Communications Systems Inc., Mitsubishi
Electric Corporation, Hitachi Ltd., Kokusai Electric Co., NEC Corporation, OKI
Electric Industry Ltd., and Samsung. The OKI agreement was the result of a
settlement of litigation filed by ITC in 1993. The licenses typically contain
"most favored nations" provisions, applied on a going forward basis only, and
provisions which could, in certain events, cause the licensee's obligation to
pay royalties to InterDigital to be suspended for an indefinite period, with or
without the accrual of the royalty obligation. Certain of InterDigital's
licensees have also stated, among other things, that the outcome of a prior
litigation over ITC's patents materially impacts the royalties due under their
license agreements. While InterDigital believes that these positions are
meritless, the positions taken by ITC's licensees may impact ITC's ability to
generate recurring licensing revenue under the existing agreements. ITC's
licensing opportunities are also affected by the increasing concentration of the
industry, particularly as to infrastructure, which results in a substantial
portion of the licensing opportunities being concentrated in a small number of
manufacturers who are generally opposing the validity of ITC's patents in
multiple forums.
In 1994, ITC also entered into a CDMA cross-license agreement with Qualcomm
Incorporated to settle litigation filed in 1993. In return for a one-time
payment of $5.5 million, ITC granted to Qualcomm a fully-paid, royalty free,
worldwide license to use and sublicense certain specified and then existing ITC
CDMA patents (including related divisional and continuation patents) to make and
sell products for IS-95-type wireless applications, including, but not limited
to, cellular, PCS, wireless local loop and satellite applications. Qualcomm has
the right to sublicense certain of ITC's licensed CDMA patents so that
Qualcomm's licensees will be free to manufacture and sell IS-95-type CDMA
products without requiring any payment to ITC. Neither ITC's patents concerning
cellular overlay and interference cancellation nor its current inventions are
licensed to Qualcomm. Under the settlement, Qualcomm granted to InterDigital a
royalty-free license to use and to sublicense the patent that Qualcomm had
asserted against InterDigital and a royalty-bearing license to use certain
Qualcomm CDMA patents in InterDigital's B-CDMA products, if needed. InterDigital
does not believe that it will be necessary to use any of such royalty-bearing or
non-licensed Qualcomm patents in its B-CDMA system. In addition, Qualcomm
agreed, subject to certain restrictions, to license certain CDMA patents on a
royalty bearing basis to those InterDigital customers that desire to use
Qualcomm's patents. The license to InterDigital does not apply to IS-95-type
systems, or to satellite systems. Certain of Qualcomm's patents, relating to key
IS-95 features such as soft and softer hand-off, variable rate vocoding, and
orthogonal (Walsh) coding, are not licensed to InterDigital.
Patent Litigation
Ericsson. In September 1993, ITC filed a patent infringement action against
Ericsson GE Mobile Communications, Inc. ("Ericsson GE"), its Swedish parent,
Telefonaktieboleget LM Ericsson ("LM Ericsson") and Ericsson Radio Systems, Inc.
("Ericsson Radio"), in the United States District Court for the Eastern District
of Virginia (the "Ericsson action") which was subsequently transferred to the
United States District Court for the Northern District of Texas. The Ericsson
action seeks a jury's determination that in making, selling, or using, and/or in
participating in the making, selling or using of digital wireless telephone
systems and/or related mobile stations, Ericsson has infringed, contributed to
the infringement of and/or induced the infringement of eight patents from ITC's
patent portfolio. The Ericsson action also seeks an injunction against Ericsson
from infringement and seeks damages, royalties, costs and attorneys' fees.
Ericsson GE filed an answer to the Virginia action in which it denied the
allegations of the complaint and asserted a counterclaim seeking a declaratory
judgment that the asserted patents are either invalid or not infringed. On the
same day that ITC filed the Ericsson action in Virginia, two of the Ericsson
Defendants, Ericsson Radio and Ericsson GE, filed a lawsuit against InterDigital
and ITC in the United States District
10
Court for the Northern District of Texas (the "Texas action"). The Texas action,
which involves the same patents that are the subject of the Ericsson action,
seeks the court's declaration that Ericsson's products do not infringe ITC's
patents, that ITC's patents are invalid and that ITC's patents are
unenforceable. The Texas action also seeks judgment against InterDigital and ITC
for tortious interference with contractual and business relations, defamation
and commercial disparagement, and Lanham Act violations. The Ericsson action and
the Texas action have been consolidated. ITC agreed to the dismissal without
prejudice of LM Ericsson.
In December 1997, Ericsson Inc., the successor to Ericsson GE and Ericsson
Radio, filed an action against ITC in the United States District Court for the
Northern District of Texas (the "1997 Texas action") seeking the court's
declaration that Ericsson Inc.'s products do not infringe two patents issued to
InterDigital earlier in 1997 as continuations of certain patents at issue in the
Texas action. Later that month, Ericsson Inc. filed an amended Complaint seeking
to include these two new patents in the Texas action in an effort to consolidate
the two cases. In January 1998, both Ericsson Inc. and InterDigital and ITC
filed motions requesting that Ericssons Inc.'s amended Complaint be allowed and
that the 1997 Texas action be dismissed, to which the Court agreed. InterDigital
and ITC intend to vigorously defend the Texas action.
Patent Oppositions. ITC has filed patent applications in numerous foreign
countries. ITC is and expects from time to time to be subject to challenges with
respect to its patents and patent applications in foreign countries. Typical of
the processes involved in the issuance of foreign patents, Philips
Patentverwaltung GmbH ("Philips"), Alcatel SEL AG ("Alcatel") and Siemens each
filed petitions in the German Patent Office seeking to revoke the issuance of
ITC's basic German TDMA system patent granted on June 28, 1990. In October 1993,
after formal opposition proceedings, the German Patent Office confirmed the
validity of the ITC basic German system patent. An appeal was filed by Philips,
Alcatel SEL and Siemens and additional arguments have been made based upon prior
art not previously considered by the patent office. Siemens has since withdrawn
from the proceeding. Formal hearings were held by the German Federal Patent
Court in June and in November 1996. At the close of the hearings, the Court
maintained the patent with certain modifications. Alcatel SEL and Phillips have
appealed the German Federal Patent Court's decision to the German Superior
Court; however, in March 1988, Alcatel SEL and Phillips withdrew their appeals,
making the decision of the German Federal Patent Court final. ITC intends to
vigorously defend its patents. However, if any of ITC's patents are revoked,
ITC's patent licensing opportunities in the relevant foreign countries, and
possibly in other countries, could be materially and adversely affected.
Government Regulation and Industry Standards
The telecommunications industry in general is subject to continued
regulation on the federal, state and international levels. The sale of
telecommunications equipment, such as the UltraPhone telephone system, is
regulated in the United States and in many foreign countries, primarily to
ensure compliance with federal technical standards for interconnection, radio
emissions and non-interference (i.e. type acceptance of a particular product).
InterDigital generally designs and builds UltraPhone equipment, and intends to
design and have built TrueLink systems, in accordance with such industry
regulations and standards as may be appropriate.
11
Employees
As of February 28, 1998, InterDigital had approximately 205 full-time
employees. In addition, the services of consultants and part-time employees are
utilized. None of InterDigital's employees are represented by a collective
bargaining unit. A breakdown of InterDigital's full-time employees by functional
area is as follows:
Number Of
Functional Area Employees
--------------- ---------
Sales and Marketing 10
Customer Support 15
Manufacturing 24
Research and Development 112
Patent Licensing 4
Corporate and Administration 40
---
Total 205
===
Executive Officers of InterDigital
The Executive Officers of InterDigital are:
Name Age Position
---- --- --------
William A. Doyle 48 President and Director
Howard E. Goldberg 52 Executive Vice President, General Counsel and Secretary
Mark Lemmo 40 Executive Vice President, Engineering & Product Operations
Joseph Gifford 52 Executive Vice President, Business Development
Charles "Rip" Tilden 44 Executive Vice President, Communications and Strategic Planning
D. Ridgely Bolgiano 65 Vice President, Chief Scientific Officer, President of InterDigital
Patents Corp and Director
William A. Doyle, a director of InterDigital since May 1996, has served as
President of InterDigital since November 1994. Previously, Mr. Doyle had been
Executive Vice President and Chief Administrative Officer from February 1994 to
November 1994 and Vice President from March 1991 to February 1994. He also
served as InterDigital's General Counsel and Secretary from March 1991 to
December 1994.
Howard E. Goldberg was promoted to Executive Vice President, General
Counsel and Secretary in May 1995 from his prior position of Vice President,
General Counsel and Secretary which he held since December 1994. In conjunction
with his responsibilities as Executive Vice President, Mr. Goldberg also
maintains principal responsibilities for strategic alliances and intellectual
property business development. Prior to 1994, Mr. Goldberg served InterDigital
as a lawyer in various consulting and full time employment capacities from April
1993, including the position of Vice President - Legal Affairs and Associate
General Counsel.
Mark Lemmo was promoted to Executive Vice President, Engineering & Product
Operations in October 1996. Previously, Mr. Lemmo had been Vice President-Sales
and Marketing since June 1994 and Vice President of Engineering from August 1991
to June 1994.
Joseph Gifford was elected Executive Vice President, Business Development
in April 1997. Prior to joining InterDigital Communications Corporation, Mr.
Gifford was employed at Motorola from August 1993 to April 1997, where he was
responsible for business development in the Wireless Access Systems Division.
Charles "Rip" Tilden was named Executive Vice President, Communications and
Strategic Planning of the Company in March 1998. Prior to that, he held the
positions of Senior Vice President from May 1997 and Vice President from
November 1996 until May 1997. Before joining InterDigital, Mr. Tilden served as
Vice President, Corporate Affairs at Alco Standard Corporation in Wayne, PA, an
office products and paper distribution company, since December 1994. Before
moving to Alco Standard, Mr. Tilden was Vice President, Communications for
GenCorp in Akron, OH, an aerospace defense, automotive and polymer products
company from 1988 to 1994.
12
D. Ridgely Bolgiano has been a director of InterDigital since 1981. He
became InterDigital's Vice President and Chief Scientist Officer in April 1984,
and has been affiliated with InterDigital in various capacities since 1974. Mr.
Bolgiano has served as President of Patents Corp. since May 1996.
InterDigital's Executive Officers are elected to the offices set forth
above to hold office until their successors are duly elected and have qualified.
13
Item 2. PROPERTIES
InterDigital owns one facility, subject to a mortgage, with an aggregate of
approximately 50,000 square feet of office, development, warehousing and
assembly facilities in King of Prussia, Pennsylvania. (See Note 10 of the Notes
to Consolidated Financial Statements.) In December 1996, InterDigital entered
into a five year lease for approximately 67,000 square feet of office and
development facilities in Melville, New York. This facility is the primary
location for InterDigital's B-CDMA development activities. (See Note 9 of the
Notes to Consolidated Financial Statements.) In the event of a substantial
increase in sales, additional production and/or warehousing facilities may be
required.
Item 3. LEGAL PROCEEDINGS
On November 7, 1994, a complaint was filed in the United States District
Court for the Eastern District of Pennsylvania against InterDigital and a former
chief executive officer of InterDigital alleging certain violations of the
disclosure requirements of the federal securities laws and seeking damages on
behalf of shareholders who purchased InterDigital's stock during the class
period stated to be March 31, 1994 to August 5, 1994. The alleged violations
related to the disclosure of three proposed financing transactions: (1) a
revised financing offered through Prudential Securities Incorporated; (2) a
Purchase Agreement entered into on March 11, 1994 between InterDigital and a
proposed purchaser to sell $30 million of InterDigital's discounted common stock
and warrants, and a related $3 million loan to InterDigital; and (3) a $25
million loan to InterDigital from Oregon Financial Group, Inc.. This action
sought damages on behalf of shareholders who purchased InterDigital's stock
during a class period purportedly extending from March 31, 1994 to August 5,
1994. The case was settled in July 1996 and the settlement was approved by the
District Court in December 1997. Such settlement had and is expected to have no
material effect on InterDigital's results of operations or financial position.
