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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------------------------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission File Number 1-11152
INTERDIGITAL COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1882087
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
781 Third Avenue, King of Prussia, Pennsylvania 19406
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 610-878-7800
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $.01 Per Share
(Title of class)
Securities registered pursuant to Section 12(g) of the Act:
$2.50 Cumulative Convertible Preferred Stock,
Par Value $.10 Per Share
(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 ___
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 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. [ ]
On March 22, 1996, the aggregate market value of the Registrant's
Common Stock, $.01 par value, held by non-affiliates of the Registrant was
approximately $408,437,000.
On March 22, 1996, there were 46,021,060 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 1996 are
incorporated by reference into Items 10 through 13 inclusive.
PART I
Item 1. BUSINESS
InterDigital Communications Corporation ("InterDigital(R)" or the "Company"),
a public corporation incorporated in the state of Pennsylvania, 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. The Company 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.
The Company's principal product is the UltraPhone(R) system, a radio telephone
system providing businesses and households access to basic telephone service
through a wireless local loop. The UltraPhone system offers greater flexibility
and ease of installation than conventional wireline-based systems and is
designed to provide higher transmission quality, capacity and spectrum
efficiency than other wireless systems presently in use. The UltraPhone system,
which incorporates the Company's TDMA technology, is sold predominantly to
foreign telephone companies to provide basic telephone service to their
customers, primarily in rural and near-urban areas, where the cost of, or time
required for, installing, upgrading or maintaining conventional wireline
telephone service supports selection of an UltraPhone system. Sales of
UltraPhone systems accounted for approximately 88%, 40% and 20%, respectively,
of the total revenues of the Company during 1993, 1994 and 1995. Through
December 31, 1995, the Company has sold over 235 UltraPhone systems worldwide,
with aggregate UltraPhone sales totaling over $135 million.
The Company's objective is to become a significant global supplier of digital
wireless communications technology and systems based on its proprietary TDMA and
B-CDMA technologies. To achieve that objective, the Company has developed an
alliance program under which it intends to align itself with key entities in the
telecommunications industry. Two of the three key objectives of the Company's
alliance program, if fully and successfully implemented, are to generate
licensing revenues as well as to improve the Company's UltraPhone product
business by (i) making the Company and its UltraPhone products more credible
competitors in large scale telecommunications infrastructure programs, (ii)
expanding the depth and coverage of UltraPhone product marketing efforts around
the world, (iii) facilitating greater focus in the Company's direct sale
activities, and (iv) funding and facilitating engineering changes and
alternative supply and production sources to attempt to significantly reduce
costs and expand product capabilities.
The third objective of the alliance program is to bolster the Company's
on-going efforts to develop its B-CDMA air interface technology and to spread
the commercialization of B-CDMA-based wireless local loop applications and start
the development of B-CDMA-based wireless Personal Communications Service ("PCS")
applications. The successful commercial development and deployment of such
products is dependent upon technological achievement, including the continued
validation of the theories upon which the new technology is being designed, 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 product.
In December 1994, the Company completed the initial implementation of the
alliance program by entering into an integrated series of agreements with
Siemens Aktiengesellschaft ("Siemens") covering UltraPhone marketing and product
development, B-CDMA development, patent licensing and other areas of
cooperation. See "Siemens Agreements." The Company continued its implementation
of the alliance program when it signed a series of agreements presently
executory, with Samsung Electronics Co., Ltd ("Samsung") in February 1996. The
agreements, cover B-CDMA technology development, patent licensing, product
development, technology transfer and other areas of cooperation. See "Samsung
Agreements".
InterDigital Technology Corporation ("ITC"), an indirect 94% owned subsidiary,
and the Company, together, offer non-exclusive, royalty bearing patent,
technology and know-how licenses to telecommunications manufacturers that
manufacture, use or sell, or intend to manufacture, use or sell, equipment that
utilizes their extensive portfolio of TDMA and Code Division Multiple Access
("CDMA") patented technologies. The Company believes that, through ITC's patent
portfolio, and the Company'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, which represents a substantial portion of the
worldwide installed base. ITC implemented a strategy during 1993 of negotiation
and litigation with certain entities which it believed were representative of
the broader number of entities infringing ITC's patents. These efforts have
resulted in patent license agreements with a total of twelve entities as of
March 29, 1996, the recognition of $28.7 and $67.7 million of licensing revenue
in 1994 and 1995, respectively, and the initiation of litigation against major
telecommunications companies. See "Technology and Patent Licensing" and Item 3.
"Legal Proceedings".
As an adjunct to its primary business, the Company had provided advanced
digital wireless research and development services to government and business
organizations. The Company also directly provided telecommunications services to
businesses and households through the ownership and operation of telephone
operating companies ("TELCOs") in certain rural areas of the United States. The
Company began to withdraw from the contract services market during 1994 and it
sold the TELCO operations during 1994.
Since its inception, the Company 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. The Company had an accumulated deficit of $150.3 million as of
December 31, 1995.
B-CDMA Technology Development
The Company and its alliance partners are developing a new air interface
technology, and products, based on the Company's patented B-CDMA technology and
other proprietary technologies. The Company's intent is to establish B-CDMA
technology as a worldwide standard for PCS. InterDigital defines "True PCS(TM)"
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. The initial objective of the development effort is to
create a wireless local loop product with performance and cost characteristics
applicable to a different range of applications than the Company's UltraPhone
system. These applications would include urban deployment in both developed and
developing countries and high-speed data transfer. This wireless local loop
product would subsequently be further developed to include limited mobility,
handset functionability and eventually PCS applications.
The Company believes that its B-CDMA technology has several potential
advantages as compared to other currently available or developing 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 5-30 Mhz) than that utilized by
other technologies (typically 1-2 Mhz). In addition, the advanced digital
signal processing techniques employed in the Company's B-CDMA technology
implementation are expected to allow a greater portion of a degraded signal
to be recovered.
o Simplified Network Planning. CDMA technologies (both broadband and
narrowband) allow nearly all available radio frequencies to be utilized in
each cell site. This eliminates the need for frequency planning and
simplifies the process of cell site planning and network expansion as
compared to other digital wireless technologies.
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o Bandwidth on Demand. The Company expects that its B-CDMA technology will
allow operators to offer bandwidth on demand services 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.
o System Design Flexibility. The B-CDMA air interface technology is being
designed with the intent of allowing 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. The Company 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. The Company believes that CDMA technologies (both broadband and
narrowband) allow more secure transmission than other wireless technologies
currently available, making intentional or accidental eavesdropping
virtually impossible with commercially available technology.
The UltraPhone System
General. The UltraPhone telephone system is an advanced digital
telecommunications system which is designed to provide wireless local loop
telephone service as an alternative to conventional wireline systems. The
UltraPhone telephone system can provide high quality voice and data
communications to large numbers of users over a broad region. Utilizing the
patented TDMA technology and the Company's other proprietary technologies, the
UltraPhone telephone system enables its users, which have historically consisted
primarily of TELCOs, to offer communication services in places where the cost
of, or time required for, installing, maintaining or upgrading conventional
wireline telephone service supports selection of the UltraPhone system. The
UltraPhone telephone system is particularly well-suited for rural and near-urban
areas of developing countries.
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 current and has optional battery back-up for power outages. The
Subscriber Station is available in several standard configurations, including a
fixed unit, a transportable unit, a multiple-line Subscriber Station ("Cluster
Unit") offered currently in a 64-line version, and a mobile unit for use in
automobiles or other mobile craft within the service area of the Base Station.
The Company has also developed a rapidly deployable and transportable version of
the fixed UltraPhone telephone system which is designed to provide high quality
and private telephone communications in cases of natural disaster, tactical
military situations, emergencies and other temporary circumstances.
The Company introduced the Modular Cluster Unit in 1994 and anticipates the
introduction during the first half of 1996 of the Company's next generation
subscriber unit (collectively, the "Company's Fourth Generation Subscriber
Station") which will be more fully-featured than its predecessor versions. The
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Company's Fourth Generation Subscriber Station will also be smaller and require
less power to operate allowing for, among other things, more effective use of
solar power, enhanced mobility, easier installation and enhanced site
flexibility. The Company's Fourth Generation Subscriber Station is designed to
permit significantly reduced costs to customers of acquiring the UltraPhone
system on a per subscriber basis and thereby make it a more cost-effective
alternative in rural and near-urban applications.
Competition:
Generally, a number of companies, many of which are substantially larger and
have substantially greater financial, technical, marketing and other resources
than the Company, sell or may introduce products which compete with the
UltraPhone system. In addition, there are other foreign and domestic companies
which are involved in telecommunications equipment research and development,
many of which are substantially larger and have substantially greater financial
and other resources than the Company. In those 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 have been tested in wireless local loop
applications and are currently scheduled to be deployed during 1996 as cellular
applications, and 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. The Company believes that, at the
present time, none of the announced consortiums is fully funded, although a
substantial portion of required funding has been obtained by at least two
satellite system operators. If ultimately deployed, some systems may be directly
competitive with the Company's products and the deployment of others may provide
the Company with new opportunities to market products on a complementary basis.
The overall wireless local loop market can be segmented in two fundamental
ways: system service area and sophistication of service features. The UltraPhone
system has been deployed in applications ranging from remote rural to dense
urban areas, but is generally utilized and is generally most cost effective in
rural to near-urban 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 remote rural applications where the
UltraPhone system is also not typically marketed.
The Company believes the following specific factors are representative of the
issues considered by potential customers in selecting a wireless local loop
technology:
o Spectrum Efficiency. The UltraPhone telephone system utilizes advanced
modulation and voice compression techniques to permit the broadcast of four,
simultaneous, high quality voice conversations in each 25 KHz radio channel,
thereby offering four times the capacity of systems using analog radio
channels of the same bandwidth and approximately 2 to 4 times the capacity
of other commercially available digital wireless systems. Such efficient use
of radio frequencies is becoming increasingly important as congestion and
over-crowding of the radio spectrum intensify worldwide. Other manufacturers
have announced products purporting to match the spectrum efficiency of the
UltraPhone system.
o Voice and Transmission Quality. The UltraPhone telephone system incorporates
digital radio modulation and voice coder techniques enabling reliable
digital transmission necessary for high quality voice communication similar
to that of wireline networks and at least equal to most other wireless
systems.
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o Network Compatibility. Network interfaces enable the UltraPhone telephone
system to be connected transparently to most standard switching systems and
telephone instruments. Some other wireless systems require proprietary
interfaces to achieve such connection.
o Access to Network Features. The UltraPhone system is specifically designed
to provide access to network features such as call waiting and conferencing
in the same manner as wireline based systems. The UltraPhone system supports
facsimile and data communications (up to 2.4 Kilobits per second; 9.6
Kilobits per second expected to be available during the second half of 1996)
providing enhanced utility for business customers. The UltraPhone's cluster
configurations enable service to be provided to large groups of co-located
users. Interfaces are also provided for payphone operation, an important
feature for public telephone programs. In contrast, most commercially
available digital and analog cellular systems require additional interface
equipment, at an additional cost, for these applications. Other non-cellular
digital wireless technologies are capable of providing direct access to
network features, including 64 Kilobit per second data communications and
ISDN services.
o Conversation Privacy. The UltraPhone system's modulation, signal compression
and time division synchronization signal processing techniques provide
inherent voice privacy during transmission of voice conversations. By
contrast, analog radio systems can be easily monitored with low-cost
receivers so that additional voice encryption equipment is required at an
added cost to achieve conversational privacy. Other digital wireless
systems, especially CDMA-based systems, can also provide extremely high
privacy.
o Ease of Installation and Maintenance. Wireless local loop systems are
generally easier and faster to install than wireline systems. In contrast to
the time-consuming task of installing wire from the telephone central office
to each subscriber's location, the deployment of the UltraPhone system
involves simply installing the Base Station and deploying a Subscriber
Station at the subscriber's site. Compared to a wireline system, an
UltraPhone Subscriber Station may be more easily relocated in order to
accommodate changing circumstances. Additional Subscriber Stations may be
added through the installation of additional modular equipment at the Base
Station to expand system capacity and the deployment of Subscriber Stations
to new customer locations, as compared with the need to install new
telephone poles or construct new underground telephone trenches in the case
of wireline systems. A wireline network also requires significant ongoing
maintenance and replacement distribution, feeder, and drop cables, as well
as associated repeater coils, pedestals, conduits, telephone poles, and
other network facilities, which maintenance and replacement costs are
exacerbated by conditions in developing countries. Extensive route planning
and engineering or map drawings must be developed, categorized, indexed, and
maintained or updated on a regular basis to record cable locations and
maintenance histories as well as identify special requirements necessary to
locate and repair cables. Extensive inventories of equipment are required
for pole and trench digging, concrete cutting, telephone pole access,
manhole access, line splicing and repair, line testing, and other
maintenance or repair activities. Training and operational management for
these activities consume significant TELCO resources. Maintenance of most
wireless networks, on the other hand, requires repairs only at central Base
Station or remote subscriber locations resulting in simplified operational
management and reduced maintenance costs.
UltraPhone Business Strategy. The Company's UltraPhone Business Strategy
consists of three components:
o Increase sales and marketing effectiveness through multi-tier sales and
marketing strategies utilizing alliance partners. The Company's UltraPhone
Business Strategy encompasses focusing of technical and customer support in
existing markets and expanding into new markets through alliance partners
and distributors and agents. Various combinations of Company-employed direct
salesmen,
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independent sales representatives and distributors have been engaged to
provide broad geographic coverage. While higher commission rates are paid to
third parties than to Company-employed direct salesmen, the Company may
nonetheless choose such alternative methods of distribution because the
Company is not required to incur the continuing overhead necessary to
support direct salesmen, or because such third party sources have
significant local industry contacts in particular geographic regions. Direct
salesmen are being supported in regions in which the Company believes that
the long-term business potential is most significant and where the
additional control provided by having a direct sales force is determined to
be essential to achievement of its business objectives. The Company is also
pursuing an approach of establishing strategic relationships with
multi-national telecommunications companies where the UltraPhone product can
complement or supplement their product lines. This is expected to create a
worldwide presence in markets which the Company could not directly support
or pursue.
o Support the Company's price competitiveness by reducing production and
installation costs of the UltraPhone system. Ongoing design engineering and
ongoing attempts to sell UltraPhone systems configured to maximize
utilization of the Cluster Unit are expected to result in a continuing trend
of lower cost of product sales. In anticipation of such trends, the Company
has adopted a policy of adjusting its selling prices to the extent necessary
to be competitive based upon comparative product features and quality and,
in certain instances, competitive with products offered by others even if
lesser featured. The comparative extent of selling price and product cost
reductions will determine the extent, if any, of improvement in gross profit
margins. The Company's Fourth Generation Subscriber Station offers size
reduction, reduced power consumption, enhanced operational capabilities and
reduced production costs, as compared to the predecessor version of the
UltraPhone Subscriber Station.
o Solidify the Company's customer base and penetrate additional market
segments by increasing the UltraPhone system's capabilities and enhancing
its features. In addition to expanded frequency capabilities, cluster units
have been engineered for the dedicated purpose of cost-effectively serving
groups of subscribers within close geographic proximity (for instance,
apartment complexes, small resort towns, industrial parks, hotels, and
suburban or remote subdivisions), thus expanding the potential UltraPhone
market beyond the Company's traditional rural target market concentration.
