UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission File Number 1-11152
INTERDIGITAL COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1882087
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
781 Third Avenue, King of Prussia, PA 19406
-------------------------------------------
(Address of principal executive offices) (Zip Code)
(610) 878-7800
--------------
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $.01 per share 48,167,389 shares
- -------------------------------------- ----------------------------
Class Outstanding at July 31, 1997
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX
PAGE
----
Part I - Financial Information:
Item 1. Consolidated Financial Statements 3
Consolidated Balance Sheets - 3
December 31, 1996 and June 30, 1997 (unaudited)
Consolidated Statements of Operations - 4
Three and Six Months Ended June 30, 1996 and 1997
(unaudited)
Consolidated Statements of Cash Flows - 5
Six Months Ended June 30, 1996 and 1997 (unaudited)
Notes to Consolidated Financial Statements 6
Item 1I. Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
Part II - Other Information:
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
DECEMBER 31, JUNE 30,
ASSETS 1996 1997
------------ --------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents, including restricted
cash of $204 and $209 respectively $ 11,954 $ 15,320
Short term investments 43,063 17,317
Accounts receivable, net of allowance for
uncollectable accounts of $558 and $546 13,921 8,730
Inventories 13,863 7,999
Other current assets 3,913 11,763
--------- ---------
Total current assets 86,714 61,129
--------- ---------
Property, plant and equipment, net of accumulated
depreciation of $8,383 and $9,865, respectively 10,517 10,662
Patents, net of accumulated amortization of
$4,152 and $4,513 respectively 9,753 9,520
Long term deposits 3,822 4,035
Other 1,830 1,834
--------- ---------
25,922 26,051
--------- ---------
$ 112,636 $ 87,180
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt $ 790 $ 807
Accounts payable 15,127 5,775
Accrued compensation and related expenses 3,551 4,498
Deferred revenue 4,790 3,105
Other accrued expenses 5,380 6,107
--------- ---------
Total current liabilities 29,638 20,292
--------- ---------
LONG TERM DEBT 4,221 3,929
--------- ---------
OTHER LONG TERM LIABILITIES 6,270 4,657
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 3)
SHAREHOLDERS' EQUITY:
Preferred Stock, $ .10 par value, 14,399 shares
authorized $2.50 Convertible
Preferred, 103 shares and 102 shares
issued and outstanding 10 10
Common Stock, $.01 par value, 75,000 shares
authorized, 48,109 shares and 48,167 shares
issued and outstanding 481 481
Additional paid-in capital 234,245 234,496
Accumulated deficit (162,229) (176,685)
--------- ---------
Total shareholders' equity 72,507 58,302
--------- ---------
$112,636 $ 87,180
========= =========
The accompanying notes are an integral part of these statements.
3
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ------------------
1996 1997 1996 1997
---- ---- ---- ----
REVENUES:
UltraPhone product revenues $ 5,007 $ 16,442 $ 6,834 $ 40,218
Licensing and alliance 9,107 1,768 24,707 3,955
-------- -------- ------- --------
14,114 18,210 31,541 44,173
-------- -------- ------- --------
OPERATING EXPENSES:
Cost of UltraPhone revenues 5,020 14,765 7,897 35,731
Sales and marketing 1,143 2,118 1,916 4,191
General and administrative 2,283 3,367 5,453 6,638
Product development 4,835 6,451 9,166 12,702
-------- -------- ------- --------
13,281 26,701 24,432 59,262
-------- -------- ------- --------
Income (loss) from operations 833 (8,491) 7,109 (15,089)
OTHER INCOME (EXPENSE):
Interest income 956 665 2,071 1,023
Interest and financing expenses (44) (108) (77) (228)
-------- -------- ------- --------
Income (loss) before income taxes and
minority interest 1,744 (7,934) 9,103 (14,294)
INCOME TAX PROVISION (998) (17) (3,505) (34)
-------- -------- ------- --------
Income (loss) before minority interest 747 (7,951) 5,598 (14,328)
MINORITY INTEREST (4) -- (891) --
-------- -------- ------- --------
Net income (loss) 743 (7,951) 4,707 (14,328)
PREFERRED STOCK DIVIDENDS (66) (63) (132) (128)
-------- -------- ------- --------
NET INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS $ 677 $ (8,014) $ 4,575 $(14,456)
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE $ 0.01 $ (0.17) $ 0.10 $ (0.30)
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 48,572 48,161 47,931 48,138
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
4
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the six months ended June 30,
---------------------------------
1996 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,707 $(14,456)
Adjustments to reconcile net income (loss) to net
cash used for operating activities-
Minority interest in subsidiary 891 --
Depreciation and amortization 898 2,346
Other (80) (1,614)
Decrease (increase) in assets-
Receivables (2,942) 5,191
Inventories 102 5,865
Other current assets (4,195) (7,850)
Increase (decrease) in liabilities-
Accounts payable 2,367 (9,351)
Accrued compensation (301) 947
Deferred revenue 7,601 (1,685)
Other accrued expenses 6,012 727
-------- --------
Net cash used for operating activities $ 15,060 $(19,880)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in short-term investments $ (7,262) $ 25,746
Additions to property and equipment, net of non-cash additions
of $0 and $ 141, respectively (2,110) (1,486)
Additions to patents (248) (489)
Other non-current assets (2,881) (360)
-------- --------
Net cash provided by investing activities $(12,501) $ 23,411
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sales of Common Stock
and exercises of stock options and warrants $ 8,621 $ 251
Payments on long-term debt, including capital lease obligations (301) (416)
-------- --------
Net cash provided by financing activities $ 8,320 $ (165)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 10,879 $ 3,366
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,427 11,954
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 20,306 $ 15,320
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 63 $ 158
======== ========
Income taxes paid, excluding foreign withholding taxes $ 308 $ 104
======== ========
The accompanying notes are an integral part of these statements.
