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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 1-11152
INTERDIGITAL COMMUNICATIONS CORPORATION
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-1882087
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(State of Incorporation) (I.R.S. Employer Identification Number)
781 Third Avenue, King of Prussia, Pennsylvania 19406
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 610-878-7800
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $.01 Per Share American Stock Exchange
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Series B Junior Participating
Preferred Stock Rights American Stock Exchange
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(Title of class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
$2.50 Cumulative Convertible Preferred Stock, Par Value $.10 Per Share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
On March 24, 2000 the aggregate market value of the Registrant's
Common Stock, $.01 par value, held by non-affiliates of the Registrant was
approximately $1,480,638,684.
On March 24, 2000, there were approximately 53,217,366 shares of the
Registrant's Common Stock, $.01 par value, outstanding.
Documents Incorporated by Reference
None.
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PART I
Item 1. BUSINESS
General
InterDigital Communications Corporation (collectively with its
subsidiaries referred to as InterDigital, the Company, we, us and our)
specializes in the design and development of technology content and system
solutions for advanced digital wireless communications applications. Over the
course of our nearly thirty-year history, we have amassed a substantial and
significant library of know-how and patents related to digital wireless
technology.
We market our technologies and solutions capabilities primarily to
telecommunications equipment producers and related suppliers for embedding into
products targeted for the following applications:
- Mobile phones
- Personal digital assistants
- Mobile computing devices
- Base stations and other infrastructure equipment
- Other terminal-end wireless devices.
In addition, we license our Time Division Multiple Access (TDMA) and
Code Division Multiple Access (CDMA) patents and technology to third parties. We
are continuing to broaden and deepen our extensive body of technical know-how
and broad patent portfolio related to wireless technologies.
The Company is a public corporation, incorporated in Pennsylvania in
1972. Our corporate and administrative offices are located in King of Prussia,
Pennsylvania. Our development teams are located in Melville, New York and King
of Prussia, Pennsylvania.
Wireless Telecommunications Industry Overview
The wireless telecommunications industry is undergoing rapid growth
worldwide. At the same time, new technologies and products are being developed
to substantially enhance the capabilities and performance of wireless services
available to consumers. The combination of rapid growth in the sales of wireless
devices and accelerating technological change sets the stage for a revolution in
wireless services that should fuel growth in the industry for many years.
The wireless market is in the early stage of a shift from
voice-oriented wireless products (primarily handsets which provide basic voice
service on the move) to data-oriented devices which provide voice as well as
high speed data to support advanced services including imaging and wireless
Internet access. Consumers are likely to gain access to these services through a
broad range of mobile terminal-end products, including handsets, personal
digital assistants, and laptop or notebook computers, among other products.
Demand for new wireless technology, which should enable the mobile devices to
deliver advanced services, is likely to grow with the market for mobile products
and services.
Industry Growth Projections
The evolving market for advanced wireless products and services is
generally referred to as the third generation (3G) market. First generation
wireless services were introduced in the 1980s, utilizing analog technology.
Second generation (2G) services were introduced in the 1990s, taking advantage
of new digital technology which greatly increased the capacity and flexibility
of wireless networks. The first and second generations of wireless services
delivered voice service with little or no ability to transmit data. The third
generation of products will be designed to add data communications capability
and, when broadly deployed, should enable global roaming for wireless users.
2
The market's 3G emergence is expected to be evolutionary rather than
revolutionary. Wireless service providers are likely to install network
infrastructure gradually over a period of years. Industry analysts expect the
first 3G products and services to be introduced in Japan in 2001, with service
in other parts of Asia, Europe and North America following throughout this
decade. As the market expands, it is likely to spark a dynamic product
development environment, with traditional wireless equipment producers and new
market entrants bringing a wide range of terminal-end mobile devices to
consumers. The great majority of those products are expected to utilize advanced
air interface technology to deliver a combination of voice and high data-rate
services.
At the end of 1999, almost 500 million wireless subscribers utilized
the current wireless products and services around the world. Market analysts
expect that number to double over the next three years and grow to well over 1
billion subscribers by 2005. On an annual basis, industry analysts project that
handset sales are expected to grow from more than 200 million in 1999 to nearly
600 million in 2003.
Market penetration for wireless products should grow as well during the
next several years. The highest penetration of wireless users today is in the
Scandinavian countries and Hong Kong, where between 60 and 70 percent of the
population owns and uses a mobile phone. In most developed nations, wireless
penetration totals at least 20 percent of the population. In the United States,
it reached approximately 25 percent at the end of 1999. Penetration is much
lower in developing countries. Most industry observers forecast substantial
growth in wireless's penetration of the population in both the developed and
developing countries throughout this decade.
Even with the growth in penetration for wireless devices worldwide,
wireless telecommunications at the end of 1999 accounted for only about 3
percent of total telecommunication minutes of use. By 2003, analysts forecast
that wireless minutes of use, as a percentage of total telecommunications, will
grow to just under 12 percent.
Industry observers expect that the use of advanced wireless technology
in mobile computing products will grow rapidly during this period as well.
Analysts forecast that, through 2003, unit shipments of notebook computers,
ultra- portables, and palm-sized computers will grow by almost 22 percent per
year worldwide. Experts predict that high-data rate wireless technology will be
embedded in these products over the next several years, providing an additional
market for advanced wireless technology.
Taken together, these forecasts portray a market that should undergo
significant growth over the next five years and which should have substantial
room for additional growth thereafter.
The Technology Landscape
Two principal digital wireless technologies are in use today to enable
wireless applications: TDMA and CDMA. Standards employing these technologies
have been adopted around the world. The Global System for Mobile Communications
(GSM) and IS 54/136, which utilize TDMA technology, serve the large majority of
wireless subscribers worldwide. GSM is the far more dominant technology, being
widely deployed in Europe, Asia, Africa, the Middle East and other regions
(including the United States) . IS 54/136 has been deployed in North America,
and Central and South America. IS-95, which employs narrowband CDMA technology,
was commercialized in the 1990s and serves a smaller percentage of users today,
primarily in the United States, Korea and several other countries.
We have been developing TDMA and CDMA technologies for many years for
fixed and mobile applications. With regard to TDMA, we were a leader in
establishing IS-54 as a wireless standard in the United States in the 1980s and
have established a substantial portfolio of patented TDMA inventions. Our core
TDMA inventions include (among others):
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- The fundamental architecture of commercial Time
Division/Frequency Division Multiple Access (TD/FDMA)
systems.
- Methods of synchronizing the operation of TD/FDMA
systems.
- A unique approach of managing system capacity and
maintaining agility through the reassignment of
online subscriber units to different time slots
and/or frequencies in response to system conditions.
- The design of a multi-component base station where
the intelligence is distributed allowing for more
robust performance.
- Initializing procedures that enable roaming.
A number of our core TDMA inventions are central to 2G wireless systems
in use today, being used in a broad range of wireless networks and terminal-end
mobile devices produced by other companies worldwide. TDMA technology that we
developed was also utilized as the air interface solution for the wireless local
loop (WLL) products we developed and produced during the past 15 years.
On the CDMA front, we acquired in 1992 a technology development company
that had been involved in fundamental research in CDMA technology, with an
emphasis on wideband or broadband application, since the mid- 1980s. We expanded
that development program, anticipating the demand for wide bandwidth technology
that would enable high data-rate wireless services. As part of that development
work, we designed and produced a state-of-the-art system-on-a-chip Application
Specific Integrated Circuit (ASIC) which contained our proprietary Broadband
Code Division Multiple Access(TM) (B-CDMA(TM)) technology which was initially
deployed in WLL products. Many of the essential elements of the B-CDMA solution
are applicable to advanced high data rate products that are being developed for
the 3G market.
As with our TDMA inventions, we have patented our CDMA inventions and
today hold a significant portfolio of patents for CDMA technology worldwide. Our
key CDMA inventions include (among others):
- The use of a common pilot channel to synchronize
subchannels in a multiple access environment.
- Various techniques for bandwidth allocation,
including multi-channel and multi-code mechanisms.
- Highly efficient schemes for controlling the
transmission power output of terminal and base
station devices vital in a CDMA system.
- Communication system overlay techniques, which allow
new wireless systems to be deployed with existing
wireless technologies without frequency reallocation.
- Joint detection and interference cancellation for
reducing multiple access interference in a physical
receiver.
- Enhancements to soft handover techniques between
designated cells.
- Various subchannel access and coding techniques.
We believe that certain of our inventions are essential to the
implementation of the 2G IS-95 systems (See "- Business Activities. Patent and
Technology Licensing".) Also, in 1999, a study group of the International
Telecommunications Union (ITU), an agency for the United Nations responsible for
establishing telecommunications standards, approved a new standard for 3G
wireless networks designed to enable global roaming for mobile users and
compatibility with the dominant existing wireless standards. The IMT-2000
standard, also referred to as the 3G wireless standard, defines five sets of
alternative specifications for the digital mobile radios which can be selected
or aggregated by equipment manufacturers to produce standards-compliant third
generation wireless products for their customers. The five specifications under
the standard include three forms of CDMA technology: TDD and FDD - forms of
wideband CDMA, and FDD Multi-carrier CDMA (referred to as cdma-2000). The
standard also includes two forms of TDMA technology: Digital Enhanced Cordless
Telephone (DECT), and UWC-136, an evolved form of the U.S. TIA/EIA-136 digital
cellular standard. Products built to one or more of these specifications are
being designed to
4
deliver a varying range of high bandwidth wireless services, including high
speed Internet access, multimedia communications, video conferencing, and other
forms of data transmission. We made numerous contributions to the 3G standards
bodies as the standard was being formulated and expect to continue to do so as
the standard is refined. Many of our contributions are included as part of the
standard adopted by the ITU study group.
We believe that our patent portfolio is applicable to all of the air
interface protocols described in the standard, and we have indicated to the
standard setting bodies that we hold patents and patent applications that are
either essential or commercially important for 3G products built to present
standards specifications.
Our current technology development programs are focused on creating
solutions (including ASICs) for the wideband CDMA protocols of the 3G standard.
We have focused on this market segment, in part, based on industry analysts'
expectations that wideband CDMA technology (as opposed to the other 3G
protocols) will serve the largest number of wireless subscribers as the 3G
market grows. For many GSM service providers, wideband CDMA is likely to be the
preferred 3G air interface protocol because its adoption offers them the least
expensive and fastest route to 3G services. Given the dominant global market
position today of the GSM service providers, analysts expect that they will
maintain a dominant market position in the next generation market. Technology
providers serving this market could benefit from a leading market position for
wideband CDMA. We believe that our heritage of know-how and patented wireless
inventions based upon both TDMA and CDMA air interface protocols presents us
with attractive opportunities to provide technology in the 3G market.
Strategy
Our strategic objective is to create long-term growth as one of the
leading developers of advanced air interface and full system-on-a-chip
technology for the wireless communications industry. To achieve this objective,
we are actively participating in worldwide 3G markets, with the following focus:
- - Emphasizing Core Technology Development and System Design Capability.
We possess longstanding core competencies in digital air interface
design and the development of full system solutions for wireless
products. By building on these strengths, we can give our customers the
full advantage of the depth of our engineering know-how and long
heritage of wireless inventions that enhance the effectiveness of end
products.
- - Building a Base of Strategic Relationships. To secure our position in
the 3G market and define our growth opportunities, we intend to
establish a network of customer/partner relationships to complement our
strengths and enhance our ability to create value in a broader market.
We seek partners that bring complementary technologies, production
capability and market access. A key ingredient in the strategic plan is
to work in partnership with a semiconductor producer to bring a number
of standards-compliant 3G ASICs to market.
- - Leveraging Technology and Intellectual Property Rights into 3G
Standards and Products. We have been a leader in developing and
promoting key industry standards starting with 2G in the 1980s as well
as the recently proposed 3G standard. We believe this strategy enables
us to promote the adoption of our technology into new standards-based
products, providing our customers time to market and other advantages.
- - Licensing Intellectual Property Worldwide. Our substantial portfolio of
patented TDMA and CDMA inventions is a unique asset. Access to these
inventions, and the technological know-how they represent, through
licensing agreements has proven valuable to producers of wireless
devices who provide advanced services around the world. By continuing
to build our licensing program, we believe that we can capture
substantial value in the future.
- - Providing Specialized Engineering Services. We intend to selectively
enter into agreements to develop technology for leading companies and
offer integration technology and implementation assistance. Our goals
5
are to stay in close touch with market demands, take advantage of
technology re-use opportunities, build our base of core technology and
add to our portfolio of patented inventions.
Business Activities
Core Technology and Product Development
Through 1999, the Company was engaged in the development, marketing,
sales and servicing of WLL equipment utilizing our technology. We redirected our
business plan in 1999. Driven by the emergence of the 3G market, intensified
product and price competition in the WLL market, and a significant decline in
demand worldwide for WLL systems, we sought to enter into arrangements with key
equipment providers involving 3G technology and products. The proposed 3G
technologies incorporated wideband CDMA protocols as well as other CDMA and TDMA
technologies. A significant part of our business activity involves the
development of core technology building blocks for the two aspects of the
wideband CDMA protocol: Time Division Duplex (TDD) and Frequency Division Duplex
(FDD) technologies. Executing on our business plan, we entered into a strategic
engineering relationship with Nokia in 1999 involving the development of high
data-rate 3G technology. In 1999, we also initiated a self-funded research and
development effort to develop building blocks for other components of the
wideband CDMA protocols included in the 3G Standard.
The TDD format operates by using a single frequency band to transmit
signals alternately in the forward and reverse direction. In the TDD scheme, the
relative capacity of the forward and reverse links can be altered in favor of
one direction (usually the forward). This is accomplished by giving a greater
time allocation to forward transmission intervals than reverse by allocating
more time slots. This asymmetry is useful for communication processes
characterized by unbalanced information flow. One important example of this
technique is Internet access in which users typically enter short messages and
receive large information payloads. Importantly, due to the fact that only one
carrier is used, frequency re-use is enhanced and planning is simplified.
FDD supports two-way radio communication using paired radio
frequencies. In the FDD format, one frequency supports transmission from a base
station to a mobile terminal (the forward link) while the other frequency
supports transmission in the reverse direction. Because of the paired
frequencies, simultaneous communication in both directions is possible. This
technique is ideal for high volume mobile voice traffic and is the traditional
cellular and PCS radio spectrum allocation format. It is designed to be
extremely flexible, providing high-quality voice transmission, along with high
speed wireless Internet access and multimedia imaging.
Based on these core technology building blocks, we intend to develop 3G
products for sale to telecommunications equipment manufacturers. Those products
could include ASICs, software and combined RF/Baseband boards, among others. Our
business plan is to develop such products either alone or through partnering
relationships with appropriate companies. We expect to also seek to license the
technology to third parties on a royalty-bearing basis. (See "- Patent and
Technology Licensing".)