The Company has designed product options for new frequencies of operation
and will continue to increase the design flexibility to adapt to varying
radio frequency allocations among different countries. The Company continues
to expand features, functions and performance specifications to meet
evolving customer requirements for a broader variety of voice and data
transmission capabilities.
The Company 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 such as the UltraPhone system.
The Company intends to continue to service, but not emphasize, the United States
market to the extent that the UltraPhone system, which will increasingly be
designed to support foreign markets, meets specified requirements. From time to
time, the Company may pursue global partnerships with other telecommunications
companies in order to promote large, multi-year infrastructure program orders of
the UltraPhone system. The Company's objectives in forming such partnerships
would be to provide local businesses and governments with economic incentives
and to solidify the Company's competitive position in a particular market by
promoting long-term commonalities of interest between the Company and its most
significant customers and to respond to any local requirements for in-country
sourcing or labor utilization.
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Sales by Geographic Area.
UltraPhone revenues by geographic area are as follows (in thousands):
1993 1994 1995
---- ---- ----
Domestic $ 4,087 $ 4,187 $ 2,685
Foreign 7,661 15,899 13,896
---------- --------- -----------
$ 11,748 $ 20,086 $ 16,581
========== ========= ==========
Major Customers. In 1993, the Company's Indonesian customer (P.T. Amalgam
Indocorpora) and Mexican customer (Telefonos de Mexico S.A. de C.V.) represented
18% and 33% of UltraPhone revenues, respectively. During 1994, the Company's
Indonesian customer and its Myanmar customer (Myanma Posts and Communications)
accounted for 54% and 12% of UltraPhone sales, respectively. During 1995, the
Company's Indonesian customer and its Russian customer (Lukoil-Langepasneftegas)
accounted for 37% and 20%, respectively of UltraPhone sales.
Backlog. At March 22, 1996, the Company's backlog of orders for UltraPhone
telephone systems and services was $56.4 million, which includes one order from
the Company's Philippine customer (Philippine Long Distance Telephone) for $17.9
million and another order from its Indonesian customer for $36.8 million. Over
$20 million of the backlog is expected to be delivered during fiscal year 1996
with the balance expected to be delivered during fiscal 1997. As of March 20,
1995, backlog was approximately $4.9 million, which included $3.3 million from
one customer.
Production. The Company assembles, integrates and tests the Subscriber and
Base Station using component parts manufactured by various suppliers to the
Company's specifications. In most but not all instances, component parts could
be purchased from several different sources. The Company believes that by
contracting component part manufacturing to third parties, it gains significant
flexibility to change product designs and avoids capital intensive manufacturing
investments. Should the Company's relationship with any of its suppliers cease
in the future, the Company believes that alternative sources of the various
component parts are available, although such an event would likely have an
adverse impact on shipments to its customers and support activities. In certain
instances, critical component parts for the UltraPhone system are purchased from
single sources thereby making the Company dependent upon those sources. The
Company is engaged in a continuing program of identifying and developing
alternative sources of critical components to reduce its dependence upon sole
source suppliers and has entered into an executory technology transfer agreement
under which, when such agreement becomes effective, Samsung may transition to
production of UltraPhone systems under license and become a potential supplier
to the Company.
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.
The Company 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.
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Research and Development; Engineering Services
In order to expand its research and development activities and to obtain
access to B-CDMA technology, the Company, in October 1992, acquired SCS
Mobilecom, Inc. and SCS Telecom, Inc. (hereinafter collectively referred to as
"SCS"), companies primarily engaged in CDMA communications interface research
and development associated with digital wireless telecommunications
applications. The founder of SCS is a pioneer in spread spectrum technology
research. Prior to its acquisition, SCS had conducted field tests using B-CDMA
prototypes for use in PCS applications. As a result of the SCS acquisition, the
Company acquired United States patents and patent applications covering various
aspects of digital wireless communications technology to supplement its existing
patents covering digital wireless technology. The Company currently employs 56
people as part of its B-CDMA technology development, and additionally utilizes
the efforts of outside engineering resources and engineering contributions from
its partners. The Company expects to continue to hire more individuals to
facilitate its currently planned objectives. As part of the Company's second and
third phase of B-CDMA technology development and product commercialization, the
Company will require substantially more technical and administrative support and
marketing resources and higher levels of sustained efforts for the next several
years.
The Company's TDMA engineering and UltraPhone system development projects
currently engage 40 employees as well as additional outside resources. The
Company currently expects that it will have to increase the level of resources
devoted to these projects in order to maintain and improve the competitive
position of the UltraPhone system.
The Company has historically offered certain research, engineering, marketing
or training services to third parties, including private industry and United
States Government agencies. During 1995, the Company substantially withdrew from
the contract engineering market in order to focus on its other core business
activities.
Siemens Agreements
On December 16, 1994, the Company 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 conditionally amended in February 1996 in connection with the Samsung
alliance. The amendments will be effective upon the effectiveness of the Samsung
agreements. (See "Samsung Agreements").
As partial consideration for the rights and licenses granted by the Company,
Siemens agreed to pay $20 million, of which $14.8 million has been paid through
December 31, 1995. In connection with the Samsung alliance, the Company and
Siemens agreed to defer the December 31, 1995 payment at least until March 31,
1996, and to consider offsetting all or a portion of such payment against
payments due to Siemens from InterDigital in conjunction with the Samsung
alliance. The Company did not recognize any revenue related to the Siemens
agreements in 1994. In accordance with accounting requirements, the Company will
recognize the $20 million of revenue over the contract performance period due to
the combined nature of the contracts. In 1995, the Company recognized $13.6
million of the revenue under this agreement based on the progress of the
completed work. The remaining $6.4 million of revenue is expected to be
recognized through December 1996, the expected date of completion of functional
testing at the system component level.
Under the UltraPhone OEM Purchase Agreement, Siemens is obligated to purchase
its requirement of wireless local loop products for certain specified
applications from the Company on an OEM basis through December 1999. Certain
affiliates of Siemens have also been granted the right, but are not obligated,
to purchase on an OEM basis under the agreement.
Under the TDMA/CDMA Development and Technical Assistance Agreement: (i)
Siemens will provide technical assistance to accelerate the commercialization
and deployment of the Company's B-CDMA
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technology, and (ii) the parties may develop UltraPhone product improvements and
enhancements. The agreement, as amended, provides that, subject to pre-existing
commitments (if any), Siemens will (A) share together with InterDigital and
Samsung, an exclusive royalty-bearing license for the Company's know-how
associated with the B-CDMA Application Specific Integrated Circuit ("ASIC") chip
(other than ASIC applications know-how), and a similar exclusive license to
certain other B-CDMA product design technology which will become non-exclusive
one year after certain development goals are accomplished, and (B) have a
non-exclusive royalty-bearing license with respect to other B-CDMA know-how.
Pursuant to the know-how licenses, Siemens is obligated to pay to the Company a
running royalty of 5% of all sales of B-CDMA equipment worldwide which
incorporates B-CDMA ASICs or otherwise incorporates B-CDMA know-how. Siemens
also has the option to purchase B-CDMA ASICs and products from the Company.
InterDigital will continue to maintain 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. In addition, under the Patent License Agreement, the
Company 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 Agreements
On February 9, 1996, the Company entered into a series of executory agreements
with Samsung and conditionally amended its agreements with Siemens as a second
major step in implementing its alliance strategy. The effectiveness of the
Samsung Agreements is conditioned upon, among other things, Samsung's receipt of
certain regulatory approvals and the receipt of funds due from Samsung upon such
approvals. Samsung may, by prior written notice to the Company, void the Samsung
agreements and Samsung's obligations thereunder if the approvals are not secured
within the time frame specified in the agreements.
Under the various agreements, Samsung will be obligated to make payments to
the Company in excess of $35 million (of which approximately one-half will
constitute royalty prepayment), less applicable withholding taxes, on or before
June 15, 1996. The Company, in turn, will be obligated to make certain payments
to Siemens which will provide additional technical assistance in conjunction
with such payment. The net amount to be received by the Company is expected to
be approximately $28 million. Samsung will also be obligated to provide
engineering manpower to the alliance for the development of the Company's B-CDMA
technology.
Samsung will receive from InterDigital royalty bearing licenses covering
InterDigital's TDMA and B-CDMA patent portfolio, its UltraPhone and B-CDMA
technology and will be licensed to use certain InterDigital trademarks.
InterDigital and Samsung anticipate that Samsung may manufacture and sell
privately labeled UltraPhone systems and may become a significant UltraPhone
supplier to InterDigital, which would take advantage of Samsung's expertise in
low cost, high quality manufacturing.
Technology and Patent Licensing
General. In February 1992, the Company transferred all of its patents, patent
applications and rights to file patent applications on certain future inventions
to ITC, a wholly-owned subsidiary of InterDigital Patents Corporation ("Patents
Corp."), a subsidiary of the Company. In December 1992, Patents Corp. sold
approximately 6% of its common stock in a private offering in order to fund
patent procurement, maintenance, licensing and enforcement activities, resulting
in net proceeds of approximately $5.2 million. ITC currently holds 65 United
States patents relating specifically to digital wireless spectrum-efficient
radiotelephony technology (both TDMA and CDMA) which expire at various times
beginning in 2004. ITC has also obtained patents, mostly related to TDMA
technologies, in 36 foreign countries. Thirty-eight other patent applications
have been filed by ITC in the United States Patent and Trademark Office and 160
other patent applications have been filed in numerous foreign countries
throughout the world, relating
9
variously to the CDMA and TDMA technologies. ITC's patents have effective terms
that range between 14 to 20 years.
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. In addition, in the normal course of business, third parties have
asserted, and may assert in the future, that the Company is engaged in the
infringing use of a third party's patents or proprietary technology. If any such
third party successfully asserts that the Company is engaged in any such
infringing use, the Company 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 the Company's products to avoid
further infringement. The cost of enforcing and protecting the patent portfolio
can be significant.
Patent Licensing Activities. As part of its licensing strategy, ITC has
identified non-licensed entities which it believes are infringing its TDMA
patents, and ITC has undertaken a program, the ultimate objective of which is
the realization of licensing revenues from its patent portfolio. ITC intends to
pursue such revenues through a process of negotiation and, when necessary,
litigation. 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 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"). Currently, numerous manufacturers supply digital cellular equipment
conforming to standards employing TDMA technology, such as the North American
IS-54-B, Japanese JDC and European GSM standards.
ITC has granted non-exclusive, non-transferable, perpetual, worldwide,
royalty-bearing licenses to use certain TDMA patents (and in certain instances,
technology) to Hughes Network Systems, AT&T, Siemens, Matsushita, Sanyo, Pacific
Communications Systems ("HNS"), Mitsubishi, Hitachi, Kokusai, OKI Electric
Industry Company, and upon effectiveness of the Samsung Agreements, 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 the Company to be suspended for an
indefinite period, with or without the accrual of the royalty obligation.
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 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 Qualcomm's royalty-bearing or non-licensed
patents in its B-CDMA system. In addition, Qualcomm agreed, subject 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
10
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
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 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 preliminary and permanent injunctions against
Ericsson from further infringement and seeks damages, royalties, costs and
attorneys' fees. Ericsson Radio and Ericsson GE filed a motion to transfer ITC's
action to the United States District Court for the Northern District of Texas
which was granted by the Court. 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 the Company and ITC in the United States District Court for
the Northern District of Texas (Civil Action No. 3-93CV1809-H (N.D.Tx.)) (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
the Company and ITC for tortious interference with contractual and business
relations, defamation and commercial disparagement, and Lanham Act violations.
The Company and ITC intend to vigorously defend the Texas action. On October 8,
1993, the District Court for the Eastern District of Virginia granted the motion
to transfer that was filed by Ericsson Radio and Ericsson GE. Both Ericsson
actions have been consolidated and are scheduled to go forward in the United
States Federal District Court for the Northern District of Texas. ITC agreed to
the dismissal without prejudice of LM Ericsson. In July, 1994, ITC filed a
motion to transfer the Texas action to the United States District Court for the
District of Delaware which was denied. At the request and with the consent of
the parties, the District Judge has executed an order extending a stay of the
proceedings until April 23, 1996. The Company anticipates that if the present
stay is not further extended, discovery will resume and the parties will proceed
to trial some time in 1997.
In October 1993, Motorola, Inc. filed an action against ITC in the United
States District Court for the District of Delaware seeking the court's
declaration that Motorola's products do not infringe certain ITC patents and
that these patents are invalid and unenforceable. ITC filed an answer and
counterclaims seeking a jury's determination that in making, selling or using
and/or participating in the making, selling or using of digital wireless
telephone systems and/or related mobile stations, Motorola has infringed,
contributed to the infringement of and/or induced the infringement of certain
ITC patents. ITC also sought preliminary and permanent injunctions against
Motorola from further infringement and sought damages. A trial was held in
United States District Court for the District of Delaware (Civil Action No.
94-73 (D. Del.)) on the issue of validity and infringement of 24 patent claims
involving four ITC patents, U.S. Patent Nos. 4,675,863; 4,817,089; 5,119,375 and
4,912,705. By stipulation of the parties, the case was limited to certain TDMA
products made, used and/or sold by Motorola.
On March 29, 1995, the trial ended with the jury's verdict, which is subject
to varying interpretations, but which is interpreted by the Company to mean that
ITC's patent claims at issue in the case are not infringed by Motorola and, if
construed to be infringed, are invalid. Motorola has filed a motion requesting
attorney's fees and expenses aggregating between $6 and $7 million. The Company
has filed a motion with the U.S. District Court for the District of Delaware
requesting that the court overturn and/or clarify all or part of the jury
verdict or grant a new trial, and, if that motion is unsuccessful, intends to
appeal the jury verdict to the U.S. Court of Appeals of the Federal Circuit. On
December 28,
11
1995, the court denied Motorola's motion for attorneys fees as
being premature. The other motion remains pending. The Company believes that
there are substantial grounds for reversal of the jury's verdict or the granting
of a new trial.