5
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. BACKGROUND:
InterDigital Communications Corporation ("InterDigital"(R) or the
"Company"), a public corporation incorporated in the Commonwealth of
Pennsylvania, develops and markets advanced digital wireless telecommunications
systems using proprietary technologies for voice and data communications and has
developed an extensive patent portfolio related to those technologies. The
Company offers its customers, licensees and alliance partners what it believes
is unique access to both time division multiple access ("TDMA") and Broadband
Code Division Multiple Access(TM) ("B-CDMA"(TM)) proprietary digital wireless
technology.
The Company's principal product is the UltraPhone(R) system, a radio
telephone system providing businesses and households access to basic telephone
service through a wireless local loop. The UltraPhone system offers greater
flexibility and ease of installation than conventional wireline-based systems
and is designed to provide high transmission quality, capacity and spectrum
efficiency. The UltraPhone system, which incorporates the Company's proprietary
TDMA technology, is sold predominantly to foreign telephone companies to provide
basic telephone service to their customers, primarily in rural and near-urban
areas, where the cost of, or time required for, installing, upgrading or
maintaining conventional wireline telephone service supports selection of an
UltraPhone system. Sales of UltraPhone systems accounted for approximately 40%,
20% and 47%, respectively, of the total revenues of the Company during 1994,
1995 and 1996. Through June 30, 1997, the Company has sold over 345 UltraPhone
systems worldwide, with aggregate UltraPhone product revenue totaling over $200
million.
The Company and its alliance partners are developing a new air interface
technology and products, based on the Company's patented B-CDMA technology and
other proprietary technologies. The initial phases of the development effort are
oriented towards development of wireless local loop products with performance
and cost characteristics applicable to a market segment distinct from the
Company's UltraPhone system. The Company has started to market its new
TrueLink(TM) wireless local loop product based on the Company's proprietary
B-CDMA technology.
InterDigital Technology Corporation ("ITC"), a wholly-owned subsidiary, and
the Company, together, offer non-exclusive, royalty-bearing patent, technology
and know-how licenses to telecommunications manufacturers that manufacture, use
or sell, or intend to manufacture, use or sell, equipment that utilizes the
Company's extensive portfolio of TDMA, code division multiple access ("CDMA")
and other patented technologies. These efforts have resulted in patent license
agreements with a total of thirteen entities, the recognition of $28.7 million,
$67.7 million and $28.7 million of licensing revenue in 1994, 1995 and 1996,
respectively.
2. BASIS OF PRESENTATION:
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal,
recurring adjustments) necessary to present fairly the Company's financial
position as of June 30, 1997 and the results of their operations for the three
and six month periods ended June 30, 1996 and 1997 and cash flows for the six
month periods ended June 30, 1996 and 1997. The accompanying unaudited
consolidated financial statements have been prepared in accordance with the
instructions for Form 10-Q and accordingly do not include all of the detailed
schedules, information and notes necessary for a fair presentation of financial
condition, results of operations and cash flows in conformity with generally
accepted accounting principles. Therefore, these financial statements should be
6
read in conjunction with the financial statements and notes thereto contained in
the Company's latest annual report on Form 10-K filed with the Securities and
Exchange Commission. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the entire year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. CONTINGENCIES:
IDC and ITC are variously parties to certain patent-related litigation in
which ITC is asserting that certain third parties infringe ITC's patents. ITC
generally is seeking injunctive relief and monetary damages. The alleged
infringers generally seek declarations that their products do not infringe ITC's
patents or that ITC's patents in suit are invalid. In one such action involving
Motorola, Inc., a Court of Appeals has partially overturned a U.S. District
Court decision by reinstating two claims that had previously been held invalid.
The Court of Appeals also affirmed the validity of three other claims, affirmed
the invalidity of nineteen claims, and denied ITC's request for a new trial as
to validity and infringement issues. ITC is presently requesting a rehearing in
the Court of Appeals, and is considering an appeal to the United States Supreme
Court. In another action, the Court had stayed the proceeding at the request of
the parties pending a decision by the Court of Appeals on the Motorola case. The
parties are in the process of requesting a continuance of the stay pending a
decision by the Court of Appeals on ITC's Petition for Rehearing. ITC is also
involved in administrative proceedings in which various parties have challenged
the validity of ITC's patents.