InterDigital is additionally both plaintiff and defendant in certain
litigation relating to its patents. (See Item 1. "Business-Technology and Patent
Licensing" of this Form 10-K.)
In addition to litigation associated with patent enforcement and licensing
activities and the litigation described above, InterDigital is a party to
certain other legal actions arising in the ordinary course of its business.
Based upon information presently available to InterDigital, InterDigital
believes that the ultimate outcome of these other actions will not materially
affect InterDigital.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
Item 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the range of the high and low sales prices
of InterDigital's Common Stock as reported by the American Stock Exchange.
High Low
---- ---
1997
First Quarter 7 7/16 5 1/4
Second Quarter 6 15/16 4 1/2
Third Quarter 6 5/16 4 15/16
Fourth Quarter 5 9/16 2 13/16
High Low
---- ---
1996
First Quarter 10 3/8 7 5/16
Second Quarter 11 1/4 7 9/16
Third Quarter 8 7/8 6 3/16
Fourth Quarter 7 13/16 5 7/16
As of March 6, 1998, there were approximately 2,529 holders of record of
InterDigital's Common Stock.
InterDigital has not paid cash dividends on its Common Stock since
inception. It is anticipated that, in the foreseeable future, no cash dividends
will be paid on the Common Stock and any cash otherwise available for such
dividends will be reinvested in InterDigital's business. The payment of cash
dividends will depend on the earnings of InterDigital, the prior dividend
requirements on its remaining series of Preferred Stock and other Preferred
Stock which may be issued in the future, InterDigital's capital requirements and
other factors considered relevant by the Board of Directors of InterDigital.
15
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information set forth below should be read in conjunction with the
Consolidated Financial Statements and notes thereto, and the other financial
information included elsewhere in this Form 10-K, as well as "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
herein.
1993 1994 1995 1996 1997
-------- -------- ------- -------- --------
Consolidated Statement of Operations Data
(in thousands, except per share data)
Revenues:
Product and Services $ 11,748 $ 20,086 $16,581 $ 24,974 $ 43,854
Licensing and Alliance -- 28,709 67,693 28,719 5,982
Contract services 1,551 1,171 681 -- --
-------- -------- ------- -------- --------
Total revenues 13,299 49,966 84,955 53,693 49,836
Income (loss) from continuing operations (32,929) (13,753) 34,605 (11,644) (34,267)
Discontinued operations (1,728) (295) -- -- --
Net income (loss) before preferred dividends (34,657) (14,048) 34,605 (11,644) (34,267)
Net income (loss) applicable to common shareholders $(34,939) $(14,330) $34,340 $(11,904) $(34,523)
======== ======== ======= ======== ========
Net income (loss) per share - Basic:
Continuing Operation $ (1.05) $ (0.37) $ 0.78 $ (0.26) $ (0.72)
Discontinued Operation (0.06) (0.01) -- -- --
-------- -------- ------- -------- --------
Net income (loss) per common share - Basic $ (1.11) $ (0.38) $ 0.78 $ (0.26) $ (0.72)
======== ======== ======= ======== ========
Weighted average number of shares
outstanding - Basic 31,515 37,463 43,925 46,462 48,166
======== ======== ======= ======== ========
Net income (loss) per share - Diluted:
Continuing Operation $ (1.05) $ (0.37) $ 0.74 $ (0.26) $ (0.72)
Discontinued Operation (0.06) (0.01) -- -- --
-------- -------- ------- -------- --------
Net income (loss) per common share - Diluted $ (1.11) $ (0.38) $ 0.74 $ (0.26) $ (0.72)
======== ======== ======= ======== ========
Weighted average number of shares
outstanding - Diluted 31,515 37,463 46,503 46,462 48,166
======== ======== ======= ======== ========
Operations and Other Data:
Number of UltraPhone systems sold 10 34 25 49 66
Number of UltraPhone subscriber stations sold 2,304 8,570 5,474 10,764 23,430
1993 1994 1995 1996 1997
-------- -------- ------- -------- --------
Consolidated Balance Sheet Data (in thousands):
Cash and cash equivalents(1) $ 8,211 $ 6,264 $ 9,427 $ 11,954 $ 17,828
Short Term Investments -- -- 55,060 43,063 7,976
Working capital 8,064 10,118 59,008 57,076 22,902
Total assets 32,326 43,830 83,167 112,636 69,363
Short-term debt(2) 256 233 430 790 869
Long-term debt 650 520 631 4,221 3,591
Accumulated deficit (170,335) (184,665) (150,325) (162,229) (196,752)
Total shareholders' equity(3) 14,004 14,872 62,440 72,507 38,505
16
- ----------
(1) Including $2,424,000, $471,000, $1,200,000, $204,000 and $193,000 of
restricted cash as at December 31, 1993, 1994, 1995, 1996 and 1997,
respectively. See Note 2 to "Notes to Consolidated Financial Statements".
(2) Includes the current portion of long-term debt.
(3) InterDigital has not declared or paid any dividends on the Common Stock
since its inception.
17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the Selected
Consolidated Financial Data, and the Consolidated Financial Statements and notes
thereto, contained elsewhere in this document.
InterDigital commenced operations in 1972 and until 1987 was primarily
engaged in research and development activities related to its TDMA wireless
digital communications technology. In 1986, InterDigital introduced the
UltraPhone system, a fixed digital wireless local loop telephone system
employing its patented and proprietary TDMA technology, which it began
installing in 1987. InterDigital's operations from 1987 through 1992 were
characterized by increasing revenues accompanied by significant operating
losses. During this period, significant costs were incurred related to the
commercialization and continued development of the UltraPhone system,
development of production sources and capacity, and the implementation of a
broad-based sales and marketing effort designed to promote regulatory and market
acceptance of the UltraPhone system. During 1993, 1994 and 1995, UltraPhone
system revenues were significantly lower than in 1992; losses increased
significantly in 1993 and 1994 as a result of the decline in UltraPhone revenues
and gross margins and other increases in costs, such as the increased investment
in B-CDMA research and development, engineering of product redesigns and
enhancements, the increase in litigation costs and the costs associated with
enforcement of ITC's intellectual property rights.
During 1994, InterDigital began to realize positive results from its
efforts to capitalize upon the revenue potential of its TDMA and CDMA patent
portfolio and entered into its first major alliance, with Siemens. InterDigital
recognized $28.7 million of licensing revenue, representing over 57% of total
revenues for 1994. During 1995, InterDigital recognized $67.7 million of
licensing and alliance revenue enabling InterDigital to report its first
profitable fiscal year since its inception. InterDigital was profitable in the
first and second quarters of 1995 and unprofitable in the third and fourth
quarters of 1995. During 1996, InterDigital completed its second major alliance
with Samsung, and recognized $28.7 million of licensing and alliance revenue
which represented 53% of the total revenues for 1996. Again in 1996,
InterDigital was profitable in the first and second quarters and unprofitable in
the third and fourth quarters. The variability of 1995 and 1996 quarterly
operating results was due to the revenue related to up-front, non-refundable
payments pursuant to license and alliance agreements. In 1997, InterDigital was
unprofitable, primarily due to substantially increased investment in the
development of its B-CDMA technology. It recognized $49.8 million in revenues,
of which $4.4 million was derived from licensing revenue from its alliance
partners, and $1.6 million of recurring royalty fees from one licensee, and
$43.8 million from its product operations. In March 1998, InterDigital entered
into its third alliance with Alcatel under which agreement Alcatel agreed, among
other things, to pay InterDigital $25 million in technology transfer and
services fees. InterDigital expects to receive such payments over a period of
time through 2003. (See Item 1. "Business - Alliance Agreements".) InterDigital
expects the variability in licensing and alliance revenues and, consequently,
its cash flow to continue until significant recurring royalties are received
under the applicable agreements.
InterDigital's expectation as to its ability to generate revenue related to
licensing and alliance activities is forward looking in nature and, as such, is
inherently subject to risks and uncertainties and is dependent upon various
factors or events, among others detailed elsewhere in this Annual Report,
including InterDigital's participation in the continued joint development effort
with its alliance partners, the ability to enter into additional alliances
and/or new licenses for InterDigital's patents and other intellectual property,
the extent to which and when current and new licensees ship product that
utilizes the licensed technology and the licensee's ability or willingness to
pay the applicable license or royalty fees. Revenues and other business
prospects could also be adversely impacted by adverse decisions in
InterDigital's outstanding and any future intellectual property rights
litigation or other patent-related proceedings, including but not limited to,
any non-issuance of ITC's patent applications or declaration of invalidity or
declaration of non-infringement of ITC's patents. (See Item 1. "Business", "-
Statement Pursuant to the Private Securities Litigation Reform Act of 1995"
below and Notes 1, 3, 4 and 5 to "Notes to Consolidated Financial Statements".)
18
InterDigital also expects to continue to derive revenues from its product
operations. InterDigital's ability to derive future revenue from product sales
will be affected by, among other factors detailed elsewhere in this Annual
Report, the intensified competition for sales of wireless local loop telephone
systems. (See Item 1. "Business" and "- Statement Pursuant to the Private
Securities Litigation Reform Act of 1995" below.) Competing products and
technologies have proliferated and competitors, many of which have significantly
greater resources than InterDigital, are more actively promoting their products
in InterDigital's target markets at prices more favorable than those offered by
InterDigital. In spite of this competitive environment, InterDigital increased
UltraPhone system revenues in 1997 compared to 1996 by over 71% to nearly $43
million. These successes were achieved by lowering UltraPhone system prices,
offering the UltraPhone system in conjunction with alliance partners, focusing
on larger scale telecommunications infrastructure programs and successfully
marketing to InterDigital's existing customer base in Indonesia. From mid-1997,
however, the Asian monetary crisis adversely affected InterDigital's ability to
market the UltraPhone system in many of the markets where it has historically
focused. In addition, emerging wireless local loop opportunities have been at
drastically reduced prices primarily due to the introduction of lower priced
competitive products, including the DECT products. Moreover, telecommunication
operators have increasingly demanded that suppliers offer advanced features not
currently available in the UltraPhone system, such as dual lines and faster data
rates. Because of the changes in the wireless local loop marketplace as well as
InterDigital's refocus of its resources on B-CDMA development, InterDigital has
discontinued its re-engineering efforts directed at cost reduction and product
enhancement of the UltraPhone system. Although InterDigital is not actively
pursuing many such wireless local loop opportunities that might have previously
been considered for the UltraPhone system, InterDigital intends to continue to
market the UltraPhone system indirectly to such opportunities through its
alliance partners and directly on a selective basis in rural niche markets where
the potential for profit exists and through post contract add-ons and systems
expansions and servicing and follow on orders.
In addition to the effects of varying selling prices and product materials
costs, InterDigital's gross profit margin ratios on product sales have been
affected by the relative proportions of direct and distributor sales, by the
average number of subscribers and clusters per system sold, by its ability to
absorb manufacturing overhead costs through generation of sufficient production
volume, and by the field service costs for installation, warranty, training and
post-sale support. Consistent with industry practices, distributor commissions
have been included in both revenues and cost of sales. Historically,
InterDigital's gross profit margin from UltraPhone system sales has been
inadequate to support its operating and other expenses. The low sales volumes
experienced in recent years have resulted in production volumes which were
inadequate to fully absorb fixed production overhead costs, producing negative
gross margins.