ITC has filed patent applications in numerous foreign countries. Typical of
the processes involved in the issuance of foreign patents, Philips, 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. On
October 19, 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 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. A formal hearing on this matter is
scheduled for June 1996. ITC is and may from time to time be subject to
additional challenges with respect to its patents and patent applications in
foreign countries. Although no assurance can be given as to the eventual outcome
of these patent challenges, ITC intends to vigorously defend its patents. If any
of these patents are revoked, ITC's patent licensing opportunities in such
relevant foreign countries, and possibly in other countries, could be materially
and adversely affected.
Rural Telephone Operating Company Business
In 1991, the Company acquired a 50% interest in Rico Telephone Company
("Rico"), and later in 1991, the Company acquired Haviland Telephone Company
("Haviland"), a Kansas-based company, which owns 12 distinct but nearly
contiguous local telephone service exchanges stretching from the suburbs of
Wichita, Kansas towards the environs of Dodge City, Kansas. Haviland and Rico
together serve approximately 3,700 basic telephone subscribers and provide
certain other communications-related services. The Company sold its interests in
Rico and Haviland in 1994.
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 countries, primarily to ensure compliance with federal
technical standards for interconnection, radio emissions and non-interference
(i.e. type acceptance of a particular product). The Company generally designs
and builds UltraPhone equipment in accordance with such industry regulations and
standards as may be appropriate.
12
Employees
As of March 15, 1996 the Company had 183 full-time employees. In addition, the
services of consultants and part-time employees are utilized. None of the
Company's employees are represented by a collective bargaining unit. The Company
considers its employee relations to be good. A breakdown of the Company's
full-time employees by functional area is as follows:
NUMBER OF
FUNCTIONAL AREA EMPLOYEES
--------------- ---------
Sales and Marketing 11
Customer Support 24
Manufacturing 26
Research and Development 96
Patent Licensing 2
Corporate and Administration 24
--------
Total 183
========
Executive Officers of the Company
The Executive Officers of the Company are:
NAME AGE POSITION
---- --- --------
William J. Burns 67 Chairman and Chief Executive Officer
William A. Doyle 46 President
Howard E. Goldberg 50 Executive Vice President, General Counsel
and Secretary
James W. Garrison 39 Vice President - Finance, Chief Financial
Officer and Treasurer
William J. Burns has been a director of the Company since June 1990; he was
named Chairman of the Board in May 1994 and Chief Executive Officer in November
1994. He has been a self-employed investor and financial consultant for the last
15 years. He has an extensive background in financing and management.
William A. Doyle was promoted to President in November 1994. Previously, Mr.
Doyle had been Executive Vice President and Chief Administrative Officer since
February 1994. Prior to February 1994, Mr. Doyle had served as Vice President,
General Counsel and Secretary of the Company from March 1991. From October 1987
to March 1991, Mr. Doyle served as Vice President, General Counsel and Secretary
of Environmental Control Group, Inc., a publicly traded company involved in the
environmental remediation business.
Howard E. Goldberg was promoted to Vice President, General Counsel and
Secretary in December 1994 and to Executive Vice President in May 1995. Prior
thereto Mr. Goldberg served the Company in various consulting and full time
employment capacities from April 1993, including the position of Vice President
- - Legal immediately prior to the most recent appointments. Prior to joining the
Company, Mr. Goldberg served as Vice President, General Counsel and Secretary of
Environmental Control Group, Inc. from March 1991. From August 1986 to March
1991, Mr. Goldberg was an associate, primarily engaged in the practice of
securities and corporate law with Fox, Rothschild, O'Brien & Frankel in
Philadelphia, Pennsylvania. Immediately prior to joining Fox, Rothschild,
O'Brien & Frankel, Mr. Goldberg served as Special Counsel, Office of
International Corporate Finance, in the Division of Corporate Finance,
Securities and Exchange Commission, Washington, D.C.
13
James W. Garrison was elected Vice President of Finance, Chief Financial
Officer and Treasurer effective December 1994. During the period from July 1994
through December 1994, Mr. Garrison served as Acting Chief Financial Officer.
Mr. Garrison joined the Company as Corporate Controller in August 1992.
Immediately prior thereto, Mr. Garrison was Controller of Horizon Cellular
Telephone Company from October 1990 to August 1992. From August 1987 to October
1990, Mr. Garrison served as Vice President of Finance for Avant-Garde Computing
Inc., having succeeded to such position after serving as Controller from 1982 to
1987. Mr. Garrison is a Certified Public Accountant who served as a Public
Accountant with Arthur Andersen & Co.
The Company's Executive Officers are elected to the offices set forth above to
hold office until their successors are duly elected and have qualified.
14
Item 2. PROPERTIES
The Company leases two facilities with an aggregate of approximately 65,000
square feet of office space and assembly facilities in King of Prussia,
Pennsylvania with terms expiring in 2000 at an aggregate annual cost of
approximately $610,000, plus annual operating expenses of approximately
$375,000. The Company has entered into a Purchase and Sale Agreement to buy one
of its current Pennsylvania facilities, comprising 50,000 square feet and
representing $375,000 annual rental and $275,000 annual operating costs. The
purchase cost will be approximately $4 million, of which $2.8 million is
expected to be funded by a mortgage loan. Completion of the purchase transaction
is subject to customary due diligence procedures and is expected to occur during
the second quarter of fiscal year 1996. The remaining 15,000 square feet of
space in King of Prussia, Pennsylvania was vacated as part of a consolidation of
the Company's King of Prussia facilities. The Company is actively pursuing a
sublessee for the space. Also, the Company leases 15,000 square feet of office
space in Great Neck, New York at an annual cost of approximately $320,000. The
Company anticipates it will need approximately 25,000 to 30,000 square feet at
its New York facility and is currently exploring alternative site options to
fulfill those needs. In the event of a substantial increase in sales, additional
production and 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 (Civil Action No. 94-CV-6751) against
the Company and its former chief executive officer alleging certain violations
of the disclosure requirements of the federal securities laws and seeking
damages on behalf of shareholders who purchased the Company's stock during the
class period stated to be March 31, 1994 to August 5, 1994. The alleged
violations relate 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 the Company and a
proposed purchaser to sell $30 million of the Company's discounted common stock
and warrants, and a related $3 million loan to the Company; and (3) a $25
million loan to the Company from Oregon Financial Group, Inc. ("OFG"). On April
25, 1995, the Court entered an order certifying the case as a class action. The
Company believes that the complaint is without merit and intends to contest it
vigorously. The Company filed a motion for summary judgment in June 1995 and a
reply brief to the plaintiff's motion for summary judgment in July 1995. Oral
arguments on the motion were held in August 1995. On September 13, 1995, the
Court entered an order directing that all summary judgment matters be submitted
prior to the adjudication of defendants' motion. Accordingly, the Court denied
defendants' motion without prejudice so that defendants could submit a
supplemental brief and expert report. The defendants filed these papers on
October 6, 1995, adding an additional basis for the motion to the effect that
there was no statistically significant change in the stock price when the "true"
facts came out, indicating that as a matter of law, there were no material
misstatements or omissions. On February 6 1996, the court denied defendants'
motion for summary judgment. The court has placed the case on the trial calendar
for July 1996.
The Company 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, the Company is a party to certain
other legal actions arising in the ordinary course of its business. Based upon
information presently available to the Company, the Company believes that the
ultimate outcome of these other actions will not materially affect the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
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
the Company's Common Stock as reported by the American Stock Exchange.
1995 High Low
---- ---
First Quarter 12 7/8 5
Second Quarter 7 7/8 5 5/8
Third Quarter 9 3/16 6 3/8
Fourth Quarter 9 1/2 6 7/16
High Low
---- ---
1994
First Quarter 5 5/8 3 3/4
Second Quarter 5 5/8 2 1/2
Third Quarter 4 1/4 2
Fourth Quarter 7 7/8 2 3/4
As of March 22, 1996, there were approximately 2,700 holders of record of the
Company's Common Stock.
The Company has not paid cash dividends on its Common Stock since inception.
It is anticipated that, in the foreseeable further, no cash dividends will be
paid on the Common Stock and any cash otherwise available for such dividends
will be reinvested in the Company's business. The payment of cash dividends will
depend on the earnings of the Company, the prior dividend requirements on its
remaining series of Preferred Stock and other Preferred Stock which may be
issued in the future, the Company's capital requirements, restrictions in loan
agreements and other factors considered relevant by the Board of Directors of
the Company.
16
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".
1991 1992(1) 1993 1994 1995
--------- --------- --------- --------- ---------
Consolidated Statement of Operations Data
(in thousands, expect per share data)(6)
Revenues:
UltraPhone $ 31,482 $ 34,348 $ 11,748 $ 20,086 $ 16,581
Licensing and Alliance -- 3,015 -- 28,709 67,693
Contract services 2,140 2,347 1,551 1,171 681
--------- --------- --------- --------- ---------
Total revenues 33,622 39,710 13,299 49,966 84,955
Nonrecurring items (2) 925 (15,088) -- -- --
Income (loss) from continuing operations (6,179) (20,342) (32,929) (13,753) 34,605
Discontinued operations (6) (60) (2,283) (1,728) (295) --
Net income (loss) before preferred dividends (6,239) (22,625) (34,657) (14,048) 34,605
Net income (loss) applicable to common shareholders $ (7,743) $ (22,917) $ (34,939) $ (14,330) 34,340
========= ========= ========= ========= =========
Net income (loss) per share
Net income (loss) from continuing operations $ (0.39) $ (0.86) $ (1.05) $ (0.37) $ 0.74
Net income (loss) - discontinued operations -- (0.09) (0.06) (0.01) --
--------- --------- --------- --------- ---------
Net income (loss) per common share $ (0.39) $ (0.95) $ (1.11) $ (0.38) $ 0.74
========= ========= ========= ========= =========
Weighted average number of shares
outstanding 19,828 24,113 31,515 37,463 46,503
========= ========= ========= ========= =========
Operations and Other Data:
Number of UltraPhone systems sold 50 45 10 34 25
Number of UltraPhone subscriber stations sold 5,826 7,160 2,304 8,570 5,474
1991 1992 1993 1994 1995
--------- --------- --------- --------- ---------
Consolidated Balance Sheet Data (in thousands):
Cash and cash equivalents (3) $ 4,595 $ 9,146 $ 8,211 $ 6,264 $ 9,427
Short Term Investments -- -- -- -- 55,060
Working capital (deficit) (3,248) 10,340) 8,064 10,118 59,008
Total assets 15,031 35,550 32,326 43,830 83,167
Short-term debt (4) 1,194 154 256 233 430
Long-term debt 158 150 650 520 631
Accumulated deficit (112,479) (135,396) (170,335) (184,665) (150,325)
Total shareholders' equity (5) 1,806 15,056 14,004 14,872 62,440
- ---------------------------------------
(1) Includes the results of operations of SCS from October 15, 1992, the
respective date of acquisition by the Company.
(2) Nonrecurring items for 1991 include a gain of $8,125,000 on the sale of a
cellular license and a loss of $7,200,000 on the cancellation of a purchase
commitment. See Note 7 to "Notes to Consolidated Financial Statements".
Nonrecurring items for 1992 include the expensing of $13,120,000 of
research and development costs acquired as part of the acquisition of SCS
and a loss of $1,968,000 on a
17
revaluation of equipment acquired as part of a cancellation of the purchase
commitment referred to above. See Note 7 to "Notes to Consolidated
Financial Statements".
(3) Including $6,710,000, $2,424,000, $471,000 and $1,200,000 of restricted
cash as at December 31, 1992, 1993, 1994 and 1995, respectively. See Note
2 to "Notes to Consolidated Financial Statements".
(4) Includes the current portion of long-term debt.
(5) The Company has not declared or paid any dividends on the Common Stock
since its inception.
(6) The accompanying selected financial data has been restated to present the
Company's TELCO operations as discontinued operations. See Note 6 to "Notes
to Consolidated Financial Statements".
18
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, the Company 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. The
Company'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, the Company began to realize positive results from its efforts to
capitalize upon the revenue potential of its TDMA and CDMA patent portfolio and
recognized $28.7 million of licensing revenue, representing over 57% of total
revenues for 1994. During 1995, the Company recognized $67.7 million of
licensing and alliance revenue enabling the Company to report its first
profitable fiscal year since its inception. The Company was profitable in the
first and second quarters of 1995 and unprofitable in the third and fourth
quarters of 1995. The variability of 1995 quarterly operating results was due to
the revenue related to one-time license agreements. The Company expects such
variability to continue until recurring royalties are due under such agreements.
Historically through 1994, InterDigital's primary source of revenue was
derived from sales of the UltraPhone digital wireless local loop telephone
system. 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 UltraPhone 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 the Company's largest
customers over a few fiscal quarters. See Note 4 to "Notes to Consolidated
Financial Statements". Additionally, the Company 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, the Company's cash flow may be expected
to fluctuate significantly for the foreseeable future.
The Company began to experience a significant decline in UltraPhone system
order volume during 1992. Beginning in 1992, competition for sales of wireless
telephone systems intensified as providers of both analog and digital cellular
systems, many of which have significantly greater resources than the Company,
more actively promoted their products for fixed site installations in the
Company's target markets. The Company sought to counter these competitive
pressures by emphasizing the advantages which it believes the UltraPhone system
offers over fixed cellular and other wireless systems, by lowering UltraPhone
system prices, and by offering the UltraPhone system through or in conjunction
with alliance partners. At the same time, the Company is in the process of
restructuring its sales and marketing efforts to focus on multi-year,
large-scale telecommunications infrastructure programs in which the UltraPhone
would be positioned as a fundamental component in the rural and near-urban
telephone networks of such programs.
19
In order to support the flexible pricing generally required in multi-year
programs, the Company introduced a redesigned central office terminal which
expanded base station capacity by over 50% and a significantly lower-priced
cluster unit during the last half of 1994 and expects to introduce a more
fully-
featured subscriber unit during the first half of 1996. Reductions in
product costs would be most fully realized in cluster systems and, to a lesser
degree, in other non-cluster configurations in which there is a high ratio of
subscriber units to base stations. The Company has experienced and may continue
to experience engineering delays in the introduction of its new subscriber unit
and/or other new enhancements or features.