In addition to litigation associated with patent enforcement and licensing
activities and the other litigation described above, the Company is a party to
certain legal actions arising in the ordinary course of its business.
4. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
The Company considers investments purchased with an remaining maturity of
three months or less to be cash equivalents for purposes of the statements of
cash flows. The Company invests its excess cash in various time deposits and
marketable securities, which are included in cash and cash equivalents, as
follows (in thousands):
December 31, June 30,
1996 1997
----------- ----------
Money market funds and demand deposits $ 2,871 $11,049
Certificates of deposit 204 ---
Repurchase agreements 1,457 437
Commercial paper 7,422 3,834
------ ------
$11,954 $15,320
====== ======
The repurchase agreements are fully collateralized by United States
Government securities and are stated at cost which approximates fair market
value.
Short-term investments available for sale as of December 31, 1996 consisted
of $26.0 million in government-issued discount notes, $2.8 million in municipal
securities and $14.2 million in corporate debt securities. Short-term
investments available for sale as of June 30, 1997 consisted of $7.7 million in
government-issued discount notes, $2.9 million in municipal securities and $6.7
million in corporate debt securities.
7
5. MAJOR CUSTOMERS AND GEOGRAPHIC DATA:
UltraPhone Equipment Revenue:
In fiscal 1996, the Company's Philippine and Indonesian customers
represented 56% and 16%, of UltraPhone product revenues, respectively. For the
three months ended June 30, 1996, the Company's Philippine and Puerto Rican
customers accounted for 66% and 14% of UltraPhone product revenues,
respectively. For the three months ended June 30, 1997, the Company's Indonesian
customer accounted for 83% of UltraPhone product revenues. For the six months
ended June 30, 1996, the Company's Philippine, Puerto Rican and Myanmarian
customers accounted for 54%, 15% and 12%, respectively, of UltraPhone product
revenues. For the six months ended June 30, 1997, the Company's Indonesian
customer accounted for 80% of UltraPhone product revenues.
UltraPhone product revenues by geographic area are as follows (in
thousands):
Three Months Six Months
Ended Ended
June 30, June 30,
1996 1997 1996 1997
---- ---- ---- ----
Domestic $ 491 $ 330 $ 940 $ 578
Foreign 4,516 16,112 5,894 39,640
======= ======= ======= =======
$ 5,007 $16,442 $ 6,834 $40,218
======= ======= ======= =======
Licensing and Alliance Revenue:
During the three months ended June 30, 1996, ITC recognized $7.5 million
related to the Samsung agreements and $1.6 million related to the Siemens
agreements. The Licensing and Alliance revenues for the three months ended June
30, 1997 include $704,000 from Samsung, $264,000 of recurring royalty revenue
from one licensee and $800,000 from Siemens. During the six months ended June
30, 1996, the Company recognized $21.5 million of revenue related to its
agreements with Siemens. During the six months ended June 30, 1997, Licensing
and Alliance revenues include $1.4 million from Samsung, $1.6 million from
Siemens and $947,000 of recurring royalty revenue from one licensee.
6. NET INCOME PER COMMON SHARE:
The net income per share is based upon the weighted average common shares
outstanding during the period adjusted for cumulative dividends on $2.50
Preferred Stock. Stock options and warrants have been considered as common stock
equivalents and have been included in the computation for the three and six
month periods for 1996 since their effect is dilutive. (See Item 6, Exhibit 11 -
Computation of Net Income Per Share.)
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
per Share," which supersedes APB Opinion No. 15 "Earnings per Share", was issued
in February 1997. SFAS 128 requires dual presentation of basic and diluted
earnings per share (EPS) for complex capital structures on the face of the
income statement. Basic EPS is computed by dividing income by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution from the exercise or conversion of stock options and
other securities into common stock. SFAS 128 is required to be adopted for year
end 1997; earlier application is not permitted. The Company does not expect any
material change to the current period presentation of EPS; there was no effect
of this accounting change on previously reported EPS for the three and six
months ended June 30, 1996.
8
7. INVENTORIES:
December 31, June 30,
1996 1997
---- ----
(In thousands)
Component parts and work-in-progress $11,640 $7,715
Finished goods 2,223 284
======== =======
$13,863 $7,999
======== =======
Inventories are stated net of valuation reserves of $5.9 million and $6.3
million as of December 31, 1996 and June 30, 1997, respectively.
8. LONG-TERM DEBT:
During the second quarter of 1996, the Company purchased its King of
Prussia facility for $3.7 million. The Company paid cash of $930,000 and
arranged a 16 year mortgage of $2.8 million with interest payable at a rate of
8.28% per annum. The entire cost of the land and buildings purchased, as well as
the improvements made to the building, have been classified as Land, Building
and Improvements within the property section of the balance sheet. The mortgage
has been classified as long-term debt on the balance sheet, with $95,000
classified as current portion of Long-term Debt.
