UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to
_________
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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
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(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (610) 878-7800
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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 48,336,420 shares
- -------------------------------------- -----------------------------
Class Outstanding at April 30, 1998
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX
PAGES
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Part I - Financial Information:
Item 1. Consolidated Financial Statements 3
Consolidated Balance Sheets - 3
December 31, 1997 and March 31, 1998 (unaudited)
Consolidated Statement of Operations - 4
Three Months Ended March 31, 1997 and 1998 (unaudited)
Consolidated Statements of Cash Flows - 5
Three Months Ended March 31, 1997 and 1998 (unaudited)
Notes to Consolidated Financial Statements 6
Item 1I. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K 13
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
DECEMBER 31, MARCH 31,
ASSETS 1997 1998
--------- ---------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents, including restricted
cash of $193 and $242 respectively ..................... $ 17,828 $ 9,236
Short term investments .................................... 7,976 13,074
Accounts receivable, net of allowance for
uncollectable accounts of $897 and $910, respectively .. 3,058 8,104
Inventories ............................................... 12,284 13,785
Other current assets ...................................... 5,428 5,438
--------- ---------
Total current assets ................................... 46,574 49,637
--------- ---------
Property, plant and equipment, net of accumulated
depreciation of $11,454 and $12,351, respectively ...... 11,373 10,677
Patents, net of accumulated amortization of
$5,579 and $5,926 respectively ......................... 9,292 9,405
Long term deposits ........................................ 519 223
Other ..................................................... 1,605 1,614
--------- ---------
22,789 21,919
--------- ---------
$ 69,363 $ 71,556
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt ......................... $ 869 $ 892
Accounts payable .......................................... 8,223 8,855
Accrued compensation and related expenses ................. 6,013 5,585
Deferred revenue .......................................... 3,461 7,401
Other accrued expenses .................................... 5,105 6,399
--------- ---------
Total current liabilities ............................... 23,671 29,132
--------- ---------
LONG TERM DEBT ............................................... 3,591 3,470
--------- ---------
OTHER LONG TERM LIABILITIES .................................. 3,596 2,144
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 2)
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,
48,158 shares and 48,245 shares issued and
outstanding ......................................... 482 482
Additional paid-in capital ................................ 234,765 234,813
Accumulated deficit ....................................... (196,752) (198,495)
--------- ---------
Total shareholders' equity ................................ 38,505 36,810
--------- ---------
$ 69,363 $ 71,556
========= =========
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
ENDED MARCH 31,
-----------------------
1997 1998
-------- --------
REVENUES:
Product $ 23,776 $ 2,163
Licensing and alliance 2,187 7,914
-------- --------
25,963 10,077
-------- --------
OPERATING EXPENSES:
Cost of product 20,965 2,602
Sales and marketing 2,074 1,067
General and administrative 2,170 1,689
Patents administration and licensing 1,101 2,265
Product development 6,251 3,883
-------- --------
32,561 11,506
-------- --------
Loss from operations (6,598) (1,429)
OTHER INCOME (EXPENSE):
Interest income 358 375
Interest and financing expenses (119) (102)
-------- --------
Loss before income taxes (6,359) (1,156)
INCOME TAX PROVISION (17) (523)
-------- --------
Net loss (6,376) (1,679)
PREFERRED STOCK DIVIDENDS (65) (64)
-------- --------
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS $ (6,441) $ (1,743)
======== ========
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.13) $ (0.04)
======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC AND DILUTED 48,114 48,237
======== ========
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 three months ended March 31,
------------------------------------
1997 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................... $ (6,441) $ (1,743)
Adjustments to reconcile net loss to net
cash used for operating activities-
Depreciation and amortization ........................... 1,157 1,244
Other ................................................... (820) (1,452)
Decrease (increase) in assets-
Receivables ..................................... (2,359) (5,046)
Inventories ..................................... 1,398 (1,501)
Other current assets ............................ (8,152) (10)
Increase (decrease) in liabilities-
Accounts payable ................................ (3,976) 632
Accrued compensation ............................ 113 (428)
Deferred revenue ................................ 1,722 3,940
Other accrued expenses .......................... 1,181 1,294
-------- --------
Net cash used for operating activities .................. $(16,177) $ (3,070)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in short-term investments ................. $ 20,642 $ (5,098)
Additions to property and equipment, net of non-cash additions
of $141 and $81, respectively .............................. (681) (81)
Additions to patents .......................................... (273) (460)
Other non-current assets ...................................... (152) 287
-------- --------
Net cash provided by (used for) investing activities .......... $ 19,536 $ (5,352)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sales of Common Stock
and exercises of stock options and warrants ................ $ 205 $ 48
Payments on long-term debt, including capital lease obligations (202) (218)
-------- --------
Net cash provided by (used for) financing activities .......... $ 3 $ (170)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .............. $ 3,362 $ (8,592)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .................... 11,954 17,828
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD .......................... $ 15,316 $ 9,236
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ................................................. $ 81 $ 78
======== ========
Income taxes paid ............................................. $ 15 $ 19
======== ========
The accompanying notes are an integral part of these statements.