InterDigital has evaluated its information technology infrastructure for
Year 2000 compliance. InterDigital does not expect that the cost to modify
such infrastructure to Year 2000 compliance will be material to its financial
condition or results of operations. InterDigital does not anticipate any
material disruption in its operations as a result of any failure by InterDigital
to be in compliance. InterDigital does not currently have any information
concerning the Year 2000 compliance status of its suppliers and customers. In
the event that any of InterDigital's significant suppliers or customers does
not successfully and timely achieve Year 2000 compliance, InterDigital's
business or operations could be adversely affected.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL REQUIREMENTS
InterDigital had working capital of $22.9 million at December 31, 1997
compared to working capital of $57.1 million at December 31, 1996. The decrease
in working capital since December 1996 is due primarily to $27.2 million of cash
used in operations and $3.5 million of cash used to purchase property and
equipment. InterDigital had, prior to 1995, experienced liquidity problems due
to its lack of profits sufficient to generate cash at a level necessary to fund
its investment in additional equipment, its UltraPhone technology development,
its patent activities, its B-CDMA technology research and development
activities, and its operating losses. From the fourth quarter of 1994 through
the second quarter of 1996, InterDigital generated cumulative operating profits
and substantially strengthened its cash position through its alliance and
licensing transactions. During the third and fourth quarters of 1996 and during
all of fiscal 1997, InterDigital again experienced operating losses which more
than offset the operating revenues from operations.
In recent years, foreign sales have represented a majority of the sales of
UltraPhone systems, and it is anticipated that foreign sales will represent a
majority of product system sales for the foreseeable future. UltraPhone system
sales have, on a historical basis, varied significantly from quarter to quarter
due to the concentration of revenues from InterDigital's largest customers over
a few fiscal quarters. (See Note 5 to
19
"Notes to Consolidated Financial Statements".) Additionally, InterDigital
expects that it may continue to experience significant fluctuations in quarterly
and annual revenues and operating results due to variations in the amount and
timing of license and alliance-related revenue. Accordingly, InterDigital's cash
flow is expected to be under continued pressure and may fluctuate significantly
for the foreseeable future.
Demands on working capital in 1998 and beyond are expected to be
significant. InterDigital expects to aggressively support its B-CDMA technology
development efforts to commercialize its technology as soon as possible. As the
commercial development effort for the current product nears completion,
substantial additional expenditures are expected to be incurred for marketing
and other activities and subsequent, substantial additional expenditures will be
required to support later stage development. Further, the cost of prosecuting
patent applications worldwide, defending the validity of ITC's patents, and
litigating patent infringement actions related to ITC's patents can be
substantial.
InterDigital's working capital requirements will depend on numerous
additional factors, including but not limited to the success of the Siemens,
Samsung and Alcatel relationships and the broader alliance strategy, the level
of demand and related margins for products, and the ability to generate license
fees and royalties. In addition, when InterDigital builds to specification to
complete an order, it traditionally experiences negative cash flows from
inception of its production ordering through customer payment at the time of, or
increasingly subsequent to, order shipment. If InterDigital were to experience
additional sudden and significant increases in orders to be built to
specification, it would intensify the need for significant short to intermediate
term financing arrangements, which may or may not be available to InterDigital.
Accordingly, InterDigital has investigated and expects that it will, at
some future date, require additional debt or equity capitalization to fully
support its technical and product development and to fund its patent enforcement
activities. InterDigital does not presently maintain bank lines of credit and
may therefore, in such event, seek to meet such needs through the sale of debt
or equity securities. There can be no assurances that InterDigital will be able
to sell any such securities, or, if it can, that it can do so on terms
acceptable to InterDigital. Notwithstanding the above, InterDigital's management
believes that cash on hand, cash expected under the Alcatel Agreement and cash
expected from other operations will be sufficient to sustain operations through
1998.
InterDigital believes that its investment in inventories and non-current
assets are stated on its December 31, 1997 balance sheet at realizable values
based on expected selling price and order volumes. Property and equipment are
currently being utilized in InterDigital's on-going business activities, and
InterDigital believes that no additional write-downs are required at this time
due to lack of use or technological obsolescence. With respect to other assets,
InterDigital believes that the value of its patents is at least equal to the
value included in the December 31, 1997 balance sheet.
Changes in Cash Flows and Financial Condition:
InterDigital has experienced negative cash flows of $23.8 million from
operations during 1997. The negative cash flows from operations are primarily
due to expenses incurred for B-CDMA technology development, UltraPhone
production and marketing and InterDigital's general and administrative
activities.
Net cash flows from (used by) investing activities for 1997 include
investments in property and equipment of $3.5 million and additions to patents
of $966,000. Also included in net cash flows from (used by) investing
activities is InterDigital's withdrawal of $35.1 million of funds previously
invested in short-term, highly liquid securities.
During 1997, InterDigital experienced negative cash flows of $738,000
from financing activities. The funds were primarily used for payment of long
term debt.
Cash and cash equivalents of $17.8 million as of December 31, 1997 includes
$193,000 of restricted cash. Short term investments of $8.0 million as of
December 31, 1997 were held by InterDigital Finance Corporation, a wholly owned
subsidiary of InterDigital. Accounts receivable of $3.1 million at December 31,
1997 reflect amounts due from normal trade receivables, including non-domestic
open accounts, as well as funds to be remitted under letters of credit. Of the
outstanding trade receivables as of December 31, 1997, $1 million has been
collected through March 6, 1998.
20
Inventory levels have decreased at December 31, 1997 to $12.3 million from
$13.9 million as of December 31, 1996, reflecting the completion of shipments on
the Indonesian contract partially offset by the build up of inventory for the
expected contract with MPT. Inventories at December 31, 1996 and December 31,
1997 are stated net of valuation reserves of $5.9 million and $5.6 million,
respectively.
Included in other accrued expenses at December 31, 1997 are professional
fees, consulting and other accruals and deferred rent relating to the corporate
headquarters and manufacturing facilities, as well as sales taxes payable.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the revenues
from each revenue category as a percentage of total revenues and gross margins
from product sales:
As a % of Total Revenues
-------------------------------------
Year Ended December 31,
-------------------------------------
1995 1996 1997
---- ---- ----
Revenues:
Product Revenues 19.5 % 46.5 % 88.0%
Licensing and Alliance 79.7 53.5 12.0
Contract Services 0.8 -- --
----- ----- -----
Total Revenues 100.0 % 100.0 % 100.0%
===== ===== =====
Product Gross Margins (8.1)% (9.6)% 4.4%
===== ===== =====
1997 Compared With 1996
Total Revenues. Total revenues in 1997 decreased 7.2% to $49.8 million from
$53.7 million in 1996 due to the significant decrease in licensing and alliance
revenue in 1997 partially offset by an increase in product revenues of 75.6% to
$43.8 million from $25.0 million in 1996. Licensing and alliance revenue of $6.0
million in 1997 included $2.8 million of alliance revenue from Samsung, the
final $1.6 million of alliance revenue recognized on the Siemens agreement and
$1.6 million of recurring royalty fees from one licensee. In 1996, License and
alliance revenue of $28.7 million included $23.0 million of alliance revenue
from Samsung, $4.8 million of alliance revenue recognized on the Siemens
agreements and $900,000 of recurring royalty fees from one licensee.
Cost of Product Revenue. The cost of product sales in 1997 revenue
increased 53.1% to $41.9 million from $27.4 million in 1996. This increase is
due primarily to the increase in product revenues. InterDigital achieved
sufficient product revenue to substantially absorb manufacturing overhead costs
resulting in a 4.4% positive gross margin compared to a negative 9.6% gross
margin in 1996.
Other Operating Expenses. Other operating expenses include sales and
marketing expenses, general and administrative expenses and product development
expenses.
Sales and marketing expenses increased 55.5% to $7.3 million during 1997 as
compared to $4.7 million in 1996. The increase is primarily due to increased
product marketing efforts and increased participation in trade shows, increased
sales commission and an increase in activity levels including costs associated
with InterDigital's B-CDMA based product.
21
General and administrative expenses for 1997 increased 10.6% to $12.3
million from $11.1 million in 1996. The increase is due primarily to an increase
in amortization of patents as well as an increase in expenses related to the
protection and exploitation of InterDigital's patents portfolio and corporate
communications activity.
Product development expenses increased 12.2% in 1997 to $24.2 million from
$21.6 million in 1996. Staff and activity levels devoted to the development of
the B-CDMA technology increased significantly.
Other Income and Expense. Interest expense for 1997 was $410,000 as
compared to $271,000 for 1996. Interest expense for 1997 includes $225,000 of
mortgage interest on InterDigital's King of Prussia property which was purchased
in 1997 and $180,000 of interest on leases. In 1996, mortgage interest was
$124,000 and interest on leases was $135,000.
Interest income for 1997 decreased 50.1% to $2.1 million from $4.2 million
in 1996. InterDigital had substantially lower average invested cash balances
during 1997 as compared to 1996.
Minority Interest. In December 1992, InterDigital sold 5.76% of the common
shares of Patents Corp., which had, prior thereto, been a wholly-owned
subsidiary of InterDigital. InterDigital recorded an increase in minority
interest in the second quarter of 1996 of $4,000. During September 1996,
InterDigital reacquired the minority interest of Patents Corp. in exchange for
shares of InterDigital's Common Stock and will therefore no longer record a
charge for minority interest.
1996 Compared With 1995
Total Revenues. Total revenues in 1996 decreased 37% to $53.7 million from
$85.0 million in 1995 due to the decrease of $38.9 million in licensing and
alliance revenue in 1996 partially offset by an increase in UltraPhone product
revenues of 51% to $25.0 million from $16.6 million in 1995. License and
alliance revenue of $28.7 million in 1996 included $23.0 million of alliance
revenue from Samsung, $4.8 million of alliance revenue recognized on the Siemens
agreements and $900,000 of recurring royalty fees from one licensee. Licensing
and Alliance revenues for 1995 resulted from license agreements with Mitsubishi,
NEC, Hitachi, Kokusai, PCSI and Sanyo. (See Item 1. "Business - Technology and
Patent Licensing".) The remaining License and alliance revenue for 1995
represents the recognition of $13.6 million of revenue associated with the
Siemens alliance. (See Item 1. "Business - Alliance Agreements".)
During 1995, InterDigital realized contract services revenue related to its
U.S. Federal government and other services contract activity. InterDigital
completed the remaining contracts for which InterDigital was obligated. During
the fourth quarter of 1994, InterDigital began withdrawing from this market in
order to focus on its other core business activities. No such revenues were
realized in 1996.
Cost of UltraPhone Revenues. The cost of UltraPhone telephone system sales
in 1996 increased by 53% to $27.4 million from $17.9 million in the 1995 period.
This increase is primarily due to the increase in UltraPhone product revenues.
Additionally, InterDigital incurred costs in 1996 related to InterDigital's
introduction of its fourth generation subscriber unit.
Contract Services Costs. Contract services costs were $762,000 in 1995.
During 1995, InterDigital completed the remaining contracts for which
InterDigital was obligated.
Other Operating Expenses. Sales and marketing expenses increased 31% to
$4.7 million in 1996 from $3.6 million in 1995. The increase is due primarily to
increased sales commission charges on the increased UltraPhone product revenues
as well as an increased level of sales and marketing activity as compared to the
prior year.