9. INCOME TAXES:
Effective January 1, 1991, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes".
The income provision for the three months ended June 30, 1996 consists of a
current foreign withholding tax provision of $990,000, a current state tax
provision of $3,000 and a Federal Alternative Minimum Tax provision of $5,000.
The income tax provision for the three months ended June 30, 1997 consisted of a
current state tax provision of $17,000. For the six months ended June 30, 1996,
the income tax provision consisted of a foreign withholding tax provision of
$3.3 million, a current state tax provision of $114,000 and a Federal
Alternative Minimum Tax provision of $91,000. The income tax provision for the
six months ended June 30, 1997 consisted of a current state provision of
$34,000. At December 31, 1996, the Company had net operating loss carryforwards
of approximately $100 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 June 30, 1997.
Pursuant to the Tax Reform Act of 1986, annual use of the Company's net
operating loss and credit carryforwards may be limited if a cumulative change in
ownership of more than 50% occurs within a three-year period. The annual
limitation is generally equal to the product of (x) the aggregate fair market
value of the Company's stock immediately before the ownership change times (y)
the "long-term tax exempt rate" (within the meaning of Section 382(f) of the
Code) in effect at that time. The Company believes that no ownership change for
purposes of Section 382 occurred up to and including June 30, 1997. The
Company's calculations reflect the adoption of new Treasury Regulations which
became effective on November 4, 1992 and which have beneficial effects regarding
the treatment of options and other aspects of the ownership change calculation.
9
10. MYANMAR CONTRACT:
On May 16, 1997, the Company signed a contract with Myanma Posts and
Telecommunications (MPT) in the Union of Myanmar, for UltraPhone systems, B-CDMA
equipment and related telecommunications equipment. The value in the agreement
is $250 million, including UltraPhone systems, infrastructure equipment and
services, as well as capital costs for a manufacturing facility to be built in
Myanmar. The agreement calls for establishment of a joint venture in Myanmar
between InterDigital and MPT for local manufacture of UltraPhone systems and
other infrastructure equipment. In addition, the agreement provides an option
for the joint venture to manufacture InterDigital's B-CDMA technology products.
The agreement is subject to certain Myanmar governmental approvals, and
finalization of the financing documents, the joint venture agreement, certain
pricing, payment and other terms.
11. SHAREHOLDER RIGHTS PLAN
In December 1996, the Company's Board of Directors adopted a Shareholder
Rights Plan and declared a distribution of one right ("Right") for each
outstanding common share of the Company to shareholders of record as of the
close of business on January 3, 1997. In addition, each share of common stock
issued after January 3, 1997 will receive one right for each common share. Each
right entitles the registered holder, subject to the terms of a Rights
Agreement, to buy one one-thousandth of a share of Series B Junior Participating
Preferred Stock at a purchase price of $45 per Right, subject to adjustment. The
Plan provides that the threshold for triggering subsequent distribution of the
rights is 10 days following the acquisition by a non-exempt person as a result
of which such person becomes the beneficial owner of 15% or more of then
outstanding shares of Company Common Stock, or 10 days following commencement of
an offer to acquire 15% or more of the then outstanding shares of Company Common
Stock. In May and July 1997, the Company's Board of Directors increased the
percentage applicable to one of its investors, provided that investor remains a
passive investor eligible to file a Schedule 13G, to 16% and 18%, respectively.
In the event that (i) the Company is the surviving corporation in a merger with
an acquiring person and shares of Company Common Stock shall remain outstanding,
(ii) a person becomes the beneficial owner of 15% (or with respect to the
aforementioned investor, 18%) or more of the then outstanding shares of Company
Common Stock, (iii) an acquiring person engages in one or more "self-dealing"
transactions as set forth in the Rights Agreement, or (iv) during such time
there is an acquiring person, an event occurs which results in such acquiring
person's ownership interest being increased by more than 1% (e.g. by means of a
reverse stock split or recapitalization), then in each case, each holder of a
Right (other than those held by an acquiring person) will thereafter have the
right to receive, upon exercise, Units of Preferred Stock (or, in certain
circumstances, Company Common Stock, cash, property or other securities of the
Company) having a current market value equal to two times the exercise price of
the Right.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FINANCIAL POSITION, LIQUIDITY AND CAPITAL REQUIREMENTS
Overview
The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto, contained elsewhere in this
document.