5
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
1. 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 financial position of
InterDigital Communications Corporation (the "Company" or "InterDigital") as of
March 31, 1998, the results of its operations for the three month periods ended
March 31, 1997 and 1998, and its cash flows for the three month periods ended
March 31, 1997 and 1998. 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 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.
In January 1998, InterDigital announced that it had restructured its
operations to more fully concentrate on the commercialization of its Broadband
Code Division Multiple Access(TM) ("B-CDMA"(TM)) technology. As part of that
restructuring, InterDigital has significantly reduced its marketing, sales and
product redesign efforts relating to the UltraPhone(R) product. Despite such
reorientation, InterDigital continues to market the UltraPhone system in
selected markets around the world as an optimal solution to rural
telecommunications needs.
2. CONTINGENCIES:
InterDigital and InterDigital Technology Corporation ("ITC"), a
wholly-owned subsidiary, are parties to a certain patent-related litigation in
which ITC is asserting that a certain third party infringes ITC's patents. ITC
generally is seeking injunctive relief and monetary damages. The alleged
infringer generally seeks declarations that ITC's patents are invalid and/or
that its products do not infringe ITC's patents as well as monetary damages. 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. Based on
current information, Management believes that the outcomes of these matters will
not have a material impact on the Company's financial position or results of
operations.
3. 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):
6
December 31, March 31,
1997 1998
------- -------
Money market funds and demand deposits $ 8,979 $ 6,907
Repurchase agreements 7,856 534
Commercial paper 993 1,795
------- -------
$17,828 $ 9,236
======= =======
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, 1997 consisted
of $2.6 million in government-issued discount notes and $5.3 million in
corporate debt securities. Short-term investments available for sale as of March
31, 1998 consisted of $8.5 million in government-issued discount notes and $4.6
million in corporate debt securities.
4. MAJOR CUSTOMERS:
Product revenues by geographic area are as follows (in thousands):
Three Months
Ended
March 31,
-----------------------
1997 1998
---- ----
Domestic $ 256 $ 267
Foreign 23,520 1,896
======= =======
$23,776 $ 2,163
======= =======
In fiscal 1997, the Company's Indonesian and Philippine customers
represented 75% and 7% of UltraPhone product sales. Late in 1997, InterDigital
began shipping prototype units of its new TrueLink(TM) wireless local loop
product based on its B-CDMA technology to its alliance partners. In the three
months ended March 31, 1997, the Company's Indonesian and Philippine UltraPhone
customers accounted for 78% and 11% of total product revenues, respectively. In
the three months ended March 31, 1998, sales to the Company's alliance partners
accounted for 87% of total product revenues, which total includes $1.1 million
in TrueLink product and component sales.
Licensing and Alliance Revenue
The licensing and alliance revenues for the three months ended March 31,
1998 include alliance revenues of $852,000 from Samsung Electronics Co., Ltd.
("Samsung") and $1.3 million from Alcatel Espana ("Alcatel"). Also included is
$192,000 in recurring royalties from an existing licensee and $5.6 million from
a new licensee.
During the three months ended March 31, 1997, the Company recognized
$704,000 from Samsung, $683,000 of recurring royalty revenue from another
licensee and $800,000 from Siemens Aktiengesellschaft ("Siemens").
5. NET LOSS PER SHARE:
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share", effective the year ended December 31, 1997. This statement
requires the disclosure of both basic and diluted earnings per share as well as
the retroactive restatement of prior years' per share disclosures.
Options and warrants to purchase common stock were outstanding during the
three month period ended March 31, 1997 and 1998 but were not included in the
computation of diluted net loss per share because they are antidilutive.
7
6. INVENTORIES:
December 31, March 31,
1997 1998
---- ----
(In thousands)
Component parts and work-in-progress $10,249 $11,768
Finished goods 2,035 2,017
======= =======
$12,284 $13,785
======= =======
Inventories are stated net of valuation reserves of $5.8 million as of
December 31, 1997 and March 31, 1998.
7. INCOME TAXES:
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes".