General and administrative expenses decreased 25% to $11.1 million in 1996
from $14.8 million in 1995. Expenses related to the protection and exploitation
of ITC's patents, including legal costs, decreased by approximately $1.8 million
in 1996 compared to 1995. The 1995 expenses included the costs of major patent
litigation. Additionally, expenses for 1995 contained $2.0 million for potential
maximum charges
22
related to a bonus compensation plan. The plan was terminated in 1995 and all
claims thereunder were paid and settled in 1995 and 1996 .
Product development expenses increased 123% to $21.6 million in 1996 from
$9.7 million in 1995. The increase in product development costs stems from
increased number of employees and activity levels as InterDigital further
develops the B-CDMA technology and UltraPhone product and technology.
Other Income and Expense. Interest expense for 1996 was $271,000 as
compared to $724,000 for 1995. The 1995 expenses include a provision of $497,000
representing additional interest calculated by InterDigital to be due to HNS and
$59,000 of interest incurred on capital leases. Interest expense for 1996
includes $124,000 of mortgage interest on InterDigital's King of Prussia
facility and $135,000 of interest on leases.
Interest income for 1996 was $4.2 million as compared to $3.1 million in
1995. The increase is due to interest earned on a higher average level of
investments during 1996 than 1995.
Minority Interest. InterDigital recorded $890,000 as an increase in
minority interest in 1996 representing the minority ownership interest in the
net income of Patents Corp. for 1996. During 1995, InterDigital recorded an
increase of $2.5 million in minority interest representing the minority
ownership interest in the net loss of Patents Corp. In September 1996,
InterDigital entered into an Agreement and Plan of Merger to acquire the portion
of Patents Corp. that InterDigital did not then currently own. Upon completion
of the transaction, Patents Corp. became a wholly-owned subsidiary of
InterDigital and therefore InterDigital will no longer recognize a minority
interest liability. (See Note 6 of the Notes to Consolidated Financial
Statements.)
Backlog
InterDigital signed a contract with MPT valued at $250 million which is
currently not included in backlog. The contract amount includes UltraPhone and
B-CDMA systems, infrastructure equipment and services, as well as capital costs
for a manufacturing facility to be built in Myanmar. Implementation of the
ministerial details of the contract is subject to certain Myanmar government
approvals as well as financing. InterDigital expects to begin production under
the contract once MPT has secured acceptable financing, initial funding is
received and all ministerial governmental approvals are received. There can be
no assurance that any of these events will occur. For example, funding may be
adversely affected by the Asian economic crisis. Further, changes in the Myanmar
government have delayed approvals. Accordingly, shipments during the first half
of 1998 may not occur and, if they do, will not be significant. There are no
significant additional orders in backlog at December 31, 1997. At December 1996,
InterDigital's backlog of orders for UltraPhone telephone equipment and services
was $37.1 million which included $32 million from InterDigital's Indonesian
customer.
STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The foregoing Management's Discussion and Analysis and discussions of
InterDigital's "Business", Item 1, contain forward looking statements
reflecting, among other things, InterDigital's current beliefs and expectations
as to its objectives, growth, financial earnings and revenue potential and
variability, working capital requirements; the development, standardization,
capabilities, production and commercialization of its B-CDMA products or
underlying technology and the schedules with respect thereto; objectives and
potential for InterDigital's product business; contract with MPT and product
delivery thereunder; market for products and marketing plans; litigation; growth
in industry markets, demand and in telecommunication infrastructure; strength
and weaknesses of competitors; effect of the Asian monetary crisis; financing
needs and capability; ability to form alliances, license its intellectual
property and generate licensing revenues; patent validity, enforceability,
applicability and infringement; and the actions of InterDigital's alliance
partners and licensees. Words such as "objectives", "intends", "expected", "
believes", "plans", "estimates", "anticipated", variations of such words, and
words with similar meaning or connotations are intended to identify such forward
looking statements.
23
Such statements are subject to risks and uncertainties. InterDigital
cautions the readers that important factors in some case have affected and, in
the future, could materially affect actual results and cause actual results to
differ materially from the results expressed in any such forward looking
statement. These factors include but are not limited to: general economic
conditions of InterDigital's customers, potential customers and the wireless
industry; actual or perceived economic conditions in Asia; the reversal or
slowdown in anticipated foreign and/or domestic TELCO infrastructure spending;
the effects of, and changes in, foreign trade, monetary and fiscal conditions,
policies, laws and regulations or other activities of foreign and the United
States governments, agencies and similar organizations; foreign exchange rates
and fluctuation in those rates; adverse foreign tax consequences; delays in
remittance and difficulties of collection of foreign payments; efforts to
nationalize foreign-owned operations; unstable foreign governments, legal
systems and intergovernmental disputes; foreign governmental action or inaction
adversely affecting radio frequency use, availability, type acceptance, spectrum
authorization and licensing; imposition of unfavorable government or industry
standards; the inability to maintain or secure adequate capital (or access
thereto) to fund operations; the failure to achieve and/or maintain market
acceptance of InterDigital's products and technology or to introduce new
competitive products on a timely and cost effective basis; the inability to hire
and/or retain appropriately qualified technical, sales or management personnel;
the availability of competitive products superior on a perceived, relative or
actual basis, with InterDigital's products; technical, financial or other
difficulties or delays in the development, re-engineering, production, testing,
commercialization and marketing of InterDigital's products or technologies;
failure of B-CDMA based equipment to meet performance tests; lack of sufficient
endorsement of B-CDMA technology and products from operators, producers and
others, or the failure to achieve widespread dissemination thereof; demand for
and pressures on margin on InterDigital's products; the failure to enter into
additional strategic alliances necessary to achieve InterDigital's business
objectives; failure to fully and successfully implement the alliance program
including the failure or inability of InterDigital's alliance partners to meet
InterDigital's expectations or contractual commitments; failure of other persons
with a business relationship with InterDigital to secure adequate financing,
required frequencies or other things necessary to fulfill their obligations to
InterDigital; changes in the Myanmar (or other applicable foreign) government,
failure to perform the Myanmar contract due to inability to secure acceptable or
adequate financing, lack of governmental or regulatory approval confirming
implementation, U.S. sanctions or other governmental prohibitions, failure of
MPT to fulfill its obligations to InterDigital, inability of MPT to absorb
required volumes of equipment, lack of continuous flow of financing, or other
factors; the difficulty or inability to enforce contractual commitments abroad;
the failure of InterDigital to successfully negotiate licensing agreements for
InterDigital's patents and other intellectual property or to enforce
InterDigital's rights under its license agreements; substantial increased costs
and other burdensome effects of legal and administrative cases and proceedings,
and the outcomes thereto, relating to InterDigital's assertion of its patents
rights, and other claims against InterDigital's patents or its products; the
inability or failure of InterDigital to protect its intellectual property
rights, including enforcing non-disclosure and non-competition agreements,
prosecuting key patent applications or defending key patents, and the inability
to successfully prove infringement of its patents. Other risk factors and
further explanations of certain of the above risk factors are included in the
foregoing "Management's Discussion and Analysis" and discussions of
InterDigital's "Business" Item 1 contained in this Annual Report. In addition,
other factors may exist that may not be fully known to InterDigital at this
time. InterDigital undertakes no obligation to publicly update any forward
looking statements, whether as a result of new information, future events or
otherwise.
24
Item 8. INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
Page
Number
------
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants 26
Consolidated Balance Sheets 27
Consolidated Statements of Operations 29
Consolidated Statements of Shareholders' Equity 30
Consolidated Statements of Cash Flows 31
Notes to Consolidated Financial Statements 32
SCHEDULES
Schedule II - Valuation and Qualifying Accounts 48
All other schedules are omitted because they are not required, are not
applicable or equivalent information has been included in the financial
statements and notes thereto.
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To InterDigital Communications Corporation:
We have audited the accompanying consolidated balance sheets of
InterDigital Communications Corporation (a Pennsylvania corporation) and
subsidiaries as of December 31, 1996 and 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
and the schedule referred to below are the responsibility of InterDigital's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of InterDigital Communications
Corporation and subsidiaries as of December 31, 1996 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
Philadelphia, PA
March 18, 1998
Arthur Andersen LLP
26
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
DECEMBER 31, DECEMBER 31,
ASSETS 1996 1997
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents, including restricted
cash of $204 and $193 respectively $ 11,954 $ 17,828
Short term investments 43,063 7,976
Accounts receivable, net of allowance for
uncollectable accounts of $558 and $897, respectively 13,921 3,058
Inventories 13,863 12,284
Other current assets 3,913 5,428
--------- ---------
Total current assets 86,714 46,574
--------- ---------
PROPERTY AND EQUIPMENT:
Land, buildings and improvements 4,078 4,231
Machinery and equipment 6,290 8,018
Computer equipment 5,612 6,699
Furniture and fixtures 2,526 2,771
Leasehold improvements 394 1,108
--------- ---------
18,900 22,827
Less-accumulated depreciation and amortization (8,383) (11,454)
--------- ---------
Net property and equipment 10,517 11,373
--------- ---------
OTHER ASSETS:
Patents, net of accumulated amortization of
$4,152 and $5,579, respectively 9,753 9,292
Long term deposits 3,822 519
Other 1,830 1,605
--------- ---------
15,405 11,416
--------- ---------
$ 112,636 $ 69,363
========= =========
The accompanying notes are an integral part of these statements.
27
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
DECEMBER 31, DECEMBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1997
------------ ------------
CURRENT LIABILITIES:
Current portion of long term debt $ 790 $ 869
Accounts payable 15,127 8,223
Accrued compensation and related expenses 3,551 6,013
Deferred revenue 4,790 3,461
Other accrued expenses 5,380 5,105
--------- ---------
Total current liabilities 29,638 23,671
--------- ---------
LONG TERM DEBT 4,221 3,591
--------- ---------
OTHER LONG TERM LIABILITIES 6,270 3,596
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Preferred Stock, $.10 par value, 14,399 shares authorized-
$2.50 Convertible Preferred, 103 shares and 102 shares
issued and outstanding 10 10
Common Stock, $.01 par value, 75,000 shares authorized,
48,109 shares and 48,230 shares issued and
outstanding 481 482
Additional paid-in capital 234,245 234,765
Accumulated deficit (162,229) (196,752)
--------- ---------
Total shareholders' equity 72,507 38,505
--------- ---------
$ 112,636 $ 69,363
========= =========
The accompanying notes are an integral part of these statements.
28
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
-------- -------- --------
REVENUES:
Product revenues $ 16,581 $ 24,974 $ 43,854
Licensing and alliance 67,693 28,719 5,982
Contract services 681 -- --
-------- -------- --------
84,955 53,693 49,836
-------- -------- --------
OPERATING EXPENSES:
Cost of product revenues 17,932 27,370 41,914
Contract service costs 762 -- --
Sales and marketing 3,597 4,679 7,276
General and administrative 14,838 11,115 12,291
Product development 9,738 21,609 24,248
-------- -------- --------
46,867 64,773 85,729
-------- -------- --------
Income (loss) from operations 38,088 (11,080) (35,893)
OTHER INCOME (EXPENSE):
Interest income 3,073 4,151 2,070
Interest and financing expenses (724) (271) (410)
-------- -------- --------
Income (loss) before income taxes and
minority interest 40,437 (7,200) (34,233)
INCOME TAX PROVISION (3,318) (3,554) (34)
-------- -------- --------
Income (loss) before minority interest 37,119 (10,754) (34,267)
MINORITY INTEREST (2,514) (890) --
-------- -------- --------
Net income (loss) 34,605 (11,644) (34,267)
PREFERRED STOCK DIVIDENDS (265) (260) (256)
-------- -------- --------
NET INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS $ 34,340 $(11,904) $(34,523)
======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE - BASIC $ 0.78 $ (0.26) $ (0.72)
======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC 43,925 46,462 48,166
======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE - DILUTED $ 0.74 $ (0.26) $ (0.72)
======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - DILUTED 46,503 46,462 48,166
======== ======== ========
The accompanying notes are an integral part of these statements.
