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 September 30, 1999
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.
48,651,195 Shares of Common Stock, par value $.01 per share, were outstanding on
October 29, 1999.
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX
PAGE
Part I - Financial Information:
Item 1. Consolidated Financial Statements 3
Consolidated Balance Sheets - 3
December 31, 1998 and September 30, 1999 (unaudited)
Consolidated Statements of Operations - 4
Three and Nine Months Ended September 30, 1999 and 1998
(unaudited)
Consolidated Statements of Cash Flows - 5
Nine Months Ended September 30, 1999 and 1998 (unaudited)
Notes to Consolidated Financial Statements (unaudited) 6
Item II. Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
Part II - Other Information:
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 16,669 $ 20,059
Short term investments 63,659 32,218
Accounts receivable 6,097 14,983
Inventories 3,435 5,102
Other current assets 3,280 3,056
--------- ---------
Total current assets 93,140 75,418
--------- ---------
Property, plant and equipment, net 7,637 9,697
Patents, net 9,669 9,948
Long term deposits 2,934 2,934
Other 1,464 1,526
--------- ---------
21,704 24,105
--------- ---------
$ 114,844 $ 99,523
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current portion of long term debt $ 490 $ 723
Accounts payable 3,456 5,973
Accrued compensation and related expenses 2,710 2,959
Deferred revenue 844 3,936
Foreign and domestic taxes payable 676 2,249
Other accrued expenses 4,438 4,826
--------- ---------
Total current liabilities 12,614 20,666
--------- ---------
LONG TERM DEBT 2,667 3,049
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 2)
SHAREHOLDERS' EQUITY:
Preferred Stock, $ .10 par value, 14,399 shares
authorized- $2.50 Convertible Preferred, 102
shares issued and outstanding 10 10
Common Stock, $.01 par value, 75,000 shares
authorized, 48,603 shares and 48,474 shares
issued and outstanding 486 484
Additional paid-in capital 236,078 235,631
Accumulated deficit (134,883) (160,039)
--------- ---------
101,691 76,086
Treasury stock, 429 and 50 shares held at cost 2,128 278
--------- ---------
Total shareholders' equity 99,563 75,808
--------- ---------
$ 114,844 $ 99,523
========= =========
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
REVENUES:
Product $ 498 $ 2,569 $ 2,022 $ 6,331
Licensing and strategic partner 10,321 2,280 56,285 55,036
-------- -------- -------- --------
10,819 4,849 58,307 61,367
-------- -------- -------- --------
COST OF PRODUCT AND OPERATING EXPENSES:
Cost of product 1,005 3,005 4,002 10,644
Sales and marketing 745 878 2,411 2,932
General and administrative 1,693 1,235 5,133 4,116
Patents administration and licensing 216 1,836 4,540 8,591
Development 4,711 4,481 15,417 12,184
Repositioning Charges 0 -- 1,213 --
-------- -------- -------- --------
8,370 11,435 32,716 38,467
-------- -------- -------- --------
Income (loss) from operations 2,449 (6,586) 25,591 22,900
INTEREST INCOME (EXPENSE):
Interest income 1,024 651 2,829 1,674
Interest and financing expenses (77) (75) (250) (274)
-------- -------- -------- --------
Income (loss) before income taxes 3,396 (6,010) 28,170 24,300
INCOME TAX PROVISION (697) (14) (2,822) (4,920)
-------- -------- -------- --------
Net income (loss) 2,699 (6,024) 25,348 19,380
PREFERRED STOCK DIVIDENDS (64) (64) (192) (192)
NET INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS $ 2,635 $ (6,088) $ 25,156 $ 19,188
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE - BASIC $ 0.05 $ (0.13) $ 0.52 $ 0.40
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC 48,285 48,427 48,383 48,349
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE - DILUTED $ 0.05 $ (0.13) $ 0.52 $ 0.39
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - DILUTED 48,819 48,427 48,789 48,782
======== ======== ======== ========
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 nine months ended September 30,
---------------------------------------
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 25,348 $ 19,188
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 3,557 3,422
Deferred revenue (3,092) 1,062
Repositioning charges 1,213 --
Decrease (increase) in assets-
Receivables 8,887 259
Inventories 1,667 422
Other current assets (224) (482)
Increase (decrease) in liabilities-
Accounts payable (2,517) (3,646)
Accrued compensation (566) (58)
Other accrued expenses (2,062) (1,585)
-------- --------
Net cash provided by operating activities 32,211 18,582
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments, net (31,441) (27,183)
Purchases of property and equipment (1,162) (1,068)
Patent costs (852) (1,230)
Other non-current assets 62 (22)
-------- --------
Net cash used in investing activities (33,393) (29,503)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sales of Common Stock
and exercises of stock options and warrants 449 694
Lease obligations incurred 0 120
Payments on long-term debt, including capital lease obligations (615) (800)
Cash dividends on Preferred Stock (192) --
Purchase of Treasury Stock (1,850) --
-------- --------
Net cash provided by (used in) financing activities (2,208) 14
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,390) (10,907)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,059 17,828
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 16,669 $ 6,921
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 224 $ 263
======== ========
Income taxes paid, including foreign witholding taxes $ 4,331 $ 4,847
======== ========
The accompanying notes are an integral part of these statements.
5
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION:
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to present fairly the financial
position of InterDigital Communications Corporation's (collectively with its
subsidiaries referred to as InterDigital, the Company, we, us and our) financial
position as of September 30, 1999, the results of our operations for the three
and nine month periods ended September 30, 1999 and 1998, and our cash flows for
the nine month periods ended September 30, 1999 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. These financial statements should be
read in conjunction with the financial statements and notes thereto contained in
the Company's annual report for the year ended December 31, 1998 on Form 10-K
filed with the Securities and Exchange Commission on March 31, 1999. The results
of operations for interim periods are not necessarily indicative of the results
to be expected for the entire year. Certain prior period amounts have been
reclassified to conform to the 1999 presentation.
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.
2. CONTINGENCIES:
The Company 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 other
matters will not have a material impact on our financial position or results of
operations.
3. NOKIA AGREEMENT:
On January 22, 1999, we entered into an agreement with Nokia Corporation
("Nokia") involving the development of new technology for third generation
wireless telecommunications products designed for high data rate applications,
such as Internet access. The agreement includes royalty bearing TDMA and CDMA
patent licenses, which are paid up generally through the project period, and
provides a structure for determining the royalty payments thereafter. We
recognized $31.5 million as licensing revenue in the first quarter of 1999 and
have also recognized $7.4 million of revenue in the first nine months of 1999
related to specialized engineering services in the development effort.
6
4. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
The Company considers investments purchased with a 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)
September 30, December 31,
1999 1998
------------- ------------
Money market funds and demand deposits $ 6,022 $ 3,160
Repurchase agreements 479 516
Commercial paper 10,168 16,383
------- -------
$16,669 $20,059
======= =======
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 September 30, 1999
consisted of $22.9 million in government-issued discount notes and $40.8 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.
5. MAJOR CUSTOMERS AND GEOGRAPHIC DATA:
Revenues by customer geography are as follows:
(in thousands)
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
U.S. $ 453 $ 293 $ 976 $ 1,129
Non U.S. 10,366 4,556 57,331 60,238
------- ------- ------- -------
$10,819 $ 4,849 $58,307 $61,367
======= ======= ======= =======
Licensing and strategic partner revenue for the three month period ended
September 30, 1999 includes $3.4 million in new licenses, $4.0 million related
to development efforts for Nokia and Samsung Electronics Company, Ltd.
("Samsung"), and $2.9 million in recurring royalties. Licensing and strategic
partner revenues for the three months ended September 30, 1998 consisted of $2.2
million related to development work and $112,000 in recurring royalties.
For the nine months ended September 30, 1999, 96.5% of our total revenues
were derived from licensing and strategic partner activities. These revenues
consisted of $42.7 million from new licensing agreements, $9.8 million related
to development activities for Nokia, Alcatel Espana ("Alcatel") and Samsung, and
$3.8 million from recurring royalties. During the same period in 1998, licensing
and strategic partner revenue accounted for more than 89.7% of our total revenue
and consisted of $48.1 million from new licensing agreements, $6.5 million from
strategic partners and $0.5 million in recurring royalties.
7
6. NET INCOME (LOSS) PER COMMON SHARE:
The following tables set forth the numerator and denominator of a
reconciliation of the shares used in the basic and diluted net income (loss) per
share computations:
(in thousands)
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
------------------------------------------- ---------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------------- ---------------------------------------
Income (Loss) per Share -Basic:
Income (loss) available to common
Stockholders $ 2,635 48,285 $ 0.05 $(6,088) 48,427 $(0.13)
Effect of Dilutive Options and
Warrants $ -- 534 $ -- -- -- $ --
------- ------- ------ ------- ------- ------
Income (Loss) per Share-Diluted:
Income (loss) available to
common stockholders +
assumed conversions $ 2,635 48,819 $ 0.05 $(6,088) 48,427 $(0.13)
======= ======= ====== ======= ======= ======
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------------------------------- ---------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------------- ---------------------------------------
Income (Loss) per Share--Basic:
Income (loss) available to
common stockholders $25,156 48,383 $ 0.52 $19,188 48,349 $ 0.40
Effect of Dilutive Options and
Warrants -- 406 -- -- 433 $ 0.01
------- ------- ------ ------- ------- ------
Income (Loss) per Share-Diluted
Income (loss) available to
common stockholders +
assumed conversions $25,156 48,789 $ 0.52 $19,188 48,782 $ 0.39
======= ======= ====== ======= ======= ======
During the three months and the nine months ended September 30, 1999, there were
6.4 million and 6.8 million options and warrants to purchase common stock
outstanding that were excluded from the computation of diluted earnings per
share because they were antidilutive.
7. REPOSITIONING OF OPERATIONS:
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 the impact of
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
8
costs of $417,000, all of which are scheduled to be paid in 1999, and asset
impairment charges of $796,000 for fixed assets associated with wireless local
loop activities.
8. INVENTORIES:
(in thousands)
September 30, December 31,
1999 1998
---- ----
Component parts and work-in-progress $1,638 $2,958
Finished goods 1,797 2,144
------ ------
$3,435 $5,102
====== ======
Inventories are stated net of valuation reserves of $13.9 million as of
September 30, 1999 and $13.7 million as of December 31, 1998. Although we have
been winding down our UltraPhone(R) product business, we still have been
continuing to market our UltraPhone products, including spare parts and
enhancements, in niche markets. We are currently in the process of filling a
5,000 line order for UltraPhone systems for a customer in Namibia.
9. INCOME TAXES:
The income tax provision for the three months ended September 30, 1999
consists of alternative minimum taxes of $68,000 and foreign withholding taxes
of $629,000. For the three months ended September 30, 1998, we had a provision
for state taxes of $14,000. For the nine months ended September 30, 1999, the
tax provision includes foreign withholding taxes of $ 2.2 million and an
alternative minimum tax of $600,000. For the same period in 1998 we had a net
state tax provision of $42,000 and a foreign withholding tax provision of $4.9
million. At December 31, 1998, we had net operating loss carryforwards of
approximately $96.7 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 September 30, 1999.
9
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 Communications Corporation (collectively with its subsidiaries
referred to as InterDigital, the Company, we, us and our) specializes in the
design and development of advanced technology solutions for the wireless
industry. Earlier this year, we initiated a change in strategy from sales and
development of wireless local loop products to technology development for
advanced wireless applications such as Internet access and high data rates for
third generation (3G) applications. In this regard, we continued our development
project with Nokia which is focused on high data rates and wide bandwidth
technology, and initiated the development of 3G commercial "system on a chip"
technology utilizing Frequency Division Duplex (FDD) technology. The new FDD
system on a chip technology is being designed so that it can be embedded into
advanced wireless products for 3G applications, including mobile phones,
personal digital assistants and other devices. We plan to market our FDD and TDD
system on a chip capabilities and technical content to communications equipment
manufacturers and/or semiconductor companies. The Company will also seek to
generate revenues from associated specialized engineering services. We are also
continuing to wind down the remaining commercial aspects related to sale and
service of both the UltraPhone and TrueLink(TM) product lines.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL REQUIREMENTS
We experienced positive cash flow from operating activities of $32.2
million in the nine months ended September 30, 1999 compared to $18.6 million in
the same period in 1998. The positive cash flows in both periods were primarily
due to payments received from new licensees.
Net cash used in investing activities was approximately $33.4 million in
the first three quarters of 1999 and $29.5 million in the first three quarters
of 1998. In both periods, most of the investing activities were associated with
the purchase of short term investments.
During the first three quarters of 1999, we used $2.2 million in financing
activities, primarily to repurchase stock of the Company.
Our working capital at September 30, 1999 was $80.5 million compared to
$54.8 million at December 31, 1998. The $25.7 million increase mainly resulted
from the receipt of cash from licensing agreements.
We had cash, cash equivalents and short-term investments of $80.3 million
as of September 30, 1999 compared to $52.3 million at December 31, 1998.
Inventory levels at September 30, 1999 were $3.4 million, a 33% decrease from
$5.1 million as of December 31, 1998, reflecting product sales in niche markets.
We believe that we are capable of supporting our operating requirements
during 1999 and 2000 through internally generated and existing funds. Should the
need arise to fund new development activities, contingency resolution, external
growth activities or other matters, we may seek financing by means of a bank
loan or line of credit or through the sale of debt or equity securities. We do
not presently maintain bank lines of credit and can give no assurance that we
could secure a loan or line of credit, either at all or on acceptable terms. In
addition, there can be no assurances that we will be able to sell any such
securities, or, if we can, that we can do so on terms acceptable to us.
We believe that our investment in inventories are stated on our September
30, 1999 and December 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 we believe
that no further 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 September
30, 1999 and the December 31, 1998 balance sheets.
10
Results of Operations - Third Quarter of 1999 Compared to the Third Quarter
of 1998
Revenues. Revenues in the third quarter of 1999 totaled $10.8 million,
compared with $4.8 million in the same quarter of 1998. The increase was
principally due to growth in specialized engineering services, higher recurring
royalties from existing patent licensees and the recognition of revenue
associated with new licensing agreements with Japan Radio Company, Ltd. ("JRC")
and Shintom Company, Ltd. ("Shintom"). Recurring royalties from existing
licensees in the third quarter of 1999 totaled nearly $3 million.
Cost of Product. Cost of product for the third quarter of 1999 decreased to
$1.0 million from $3.0 million in the third quarter of 1998, primarily due to a
decrease in product revenues.
Other Operating Expenses. Other operating expenses include sales and
marketing expenses, general and administrative expenses, patent administration
and licensing, and product development expenses.
Sales and marketing expenses decreased 15% to $745,000 during the third
quarter of 1999 as compared to $878,000 during the third quarter of
1998. The decrease is primarily due to a decrease in activity levels, and
reduced commission expenses associated with lower product revenues in the third
quarter of 1999.
General and administrative expenses for the third quarter of 1999 increased
37% to $1.7 million from $1.2 million for the third quarter of 1998. The
increase is primarily due to higher personnel costs and the timing of certain
other strategic spending.
Patents administration and licensing activities expense decreased 88% to
$216,000 for the third quarter of 1999 as compared to $1.8 million during the
same period in 1998. The net decrease is due primarily to the recovery of
certain litigation costs associated with patent administration activities.
Development expenses for the third quarter of 1999 increased 5% to $4.7
million as compared to $4.5 million during the third quarter of 1998. The
increase is due to the ramp-up of technology development for Nokia and other
internal initiatives.
Interest Income and Expense. Interest income for the third quarter of 1999
increased to $1.0 million from $651,000 in the third quarter of 1998 due to
higher average invested cash balances in the third quarter of 1999. Interest
expense for the three month period ended September 30, 1999 was $77,000 as
compared to $75,000 for the three month period ended September 30, 1998 due to
lower outstanding debt in the period.
RESULTS OF OPERATIONS
Results of Operations - Nine Months Ended September 30, 1999 Compared to Nine
Months Ended September 30, 1998
Revenues. Total revenues for the nine months ended September 30, 1999 decreased
5% to $58.3 million from $61.4 million for the nine months ended September 30,
1998, primarily due to a decrease in product sales. Licensing and strategic
partner revenues for the nine months ended September 30, 1999 included $38.9
million from Nokia, $11.3 million from new licenses with Robert Bosch GMBH, JRC
and Shintom, $2.3 million related to the Alcatel and Samsung agreements, and
$3.8 million from recurring royalty licensing revenue. Licensing and strategic
partner revenues for the nine months ended September 30, 1998 included $48.1
million in new licenses from Sharp Corporation, Kyocera Corporation and Toshiba
Corporation, $6.5 million related to the Alcatel and Samsung agreements, and
$0.4 million of recurring royalty licensing revenue.
Cost of Product. The cost of product revenues for the nine months ended
September 30, 1999 decreased 62% to $4.0 million from $10.6 million for the nine
months ended September 30, 1998 due to decreased product sales and the absence
of changes in inventory reserves which negatively impacted the first nine months
of 1998 results.
Operating Expenses. Other operating expenses include sales and marketing
expenses, general and administrative expenses, patent administration and
licensing, and product development expenses.
11
Sales and marketing expenses decreased 18% to $2.4 million during the nine
months ended September 30, 1999 compared to $2.9 million during the nine months
ended September 30, 1998. The decrease is primarily due to decreased personnel,
travel and commissions expenses, commensurate with the decreased UltraPhone
product revenues and decreased activity levels.
General and administrative expenses for the nine months ended September 30,
1999 increased 25% to $5.1 million from $4.1 million for the nine months ended
September 30, 1998. The increase is primarily due to higher personnel costs and
the timing of certain other strategic spending.
Patents administration and licensing expenses decreased 47% in the nine
months ended September 30, 1999 to $4.5 million compared to $8.6 million in the
first nine months of 1998. We have incurred less costs such as commissions and
other expenses related to our activities supporting our licensing strategy to
offer non-exclusive, royalty bearing patent, technology and know-how and
trademark licenses, and have recovered certain expenses related to an on-going
patent litigation.
Development expenses increased 27% for the nine months ended September 30,
1999 to $15.4 million from $12.2 million for the nine months ended September 30,
1998. The increase over the prior year period is due primarily to increased
staff and activity levels devoted to the development of advanced wireless
applications.
Repositioning of Operations. 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 the impacts of 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 $417,000, all of which are scheduled to be paid in 1999,
and asset impairment charges of $796,000 for fixed assets associated with
wireless local loop activities.
As part of the winding down of the UltraPhone business, we entered into a
contract during the third quarter of 1999 to sell equipment supporting 5,000
lines for a customer in Namibia. In November, 1999, a prospective purchaser in
another country filed an action against us seeking, among other things, a
preliminary injunction to enjoin us from shipping any equipment in fulfillment
of the Namibia contract. If this prospective purchaser is successful in
obtaining a preliminary injunction against us, we could be precluded from
consummating the Namibia sale in accordance with our contractual requirements
and we could be liable for damages for breach of the Namibia contract, among
other things. Moreover, this could occur without the prospective purchaser
ultimately purchasing the inventory in issue.
Income and Expense. Interest income for the nine months ended September 30,
1999 was $2.8 million as compared to $1.7 million for the same period in 1998 as
a result of higher than average invested cash in 1999 as compared to 1998.
Interest expenses for the nine month period ended September 30, 1999 was
$250,000 as compared to $274,000 for the nine month period ended September 30,
1998 due to lower overall debt in the first nine months of 1999 as compared to
the same period in 1998.
Year 2000
Many currently installed computer systems in many companies are not capable
of distinguishing 21st century dates from 20th century dates. As a result,
beginning on January 1, 2000, both IT (Information Technology) and non-IT
systems used by many organizations in a wide variety of industries (including
technology, transportation, utilities, finance and telecommunications) will
produce erroneous results or fail unless they have been modified or upgraded to
process date information correctly. Significant uncertainty exists concerning
the scope and magnitude of problems associated with the century change. We
recognize the need to ensure that our operations will not be adversely affected
by Year 2000 system failures. In this regard, we have been implementing a Year
2000 compliance program, consisting of auditing, assessing, remediating,
testing, and contingency planning, to ensure that our IT and non-IT systems will
function properly beyond 1999. The program is designed to cover both systems
operated by us as well as systems operated by third parties that we consider to
be material to our operations. We
12
have established a Committee consisting of members of management from various
disciplines to implement this program and have engaged a consultant to assist
the Committee.
As part of our Year 2000 compliance program, we have engaged in a
comprehensive assessment of the potential overall impact of the impending
century change on our business, financial condition and operating results. Our
compliance program is focused on systems and third parties which our management
views as High Risk, leaving compliance efforts relating to other systems and
third parties to be remediated on a resource permitting basis. We believe that
we will have the ability to allocate adequate resources to address all systems
categorized as High Risk under our Year 2000 compliance program and expect any
Year 2000 remediation applicable to our own High Risk systems to be completed on
a timely basis. We have conducted a thorough audit of our systems and have been
testing and upgrading certain systems for Year 2000 compatibility. We have
determined over 80% of our systems designated as High Risk to be in an
acceptable state of Year 2000 readiness. We anticipate a determination of
acceptable readiness of our remaining High Risk systems prior to the end of
1999. However, there can be no assurance that all of our mission critical
systems will be identified, correctly assessed or remediated on a timely basis
or successfully.
In addition, we have contacted certain third parties upon whom we rely to
ensure that those third parties have assessed the Year 2000 issues on their own
systems and are taking steps to ensure that their systems are Year 2000
compatible. Most of these third parties have responded to us that they have Year
2000 projects in process, but have not guaranteed their Year 2000 readiness. A
few of these third parties have not responded to our information requests. There
can be no assurance that the products or systems of third parties upon which we
rely will be identified, correctly assessed or remediated on a timely basis or
successfully.
With respect to our products, we have conducted a series of tests on the
UltraPhone 110 and 110A, all of which were completed successfully, revealing no
date-related failures. However, our testing of the UltraPhone 100 system
demonstrated that the operating system used in Alcyon-based UltraPhone 100
systems is not compliant. We have offered an upgrade to affected customers at
such customers' cost to address this problem. In all other respects, the tests
run on the UltraPhone 100 were completed successfully, revealing no date-related
failures.
Failure to achieve timely and successful Year 2000 compliance could cause
delays or difficulties in development efforts or result in a cessation of
business. There can be no assurance that we will be able to achieve Year 2000
compliance, either successfully or on a timely basis. Moreover, our products and
components may be integrated into larger systems that we cannot adequately
evaluate for Year 2000 compliance. We may face claims based on Year 2000
problems in delaying other companies in their operations or development efforts,
in other companies' products, or issues arising from the integration of multiple
products within an overall system. Our business, financial condition, or results
of operations could be materially adversely affected by the failure of our
systems, our customers' systems or the systems of third parties upon whom we
rely to properly operate or manage dates associated with the impending century
change.
We are at work on the completion of contingency plans to address potential
problems with our internal systems and third party interactions, as well as
mobilization plans designed to reduce the impact of Year 2000 failures and
facilitate business resumption in the event of interruptions caused by Year 2000
failures. These plans include 1999 actions designed to mitigate failures,
century rollover assessment procedures, procedures and plans for dealing with a
major disruption of internal business systems, procedures and plans for dealing
with a business shutdown and identification of alternative vendors of materials
and services. Contingency planning is intended to cover all systems and third
parties designated as High Risk as well as most systems and many third parties
not designated as High Risk. Contingency and mobilization planning will continue
through the end of 1999. The potential ramifications of a Year 2000 type failure
are potentially far-reaching and largely unknown. We cannot assure you that a
contingency plan or a mobilization plan in effect at the time of a system
failure or business interruption will adequately address the immediate or long
term effects of a failure or interruption, either at all or in a timely manner,
or that such a failure or interruption would not have a material adverse impact
on our operations or financial results in spite of careful planning. For
example, replacement of certain development tools could require design and
customization prior to implementation. With very limited exception, we do not
intend to acquire secondary systems prior to January 1, 2000 as part of
contingency planning.
To date, we have not incurred any material costs directly associated with
our Year 2000 compliance efforts. We have incurred the compensation expense
associated with salaried employees who have devoted some of their time to
13
its Year 2000 assessment, the cost of our remediation efforts and the cost
of our consultant. We do expect to expend additional resources on remediation
efforts out of general corporate funds, but at this time do not expect the total
cost of Year 2000 remediation efforts to be material to our business, financial
condition and operating results. During the months prior to the century change,
we will continue to remediate and/or test our remaining High Risk systems which
are still not in an acceptable state of compliance, as well as certain systems
provided to us by third parties, to the extent reasonably practicable to
determine whether they are Year 2000 compliant. Despite this assessment, we may
not identify, assess and/or correct all significant Year 2000 problems on a
timely basis. Year 2000 compliance efforts may involve significantly more time
and expense than expected, and unremediated problems could affect our business,
financial condition and operating results.
The preceding Year 2000 disclosure is designated a "Year 2000 Readiness
Disclosure" under the Year 2000 Information and Readiness Disclosure Act.
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, our current beliefs and expectations
as to product operations and Year 2000 compliance. Words such as "plan",
"believe" and "expect", 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 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, our plans to shift our strategic emphasis to 3G technology and products
and to market our FDD system on a chip capabilities and technology content and
the ability to generate revenues from assoicated specialized 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, inability 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 timeframe
anticipated. Year 2000 compliance could be affected by the failure of the
Company or third parties to successfully identify, assess or remediate Year 2000
problems on a timely basis or successfully, as well as on the successful
development and implementation of our contingency and mobilization plans. 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 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in quantitative and qualitative market
risk from the disclosure included in the December 31, 1998 Form 10-K.
14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As reported in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 and Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1999 and June 30, 1999, InterDigital is a party to a lawsuit involving
Ericsson Inc. During the third quarter 1999, Ericsson filed a Motion to file a
Fifth Amended Complaint to add claims for breach of contract and fraud. This
Motion has not yet been decided by the Court.
In addition to the litigation described above, the Company is a party to
certain legal actions described in Item 2 "Management's Discussion and Analysis"
herein, associated with patent enforcement and licensing activities and arising
out of the other in the ordinary course of its business. Based on current
information, Management believes that the outcomes of these other matters will
not have a material impact on our financial position or results of operations.
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 10.25 Separation and Confidentiality Agreement dated
September 23, 1999 by and between InterDigital and
William A. Doyle.
Exhibit 27 Financial Data Schedule
(b) The following is a list of Current Reports on Form 8-K filed during the
third quarter of 1999:
None.
15
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: November 11, 1999 /s/ Howard E. Goldberg
--------------------------------
Howard E. Goldberg , Interim
President
Date: November 11, 1999 /s/ R. J. Fagan
--------------------------------
Richard J. Fagan, Executive Vice
President and Chief Financial
Officer