The income tax provision for the three months ended March 31, 1998 includes
a current state tax expense of $17,800, a state tax refund of $49,855 from a
prior period and a current foreign withholding tax of $555,500.
The income tax provision for the three months ended March 31, 1997
consisted of a current state tax expense of $17,000. At December 31, 1997, the
Company had net operating loss carryforwards of approximately $135 million.
Since realization of the tax benefits associated with these carryforwards is not
assured, a valuation allowance of 100% of the potential tax benefit is recorded
as of March 31, 1998.
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 March 31, 1998.
8. NEW ACCOUNTING PRONOUNCEMENTS:
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 requires the reporting of comprehensive income in addition to net
income from operations. The Company has reviewed SFAS 130 and has determined
that for the quarters ended March 31, 1998 and 1997, no items meeting the
definition of comprehensive income, as specified in SFAS 130 existed in the
financial statements.
9. SUBSEQUENT EVENTS:
On April 17, 1998, InterDigital entered into a TDMA patent license with
Kyocera Corporation for an aggregate gross payment of $27.5 million. All of the
revenue associated with this payment will be recognized in the second quarter of
1998.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto, contained elsewhere in this
document.
InterDigital commenced operations in 1972 and until 1987 was primarily
engaged in research and development activities related to its TDMA wireless
digital communications technology. In 1986, InterDigital introduced the
UltraPhone system, a fixed digital wireless local loop telephone system
employing its patented and proprietary TDMA technology, which it began
installing in 1987. InterDigital's operations from 1987 through 1992 were
characterized by increasing revenues accompanied by significant operating
losses. In late 1992, InterDigital acquired by merger two related companies
whose business included research and development activities related to CDMA
wireless digital communications technology. Since that time, InterDigital has
invested substantial amounts in its B-CDMA development efforts.
In addition to its UltraPhone and B-CDMA business activities, in 1993,
InterDigital, together with ITC implemented a comprehensive license strategy
designed to capitalize upon the revenue potential of ITC's extensive TDMA and
CDMA patent portfolio. During 1994 and 1995, InterDigital, began to realize
positive results from these efforts by entering into its first major alliance
with Siemens and by entering into eleven additional license agreements. Despite
profitability in the first and second quarters and unprofitable operations in
the third and fourth quarters, InterDigital recognized a total of $67.7 million
of licensing and alliance revenue in 1995 enabling it to report its first and
only profitable fiscal year since its inception. During 1996, InterDigital
completed its second major alliance with Samsung and entered into one additional
license agreement, bringing the total number of licensees to thirteen. In 1996,
InterDigital was profitable in the first and second quarters and unprofitable in
the third and fourth quarters. The variability of 1995 and 1996 quarterly
operating results was due to the revenue related to up-front, non-refundable
payments pursuant to license and alliance agreements. In 1997, InterDigital was
unprofitable, primarily due to substantially increased investment in the
development of its B-CDMA technology. It recognized $49.8 million in revenues,
of which $4.4 million was derived from licensing revenue from its alliance
partners, and $1.6 million of recurring royalty fees from one licensee, and
$43.8 million from its product operations.
In 1997, InterDigital and its alliance partners started to engage in
pre-market planning activities associated with their new B-CDMA-based wireless
local loop products. During 1997, InterDigital had approximately $1.1 million of
sales related to prototype TrueLink products and component sales to its alliance
partners. These sales included B-CDMA ASICs (Application Specific Integrated
Circuits) and other components sold for integration into the alliance partners'
pre-production products. In January 1998, InterDigital announced that it had
restructured its operations to more fully concentrate on the commercialization
of its B-CDMA technology. As part of that restructuring, InterDigital announced
its plans to curtail its level of spending relating to the re-engineering and
next generation development efforts on the UltraPhone system and is not
currently pursuing additional UltraPhone product redesign efforts. In March
1998, InterDigital's TrueLink(TM) system was unveiled for commercial launch at
the CEBIT show. InterDigital expects field trials of the TrueLink product to
occur during 1998.
Through April, 1998, InterDigital entered into two additional patent
licenses with Sharp Corporation and Kyocera Corporation for aggregate gross
payments of $33 million. Of this amount, InterDigital recognized $5.6 million in
the first quarter of 1998, with the remaining portion to be recognized in the
second quarter of 1998. In addition, in March 1998, InterDigital entered into
its third alliance with Alcatel covering B-CDMA technology development, CDMA
patent licensing, trademark licensing, product development, technology transfer,
standards support and other areas of cooperation. This brought the total number
of licensees to sixteen. Under the terms of the Alcatel agreement, Alcatel
agreed to pay a technology transfer and services fee valued at approximately $25
million. Of this fee, $5.4 million was paid in March 1998. An additional $12.6
million is expected to be paid in the 1998-1999 time frame, based on the
achievement of certain product development and commercialization milestones. The
remaining fee is expected to be paid in conjunction with purchases of B-CDMA
ASICs through no later than December 31, 2003. The Company will recognize the
$25 million over time as the contract is performed. In the quarter ended March
31, 1998, the Company recognized $1.3 million of the $25 million. As part of the
transaction, Alcatel was also granted an option to purchase $22
9
million in InterDigital common stock on terms and conditions to be negotiated.