The Company anticipates that it will continuously need to reduce prices and
expand product features due to industry demands which will result in continued
pressure upon gross profit margins until such time as the Company is able to
reduce product costs commensurate with price reductions. More specifically, the
Company has accepted major orders for 1996 and 1997 delivery (see "Backlog"),
and is actively marketing the UltraPhone system in certain opportunities, at
sales prices which are expected to generate little, if any, margin based on the
current cost characteristics of the system configurations being proposed. In
these situations, and in any additional situations where the Company elects to
accept similarly margined orders, it would do so because of collateral profit
potential as next enumerated, or because of other strategic positioning
considerations. The Company believes that any profit potential would primarily
relate to design engineering to reduce product costs, the expected positive
effects on vendor pricing of the increased production volume, change orders
(including post contract system reconfigurations), post contract add-ons and
systems expansions and servicing, as well as follow on orders. Given the
possibility of engineering delays and difficulties, and the continuing inability
to sell UltraPhone systems with a high cluster utilization, the Company can give
no assurance that it will be able to achieve sufficient product cost reductions
or otherwise achieve satisfactory gross profit margins. In addition, there can
be no assurance that the development costs necessary to achieve such potential
product cost reductions will be acceptable to the Company.
The inability to competitively approach the aggressive pricing from fixed
cellular and other competitors, the significant additional complexities of, and
time required in, competing for large scale programs, as well as the
restructuring of the sales force, have all adversely impacted order volume and
revenues since 1993. Delays in introduction of the new subscriber unit may
further adversely affect order volume and timing of revenue recognition,
including timing of revenue recognition from the two major orders currently in
backlog (see "Backlog"). The Company is continuing to adjust its sales and
marketing strategies by focusing its direct efforts, improving its UltraPhone
system distribution network and pursuing various alliance partners. The Company
entered into its first major alliance in December 1994 with Siemens and, on an
executory basis, entered into its second major alliance with Samsung in February
1996.
In addition to the effects of varying selling prices and product materials
costs, the Company's gross profit margin ratios are ordinarily affected by the
relative proportions of direct and distributor sales, by the average number of
subscribers 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, the Company'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.
On March 29, 1995, a trial involving ITC and Motorola, Inc. ended with the
jury's verdict, which is subject to varying interpretation, but which is
interpreted by the Company to mean that ITC's patent claims at issue in the
case, involving four of ITC's patents, are not infringed by Motorola and, if
construed to be infringed, are invalid. While the Company intends to appeal the
jury verdict and believes that substantial grounds exist to overturn the
verdict or grant a new trial, the ultimate resolution of this matter will likely
occur in the intermediate to long-term. Until there is a final judicial
determination the verdict may adversely affect the Company's level of revenue
and potential cash flow from ITC's patent portfolio and may impair generally
20
the Company's ability to raise additional funds for general corporate purposes.
The outcome of the jury trial may also temporarily or permanently adversely
affect ITC's pending U.S. litigation against Ericsson and its ability to realize
running royalties or specified installment payments under certain of its license
agreements.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL REQUIREMENTS
The Company had working capital of $59.0 million at December 31, 1995 compared
to working capital of $10.1 million at December 31, 1994. The increase in
working capital since December is due primarily to $86.1 million of cash
received on patent licensing agreements during 1995 and $13.1 million received
from stock option and warrant exercises, offset by operating cash needs of the
Company. The Company 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. Since the fourth quarter of 1994, the Company has
generated cumulative operating profits and substantially strengthened its cash
position through its alliance and licensing transactions. Proceeds from
licensing transactions, paid to ITC, can be made available for uses related to
UltraPhone product marketing efforts, product development efforts or other
Company uses upon such funds being transferred to InterDigital pursuant to
contractual arrangements or in conjunction with a dividend declaration.
Assuming the receipt of certain required regulatory approvals, net proceeds of
the presently executory Samsung agreements signed in February 1996 are expected
to be approximately $28 million and are expected to be fully realized by the end
of the second quarter of 1996.
Demands on working capital in 1996 and beyond are expected to increase. The
Company expects to significantly increase its B-CDMA technology development
expenditures to commercialize its technology as soon as possible. As the
development effort nears first stage completion, currently anticipated in early
1997, 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. Engineering efforts required to
support the UltraPhone product are also expected to increase significantly as
the Company continues its efforts to reduce the cost of the UltraPhone and
increase its market share. Marketing and other costs are expected to increase as
well as the Company seeks to more effectively support its alliance program.
Certain emerging trends associated with product sales could also negatively
impact future working capital, should they occur. The Company has not offered
vendor financing to prospective customers, instead relying on its efforts to
assist prospective customers in obtaining financing from other sources. Should
the Company engage in a vendor financing program (it has no current plans to do
so), such a program would have a material impact on working capital needs. Many
prospective customers have required increasingly significant delivery and
performance guarantees of various types, including delay damage clauses,
performance bonds and performance guarantees. The working capital required to
provide such guarantees could be significant for large orders, and the costs
that might be incurred if any such guarantee were called upon, could have a
material adverse impact on working capital. The Company obtains some component
parts from single sources, while other components are available from multiple
sources; changing sources of supply would likely cause a disruption in supply.
Any interruption in the supply of quality components could have an adverse
impact on working capital.
The Company's working capital requirements will depend on numerous additional
factors, including but not limited to the success of the Siemens and Samsung
relationships and the broader alliance strategy, the level of demand and related
margins for the UltraPhone system, the ability to generate license fees and
royalties, and the need to expend funds in connection with its patent
enforcement activities. In addition, when the Company 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 the Company were to experience
additional sudden and significant
21
increases in orders to be built to specification, it would intensify the need
for significant short to intermediate term financing arrangements.
Accordingly, the Company may, at some future date subsequent to 1996, require
additional debt or equity capitalization to fully support its technical and
product development and marketing activities and to fund its patent enforcement
activities. The Company 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 the Company will be able to
sell any such securities, or, if it can, that it can do so on terms acceptable
to the Company.
The Company recently relocated its Pennsylvania operations and support
activities to a new location within the King of Prussia, Pennsylvania area. The
Company has entered into an agreement to purchase the new facility. The cost
will be approximately $4 million, which sum is expected to be partially financed
through an institutional mortgage loan.
The Company believes that its investment in inventories and non-current assets
are stated on its December 31, 1995 balance sheet at realizable values based on
expected selling price and order volumes. Property and equipment are currently
being utilized in the Company's on-going business activities, and the Company
believes that no additional write-downs are required at this time due to lack of
use or technological obsolescence. With respect to other assets, the Company
believes that the value of its patents is at least equal to the value included
in the December 31, 1995 balance sheet.
Changes in Cash Flows and Financial Condition:
The Company has experienced positive cash flows of $49.4 million from
operations during 1995. The positive cash flows from operations are primarily
due to the receipt of $86.1 million related to the Company's patent licensing
activities offset by expenses incurred for UltraPhone production and marketing,
B-CDMA technology development and the Company's general and administrative
activities.
Net cash flows from (used by) investing activities for 1995 include
investments in property and equipment and other long term assets of $3.8
million. Also included in net cash flows from (used by) investing activities is
the Company's investment of $55.1 million of excess funds in short-term, highly
liquid securities. Notwithstanding the above, the amount of cash used in
investing activities has, historically, been low relative to cash used in
operations.
During 1995, the Company generated $12.6 million from financing activities.
The funds were primarily generated by the exercise of stock options and
warrants.
Cash and cash equivalents of $9.4 million as of December 31, 1995 includes
$1.7 million held by Patents Corp. and $1.2 million of restricted cash. All of
the short term investments as of December 31, 1995 were held by ITC. The
UltraPhone accounts receivable of $2.8 million at December 31, 1995 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, 1995, $1.2 million has been collected
through March 22 , 1996.
Inventory levels have decreased at December 31 1995 to $4.9 million from $5.0
million as of December 31, 1994, reflecting the sale of systems, principally to
the Company's Indonesian customer. Inventories at December 31, 1994 and December
31, 1995 are stated net of valuation reserves of $7.5 million and $6.9 million,
respectively.
Included in other accrued expenses at December 31, 1995 are professional fees,
consulting and other accruals and deferred rent relating to the corporate
headquarters and manufacturing facilities, as well as sales taxes payable.
22
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
UltraPhone sales as a percentage of revenues from UltraPhone sales:
As a % of Total Revenues
----------------------------------
Year Ended December 31,
----------------------------------
1993 1994 1995
----- ----- -----
Revenues:
UltraPhone 88.3% 40.2% 19.5%
Licensing and Alliance -- 57.5 79.7
Contract services 11.7 2.3 0.8
----- ----- -----
Total revenues 100.0% 100.0% 100.0%
===== ===== =====
UltraPhone gross margins (85.3)% (16.8)% (8.1)%
===== ===== =====
1995 COMPARED WITH 1994
Total Revenues. Total revenues in 1995 increased 70% to $85.0 million from
$50.0 million in 1994 due to the recognition of $39.0 million of additional
licensing revenue in 1995 offset by a decrease in UltraPhone revenues of 17% to
$16.6 million from $20.1 million in 1994. License and alliance revenue of $67.7
million in 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 represents the recognition of $13.6
million of revenue associated with the Siemens alliance. See Item 1.
"Business-Siemens Agreements".
The Company realizes contract services revenue related to its U.S. Federal
government and other services contract activity. Such revenues declined 42% to
$681,000 in 1995 from $1.2 million in 1994. The Company has substantially
completed its withdrawal from this market in order to focus on its other core
business activities.
Cost of UltraPhone Revenues. The cost of UltraPhone sales in 1995 decreased by
24% compared to the 17% decrease in UltraPhone revenues. This resulted in a
decrease from $23.4 million in 1994 to $17.9 million in 1995. The Company
recorded charges totaling $1.5 million in 1994, to increase its inventory
valuation and purchase commitment reserves. The decreased production volume in
1995 required the Company to less fully absorb its fixed production overhead
costs. Because of continued competitive pressures and the inability to attain
significant volumes of orders and shipments of the modular cluster, materials
costs as a percentage of revenues increased in 1995 compared to 1994.
Contract Services Costs. Contract services costs decreased 47% to $762,000 in
1995 from $1.4 million in 1994. The decrease in margins reflects the lower
activity levels and consequent unabsorbed overhead costs associated with the
Company's withdrawal from the contract services business.
Other Operating Expenses. Other operating expenses include sales and marketing
expenses, general and administrative expenses and research and development
expenses.
Sales and marketing expenses decreased 21% to $3.6 million in 1995 from $4.5
million in 1994. The decrease is due primarily to decreased sales commission
charges on the decreased UltraPhone system revenues as well as the decrease in
Company sales personnel reflecting the Company's increased use of in-country,
consultants.
23
General and administrative expenses decreased 35% to $14.8 million in 1995
from $22.9 million in 1994. Expenses related to the protection and exploitation
of the Company's patents, including legal costs, decreased by approximately $3.7
million in 1995 compared to 1994. Expenses for 1994 included the preparation for
the Motorola trial as well as litigation expenses incurred in the litigation and
settlement with Qualcomm. See Item 1 "Business - Technology and Patent
Licensing". Included in the Patents Corp. expenses for 1994 were accounting
charges and reserves totaling $2.7 million which represented what the Company
believes to be the maximum amount of charges under certain writings subject to
varying interpretations which the Company may incur relating to bonus
compensation and compensatory options to purchase Patents Corp. common stock
claimed by some Patents Corp. officers and employees. The charge relating to the
compensatory options was based on the difference between the deemed value for
accounting purposes of the shares subject to the options and the exercise price
of the option. Expenses for 1995 contain $2.0 million for potential maximum
charges under this bonus compensation arrangement. Legal fees and expenses
related to litigation and other corporate matters decreased by $1.2 million in
1995 compared to 1994. Expenses for 1994 included a charge of approximately $1.3
million to fully reserve the note receivable related to the 1994 purchase by a
third party of three UltraPhone systems originally sold to the Company's
Indonesian customer in 1993. General and administrative expenses in 1994 also
includes $1.6 million, primarily severance charges, relating to the Company's
withdrawal from the contract services market and other reductions in force or
terminations. No such charges were incurred in 1995. Expenses for 1995 include a
$1.3 million charge for the remaining lease commitments of the space that the
Company vacated as part of the move of its King of Prussia facilities. (See
Properties.)
Research and development expenses increased 28% to $9.7 million in 1995 from
$7.6 million in 1994. The increase in research and development costs stems from
increased number of employees and activity levels as the Company further
develops the B-CDMA technology and UltraPhone systems .
Other Income and Expense. Interest income in 1995 was $3.1 million as compared
to $113,000 for 1994. The increase is due primarily to greater average invested
cash balances in 1995 compared to 1994 due to the receipt of cash and investment
of funds for licensing and alliance revenues. Interest expense for 1995 was
$724,000 as compared to $1.5 million for 1994. 1994 expenses include a provision
of $975,000 representing additional interest calculated by the Company to be due
to HNS. Interest expense for 1994 also included $193,000 of interest expense
related to two short-term borrowings during the year of $3.0 and $2.4 million,
respectively, and increased charges by vendors. Interest and financing expense
in 1995 included a charge for additional interest recorded as part of a
settlement of litigation with HNS.
Minority Interest. The Company recorded $2.5 million as an increase in
minority interest in 1995 representing the minority ownership interest in the
net income of Patents Corp. for 1995. During 1994, the Company recorded an
increase of $878,000 in minority interest representing the minority ownership
interest in the net income of Patents Corp for 1994.
Discontinued Operations. During 1994, the Company had a loss from discontinued
operations of $416,000, primarily from the interest expense on the Seller notes
and the amortization of goodwill. The Company recognized a $121,000 gain on the
sale of the Haviland Telephone Company operations.
1994 COMPARED WITH 1993
Total Revenues. Total revenues in 1994 increased 276% to $50.0 million from
$13.3 million in 1993 due to the recognition of $28.7 million of licensing and
alliance revenue in 1994 and an increase in UltraPhone revenues of 71% to $20.1
million from $11.7 million in 1993. No license and alliance revenues were
recognized in 1993. License and alliance revenue of $5.5 million in 1994
resulted from the settlement of the Qualcomm litigation. The remaining license
and alliance revenue represents non-refundable royalty advances from AT&T and
OKI Electric and revenue associated with a patent license granted to Matsushita.
See Item 1. "Business - Technology and Patent Licensing".
24
The Company realized contract services revenue related to its U.S. Federal
government and other services contract activity. Such revenues declined 24.5% to
$1.2 million in 1994 from $1.6 million in 1993. The Company has substantially
completed its withdrawal from this market in order to focus on its other core
business activities.
