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, 2001
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 19406-1409
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(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (610) 878-7800
--------------
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 55,661,215
- -------------------------------------- -------------------------------
Class Outstanding at October 31, 2001
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX
PAGES
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Part I - Financial Information:
Item 1. Condensed Consolidated Financial Statements (unaudited): 3
Condensed Consolidated Balance Sheets -
September 30, 2001 and December 31, 2000 3
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2001 4
and 2000
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 13
Part II - Other Information:
Item 1. Legal Proceedings 14
2
PART I - FINANCIAL INFORMATION
Item I. FINANCIAL STATEMENTS
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
SEPTEMBER 30, DECEMBER 31,
ASSETS 2001 2000
- ------ --------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 14,581 $ 12,343
Short term investments 80,378 76,644
Accounts receivable, net 17,016 16,928
Other current assets 6,309 6,890
--------- ---------
Total current assets 118,284 112,805
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET 14,645 11,302
PATENTS, NET 10,841 10,102
OTHER 12,610 7,416
--------- ---------
38,096 28,820
--------- ---------
TOTAL ASSETS $ 156,380 $ 141,625
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current portion of long term debt $ 161 $ 326
Accounts payable 3,268 4,482
Accrued compensation and related expenses 4,270 3,742
Deferred revenue 7,946 12,108
Foreign and domestic taxes payable 712 1,284
Other accrued expenses 2,866 3,473
--------- ---------
Total current liabilities 19,223 25,415
LONG TERM DEBT 2,123 2,234
LONG TERM DEFERRED REVENUE 67,294 40,066
--------- ---------
TOTAL LIABILITIES 88,640 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,
54,102 shares and 53,780 shares issued and
outstanding 541 538
Additional paid-in capital 270,076 267,936
Accumulated deficit (191,525) (181,899)
Unearned compensation (3,284) (4,597)
--------- ---------
75,813 81,983
Treasury stock, 1,500 shares held at cost (8,073) (8,073)
--------- ---------
Total shareholders' equity 67,740 73,910
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 156,380 $ 141,625
========= =========
The accompanying notes are an integral part of these statements.
3
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED 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,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
REVENUE:
Product revenues $ -- $ -- $ -- $ 5,634
Licensing and alliance 14,543 12,843 44,183 35,398
-------- -------- -------- --------
14,543 12,843 44,183 41,032
-------- -------- -------- --------
COST OF PRODUCT AND OPERATING EXPENSES:
Cost of product -- -- -- 5,200
Sales and marketing 1,196 798 3,486 3,046
General and administrative 3,449 3,259 10,903 9,133
Patents administration and licensing 2,947 1,771 6,613 3,239
Development 11,865 6,370 33,735 18,258
-------- -------- -------- --------
19,457 12,198 54,737 38,876
-------- -------- -------- --------
Income (loss) from operations (4,914) 645 (10,554) 2,156
INTEREST INCOME (EXPENSE):
Interest income 1,099 1,620 3,954 4,647
Interest and financing expenses (69) (53) (200) (188)
-------- -------- -------- --------
Income (loss) before income taxes (3,884) 2,212 (6,800) 6,615
INCOME TAX PROVISION (1,093) (979) (2,723) (2,377)
-------- -------- -------- --------
Net income (loss) before cumulative effect of change in accounting principle (4,977) 1,233 (9,523) 4,238
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX -- -- -- (53,875)
-------- -------- -------- --------
Net income (loss) (4,977) 1,233 (9,523) (49,637)
PREFERRED STOCK DIVIDENDS (35) (34) (103) (103)
-------- -------- -------- --------
NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS $ (5,012) $ 1,199 $ (9,626) $(49,740)
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE
BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - BASIC $ (0.09) $ 0.02 $ (0.18) $ 0.08
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE - BASIC $ (0.09) $ 0.02 $ (0.18) $ (0.96)
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC 53,277 51,973 53,212 51,792
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE
BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - DILUTED $ (0.09) $ 0.02 $ (0.18) $ 0.07
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE - DILUTED $ (0.09) $ 0.02 $ (0.18) $ (0.96)
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - DILUTED 53,277 56,141 53,212 56,587
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
4
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss before preferred stock dividends $ (9,523) $(49,637)
Adjustments to reconcile net loss to net
cash provided by operating activities-
Depreciation and amortization 4,807 3,280
Deferred revenue increase (decrease) 23,066 (9,869)
Cumulative effect of change in accounting principle, net of tax -- 53,875
Amortization of unearned compensation 2,223 1,490
Repositioning charges -- --
Deferred charges (increase) decrease (5,121) 1,206
Other (73) 150
Decrease (increase) in assets-
Receivables (88) (107)
Inventories -- 3,092
Other current assets 581 5,790
Increase (decrease) in liabilities-
Accounts payable (1,214) (54)
Accrued compensation 528 (1,043)
Other accrued expenses (1,179) (3,047)
-------- --------
Net cash provided by operating activities 14,007 5,126
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of short-term investments, net (3,734) (6,395)
Purchases of property and equipment (6,868) (4,740)
Patent costs (2,021) (1,107)
-------- --------
Net cash used in investing activities (12,623) (12,242)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of stock options and warrants
and employee stock purchase plan 1,233 11,945
Lease obligations incurred -- --
Payments on long-term debt, including capital lease obligations (276) (338)
Cash dividends on preferred stock (103) (103)
Purchase of treasury stock -- --
-------- --------
Net cash provided by financing activities 854 11,504
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,238 4,388
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,343 14,592
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,581 $ 18,980
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 153 $ 188
======== ========
Income taxes paid, including foreign withholding taxes $ 5,313 $ 1,202
======== ========
The accompanying notes are an integral part of these statements.