The exercise of this option may be dependent on the receipt of certain
InterDigital corporate approvals. InterDigital expects the variability in
licensing and alliance revenues and, consequently, its cash flow to continue
unless and until significant recurring royalties are received under the
applicable license and alliance agreements.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL REQUIREMENTS
Liquidity
The Company had working capital of $20.6 million at March 31, 1998 compared
to working capital of $22.9 million at December 31, 1997. The decrease in
working capital since December is due primarily to the operating needs of the
Company.
Demands on working capital in 1998 and beyond are expected to increase. The
Company expects to significantly increase its B-CDMA technology development
expenditures to commercialize, update and expand applications for its
technology. As the commercial development effort for the current product nears
completion, substantial additional expenditures are expected to be incurred for
marketing and other activities and subsequent, substantial additional
expenditures will be required to support later stage development. Marketing,
administrative, and other costs are expected to increase as well as the Company
seeks to more effectively support its alliance program. Further, the cost of
prosecuting patent applications worldwide, defending the validity of ITC's
patents, and litigating patent infringement actions related to ITC's patents can
be substantial.
The Company's working capital requirements will depend on numerous
additional factors, including but not limited to the success of furthering the
alliance strategy, the extent of the niche market and related margins for the
UltraPhone system, the ability to generate license fees and royalties, and the
need to expend funds in connection with its patent enforcement activities.
The Company does not presently maintain bank lines of credit. The Company
is investigating and may, at some future date, find it desirable to obtain
additional debt or equity capitalization to fully support its technical and
product development and marketing activities and/or to fund its patent
enforcement activities. There can be no assurances that the Company will be able
to sell any such securities, or, if it can, that it can do so on terms favorable
to the Company.
The Company believes that its investment in inventories and non-current
assets are stated on its December 31, 1997 and March 31, 1998 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, 1997 and March 31, 1998 balance
sheets.
Backlog
At March 31, 1998, the Company's shippable backlog of orders for UltraPhone
telephone equipment and services was $0.7 million. At March 31, 1997, the
Company's backlog of orders for UltraPhone telephone equipment and services was
$15.4 million which included $14.8 million from InterDigital's Indonesian
customer.
Changes in Cash Flows and Financial Condition
The Company has experienced negative cash flows of $3.1 million from
operations during the three months ended March 31, 1998. The negative cash flows
from operations are primarily due to activities in patent licensing and patent
litigation.
Net cash flows from investing activities were negative for the quarter
ended March 31, 1998 due primarily to the conversion of some of the Company's
cash and cash equivalents into short-term investments. Notwithstanding the
above, the amount of cash used in investing activities has, historically, been
low relative to cash used in operations.
During the three month period ended March 31, 1998, the Company used
$170,000 in financing activities. The funds were primarily used for payments on
long-term debt (including capital lease obligations).
10
Cash, cash equivalents and short-term investments of $22.3 million as of
March 31, 1998 include $242,000 of restricted cash. The accounts receivable of
$8.1 million at March 31, 1998 reflect licensing receivables, 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 March 31, 1998, $5.4 million has been collected through May 4, 1998.
Inventory levels at March 31, 1998 of $13.8 million have increased slightly
as compared to $12.3 million as of December 31, 1997, reflecting the receipt of
inventory items with long lead times.
Included in other accrued expenses at March 31, 1998 are professional fees,
consulting and other accruals as well as sales taxes payable.
RESULTS OF OPERATIONS
First Quarter of 1998 Compared to the First Quarter of 1997
Total Revenues. Total revenues in the first quarter ended March 31, 1998
decreased to $10.1 million from $26.0 million in the first quarter ended March
31, 1997. The decrease was primarily due to a decline in UltraPhone product
sales in the first quarter of 1998 to $1.1 million from $23.8 million in the
comparable quarter of 1997, partially offset by $1.1 million in sales of
TrueLink product and a $5.7 million increase in licensing and alliance revenues.