We are currently targeting a TDD ASIC, as well as dual and tri-mode
ASICs incorporating TDD functionality. The initial ASICs would be targeted for
mobile handsets; however, we may also extend our TDD ASIC offering to the
infrastructure market segment.
We are also currently developing our next generation FDD
system-on-a-chip. Our engineering team is developing the technology for a
system-on-a-chip solution, including the complex software and specifications
for the manufacture of ASICs which can be embedded into a range of wireless
products. The initial target product for the FDD
6
ASIC will be mobile handsets. The FDD development effort was initiated in 1999
following the completion of our second generation FDD system-on-a-chip (which we
called our B-CDMA ASIC), developed in conjunction with Texas Instruments, Inc.
The B-CDMA ASIC was designed for fixed wireless access products but employs FDD,
TDD and wideband-CDMA technology components. The B-CDMA ASIC has been fabricated
and successfully tested. This experience provides us with an important first
step toward developing a commercial FDD system-on-a-chip solution since the
B-CDMA ASIC already contains a significant percentage of the technology building
blocks that will be used to design our new FDD ASIC.
In the first half of 1999, we made a major shift in our business
strategy by dedicating our resources into the emerging 3G market. As part of
that undertaking, we decided to discontinue the further development and
manufacture of WLL products. The decision to move away from the manufacture of
WLL products was also driven by intensified product and price competition and a
shift in world markets away from WLL systems, among other things. Since that
time, we have been winding down all remaining commercial aspects of that
business.
InterDigital recorded expenses of $20.5 million, $17.2 million, and
$24.2 million during 1999, 1998 and 1997, respectively, related to all of its
research and of development efforts for TDMA, B-CDMA and 3G based product and
technology development. Revenues recognized in 1999, 1998 and 1997 associated
with development efforts were $13.9 million, $8.0 million and $4.4 million,
respectively.
At December 31, 1999, InterDigital's backlog of orders for
UltraPhone(R) telephone equipment and services was approximately $5.1 million.
All of this backlog is expected to be shipped in 2000. Backlog as of December
31, 1998 was approximately $1.0 million.
The following table sets forth, for the periods indicated, the revenues
from each revenue category as a percentage of total revenues and gross margins
from product sales:
1999 1998 1997
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Revenues:
Product Revenues 6.4% 6.8% 88.0%
Licensing and Strategic Partner 93.6 93.2 12.0
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Total Revenues 100.0% 100.0% 100.0%
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Revenues by customer geography are as follows (in thousands):
Year Ended December 31,
1999 1998 1997
---- ---- ----
U.S. $ 1,660 $ 1,873 $ 2,853
Non-U.S. 69,007 97,348 $46,983
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$70,667 $99,221 $49,836
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In 1999, 60% of InterDigital's revenue was from our customer in
Finland. An additional 26% of revenue was from Japan. In 1998, more than 84% of
total revenue was derived from our customers in Japan. In 1997, 66% of revenues
were from Indonesia. Additionally, 6% of revenues were from our Philippine
customer and another 6% of 1997 revenues were derived from our strategic partner
in Korea.
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Strategic Engineering Services.
Based on the core competencies of our engineering team resulting from
research and development work in TDMA and wideband CDMA technical areas dating
back to the 1980s, we believe that we are positioned to deliver valuable
engineering services to companies seeking to develop 3G compliant technologies
and product embodiments. We anticipate that our engineering services could take
on a number of forms.
Because the 3G market is in its early stage, we believe that we can
help companies develop core technology for their 3G products. In the first of
such arrangements, we entered into a strategic technology development agreement
in February 1999 with Nokia covering the development of new technology for 3G
wireless communications products designed for high data rate applications, such
as Internet access. The agreement provides that we are to deliver technology
building blocks for Nokia to use in 3G wireless products. It also provides that
Nokia will fund the project, maintain an active role in the development plan
and, when the development is complete, be able to use the technology in 3G
products. We will own the developed technology and will have the ability to
license the technology to other companies, as well as design, manufacture, sell
and use products and components that utilize the resulting technology. Nokia has
the right to terminate the agreement both for convenience (with certain
financial ramifications) and for cause.
We anticipate offering a second form of strategic engineering services
in which we would assist equipment suppliers in developing specific products
based on our existing TDD or FDD technology. As part of this service, we would
build upon the existing core technology and provide our customers with
technology integration and applications engineering for their 3G products. We
may also develop reference designs which the customer could use to customize
their product. We anticipate that while such services may be attractive to a
wide number of companies, our target market for such services will typically be
the second and third tier producers.
The competitive landscape in this market is changing. Traditionally,
most telecommunications companies develop product and application designs
in-house. While in-house engineering and development staffs, particularly at
well-resourced companies, represent a competitive threat to our strategic
engineering services market strategy, the shortage of qualified engineers, the
need for background technology, and the fast pace of market development, has
created an opportunity for companies like InterDigital that can provide ready
access to both engineering talent and relevant know-how. Other companies are
competing in this space, seeking to provide comparable engineering services.
While these companies may have qualified engineers and relevant know-how, we
believe we have a competitive advantage over such companies because of our deep
history in TDMA and CDMA technologies (which form the foundation of 3G
technologies), and our system and semiconductor design experience. Nonetheless,
we cannot predict what level of market share, if any, that we will capture of
the strategic engineering services market.
Patent and Technology Licensing
Since our inception, we have employed an aggressive program of
acquiring and protecting of intellectual property. Our wholly-owned subsidiary,
InterDigital Technology Corporation (ITC), currently holds approximately 137
United States patents and approximately 345 foreign patents relating
specifically to digital wireless radiotelephony technology (TDMA and/or CDMA)
which expire at various times beginning in 2004 and ending in 2015. ITC also has
approximately 25 other patents, both in the United States and in non-U.S.
countries. ITC has also filed approximately 76 United States and approximately
213 foreign patent applications relating primarily and variously to the CDMA and
TDMA technologies. During 1999, ITC received 37 new patents, 22 in the United
States (the majority of which were for CDMA inventions) and applied for more
than 50 new patents worldwide. ITC's patents have effective terms of up to 20
years from the date of their first filing.
In 1992, we undertook a comprehensive patent licensing program, the
ultimate objective of which is the realization of licensing revenues from third
party use of inventions underlying ITC's patent portfolio. ITC believes that, in
many instances, licenses for certain of its patents are required in order for
third parties to manufacture and sell digital cellular products in compliance
with TDMA-based standards currently in use worldwide. Those standards
8
include, but are not limited to the, U.S Digital Cellular (IS-54/136) the
Global System for Mobile Communication, the Pan- Asian Digital Cellular
Standard, Digital Enhanced Cordless Telephone and Personal Handyphone System.
Currently, numerous manufacturers supply digital cellular equipment conforming
to such standards.
ITC offers non-exclusive, royalty bearing patent licenses to
telecommunications manufacturers that manufacture, use or sell, or intend to
manufacture, use or sell, equipment that utilizes our extensive portfolio of
intellectual property. At December 31, 1999, ITC had granted 21 non-exclusive,
non-transferable, perpetual, worldwide, royalty-bearing licenses to use certain
TDMA patents.
We also anticipate that we will be able to generate significant revenue
from the licensing of patents for 3G applications. Based on the standards as
adopted, we believe that we have a number of patents that are essential to the
implementation of all of the technology modes incorporated in the existing 3G
standards. We also expect that many of our patents or to be issued patents will
be commercially important in the actual product implementation.
We have recently initiated active discussions on a worldwide basis
regarding the licensing of our CDMA patents. Our current license agreements with
Nokia, Siemens and Qualcomm do include rights under certain of our patents to
manufacture and sell products compliant with 3G standards, with some
limitations. The Nokia Agreement is paid-up, generally, through the period
during which Nokia and InterDigital are engaged in the 3G development project.
(See "- Strategic Engineering Services"). After such period, a structure is
provided for determining future royalty payments. All of our current essential
patents for 3G standards are included under the Nokia Agreement. The Siemens and
Qualcomm agreements are fully paid-up with regard to the rights granted, which
includes certain rights as to 3G products. The Siemens agreement does not
include any rights under patents issuing from patent applications filed after
December 15, 1999. The Qualcomm license agreement excludes, among other things,
any rights under our patents as regards TDMA standards, any rights under our
patent applications filed after March 7, 1995, as well as patents relating to
cellular overlay and interference cancellation. Based on these limitations,
neither the Siemens nor the Qualcomm agreement provides rights under all the ITC
patents which we believed to be essential to 3G, or all of the inventions which
we believe will be essential and which are contained in pending patent
applications. The Qualcomm license agreement grants Qualcomm the paid-up right
to grant sublicenses under certain of our patents to Qualcomm's customers.
In high technology fields characterized by rapid change and engineering
distinctions, the validity and value of patents are often subject to complex
legal and factual challenges and other uncertainties. Accordingly, ITC's patent
claims are subject to uncertainties which are typical of patent enforcement
generally. If any third party successfully asserts that certain of our patent
claims are not valid or do not cover their products, or if the 3G standards were
to change in a material manner, or if products are implemented in a way such
that patents that we believe to be commercially important are not infringed,
InterDigital's licensing potential and revenues could be adversely affected. The
cost of enforcing and protecting the patent portfolio can be significant.
In that regard, we are currently in litigation with Ericsson, Inc.,
which is seeking the court's declaration that Ericsson's products do not
infringe ITC's United States TDMA patents, that certain of ITC's United States
TDMA patents are invalid and that certain of ITC's United States TDMA patents
are unenforceable. Ericsson has also asserted claims of tortious interference
with contractual and business relations, defamation and commercial
disparagement, violation of ss. 43(A) of the Lanham Act, breach of contract
directly or as a third-party beneficiary, and fraud and negligent
misrepresentation for which Ericsson seeks an unspecified amount of actual
damages, costs and attorneys' fees. We are vigorously contesting each of
Ericsson's allegations. In addition, ITC has counterclaimed against Ericsson
alleging that Ericsson is willfully infringing certain United States TDMA
patents owned by ITC. ITC seeks a permanent injunction against Ericsson's
infringement of these patents, and an unspecified amount of actual and exemplary
damages, costs and attorneys' fees. (See Item 3. "Legal Proceedings. Ericsson".)
In addition to patent licensing, we have also been actively engaged
since 1994 in the licensing of know-how both to companies with whom we have had
strategic relationships (including alliance partners) and to other companies.
Our initial technology transfer program involved our proprietary B-CDMA
technology, a wideband CDMA technology
9
initially adapted for WLL applications but with mobile capability. In 1994, we
entered into technology licensing arrangement with Siemens AG under which
Siemens was provided access and use, on a royalty-bearing basis, to our
developed and to-be-developed B-CDMA technology. In January 1996, we added
Samsung as a licensee both to our B-CDMA technology and our UltraPhone product
know-how. Alcatel Espana signed a license with us in 1998 for B-CDMA
technology. In 1999, both Siemens and Alcatel made corporate decisions not to
invest further in the development of proprietary B- CDMA technology for fixed
wireless applications and to focus their energies on the 3G market. In 1999, we
signed a technology transfer and licensing agreement with Nokia for TDD
technology. (See "- Business Activities. Strategic Engineering Services.")
Since 1992, we have generated approximately $282 million in patent
royalty and technology licensing revenue.
The following table summarizes the technology areas in which we granted
licenses under our patents and technology:
IS-54/136 GSM PHS
American Telephone & Telegraph American Telephone & Telegraph American Telephone & Telegraph
Hitachi, Ltd. Hitachi, Ltd. Denso Corporation
Hughes Network Systems Japan Radio Company Hitachi, Ltd.
Kyocera Corporation Kyocera Corporation Iwatsu America, Inc.
Matsushita Electrical Co, Ltd. Matsushita Electrical Company, Ltd. Japan Radio Company
Mitsubishi Electric Corp. Mitsubishi Electric Corporation Kokusai Electric Co., Ltd.
NEC Corporation NEC Corporation Kyocera Corporation
Nokia Corporation Nokia Corporation Matsushita Electrical Company, Ltd.
Oki Electric Industry, Ltd. Oki Electric Industry, Ltd. Mitsubishi Electric Corporation
Pacific Comm. Sciences, Inc. Pacific Communication Sciences, Inc. NEC Corporation
Robert Bosch GMBH Robert Bosch GMBH Nokia Corporation
Samsung Electronics Co, Ltd. Samsung Electronics Company, Ltd. Oki Electric Industry, Ltd.
Sanyo Electric Corp. Sanyo Electric Corporation Robert Bosch GMBH
Siemens AG Shintom Company Samsung Electronics Company, Ltd.
Toshiba Corporation Siemens AG Sanyo Electric Corporation
Toshiba Corporation Sharp Corporation
PDC Shintom Corporation
American Telephone & Telegraph TDD Technology Siemens AG
Denso Corporation Nokia Corporation Toshiba Corporation
Hitachi, Ltd
Japan Radio Company B-CDMA Technology IS-95
Kokusai Electric Company, Ltd. Alcatel Espana American Telephone & Telegraph
Kyocera Corporation Samsung Electronics Co., Ltd. Nokia Corporation
Matsushita Electrical Co., Ltd. Siemens AG Oki Electric Industry, Ltd.
Mitsubishi Electric Corp Qualcomm, Inc.
NEC Corporation DECT Siemens AG
Nokia Corporation Kyocera Corporation
Oki Electric Industry, Ltd. Matsushita Electrical Co., Ltd. TETRA
Pacific Comm. Sciences, Inc Nokia Corporation Japan Radio Company
Robert Bosch GMBH Siemens AG Matsushita Electrical Company, Ltd.
Samsung Electronics Co., Ltd. Sanyo Electric Co., Ltd Nokia Corporation
Sanyo Electronics Co., Ltd. Toshiba Corporation Siemens AG
Sharp Corporation
Siemens AG UltraPhone Product Know-How
Toshiba Corporation Samsung Electronics Co., Ltd.
10
Technical Standards Activity
The ITU has established a standard for 3G products known as IMT-2000.
We have participated actively in the 3G standards development process,
contributing a significant number of proposed concepts and methodologies to the
standards bodies in Europe and the United States. A number of our contributions
have been adopted and are now part of the standard which will be implemented
worldwide. Mr. Brian Kiernan, one of our Senior Vice Presidents, is the Chair of
a task force under the Institute of Electrical and Electronic Engineers that
develops standards for wireless access systems. In addition, we are members of
various standards bodies including the ITU, 3G Partnership Project (3GPP),
Telecommunications Industries Association (TIA), Electronics Industries
Association (EIA), European Telecommunications Standards Institute (ETSI),
American National Standards Institute (ANSI), and Association of Radio
Industries and Businesses (ARIB).
Employees; Research & Development Resources and Expenses
As of March 1, 2000, InterDigital had approximately 191 full-time
employees. In addition, we use the services of consultants and part-time
employees. None of InterDigital's employees are represented by a collective
bargaining unit. A breakdown of InterDigital's full-time employees by functional
area is as follows:
NUMBER OF
FUNCTIONAL AREA EMPLOYEES
--------------- ---------
Sales and Marketing 5
Customer Support 10
Manufacturing 10
Research and Development 126
Patent Licensing 11
Corporate and Administration 29
---
Total 191
===
As of March 1, 2000, InterDigital employed approximately 126 people
whose primary responsibilities are 3G technology development, and additionally
utilizes the efforts of outside engineering resources as well as engineering
contributions from Nokia. Further development of InterDigital's technologies is
expected to require additional technical and administrative support, as well as
additional marketing resources and higher levels of sustained efforts for the
next several years. We have undertaken an aggressive effort to increase and
retain our engineering resources. The recruitment of personnel with technical
expertise in wireless communications technology development is highly selective
and competitive. In addition to recruiting high quality engineers, we intend to
attempt to satisfy our increasing need for engineering resources through, among
other things, consulting services and further strategic relationships.
Executive Officers
The Executive Officers of InterDigital are:
NAME AGE POSITION
- ---- --- --------
Howard E. Goldberg 54 Interim President and President of ITC
Richard J. Fagan 43 Executive Vice President and Chief Financial Officer
Joseph H. Gifford 54 Executive Vice President - Business Development
Mark Lemmo 42 Executive Vice President - Engineering & Product Operations
William J. Merritt 41 Executive Vice President, General Counsel and Secretary
11
Charles "Rip" Tilden 46 Executive Vice President - Communications, Investor Relations and Strategic
Planning
Howard E. Goldberg was promoted to Interim President in September, 1999
from his prior position as Executive Vice President-Strategic Alliances, which
he has held since October, 1998. Mr. Goldberg also serves as President of ITC.
Prior to becoming Executive Vice President, he also held the positions of
General Counsel and Secretary from May 1995 to October 1998. Mr. Goldberg served
as Vice President, General Counsel and Secretary from December 1994 to May 1995.
He served as an attorney in various consulting and full time employment
capacities prior to that from April 1993, including the position of Vice
President - Legal Affairs and Associate General Counsel, and served in various
financial and general business capacities prior thereto.
Richard J. Fagan joined InterDigital as a Senior Vice President and
Chief Financial Officer in November 1998, and was promoted to Executive Vice
President in September, 1999. Prior to that, he served as Controller and
Treasurer of Quaker Chemical, a Pennsylvania chemical corporation, since 1994
and as Assistant Corporate Controller of that corporation from 1993 to 1994.
Joseph H. Gifford was appointed to Executive Vice President, Business
Development in April 1997. Prior to joining InterDigital Communications
Corporation, Mr. Gifford held executive positions at Motorola, Inc. from August
1993 to April 1997, where he was responsible for business development and
marketing in the Wireless Access Systems Division.
Mark Lemmo was promoted to Executive Vice President, Engineering &
Product Operations in October 1996. Previously, Mr. Lemmo had been Vice
President-Sales and Marketing since June 1994 and Vice President of Engineering
from August 1991 to June 1994.
William J. Merritt was promoted to Executive Vice President in
September 1999 and continues in the capacity of General Counsel and Secretary.
Prior to that, he held the position of Senior Vice President, General Counsel
and Secretary since October 1998 and Vice President - Legal and Assistant
Secretary since January 1996. Prior to joining InterDigital, from 1987 to 1996,
Mr. Merritt held a variety of positions in the Legal Department for Long Island
Lighting Company, a New York electric and gas utility company, the last of which
was Assistant General Counsel responsible for all company litigation and
corporate matters. Mr. Merritt was also General Counsel to that company's power
plant operation subsidiary, Dynamic Energy Services Corporation, since 1995.
Charles "Rip" Tilden was named Executive Vice President-Communications,
Investor Relations and Strategic Planning of InterDigital in March 1998. Prior
to that, he held the positions of Senior Vice President from May 1997 and Vice
President from November 1996 until May 1997. Before joining InterDigital, Mr.
Tilden served as Vice President, Corporate Affairs at Alco Standard Corporation
in Wayne, PA, an office products and paper distribution company, since December
1994. Before moving to Alco Standard, Mr. Tilden was Vice President,
Communications for GenCorp in Akron, OH, an aerospace defense, automotive and
polymer products company from 1988 to 1994.
InterDigital's Executive Officers are elected to the offices set forth
above to hold office until their successors are duly elected and have qualified.
All of such persons are parties to agreements which provide severance pay
benefits, among other things, in certain events of terminations of employment.
These agreements generally provide for the payment of severance up to a maximum
of one year's salary and up to a maximum of one year's continuation of medical
and dental benefits. In addition, in the event of a termination or resignation
within one year following a change of control, which is defined as the
acquisition, including by merger or consolidations, or by the issuance by
InterDigital of its securities, by one or more persons in one transaction or a
series of related transactions, of more than fifty percent (50%) of the voting
power represented by the outstanding stock of InterDigital, the executive would
generally receive two years of salary and the immediate vesting of all
restricted stock and stock options.
12
Risk Factors
Item 1, "Business" and Item 7, "Management's Discussion and Analysis"
contained within this Annual Report on Form 10-K contain forward-looking
statements reflecting, among other things, (i) our strategic objectives; (ii)
analysts', industry observers' and experts' beliefs and forecasts as to the
market for wireless products and services, 3G market growth, and the timing of
market development; and (iii) our current beliefs and expectations as to 3G
product and technological capability, the successful development and the
applications for our technology and potential products, 3G markets, demand for
3G products, timing of 3G market development, applicability of standards,
preferences of service providers, our ability to enter into new business
relationships, enter into new licenses, bring 3G products to market, and deliver
engineering services, our ability to derive revenues from our patents, our
competition and competitive advantages, and the effectiveness of our Year 2000
compliance. Words such as "should", "likely to", "expect", "forecast",
"believe", "strategy", "intend", "plan", "targeting", "anticipate", "project",
and "may seek", variations of such words, and words with similar meaning or
connotations are intended to identify such forward-looking statements.
Such statements are subject to risks and uncertainties. We caution
readers that important factors in some cases have affected and, in the future,
could materially affect actual results and cause actual results to differ
materially from the results expressed in any such forward looking statement. You
should not place undue reliance on these forward-looking statements, which apply
on or as of the date of this report. Certain of these risks and uncertainties
are described in greater detail below. It should be noted that risks described
as affecting one forward looking statement may affect other forward looking
statements. In addition, other factors may exist that are not detailed below or
that are not fully known to us at this time. We undertake no obligation to
publicly update any forward-looking statements, whether as a result of new
information, future events or otherwise.
Our Strategy Is Forward-Looking in Nature
Our strategy is forward-looking in nature and, as such, is inherently
subject to risks and uncertainties. Many factors, including the other Risk
Factors detailed below, could affect our potential revenues and profitability
and our ability to achieve our objective to become a premier provider of
innovative technology for advanced wireless communications products. For
example, our plans to place our strategic emphasis on 3G technology and
products, to devote substantial resources to the development of TDD and FDD
technology, to market our FDD and TDD components (including system-on-a-chip),
our capabilities and technology content, and generate sufficient revenues from
associated engineering services could be affected by shifts in our strategy, the
ability to generate sufficient revenues to support our development activities
(which could itself be affected by numerous factors including, without
limitation, the ability to secure new and enforce existing license agreements
and the ability to enter into new strategic relationships), unanticipated
development costs, difficulties or delays in engineering projects, failure to
successfully enter into additional strategic relationships, our ability to
successfully and timely complete engineering projects, our ability and the
ability of our partners to successfully market and sell 3G products, our ability
to hire or retain adequate personnel, Nokia's exercise of its rights to
terminate the development project for convenience, and the failure of the 3G
market to materialize in the manner or time frame anticipated.
Analyst and Market Predictions are Forward-Looking in Nature
Our market predictions, as well as, analyst, industry observer and
expert predictions described in "-Wireless Telecommunications Industry Overview"
above, are forward looking in nature and, as such, are inherently subject to
risks and uncertainties. Many factors could affect these predictions including,
but not limited to, the validity of their and our assumptions, economic
conditions, customer buying patterns, timeliness of equipment development,
pricing of 3G products, continued growth in telecommunications services that
would be delivered on 3G devices, and availability of capital for infrastructure
improvements. Also, the 3G market may not develop at the rate or the pace that
we or they predict.
13
Our Future Operating Results are Uncertain and Likely to Fluctuate
Although we have experienced an increase in both revenues and
profitability over the last two years, we have experienced and may continue to
experience quarterly variability in operating results. It is particularly
difficult to predict the timing or amount of our strategic partner or license
revenues because (i) we may not be able to enter into additional strategic
partnerships or license agreements, either at all or on acceptable terms; (ii)
the negotiating cycles for partnership and licensing agreements are lengthy and
variable, typically ranging between 6 months and 2 years prior to signing; (iii)
the markets for our technologies are subject to rapid technological changes;
(iv) our markets are subject to increased competition from other products and
technologies and announcements of new products and technologies by our
competitors; (v) we may experience delays or difficulties in our technology
development efforts; and (vi) the strength of our patent portfolio could be
weakened through patents being declared invalid, design-arounds, changes to the
standards, and adverse court decisions; and (vii) we may be unable to adequately
protect our proprietary rights. Nevertheless, we base our decisions regarding
our operating expenses on a combination of current cash balances and anticipated
revenue trends. Because the base level of many of our expenses are relatively
fixed, a delay in recognizing revenue from a limited number of licenses
transactions could cause our operating results to vary significantly from
quarter to quarter and could result in operating losses. To the extent these
expenses are not followed by increased revenues, our operating results will
suffer. In addition, increased expenses which could result from factors such as
increased hiring and retention costs or actions designed to keep pace with
technology and product market targets could adversely impact near-term
profitability targets.
We Rely Heavily on our Relationships with Third Parties
We rely heavily on our relationship with Nokia as part of our 3G
strategy. Our development agreement with Nokia is terminable. In the event Nokia
were to terminate our development agreement, we may, depending upon the
circumstances, be compelled to terminate the development project. Following any
such termination, our position as a 3G technology developer could be weakened
which, in turn, could adversely affect our ability to enter into new
relationships for technology development.
The successful achievement of our objectives is also partially
dependent on our ability to enter into new strategic partnerships, including a
relationship with a semi-conductor manufacturer. Our failure to enter into such
additional relationships, either on acceptable terms or at all, could impair our
ability to introduce our technology and resulting products. In addition, delays
in entering into such relationships could cause us to miss critical market
windows. (See "-Our Markets are Subject to Rapid Technological Change".) This,
in turn, may adversely affect our future revenue streams.
Further, our royalty revenue depends in part on the performance of our
licensees to sell products. Their ability to deliver such products is outside of
our control.
We Have Substantial Global Competition
Competition in the wireless telecommunications industry is intense. We
cannot assure you that we will be able to successfully compete, or that our
competitors will not develop new technologies and products that are more
commercially effective than our own. We face competition from companies
providing services comparable to ours. We also face competition from the
in-house development teams at telecommunication equipment suppliers. Many of our
competitors are substantially larger than we are, and have financial, technical,
marketing, sales, and distribution resources greater than ours. In addition, our
customers may face competition from other telecommunication equipment providers.
It is also possible that new competitors may enter the market.
Further, our ability to derive revenues from the licensing of
technology will depend in part on the successful and timely development of our
technologies and in part on our ability to gain additional customers. Our
competitive position can be compromised by the introduction of superior
technology or our delay in (or a competitor's more timely introduction of)
relevant technology. (See "- Our Markets are Subject to Rapid Technological
Change".)
In order to generate revenues and profits from sales of ASIC products,
we must continue to make substantial investments and technological innovations,
which are subject to a number of risks and uncertainties. Other digital wireless
14
technologies, particularly cdma2000 and enhanced data rates for global evolution
(EDGE), are expected to be competitive with our own form of wideband CDMA and we
cannot assure you that our technology will be selected by wireless service
providers for their networks. (See "- We Need to Effect Further Technology &
Product Development".) In addition, our semiconductor partner must be able to
provide competitively priced products, and possess adequate manufacturing and
distribution networks.
We Need to Effect Further Technology & Product Development
We may experience technical, financial or other difficulties or delays
related to the further development of our technology. Delays can be costly, and
there can be no assurance that our development effort will ultimately be
successful. Further, if such engineering efforts are not successful or delays
are serious, our existing and potential strategic relationships could suffer or
these strategic partners could be hampered in their marketing efforts of
products containing our technologies. This means that we could experience
reduced royalty revenues or lower royalty revenues on such organizations'
products containing our technology, or that we could miss a critical market
window. (See "- Our Markets are Subject to Rapid Technological Change".)
Further, if we do not meet the material obligations under our contracts with our
partners, the partner could terminate the relationship and/or hold us liable for
breach. (See "-We Rely Heavily on our Relationships with Third Parties".)
Moreover, our technologies are in the development stage, and have not been fully
tested in commercial use. It is possible that they may not perform as expected.
Our Markets are Subject to Rapid Technological Change
The entire communications market in which we compete is characterized
by rapid technological change, frequent product introductions and evolving
domestic and international industry standards. Existing technology and products
become obsolete and unmarketable when products using new technologies are
introduced and new industry standards emerge. As a result, marketability and the
potential life cycles of the products and technologies that we are developing
can not be assured and are difficult to estimate. In addition, new industry
standards, falling prices or technology changes may render the products and/or
technologies obsolete or non-competitive. To be successful, we must continue to
develop new products and technologies that successfully respond to such changes.
We may not be able to form strategic relationships, either at all or on
acceptable terms, to enable us to develop such new products and technologies.
(See "-We Rely Heavily on our Relationships with Third Parties".) Even if we do,
we may not be able to introduce such products or technologies successfully in a
timely manner. Missing a critical market window could reduce or eliminate our
ability to capitalize on the technology and products as to which the window
applies.
These efforts will require continued significant investment in research
and development. We cannot be sure that we will have sufficient resources to
make such investments, that we will be able to make the technological advances
necessary to achieve these goals, or that the costs of the acquired efforts will
be acceptable. (See "-We Need to Effect Further Technology & Product
Development".) Our business, financial condition and operating results could be
materially adversely affected if we are unable to respond to the need for
technological change or if these products or technologies do not achieve market
acceptance when released. (See "-Our Future Operating Results are Uncertain and
Likely to Fluctuate".)
The Applicability of Our Patents to Industry Standards is Subject to Change
The ITU has developed a standard for 3G products known as IMT-2000. A
number of our contributions have been adopted and are now part of the standard.
However, we expect that the standard will be refined as equipment designs for 3G
systems are finalized. Material changes to the 3G standard could adversely
affect the applicability of our patents to the standard. If the wireless
industry adopts 3G standards which are incompatible with our technology or
determines not to rely on our intellectual property, this could have a material
adverse effect on our business, results of operations, liquidity and financial
position.
15
In addition, we believe that, in many instances, licenses for certain
of ITC's TDMA patents are required in order for third parties to manufacture and
sell digital cellular products in compliance with the IS-54-B/IS-136 Standard,
the Global System for Mobile Communication, the Pan Asian Digital Cellular
Standard, Digital Enhanced Cordless Telephone and Personal Handyphone System.
While we intend to vigorously enforce and protect our intellectual property
position against any infringement, we cannot assure you that the validity of our
relevant patents will be maintained, or that any of our patents will be
determined to be applicable to any standard. Such a finding would impair our
licensing opportunities as to those patents, which would, in turn, adversely
affect our receipt of future revenues. (See "-We Rely on and May Be Unable to
Adequately Protect Our Proprietary Rights".)
We Rely On and May Be Unable to Adequately Protect Our Intellectual Property
Rights
Our business opportunities substantially depend upon the development of
know-how and patent inventions. To protect these rights, we rely primarily on a
combination of patent laws, confidentiality agreements with employees and third
parties, and protective contractual provisions. Despite our efforts to protect
our proprietary rights, unauthorized parties may copy aspects of our technology
and information that we regard as proprietary. Other parties may breach
confidentiality agreements and other protective contracts into which we have
entered. We may not have adequate remedies in the event of such breach. Further,
we cannot assure you that the pending patent applications will be granted, or
that our existing or new patents will provide adequate protection or coverage.
(See "-The Applicability of Our Patents to Industry Standards is Subject to
Change".)
In addition, the cost of defending our intellectual property has been
and may continue to be significant. Moreover, third parties could circumvent
ITC's patents through design changes. Any of these events could adversely affect
our prospects for realizing future income. (See "-We Could Experience
Unfavorable Results in Patent Litigation" below and "-Our Operating Results are
Uncertain and Likely to Fluctuate" above.)
From time to time, certain companies may also assert that their patent,
copyright and other intellectual property rights are also important to the
industry or to us. In that regard, from time to time third parties provide us
with copies of their patents relating to digital wireless technologies and offer
licenses to such technologies. We in turn evaluate such patents and the
advisability of obtaining such licenses. If any of our products were found to
infringe on protected technology, we could be required to redesign such
products, license such technology, and/or pay damages to the infringed party. If
we are unable to license protected technology used in our products and/or if we
cannot economically redesign such products, we could be prohibited from
marketing such products.
We Could Experience Unfavorable Results in Patent Litigation
Together with ITC, we are currently in litigation with Ericsson over
certain of ITC's patents. During the course of such litigation (or in a future
yet unidentified and unfiled litigation), certain of ITC's key patents could be
declared invalid or not infringed. This could adversely affect our competitive
position and our ability to enter into additional licensing agreements and to
realize licensing revenues from current licensees. (See, Item 3. "Legal
Proceedings".)
Our License Agreements Contain Provisions which Could Impair Our Ability to
Realize Licensing Revenues
Certain of our licenses contain "most favored nations" and other
provisions, applied on a going forward basis only, which could, in certain
events, cause the licensee's obligation to pay royalties to us to be terminated
or suspended for an indefinite period, with or without the accrual of the
royalty obligation. In addition, certain of our licensees had, in the past,
stated, among other things, that the outcome of a prior litigation over ITC's
patents materially impacted the royalties due under their license agreements.
While we believe that these positions have been meritless, similar positions
could be asserted in the event that a licensee's obligation to pay royalties to
us in the future is either terminated or indefinitely suspended or in the event
that ITC's patents are held invalid or unenforceable or this position could be
found to have merit. Such positions
16
taken could interfere with ITC's ability to secure new licenses or to generate
recurring licensing revenue under the existing agreements. In addition, ITC may
have to incur expenses and suffer further delays to mediate, arbitrate and/or
litigate such assertions, with no assurance of ultimate success. ITC's licensing
opportunities are also affected by the increasing concentration of the wireless
industry, particularly as to infrastructure, which results in a substantial
portion of the licensing opportunities being concentrated in a small number of
non-licensed manufacturers, many of whom are generally opposing the validity of
ITC's patents in multiple forums.
We Depend on Sufficient Engineering Resources
Competition for qualified and talented individuals with engineering
experience in emerging technologies, like wideband CDMA, is intense. Further,
none of the persons that we currently employ are parties to agreements that
require them to provide services to us for a minimum period of time. Our success
and ability to enter into additional strategic or other relationships may depend
on our ability to attract and retain a significant number of talented and
qualified technical personnel; and there can be no assurance that we will be
able to do so. The failure to attract and retain highly qualified personnel
could interfere with our ability to undertake additional technology and product
development efforts as well as our ability to meet our strategic objectives.
Year 2000 Problems May Cause Engineering Difficulties or Delays
Although we have passed the January 1, 2000 and February 29, 2000
critical dates for experiencing Year 2000 related failures without significant
problems and we are not aware of any impending failures, it is possible that the
full impact of the date changes has not been fully recognized. For example, it
is possible that Year 2000 related issues may arise in the future, either
because they have not yet become apparent to us or because future date changes
trigger failures. In addition, we could still be negatively affected if third
parties upon whom we rely are adversely affected by the Year 2000 or similar
issues.
We Face Risks From Our International Operations
We conduct business in foreign jurisdictions and with foreign
organizations. In doing so, we are subject to the effects of government
regulations, tariffs and other applicable trade barriers, currency control
regulations, political instability, potentially adverse tax consequences,
inability to enforce contractual commitments abroad, and general delays in
remittance and difficulties of collecting foreign payments, among other things.
We Face Risks From Economic Conditions
We and our customers face risks from economic conditions generally
which affect, among other things, the ability and willingness of companies to
invest in technological and product development, our need for working capital,
and our revenue recognition.
17
Item 2. PROPERTIES
InterDigital owns one facility, subject to a mortgage, with an
aggregate of approximately 50,000 square feet of office, development,
warehousing and assembly facilities in King of Prussia, Pennsylvania. In
December 1996, InterDigital entered into a five-year lease for approximately
67,000 square feet of office and development facilities in Melville, New York.
These facilities are the locations for our wideband CDMA development activities.
Item 3. LEGAL PROCEEDINGS
Ericsson
In September 1993, ITC filed a patent infringement action against
Ericsson GE Mobile Communications, Inc. ("Ericsson GE"), its Swedish parent,
Telefonaktieboleget LM Ericsson ("LM Ericsson") and Ericsson Radio Systems, Inc.
("Ericsson Radio"), in the United States District Court for the Eastern District
of Virginia (the "Ericsson action") which was subsequently transferred to the
United States District Court for the Northern District of Texas. The Ericsson
action seeks a jury's determination that in making, selling, or using, and/or in
participating in the making, selling or using of digital wireless telephone
systems and/or related mobile stations, Ericsson has infringed, contributed to
the infringement of and/or induced the infringement of eight patents from ITC's
patent portfolio. The Ericsson action also seeks an injunction against Ericsson
from infringement and seeks unspecified damages based upon the Court's
determination of what constitutes a reasonable royalty for infringement,
royalties, costs and attorneys' fees. Ericsson GE filed an answer to the
Virginia action in which it denied the allegations of the complaint and asserted
a Counterclaim seeking a Declaratory Judgement that the asserted patents are
either invalid or not infringed. On the same day that ITC filed the Ericsson
action in Virginia, two of the Ericsson Defendants, Ericsson Radio and Ericsson
GE, filed a lawsuit against InterDigital and ITC in the United States District
Court for the Northern District of Texas (the "Texas action"). The Texas action,
which involves the same patents that are the subject of the Ericsson action,
seeks the court's declaration that Ericsson's products do not infringe ITC's
patents, that ITC's patents, are invalid and that ITC's patents are
unenforceable. The Texas action also seeks judgment against InterDigital and ITC
for tortious interference with contractual and business relations, defamation
and commercial disparagement, Lanham Act violations. The Ericsson action and the
Texas action have been consolidated. ITC agreed to the dismissal without
prejudice of LM Ericsson.
In December 1997, Ericsson Inc., the successor to Ericsson GE and
Ericsson Radio, filed an action against ITC in the United States District Court
for the northern District of Texas (the "1997 Texas action") seeking the court's
declaration that Ericsson Inc.'s products do not infringe two patents issued to
InterDigital earlier in 1997 as continuations of certain patents at issue in the
Texas action. Later that month, Ericsson Inc. filed an amended Complaint seeking
to include these two new patents in the Texas action in an effort to consolidate
the two cases. In January 1998, both Ericsson Inc. and InterDigital and ITC
filed motions requesting that Ericsson Inc.'s amended Complaint be allowed and
that the 1997 Texas action be dismissed, to which the Court agreed. In 1998,
Ericsson Inc. filed a Motion for Partial Summary Judgment, which was denied by
the Court in early 1999. Also in 1998, the United States District Court for the
Northern District of Texas granted InterDigital's Motion to amend its
Counterclaim by adding four additional patents. During the third quarter of
1999, Ericsson Inc. filed for leave to file an additional Amended Complaint to
add causes of action for breach of contract and fraud and negligent
misrepresentation. The Court granted Ericsson's request. Fact discovery has been
substantially concluded. The "Markman" hearing is scheduled to take place in
April, 2000, where a Special Master will make recommendations to the Court as to
the meaning of certain terms contained in the patents. InterDigital and ITC
intend to vigorously defend the Texas action. However, if any of ITC's patents
are held invalid, ITC's licensing opportunities and collection of royalty
revenues could be materially and adversely affected.
18
Product-Based Suit
On October 27, 1999, Cavalier Technologies and Consultants Ltd.
("Cavalier") filed suit against us in the United States District Court of the
Eastern District of Pennsylvania for breach of contract to team to supply and
for breach of contract to supply UltraPhone systems in Kenya and for fraudulent
representations as to our future plans for the UltraPhone business. Concurrently
with the filing of its Complaint, Cavalier filed a request for a Temporary
Restraining Order and a Motion for a Preliminary Injunction to prevent us from
shipping any of our remaining inventory of UltraPhone equipment to other
customers. The Court denied the TRO application, and scheduled a preliminary
injunction hearing. In December, 1999, the Court issued a bench ruling denying
Cavalier's motion for a preliminary injunction on the grounds that Cavalier had
failed to demonstrate irreparable harm. Cavalier continues to seek damages and
injunctive relief. We anticipate that the trial will be set for later in 2000.
We have asserted a damages counterclaim for past due balances.
Other
ITC has filed patent applications in numerous foreign countries. ITC is
and expects from time to time to be subject to challenges with respect to its
patents and patent applications in foreign countries. ITC intends to vigorously
defend its patents. However, if any of ITC's patents or applications are
revoked, ITC's patent licensing opportunities in the relevant foreign countries,
and possibly in other countries, could be materially and adversely affected.
In addition to litigation associated with patent enforcement and
licensing activities and the litigation described above, InterDigital is a party
to certain other legal actions arising in the ordinary course of its business.
Based upon information presently available to InterDigital, InterDigital
believes that the ultimate outcome of these other actions will not materially
affect InterDigital.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
19
PART II
Item 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the range of the high and low sales
prices of InterDigital's Common Stock as reported by the American Stock
Exchange.
High Low
---- ---
1999
First Quarter 6 15/16 4 1/8
Second Quarter 5 3/4 4 1/16
Third Quarter 6 3/4 4 1/4
Fourth Quarter 82 5 5/16
High Low
---- ---
1998
First Quater 6 3/16 2 9/16
Second Quarter 7 7/16 5 3/16
Third Quarter 5 7/8 2 11/16
Fourth Quarter 6 7/8 3
As of March 24, 2000, there were approximately 1,860 holders of
record of our Common Stock.
We have not paid cash dividends on our Common Stock since inception. It
is anticipated that, in the foreseeable future, no cash dividends will be paid
on our Common Stock and any cash otherwise available for such dividends will be
reinvested in our business. The payment of cash dividends will depend on our
earnings, the prior dividend requirements on our remaining series of Preferred
Stock and other Preferred Stock which may be issued in the future, our capital
requirements and other factors considered relevant by our Board of Directors.
Changes in Capitalization
In March 2000, we amended our Shareholder Rights Plan, originally
adopted in December 1996, in a number of respects. Under the Plan, a
distribution of one right for each outstanding common share of the Company has
been made. Each right entitles the shareholder, subject to the terms of the
Plan, to purchase one one-thousandth of a share of Series B Junior Participating
Preferred Stock at a purchase price of $250 per share unit, subject to
adjustment. Initially, the rights attach to certificates representing shares of
outstanding common stock, and no separate rights certificates are distributed.
The rights will only separate from the common stock after the "Distribution
Date", which will occur upon (i) the earlier of (A) ten business days following
the earliest of the date of a public announcement, the date the Company first
learns of such acquisition, or, in certain limited circumstances, the date of
such acquisition, that a person or group of affiliated or associated persons
(other than the Company, any of its subsidiaries or any of their employee
benefit plans) (such person or group being defined as an "Acquiring Person") has
acquired, obtained the right to acquire or otherwise obtained beneficial
ownership (in limited circumstances, beneficial ownership can be deemed if such
person or group possesses voting power over shares arising from a proxy, even if
revocable, given in response to a proxy or consent solicited by or on behalf of
such person or group and in furtherance of such person's or group's publicly
announced intention to acquire control over the Company or
20
over all or substantially all of the assets or stock of the Company) of 10% or
more of the then outstanding shares of Company Common Stock; (B) ten business
days following the commencement of a tender offer or exchange offer that would
result in a person or group beneficially owning 10% or more of the then
outstanding shares of Company Common Stock; and (C) ten business days after a
non-exempt person or group publicly announces an intent to acquire control over
the Company and proposes in a proxy or consent solicitation to elect such a
number of directors which, if elected, would represent a majority of the
directors when compared with the Independent Directors continuing to serve on
the Board of Company, or (ii) such later date as may be determined by action of
a majority of the Independent Directors of the Board prior to the occurrence of
any event specified in (i) above. The determination of beneficial ownership
generally excludes options to purchase shares and shares acquired from the
Company pursuant to stock-based plans for employees and directors. In general,
in the event that the Company is acquired in a merger or other business
combination interaction, each holder of a right will have the right to receive,
upon exercise, units of Preferred Stock (or, in certain circumstances, Company
Common Stock, cash, property, or other securities of Company) having a current
market value equal to two times the exercise price of the Right.
The full text of the March 2000 amendments is set forth as Amendment
No. 3 to the Shareholder Rights Plan, which is attached as Exhibit 4.4 hereto.
In all other respects not inconsistent with the foregoing, a summary of the
other provisions of such Shareholder Rights Plan is contained in the Form 8-A
filed by the Company on January 2, 1997.
21
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information set forth below should be read in conjunction with the
Consolidated Financial Statements and notes thereto, and the other financial
information included elsewhere in this Form 10-K, as well as "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
herein.
Year Ended December 31,
--------------------------------------------------------
Consolidated Statement of Operations Data 1999 1998 1997 1996 1995
(In thousands, except per share data) ---- ---- ---- ---- ----
Revenues:
Product and Services $ 4,496 $ 6,751 $ 43,854 $ 24,974 $ 16,581
Licensing and Strategic Partner 66,171 92,470 5,982 28,719 67,693
Total Revenues 70,667 99,221 49,836 53,693 84,955
Net income (loss) before preferred dividends 26,706 36,968 (34,267) (11,644) 34,605
Net income (loss) applicable to common $ 26,451 $ 36,713 $ (34,523) $ (11,904) $ 34,340
shareholders
Net income (loss) per share - basic $ 0.55 $ 0.76 $ (0.72) $ (0.26) $ 0.78
Net income (loss) per share - diluted $ 0.52 $ 0.75 $ (0.72) $ (0.26) $ 0.74
Weighted Average number of shares outstanding
- basic 48,357 48,380 48,166 46,462 43,925
Weighted Average number of shares outstanding
- diluted 50,495 48,771 48,166 46,462 46,503
Consolidated Balance Sheet Data (in thousands):
Cash and cash equivalents $ 14,592 $ 20,059 $ 17,828 $ 11,954 $ 9,427
Short Term Investments 68,550 32,218 7,976 43,063 55,060
Working capital 95,498 54,752 22,903 57,076 59,008
Total assets 126,571 99,523 69,363 112,636 83,167
Long Term Debt 3,005 3,772 4,460 5,011 1,061
Accumulated deficit (133,588) (160,039) (196,752) (162,229) (150,325)
Total shareholders' equity 109,507 75,808 38,505 72,507 62,440
22
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.
We commenced operations in 1972. Since that time, we have been
primarily engaged in research and development activities related to wireless
digital communications technology, principally TDMA and CDMA technologies. We
have established a substantial and significant library of patents and technology
know-how related to such technologies.
Through 1999, we were also engaged in the development, marketing, sales
and servicing of WLL equipment utilizing our technology. We developed, marketed
and sold a TDMA-based WLL system trademarked the "UltraPhone(R)" system. We also
developed a CDMA-based WLL system, trademarked the "Truelink(TM)" system, which
utilized wideband CDMA technology. As part of our WLL development and marketing
efforts, we entered into strategic alliance agreements with Siemens AG (in
1994), Samsung Electronics Co., Ltd. (in 1996), and Alcatel Espana (in 1998)
involving the Company's proprietary B-CDMA WLL technology.
In the first half of 1999, we made a major shift in our business
strategy by dedicating our resources into the emerging 3G market. As part of
that undertaking, we decided to discontinue the further development and
manufacture of WLL products. The decision to move away from the manufacture of
WLL products was further driven by intensified product and price competition in
the WLL market, and a significant decline in demand worldwide for WLL systems.
As part of our shift, we sought to enter into arrangements with key equipment
providers involving 3G technology and products. The proposed 3G technologies
incorporate wideband CDMA protocols as well as other CDMA and TDMA technologies.
Industry analysts project that the first 3G products and services will be
introduced in Japan in 2001, with services being offered in other parts of Asia,
Europe and North America throughout this decade. The study group for
International Telecommunications Union formally adopted the 3G standards in
1999, solidifying wideband CDMA as one of the fundamental technologies for 3G.
Executing on our business plan, we entered into a strategic engineering
relationship with Nokia in 1999 involving the development of high data-rate
technology. As part of the Nokia agreement, we will retain ownership rights over
the technology we develop for Nokia. Also, included in the agreement were
certain TDMA and CDMA licenses which are paid up generally through the project
period. The agreement also provides a structure for determining patent royalty
payments thereafter.
In 1999, we also initiated a self-funded research and development
effort to develop building blocks for FDD technology, another component of the
wideband CDMA protocols included in the 3G Standard. The FDD program builds off
of our extensive B-CDMA development efforts.
We plan to market system-on-a-chip ASICs and components related to our
FDD and TDD technology to equipment producers worldwide. We also plan to
generate revenues from the licensing of the TDD and FDD technologies and patents
to third parties, as well as providing specialized engineering services to
equipment producers centered around these technologies. Our ability to derive
future revenues will be affected by other factors detailed elsewhere in this
Annual Report. (See "Item 1. Business. Risk Factors" below.)
As a result of the decline in the rural fixed and wireless access
market and the anticipated emergence of 3G standards in 1999, we ceased further
development and sales activities with regard to WLL equipment. In 1999, Siemens
withdrew from our B-CDMA development project. In April 1999, Alcatel informed us
that it was also withdrawing from our B-CDMA development project, on the same
basis. As a result of Alcatel's and Siemens' decisions as well as our own
assessment of the WLL market, we decided to reduce our resource commitment to
B-CDMA development.
In 1999, we also decided to discontinue the manufacture of the
UltraPhone system. We sustained significant losses over the life of the
UltraPhone Product line due to our inability to achieve sufficient sales volumes
and the need to continue
23
to consistently upgrade and re-engineer the product, at significant expense. We
expect final shipments will be completed by June 2000 at which point we expect
to exit the business.
Going forward over the course of the next few years, we expect the
variability in our revenues and, consequently, our cash flow to continue due to
the timing and amount of sales by our TDMA and CDMA licensees. We expect to
continue to experience considerable fluctuations in quarterly and annual
operating results in the future due to variations in the amount and timing of
recognition of TDMA and CDMA license, royalty and development fees. (See Item 1.
"Business. Risk Factors".)
FINANCIAL POSITION, LIQUIDITY AND CAPITAL REQUIREMENTS
We generated positive cash flows from operating activities of $24.2
million in 1999 compared to $30.1 million in 1998. The decrease principally
resulted from lower net income levels attained in 1999.
Net cash flows used in investing activities increased to $35.5 million
in 1999 from $27.5 million in 1998. This increase was due mainly to a higher
level of additional investment of funds in short-term, highly liquid securities
($36.3 million in 1999 versus $24.2 million in 1998) offset in part by a 1999
reduction in long-term deposits. In addition, investments in property and
equipment and patents were $2.9 million in 1999 as compared to $3.6 million in
1998.
During 1999, net cash provided by financing activities was $6.1 million
as compared to $0.4 million used in 1998. The increase in 1999 primarily
resulted from net proceeds of $12.4 million related to option and warrant
exercises and our employee stock purchase plan. This was partially offset by the
use of $5.4 million to repurchase approximately 1.0 million common shares under
a share repurchase program.
As of December 31, 1999, we had $83.1 million of cash, cash equivalents
and short-term investments, compared to $52.3 million as of December 31, 1998.
Our working capital increased by $40.7 million to $95.5 million at December 31,
1999 from $54.8 million at December 31, 1998 mainly as a result of the receipt
of cash from licensing agreements as well as reductions in deferred revenues and
current payables.
We are capable of supporting our operating requirements during 2000
through internally generated funds. Should the need arise to fund new
development activities, contingency resolution, external growth activities or
other matters, we may seek financing through bank facilities or the sale of debt
or equity securities.
We believe that our investment in inventories at December 31, 1999 is
realizable based on expected selling prices and order volumes. Property and
equipment are currently being utilized in our on-going business activities, and
we believe that no additional write-downs are required at this time due to lack
of use or technological obsolescence. With respect to other assets, we believe
that the value of our patents is at least equal to the value included in the
December 31, 1999 balance sheet.
RESULTS OF OPERATIONS
1999 Compared With 1998
Revenues
Revenues in 1999 totaled $70.7 million, compared to $99.2 million in
1998. The decrease relates to a lower amount of licensing revenue. In 1999,
InterDigital recognized $42.8 million in new licenses, $14.0 million in
engineering services for strategic partners, $9.5 million from recurring
royalties and $4.4 million in product revenues. In 1998, new licensee revenue
was $83.5 million, strategic partner revenue was $8.0 million, recurring
royalties were approximately $1 million and product revenues were $6.8 million.
24
Cost of Product
Cost of product revenues decreased 67% to $5.9 million from $17.6
million in 1998. The decrease reflects decreased product sales as well as the
impact of a write-down of inventory of $7.9 million in 1998. We experienced
negative gross margins in both years as there were insufficient product sales to
absorb manufacturing overhead.
Other Operating Expenses
Other operating expenses include sales and marketing expenses, general
and administrative expenses, patents administration, and development expenses.
Sales and marketing expenses decreased 6% to $3.6 million during 1999
as compared to $3.9 million in 1998. The decrease is primarily due to decreased
sales commissions and decreased marketing activity for the UltraPhone product.
General and administrative expenses for 1999 increased 43% to $7.8
million from $5.4 million in 1998 due in part to staffing level changes and
higher compensation costs associated with restricted stock grants.
Patents administration and licensing costs decreased 52% to $5.3
million as compared to $11.1 million in 1998. We incurred less costs such as
commissions and other expenses related to our activities supporting our
licensing program, and recovered certain expenses related to an ongoing patent
litigation with Ericsson. In February of 2000, InterDigital and its insurers
defined the method, timing and limitations of reimbursement for covered
litigation expenses.
Development costs increased 19% to $20.5 million from $17.2 million in
1998. This increase reflects the ramp up of development costs associated with
launching the 3G projects.
Repositioning
In the second quarter of 1999, we recorded a pre-tax repositioning
charge of $1.2 million in connection with a change in our strategy from sales
and development of wireless local loop products to technology development for
advanced wireless applications. This action was taken after assessing our long
term business prospects associated with continued investment in the development
of wireless local loop systems. The repositioning charge included costs
associated with workforce reductions (approximately 27 employees) and asset
impairment charges related to wireless local loop development equipment. The
components of the repositioning charge included severance and other benefit
costs of $0.4 million, all of which were paid in 1999, and asset impairment
charges of $0.8 million for fixed assets associated with wireless local loop
activities. Management's efforts with respect to this plan are substantially
complete.
Other Income and Expense
Interest Income for 1999 was $3.9 million as compared to $2.6 million
in 1998 as a result of higher average invested cash in 1999 as compared to 1998.
Interest expense was $0.3 million in 1999 compared to $0.4 million in 1998 due
to lower overall debt in 1999 as compared to 1998.
1998 Compared With 1997
Revenues.
Revenues in 1998 increased 99% to $99.2 million from $49.8 million in
1997 due to the significant increase in licensing and strategic partner revenue.
In 1998, licensing and strategic partner revenue included $83.5 million from new
and existing license agreements, approximately $1 million in recurring
royalties, $4.6 million from Alcatel, and $3.4 million from Samsung. In 1997,
licensing and strategic partner revenue included $1.6 million in recurring
royalties, the final $1.6 million of strategic partner revenue from Siemens, and
$2.8 million from Samsung.
25
Cost of Product
Cost of product decreased in 1998 to $17.6 million from $41.9 million
in 1997. The decrease is directly related to the decrease in product sales. In
1998, there were insufficient product sales to absorb manufacturing overhead and
increases in inventory reserves resulting in a negative gross margin of 160.4%
as compared to a positive gross margin of 4.4% in 1997. In 1998, InterDigital
recorded charges totaling $7.9 million to reduce the carrying value of its
inventory of UltraPhone components to its net realizable value due to excess
inventories resulting from the cancellation of the Myanmar contract.
Other Operating Expenses
Other operating expenses include sales and marketing expenses, general
and administrative expenses, patents administration, and development expenses.
Sales and marketing expenses decreased 47% to $3.9 million during 1998
as compared to $7.3 million in 1997. The decrease was primarily due to decreased
sales commissions and decreased marketing activity for the UltraPhone product.
General and administrative expenses for 1998 decreased 24% to $5.4
million in 1998 from $7.2 million in 1997. The decrease was due to cost
management and a reduction in workforce in early 1998.
Patents administration and licensing costs increased 118% to $11.1
million from $5.1 million in 1997. The increase was primarily due to increased
activities related to the generation of licensing revenue and the protection and
enforcement of InterDigital's patent portfolio.
Development costs decreased 29% to $17.2 million in 1998 from $24.2
million in 1997. The decrease was primarily due to reduced development of
InterDigital's UltraPhone system and to the timing of certain B-CDMA related
development expenses.
Other Income and Expense.
Interest income for 1998 increased 24% to $2.5 million from $2.1
million in 1997 due to higher average invested cash balances during 1998.
Interest expense of $.4 million was approximately the same in 1998 and 1997.
Year 2000
During 1999, we implemented a Year 2000 compliance program, consisting of
auditing assessing, remediating, testing, and contingency planning, to ensure
that our IT and non-IT systems, as well as the systems of third parties, would
function properly when the calendar changed from December 31, 1999 to January 1,
2000. The program covered both systems operated by us as well as systems
operated by third parties that we considered to be material to our operations.
In total, we have spent approximately $0.3 million in external costs on this
program, primarily to upgrade non-compliant hardware and software and the cost
of our consultant. We do not expect to incur any significant additional costs
related to Year 2000 compliance.
We did not experience any significant malfunctions or errors in our
operating or business systems when the date changed from 1999 to 2000. Based on
operations since January 1, 2000, we do not expect any significant impact to our
ongoing business as a result of the "Year 2000 Issue." We are not currently
aware of any significant Year 2000 or similar problems that have arisen for
third parties upon which we rely. (See Item 1. Business. Risk Factors. Year 2000
Problems May Cause Engineering Difficulties or Delays.")
26
Item 8. INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
NUMBER
------
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accounts 28
Report of Management 29
Consolidated Balance Sheets 30
Consolidated Statements of Operations 31
Consolidated Statements of Shareholders' Equity 32
Consolidated Statements of Cash Flows 33
Notes to Consolidated Financial Statements 34
SCHEDULES:
Schedule II - Valuation and Qualifying Accounts 51
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.
27
REPORT OF INDEPENDENT PUBLIC ACCOUNTS
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, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
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 aspects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Philadelphia, PA
February 7, 2000
28
REPORT OF MANAGEMENT
Management is responsible for the consolidated financial statements and the
other financial information contained in this Annual Report. The financial
statements have been prepared in accordance with generally accepted accounting
principles considered by management to present fairly the company's financial
position, results of operations and cash flows. The financial statements include
some amounts that are based on management's best estimates and judgements.
To provide reasonable assurance that assets are safeguarded against the
loss from unauthorized use or disposition and accounting records are reliable
for preparing financial statements, management maintains a system of accounting
and other controls. Even an effective system of internal controls, no matter how
well designed, has inherent limitations, including the possibility of human
error and the circumvention or overriding of controls. Accordingly, even an
effective system of internal controls can provide only reasonable assurance with
respect to financial statement preparation and safeguarding of assets. The
system of accounting and other controls is continually assessed, modified and
improved, where appropriate and cost effective, in response to changes in
business conditions and operations and recommendations made by the independent
auditors.
The financial statements have been audited by the company's independent
auditors, Arthur Andersen LLP, in accordance with generally accepted auditing
standards. Their report is presented herein.
Howard E. Goldberg
Interim President
Richard J. Fagan
Executive Vice President and Chief Financial Officer
King of Prussia, Pennsylvania
March 29, 2000
29
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
DECEMBER 31,
----------------------------
ASSETS 1999 1998
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 14,592 $ 20,059
Short term investments 68,550 32,218
Accounts receivable, net 10,884 14,983
Inventories 3,092 5,102
Other current assets 11,625 3,056
--------- ---------
Total current assets 108,743 75,418
--------- ---------
Property, plant and equipment, net 7,393 9,697
Patents, net 9,723 9,948
Long term deposits 284 2,934
Other 428 1,526
--------- ---------
17,828 24,105
--------- ---------
TOTAL ASSETS $ 126,571 $ 99,523
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt $ 446 $ 723
Accounts payable 2,454 5,973
Accrued compensation and related expenses 4,326 2,959
Deferred revenue 69 3,936
Foreign and domestic taxes payable 1,093 2,249
Other accrued expenses 4,857 4,826
--------- ---------
Total current liabilities 13,245 20,666
LONG TERM DEBT 2,559 3,049
OTHER NON-CURRENT LIABILITIES 1,260 --
TOTAL LIABILITIES 17,064 23,715
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTES 9 AND 10)
SHAREHOLDERS' EQUITY:
Preferred Stock, $ .10 par value, 14,399 shares authorized- $2.50 Convertible
Preferred, 99 shares issued and outstanding 10 10
Common Stock, $.01 par value, 75,000 shares authorized,
50,985 shares and 48,427 shares issued and outstanding 510 484
Additional paid-in capital 249,976 235,631
Accumulated deficit (133,588) (160,039)
Unearned Compensation (1,769) --
--------- ---------
115,139 76,086
Treasury stock, 1,042 and 50 shares held at cost 5,632 278
--------- ---------
Total shareholders' equity 109,507 75,808
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 126,571 $ 99,523
========= =========
The accompanying notes are an integral part of these statements.
30
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
---- ---- ----
REVENUES:
Product revenues $ 4,496 $ 6,751 $ 43,854
Licensing and alliance 66,171 92,470 5,982
-------- -------- --------
70,667 99,221 49,836
-------- -------- --------
OPERATING EXPENSES:
Cost of product 5,876 17,577 41,914
Sales and marketing 3,614 3,864 7,276
General and administrative 7,761 5,434 7,189
Patents administration and licensing 5,330 11,145 5,102
Development 20,481 17,166 24,248
Repositioning charges 1,213 - -
-------- -------- --------
44,275 55,186 85,729
-------- -------- --------
Income (loss) from operations 26,392 44,035 (35,893)
OTHER INCOME (EXPENSE):
Interest income 3,883 2,561 2,070
Interest and financing expenses (323) (367) (410)
-------- -------- --------
Income (loss) before income taxes 29,952 46,229 (34,233)
INCOME TAX PROVISION (3,246) (9,261) (34)
-------- -------- --------
Net income (loss) 26,706 36,968 (34,267)
PREFERRED STOCK DIVIDENDS (255) (255) (256)
-------- -------- --------
NET INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS $ 26,451 $ 36,713 $(34,523)
======== ======== ========
EARNINGS PER SHARE
Basic $ 0.55 $ 0.76 $ (0.72)
======== ======== ========
Diluted $ 0.52 $ 0.75 $ (0.72)
======== ======== ========
AVERAGE COMMON SHARES OUTSTANDING
Basic 48,357 48,380 48,166
======== ======== ========
Diluted 50,495 48,771 48,166
======== ======== ========
The accompanying notes are an integral part of these statements.
31
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands except per share data)
$2.50 Additional
Convertible Common Paid-In Accumulated Unearned Treasury
Preferred Stock Stock Capital Deficit Compensation Stock Total
-----------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $ 10 $ 481 $ 234,245 $ (162,229) $ -- -- $ 72,507
Exercise of Common Stock options -- -- 17 -- -- -- 17
Exercise of Common Stock warrants -- -- 18 -- -- -- 18
Dividend of Common Stock and cash to
$2.50 Preferred shareholders -- -- 92 (256) -- -- (164)
Sale of Common Stock under Employee
Stock Purchase Plan -- 1 393 -- -- -- 394
Net loss -- -- --- (34,267) -- -- (34,267)
-----------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 10 482 234,765 (196,752) -- -- 38,505
Exercise of Common Stock options -- 1 479 -- -- -- 480
Dividend of Common Stock and cash to
$2.50 Preferred shareholders -- -- 53 (255) -- -- (202)
Sale of Common Stock under Employee
Stock Purchase Plan -- 1 334 -- -- -- 335
Treasury Stock Acquired (278) (278)
Net income -- -- -- 36,968 -- -- 36,968
-----------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 10 484 235,631 (160,039) -- (278) 75,808
Exercise of Common Stock options -- 17 9,536 -- -- -- 9,553
Exercise of Common Stock warrants -- 5 2,504 -- -- -- 2,509
Dividend of Common Stock and cash to
$2.50 Preferred shareholders -- -- 87 (255) -- -- (168)
Sale of Common Stock under Employee
Stock Purchase Plan -- 1 324 -- -- -- 325
Issuance of Restricted Common Stock -- 3 1,894 -- (1,897) -- --
Amortization of unearned Compensation -- -- -- -- 128 -- 128
Treasury Stock Acquired -- -- -- -- -- (5,354) (5,354)
Net income -- -- -- 26,706 -- -- 26,706
-----------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ 10 $ 510 $ 249,976 $ (133,588) $ (1,769) $ (5,632) $109,507
===================================================================================
The accompanying notes are an integral part of these statements.
32
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31
----------------------------------------------
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 26,706 $ 36,968 $(34,267)
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 4,670 4,629 4,855
Deferred revenue (3,867) (3,121) (4,003)
Amortization of unearned compensation 128 - -
Repositioning charges 1,213 - -
Decrease (increase) in assets-
Receivables 4,099 (11,925) 10,863
Inventories 2,010 7,182 1,579
Other current assets (8,569) (278) 1,846
Increase (decrease) in liabilities-
Accounts payable (3,519) (2,250) (6,904)
Accrued compensation 1,050 39 632
Other accrued expenses 35 (1,123) 1,555
-------- -------- --------
Net cash provided by (used in) operating activities 23,956 30,121 (23,844)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of short-term investments, net (36,332) (24,242) 35,087
Purchases of property and equipment (1,646) (1,831) (3,927)
Patent costs (1,291) (1,778) (966)
Other non-current assets 3,748 314 (190)
-------- -------- --------
Net cash provided by (used in) investing activities (35,521) (27,537) 30,004
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sales of Common Stock
and exercises of stock options and warrants 12,387 815 429
Lease obligations incurred - 251 452
Payments on long-term debt, including capital lease obligations (767) (939) (1,003)
Cash dividends on Preferred Stock (168) (202) (164)
Purchase of Treasury Stock (5,354) (278) --
-------- -------- --------
Net cash provided by (used in) financing activities 6,098 (353) (286)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,467) 2,231 5,874
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 20,059 17,828 11,954
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 14,592 $ 20,059 $ 17,828
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 296 $ 350 $ 362
======== ======== ========
Income taxes paid, including foreign withholding taxes $ 4,403 $ 8,881 $ 22
======== ======== ========
The accompanying notes are an integral part of these statements.
33
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. BACKGROUND:
InterDigital Communications Corporation (collectively with its subsidiaries
referred to as InterDigital, the Company, we, us and our) develops and markets
advanced digital wireless communications applications. In conjunction with our
technology development, we have developed an extensive body of technical
know-how and a broad patent portfolio which we license worldwide and related
product embodiments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of InterDigital
and its subsidiaries. All significant inter-company accounts and transactions
have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash, Cash Equivalents and Short-Term Investments
InterDigital considers all highly liquid investments purchased with
remaining maturities of three months or less to be cash equivalents. Investments
are held at amortized cost which approximates market value. At December 31,
1999, all of InterDigital's short-term investments were classified as available
for sale pursuant to Statement of Financial Accounting Standards ("SFAS") No.
115. "Accounting for Certain Investments in Debt and Equity Securities". At
December 31, 1999 and 1998, there were no significant unrealized holding gains
or losses.
Cash and cash equivalents consist of the following (in thousands):
December 31,
--------------------
1999 1998
---- ----
Money market funds and demand accounts $14,350 $ 3,160
Repurchase agreements 242 516
Commercial paper - 16,383
------- -------
$14,592 $20,059
======= =======
34
The repurchase agreements are fully collateralized by United States
Government securities and are stated at cost which approximates fair market
value.
Short-term investments available for sale as of December 31, 1999 consisted
of $35.6 million in government- issued discount notes and $33.0 million in
corporate debt securities. Short-term investments available for sale as of
December 31, 1998 consisted of $18.2 million in government-issued discount notes
and $14.0 million in corporate debt securities.
Inventories
Inventories are stated at the lower of cost or market, with cost determined
on a first-in-first-out basis and market based on net realizable value.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization of
property, plant and equipment are provided using the straight-line method. The
estimated useful lives for computer equipment, machinery and equipment, and
furniture and fixtures are generally three to five years. Leasehold improvements
are being amortized over their lease term, generally five to ten years. The
buildings are being depreciated over twenty-five years. Depreciation expense was
$3.2 million, $3.5 million and $3.2 million in 1999, 1998 and 1997,
respectively.
Patents
The costs to obtain certain patents for InterDigital's TDMA and CDMA
technologies have been capitalized and are being amortized on a straight-line
basis over 10 years. Amortization expense was $1.5 million, $1.1 million and
$1.4 million in 1999, 1998 and 1997, respectively.
Development
All development expenditures are charged to expense in the period incurred.
Revenue Recognition
Patent licensing revenues included in licensing and strategic partner
revenues, consist primarily of up-front royalty payments and one-time,
non-refundable fees which are recognized at the time of the applicable agreement
since we have no remaining obligations and do not have any continuing
involvement with the licensee. Strategic partner revenues included in licensing
and strategic partner revenues are generated by patent, technology and know- how
licensing and development agreements. Due to the combined nature of some
agreements, revenue may be recognized over the performance period. Royalty
revenue is recorded as earned in accordance with the specific terms of each
license agreement when reasonable estimates of such amounts can be made. Product
revenues are recognized upon shipment of systems. Installation, training and
other services are recognized upon completion of services.
Concentration of Credit Risk
Financial instruments which potentially subject us to concentration of
credit risk consist primarily of cash equivalents, short-term investments, and
accounts receivable. We place our cash equivalents and short-term investments
only in highly rated financial instruments and in United States Government
obligations. Our accounts receivable are derived principally from patent license
agreements, engineering services and product sales, which provide for deferred
and/or installment payments.
35
Impairment of Long-Lived Assets
Pursuant to SFAS No. 121. "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of", InterDigital is required to
evaluate long-lived assets and certain intangible assets for impairment when
factors indicate that the carrying amount of an asset may not be recoverable.
When factors indicate that such assets should be evaluated for possible
impairment, we review the realizability of our long-lived assets by analyzing
the projected undiscounted cash flows in measuring whether the asset is
recoverable. In 1999, an $0.8 million charge was taken as a part of a
repositioning program. (See Note 3.) No such adjustments were recorded in 1998
or 1997.
Net Income (Loss) Per Common Share
InterDigital follows SFAS No. 128. "Earnings per Share". The following
tables reconcile the numerator and denominator of the basic and diluted net
income (loss) per share computation (in thousands, except for per share data):
Year Ended December 31,
------------------------------------------------------------------------------------
1999 1998
----------------------------------------- ---------------------------------------
Income Shares Per-Share Income Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Income (Loss) per Share-Basic:
Income (loss) available to
common shareholders $ 26,451 48,357 $ 0.55 $36,713 43,380 $ 0.76
Dilutive effect of options and
warrants -- 2,138 $(0.03) -- 391 (0.01)
Income (Loss) per Share-Diluted:
Income (loss) available to
common stockholders + dilutive
effects of options and warrants $ 26,451 50,495 $ 0.52 $36,713 48,771 $ 0.75
1997
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Income (Loss) per Share-Basic:
Income (loss) available to
common shareholders $(34,523) 48,166 $(0.72)
Dilutive effect of options and
warrants -- -- --
Income (Loss) per Share-Diluted:
Income (loss) available to
common stockholders + dilutive
effects of options and warrants $(34,523) 48,166 $(0.72)
Options and warrants outstanding during the years ended December 31, 1999
and 1998 to purchase approximately 1.6 and 7.4 million shares of common stock,
respectively, were not included in the computation of diluted EPS because the
exercise prices of the options were greater than the weighted average market
prices of the common stock during the period and, therefore, the effect would be
anti-dilutive. All options and warrants
36
outstanding for the year ended December 31, 1997 were excluded from the
computation of diluted earnings per share as a result of the net loss for the
period.
Reclassification
Certain prior period amounts have been reclassified to conform to the 1999
presentation.
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 expresses the views of the Securities and Exchange
Commission in applying generally accepted accounting principles to certain
transactions, including licensing agreements. We are in the process of analyzing
the impact of SAB No. 101 on our consolidated financial statements. SAB No. 101
will not have any impact on our liquidity or cash flows from operations.
3. REPOSITIONING:
In the second quarter of 1999, we recorded a pre-tax repositioning charge
of $1.2 million in connection with a change in our strategy from sales and
development of wireless local loop products to technology development for
advanced wireless applications. This action was taken after assessing our long
term business prospects associated with continued investment in the development
of wireless local loop systems. The repositioning charge included costs
associated with workforce reductions (approximately 27 employees) and asset
impairment charges related to wireless local loop development equipment. The
components of the repositioning charge included severance and other benefit
costs of $0.4 million, all of which were paid in 1999, and asset impairment
charges of $0.8 million for fixed assets associated with wireless local loop
activities. Management's efforts with respect to this plan are substantially
complete.
4. STRATEGIC PARTNER AGREEMENTS:
In February 1999, we entered into a long-term cooperation agreement with
Nokia for development of new technology for third generation (3G) wireless
telecommunications products. As part of the agreement, we will retain ownership
rights over the technologies we develop for 3G. Also included in the agreement
were certain paid-up TDMA and CDMA licenses, which generally extend through the
project period. We recognized revenues of $42.6 million from Nokia in 1999
related to this agreement. These revenues consisted of an initial licensing fee
of $31.5 million, development services revenue of $10.8 million, and $0.3
million of recurring royalties.
Prior to our 1999 strategic shift to focus on technology development for
the 3G market, our development group was focused primarily on technology
development of full systems to address needs in the fixed wireless local loop
market. As part of that effort, we entered into a series of agreements with
Samsung, Siemens and Alcatel to develop B-CDMA technology and products that
embodied that technology. These three companies and InterDigital comprised the
B-CDMA Alliance. In early 1999, after reassessing the market potential of the
residential wireless local loop market, Siemens announced its withdrawal from
the B-CDMA Alliance. In April of 1999, Alcatel also withdrew from the B-CDMA
37
Alliance. Minimal activity took place with respect to the Samsung B-CDMA
relationship during most of 1999. InterDigital recognized revenue associated
with these agreements of $3.1 million, $8.0 million and $4.4 million in 1999,
1998 and 1997, respectively. Of the totals, InterDigital recognized revenues of
$3.0 million, $3.4 million, and $2.8 million in 1999, 1998, and 1997
respectively from Samsung, $1.6 million in 1997 from the Siemens and $.1 million
in 1999 and $4.6 million in 1998 from Alcatel.
5. MAJOR CUSTOMERS AND GEOGRAPHIC DATA:
Revenues by customer geography are as follows (in thousands):
Year Ended December 31,
------------------------------------------
1999 1998 1997
---- ---- ----
U.S. $ 1,660 $ 1,873 $ 2,853
Non-U.S. 69,007 97,348 46,983
------- ------- -------
$70,667 $99,221 $49,836
======= ======= =======
In 1999, 60% of InterDigital's revenue was from our customer in Finland. An
additional 26% of revenue was from Japan. In 1998, more than 84% of total
revenue was derived from our customers in Japan. In 1997, 66% of revenues were
from Indonesia. Additionally, 6% of revenues were from our Philippine customer
and another 6% of 1997 revenues were derived from our strategic partner in
Korea.
Licensing and Strategic Partner Revenue
In 1999, ITC entered into 4 new TDMA license agreements with Robert Bosch
GMBH, Japan Radio Company, ltd., Shintom Company, LTD. and Iwatsu America, Inc.,
and granted a combined TDMA and CDMA license to Nokia. In prior years, ITC had
granted non-exclusive, non-transferrable, perpetual, worldwide, royalty-bearing
licenses to use certain TDMA patents (and in certain instances, technology) to
13additional corporations. Additionally, in prior years, ITC had granted
non-exclusive, non-transferrable, perpetual, worldwide, royalty-bearing
licenses to use certain CDMA patents (and in certain instances, technology) to
Alcatel, Qualcomm and Advanced Digital Technologies and to use TDMA and CDMA
patents (and in certain instances technology) to Siemens, Samsung and AT&T. Many
of these licenses contain "most favored licensee" provisions, applied on a going
forward basis only, and provisions which could, in certain events, cause the
licensee's obligation to pay royalties to InterDigital to be suspended for an
indefinite period, with or without the accrual of the royalty obligation.
Initial revenues from new TDMA licensees in 1999 totaled $42.8 million.
1999 revenues from strategic partners totaled $14.0 million, of which $10.8 was
derived from development work for Nokia. In 1999, InterDigital recognized $9.4
million in recurring royalty revenue from its TDMA licenses.
During 1998, InterDigital entered into four new TDMA licensing agreements
and revised agreements with two existing licensees. These licensing transactions
resulted in $83.5 million of revenue in 1998. Additionally, recurring royalty
fees of $1.0 million were recognized in 1998. Also in 1998, InterDigital
recognized $4.6 million and $3.4 million in revenue related to the Alcatel and
Samsung agreements, respectively.
In 1997, InterDigital recognized $2.8 million in licensing and strategic
partner revenue from Samsung, $1.6 million from Siemens and $1.6 million of
recurring royalty revenue from one licensee.
38
6. INVENTORIES:
December 31,
--------------------------
1999 1998
---- ----
(In thousands)
Component parts and work-in-progress $1,522 $2,958
Finished goods 1,570 2,144
------ -----
$3,092 $5,102
====== ======
Inventories are stated net of valuation reserves of $13.1 million and $13.7
million as of December 31, 1999 and 1998, respectively. In 1998, InterDigital
recorded charges totaling $7.9 million to reduce the carrying value of its
inventory of UltraPhone components to its net realizable value, due to excess
inventories resulting from the cancellation of the Myanmar contract. The final
shipments of Ultraphone products are scheduled for the first half of 2000.
7. PROPERTY, PLANT AND EQUIPMENT:
December 31,
----------------------------
1999 1998
---- ----
(In thousands)
Land, building and improvements $ 4,427 $ 4,258
Machinery and equipment 8,463 8,971
Computer equipment 8,039 7,484
Furniture and fixtures 2,871 2,806
Leasehold improvements 1,196 1,139
-------- --------
24,996 24,658
Less Accumulated depreciation (17,603) (14,961)
-------- --------
$ 7,393 $ 9,697
======== ========
39
8. LONG-TERM DEBT OBLIGATIONS:
December 31,
-------------------------
1999 1998
---- ----
(In thousands)
Mortgage debt $ 2,468 $ 2,575
Capitalized leases 537 1,197
------- -------
Total long-term debt obligations 3,005 3,772
Less -- Current portion (446) (723)
------- -------
$ 2,559 $ 3,049
======= =======
During 1996, InterDigital purchased its King of Prussia facility for $3.7
million, including cash of $930,000 and a 16 year mortgage of $2.8 million with
interest payable at a rate of 8.28% per annum.
Capitalized lease obligations are payable in monthly installments at an
average rate of 11.2%, through 2001. The net book value of equipment under
capitalized lease obligations is $1.7 million.
Maturities of principal of the long-term debt obligations as of December
31, 1999 are as follows (in thousands):
2000 $ 446
2001 326
2002 146
2003 148
Thereafter 1,939
------
$3,005
======
9. COMMITMENTS AND CONTINGENCIES:
Leases
InterDigital has entered into various operating lease agreements. Total
rent expense was $1.4 million in 1999 and 1998 and $1.3 million for 1997,
primarily for office, assembly and warehouse space. In 1999, two building leases
expired and were not renewed as those facilities had not been currently
occupied. Minimum future rental payments for operating leases as of December 31,
1999 are as follows (in thousands):
2000 $1,314
2001 1,349
2002 232
------
$2,895
======
40
Employment Agreements
InterDigital has entered into agreements with certain officers that provide
for the payment of severance pay benefits, among other things, in certain events
of termination of employment. These agreements generally provide for the payment
of severance up to a maximum of one year's salary (approximately $1.9 million at
December 31, 1999) and up to a maximum of one year's continuation of medical and
dental benefits. In these agreements, in the event of a termination or
resignation within one year following a change of control, which is defined as
the acquisition, including by merger or consolidation, or by the issuance by
InterDigital of its securities, by one or more persons in one transaction or a
series of related transactions, of more than fifty percent (50%) of the voting
power represented by the outstanding stock of InterDigital, the employee would
receive generally two years of salary (approximately $3.7 million at December
31, 1999) and the immediate vesting of all stock options.
10. LITIGATION:
In September 1993, ITC filed a patent infringement action against Ericsson
GE Mobile Communications, Inc. ("Ericsson GE"), its Swedish parent,
Telefonaktieboleget LM Ericsson ("LM Ericsson") and Ericsson Radio Systems, Inc.
("Ericsson Radio"), in the United States District Court for the Eastern District
of Virginia (Civil Action No. 93-1158-A (E.D.Va.)) (the "Ericsson action") which
was subsequently transferred to the United States District Court for the
Northern District of Texas. The Ericsson action seeks a jury's determination
that in making, selling, or using, and/or in participating in the making,
selling or using of digital wireless telephone systems and/or related mobile
stations, Ericsson has infringed, contributed to the infringement of and/or
induced the infringement of eight patents from ITC's patent portfolio. The
Ericsson action also seeks an injunction against Ericsson from infringement and
seeks unspecified damages based upon the court's determination of what
constitutes a reasonable royalty for infringement, royalties, costs and
attorneys' fees. Ericsson GE filed an answer to the Virginia action in which it
denied the allegations of the complaint and asserted a Counterclaim seeking a
Declaratory Judgment that the asserted patents are either invalid or not
infringed. On the same day that ITC filed the Ericsson action in Virginia, two
of the Ericsson Defendants, Ericsson Radio and Ericsson GE, filed a lawsuit
against InterDigital and ITC in the United States District Court for the
Northern District of Texas (the "Texas action"). The Texas action, which
involves the same patents that are the subject of the Ericsson action, seeks the
court's declaration that Ericsson's products do not infringe ITC's patents, that
ITC's patents are invalid and that ITC's patents are unenforceable. The Texas
action also seeks judgment against InterDigital and ITC for tortious
interference with contractual and business relations, defamation and commercial
disparagement, and Lanham Act violation. The Ericsson action and the Texas
action have been consolidated. ITC agreed to the dismissal without prejudice of
LM Ericsson.
In December 1997, Ericsson Inc., the successor to Ericsson GE and Ericsson
Radio, filed an action against ITC in the United States District Court for the
Northern District of Texas (the "1997 Texas action") seeking the court's
declaration that Ericsson Inc.'s products do not infringe two patents issued to
InterDigital earlier in 1997 as continuations of certain patents at issue in the
Texas action. Later that month, Ericsson Inc. filed an amended Complaint seeking
to include these two new patents in the Texas action in an effort to consolidate
the two cases. In January 1998, both Ericsson Inc. and InterDigital and ITC
filed motions requesting that Ericsson Inc's amended Complaint be allowed and
that the 1997 Texas action be dismissed, to which the Court agreed. In 1998,
Ericsson Inc. filed a Motion for Partial Summary Judgement, which was denied by
the Court in early 1999. Also during 1998, the United States District Court for
the Northern District of Texas granted InterDigital's Motion to amend its
Counterclaim by adding four additional patents. During the third quarter of
1999, Ericsson Inc. filed for leave to file an additional Amended Complaint to
add causes of action for breach of contract and fraud and negligent
misrepresentation. The Court granted Ericsson's request. Fact discovery has been
substantially concluded. The "Markman" hearing is scheduled to take place in
April, 2000 where a Special Master will make recommendations
41
to the court as to the meaning of certain terms contained in the patents.
InterDigital records expenses for fees related to litigation as they are
incurred. Such fees are included as patents administration and licensing
expense. During the year ended December 31, 1999, the Company recovered certain
expenses related to this litigation from its insurance carrier. Such recoveries
are included as a reduction to patents administration and licensing expense when
they are submitted to the insurance company. In February 2000, the Company and
its insurers defined the method, timing and limitations of reimbursements for
covered litigation expenses.
Also, on October 27, 1999, Cavalier Technologies and Consultants Ltd.
("Cavalier") filed suit against us in the United States District Court of the
Eastern District of Pennsylvania for breach of contract to team to supply and
breach of contract to supply UltraPhone systems in Kenya and for fraudulent
representations as to our future plans for the UltraPhone business. Concurrently
with the filing of its Complaint, Cavalier filed a request for a Temporary
Restraining Order and a Motion for a Preliminary Injunction to prevent us from
shipping any of our remaining inventory of UltraPhone equipment to other
customers. The Court denied the TRO application, and scheduled a preliminary
injunction hearing. In December, 1999, the Court issued a bench ruling denying
Cavalier's motion for a preliminary injunction on the grounds that Cavalier had
failed to demonstrate irreparable harm. Cavalier continues to seek damages and
injunctive relief. We have asserted a damages counterclaim for past due
balances.
11. PREFERRED STOCK:
The holders of the $2.50 Convertible Preferred Stock are entitled to
receive, when and as declared by our Board of Directors, cumulative annual
dividends of $2.50 per share payable in cash or Common Stock (as defined) at the
Company's election (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 we fail 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 the adjustment under certain
conditions). In 1999, 1998 and 1997, InterDigital declared and paid dividends on
the $2.50 Convertible Stock of $255,000, $255,000 and $256,000, respectively.
These dividends, were paid with cash of $168,000, $202,000 and $162,000, and
17,530, 8,860 and 19,281 shares of Common Stock, respectively.
Upon any liquidations, dissolution or winding up of InterDigital, the
holders of the $2.50 Convertible Preferred Stock will be entitled to receive,
from InterDigital's assets available for distribution to shareholders, $25 per
share plus all dividends accrued, before any distribution is made to the Common
shareholders, after such payments, 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 per share.
The holders of the $2.50 Convertible Preferred Stock do not have any voting
rights except on those amendments to be Articles of Incorporation which would
adversely affect their rights, create any class or series of stock ranking
senior to or on a parity with the $2.50 Preferred Stock, as to either dividend
or liquidation rights, or increase the authorized number of shares of any senior
stock. In addition, if two or more consecutive semiannual dividends on the $2.50
Preferred are not paid by InterDigital, the holders of the Preferred, separately
voting as a class, will be entitled to elect one additional director of
InterDigital.
42
12. COMMON STOCK COMPENSATION PLANS AND WARRANTS
Stock Compensation Plans
InterDigital has stock-based compensation plans under which, depending on
the plan, directors, employees, consultants and advisors can receive stock
options, stock appreciation rights, restricted stock awards and other stock unit
awards.
Common Stock Option Plans
InterDigital has granted options under two incentive stock option plans,
four non-qualified stock option plans and one plan which provides for grants of
both incentive and non-qualified stock options to non-employee directors,
officers and employees of InterDigital and certain others, depending on the
plan. One incentive stock option plan, three non-qualified stock option plans
and the plan that allows for both incentive and non-qualified stock options are
authorized to grant options for up to 600,000, 2,035,600, 1,500,000, 2,000,000
and 4,000,000 shares, respectively of InterDigital's Common Stock. No further
grants are allowed under the remaining stock option plans. The Board of
Directors or a Committee of the Board determines the number of options to be
granted. The option prices are determined based on market prices 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 fair market value of the Common
Stock at the date of grant and incentive stock options granted become
exercisable at 20% per year beginning one year after date of grant and generally
remain exercisable for 10 years. Under the non-qualified option plans, options
are generally exercisable for a period of 10 years from the date of grant and
may vest on the grant date, another specified date or over a period of time. All
options granted under the plan which provides for both incentive and
non-qualified stock options to non-employee directors and grants awarded to
inventors most commonly vest in six bi-annual installments. All incentive
options granted under such plan have exercise prices of not less than 100% of
the fair market value of the Common Stock on the grant date in accordance with
Internal Revenue Code requirements.
SFAS No. 123 Disclosure
InterDigital has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). Accordingly, no compensation cost has been
recognized in the Statements of Operations for InterDigital's stock option
plans. Had compensation cost been calculated based on the fair value at the
grant due for awards in 1999, 1998 and 1997 consistent with the provision of
SFAS No. 123, InterDigital's net income (loss) and net income (loss) per share
would have been changed to the following pro forma amounts:
1999 1998 1997
---- ---- ----
Net income (loss) applicable to Common
Shareholders - as reported $26,451 $36,713 $(34,523)
Net income (loss) applicable to Common
Shareholders - pro forma $23,540 $32,837 $(37,894)
Net income (loss) per share - as reported - basic $ 0.55 $ 0.76 $ (0.72)
Net income (loss) per share - as reported - diluted $ 0.52 $ 0.75 $ (0.72)
Net income (loss) per share - pro forma - basic $ 0.49 $ 0.68 $ (0.79)
Net income (loss) per share - pro forma - diluted $ 0.47 $ 0.67 $ (0.79)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997; no dividend yield; expected
volatility of 125% for 1999, 83% for 1998, 70% for 1997, risk-free interest
rates of approximately 5.66%, 5.27% and 6.24% for 1999, 1998 and 1997,
respectively, and an expected option life of 4.40 years for 1999, 3.05
43
years for 1998 and 3.72 years for 1997. The weighted average fair value at the
date of grant for options granted during 1999, 1998 and 1997 is estimated as
$6.61, $3.05 and $2.89 per share, respectively.