Cost of UltraPhone Revenues. The cost of UltraPhone telephone system sales in
1994 increased by only 7.7% compared to the 71% increase in UltraPhone revenues.
This resulted in an increase of $1.7 million to $23.5 million in 1994 compared
to $21.8 million in 1993. The Company recorded charges totaling $6,750,000 and
$1,500,000 in 1993 and 1994, respectively, to increase its inventory valuation
and purchase commitment reserves. The increased production volume in 1994
allowed the Company to more fully absorb its fixed production overhead costs.
Because of continued competitive pressures and the inability to attain
significant volumes of orders and shipments of the newly introduced modular
cluster, materials costs as a percentage of revenues increased in 1994 compared
to 1993.
Contract Services Costs. Contract services costs decreased 20.3% to $1.4
million in 1994 from $1.8 million in 1993. The decrease in margins reflects the
lower activity levels and consequent unabsorbed overhead costs.
Other Operating Expenses. Other operating expenses include sales and marketing
expenses, general and administrative expenses and research and development
expenses.
Sales and marketing expenses increased 4.1% to $4.5 million in 1994 from $4.4
million in 1993. The increase is due primarily to increased sales commissions
charges on the increased UltraPhone revenues.
General and administrative expenses increased 110% to $22.9 million in 1994
from $10.9 million in 1993. Expenses related to the protection and exploitation
of the Company's patents, including legal costs, increased by approximately $8.1
million in 1994 compared to 1993. See Item 1 "Business - Technology and Patent
Licensing". Included in the Patents Corp. expenses for 1994 are accounting
charges and reserves totaling $2.7 million which represents what the Company
believes to be the maximum amount of charges under certain writings subject to
varying interpretations which the Company may incur relating to bonus
compensation and compensatory options to purchase Patents Corp. common stock
claimed by some Patents Corp. officers and employees. The charge relating to the
compensatory options is based on the difference between the deemed value for
accounting purposes of the shares subject to the options and the exercise price
of the option. Legal fees and expenses related to litigation and other corporate
matters increased by $1.4 million in 1994 compared to 1993. Expenses related to
the SCS operations that were acquired in October 1992 increased to $1.9 million
in 1994 from $1.4 million in 1993. 1994 expenses include a charge of
approximately $1.3 million to fully reserve the note receivable related to the
1994 purchase by a third party of three UltraPhone systems originally sold to
the Company's Indonesian customer in 1993. The Company is continuing to assist
the buyer and received a $100,000 partial payment against the note in March
1995. However, uncertainties related to the buyer's business prospects make
further realization of the note questionable. Expenses in 1993 included
provisions of $450,000 for losses on accounts receivable related to
indeterminate installation delays with one UltraPhone customer and uncertainty
in collecting certain contract services revenues. General and administrative
expenses in 1994 also includes $1.6 million, primarily severance charges,
relating to the Company's withdrawal from the contract services market and other
reductions in force or terminations. No such charges were incurred in 1993.
Research and development expenses increased 7.6% to $7.6 million in 1994 from
$7.1 million in 1993. The increase in research and development costs stems from
increased number of employees and activity levels as the Company further
develops the UltraPhone systems and B-CDMA technology.
Other Income and Expense. Interest expense for 1994 was $1.5 million as
compared to $797,000 for 1993. 1994 expenses include a provision of $975,000
representing additional interest calculated by the Company to be due to HNS.
Interest expense for 1994 also included $193,000 of interest expense related
25
to two short-term borrowings during the year of $3.0 and $2.4 million,
respectively, and increased charges by vendors. Interest and financing expense
in 1993 included charges of $380,000 incurred as a result of the withdrawal of a
proposed public sale of securities.
Minority Interest. The Company recorded $878,000 as an increase in minority
interest in 1994 representing the minority ownership interest in the net income
of Patents Corp. for 1994. During 1993, the Company recorded a reduction of
$178,000 in minority interest representing the minority ownership interest in
the net loss of Patents Corp.
Discontinued Operations. During 1994, the Company had a loss from discontinued
operations of $416,000, primarily from the interest expense on the Seller notes
and the amortization of goodwill. The Company recognized a $121,000 gain on the
sale of the Haviland Telephone Company operations.
BACKLOG
At March 22, 1996, the Company's backlog of orders for UltraPhone telephone
equipment and services was $56.4 million, which includes one order from the
Company's Philippine customer for $17.9 million and another order from its
Indonesian customer for $36.8 million. Over $20 million of the backlog is
expected to be delivered during fiscal year 1996 with the balance expected to be
delivered during fiscal 1997. At March 20, 1995, the Company's backlog of orders
for UltraPhone telephone equipment and services was $4.9 million, which included
an order of $3.3 million from one customer. See "Overview".
26
Statement Pursuant to The Private Securities Litigation Reform Act of 1995
The foregoing Management's Discussion and Analysis and discussion of the
Company's business contains various statements which are forward-looking
statements. Such forward-looking statements are made pursuant to the "safe
harbor" provisions of Section 21E of the Securities Exchange Act of 1934, as
amended, which were enacted as part of the Private Securities Litigation Reform
Act of 1995.
The Company cautions readers that the following important factors, among
others, in some cases have affected and, in the future, could materially
adversely affect the Company's actual results and cause the Company's actual
results to differ materially from the results expressed in any forward-looking
statements made by, or on behalf of, the Company:
General and specific economic conditions of the Company's customers,
potential customers and the wireless communications industry; reversal of or
slow-down in anticipated TELCO infrastructure spending, thereby decreasing
overall product demand below present forecasts; implementation delay in the
conversion from analog cellular technology to digital cellular technology,
whether caused by continuing sufficiency of capacity, new methods for
increasing analog capacity or customer funding, unwillingness of TELCOs to
fund infrastructure replacement or for other reasons.
The effects of, and changes in, foreign trade, monetary and fiscal
policies, laws and regulations, other activities of foreign governments,
agencies and similar organizations, and foreign social and economic
conditions, such as trade restrictions or prohibitions, inflation and
monetary fluctuations, import and other charges or taxes, the ability or
inability of the Company to obtain or hedge against foreign currency,
foreign exchange rates and fluctuations in those rates, adverse foreign tax
consequences, general delays in remittance and difficulties of collection of
foreign payments, efforts to nationalize foreign owned operations, unstable
governments and legal systems, and inter-governmental disputes, as well as
foreign governmental actions affecting frequency, use and availability, type
acceptance, spectrum authorizations and licensing.
Failure to enter additional sufficient strategic alliances necessary to
achieve the Company's business objectives; failure to fully and successfully
implement the alliance program; inadequacy or inability of alliance partners
to meet Company expectations; failure of alliance partners to meet
contractual obligations to the Company.
Lack of existing lines of credit to draw on to support technical and
product development and to fund patent enforcement activities, requiring the
possible sale of debt or equity securities.
The growth in the amount of, and the rate of increase of, the Company's
selling, general and administrative expenses.
Difficulties in the Company's business related to the market acceptance of
its products and/or technologies and any difficulties experienced by current
or future customers using the Company's products and/or technologies.
Inability to retain existing, and/or hire new, appropriately qualified
administrative, sales and marketing personnel.
Increased and/or more aggressive marketing of competitive wireless
communications systems, in many cases by much larger and better financed
organizations.
Announcements of new products or technologies by the Company's
competitors; the ability of competitive products to achieve a perceived,
absolute or relative overall value advantage when compared to the Company's
products or technologies on the basis of features, quality and pricing;
27
the inability of the Company to keep pace with technological developments
and/or respond in a timely manner to changes in customers' needs.
Increased pressure to engage in a vendor financing program.
Adverse trends in the equipment acquisition and replacement pattern of the
Company's customers.
Loss of customers.
Fluctuating demand for the Company's products; additional sudden and
significant increases in product orders requiring short term and
intermediate term financing.
Inability of the Company or its customers to secure acceptable financing
related to purchase and installation of the Company's products.
Lack of timely availability of the Company's products and the ability and
willingness of purchasers, in such circumstances, to acquire alternative
products.
Imposition of government or industry standards or competitive
technological developments which render any of the Company's technologies
and/or products obsolete or non-competitive.
Lack of frequency or bandwidth allocations within the technical
specifications of the Company's products or technology; engineering problems
in implementing new frequencies or operating with non-standard bandwidths.
Manufacturing-related problems, including quality, cost or delivery
problems with vendors and component suppliers; unavailability of alternative
sources for component parts of the Company's products or unavailability of
component at competitive prices; longer than desirable development time
arising from the necessity to use alternative sources.
Unanticipated cash flow restrictions, continued or increased pressure to
lower the selling prices of the Company's products; failure to realize
revenues from orders on backlog; failure to increase future orders for and
revenue from UltraPhone products; failure to improve margins; failure to
achieve or maintain technical compliance with terms of customer contracts.
Difficulties or delays in the development, production, testing and
marketing of products or underlying communications technologies, including,
but not limited to (i) the failure to commercialize new products when
anticipated and the failure of manufacturing economies to develop when
planned, (ii) loss of the Company's key personnel, or inability to hire
sufficient number of qualified engineers to achieve technology development
objectives, (iii) the lack of availability or insufficiency of operating,
debt, equity or alliance related funds for research necessary to effectively
and timely complete product and technology development, or lack of
availability on terms acceptable to the Company, and (iv) increased project
engineering costs for future and current projects.
Substantial increased or continuing burdensome impact of the costs and
other effects of legal and administrative cases and proceedings (whether
civil, such as intellectual property and product-related matters, or
criminal), settlements and investigations, claims and changes in those
items, developments or assertions by or against the Company relating to
intellectual property rights and intellectual property licenses, including
but not limited to assertions that others infringe the Company's or ITC's
proprietary rights or that the Company's products infringe proprietary
rights of others.
Failure of the Company to successfully negotiate licensing agreements for
the Company's patents and other intellectual property; inability to
28
enforce patents against third parties; inability to enforce, or inadequacy
of, non-competition and non-disclosure agreements relating to Company's
proprietary rights; adverse decision in the Company's outstanding or any
future intellectual property rights litigation, including but not limited to
declaration of invalidity of ITC patents.
Suspension of royalty revenues under existing or future license
agreements, with or without the accrual of royalty obligations.
Adverse effects from the Motorola jury verdict, including but not limited
to (i) adverse impacts on the level of revenue and potential cash flow from
ITC's patent portfolio (ii) the impairment of the Company's ability to raise
funds for general corporate purposes, and (iii) the temporary or permanent
impairment of ITC's pending U.S. litigation against Ericsson.
The failure of the Motorola trial court or appeals courts to reverse,
vacate and/or remand the Motorola jury determination, recognizing that,
notwithstanding the Company's belief that substantial grounds exist for
reversal, vacation and/or remand, the Company carries the burden on appeal
and, more often than not, jury determinations are upheld.
An adverse decision in foreign patenting forums regarding the validity of
ITC's patents, which could materially impact ITC patent licensing
opportunities.
29
Item 8. INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
NUMBER
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants 30
Consolidated Balance Sheets 31
Consolidated Statements of Operations 33
Consolidated Statements of Shareholders' Equity 34
Consolidated Statements of Cash Flows 35
Notes to Consolidated Financial Statements 37
SCHEDULES
Schedule II - Valuation and Qualifying Accounts 55
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.
30
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, 1994 and 1995, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements and the schedule
referred to below are the responsibility of the Company'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, 1994 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, 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 26, 1996
Arthur Andersen LLP
31
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
DECEMBER 31, DECEMBER 31,
ASSETS 1994 1995
- ------ ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents, including restricted
cash of $471 and $1,200, respectively $ 6,264 $ 9,427
Short term investments -- 55,060
License fees receivable 20,900 400
Accounts receivable, net of allowance for
uncollectable accounts of $2,333 and $340, respectively 3,683 2,757
Inventories 5,014 4,853
Other current assets 1,399 1,474
-------- --------
Total current assets 37,260 73,971
-------- --------
PROPERTY AND EQUIPMENT:
Machinery and equipment 3,780 4,033
Computer equipment 3,476 3,734
Furniture and fixtures 1,521 1,540
Leasehold improvements 831 1,114
-------- --------
9,608 10,421
Less-accumulated depreciation and amortization (7,333) (5,969)
-------- --------
Net property and equipment 2,275 4,452
-------- --------
OTHER ASSETS:
Patents, net of accumulated amortization of
$2,946 and $3,456 respectively 2,588 2,405
Other 1,707 2,339
-------- --------
Total other assets 4,295 4,744
-------- --------
$ 43,830 $ 83,167
======== ========
The accompanying notes are an integral part of these statements.
32
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands)
DECEMBER 31, DECEMBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1994 1995
- ------------------------------------ --------- ---------
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 233 $ 430
Due to Hughes Network Systems, Inc. 7,003 --
Accounts payable 9,536 4,313
Accrued compensation and related expenses 2,904 4,335
Purchase commitment reserve 1,304 855
Deferred revenue 665 1,597
Income and foreign withholding taxes payable 1,573 653
Other accrued expenses 3,924 2,780
--------- ---------
Total current liabilities 27,142 14,963
--------- ---------
CAPITAL LEASE OBLIGATIONS 439 631
--------- ---------
OTHER LONG TERM LIABILITIES 81 1,323
--------- ---------
MINORITY INTEREST 1,296 3,810
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY:
Preferred Stock, $ .10 par value, 14,399 shares authorized-
$2.50 Convertible Preferred, 113 shares and 105 shares
issued and outstanding 11 11
Common Stock, $.01 par value, 75,000 shares authorized,
41,811 shares and 44,424 shares issued and
outstanding 418 444
Additional paid-in capital 199,158 212,310
Accumulated deficit (184,665) (150,325)
--------- ---------
14,922 62,440
Deferred compensation (50) --
--------- ---------
Total shareholders' equity 14,872 62,440
--------- ---------
$ 43,830 $ 83,167
========= =========
The accompanying notes are an integral part of these statements.