Cost of Product Sales. The cost of Product sales for the first quarter of
1998 decreased to $2.6 million from $21 million for the first quarter of 1997
due to the decrease in product revenues. The Company experienced a negative
gross margin on product revenue of $20.3% as compared to a positive gross margin
of 11.8% for the quarter ended March 31, 1997 when manufacturing overhead
expenses were almost fully absorbed. Included in cost of product sales are costs
of product assembly, integration and testing, distributor commissions, freight
and tariffs, and expenses associated with installation, support and warranty
services. Also included in the cost of sales are any manufacturing overhead
expenses the Company has incurred that are not absorbed into inventory based on
low volume of production during the quarter.
Other Operating Expenses. Other operating expenses include sales and
marketing expenses, general and administrative expenses, patent services, and
product development expenses.
Sales and marketing expenses decreased 49% to $1.1 million during the first
quarter of 1998 as compared to $2.1 million during the first quarter of 1997.
The decrease is primarily due to decreased staff and activity levels, and
included a decrease in commission expense due to the decrease in UltraPhone
product revenues in the three month period of 1998.
General and administrative expenses for the first quarter of 1998 decreased
22% to $1.7 million from $2.2 million for the first quarter of 1997. The
decrease is primarily due to cost containment measures and the timing of certain
administrative expenses.
Patents administration and licensing expenses increased 106% to $2.3
million during the first quarter of 1998 as compared to $1.1 million during the
same period in 1997. The increase is due primarily to expenses related to new
patents and increased activity related to capitalizing the revenue potential of
InterDigital's extensive TDMA and CDMA patent portfolio.
Product development expenses for the first quarter of 1997 decreased 38% to
$3.9 million during the first quarter of 1998 as compared to $6.3 million during
the first quarter of 1997. Staff and activity levels devoted to further
development of the TDMA technology decreased significantly. Expenses were also
affected by the timing of certain B-CDMA activities.
Other Income and Expense. Interest income for the first quarter of 1998 was
$375,000 as compared to $358,000 for the first quarter of 1997. The Company had
similar average invested cash balances in both periods. Interest expense for the
three month period ended March 31, 1998 was $102,000 as compared to $119,000 for
the three month period ended March 31, 1997. The decrease is due to lower
outstanding debt in the period.
11
STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The foregoing Management's Discussion and Analysis contains forward looking
statements reflecting, among other things, InterDigital's current beliefs and
expectations as to its working capital requirements, field trials, and receipt
of revenues from Alcatel and royalty payments. Words such as "intends",
"expects", and "believes", 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. InterDigital
cautions the 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. For example, working capital requirements may be affected by the
Company's ability to generate revenues, secure other sources of adequate capital
(or access thereto) to fund operations and to maintain capital, which in turn
may be affected by general economic and industry specific conditions, its
ability to successfully implement the alliance and the licensing programs, its
ability to successfully develop and commercialize product, and the costs related
to enforcement of its patent rights. Field tests could be impeded by the failure
or inability of persons with a business relationship with the Company to secure
adequate financing, required frequencies or other things necessary to fulfill
their obligations to InterDigital or by the failure of InterDigital to enter
into additional agreements to conduct the testing, as well as by technical
difficulties. Receipt of expected revenues from Alcatel could be affected by the
failure of B-CDMA based equipment to meet performance tests caused by technical,
financial or other difficulties or delays in development, re-engineering,
production, or testing. Receipt of expected revenues from royalties could be
affected by the failure of InterDigital to successfully negotiate additional
licensing agreements for its patents and other intellectual property or to
enforce its rights under its license agreements; the outcomes under legal and
administrative cases and proceedings relating to InterDigital's assertion of its
patents rights, the inability or failure of InterDigital to protect its
intellectual property rights, and the inability to successfully prove
infringement of its patents. In addition, factors affecting one forward looking
statement may affect other forward looking statements and other factors may
exist that are not listed above or that are not fully known to InterDigital at
this time. InterDigital undertakes no obligation to publicly update any forward
looking statements, whether as a result of new information, future events or
otherwise.
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PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following is a list of exhibits filed as part of the Form 10-Q.
Exhibit 27 Financial Data Schedule
(b) The following is a list of Current Reports on Form 8-K filed during the
first quarter of 1998:
The Company filed a Current Report on Form 8-K dated March 12,
1998 under Item 5 - Other Events relating to its alliance with
Alcatel. 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: May 14, 1998 /s/ William A. Doyle
---------------------------------
William A. Doyle, President
Date: May 14, 1998 /s/ Loretta P. Brehony
---------------------------------
Loretta P. Brehony, Controller
and Principal Accounting Officer
14