The Company's ability to derive revenue from product sales will be affected
by, among other things, the intensified competition for sales of wireless local
loop telephone systems. Competing products and technologies have proliferated
and competitors, many of which have significantly greater resources than the
Company, are more actively promoting their products in the Company's target
markets. In spite of this competitive environment, the Company increased
UltraPhone system revenues in 1996 compared to 1995 by over 50% to nearly $25
million and built 1996 year-end product backlog to $80.7 million, including $43
million subsequently removed from backlog for the Pakistan contract (See
"Backlog"), from $20.0 million at December 31, 1995. These successes were
achieved by lowering UltraPhone system prices, offering the UltraPhone system in
conjunction with alliance partners, focusing on larger scale telecommunications
infrastructure programs and successfully marketing to the Company's existing
customer base in Indonesia. On large scale opportunities when commencement of
product delivery significantly lags contract negotiation and where deliveries
are expected to extend over a significant period of time, the Company is
actively marketing the UltraPhone system at sales prices which would generate
little, if any, margin based on the current cost characteristics of the system
configurations being proposed. In these situations, and in any additional
situations where the Company elects to accept similarly margined orders, it
would do so because of collateral profit potential, as next enumerated, or
because of other strategic positioning considerations. The Company believes that
any profit potential would primarily relate to design engineering to reduce
produce costs prior to delivery of the order, the expected positive effects on
vendor pricing of the increased production volume, change orders (including post
contract systems reconfiguration), post contract add-ons and systems expansions
and servicing, as well as follow on orders.
The Company anticipates that it will continuously need to reduce prices and
expand product features due to industry demands which will result in continued
pressure upon gross profit margins until such time as the Company is able to
reduce product costs by amounts significantly greater than the selling price
reductions. The Company has experienced and may continue to experience
engineering delays in the introduction of new, more efficient, lower cost system
components and other new enhancements or features. Given the possibility of
engineering delays and difficulties, and the continuing inability to sell
UltraPhone systems with a high cluster utilization, the Company can give no
assurance that it will be able to achieve sufficient product cost reductions or
otherwise achieve satisfactory gross profit margins. In addition, there can be
no assurance that the development costs necessary to achieve such potential
product cost reductions will be acceptable to the Company.
The Company does not currently have a material backlog of product orders.
(See "Backlog".) Accordingly, the Company cannot predict with certainty when it
will begin shipping any significant orders, and the volume of production and
shipments prior to that time may not fully absorb fixed manufacturing costs,
which would negatively affect gross margins. Additionally, the Company signed a
contract with MPT for $250 million which is currently not included in backlog.
The contract amount includes UltraPhone systems, infrastructure equipment and
services, as well as capital costs for a manufacturing facility to be built in
Myanmar. The contract is subject to certain Myanmar governmental approvals, and
finalization of the financing documents, the joint venture agreement, certain
pricing, payment and other terms.
In addition to the effects of varying selling prices and product material
costs, the Company's gross profit margin ratios are ordinarily affected by the
relative proportions of direct and distributor sales, by the average number of
subscribers per system sold, by its ability to absorb manufacturing overhead
costs through generation of sufficient production volume, and by the field
service costs for installation, warranty,
11
training and post-sale support. Consistent with industry practices,
distributor commissions have been included in both revenues and cost of sales.
Historically, the Company's gross profit margin from UltraPhone system sales has
been inadequate to support its operating and other expenses. The low sales
volumes experienced in recent years have resulted in production volumes which
were inadequate to fully absorb fixed production overhead costs, producing
negative gross margins.
Liquidity
The Company had working capital of $40.8 million at June 30, 1997 compared
to working capital of $57.1 million at December 31, 1996. The decrease in
working capital since December is due primarily to the operating cash needs of
the Company.
Demands on working capital in 1997 and beyond are expected to increase. The
Company expects to continue its B-CDMA technology development expenditures at
significant levels in order to commercialize its technology. Additional
expenditures are being incurred for marketing and other activities and
subsequent, substantial additional expenditures will be required to support
later stage development. Engineering efforts required to support the UltraPhone
product are also continuing at significant levels as the Company continues its
efforts to reduce the cost of the UltraPhone product and increase its market
share. Marketing, administrative and other costs are expected to increase as
well, as the Company seeks to more effectively support its alliance and
licensing program.
The Company's working capital requirements will depend on numerous
additional factors, including but not limited to the success of the Siemens and
Samsung relationships and the broader alliance strategy, the level of demand and
related margins for the UltraPhone system, the ability to generate license fees
and royalties, and the need to expend funds in connection with its patent
related activities. In addition, when the Company builds to specification to
complete an order, it traditionally experiences negative cash flows from
inception of its production ordering through customer payment at the time of, or
increasingly subsequent to, order shipment. If the Company were to experience
additional sudden and significant increases in orders to be built to
specification, it would intensify the need for significant short to intermediate
term financing arrangements. Also, the Company has ordered, and may continue to
order, inventory in support of anticipated shipments not currently supported by
shippable backlog (see "Backlog"). Should the Company incur a significant delay
in securing the applicable shippable backlog it would have a negative impact on
its cash resources.
Accordingly, absent significant increases in cash generated by operations,
the Company will, at some future date, require additional debt or equity
capitalization to fully support its technical and product development and
marketing activities and to fund its patent related activities. The Company
does not presently maintain bank lines of credit and may therefore, in such
event, seek to meet such needs through the sale of debt or equity securities.