33
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1993 1994 1995
-------- -------- --------
REVENUES:
UltraPhone $ 11,748 $ 20,086 $ 16,581
Licensing and Alliance -- 28,709 67,693
Contract Services 1,551 1,171 681
-------- -------- --------
13,299 49,966 84,955
-------- -------- --------
OPERATING EXPENSES:
Cost of UltraPhone revenues 21,770 23,454 17,932
Contract service costs 1,793 1,429 762
Sales and marketing 4,356 4,540 3,597
General and administrative 10,874 22,884 14,838
Research and development 7,066 7,603 9,738
-------- -------- --------
45,859 59,910 46,867
-------- -------- --------
Income (loss) from operations (32,560) (9,944) 38,088
OTHER INCOME (EXPENSE):
Interest income 250 113 3,073
Interest and financing expenses (797) (1,466) (724)
-------- -------- --------
Income (loss) from continuing operations before income taxes
and minority interest (33,107) (11,297) 40,437
INCOME TAX PROVISION -- (1,578) (3,318)
-------- -------- --------
Income (loss) from continuing operations before minority interest (33,107) (12,875) 37,119
MINORITY INTEREST 178 (878) (2,514)
-------- -------- --------
Net income (loss) from continuing operations (32,929) (13,753) 34,605
DISCONTINUED OPERATIONS:
Loss from operations (1,728) (416) --
Gain from sale of discontinued operations -- 121 --
-------- -------- --------
Net income (loss) (34,657) (14,048) 34,605
PREFERRED STOCK DIVIDENDS (282) (282) (265)
-------- -------- --------
NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS $(34,939) $(14,330) $ 34,340
======== ======== ========
NET INCOME (LOSS) PER SHARE - CONTINUING OPERATIONS $ (1.05) $ (0.37) $ 0.74
NET INCOME (LOSS) PER SHARE - DISCONTINUED OPERATIONS (0.06) (0.01) --
-------- -------- --------
NET INCOME (LOSS) PER COMMON SHARE $ (1.11) $ (0.38) $ 0.74
======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 31,515 37,463 46,503
======== ======== ========
The accompanying notes are an integral part of these statements.
34
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Convertible
Preferred Stock Additional
--------------- Common Paid-In Accumulated Deferred
$2.50 Stock Capital Deficit Compensation Total
------ ----- ------- -------- ------------- -----
BALANCE, DECEMBER 31, 1992 $11 $278 $150,620 $(135,396) $(457) $15,056
Sales of Restricted Common Stock -- 68 28,552 -- -- 28,620
Exercise of Common Stock options -- 4 1,315 -- -- 1,319
Exercise of
-- -- 151 -- -- 151
Grants of Common Stock and options below
fair market value -- -- 183 -- -- 183
Amortization of deferred compensation -- -- -- -- 249 249
Exchange of Conversion Right on
Exchangeable Common Stock -- -- 3,253 -- -- 3,253
Dividend of Common Stock and cash to
$2.50 Preferred shareholders -- -- 112 (282) -- (170)
Net Loss -- -- -- (34,657) -- (34,657)
-----------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 $11 $350 $184,186 $(170,335) $(208) $14,004
Sales of Restricted Common Stock -- 63 12,253 -- -- 12,316
Exercise of Common Stock options -- 3 582 -- -- 585
Conversion of notes payable into
Common Stock -- 1 188 -- -- 189
Amortization of deferred compensation -- -- -- -- 158 158
Dividend of Common Stock and cash to
$2.50 Preferred shareholders -- -- 86 (282) -- (196)
Issuance of stock options of subsidiary
below deemed accounting value net of -- -- 1,598 -- -- 1,598
minority interest
Sale of Common Stock under Employee -- 1 265 -- -- 266
Stock Purchase Plan
Net Loss -- -- -- (14,048) -- (14,048)
-----------------------------------------------------------------------------------
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
===================================================================================
The accompanying notes are an integral part of these statements
35
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the year ended December 31,
--------------------------------------
1993 1994 1995
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $(34,657) $(14,048) $ 34,605
Adjustments to reconcile net income(loss) to net
cash provided by (used for) operating activities-
Minority interest in subsidiary (178) 878 2,514
Depreciation and amortization 2,164 1,965 1,740
Compensation on stock issued
and stock options granted 432 2,108 50
Provision for inventory reserves 5,150 1,500 (346)
Provision for losses on accounts receivable 635 1,111 7
Discontinued operations 1,728 295 --
Other (1,926) 69 1,375
Decrease (increase) in assets-
Receivables 4,447 (21,524) 21,419
Inventories (8,123) 3,437 507
Other current assets 1,127 (641) (75)
Increase (decrease) in liabilities-
Accounts payable 532 4,376 (5,223)
Reserve for Hughes Network Systems, Inc. 180 1,132 (7,003)
Reserve for purchase commitments 1,600 -- (449)
Other accrued expenses (1,904) 4,267 299
-------- -------- --------
Net cash provided by (used for) operating activities $(28,793) $(15,075) $ 49,420
-------- -------- --------
The accompanying notes are an integral part of these statements.
(Continued)
36
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
For the year ended December 31,
--------------------------------------
1993 1994 1995
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in short-term investments $ -- $ -- ($55,060)
Proceeds from sale of discontinued operations -- 2,555 --
Additions to property and equipment, net of amounts
acquired under capital leases and debt agreements of
$868, $0 and $657, respectively (1,224) (517) (2,412)
Additions to patents (600) (592) (335)
Other non-current assets (606) (1,144) (1,095)
Net investing activity of discontinued operations (491) -- --
-------- -------- --------
Net cash provided by (used for) investing activities (2,921) 302 (58,902)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sales of Common Stock
and exercises of stock options and warrants 30,101 13,353 13,137
Proceeds from long-term debt 18 -- --
Payments on long-term debt, including
capital lease obligations (270) (153) (268)
Cash dividends to minority interest in subsidiary -- (178) --
Cash dividends on preferred stock (170) (196) (224)
Net financing activity of discontinued operations 1,100 -- --
-------- -------- --------
Net cash provided by financing activities 30,779 12,826 12,645
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (935) (1,947) 3,163
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,146 8,211 6,264
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 8,211 $ 6,264 $ 9,427
======== ======== ========
The accompanying notes are an integral part of these statements.
37
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
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. The
Company's principal product is the UltraPhone, a telephone system providing
business and households access to basic telephone service through a wireless
local loop. UltraPhone revenues accounted for approximately 20% of the total
revenues of the Company during 1995. Since 1987, the Company has sold over 235
UltraPhone systems worldwide, with aggregate UltraPhone telephone system
revenues totaling over $135 million.
In addition to its UltraPhone telephone system business, the Company, through
ITC, is seeking to capitalize upon the revenue potential of the extensive TDMA
and CDMA patent portfolio. ITC implemented a strategy during 1993 of negotiation
and litigation with certain entities which it believed were infringing the
Company's patents. These efforts have resulted in patent license agreements with
five entities in 1994 and an additional six entities in 1995, the recognition of
$28.7 million and $67.7 million of licensing and alliance revenue in 1994 and
1995, respectively, and the initiation of litigation with major
telecommunications companies. The Company has also formed two business alliances
based upon its TDMA and B-CDMA technologies. (See Notes 2, 3, 4 and 17).
As an adjunct to its primary business, the Company provides advanced digital
wireless research and development services to government and business
organizations. During the third quarter of 1994, the Company substantially
completed its withdrawal from the contract services market in order to focus on
its other core business activities. Beginning in 1991, the Company also provided
telecommunications services to businesses and households through the ownership
and operation of TELCOs, primarily Haviland, in rural areas of the United
States. During 1994, the Company exited this business through the sale of its
investments in the TELCOs and accordingly has accounted for the TELCO operations
as discontinued operations. (See Note 6).
Operations of the Company are subject to certain risks and uncertainities,
including, but not limited to, uncertainties related to intellectual property
rights, the acceptance by customers of the Company's technology, the development
and commercialization of new products, uncertainty and volatility of future
profitability and access to capital and dependence on alliance arrangements and
key personnel.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Management's Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting 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 amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
38
Cash and Cash Equivalents and Short-Term Investments
The Company 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, 1995 are
classified as short-term. At December 31, 1995, all of the Company'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, 1995, there were no significant unrealized holding gains or
losses.
Cash, cash equivalents consisted of the following:
December 31,
-------------------------
1994 1995
---- ----
Money market funds and demand accounts $ 124 $ 2,096
Certificates of deposit 340 996
Repurchase agreements 5,800 3,955
Commercial paper -- 2,380
---------- -----------
$ 6,264 $ 9,427
========== ===========
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 consisted of $40.5 million in
government issued discount notes, $2.5 million in municipal securities and $12.1
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.
Patents
The costs to obtain certain patents for the Company'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
$466,000, $500,000, and $510,000 in 1993, 1994 and 1995, respectively.
39
Research and Development
All research and development expenditures are charged to research and
development expense in the period incurred, except for immaterial amounts of
capitalized software development costs.
Revenue Recognition
UltraPhone telephone system revenues are recognized upon shipment of systems
and upon completion of services.
The Company 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.
Licensing revenues included in License and Alliance Revenues in both 1994 and
1995 consist entirely of upfront, one-time, non-refundable fees which were
recognized at the time of the applicable agreement and excludes royalties
required to be paid, when and as sales occur subsequent to 1995, under
applicable know-how licenses. Alliance revenues included in License and Alliance
Revenues for 1995 include both patent licensing and other types of cooperation
agreements. Due to the combined nature of the agreements, revenue is recognized
over some performance period based on the nature of the agreement. Recurring
royalty revenues under both licensing and alliance agreements 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 the Company to concentration
of credit risk consist primarily of cash equivalents, short-term investments and
accounts receivable. By policy, the Company places its cash equivalents and
short-term investments only with high quality financial institutions and in
United States Government obligations. The Company'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 84% of the Company's 1995 UltraPhone telephone system sales were
export sales (see Note 4). The Company 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, based on previous
experience, credit risk is considered to be acceptable.
New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of Long
Lived Assets and for Long Lived Assets to be Disposed Of" (SFAS No. 121). SFAS
No. 121 establishes accounting standards for the impairment of long lived
assets, certain identifiable intangibles and goodwill. The Company is required
to adopt SFAS No. 121 effective January 1, 1996. The adoption of SFAS No. 121 is
not expected to have a material effect on the Company's patents, financial
condition or results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," which will be adopted by the Company in 1996 as required by this
statement. The Company has elected to continue to measure such compensation
expense using the method prescribed by Accounting Principles Board Option No.
25, "Accounting for Stock Issued to Employees," as permitted by SFAS No. 123.
When adopted, SFAS No. 123 will not have any effect on the Company's financial
position or results of operations but will require the Company to provide
expanded disclosure regarding its stock-based employee compensation plans.
40
Discontinued Operations
The Consolidated Statements of Operations and Consolidated Statements of Cash
Flows for the year ended December 31, 1993 have been restated to give effect to
discontinued operations accounting for the TELCO operations. (See Note 6).
Net Income (Loss) Per Common Share
The net income (loss) per share is based upon the weighted average common
shares outstanding during the period adjusted for cumulative dividends on $2.50
Preferred Stock. Common stock equivalents have been included in the computation
for 1995 since the effect is dilutive. See Exhibit 11, Computation of Net Income
(loss) Per Share Earnings.
Supplemental Cash Flow Information
The Company paid $2.7 million of foreign withholding, federal, and state
income taxes during 1995. Additionally, the Company paid $63,000 of interest
during 1995 (excluding interest related to the HNS obligation). Interest and
income taxes paid in 1993 and 1994 were not material.
Reclassifications
Certain reclassifications have been made to the 1994 and 1993 consolidated
financial statements to conform to the 1995 presentation.
3. SIEMENS AGREEMENTS:
On December 16, 1994, the Company 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 conditionally amended in February 1996 in connection with the Samsung
alliance. The amendments will be effective upon the effectiveness of the Samsung
agreements. (See Note 17.)
As partial consideration for the rights and licenses granted by the Company,
Siemens agreed to pay $20 million, of which $14.8 million has been paid by
December 31, 1995. In connection with the Samsung alliance, the Company and
Siemens agreed to defer the December 31, 1995 payment at least until March 31,
1996, and to consider offsetting all or a portion of such payment against
payments due to Siemens from InterDigital in conjunction with the Samsung
alliance. The Company did not recognize any revenue related to the agreements in
1994. In accordance with accounting requirements, the Company will recognize the
$20 million of revenue over the contract performance period due to the combined
nature of the contracts. In 1995 the Company recognized $13.6 million of the
revenue under this agreement based on the progress of the completed work. The
remaining $6.4 million of revenue is expected to be recognized through December
1996, the expected date of completion of functional testing at the system
component level.
Under the UltraPhone OEM Purchase Agreement, Siemens is obligated to purchase
its requirement of wireless local loop products for certain specified
applications from the Company on an OEM basis through December 1999. Certain
affiliates of Siemens have also been granted the right, but are not obligated,
to purchase on an OEM basis under the agreement.
Under the TDMA/CDMA Development and Technical Assistance Agreement: (i)
Siemens will provide technical assistance to accelerate the commercialization
and deployment of the Company's B-CDMA technology, and (ii) the parties may
develop UltraPhone product improvements and enhancements. The agreement, as
amended, provides that, subject to pre-existing commitments (if any), Siemens
will (A) share together with InterDigital and Samsung, an exclusive
royalty-bearing license for the Company's know-how associated with the B-CDMA
Application Specific Integrated Circuit ("ASIC") chip (other than
41
ASIC applications know-how), and a similiar exclusive license to certain other
B-CDMA product design technology which will become non-exclusive one year after
certain development goals are accomplished, and (B) have a non-exclusive
royalty-bearing license with respect to other B-CDMA know-how. Pursuant to the
know-how licenses, Siemens is obligated to pay to the Company a running royalty
of 5% of all sales of B-CDMA equipment worldwide which incorporates B-CDMA ASICs
or otherwise incorporates B-CDMA know-how. Siemens shall also have the option to
purchase B-CDMA ASICs and products from the Company. InterDigital will continue
to maintain 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. In addition, under the Patent License
Agreement, the Company 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.
4. MAJOR CUSTOMERS AND GEOGRAPHIC DATA:
UltraPhone Equipment Revenue:
In 1993, the Company's Indonesian customer (P.T. Amalgam Indocorpora) and
Mexican customer (Telefonos de Mexico S.A. de C.V.) represented 18% and 33% of
UltraPhone revenues, respectively. During 1994, the Company's Indonesian
customer and its Myanmar customer (Myanma Posts and Communications) accounted
for 54% and 12% of UltraPhone sales, respectively. During 1995, the Company's
Indonesian customer and its Russian customer (Lukoil-Langepasneftegas) accounted
for 37% and 20%, respectively of UltraPhone telephone system sales.