29
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
$2.50 Additional
Convertible Common Paid-In Accumulated Deferred
Preferred Stock Stock Capital Deficit Compensation Total
------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 11 418 199,158 (184,665) (50) 14,872
Exercise of Common Stock options -- 19 9,935 -- -- 9,954
Exercise of Common Stock warrants -- 6 2,933 -- -- 2,939
Amortization of deferred compensation -- -- -- -- 50 50
Dividend of Common Stock and cash to
$2.50 Preferred shareholders -- -- 41 (265) -- (224)
Sale of Common Stock under Employee
Stock Purchase Plan -- 1 243 -- -- 244
Net Income -- -- -- 34,605 -- 34,605
-------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 11 444 212,310 (150,325) -- 62,440
Exercise of Common Stock options -- 4 2,311 -- -- 2,315
Exercise of Common Stock warrants -- 16 7,342 -- -- 7,358
Dividend of Common Stock and cash to
$2.50 Preferred shareholders -- -- 42 (260) -- (218)
Sale of Common Stock under Employee
Stock Purchase Plan -- 1 349 -- -- 350
Issuance of Common Stock associated
with the Patents Corp. merger -- 15 11,891 -- -- 11,906
Conversion of preferred stock to common (1) 1 -- -- -- --
Net Loss -- -- -- (11,644) -- (11,644)
-------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 10 481 234,245 (162,229) -- 72,507
Exercise of Common Stock options -- -- 17 -- -- 17
Exercise of Common Stock warrants -- -- 18 -- -- 18
Dividend of Common Stock and cash to
$2.50 Preferred shareholders -- -- 92 (256) -- (164)
Sale of Common Stock under Employee
Stock Purchase Plan -- 1 393 -- -- 394
Net Loss -- -- -- (34,267) -- (34,267)
-------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $ 10 $ 482 $234,765 $(196,752) $-- $38,505
=========================================================================
30
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the years ended December 31,
-------------------------------------------
1995 1996 1997
-------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 34,605 $(11,644) $(34,267)
Adjustments to reconcile net income (loss) to net
cash used for operating activities-
Minority interest in subsidiary 2,514 890 --
Depreciation and amortization 1,740 3,747 4,855
Compensation on stock issued and stock options granted 50 -- --
Other 1,036 (3,337) (2,674)
Decrease (increase) in assets-
Receivables 21,419 (10,764) 10,863
Inventories 507 (9,010) 1,579
Other current assets (75) (2,439) 1,846
Increase (decrease) in liabilities-
Accounts payable (5,223) 10,814 (6,904)
Due to Hughes Network Systems, Inc. (7,003) -- --
Accrued compensation 1,431 (784) 2,462
Deferred revenue 932 8,140 (1,329)
Other accrued expenses (2,513) 1,092 (275)
-------- -------- --------
Net cash provided by (used for) operating activities $ 49,420 $(13,295) $(23,844)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in short-term investments $(55,060) $ 11,997 $ 35,087
Additions to property and equipment, net of non-cash additions
of $657, $4,667 and $452, respectively (2,412) (4,073) (3,475)
Additions to patents (335) (870) (966)
Other non-current assets (1,095) (319) (190)
-------- -------- --------
Net cash provided by (used for) investing activities $(58,902) $ 6,735 $ 30,456
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sales of Common Stock
and exercises of stock options and warrants 13,137 $ 10,025 $ 429
Payments on long-term debt, including capital lease obligations (268) (717) (1,003)
Cash dividends on Preferred Stock (224) (221) (164)
-------- -------- --------
Net cash provided by (used for) financing activities $ 12,645 $ 9,087 $ (738)
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 3,163 $ 2,527 $ 5,874
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,264 9,427 11,954
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,427 $ 11,954 $ 17,828
======== ======== ========
The accompanying notes are an integral part of these statements.
31
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. BACKGROUND:
InterDigital develops and markets advanced digital wireless
telecommunications systems using proprietary technologies for voice and data
communications and has developed an extensive patent portfolio related to those
technologies. Currently, InterDigital's principal commercial product is the
UltraPhone system, a telephone system providing business and households access
to basic telephone service through a wireless local loop. UltraPhone system
revenues accounted for approximately 86% of the total revenues of InterDigital
during 1997. Since 1987, InterDigital has sold over 351 UltraPhone systems
worldwide, with aggregate UltraPhone telephone system revenues totaling over
$205 million. In 1998, InterDigital restructured its operations to de-emphasize
the UltraPhone product.
InterDigital has also started to market its new TrueLink wireless local
loop product based on InterDigital's proprietary B-CDMA technology.
InterDigital's B-CDMA technology was demonstrated in Hannover, Germany at the
CEBIT telecommunications show in March 1997. During 1997, InterDigital had
approximately $1.1 million of TrueLink product sales. These sales included ASICs
and B-CDMA components sold to alliance partners for their integration into
pre-production products.
In addition to its product sales, InterDigital, through ITC, has sought to
capitalize upon the revenue potential of the extensive TDMA and CDMA patent
portfolio. ITC implemented a comprehensive patent licensing strategy during
1993. These efforts have resulted in patent license agreements with a total of
thirteen entities as of December 31, 1997, consisting of five entities in 1994,
six more entities in 1995 and an additional entity in 1996, the recognition of
$67.7 million, $28.7 million and $6.0 million of licensing and alliance revenue
in 1995, 1996 and 1997, respectively.
To date, InterDigital has also formed three business alliances based upon
its B-CDMA technologies. (See Notes 2, 3, 4 and 5). InterDigital and its
alliance partners are developing a new air interface technology, and products,
based on InterDigital's patented B-CDMA technology and other proprietary
technologies. The initial phases of the development effort are oriented towards
development and commercialization of wireless local loop applications with
performance and cost characteristics applicable to a market segment distinct
from InterDigital's UltraPhone system.
Operations of InterDigital are subject to several risks and uncertainties,
including but not limited to, uncertainties related to intellectual property
rights, the acceptance by customers of InterDigital's technologies, the ability
to generate a satisfactory gross profit on product revenues, the development and
commercialization of new products, uncertainty and volatility of future
profitability, cash flows and access to capital and dependence on alliance
arrangements and key personnel. Notwithstanding the above, InterDigital's
management believes that cash on hand, cash expected under the Alcatel Agreement
and cash expected from other operations will be sufficient to sustain operations
through 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of InterDigital
and its subsidiaries. All significant inter-company accounts and transactions
have been eliminated in consolidation.
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported
32
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash, Cash Equivalents and Short-Term Investments
InterDigital considers all highly liquid investments purchased with
remaining maturities of three months or less to be cash equivalents. Investments
are held at amortized cost which approximates market value, and at December 31,
1997 are classified as short-term. At December 31, 1997, all of InterDigital's
short-term investments are classified as available for sale pursuant to
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," (SFAS 115). Therefore any unrealized
holding gains or losses should be presented in a separate component of
stockholders' equity. At December 31, 1996 and 1997, there were no significant
unrealized holding gains or losses.
Cash and cash equivalents consisted of the following:
December 31,
-------------------------
1996 1997
------- -------
Money market funds and demand accounts $ 2,871 $ 8,979
Certificates of deposit 204 --
Repurchase agreements 1,457 7,856
Commercial paper 7,422 993
------- -------
$11,954 $17,828
======= =======
The repurchase agreements are fully collateralized by United States
Government securities and are stated at cost which approximates fair market
value.
Short-term investments available for sale as of December 31, 1996 consisted
of $26.0 million in government-issued discount notes, $2.8 million in municipal
securities and $14.2 million in corporate debt securities. Short-term
investments available for sale as of December 31, 1997 consisted of $2.6 million
in government-issued discount notes and $5.3 million in corporate debt
securities.
Inventories
Inventories are stated at the lower of cost or market, with cost determined
on a first-in, first-out basis and market based on net realizable value.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization of
property, plant and equipment are provided using the straight-line method. The
estimated useful lives for computer equipment, machinery and equipment and
furniture and fixtures are generally three to five years. Leasehold improvements
are being amortized over their lease term, generally five to ten years. The
Buildings are being depreciated over a twenty-five year life.
Patents
The costs to obtain certain patents for InterDigital's TDMA and CDMA
technologies have been capitalized and are being amortized on a straight-line
basis over their estimated useful lives, generally 10 years. Amortization was
$510,000, $696,000 and $1.4 million in 1995, 1996 and 1997, respectively.
33
Product Development
All product development expenditures are charged to research and
development expense in the period incurred.
Revenue Recognition
UltraPhone product revenues are recognized upon shipment of systems.
Installation, training and other services are recognized upon completion of
services.
InterDigital through its wholly-owned subsidiary, InterDigital Telecom
Inc., provided training and contract engineering services for the United States
Government until the discontinuation of these activities in the first half of
1995. Revenues on these contracts were recognized as the services were provided.
Patent licensing revenues included in License and Alliance Revenues consist
primarily of up-front royalty payments and one-time, non-refundable fees which
were recognized at the time of the applicable agreement. Alliance revenues
included in License and Alliance Revenues were generated by patent, technology
and know-how licensing agreements. Due to the combined nature of the agreements,
revenue is recognized over the performance period, based on the nature of the
agreement. Recurring royalty revenues under both licensing and alliance
agreements, to the extent received, may be recognized in the future according to
the terms of the agreements. (See Notes 3 and 4).
Concentration of Credit Risk
Financial instruments which potentially subject InterDigital to
concentration of credit risk consist primarily of cash equivalents, short-term
investments and accounts receivable. By policy, InterDigital places its cash
equivalents and short-term investments only in highly rated financial
instruments and in United States Government obligations. InterDigital's accounts
receivable are derived principally from sales of UltraPhone telephone systems
and patent license agreements which provide for deferred and/or installment
payments. Approximately 97% of InterDigital's 1997 telephone system sales were
export sales (See Note 5). InterDigital generally requires a United States
dollar irrevocable letter of credit for the full amount of significant foreign
sales to be in place at the time of shipment except in cases where credit risk
is considered to be acceptable.
Impairment of Long-Lived Assets
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", InterDigital is required to evaluate the impairment of
long-lived assets and certain intangibles assets on a periodic basis.
InterDigital reviews the realizability of its long-lived assets by analyzing the
projected undiscounted cash flows and adjusts the net book value of the recorded
assets when the net book value of the assets exceeds the undiscounted cash flow.
No such adjustments have been recorded in 1995, 1996 and 1997.
Net Income (Loss) Per Common Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share", effective the year ended December 31, 1997. This
statement requires the disclosure of both basic and diluted earnings per share
as well as the retroactive restatement of prior years' per share disclosures.
The following tables reconcile the numerator and denominator of the basic
and diluted net income (loss) per share computations:
Year Ended December 31, 1995 Year Ended December 31, 1996
----------------------------------------- -------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Income (loss) per Share-Basis:
Income (loss) available to
common stockholders $34,340 43,925 $0.78 $(11,904) 46,462 $(0.26)
Effect of Dilutive Options
and Warrants -- 2,578 0.04 -- -- --
------- ------ ----- -------- ------ ------
Income (loss) per Share-Diluted:
Income (loss) available to common
stockholders assumed conversions $34,340 46,503 $0.74 $(11,904) 46,462 $(0.26)
======= ====== ===== ======== ====== ======
Year Ended December 31, 1997
-----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Income (loss) per Share-Basis:
Income (loss) available to
common stockholders $(34,523) 48,166 ($0.72)
Effect of Dilutive Options
and Warrants -- -- --
-------- ------ -----
Income (loss) per Share-Diluted:
Income (loss) available to common
stockholders assumed conversions $(34,523) 48,166 ($0.72)
======== ====== =====
Options and warrants (see Note 12)to purchase common stock were outstanding
during 1996 and 1997, but were not included in the computation of diluted net
income (loss) per share because they are antidilutive.