There can be no assurance that the Company will be able to sell any such
securities when it needs to, or, if it can, that it will be able to do so on
terms acceptable to the Company.
The Company believes that its investment in inventories and non-current
assets are stated on its December 31, 1996 and June 30, 1997 balance sheets at
realizable values based on expected selling price and order volumes. Property
and equipment are currently being utilized in the Company's on-going business
activities, and the Company believes that no additional write-downs are required
at this time due to lack of use or technological obsolescence. With respect to
other assets, the Company believes that the value of its patents is at least
equal to the value included in the December 31, 1996 and June 30, 1997 balance
sheets.
Backlog
At June 30, 1997, the Company's backlog of orders for UltraPhone telephone
equipment and services was $1.4 million. All of the backlog is scheduled to be
delivered during the remainder of fiscal year 1997. Previously, the Company
included in backlog a $43 million order from Pakistan Telecommunications Company
Limited ("PTCL"). PTCL allowed the contract to lapse on July 17, 1997, when it
did not accept
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InterDigital's proposal to finance the order. The Company continues to work
through the issues associated with the contract but the Company cannot say with
any degree of certainty whether it will be able to reestablish the agreement.
Additionally, the Company signed a contract with MPT for $250 million which
is currently not included in backlog. The contract amount includes UltraPhone
and B-CDMA systems, infrastructure equipment and services, as well as capital
costs for a manufacturing facility to be built in Myanmar. The contract is
subject to certain Myanmar governmental approvals, and finalization of the
financing documents, the joint venture agreement, certain pricing, payment and
other terms. In any event, shipments during the remainder of 1997 will not be
significant due to lengthy materials procurement lead times.
At June 30, 1996, the Company's backlog of orders for UltraPhone telephone
equipment and services was $53.0 million.
Cash Flows and Financial Condition
The Company has experienced negative cash flows from operations during the
six months ended June 30, 1997. The negative cash flows from operations are
primarily due to expenses incurred for UltraPhone engineering and marketing,
B-CDMA technology development and the Company's general and administrative
activities.
Net cash flows from investing activities were positive for the six months
ended June 30, 1997 due to the conversion of some of the Company's short-term
investments into cash or cash equivalents. Notwithstanding the above, the amount
of cash used in investing activities has, historically, been low relative to
cash used in operations.
During the six months ended June 30, 1997, the Company experienced negative
cash flows of $165,000 from financing activities. The funds were used for
payments on long-term debt (including capital lease obligations) but were
partially offset by proceeds from the exercise of stock options and warrants and
the sale of stock through the Company's Employee Stock Purchase Plan.
Cash, cash equivalents and short-term investments of $32.6 million as of
June 30, 1997 includes $209,000 of restricted cash. The UltraPhone product
accounts receivable of $8.7 million at June 30, 1997 reflect amounts due from
normal trade receivables, including non-domestic open accounts, as well as funds
to be remitted under letters of credit. Of the outstanding trade receivables as
of June 30, 1997, $3.2 million has been collected through July 31, 1997.
Inventory levels at June 30, 1997 of $8.0 million have decreased as
compared to $13.9 million as of December 31, 1996, reflecting the shipment of
inventory for the Indonesian order. Inventories at December 31, 1996 and June
30, 1997 are stated net of valuation reserves of $5.9 million and $6.3 million,
respectively.
Included in other accrued expenses at June 30, 1997 are professional fees,
consulting and other accruals as well as sales taxes payable.
Results of Operations -- Second Quarter of 1997 Compared to the
Second Quarter of 1996
Total Revenues. Total revenues in the second quarter ended June 30, 1997
increased to $18.2 million from $14.1 million in the second quarter ended June
30, 1996 due to an increase in UltraPhone product sales. UltraPhone product
sales increased in the second quarter of 1997 to $16.4 million from $5.0 million
in the comparable quarter of 1996, partially offset by a decline in licensing
and alliance revenues to $1.8 million in the second quarter of 1997 as compared
to $9.1 million in the comparable quarter of the prior year.
During the second quarter of 1997, the Company recognized $704,000 of
Samsung revenue that related to the UltraPhone B-CDMA technology development
portion of the agreement. The Company also recognized $264,000 of recurring
royalty revenue during the second quarter of 1997 from one of its
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licensees. Additionally, the Company recognized revenue of $800,000 as part
of the Siemens series of agreements. During the second quarter of 1996, the
Company recognized $7.5 million as part of the Samsung agreements and $1.6
million as part of the Siemens series of agreements.
Cost of UltraPhone Product Revenues. The cost of UltraPhone sales for the second
quarter of 1997 increased to $14.8 million from $5.0 million for the second
quarter of 1996, primarily due to the increase in UltraPhone product revenues.
The Company had approximately 10.2% positive gross margin on UltraPhone system
sales for the quarter ended June 30, 1997 as compared to a break-even gross
margin for the quarter ended June 30, 1996. Due to the increased volume of
UltraPhone product revenues, manufacturing overhead expenses were more fully
absorbed. Additionally, the Company has been successful in reducing the cost of
the UltraPhone product and has gained efficiencies in the manufacturing process.