UltraPhone telephone system revenues by geographic area are as follows (in
thousands):
1993 1994 1995
---- ---- ----
Domestic $ 4,087 $ 4,187 $ 2,685
Foreign 7,661 15,899 13,896
------------ ------------ ------------
$ 11,748 $ 20,086 $ 16,581
============ ============ ============
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 Hughes Network Systems, AT&T, Siemens (see Note 3), Matsushita,
Sanyo, Pacific Communications Systems, Mitsubishi, Hitachi, Kokusai, OKI
Electric Industry Company, and upon effectiveness of the Samsung Agreements (see
Note 17), Samsung. 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 the
Company to be suspended for an indefinite period, with or without the accrual of
the royalty obligation.
The 1995 Licensing and Alliance revenues contain $20.1 million from Mitsubishi
and $26.9 million from NEC. The 1994 licensing and alliance revenues contain
$20.0 million from Matsushita. Additionally, in 1994, ITC also entered into a
CDMA license agreement with Qualcomm Incorporated to settle litigation filed in
1993. In return for one-time payment of $5.5 million, ITC granted to Qualcomm a
fully-paid, royalty free, worldwide license to use and sublicense ITC's existing
CDMA patents and certain future CDMA 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 ITC's 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.
42
5. PATENTS CORP.:
During the fourth quarter of 1992, the Company formed InterDigital Patents
Corporation ("Patents Corp.") and contributed to Patents Corp. its entire
ownership interest in ITC in return for 100% of its common stock. The Company
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. Each
Unit consisted of 62,500 shares of Patents Corp. Common Stock and warrants to
purchase 62,500 of the Company's Common Stock at an exercise price of $5.50 per
share. Included in the Patents Corp. expenses for 1994 were accounting charges
and reserves totaling $2.7 million which represented the maximum amount of
charges under certain writings subject to varying interpretations which the
Company believed it may incur relating to bonus compensation and compensatory
options to purchase Patents Corp. common stock claimed by some Patents Corp.
officers and employees. Expenses for 1995 contain $2.0 million for potential
maximum charges under this bonus compensation arrangement. The charge relating
to the compensatory options was based on the difference between the deemed value
for accounting purposes of the shares subject to the options and the exercise
price of the option.
The proceeds from licensing transactions are paid to ITC. (See Notes 3 and 4).
The availability of such funds for uses related to UltraPhone marketing efforts,
TDMA or B-CDMA product development efforts or other Company uses is dependent
upon such funds being transferred from Patents Corp. to InterDigital pursuant to
contractual arrangements or in conjunction with a dividend declaration.
6. SALE OF TELEPHONE OPERATING COMPANIES:
During the first quarter of 1994, the Company committed to a formal plan to
sell its interests in the TELCOs and entered into negotiations with interested
parties to that end. The Company entered into a definitive agreement to sell the
Haviland Telephone Company operations as of September 26, 1994. Proceeds of the
sale were $3,050,000 in cash, the assumption of existing liabilities and a
$100,000 interest bearing, unsecured note. Collection of the note by the Company
is based on certain performance measures of the fiscal 1995 Haviland Telephone
Company operations. The Company recognized a gain on the sale of approximately
$121,000. The Company sold its remaining TELCO operations in December 1994 for
cash proceeds of approximately $250,000, recognizing a gain on the sale of
approximately $50,000. The results of operations of the TELCOs for 1993 and 1994
have been classified as discontinued operations.
Revenues for the TELCO operations were approximately $3.1 million and $2.4
million for the years ended December 1993 and 1994, respectively.
7. HUGHES AGREEMENTS:
During 1986 and 1987, the Company entered into a series of three
commercialization and production agreements with M/A-COM, Inc., which was later
acquired and renamed Hughes Network Systems, Inc. ("HNS"). In July 1989, the
Company granted to HNS a non-exclusive, worldwide license to use certain of the
Company's patented technology in the field of digital cellular telephony in the
United States and certain other countries. In February 1992, the Company granted
to HNS an additional non-exclusive, royalty bearing, worldwide license to
manufacture and sell products based on the Company's TDMA patented technology.
During 1992, the Company canceled its production agreements, accepted final
delivery of certain UltraPhone inventory and purchased certain test equipment
from HNS. The applicable cancelation fees and inventory and equipment purchase
prices were not paid in full until the settlement of litigation in 1995.
Effective in June 1995, the Company entered into a Settlement Agreement and
Mutual Release (the "Settlement Agreement") with HNS. Under the terms of the
Settlement Agreement, the Company paid
43
HNS $7.5 million, which amount had been substantially previously reserved by the
Company, and HNS was granted credits aggregating $900,000 against future royalty
and other payment obligations relating to the Company's proprietary TDMA
technology ("Credits"). The Credits may be applied to any royalties becoming due
to the Company or its affiliates from HNS after the date of the Settlement
Agreement pursuant to the two license agreements and any other agreement between
HNS and the Company or its affiliates relating to intellectual property rights.
8. INVENTORIES:
December 31,
1994 1995
---- ----
(In thousands)
Component parts and work-in-progress $ 3,864 $ 4,341
Finished goods 1,150 512
---------- ----------
$ 5,014 $ 4,853
========== ==========
Inventories are stated net of valuation reserves of $7.5 million and $6.9
million as of December 31, 1994 and 1995, respectively. In addition, inventory
purchase commitment reserves were $1.3 million and $855,000 as of December 31,
1994 and 1995, respectively.
9. SHORT-TERM BORROWINGS:
In March 1994, the Company entered into a $3.0 million secured borrowing
arrangement, evidenced by Promissory Notes, in connection with a proposed
long-term financing arrangement. The Promissory Notes, which bore interest at
11% per annum, were repaid in 2 installments in June and July, 1994 when the
parties to the long-term financing arrangement agreed not to proceed.
During the second quarter of 1994, the Company received $2.4 million in
proceeds from the issuance of a series of Promissory Notes. The Notes were
collateralized by the proceeds from the sale of Haviland Telephone Company,
accrued interest at a rate of 11% which was payable at maturity and had initial
terms of 90 days, with original maturities occurring during August and September
1994. At maturity, the holder could elect to have the repayment of principal, in
whole or in part, in the form of Common Stock at the conversion price of $3.75
per share. In the event of such election, the Company's obligation to pay
interest to noteholders was to be waived. Additionally, as an inducement to
enter into the note agreement, the noteholders were granted 280,000 warrants
with a term of 10 years and an exercise price of $3.75 per share. As of
September 30, 1994, $2.3 million of the Notes were extended in consideration for
a reduction in the conversion rate to $1.78 per share and a reduced exercise
price in the warrants. As of December 31, 1994, $2.2 million of the Notes had
been repaid and $189,000 had converted in exchange for 106,000 shares of Common
Stock. Interest expense related to the Notes was $97,000 during 1994.
10. CAPITAL LEASE OBLIGATIONS:
1994 1995
---- ----
(In thousands)
Capital lease obligations $ 672 $ 1,061
Less -- Current portion (233) (430)
----------- ----------
$ 439 $ 631
=========== ==========
44
Capitalized lease obligations are payable in monthly installments at various
interest rates through 1999. The net book value of the equipment under
capitalized lease obligations is $1.0 million.
Maturities of principal of the capitalized lease obligations as of December
31, 1995 are as follows (in thousands):
1996 $ 430
1997 324
1998 246
1999 61
2000 --
------
$1,061
======
11. COMMITMENTS AND CONTINGENCIES:
The Company has entered into various operating lease agreements, primarily for
office, assembly and warehouse space. Total rent expense was $1.4 million, $1.3
million, and $2.5 million for the years ended December 31, 1993, 1994 and 1995,
respectively. Minimum future rental payments for operating leases as of December
31, 1995 are as follows (in thousands):
1996 $ 1,227
1997 1,187
1998 1,154
1999 934
2000 527
2001 and thereafter. --
--------
$ 5,029
========
Included in the minimum future rental payments is $375,000 per year for the
lease of the Company's new King of Prussia facilities comprising 50,000 square
feet. The Company has entered into a Purchase and Sale Agreement to buy the
facility. The purchase cost will be approximately $4 million, of which $2.8
million is expected to be funded by a mortgage loan. Completion of the purchase
transaction is subject to customary due diligence procedures and is expected to
occur during the second quarter of fiscal year 1996.
Sole Source Suppliers
The Company currently buys several of its base station and subscriber station
components from sole source suppliers. Although there are a limited number of
manufacturers of the particular components, management believes that other
suppliers could provide similar components on comparable terms. A change in
suppliers, however, could cause a delay in manufacturing amd shipments, a
possible loss of sales, and could cause the Company to fail to fulfill certain
performance obligations under current customer contracts, which would affect
operating results adversely.
12. 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 seeks a
jury's determination that in making, selling, or using, and/or in participating
in the making, selling or using of digital wireless
45
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 preliminary
and permanent injunctions against Ericsson from further infringement and seeks
damages, royalties, costs and attorneys' fees. Ericsson Radio and Ericsson GE
filed a motion to transfer ITC's action to the United States District Court for
the Northern District of Texas which was granted by the Court. 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 the Company and ITC in the United
States District Court for the Northern District of Texas (Civil Action No.
3-93CV1809-H (N.D.Tx.)) (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 the Company and ITC for tortious interference with
contractual and business relations, defamation and commercial disparagement, and
Lanham Act violations. The Company and ITC intend to vigorously defend the Texas
action. Both Ericsson actions have been consolidated and are scheduled to go
forward in the United States Federal District Court for the Northern District of
Texas. ITC agreed to the dismissal without prejudice of LM Ericsson. In July,
1994, ITC filed a motion to transfer the Texas action to the United States
District Court for the District of Delaware which was denied. At the request and
with the consent of the parties, the District Judge has executed an order
extending a stay of the proceedings until April 23, 1996. The Company
anticipates that if the present stay is not further extended, discovery will
resume and the parties will proceed to trial some time in 1997.
In October 1993, Motorola, Inc. filed an action against ITC in the United
States District Court for the District of Delaware seeking the court's
declaration that Motorola's products do not infringe certain ITC patents and
that these patents are invalid and unenforceable. ITC filed an answer and
counterclaims seeking a jury's determination that in making, selling or using
and/or participating in the making, selling or using of digital wireless
telephone systems and/or related mobile stations, Motorola has infringed,
contributed to the infringement of and/or induced the infringement of certain
ITC patents. ITC also sought preliminary and permanent injunctions against
Motorola from further infringement and sought damages. A trial was held in
United States District Court for the District of Delaware (Civil Action No.
94-73 (D. Del.)) on the issue of validity and infringement of 24 patent claims
involving four ITC patents, U.S. Patent Nos. 4,675,863; 4,817,089; 5,119,375 and
4,912,705. By stipulation of the parties, the case was limited to certain TDMA
products made, used and/or sold by Motorola.
On March 29, 1995, the trial ended with the jury's verdict, which is subject
to varying interpretations, but which is interpreted by the Company to mean that
ITC's patent claims at issue in the case are not infringed by Motorola and, if
construed to be infringed, are invalid. Motorola has filed a motion requesting
attorney's fees and costs aggregating between $6 and $7 million. The Company has
filed a motion with the U.S. District Court for the District of Delaware
requesting that the court overturn and/or clarify all or part of the jury
verdict or grant a new trial, and, if that motion is unsuccessful, intends to
appeal the jury verdict to the U.S. Court of Appeals of the Federal Circuit. On
December 28, 1995, the court denied Motorola's motion for attorneys fees as
being premature. The other motion remains pending. The Company believes that
there are substantial grounds for reversal of the jury's verdict or the granting
of a new trial.
On November 7, 1994, a complaint was filed in the United States District Court
for the Eastern District of Pennsylvania (Civil Action No. 94-CV-6751) against
the Company and its former chief executive officer alleging certain violations
of the disclosure requirements of the federal securities laws and seeking
damages on behalf of shareholders who purchased the Company's stock during the
class period stated to be March 31, 1994 to August 5, 1994. The alleged
violations relate 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 the Company and a
proposed purchaser to
46
sell $30 million of the Company's discounted common stock
and warrants, and a related $3 million loan to the Company; and (3) a $25
million loan to the Company from Oregon Financial Group, Inc. ("OFG"). On April
25, 1995, the Court entered an order certifying the case as a class action. The
Company believes that the complaint is without merit and intends to contest it
vigorously. The Company filed a motion for summary judgment in June 1995 and a
reply brief to the plaintiffs motion for summary judgment in July 1995. Oral
arguments on the motion were held in August 1995. On September 13, 1995, the
Court entered an order directing that all summary judgment matters be submitted
prior to the adjudication of defendants' motion. Accordingly, the Court denied
defendants' motion without prejudice so that defendants could submit a
supplemental brief and expert report. The defendants filed these papers on
October 16, 1995, adding an additional basis for the motion to the effect that
there was no statistically significant change in the stock price when the "true"
facts came out, indicating that as a matter of law, there were no material
misstatements or omissions. On February 6, 1996, the court denied defendants
motion for summary judgment. The court has placed the case on the trial calendar
for July 1996.
In connection with ITC's various patent infringement lawsuits, Patents Corp.
has entered into several contingent fee arrangements, principally with outside
legal counsel. In the event of a successful outcome in any of the various
lawsuits, as defined in the agreements, Patents Corp. would owe additional fees
to its service providers. No provision has been made in either the 1994 or 1995
financial statements for such contingent fee arrangements.
13. PREFERRED STOCK:
In 1989, HNS purchased 400,000 shares of the Company's $3.00 Convertible
Preferred Stock (the $3.00 Preferred) for $10.0 million, net of $14,000 in
expenses. Of this amount, $4.8 million was used to repay a portion of the amount
due to HNS (see Note 7). In connection with this transaction HNS received a
warrant exercisable for four years, commencing July 1, 1990, to purchase 200,000
shares of Common Stock at $10.77 per share. In March 1992, HNS converted the
$3.00 Preferred into 1,064,000 shares of Common Stock. In connection with this
conversion, the Company reduced the conversion price from $10.34 per share to
$9.40 per share and accelerated the expiration date of the above warrants to 90
days from the date the Common Stock and warrants were registered. The warrants
were not exercised and have expired.
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 the
Company (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
the Company 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 1993, 1994 and 1995, the Company declared and paid dividends on
the $2.50 Convertible Preferred Stock of $282,000, $282,000 and $265,000,
respectively. These dividends, were paid with cash of $170,000, $196,000, and
$224,000, and 17,455, 20,593 and 5,765 shares of Common Stock, respectively.