Supplemental Cash Flow Information
InterDigital paid $22,000 of federal and state income taxes during 1997. In
1995 and 1996, InterDigital paid $2.7 million and $3.7 million, respectively, in
foreign withholding, federal and state income taxes. Additionally, InterDigital
paid $63,000, $253,000 and $362,000 of interest during 1995, 1996 and 1997,
respectively (excluding interest related to the HNS obligation).
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130") and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130
and SFAS 131 are effective for fiscal years beginning after December 15, 1997.
Therefore, the Company will adopt these standards on January 1, 1998. The
Company does not anticipate the adoption of SFAS 130 or SFAS 131 to result in
any substantive changes in its disclosures.
34
3. SIEMENS AGREEMENTS:
On December 16, 1994, InterDigital entered into a Master Agreement and a
series of four related agreements as elements of an integrated transaction
establishing a broad based marketing and technology alliance with Siemens. These
agreements were amended in February 1996 in connection with the Samsung alliance
and in March 1998 in connection with the Alcatel agreement. (See Notes 4 and
17).
As partial consideration for the rights and licenses granted by
InterDigital, Siemens agreed to pay $20 million, of which $15.1 million was paid
in cash, with the remaining payment offset against payments due to Siemens from
InterDigital in conjunction with the Samsung alliance. In accordance with
accounting requirements, InterDigital recognized the $20 million of revenue over
the contract performance period due to the combined nature of the contracts. In
1995, 1996 and 1997, InterDigital recognized $13.6 million, $4.8 million and
$1.6 million, respectively of the revenue under this agreement based on the
progress of the completed work.
4. SAMSUNG AGREEMENTS:
On February 9, 1996, InterDigital entered into a series of agreements with
Samsung and amended its agreements with Siemens as a second major step in
implementing its alliance strategy. Under the various agreements, Samsung made
up-front payments to InterDigital in excess of $35 million (of which
approximately one-half constituted royalty prepayments), less applicable
withholding taxes. All payments from Samsung were received by June 30, 1996. In
July 1996, InterDigital made, via offset (see Note 3) certain payments to
Siemens, which in turn, committed to provide additional technical assistance.
The net up-front amount received by InterDigital, after giving effect to the
receipt of certain exemptions from Korean Service Withholding Tax granted by the
Korean Ministry of Information and Communications, was approximately $29
million. Samsung is also obligated to provide engineering manpower for the
development of InterDigital's B-CDMA technology.
Samsung has received from InterDigital royalty-bearing licenses covering
InterDigital's TDMA and B-CDMA patent portfolio, its UltraPhone and B-CDMA
technologies and is licensed to use certain InterDigital trademarks. The
agreements give Samsung the right to manufacture and sell privately labeled
UltraPhone systems.
InterDigital recognized $23 million as revenue during 1996
and $2.8 million
as revenue during 1997. The balance of the revenue is expected to be recognized
through fiscal 1999, the expected date of completion of the applicable
development effort.
5. MAJOR CUSTOMERS AND GEOGRAPHIC DATA:
Product Revenue:
During 1995, InterDigital's Indonesian customer and its Russian customer
(Lukoil-Langepasneftegas) accounted for 37% and 20%, respectively of product
revenues. During 1996, InterDigital's Philippine customer (Philippine Long
Distance Telephone Company) and its Indonesian customer accounted for 56% and
16% of product revenues, respectively. During 1997, InterDigital's Indonesian
and Philippine customers represented 75% and 7% of total product revenues,
respectively. Due to the economic crisis in Asia, InterDigital does not expect
any significant orders from its Indonesian or Philippine customers in the
near future.
Product revenues by geographic area are as follows (in thousands):
1995 1996 1997
------- ------- -------
Domestic $ 2,685 $ 1,958 $ 1,253
Foreign 13,896 23,016 42,601
------- ------- -------
$16,581 $24,974 $43,854
======= ======= =======
35
Licensing and Alliance Revenue:
ITC has granted non-exclusive, non-transferable, perpetual, worldwide,
royalty-bearing licenses to use certain TDMA patents (and in certain instances,
technology) to HNS, AT&T, Siemens (see Note 3), Matsushita, Sanyo, Pacific
Communications Systems, Mitsubishi, Hitachi, Kokusai, NEC Corporation, OKI
Electric Industry Company, and Samsung (see Note 4). The licenses typically
contain "most favored nations" provisions, applied on a going forward basis
only, and provisions which could, in certain events, cause the licensee's
obligation to pay royalties to InterDigital to be suspended for an indefinite
period, with or without the accrual of the royalty obligation.
In 1997, InterDigital recognized $2.8 million in Licensing and Alliance
revenue from Samsung, $1.6 million from Siemens and $1.6 million of recurring
royalty revenue from one licensee. The 1996 Licensing and Alliance revenues
contain $23.0 million from Samsung, $4.8 million from Siemens and $900,000 of
recurring royalty fees from one licensee. The 1995 Licensing and Alliance
revenues contain $20.1 million from Mitsubishi, $26.9 million from NEC and $13.6
million related to the Siemens alliance agreement.
6. PATENTS CORP.:
During the fourth quarter of 1992, InterDigital formed Patents Corp. and
contributed to Patents Corp. its entire ownership interest in ITC in return for
100% of its common stock. InterDigital had previously contributed all of its
past, present and future (conceived on or before February 2002) patent rights to
ITC. Subsequently, Patents Corp. issued 22 Units in a private placement at
$250,000 per Unit, receiving net proceeds of $5.2 million in return for 5.76% of
the ownership interest in Patents Corp.
During September 1996, InterDigital entered into an Agreement and Plan of
Merger (the "Plan of Merger") with Patents Corp. and IP Acquisition Corporation
("Merger Co"), a wholly-owned subsidiary of InterDigital, providing for the
merger of Merger Co with and into Patents Corp. (the "Merger") and the issuance
of approximately 1.5 million shares of InterDigital Common Stock to the
shareholders of Patents Corp. in exchange for their Patents Corp. Common Stock.
Upon completion of the Merger, Patents Corp. became a wholly-owned subsidiary of
InterDigital and $7.1 million, representing the excess of the fair value of
InterDigital Common Stock exchanged over the book value of the minority
interest, was assigned as additional Patents assets on the consolidated balance
sheet.
7. INVENTORIES:
December 31,
-----------------------
1996 1997
------- -------
(In thousands)
Component parts and work-in-progress $11,640 $10,249
Finished goods 2,223 2,035
------- -------
$13,863 $12,284
======= =======
Inventories are stated net of valuation reserves of $5.9 million and $5.8
million as of December 31, 1996 and 1997, respectively. As of December 31, 1997,
InterDigital had no substantial backlog other than its contract with MPT.
(See Note 16.) If product is not delivered under that contract, InterDigital
would require substantial additional reserves to record inventory at its net
realizable value.
36
8. LONG-TERM DEBT OBLIGATIONS:
1996 1997
------ ------
(In thousands)
Mortgage debt $2,764 $2,673
Capitalized leases 2,247 1,787
------ ------
Total long-term debt obligations 5,011 4,460
Less -- Current portion (790) (869)
------ ------
$4,221 $3,591
====== ======
During the second quarter of 1996, InterDigital purchased its King of
Prussia facility for $3.7 million. InterDigital paid cash of $930,000 and
arranged a 16 year mortgage of $2.8 million with interest payable at a rate of
8.28% per annum. The entire cost of the land and buildings purchased as well as
the improvements have been classified as Land, Building and Improvements within
the property section of the balance sheet.
Capitalized lease obligations are payable in monthly installments at
interest rates that range between 8.52% and 16.97% through 2000. The net book
value of the equipment under capitalized lease obligations is $1.7 million.
Maturities of principal of the long-term debt obligations as of December
31, 1997 are as follows (in thousands):
1998 $ 869
1999 695
2000 365
2001 350
2002 2,181
------
$4,460
======
9. COMMITMENTS AND CONTINGENCIES:
InterDigital has entered into various operating lease agreements, primarily
for office, assembly and warehouse space. Total rent expense was $2.5 million,
$1.0 million and $1.3 million for the years ended December 31, 1995, 1996 and
1997, respectively. Minimum future rental payments for operating leases as of
December 31, 1997 are as follows (in thousands):
1998 $2,208
1999 1,970
2000 1,755
2001 1,802
2002 652
2003 and thereafter 1,578
------
$9,965
======
Included in the minimum future rental payments is $410,000 per year for the
lease of InterDigital's former Great Neck, New York facilities comprising 15,000
square feet and $206,000 per year for the lease of a proposed other New York
facility comprising approximately 38,000 square feet. InterDigital is currently
negotiating releases under both agreements. There can be no assurance that
InterDigital will be able to obtain either of these releases. InterDigital has
made an accrual to cover expected facility expenses incurred through the
estimated date of release under the agreements. InterDigital does not expect an
additional material charge to expense related to these leases. If InterDigital
were not released from the agreements, approximately $3.2 million would be
payable under the leases through 2006.
37
Sole Source Suppliers
InterDigital currently buys several of its base station and subscriber
station components from sole source suppliers. A change in suppliers or
difficulties in the supply of components from said sources could cause a delay
in manufacturing and shipments, a possible loss of sales, and could cause
InterDigital to fail to fulfill certain performance obligations under current
customer contracts, which would affect operating results adversely.
Employment Agreements
InterDigital has entered into agreements with certain officers that provide
severance pay benefits, among other things, in certain events of termination of
employment. Certain of these agreements generally provide for the payment of
severance up to a maximum of one year's salary (approximately $1.2 million at
December 31, 1997) and up to a maximum of one year's continuation of medical and
dental benefits. In certain of these agreements, in the event of a termination
following a change in control, which is defined as the acquisition, including by
merger or consolidation, or by the issuance by InterDigital of its securities,
by one or more persons in one transaction or a series of related transactions,
of more than fifty percent (50%) of the voting power represented by the
outstanding stock of InterDigital, the employee would generally receive two
years of salary (approximately $2.3 million at December 31, 1997) and the
immediate vesting of all stock options.
10. LITIGATION:
In September 1993, ITC filed a patent infringement action against Ericsson
GE Mobile Communications, Inc. ("Ericsson GE"), its Swedish parent,
Telefonaktieboleget LM Ericsson ("LM Ericsson") and Ericsson Radio Systems, Inc.
("Ericsson Radio"), in the United States District Court for the Eastern District
of Virginia (Civil Action No. 93-1158-A (E.D.Va.)) (the "Ericsson action") which
was subsequently transferred to the United States District Court for the
Northern District of Texas. The Ericsson action seeks a jury's determination
that in making, selling, or using, and/or in participating in the making,
selling or using of digital wireless telephone systems and/or related mobile
stations, Ericsson has infringed, contributed to the infringement of and/or
induced the infringement of eight patents from ITC's patent portfolio. The
Ericsson action also seeks an injunction against Ericsson from infringement and
seeks damages, royalties, costs and attorneys' fees. Ericsson GE filed an answer
to the Virginia action in which it denied the allegations of the complaint and
asserted a counterclaim seeking a declaratory judgment that the asserted patents
are either invalid or not infringed. On the same day that ITC filed the Ericsson
action in Virginia, two of the Ericsson Defendants, Ericsson Radio and Ericsson
GE, filed a lawsuit against InterDigital and ITC in the United States District
Court for the Northern District of Texas (the "Texas action"). The Texas action,
which involves the same patents that are the subject of the Ericsson action,
seeks the court's declaration that Ericsson's products do not infringe ITC's
patents, that ITC's patents are invalid and that ITC's patents are
unenforceable. The Texas action also seeks judgment against InterDigital and ITC
for tortious interference with contractual and business relations, defamation
and commercial disparagement, and Lanham Act violations. InterDigital and ITC
intend to vigorously defend the Texas action. The Ericsson action and the Texas
action have been consolidated. ITC agreed to the dismissal without prejudice of
LM Ericsson.