Included in cost of UltraPhone system sales are costs of product assembly,
integration and testing, distributor commissions, freight and tariffs, and
expenses associated with installation, support and warranty services related to
the UltraPhone systems. Also included in the cost of sales are any manufacturing
overhead expenses the Company has incurred that are not absorbed into inventory
based on the low volume of production during the quarter.
Other Operating Expenses. Other operating expenses include sales and marketing
expenses, general and administrative expenses and product development expenses.
Sales and marketing expenses increased 85% to $2.1 million during the
second quarter of 1997 as compared to $1.1 million during the second quarter of
1996. The increase is primarily due to an increase in commission expense due to
the increase in UltraPhone product revenues in the three month period of 1997
and increased staff and activity levels, including costs associated with
increasing activity related to the Company's B-CDMA based product.
General and administrative expenses for the second quarter of 1997
increased 47% to $3.4 million from $2.3 million for the second quarter of 1996.
The increase is primarily due to an increase in expenses related to severance
costs for the Company's former CEO during the 1997 period and corporate
communications activities.
Product development expenses for the second quarter of 1997 increased 33%
to $6.5 million as compared to $4.8 million during the second quarter of 1996.
Staff and activity levels devoted to the development of the B-CDMA technology
increased significantly.
Other Income and Expense. Interest income for the second quarter of 1997 was
$664,000 as compared to $1.0 million for the second quarter of 1996. The Company
had lower average invested cash balances in the 1997 period as compared to the
1996 period. Interest expense for the quarter ended June 30, 1997 was $108,000
as compared to $44,000 for the quarter ended June 30, 1996. The increase is due
primarily to the mortgage interest related to the Company's purchase of its King
of Prussia facilities in the second quarter of 1996.
Minority Interest. In December 1992, the Company sold 5.76% of the common shares
of InterDigital Patents Corporation ("Patents Corp,"), which had, prior thereto,
been a wholly-owned subsidiary of the Company. The Company recorded an increase
in minority interest in the second quarter of 1996 of $4,000. During September
1996, the Company reacquired the minority interest of Patents Corp. in exchange
for shares of the Company's Common Stock and will therefore no longer record a
change in the Minority Interest liability.
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Results of Operations -- Six Months Ended June 30, 1997 Compared to
Six Months Ended June 30, 1996
Total Revenues. Total revenues for the six months ended June 30, 1997 increased
40% to $44.2 million from $31.5 million for the six months ended June 30, 1996
primarily due to an increase in the amount of UltraPhone product revenues
partially offset by a decrease in Licensing and Alliance revenues. UltraPhone
equipment sales increased 488% during the six months ended June 30, 1997 to
$40.2 million from $6.8 million in the comparable period of 1996 primarily due
to the completion of shipments of the Indonesian order. License and Alliance
revenues for the six months ended June 30, 1997 includes $1.4 million as part of
the Samsung Agreements, $1.6 million as part of the Siemens Agreements and
$947,000 of recurring royalty revenue from one licensee. Licensing and Alliance
revenues for the six months ended June 30, 1996 includes $21.5 million as part
of the Samsung agreements and $3.2 million as part of the Siemens agreements.
Cost of UltraPhone Sales. The cost of UltraPhone equipment sales for the six
months ended June 30, 1997 increased 349% to $35.7 million from $7.9 million for
the six months ended June 30, 1996. The Company incurred a positive gross margin
on UltraPhone equipment sales of 11.1% for the six months ended June 30, 1997 as
compared to a negative gross margin of 15.5% for the six month period ended June
30, 1996. Included in cost of UltraPhone equipment sales are costs of product
assembly, integration and testing, distributor commissions, freight and tariffs,
and expenses associated with installation, support and warranty services related
to the UltraPhone systems, as well as the overhead expenses the Company has
incurred in maintaining its production resources that were not absorbed into
inventory due to the low volume of production. At low production levels, such as
those experienced in the first half of 1996, the Company incurs substantial
negative gross profit margins because production costs are spread over only a
limited number of units of production.
Other Operating Expenses. Other operating expenses include sales and marketing
expenses, general and administrative expenses and product development expenses.
Sales and marketing expenses increased 119% to $4.2 million during the six
months ended June 30, 1997 compared from $1.9 million during the six months
ended June 30, 1996. The increase is primarily due to increased commissions
expense, commensurate with the increase in UltraPhone system revenues and
increased levels of marketing and sales activities.
General and administrative expenses for the six months ended June 30, 1997
increased 22% to $6.6 million from $5.5 million for the six months ended June
30, 1996. The increase in general and administrative expense is due primarily to
higher activity levels.
Product development expenses increased 39% for the six months ended June
30, 1997 to $12.7 million from $9.2 million for the six months ended June 30,
1996. The increase over the prior year period is due primarily to increased
staff and activity levels devoted to the development of the B-CDMA technology
and the continued development of the Company's UltraPhone product.