The following table summarizes information regarding the stock options
outstanding at December 31, 1999 (in thousands, except per share amounts):
Information with respect to stock options under the above plans is summarized as
follows (in thousands, except per share amounts):
Weighted
Available Outstanding Options Average
for ------------------------ Exercise
Grant Number Price Range Price
----- ------ ----------- -----
BALANCE AT DECEMBER 31, 1996 5,604 4,389 $.01-$14.875 $7.14
Granted (2,539) 2,539 $4.375-$5.688 $5.45
Canceled 879 (879) $5.250-$14.500 $9.15
Exercised - (3) $0.600-$5.625 $4.79
BALANCE AT DECEMBER 31, 1997 3,944 $.01-$11.625 $6.14
Granted (608) 608 $3.250-$5.6875 $5.04
Canceled 715 (715) $5.375-$10.750 $3.13
Exercised - (153) $0.600-$5.625 $3.13
BALANCE AT DECEMBER 31, 1998 4,051 5,786 $.01-$11.625 $6.05
Granted (689) 689 $4.3750-$11.0 $7.49
Canceled 397 (397) $5.25-$10.5 $7.50
Exercised - (1,660) $0.1-$11.625 $5.77
-----
BALANCE AT DECEMBER 31, 1999 3,759 4,418 $.01-$11.625 $6.26
Common Stock Warrants
As of December 31, 1999, we had various warrants outstanding to purchase
3.0 million shares of Common Stock at exercise prices ranging from $2.50 to
$10.00 per share, with a weighted average exercise price of $5.37 per share. As
of December 31, 1999, all of these warrants were currently exercisable. These
warrants expire in various years through 2006. The exercise price and number of
shares of Common Stock to be obtained upon exercise of certain of these warrants
are subject to adjustment under certain conditions.
Restricted Stock
In 1999, we adopted the 1999 Restricted Stock Plan, under which we can
issue up to 1,500,000 shares of restricted common stock and restricted stock
units to directors, employees, consultants and advisors. As of December 31,
1999, we had 322,000 shares of restricted Common Stock issued and outstanding.
The restrictions lapse over periods ranging from 1.5 to 5.5 years from the date
of the grant. We recorded unearned compensation of $1.9 million for the value of
the restricted stock, which is being amortized over the respective vesting
periods. We also accrued a $1.3 million liability in 1999 for the pro-rata share
of the estimated liability associated with certain tax reimbursement features of
this Plan. We are in the process of replacing the tax reimbursement features
related to certain of the grants with restricted stock unit grants.
13. SHAREHOLDER RIGHTS PLAN
In December 1996, InterDigital's Board of Directors declared a distribution
under its Shareholder Rights Plan of one right for each outstanding common share
of InterDigital to shareholders of record as the close of business on January 3,
1997. In addition, any new common shares issued after January 4, 1997 will
receive one right for each common share. The Plan was amended in a number of
respects in March 2000. As amended, each right entitles shareholders to buy one
one-thousandth of a share of Series B Junior Participating Preferred Stock at a
purchase price of $250 per share, subject to adjustment. Ordinarily, the rights
will not be exercisable until 10 days after a non-exempt person or group owns or
acquires more than 10% of InterDigital's outstanding Common Stock or a
non-exempt person or group begins an offer for 10% or more of InterDigital's
outstanding Common Stock or after a non-exempt person or group publicly
announces an intent to acquire control over InterDigital and proposes in a proxy
or consent solicitation to elect such a number of directors which, if elected,
would represent a majority of the directors when compared with the Independent
Directors continuing to serve on the Board. In general, in the event that
InterDigital is acquired in a merger or other business combination interaction,
each holder of a right will have the right to receive, upon exercise, Units of
Preferred Stock (or, in certain circumstances, Company Common Stock, cash,
property, or other securities of InterDigital) having a current market value
equal to two times the exercise price of the Right.
14. INCOME TAXES:
The 1999 income tax provision includes a federal alternative minimum tax
provision of $0.6 million and a foreign withholding tax provision of $2.6
million. The 1998 income tax provisions includes a federal alternative minimum
tax provision of $0.9 million, a foreign withholding tax provision of $8.3
million. The 1997 income tax provision includes a current state tax provision of
$34,000.
At December 31, 1999, InterDigital had net operating loss carryforwards of
approximately $95.6 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, 1999.
44
The net operating loss carryforwards are scheduled to expire as follows:
2002 $ 6.8 million
2003 18.2 million
2004 20.0 million
2005 11.9 million
thereafter 38.7 million
-------------
$95.6 million
=============
Pursuant to the Tax Reform Act of 1986, annual use of InterDigital's net
operating loss and credit carryforwards may be limited if a cumulative change in
ownership of more than 50% occurs within a three-year period. The annual
limitation is generally equal to the product of (x) the aggregate fair market
value of InterDigital's stock immediately before the ownership change times (y)
the "long-term tax exempt rate" (within the meaning of Section 382(f) of the
Code) in effect at that time. InterDigital believes that no ownership change for
purposes of Section 382 occurred up to and including December 31, 1999.
InterDigital's calculations reflect the adoption of new Treasury Regulations
which became effective on November 4, 1992 and which have beneficial effects
regarding the treatment of options and other aspects of the ownership change
calculation.
45
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Cash Equivalent and Investments.
We do not use derivative financial instruments in our investment portfolio.
We place our investments in instruments that meet high credit quality standards,
as specified in our investment policy guidelines. This policy also limits the
amount of credit exposure to any one issue, issuer, and type of instrument. We
do not expect any material loss with respect to its investment portfolio.
The following table provides information about our investment portfolio.
For investment securities, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates. All investment
securities are expected to mature in 2000.
(in thousands)
Cash equivalents...................................$14,592
Average interest rate...............................5.5%
Short-term investments..............................68,550
Average interest rate...............................5.2%
Total portfolio....................................$83,142
Average interest rate...............................5.3%
Long-term Debt.
The table below sets forth information about our long-term debt obligation,
by expected maturity dates.
Expected Maturity Date
December 31,
---------------------------------------------------------------------------------------------
2000 2001 2002 2003 and beyond Total Fair Value
---- ---- ---- --------------- ----- ----------
Fixed Rate $446,000 $326,000 $146,000 $2,087,000 $3,005,000 $3,005,000
Weighted Average 8.51% 7.41% 8.30% 8.28% 8.50%
Interest Rate
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
46
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF INTERDIGITAL
Information concerning executive officers appears under the caption Item 1.
"Business. Executive Officers" 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 2002 Annual Meeting" to but not
including "-Committees and Meetings of the Board of Directors" in InterDigital's
proxy statement to be filed with the Commission within 120 days after the close
of InterDigital's fiscal year ended December 31, 1999 and forwarded to
shareholders prior to the 2000 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" 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" 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 TRANSACTION
None.
47
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT OF SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this Form 10-K:
(1) Financial Statements
(2) Financial Statements
(3) The Index to Financial Statements and Schedules and the Financial
Statements begin on page 27.
*2.1 Plan of Merger by and among InterDigital, Patents Corp. and
Merger Co. dated as of August 16, 1996 (Exhibit 2 to
InterDigital's Registration Statement No. 333-10521 filed on
August 20, 1996).
2.2 Plan of Merger by and between InterDigital and Patents Corp.
dated December 3, 1999.
*3.1 Restated Articles of Incorporation, (Exhibit 3.1 to
InterDigital's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1996).
3.2 By-laws, as amended March 2, 2000.
*4.1 Rights Agreement between InterDigital and American Stock Transfer
& Trust CO., ("AST") (Exhibit 4 to InterDigital's Current Report
on Form 8-K filed on December 31, 1987).
*4.2 Amendment No. 1 to the Rights Agreement between InterDigital and
AST (Exhibit 4.2 to InterDigital's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997).
*4.3 Amendment No. 2 to the Rights Agreement between InterDigital and
AST (Exhibit 4.3 to the June 1997 Form 10-Q).
4.4 Amendment No. 3 to the Rights Agreement between InterDigital and
AST.
*10.1 Non-Qualified Stock Option Plan, as amended (Exhibit 10.4 to
InterDigital's Annual Report on Form 10-K for the year ended
December 31, 1991).
*10.2 Intellectual Property License Agreement between InterDigital and
Hughes Network Systems, Inc. (Exhibit 10.39 to InterDigital's
Registration Statement No. 33-28253 filed on April 18, 1989).
*10.3 1992 License Agreement dated February 29, 1992 between
InterDigital and Hughes Network Systems, Inc. (Exhibit 10.3 to
InterDigital's Current Report on Form 8-K dated February 29, 1992
(the "February 1992 Form 8-K")).
*10.4 E-TDMA License Agreement dated February 29, 1992 between
InterDigital and Hughes Network Systems, Inc. (Exhibit 10.4 to
the February 1992 Form 8-K).
*10.5 1992 Non-Qualified Stock Option Plan (Exhibit 10.1 to
InterDigital's Current Report on Form 8-K dated October 21,
1992).
*10.6 1992 Employee Stock Option Plan (Exhibit 10.71 to InterDigital's
Annual Report on Form 10-K for the year ended December 31, 1992).
48
*10.7 1995 Employee Stock Option Plan, as amended (Exhibit 10.7 to
InterDigital's Annual Report on Form 10-K for the year ended
December 31, 1997(the "1997 Form 10-K")).
*10.8 1997 Stock Option Plan for Non-Employee Directors (Exhibit 10.34
to InterDigital's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1997 (the "September 1997 Form
10-Q")).
*10.9 Amendment #2 to the Employee Stock Purchase Plan (Exhibit 10.9 to
the 1997 Form 10-K).
*10.10 Amendment #1 to the Employee Stock Purchase Plan (Appendix to
InterDigital's Proxy Statement filed May 23, 1996).
*10.11 Employee Stock Purchase Plan (Exhibit 10.52 to InterDigital's
Registration Statement No. 33-65630 filed June 6, 1993).
*10.12 Master Agreement among InterDigital, ITC, and Siemens dated
December 16, 1994 (Exhibit 99.1 to InterDigital's Current Report
on Form 8-K dated December 16, 1994 the ("December 1994 8-K")).**
*10.13 Patent License Agreement among InterDigital, ITC and Siemens
dated December 16, 1994 (Exhibit 99.2 to the December 1994 Form
8-K).**
*10.14 TDMA/CDMA Development and Technical Assistance Agreement between
InterDigital and Siemens dated December 16, 1994 (Exhibit 99.3 to
the December 1994 Form 8-K).**
*10.15 Cooperation Agreement between InterDigital and Siemens dated
December 1994 (Exhibit 99.5 to the December 16, 1994 Form 8-K).**
*10.16 ASIC Design and Development Agreement dated February 12, 1996 by
and between InterDigital Communications Corporation and LSI Logic
Corporation (Exhibit 10.19 to InterDigital's Annual Report on
Form 10-K for the year ended December 31, 1996 (the "1996 Form
10-K")).
*10.17 Employment Agreement dated February 25, 1997 by and between
InterDigital Communications Corporation and Howard E. Goldberg
(Exhibit 10.24 to the 1996 Form 10-K).
*10.18 Employment Agreement dated November 18, 1996 by and between
InterDigital Communications Corporation and Charles Tilden
(Exhibit 10.26 to the 1996 Form 10-K).
*10.19 Employment Agreement dated June, 1997 by and between InterDigital
and Joseph Gifford (Exhibit 10.33 to the September 1997 Form
10-Q).
*10.20 Employment Agreement dated May 7, 1997 between InterDigital and
Mark Lemmo (Exhibit 10.32 to InterDigital's Quarterly Report for
the quarter ended March 31, 1997).
*10.21 Employment Agreement dated September 3, 1998 by and between
InterDigital and William Merritt (Exhibit 10.23 to InterDigital's
Annual Report on Form 10-K for the year ended December 31, 1998
(the "1998 Form 10-K")).
*10.22 Employment Agreement dated November 16, 1998 by and between
InterDigital and Richard Fagan (Exhibit 10.24 to the 1998 Form
10-K).
49
*10.23 Separation and Confidentiality Agreement dated September 23,
1999 by and between InterDigital and William A. Doyle (Exhibit
10.25 to InterDigital's Quarterly Report on Form 10Q for the
quarterly period ended September 30, 1999).
10.24 1999 Restricted Stock Plan.
10.25 Amendment to 1995 Stock Option Plan for Employees and Outside
Directors.
21 Subsidiaries of InterDigital.
23.1 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
- ---------------
* Incorporated by reference to the previous filing indicated.
** Confidential treatment has been granted for portions of these agreements.
(b) Reports filed on Form 8-K during the last quarter of 1999:
None.
50
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Charged
Balance to Costs Balance at
Beginning of and End of
Description Period Expenses Deductions Period
- ----------- ------ -------- --------- ------
1999
Allowance for
uncollectible accounts $975 -- $502 $473
1998
Allowance for
uncollectible accounts $897 $ 87 $ 6 $975
1997
Allowance for
uncollectible accounts $558 $ 508 $169 $897
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, InterDigital has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 29th day of
March, 2000.
INTERDIGITAL COMMUNICATIONS
CORPORATION
By: /s/Howard E. Goldberg
-------------------------------------------------
Howard E. Goldberg
Interim President and Principal Executive Officer
By: /s/Richard J. Fagan
-------------------------------------------------
Richard J. Fagan
Executive Vice President and
Chief Financial Officer
52
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of InterDigital and in
the capacities and on the dates indicated.
Date: March 29, 2000 /s/ D. Ridgely Bolgiano
------------------------------------
D. Ridgely Bolgiano, Director
Date: March 29, 2000 /s/ Harry Campagna
------------------------------------
Harry Campagna, Director
Date: March 29, 2000 /s/ Steven Clontz
------------------------------------
Steven Clontz, Director
Date: March 29, 2000 /s/ Joseph S. Colson, Jr.
------------------------------------
Joseph S. Colson, Jr., Director
Date: March 29, 2000 /s/ Robert Roath
------------------------------------
Robert Roath, Director
53
EXHIBIT INDEX
Exhibit No. Description
2.2 Plan of Merger by and between InterDigital and Patents Corp.
dated December 3, 1999.
3.2 By-laws, as amended March 2, 2000.
4.4 Amendment No. 3 to the Rights Agreement between InterDigital
and Ast.
10.23 1999 Restricted Stock Plan.
10.25 Amendment to the 1995 Stock Option Plan for Employees and
Outside Directors.
21 Subsidiaries of InterDigital.
23.1 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
54