In December 1997, Ericsson Inc., the successor to Ericsson GE and Ericsson
Radio, filed an action against ITC in the United States District Court for the
Northern District of Texas (the "1997 Texas action") seeking the court's
declaration that Ericsson Inc.'s products do not infringe two patents issued to
InterDigital earlier in 1997 as continuations of certain patents at issue in the
Texas action. Later that month, Ericsson Inc. filed an amended Complaint seeking
to include these two new patents in the Texas action in an effort to consolidate
the two cases. In January 1998, both Ericsson Inc. and InterDigital filed
motions requesting that Ericsson Inc.'s amended Complaint be allowed and that
the 1997 Texas action be dismissed, to which the Court agreed.
38
11. PREFERRED STOCK:
The holders of the $2.50 Convertible Preferred Stock are entitled to
receive, when and as declared by the Board, cumulative annual dividends of $2.50
per share payable in cash or Common Stock (as defined) at the election of
InterDigital (subject to a cash election right of the holder), if legally
available. Such dividends are payable semiannually on June 1 and December 1. In
the event InterDigital fails to pay two consecutive semiannual dividends within
the required time period, certain penalties may be imposed. The $2.50
Convertible Preferred Stock is convertible into Common Stock at any time prior
to redemption at a conversion price of $12 per share (subject to adjustment
under certain conditions). In 1995, 1996 and 1997, InterDigital declared and
paid dividends on the $2.50 Convertible Preferred Stock of $265,000, $260,000
and $256,000, respectively. These dividends, were paid with cash of $224,000,
$218,000 and $162,000, and 5,765, 5,862 and 19,281 shares of Common Stock,
respectively.
Upon any liquidation, dissolution or winding up of InterDigital, the
holders of the $2.50 Convertible Preferred Stock will be entitled to receive,
from InterDigital's assets available for distributions to shareholders, $25 per
share plus all dividends accrued, before any distribution is made to the Common
shareholders. After such payment, the holders of the $2.50 Convertible Preferred
Stock would not be entitled to any other payments. The redemption price for each
share of $2.50 Convertible Preferred Stock was $25.25 per share through May 31,
1997, plus all accrued and unpaid dividends. The redemption became fixed at $25
per share on June 1, 1997, and thereafter.
The holders of the $2.50 Convertible Preferred Stock do not have any voting
rights except on those amendments to the Articles of Incorporation which would
adversely affect their rights, create any class or series of stock ranking
senior to or on a parity with the $2.50 Preferred, as to either dividend or
liquidation rights, or increase the authorized number of shares of any senior
stock. In addition, if two or more consecutive semiannual dividends on the $2.50
Preferred are not paid by InterDigital, the holders of the Preferred, separately
voting as a class, will be entitled to elect one additional director of
InterDigital.
12. COMMON STOCK OPTION PLANS AND WARRANTS:
Common Stock Option Plans
InterDigital has granted options under two incentive stock option plans,
four non-qualified stock option plans and one plan which provides for grants of
both incentive and non-qualified stock options for officers and employees of
InterDigital and others. One incentive stock option plan, three non-qualified
stock option plans and the plan that allows for both incentive and non-qualified
stock options are authorized to grant options for up to 600,000, 2,035,600,
1,500,000, 2,000,000 and 4,000,000 shares, respectively of InterDigital's Common
Stock. No further grants are allowed under the remaining stock option plans. The
number of options to be granted and the option prices are determined by the
Board or a committee of the Board of Directors in accordance with the terms of
the plans. Under the terms of the incentive stock option plan, the option price
cannot be less than 100% of the fair market value of the Common Stock at date of
grant and incentive stock options granted become exercisable at 20% per year
beginning one year after date of grant and generally remain exercisable for 10
years. Under the non-qualified option plans, options are generally exercisable
for a period of 10 years from the date of grant and may vest on the grant date,
another specified date or over a period of time. All options granted under the
plan which provides for both incentive and non-qualified stock options have a
ten year-term and, with the exception of automatic grants on non-qualified stock
options to non-employee directors and grants awarded to inventors, most commonly
vest in six bi-annual installments. All incentive options granted under such
plan have exercise prices of not less
39
than 100% of the fair market value of the Common Stock on the grant date in
accordance with Internal Revenue Code requirements.
Information with respect to stock options under the above plans is
summarized as follows (in thousands, except per share amounts):
Available
For Outstanding Options
Grant Number Price Range
--------- ------------------------
BALANCE AT DECEMBER 31, 1994 2,409 5,911 $.01-$14.875
Additional authorized 4,000 -- --
Granted (166) 166 $6.56-$10.75
Canceled 135 (135) $.60-$11.625
Exercised -- (1,928) $.01-$10.50
----- ------
BALANCE AT DECEMBER 31, 1995 6,378 4,014 $.01-$14.875
Granted (862) 862 $5.625-$11.53
Canceled 88 (88) $.60-$14.875
Exercised -- (399) $.60-$8.875
----- ------
BALANCE AT DECEMBER 31, 1996 5,604 4,389 $.01-$14.875
Granted (2,539) 2,539 $4.375-$5.688
Canceled 879 (879) $5.250-$14.500
Exercised -- (3) $0.600-$5.625
----- ------
BALANCE AT DECEMBER 31, 1997 3,944 6,046
===== ======
40
1995 1996 1997
----- ----- -----
Weighted Average Exercise Price of
Options Granted During Year $7.00 $7.79 $5.45
===== ===== =====
Weighted Average Exercise Price of
Options Exercised During Year $5.28 $5.75 $4.79
===== ===== =====
Weighted Average Exercise Price of
Options Canceled During Year $7.22 $9.93 $9.15
===== ===== =====
Weighted Average Exercise Price of
Outstanding Options At December 31 $6.91 $7.14 $6.14
===== ===== =====
Exercisable Options at December 31 3,030 3,698 3,853
===== ===== =====
Weighted Average Exercise Price of
Exercisable Options at December 31 $7.01 $7.05 $6.47
===== ===== =====
InterDigital has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Accordingly, no compensation cost has been
recognized in the Statements of Operations for InterDigital's stock option
plans. Had compensation cost been calculated based on the fair value at the
grant date for awards in 1995, 1996 and 1997 consistent with the provision of
SFAS No. 123, InterDigital's net income (loss) and net income (loss) per share
would have been changed to the following pro forma amounts:
1995 1996 1997
------- -------- ---------
Net income (loss) applicable to Common
Shareholders - as reported $34,340 $(11,904) $ (34,523)
Net income (loss) applicable to Common
Shareholders - pro forma $33,872 $(13,757) $(37,894 )
Net income (loss) per share - as reported - basic $ 0.78 $ (0.26) $ (0.72)
Net income (loss) per share - as reported - diluted $ 0.74 $ (0.26) $ (0.72)
Net income (loss) per share - pro forma - basic $ 0.77 $ (0.30) $ (0.79)
Net income (loss) per share - pro forma - diluted $ 0.73 $ (0.30) $ (0.79)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in both 1995, 1996 and 1997; no dividend yield;
expected volatility of 80% for 1995 and 1996, 70% for 1997, risk-free interest
rates of approximately 6.46%, 6.25% and 6.24% for 1995, 1996 and 1997,
respectively, and an expected option life
41
of 3.85 years for 1995 and 1996 and 3.72 years for 1997. The weighted average
fair value at the date of grant for options granted during 1995, 1996 and 1997
is estimated as $4.62, $5.11 and $2.89 per share, respectively. The pro forma
effect on net income (loss) for 1995, 1996 and 1997 is not representative of the
pro forma effect on net income (loss) in future years because it does not take
into consideration pro forma compensation expense related to grants made prior
to 1995.
The following table summarizes information regarding the stock options
outstanding at December 31, 1997 (in thousands, except per share amounts):
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of As of Contractual Exercisable As of Exercise
Exercise Prices 12/31/97 Life Price 12/31/97 Price
- ------------------- ----------- ----------- ----------- ----------- --------
$0.01-$5.38 874 6.37 $ 3.66 874 $ 3.66
$5.44-$5.44 2,217 9.72 $ 5.44 374 $ 5.44
$5.50-$6.00 1,008 7.03 $ 5.74 775 $ 5.78
$6.13-$7.69 1,052 7.19 $ 6.99 937 $ 6.90
$7.75-$11.50 640 12.94 $ 9.04 638 $ 9.04
$11.63-$11.63 255 46.95 $11.63 255 $11.63
----- ----- ------ ----- ------
$0.01-$11.63 6,046 10.26 $ 6.14 3,853 $ 6.47
===== ===== ====== ===== ======
Common Stock Warrants
As of December 31, 1997, in addition to the option plans discussed above,
InterDigital has various warrants outstanding to purchase 3,574,000 shares of
Common Stock at exercise prices ranging from $2.50 to $10.00 per share, with a
weighted average exercise price of $5.36 per share. As of December 31, 1997, all
of these warrants are currently exercisable. These warrants expire in various
years through 2006. 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.
13. SHAREHOLDER RIGHTS PLAN:
In December 1996, InterDigital's Board of Directors declared a distribution
under its Shareholder Rights Plan of one right for each outstanding common share
of InterDigital to shareholders of record as the close of business on January 3,
1997. In addition, any new common shares issued after January 4, 1997 will
receive one right for each common share. Each right entitles shareholders to buy
one one-thousandth of a share of Series B Junior Participating Preferred Stock
at an purchase price of $45 per share, subject to adjustment. Ordinarily, the
rights will not be exercisable until 10 days after a non-exempt person or group
owns or acquires more than 15% of InterDigital's outstanding common stock or a
non-exempt person or group begins an offer for 15% or more of InterDigital's
outstanding common stock. In general, in the event that InterDigital is acquired
in a merger or other business combination interaction, each holder of a right
will have the right to receive, upon exercise, Units of Preferred Stock (or, in
certain circumstances, Company Common Stock, cash, property, or other securities
of InterDigital) having a current market value equal to two times the exercise
price of the Right.
14. RELATED-PARTY TRANSACTIONS:
All warrants and options granted to related parties, as described below,
are included in the number of warrants and options disclosed as outstanding in
Note 13.
42
During 1995, InterDigital hired, as a part time employee, the wife of an
executive officer and a member of the Board of Directors. For her 1995 services,
she was paid $18,496 during 1995 and 1996. She was also reimbursed for certain
traveling expenses.
During 1995 and 1996, InterDigital utilized as a consultant the son of an
executive officer and a member of the Board of Directors. He was paid $37,800
and $72,000, respectively, for these consulting services and was reimbursed
certain traveling expenses.
15. INCOME TAXES:
The 1997 income tax provision includes a current state tax provision of
$34,000. The 1996 income tax provision includes a current foreign withholding
tax provision of $3.3 million and a current state tax provision of $133,000. The
1995 income tax provision consists of a current foreign withholding tax
provision of $2.4 million, a current state tax provision of $219,000 and a
federal alternative minimum tax provision of $737,000. At December 31, 1997,
InterDigital had net operating loss carryforwards of approximately $135 million.
Since realization of the tax benefits associated with these carryforwards is not
assured, a valuation allowance of 100% of the potential tax benefit is recorded
as of December 31, 1997.
The net operating loss carryforwards are scheduled to expire as follows:
2002 $ 7.9 million
2003 18.2 million
2004 20.0 million
2005 11.9 million
thereafter 77.1 million
--------------
$135.1 million
==============
Pursuant to the Tax Reform Act of 1986, annual use of InterDigital's net
operating loss and credit carryforwards may be limited if a cumulative change in
ownership of more than 50% occurs within a three-year period. The annual
limitation is generally equal to the product of (x) the aggregate fair market
value of InterDigital's stock immediately before the ownership change times (y)
the "long-term tax exempt rate" (within the meaning of Section 382(f) of the
Code) in effect at that time. InterDigital believes that no ownership change for
purposes of Section 382 occurred up to and including December 31, 1997.
InterDigital's calculations reflect the adoption of new Treasury Regulations
which became effective on November 4, 1992 and which have beneficial effects
regarding the treatment of options and other aspects of the ownership change
calculation.
16. MYANMAR CONTRACT:
On May 16, 1997, InterDigital entered into a contract with MPT valued at
$250 million. The contract amount includes UltraPhone and B-CDMA systems,
infrastructure equipment and services and the capital costs for a manufacturing
facility in Myanmar. The contract also requires the formation of a joint venture
between InterDigital and MPT, which would operate the manufacturing facility.
InterDigital expects to begin production under the contract once MPT has
secured acceptable financing, initial funding is received and all ministerial
governmental approvals are received. There can be no assurance that any of these
events will occur. If the Company were not able to begin production on this
contract, the Company's utilization of its current inventory balances could be
adversely affected.
17. SUBSEQUENT EVENTS:
On March 12, 1998, InterDigital entered into an Agreement with Alcatel
Espana covering B-CDMA technology development, patent licensing, product
development, technology transfer, standards support and other areas of
cooperation. Under the terms of the Agreement, Alcatel agreed to pay a
technology transfer and services fee valued at approximately $25 million. Of
this fee, $5.4 million was paid in March 1998. The Agreement provides for
payment of an additional $12.6 million based on the achievement of certain
product development and commercialization milestones. The Agreement also
provides for payment of the remaining fee in conjunction with the purchase of
B-CDMA ASICs through December 31, 2003.
43
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF INTERDIGITAL
Information concerning executive officers appears under the caption Item 1.
"Business - Executive Officers of InterDigital" in Part I of this Form 10-K.
Information concerning directors is incorporated by reference herein from the
information following the caption "ELECTION OF DIRECTORS -Nominees for Election
to the Board of Directors for a Three Year Term Expiring at 2001 Annual Meeting"
to but not including "-Committees and Meetings of the Board of Directors" in
InterDigital's proxy statement to be filed with the Commission within 120 days
after the close of InterDigital's fiscal year ended December 31, 1997 and
forwarded to shareholders prior to the 1998 annual meeting of shareholders (the
"Proxy Statement").
Information in the two paragraphs immediately following the caption
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the
Proxy Statement is incorporated by reference herein.
Item 11. EXECUTIVE COMPENSATION.
Information following the caption "Executive Compensation -Summary
Compensation Table" to but not including the caption "Shareholder Return
Performance Graph" and information following the caption "Compensation Committee
Interlocks and Insider Participation" to but not including the caption "Certain
Relationships and Related Transactions" in the Proxy Statement is incorporated
by reference herein.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information following the caption "Security Ownership of Certain Beneficial
Owners and Management" to but not including the caption "Compensation Committee
Interlocks and Insider Participation" in the Proxy Statement is incorporated by
reference herein.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information following the caption "Certain Relationships and Related
Transactions" to but not including the caption "APPOINTMENT OF INDEPENDENT
ACCOUNTANTS" in the Proxy Statement is incorporated by reference herein.
44
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
(1) Financial Statements
(2) Financial Statement Schedules
The Index to Financial Statements and Schedules and the
Financial Statements begin on page 25.
(3) Exhibits
*2.1 Plan of Merger by and among InterDigital, Patents Corp. and
Merger Co. dated as of August 16, 1996 (Exhibit 2 to
InterDigital's Registration Statement No. 333-10521 filed on
August 20, 1996).
*3.1 Restated Articles of Incorporation. (Exhibit 3.1 to
InterDigital's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1996 (the "September 1996 Form
10-Q)).
*3.2 By-laws, as amended October 6, 1996 (Exhibit 3.2 to the
September 1996 Form 10-Q).
*4.1 Rights Agreement between InterDigital and American Stock
Transfer & Trust Co. ("AST") (Exhibit 4 to InterDigital's
Current Report on Form 8-K filed on December 13, 1987).
*4.2 Amendment No. 1 to the Rights Agreement between InterDigital
and AST (Exhibit 4.2 to the June 1997 Form 10-Q).
*4.3 Amendment No. 2 to the Rights Agreement between InterDigital
and AST (Exhibit 4.3 to the June 1997 Form 10-Q).
*10.1 Non-Qualified Stock Option Plan, as amended (Exhibit 10.4 to
InterDigital's Annual Report on Form 10-K for the year ended
December 31, 1991).
*10.2 Intellectual Property License Agreement between InterDigital
and Hughes Network Systems, Inc. (Exhibit 10.39 to
InterDigital's Registration Statement No. 33-28253 filed on
April 18, 1989).
*10.3 1992 License Agreement dated February 29, 1992 between
InterDigital and Hughes Network Systems, Inc. (Exhibit 10.3 to
InterDigital's Current Report on Form 8-K dated February 29,
1992 (the "February 1992 Form 8-K)).
*10.4 E-TDMA License Agreement dated February 29, 1992 between
InterDigital and Hughes Network Systems, Inc. (Exhibit 10.4 to
the February 1992 Form 8-K).
*10.5 1992 Non-Qualified Stock Option Plan (Exhibit 10.1 to
InterDigital's Current Report on Form 8-K dated October 21,
1992).
*10.6 1992 Employee Stock Option Plan (Exhibit 10.71 to the 1992
Form 10-K).
10.7 1995 Employee Stock Option Plan, as amended.
*10.8 1997 Stock Option Plan for Non-Employee Directors (Exhibit
10.34 to the September 1997 Form 10-Q).
45
10.9 Amendment #2 to the Employee Stock Purchase Plan.
*10.10 Amendment #1 to the Employee Stock Purchase Plan (Appendix to
InterDigital's Proxy Statement filed May 23, 1996).
*10.11 Employee Stock Purchase Plan (Exhibit 10.52 to InterDigital's
Registration Statement No. 33-65630 filed on June 6, 1993).
*10.12 Master Agreement among InterDigital, ITC, and Siemens dated
December 16, 1994 (Exhibit 99.1 to InterDigital's Current
Report on Form 8-K dated December 16, 1994 the ("December 1994
8-K)). **
*10.13 Patent License Agreement among InterDigital, ITC and Siemens
dated December 16, 1994 (Exhibit 99.2 to the December 1994
Form 8-K). **
*10.14 TDMA/CDMA Development and Technical Assistance Agreement
between InterDigital and Siemens dated December 16, 1994
(Exhibit 99.3 to the December 1994 Form 8-K). **
*10.15 UltraPhone OEM Purchase Agreement between InterDigital and
Siemens dated December 16, 1994 (Exhibit 99.4 to the December
1994 Form 8-K). **
*10.16 Cooperation Agreement between InterDigital and Siemens dated
December 1994 (Exhibit 99.5 to the December 16, 1994 Form
8-K). **
*10.17 ASIC Design and Development Agreement dated February 12, 1996
by and between InterDigital Communications Corporation and LSI
Logic Corporation (Exhibit 10.19 to the 1996 Form 10-K).
*10.18 Employment Agreement dated October 14, 1996 by and between
InterDigital Communications Corporation and Gregory E. Webb
(Exhibit 10.22 to the 1996 Form 10-K).
*10.19 Employment Agreement dated November 20, 1996 by and between
InterDigital Communications Corporation and James W. Garrison
(Exhibit 10.23 to the 1996 Form 10-K).
*10.20 Employment Agreement dated February 25, 1997 by and between
InterDigital Communications Corporation and Howard E. Goldberg
(Exhibit 10.24 to the 1996 Form 10- K).
*10.21 Employment Agreement dated November 20, 1996 by and between
InterDigital Communications Corporation and William A. Doyle
(Exhibit 10.25 to the 1996 Form 10-K).
*10.22 Employment Agreement dated November 18, 1996 by and between
InterDigital Communications Corporation and Charles Tilden
(Exhibit 10.26 to the 1996 Form 10-K).
*10.23 Severance Benefit Agreement dated April 26, 1996 by and
between InterDigital Communications Corporation and D. Ridgely
Bolgiano (Exhibit 10.27 to the 1996 Form 10-K).
*10.24 Severance Benefit Agreement dated April 26, 1996 by and
between InterDigital and Mark Lemmo (Exhibit 10.32 to the
March 1997 Form 10-Q).
*10.25 Employment Agreement dated June, 1997 by and between
InterDigital and Joseph Gifford (Exhibit 10.33 to the
September 1997 Form 10-Q).
*10.26 Consulting Agreement dated as of April 30, 1996 by and between
InterDigital and William J. Burns (Exhibit to the 1996 Form
10-K).
46
*10.27 Separation and Confidentiality Agreement dated as of April 30,
1996 by and between InterDigital Communications Corporation
and William J. Burns (Exhibit to the 1996 Form 10-K).
21 Subsidiaries of InterDigital.
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule
- ----------
* Incorporated by reference to the previous filing indicated.
** Confidential treatment has been granted for portions of these agreements.
(b) Reports filed on Form 8-K during the last quarter of 1997:
None.
47
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Charged
Balance at to Costs Charged Balance at
Beginning of and to Other End of
Description Period Expenses Accounts Deductions Period
----------- ------------ -------- -------- ---------- ----------
1995
- ----
Allowance for
uncollectible accounts $2,333 $108 $(101)(2) $2,000(1) $340
1996
- ----
Allowance for
uncollectible accounts $340 $339 $ -- $ 121(1) $558
1997
- ----
Allowance for
uncollectible accounts $558 $508 $ -- $ 169(1) $897
- ----------
Notes: (1) Write-off of amounts reserved in prior periods.
(2) Recovery of a previously reserved receivable.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, InterDigital has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 31st day of
March, 1998.
INTERDIGITAL COMMUNICATIONS
CORPORATION
By: /s/ William A. Doyle
-------------------------------------------
William A. Doyle
President and Principal Executive Officer
By: /s/ Keith R. Ruck
-------------------------------------------
Keith R. Ruck
Controller and Principal Accounting Officer
49
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of InterDigital and in
the capacities and on the dates indicated.
Date: March 31, 1998 /s/ D. Ridgely Bolgiano
-----------------------------
D. Ridgely Bolgiano, Director
Date: March 31, 1998 /s/ Harry Campagna
-----------------------------
Harry Campagna, Director
Date: March 31, 1998 /s/ William A. Doyle
-----------------------------
William A. Doyle, Director
Date: March 31, 1998 /s/ Robert Roath
-----------------------------
Robert Roath, Director
50
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
10.7 1995 Employee Stock Option Plan, as amended.
10.9 Amendment #2 to the Employee Stock Purchase Plan.
21 Subsidiaries of InterDigital.
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule
51