Other Income and Expense. Interest income for the six months ended June 30, 1997
was $1.0 million as compared to $2.1 million for the six months ended June 30,
1996. The decrease is due primarily to lower average invested cash and
investment balances in 1997 compared to 1996. Interest expense for the six month
period ended June 30, 1997 was $228,000 as compared to $77,000 for the six month
period ended June 30, 1996. The increase is due primarily to the mortgage
interest related to the Company's purchase of its King of Prussia facilities in
the second quarter of 1996.
Minority Interest. In December 1992, the Company sold 5.76% of the common shares
of Patents Corp., which had, prior thereto, been a wholly-owned subsidiary of
the Company. The Company recorded $891,000 as an increase in minority interest
in the six months ended June 30, 1996 representing the minority interest's
portion of the net income of Patents Corp. for the six months ended June 30,
1996. During September 1996, the Company reacquired the minority interest of
Patents Corp. in exchange for
15
shares of the Company's Common Stock and will therefore no longer record a
change in the Minority Interest liability.
STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The foregoing Management's Discussion and Analysis and discussions of the
Company's business contain forward looking statements reflecting, among other
things, the Company's current beliefs, intentions and expectations as to its
objectives, including with respect to its contract with MPT, its contract with
PTCL and its backlog. Such statements are subject to risks and uncertainties.
The Company cautions the readers that important factors in some case have
affected and, in the future, could materially affect the Company's actual
results and cause the Company's actual results to differ materially from the
results expressed in any such forward looking statement. These factors include
but are not limited to: difficulties or delays in the development, production,
testing and marketing or sale of the Company's products; failure to consummate
the Myanmar contract due to inability to finalize the documentation, secure
acceptable financing, lack of governmental or regulatory approval, U.S.
sanctions or other governmental prohibitions, or other factors; the failure to
reestablish negotiations or renegotiate a mutually acceptable contract with
PTCL; the effects of, and changes in, foreign trade, monetary and fiscal
policies, laws and regulations or other activities of foreign and the United
States governments, agencies and similar organizations; and the availability of
competitive products superior on a perceived, relative or actual basis with the
Company's products. The Company undertakes no obligation to publicly update any
forward looking statements, whether as a result of new information, future
events or otherwise.
16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In July, 1997, the U.S. Court of Appeals for the Federal Circuit partially
overturned a U.S. District Court decision in the patent infringement case
between ITC and Motorola, Inc. by reinstating two claims that had previously
been held invalid. The Court of Appeals also affirmed the validity of three
other claims, affirmed the invalidity of nineteen claims, and denied ITC's
request for a new trial as to validity and infringement issues. ITC is presently
requesting a rehearing in the Court of Appeals, and is considering an appeal to
the United States Supreme Court.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on June 20, 1997, the
shareholders of the Company elected two directors of the Company and ratified
the appointment of Arthur Andersen LLP as the Company's independent accountants
for the year ending December 31, 1997. Messrs. William A. Doyle and D. Ridgely
Bolgiano were elected to serve as directors at the meeting. 45,400,867 shares
were voted in favor of Mr. Doyle, 483,684 shares being withheld, and 45,383,708
shares were voted in favor of Mr. Bolgiano, 500,843 shares being withheld.
Messrs. Harry G. Campagna, Barney Cacioppo and Robert S. Roath also continued to
serve their terms as directors. The vote ratifying the appointment of Arthur
Andersen LLP was 45,555,890 shares for, 161,444 shares against and 167,217
shares abstaining.
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Item 6. Exhibits and Reports on Form 8-K.
(a) The following is a list of exhibits filed as part of this Form 10-Q:
Exhibit 4.1 Rights Agreement between InterDigital Communications
Corporation and American Stock Transfer and Trust (Exhibit 4
to the Company's Current Report on Form 8-K filed on
December 13, 1987).
Exhibit 4.2 Amendment No. 1 to the Rights Agreement between InterDigital
Communications Corporation and American Stock Transfer and
Trust Company
Exhibit 4.3 Amendment No. 2 to the Rights Agreement between InterDigital
Communications Corporation and American Stock Transfer and
Trust Company
Exhibit 10.33 Employment Agreement dated May 7, 1997 by and between
InterDigital Communications Corporation and Joseph Gifford
Exhibit 11 Computation of Net Income Per Share
Exhibit 27 Financial Data Schedule
(b) The following is a list of Current Reports on Form 8-K filed during the
second quarter of 1997:
The Company filed a Current Report on Form 8-K dated April 7, 1997 under
Item 5 - Other Events, with a copy of its quarterly letter to shareholders.
No financial statements were filed with this report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERDIGITAL COMMUNICATIONS CORPORATION
Date: August 8, 1997 /s/ William A. Doyle
----------------------------------
William A. Doyle, President
Date: August 8, 1997 /s/ James W. Garrison
----------------------------------
James W. Garrison, Vice President
- Finance, Chief Financial
Officer and Treasurer
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