Upon any liquidation, dissolution or winding up of the Company, the holders of
the $2.50 Convertible Preferred Stock will be entitled to receive, from the
Company'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 is $25.50 per share through May 31,
1996, plus all accrued and unpaid dividends. The redemption price of $25.50 per
share will decrease $.25 per share for each succeeding 12-month period until the
redemption price is 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
47
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 the Company, the holders of the
Preferred, separately voting as a class, will be entitled to elect one
additional director of the Company.
14. COMMON STOCK OPTION PLANS AND WARRANTS:
Common Stock Option Plans
The Company has incentive and non-qualified stock option plans for officers
and key employees of the Company and others. The number of options to be granted
and the option prices are determined by 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. 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 plan, options
are exercisable for a period of 10 years from the date of grant and normally
vest on the grant date.
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, 1992 683 6,018 $.01-$14.875
Granted (452) 452 $.01-$10.00
Canceled 268 (268) $4.00-$12.375
Exercised -- (366) $.01-$8.75
------ ------
BALANCE AT DECEMBER 31, 1993 499 5,836 $.01-$14.875
Additional authorized 2,250 -- --
Granted (689) 689 $2.625-$5.25
Canceled 349 (349) $4.375-$8.375
Exercised -- (265) $.01-$4.00
------ ------
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
====== ======
WEIGHTED AVERAGE EXERCISE PRICE OF
OUTSTANDING OPTIONS AT DECEMBER 31, 1995 $6.91
-----
EXERCISABLE AT DECEMBER 31, 1995 3,030
-----
WEIGHTED AVERAGE EXERCISE PRICE OF
EXERCISABLE OPTIONS AT DECEMBER 31, 1995 $7.01
-----
48
As part of the adoption of the 1995 Stock Option Plan for Employees and
Outside Directors, a total of 4,000,000 additional shares of the Company's
Common Stock was made available for the granting of options under the plan.
Common Stock Warrants
As of December 31, 1995, in addition to the option plans discussed above, the
Company has various warrants outstanding to purchase 5,952,000 shares of Common
Stock at exercise prices ranging from $2.50 to $10.00 per share, with a weighted
average exercise price of $5.23 per share. As of December 31, 1995, all of these
warrants are currently exercisable. These warrants expire in various years
through 2004. 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.
15. 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
14.
In 1993, the Company granted options pursuant to the 1982 non-qualified stock
option plan to the members of the Board of Directors for 71,000 shares of Common
Stock exercisable at $5.75 per share.
In 1993, the Company granted 10 year warrants to purchase a total of 30,000
shares to a member of the Board of Directors. The exercise price of the warrants
is $6.25 per share.
In 1993, the Company granted options pursuant to the 1992 non-qualified stock
option plan to an officer for 10,000 shares of Common Stock exercisable at $6.25
per share.
From January 1993 through December 1994, Great Circle Communications Ltd. Bda.
("Great Circle") provided consulting services to Patents Corp. for which Great
Circle has been remunerated, in the aggregate, $4,000 per month (including
reimbursement of certain out-of-pocket expenses). The President, and a director
of, Great Circle, served as a member of the Board of Directors of the Company
from November 1985 through June 1994 and as a member of the Board of Directors
of Patents Corp. from its inception to November 1994.
An individual who, until December 1994, was an officer and member of the Board
of Directors, and his wife, lease one converted residence located in Port
Washington, New York to the Company for office and laboratory use. The lease,
which became effective in January 1987 and is for an eleven year term, provide
for an aggregate base rental of $36,000 per annum and obligates the Company to
pay increases in real estate taxes over the 1986 base year.
During 1994, the Company engaged an individual who was, at the time, a member
of the Board of Directors, to perform certain consulting services. Total fees
paid for such services, which are not continuing, were $30,000.
During 1995, the Company 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, the Company utilized as a consultant the son of an executive
officer and a member of the Board of Directors. He was paid $37,800 for these
consulting services and was reimbursed certain traveling expenses.
49
16. INCOME TAXES:
Effective January 1, 1991, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
The 1995 income tax provision consists of a current foreign withholding tax
provision of $2.4 million, a federal alternative minimum tax provision of
$737,000 and a current state tax provision of $219,000. The 1994 income tax
provision consists of a current foreign withholding tax provision of $900,000
and a current state tax provision of $678,000. At December 31, 1995, the Company
had net operating loss carryforwards of approximately $102 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, 1995.
The net operating loss carryforwards are scheduled to expire as follows:
2001 $ 2.5 million
2002 10.3 million
2003 18.2 million
2004 20.0 million
2005 11.9 million
thereafter 38.7 million
----------------
$ 101.6 million
================
Pursuant to the Tax Reform Act of 1986, annual use of the Company'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 the Company'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. The Company believes that no ownership change for
purposes of Section 382 occurred up to and including December 31, 1995. The
Company'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.
17. SUBSEQUENT EVENTS
On February 9, 1996, the Company entered into a series of executory agreements
with Samsung and conditionally amended its agreements with Siemens as a second
major step in implementing its alliance strategy. The effectiveness of the
Samsung Agreements is conditioned upon, among other things, Samsung's receipt of
certain regulatory approvals and the receipt of funds due from Samsung upon such
approvals. Samsung may, by prior written notice to the Company, void the Samsung
agreements and Samsung's obligations thereunder if the approvals are not secured
within the time frame specified in the agreements.
Under the various agreements, Samsung will be obligated to make payments to
the Company in excess of $35 million (of which approximately one-half will
constitute royalty prepayment), less applicable withholding taxes, on or before
June 15, 1996. The Company, in turn, will be obligated to make certain payments
to Siemens which will provide additional technical assistance in conjunction
with such payment. The net amount to be received by the Company is expected to
be approximately $28 million. Samsung will also be obligated to provide
engineering manpower, to the alliance for the development of the Company's
B-CDMA technology.
50
Samsung will receive from InterDigital royalty bearing licenses covering
InterDigital's TDMA and B-CDMA patent portfolio, its UltraPhone and B-CDMA
technology and will be licensed to use certain InterDigital trademarks.
InterDigital and Samsung anticipate that Samsung may manufacture and sell
privately labeled UltraPhone systems and may become a significant UltraPhone
supplier to InterDigital, which will take advantage of Samsung's expertise in
low cost, high quality manufacturing.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Part III
Item 10. Directors and Executive Officers of the Company
Information concerning executive officers appears under the caption "Item 1.
Business- Executive Officers of the Company" 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 1999 Annual Meeting"
to but not including "-Committees and Meetings of the Board of Directors" in the
Company's proxy statement to be filed with the Commission within 120 days after
the close of the Company's fiscal year ended December 31, 1995 and forwarded to
shareholders prior to the 1996 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 "PROPOSED APPROVAL OF AMENDMENTS
TO THE COMPANY'S 1995 STOCK OPTION PLAN FOR EMPLOYEES AND OUTSIDE DIRECTORS"
in the Proxy Statement is incorporated by reference herein.
51
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 27.
(3) Exhibits
*3.1 Articles of Incorporation of the Company, as amended through
March 1987. (Exhibit 3.1 to the Company's Registration
Statement No. 33-12913 filed on March 26, 1987 [the "1987
Registration Statement"]).
*3.2 Designation of the Rights and Preferences of the $2.50
Cumulative Preferred Stock (Exhibit 4.1 to the 1987
Registration Statement)
*3.3 Articles of Amendment filed with the Pennsylvania Department
of State on July 12, 1989. (Exhibit 3.3 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1993 [the "1993 Form 10-K]).
*3.4 Statement Affecting Class or Series of Shares of the Company
filed with the Pennsylvania Department of State on July 24,
1989. (Exhibit 3.3 to the Company's Registration Statement
No. 33-32888 filed on January 8, 1990 [the "1990 Registration
Statement"]).
*3.5 Statement of Change of Registered Office filed with the
Pennsylvania Department of State on June 10, 1991.
*3.6 Articles of Amendment filed with the Pennsylvania Department
of State on October 15, 1992. (Exhibit 3.6 to the 1993 Form
10-K).
*3.7 Articles of Amendment filed with the Pennsylvania Department
of State on May 28, 1993. (Exhibit 3.7 to the 1993 Form
10-K).
3.8 By-laws of the Company, as amended and restated through
November 15, 1994.
*10.1 Form of Amendment to Common Stock Purchase Warrant Agreement
dated July 7, 1988 (Exhibit 4.7 to the Company's
Post-Effective Amendment No. 1 to Registration Statement No.
33-15931 filed on May 13, 1988 [the "1988 Registration
Statement"]).
*10.2 Incentive Stock Option Plan, as amended (Exhibit 10.1 to the
1988 Registration Statement).
*10.3 Non-Qualified Stock Option Plan, as amended (Exhibit 10.4 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1991 [the "1991 Form 10-K"]).
52
*10.4 Intellectual Property License Agreement between the Company
and Hughes Network Systems, Inc. (Exhibit 10.39 to the 1989
Registration Statement).
*10.5 Agreement of Lease for Building F between Swedeland Road
Corporation and the Company dated October 25, 1989. (Exhibit
10.48 to the 1989 Form 10-K).
*10.6 1992 License Agreement dated February 29, 1992 between the
Company and Hughes Network Systems, Inc. (Exhibit 10.3 to the
February 1992 Form 8-K).
*10.7 E-TDMA License Agreement dated February 29, 1992 between the
Company and Hughes Network Systems, Inc. (Exhibit 10.4 to the
February 1992 Form 8-K).
*10.8 1992 Non-Qualified Stock Option Plan (Exhibit 10.1 to the
October 1992 Form 8-K).
*10.9 Stock Option Agreement for 500,000 shares of Common Stock
dated October 15, 1992, between International Mobile Machines
Corporation to Donald L. Schilling (Exhibit 10.5 to the
October 1992 Form 8-K).
*10.10 Stock Option Agreement for 500,000 shares of Common Stock
dated October 15, 1992, between International Mobile Machines
Corporation to Annette Schilling (Exhibit 10.6 to the October
1992 Form 8-K).
*10.11 Distribution Agreement dated January 1, 1993 between the
Company and P.T. Amalgam Indocorpora (Exhibit 10.69 to the
1992 Form 10-K).
*10.12 1992 Incentive Stock Option Plan (Exhibit 10.70 to the 1992
Form 10-K).
*10.13 1992 Employee Stock Option Plan (Exhibit 10.71 to the 1992
Form 10-K).
*10.14 Employee Stock Purchase Plan. (Exhibit 10.52 to the 1993
Registration Statement).
*10.15 Termination Agreement between and among Registrant, Donald L.
Schilling and Annette Schilling dated December 1, 1994
(Exhibit 10.23 to the 1994 Form 10-K).
*10.16 Master Agreement among the Registrant, InterDigital
Technology Corporation ("ITC"), and Siemens
Aktiengesellschaft ("Siemens") dated December 16, 1994
(Exhibit 99.1 to the December 16, 1994 Form 8-K). **
*10.17 Patent License Agreement among the Registrant, ITC and
Siemens dated December 16, 1994 (Exhibit 99.2 to the December
16, 1994 Form 8-K). **
*10.18 TDMA/CDMA Development and Technical Assistance Agreement
between the Registrant and Siemens dated December 16, 1994
(Exhibit 99.3 to the December 16, 1994 Form 8-K). **
*10.19 UltraPhone OEM Purchase Agreement between the Registrant and
Siemens dated December 16, 1994 (Exhibit 99.4 to the December
16, 1994 Form 8-K). **
*10.20 Cooperation Agreement between the Registrant and Siemens
dated December 16, 1994 (Exhibit 99.5 to the December 16,
1994 Form 8-K). **
*10.21 Patent License Agreement among the Registrant, InterDigital
Technology Corporation and American Telephone and Telegraph
Company dated April 22, 1994 (Exhibit 10.1 to the Form 10-Q
for the quarterly period ended March 31, 1994). **
53
*10.22 Stock Purchase Agreement, dated as of August 26, 1994 by and
among Universal Service Telephone Corporation, Lynch
Telephone Corporation VII and Brighton Communications
Corporation (Exhibit 2.1 to the October 11, 1994 Form 8-K).
10.23 Executive Bonus Plan, dated May 19, 1994.
10.24 Lease Agreement dated July 14, 1995 by and among InterDigital
Communications Corporation and 781 Third Partnership.
11 Statement re: Computation of Net Income (Loss) Per Share
Earnings.
*22 Subsidiaries of the Company. (Exhibit 22 to the 1992 Form
10-K).
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 1995:
None.
54
(c) Exhibits filed with this Form 10-K:
Exhibit
No. Description
10.23 Executive Bonus Plan dated May 19, 1994.
10.24 Lease Agreement dated July 14, 1995 by and among
InterDigital Communications Corporation and 781
Partnership.
11 Statement re: Computation of Net Income (Loss) Per Share
Earnings.
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule
55
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Charged
Balance at to Costs Charged to Balance
Beginning of and Other at End of
Description Period Expenses Accounts Deductions Period
----------- ------ -------- -------- ---------- ------
1993
Allowance for
uncollectible accounts $ 613 $ 635 $ -- $ 14(1) $1,234
1994
Allowance for
uncollectible accounts $1,234 $1,110 $ -- $ 11(1) $2,333
1995
Allowance for
uncollectible accounts $2,333 $ 108 $ (101) (2) $2,000(1) $ 340
Notes: (1) Write-off of amounts reserved in prior periods.
(2) Recovery of a previously reserved receivable.
56
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
Date: March 26, 1996 /s/ D. Ridgely Bolgiano
----------------------------------
D. Ridgely Bolgiano, Director
Date: March 26, 1996 /s/ William J. Burns
----------------------------------
William J. Burns, Director
Date: March 26, 1996 /s/ Harry Campagna
----------------------------------
Harry Campagna, Director
Date: March 26, 1996 /s/ Harley L. Sims
----------------------------------
Harley L. Sims, Director
Date: March 26, 1996 /s/ Barney Caciopo
----------------------------------
Barney Caciopo, Director
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on the 26th day of March, 1996.
INTERDIGITAL COMMUNICATIONS CORPORATION
By: /s/ William J. Burns.
William J. Burns.
Chairman and Chief Executive
Officer, the principal executive
officer
By: /s/ James W. Garrison
James W. Garrison
Vice President - Finance, Chief
Financial Officer and Treasurer, the
principal financial officer and
principal accounting officer
58
EXHIBIT INDEX
Exhibit
No. Description
10.23 Executive Bonus Plan dated May 19, 1994.
10.24 Lease Agreement dated July 14, 1995 by and among
InterDigital Communications Corporation and 781
Partnership.
11 Statement re: Computation of Net Income (Loss) Per Share
Earnings.
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule