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, 2001
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 19406-1409
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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 55,589,204
- -------------------------------------- ----------------------------
Class Outstanding at July 31, 2001
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX
PAGES
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Part I - Financial Information:
Item 1. Consolidated Financial Statements (unaudited): 3
Consolidated Balance Sheets -
June 30, 2001 and December 31, 2000 3
Consolidated Statements of Operations -
Three and Six Months Ended June 30, 2001 and 2000 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk 10
Part II - Other Information:
Item 1. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
2
PART I - FINANCIAL INFORMATION
Item I. FINANCIAL STATEMENTS
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
JUNE 30, DECEMBER 31,
ASSETS 2001 2000
- ------ -------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 14,814 $ 12,343
Short term investments 77,573 76,644
Accounts receivable, net of allowances of $13 and $473 15,862 16,928
Other current assets 6,304 6,890
--------- ---------
Total current assets 114,553 112,805
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET 14,298 11,302
PATENTS, NET 10,546 10,102
OTHER 10,634 7,416
--------- ---------
35,478 28,820
--------- ---------
TOTAL ASSETS $ 150,031 $ 141,625
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current portion of long term debt $ 206 $ 326
Accounts payable 3,234 4,482
Accrued compensation and related expenses 3,425 3,742
Deferred revenue 7,966 12,108
Foreign and domestic taxes payable 927 1,284
Other accrued expenses 1,818 3,473
--------- ---------
Total current liabilities 17,576 25,415
LONG TERM DEBT 2,158 2,234
LONG TERM DEFERRED REVENUE 58,249 40,066
--------- ---------
TOTAL LIABILITIES 77,983 67,715
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
SHAREHOLDERS' EQUITY:
Preferred Stock, $.10 par value, 14,399 shares authorized- $2.50 Convertible
Preferred, 55 shares issued and
outstanding, liquidation value of $1,375 5 5
Common Stock, $.01 par value, 100,000 shares authorized,
54,085 shares and 53,780 shares issued and
outstanding 541 538
Additional paid-in capital 270,092 267,936
Accumulated deficit (186,513) (181,899)
Unearned compensation (4,004) (4,597)
--------- ---------
80,121 81,983
Treasury stock, 1,500 shares held at cost 8,073 8,073
--------- ---------
Total shareholders' equity 72,048 73,910
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 150,031 $ 141,625
========= =========
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,
---------------------- ----------------------
2001 2000 2001 2000
------- ------- --------- -------
REVENUES:
Product revenues $ - $ 1,076 $ - $ 5,634
Licensing and alliance 14,953 11,912 29,640 22,555
------- ------- -------- --------
14,953 12,988 29,640 28,189
------- ------- -------- --------
COST OF PRODUCT AND OPERATING EXPENSES:
Cost of product - 1,374 - 5,200
Sales and marketing 1,099 727 2,290 2,248
General and administrative 3,853 3,206 7,454 5,874
Patents administration and licensing 1,942 1,812 3,666 1,468
Development 10,994 6,444 21,870 11,888
------- ------- -------- --------
17,888 13,563 35,280 26,678
------- ------- -------- --------
Income (loss) from operations (2,935) (575) (5,640) 1,511
INTEREST INCOME (EXPENSE):
Interest income 1,306 1,376 2,855 3,027
Interest and financing expenses (75) (67) (131) (135)
------- ------- -------- --------
Income (loss) before income taxes (1,704) 734 (2,916) 4,403
INCOME TAX PROVISION (721) (665) (1,630) (1,398)
------- ------- -------- --------
Net income (loss) before cumulative effect of change in
accounting principle (2,425) 69 (4,546) 3,005
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX - - - (53,875)
------- ------- -------- --------
Net income (loss) (2,425) 69 (4,546) (50,870)
PREFERRED STOCK DIVIDENDS (34) (35) (68) (69)
------- ------- -------- --------
NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS $(2,459) $ 34 $ (4,614) $(50,939)
======= ======= ======== ========
NET INCOME (LOSS) PER COMMON SHARE
BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - BASIC $ (0.05) $ 0.00 $ (0.09) $ 0.06
======= ======= ======== ========
NET INCOME (LOSS) PER COMMON SHARE - BASIC $ (0.05) $ 0.00 $ (0.09) $ (0.99)
======= ======= ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC 53,230 51,654 53,179 51,472
======= ======= ======== ========
NET INCOME PER COMMON SHARE
BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - DILUTED $ (0.05) $ 0.00 $ (0.09) $ 0.05
======= ======= ======== ========
NET INCOME (LOSS) PER COMMON SHARE - DILUTED $ (0.05) $ 0.00 $ (0.09) $ (0.99)
======= ======= ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - DILUTED 53,230 55,870 53,179 56,391
======= ======= ======== ========
The accompanying notes are an integral part of these statements.
4
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
FOR THE SIX MONTHS
ENDED JUNE 30,
-------------------------------
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss before preferred stock dividends $ (4,546) $(50,870)
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 3,072 2,123
Deferred revenue increase (decrease) 14,041 (5,990)
Cumulative effect of change in accounting principle, net of tax - 53,875
Amortization of unearned compensation 1,524 861
Deferred charges (increase) decrease (3,134) 803
Other (84) 137
Decrease (increase) in assets-
Receivables 1,066 (2,768)
Inventories - 3,092
Other current assets 586 6,747
Increase (decrease) in liabilities-
Accounts payable (1,248) (498)
Accrued compensation (317) (1,139)
Other accrued expenses (2,012) (2,489)
-------- --------
Net cash provided by operating activities 8,948 3,884
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of short-term investments, net (929) (595)
Purchases of property and equipment (5,230) (3,002)
Patent costs (1,282) (762)
-------- --------
Net cash used in investing activities (7,441) (4,359)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of stock options and warrants
and employee stock purchase plan 1,228 11,329
Payments on long-term debt, including capital lease obligations (196) (232)
Cash dividends on preferred stock (68) (69)
-------- --------
Net cash provided by financing activities 964 11,028
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,471 10,553
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,343 14,592
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,814 $ 25,145
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 103 $ 131
======== ========
Income taxes paid, including foreign withholding taxes $ 3,209 $ 456
======== ========
The accompanying notes are an integral part of these statements.
5
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(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 (collectively with
its subsidiaries referred to as InterDigital, the Company, we, us and our) as of
June 30, 2001, and the results of operations for the three and six month periods
ended June 30, 2001 and 2000, and cash flows for the six months ended June 30,
2001 and 2000. We recorded a cumulative effect of change in accounting principle
of $53.9 million as of January 1, 2000 to record revenue in accordance with
Staff Accounting Bulletin (SAB) No. 101. The results of operations for the three
and six months ended June 30, 2001 and 2000 are in accordance with SAB No. 101.
For the six months ended June 30, 2001 and 2000, the Company recognized revenues
of $5.4 million and $6.0 million, respectively, related to amounts that were
deferred as a result of the cumulative effect of change in accounting principle.
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 (SEC). The results of
operations for interim periods are not necessarily indicative of the results to
be expected for the entire year.
Certain reclassifications were made to the balance sheet and statement
of cash flows to conform to the current 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. REVENUES:
Substantially all of the Company's revenue is derived from customers
based outside of the United States (primarily Japan and Europe). These revenues
are paid in U.S. dollars and are not subject to any substantial foreign exchange
transaction risks. In the first half of 2001, all of InterDigital's revenues
were derived from licensing and strategic partner activities.
In the three months ended June 30, 2001, revenues consisted of $7.0
million from royalties and $8.0 million related to development activities for
Nokia Corporation (Nokia). During the same period in 2000, total revenues
consisted of $7.2 million from royalties, $4.7 million from development work,
and $1.1 million of sales of discontinued products.
In the six months ended June 30, 2001, revenues consisted of $14.9
million from royalties and $14.7 million related to development activities for
Nokia. During the same period of 2000, total revenues consisted of $14.5 million
of recurring royalties, $8.1 million from development work and $5.6 million from
sales of discontinued products.
6
3. LEGAL PROCEEDINGS:
InterDigital and InterDigital Technology Corporation (ITC), a
wholly-owned subsidiary, are parties to a certain patent-related litigation with
Ericsson Inc. ("Ericsson") in which ITC is asserting patent infringement. ITC
generally is seeking injunctive relief and monetary damages. Ericsson 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 March 2001, ITC filed a Complaint against licensee NEC Corporation
with the American Arbitration Association. The Complaint alleges that the
licensee has substantially under-reported sales of TDMA-based products for which
the licensee is obligated to pay ITC royalties pursuant to the TDMA patent
license agreement entered into by the parties. ITC is seeking payment of the
under-reported royalties.
The Company is party to other legal proceedings which management
currently believes will not have a material effect on the Company's results of
operations or financial condition.
4. INCOME PER SHARE:
The following table sets forth a reconciliation of the shares used in
the basic and diluted net income (loss) per share computations:
(In thousands, except per share data)
Three Months Ended June 30, 2001 Three Months Ended June 30, 2000
------------------------------------------------- ------------------------------------------------
Income (loss) Shares Per-Share Income (loss) Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------- ------------- --------- ------------- ------------- ---------
Income per Share-Basic:
Income (loss) available to
common stockholders $(2,459) 53,230 $(0.05) $34 51,654 $0.00
Effect of dilutive options and
warrants -- -- -- -- 4,216 --
------- ------ ------ ----- ------- ------
Income per Share-Diluted:
Income (loss) available to
common stockholders +
dilutive effects of options
and warrants $(2,459) 53,230 $(0.05) $34 55,870 $0.00
======= ======= ====== ===== ======= ======
7
(In thousands, except per share data)
Six Months Ended June 30, 2001 Six Months Ended June 30, 2000
------------------------------------------------- ------------------------------------------------
Income (loss) Shares Per-Share Income (loss) Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------- ------------- --------- ------------- ------------- ---------
Income per Share-Basic:
Income (loss) available to
common stockholders before
cumulative effect of change
in accounting principle $(4,614) 53,179 $(0.09) $2,936 51,472 $0.06
Effect of dilutive options and
warrants -- -- -- -- 4,919 <0.01>
-------- -------- ------ ------ ------- -------
Income per Share-Diluted:
Income (loss) available to
common stockholders +
dilutive effects of options
and warrants $(4,614) 53,179 $(0.09) $2,936 56,391 $0.05
======== ======== ====== ====== ======= =======
Options and warrants to purchase shares of common stock were
outstanding during the three and six months ended June 30, 2001 but were
excluded from the computation of diluted earnings per share due to the net
losses for the periods. During the three and six months ended June 30, 2000,
there were 1.2 million and 0.8 million options to purchase common stock
outstanding, respectively, that were excluded from the computation of diluted
earnings per share because they were antidilutive.
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, in addition to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000 filed with the SEC.
We develop advanced wireless technologies and products that drive voice
and data communications. Our current technology development programs are focused
on creating hardware and software products for the wideband CDMA air-interface
protocols of the 3G standard. We are currently developing wideband CDMA FDD and
wideband CDMA TDD technology platforms. The large majority of GSM service
providers, along with TDMA and some IS-95 service providers, have selected
wideband CDMA as their 3G air-interface protocol. Our business plan involves
addressing this market through a number of different market channels, including
by licensing our technology to equipment manufacturers, developing and selling
(either alone or through partnerships) integrated circuits (ICs) and other
components and subsystems, providing strategic engineering services, and
licensing manufacturers under our patent portfolio.
Consistent with this plan, in 1999, we entered into a strategic
technology development arrangement with Nokia covering the development of high
data rate wideband CDMA technology for third generation (3G) wireless
communication products. Also, in March 2001, we entered into a long-term
cooperative relationship with Infineon Technologies AG involving the development
of FDD (Layer 2/3) software for use in Infineon's terminal unit 3G
system-on-chip ICs and for joint marketing as a stand-alone product. Under the
agreement, Infineon has also committed to cooperate with us to design custom
ASICs based on an Infineon platform for both infrastructure and selected
terminal units applications where Infineon would serve as the foundry.
As part of the Company's strategic planning process, we systematically
monitor and review developments that may define market opportunities for our
technology and intellectual property. In that regard, we are carefully assessing
Siemens' recent announcement that it intends to place increased emphasis on
developing a low chip rate TD-SCDMA (Time Division-Synchronous Code Division
Multiple Access) solution for the market in China and possibly Europe. The Third
Generation Partnership Project (3GPP) standard incorporates two forms of TDD
technology--high chip rate TDD (generally referred to as wideband TDD), which
has been our principal area of product focus, and low chip rate TDD (generally
referred to as narrowband TDD). TD-SCDMA is a low chip rate TDD being sponsored
by China. Siemens has been one of the principal advocates of TDD as a mass
market 3G technology solution and a key contributor in the 3GPP TDD standards
working groups, along with us. Regardless of the form, or forms, of TDD
technology that are deployed in the market, we believe that our technology,
know-how and intellectual property position us to benefit from the growth of the
3G market.
(See "Statement Pursuant to the Securities Litigation Reform Act of
1995" below.)
FINANCIAL POSITION, LIQUIDITY AND CAPITAL REQUIREMENTS
We generated positive cash flow from operating activities of $8.9
million in the first six months of 2001 compared to $3.9 million in the same
period of 2000. The increased level of operating cash flow in the first six
months of 2001 resulted from a net cash receipt of just over $17 million of
advance royalties related to our licensing agreement with Matsushita
Communications Industrial Co., Ltd. This receipt was offset in part by reduced
cash earnings (net loss adjusted for non-cash revenue or expenses) generated
during the period. Operating cash flow in the first six months of 2000 was
affected positively by changes in operating working capital related to inventory
sales and cash receipts associated with completed performance bonds and
insurance recoveries.
9
Net cash used in investing activities increased to $7.4 million in the
first half of 2001 from $4.4 million in the comparable period of 2000. The
increase was due to a higher level of investments in property and equipment as
well as patents in 2001 associated with accelerated development activity on 3G
related programs.
During the first six months of 2001, net cash provided by financing
activities was $1.0 million as compared to $11.0 million in the first six months
of 2000. The decrease resulted from lower net proceeds from exercise of options
and warrants and employee stock purchase plan ($1.2 million in the first half
2001 versus $11.3 million in the first half of last year).
As of June 30, 2001, we had $92.4 million of cash, cash equivalents and
short-term investments, compared to $89.0 million as of December 31, 2000. Our
working capital excluding cash, cash equivalents, short-term investments and
current maturities of debt increased to $4.8 million at June 30, 2001 from a
negative $1.3 million at December 31, 2000. The increase mainly resulted from a
reduction of $4.1 million in the amount of current deferred revenue reflected on
the June 30, 2001 balance sheet and reflecting revised estimates of such
amounts.
We are capable of supporting our operating requirements for the
foreseeable future through cash and short-term investments on hand as well as
other internally generated funds. Should the need arise to fund new development
activities, external growth activities or other matters, we may seek financing
through bank facilities or the sale of debt or equity securities.
Property and equipment are currently being utilized in our on-going
business activities, and we believe that no write-downs are required at this
time due to lack of use or technological obsolescence. With respect to patent
assets, we believe that the value of our patents is at least equal to the value
included in the June 30, 2001 balance sheet.
RESULTS OF OPERATIONS
Second Quarter of 2001 Compared to the Second Quarter of 2000
Revenues
Revenues in second quarter of 2001 totaled $15.0 million, compared to
$13.0 million ($11.9 million excluding $1.1 million of discontinued product
sales) in last year's second quarter. Second quarter 2001 recurring royalty
revenue decreased slightly to $7.0 million from $7.2 million in the same period
last year. Specialized engineering services revenue increased 70% to $8.1
million from $4.7 million in the comparable period of 2000, reflecting higher
activity levels on technology development work being performed for Nokia.
Cost of Product
There was no cost of product in the second quarter of 2001 due to the
fact that the Company exited the wireless local loop product business in 2000
and does not currently sell any other products. Cost of product in the second
quarter of 2000 was $1.4 million.
Operating Expenses
Sales and marketing expenses of $1.1 million in the second quarter of
2001 increased 51% from $0.7 million in last year's second quarter. The increase
in the second quarter of 2001 was due to additional headcount in key positions
filled since last year.
General and administrative expenses for the second quarter of 2001
increased 20% to $3.9 million from $3.2 million in the second quarter of 2000.
The increase was due largely to increased resources necessary to support
development program expansion and higher non-cash expenses related to
stock-based compensation.
Patents administration and licensing expenses increased to $1.9 million
in the second quarter of 2001 from $1.8 million in the comparable period of
2000. The increase was due to expansion of patent licensing activities.
10
Development expenses in the second quarter of 2001 increased 71% to
$11.0 million from $6.4 million in the second quarter of 2000. This increase
over last year's second quarter was due primarily to increased staff and
activity levels devoted to development of advanced 3G wireless applications.
Other Income and Expense
Interest income of $1.3 million was similar to last year's second
quarter levels while interest and financing expenses increased slightly over the
same period last year.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Revenues
Revenues for the six months ended June 30, 2001 increased to $29.6
million from $28.2 million for the six months ended June 30, 2000 primarily due
to increased revenue from engineering services. For the first half of 2001,
recurring royalty revenue was $14.9 million, and specialized engineering service
revenue was $14.7 million primarily related to technology development work being
performed for Nokia. Licensing and strategic partner revenues for the six months
ended June 30, 2000 included $8.1 million from engineering development services,
$14.5 million in recurring royalties and $5.6 million in revenue from the final
sales of UltraPhone(R) product.
Cost of Product
There was no cost of product in the first half of 2001 due to the fact
that the Company exited the wireless local loop product business in 2000 and
does not currently sell any other products. Cost of product for the six months
ended June 30, 2000 was $5.2 million.
Operating Expenses
Sales and Marketing expenses increased to $2.3 million during the six
months ended June 30, 2001 compared to $2.2 million during the six months ended
June 30, 2000. The increase is primarily due to increased personnel partially
offset by decreases in outside service fees.
General and administrative expenses for the six months ended June 30,
2001 increased 27% to $7.5 million from $5.9 million for the six months ended
June 30, 2000. The increase is primarily due to higher personnel costs related
to increased management infrastructure and resources needed for expansion. These
increases were partially offset by decreased outside professional service fees.
Patents administration and licensing activities expense increased 150%
in the six months ended June 30, 2001 to $3.7 million compared to $1.5 million
in the first half of 2000. The increase was due in large part to the recognition
in last year's first half of an insurance recovery related to the cost of
ongoing patent litigation with Ericsson Inc. (Ericsson). We have defined the
method, timing and limitations of reimbursements for covered litigation expenses
with our insurer such that expected reimbursements are now recognized in the
same period as the related expenses.
Development expenses increased 84% for the six months ended June 30,
2001 to $21.9 million from $11.9 million for the six months ended June 30, 2000.
The increase over the prior year period is due primarily to increased staff and
activity levels devoted to development of advanced 3G wireless applications.
11
Other Income and Expense
Interest income for the six months ended June 30, 2001 was $2.9 million
as compared to $3.0 million for the same period in 2000 as a result of lower
interest rates as compared to 2000. Interest expense for the six-month period
ended June 30, 2001 was similar to costs incurred in the same period in 2000.
Expected Trends
In the current atmosphere of market uncertainty within the wireless
industry, we, like many of our customers, have tempered our expectations for
growth in near-term core revenues. The reduced rate of growth in second
generation (2G) product sales by the major wireless equipment manufacturers had
a dampening impact on the level of 2G patent licensing royalties we reported in
the first half of 2001. We expect this to have some dampening impact on second
half 2001 royalties as well. The current environment also has affected
discussions with new potential licensees, particularly those manufacturers who
are experiencing financial difficulties. Despite the short-term challenges, we
remain cautiously optimistic that we will be able to grow our 2G and 3G licensee
base during the remainder of the year. We expect that second half 2001
specialized engineering services revenues will likely be lower than those
reported in the first half as we work with Nokia to refine the pace and scope of
work performed during the period in response to ever changing market dynamics.
We plan to continue our investment in technology development on a
steady basis during the second half of the year, managing our expenses and
staffing levels so as to maintain our excellent financial health. We now believe
that operating results for the third and fourth quarter, respectively, absent
one-time revenue from past infringement or other licensing sources, will most
likely reflect losses exceeding those reported in the second quarter, given our
continued commitment to aggressive positioning for the 3G market.
(See "Statement Pursuant to the Securities Litigation Reform Act of
1995" below.)
12
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 ability to
benefit from the growth of the 3G market, our expectations for second-half 2001
royalties, our ability to grow our 2G and 3G licensee base during the remainder
of 2001, and our expectation for reduced revenues from specialized engineering
services. Words such as "believe", "expect", "will be able to", and "will
likely be", variations of such words, and words with similar meaning or
connotations are intended to identify such forward-looking statements.
Such forward-looking 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 due to a variety of factors including, but not limited to the
following factors. Our ability to benefit from the growth of the 3G market may
be affected by changes in technology preferences of strategic partners,
equipment manufacturers or consumers, our inability to capture low chip rate TDD
market opportunities, lack of multi-vendor support for a standardized technology
(including high chip rate TDD), changes to the 3G standard in a manner that
adversely affects the applicability of our patents to the standard, limited or
no deployment of high chip-rate TDD technology or TDD technology in general, the
development of substitute technologies, competition from other technologies or
from other companies developing the same technology as we are, failure of the 3G
market to materialize at all or at the rate or pace that we expect, or
termination of our strategic partnerships. Our expectations for second-half 2001
royalties may be affected by unanticipated changes in the rate of near term 2G
product sales by InterDigital licensees, adverse developments in the Ericsson
patent litigation, failure of licensees to meet expectations and commitments,
and the timing and accuracy of reports and guidance provided by licensees. Our
ability to grow our 2G and 3G licensee base during the remainder of 2001 may be
affected by changes to the 3G standard or to the 3G market in a manner that
adversely affects the applicability of our patents to the standard, and adverse
developments in the Ericsson patent litigation. Our expectation for reduced
revenues as well as for continued revenues from specialized engineering services
may be affected by our inability to successfully refine the pace, scope or
direction of the current development project or predict the level of ongoing
development work for Nokia, and Nokia's right to terminate the development
project for any reason. 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 our Annual Report on Form 10-K for
the year ended December 31, 2000 (Form 10-K).
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
As reported in our Form 10-K, InterDigital is a party to a lawsuit
involving Ericsson. During the second quarter of 2001, the Judge issued an order
requiring the parties to mediate the case. Additionally, the court routinely has
placed matters under seal, which precludes the Company from making certain other
non-material updates to the information concerning this lawsuit contained in our
Form 10-K.
The Company is a party to additional legal proceedings, as reported in
our Form 10-K, for which there are no material updates.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of the Shareholders held on June 4, 2001, our
shareholders elected Mr. Robert S. Roath and Mr. Joseph S. Colson, Jr. as
directors of the Company and ratified the appointment of Arthur Andersen LLP as
the Company's independent public accountants for the year ending December 31,
2001. Our shareholders elected Mr. Roath as a director by a vote of 49,860,337
shares in favor, and 288,352 shares withheld. Our shareholders elected Mr.
Colson as a director by a vote of 49,860,304 shares in favor and 288,385 shares
withheld. Messrs. Harry G. Campagna, Steven T. Clontz, D. Ridgely Bolgiano and
Howard E. Goldberg also continued to serve their terms as directors. The vote
ratifying the appointment of Arthur Andersen LLP was 49,549,224 shares in favor,
496,590 shares withheld and 102,875 shares abstaining. There were no broker
non-votes with respect to any matters voted on at this Meeting.
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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 9, 2001 /s/ Howard E. Goldberg
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Howard E. Goldberg
President and Chief Executive Officer
Date: August 9, 2001
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Richard J. Fagan
Executive Vice President and Chief Financial
Officer
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