5
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(UNAUDITED)
1. BASIS OF PRESENTATION:
In the opinion of management, the accompanying unaudited condensed
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 September 30, 2001, and the results of operations for the
three and nine month periods ended September 30, 2001 and 2000, and cash flows
for the nine months ended September 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 nine months ended September 30, 2001
and 2000 are in accordance with SAB No. 101. For the nine months ended September
30, 2001 and 2000, the Company recognized revenue of $7.4 million and $9.9
million, respectively, related to amounts that were deferred as a result of the
cumulative effect of change in accounting principle. The accompanying unaudited
condensed 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 sheets and
statements of cash flows for prior periods 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, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. REVENUE:
Substantially all of the Company's revenue is derived from customers
based outside of the United States (primarily Japan and Europe). This revenue is
paid in U.S. dollars and is not subject to any substantial foreign exchange
transaction risks. In the first nine months of 2001, all of InterDigital's
revenue was derived from licensing and strategic partner activities.
In the three months ended September 30, 2001, revenue consisted of $9.9
million from royalties and $4.7 million related to development activities for
Nokia Corporation (Nokia). During the same period in 2000, total revenue
consisted of $8.4 million from royalties and $4.4 million from development work.
In the nine months ended September 30, 2001, revenue consisted of $24.8
million from royalties and $19.4 million related to development activities for
Nokia. During the same period of 2000, total revenue consisted of $22.9 million
from royalties, $12.5 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, remain 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 Ericsson's
products do not infringe ITC's patents as well as monetary damages. We have not
recorded any gain or loss related to this matter other than legal fees, net of
insurance reimbursements.
The arbitration proceeding filed by ITC against licensee NEC
Corporation (NEC) with the American Arbitration Association is continuing. In
this proceeding, ITC is alleging that NEC failed to report Japanese sales of
TDMA products for which NEC is obligated to pay royalties pursuant to its TDMA
Patent License Agreement with ITC. NEC disputes ITC's claim to these royalties
and the amount due, if any. An evidentiary hearing was held during the third
quarter of 2001, but a decision has not yet been rendered. (See, Part II, Item
1. Legal Proceedings on page 14). We have not recorded any gain or loss related
to this matter other than legal fees.
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 September 30, 2001 Three Months Ended September 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 $(5,012) 53,277 $(0.09) $1,199 51,973 $0.02
Effect of dilutive options and
warrants --- --- --- --- 4,168 ---
------------- ------------- -------------- ------------- -------------- --------------
Income per Share-Diluted:
Income (loss) available to
common stockholders +
dilutive effects of options
and warrants $(5,012) 53,277 $(0.09) $1,199 56,141 $0.02
============= ============= ============== ============= ============== ==============
7
(In thousands, except per share data)
Nine Months Ended September 30, 2001 Nine Months Ended September 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 $(9,626) 53,212 $(0.18) $4,135 51,792 $0.08
Effect of dilutive options and
warrants --- --- --- --- 4,795 <0.01>
------------ ------------- -------------- ------------- -------------- -------------
Income per Share-Diluted:
Income (loss) available to
common stockholders +
dilutive effects of options
and warrants $(9,626) 53,212 $(0.18) $4,135 56,587 $0.07
============= ============= ============== ============= ============== =============
Options and warrants to purchase 6.3 million and 5.7 million shares of
common stock were outstanding during the three and nine months ended September
30, 2001, respectively, but were excluded from the computation of diluted
earnings per share due to the net losses for the periods. During the three and
nine months ended September 30, 2000, there were options and warrants to
purchase 1.2 million and 0.8 million shares common stock, 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
condensed 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 Code Division
Multiple Access (WCDMA) air-interface protocols of the third generation (3G)
standard. We are currently developing CDMA Frequency Division Duplex (FDD) and
WCDMA Wideband Time Division Duplex (WTDD) technology platforms. The large
majority of Global System for Mobile Communications (GSM) service providers,
along with Time Division Multiple Access (TDMA) and some IS-95 service
providers, have selected WCDMA 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 and component
manufacturers, developing and selling (either alone or through partnerships)
integrated circuits (ICs) and other components and subsystems, providing
strategic engineering services, and licensing equipment and component
manufacturers under our patent portfolio.
Under our strategic technology development arrangement with Nokia, we
are continuing the development and validation of the fully standards compliant
WTDD technology-based 3G wireless communications products. During the third
quarter of 2001, InterDigital and Nokia agreed to refine the pace and scope of
the program and to increase the funding for the program to a maximum of
approximately $58 million, up from the original estimate of approximately $40
million. Because of third quarter changes in the Nokia contract, we will report
revenue for the remainder of the program on the percentage of completion
accounting basis (as measured by the ratio of the costs of the current period to
the most recent estimated contract cost) beginning in the third quarter of 2001.
This will take into account the contract maximum of approximately $58 million.
Previously, revenue associated with this program had been reported on a time and
materials basis. As of June 30, 2001, we had billed approximately $46 million
under the contract. Also, in March 2001, we entered into a long-term cooperative
relationship with Infineon Technologies AG (Infineon) 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
Application Specific ICs (ASICs) based on an Infineon platform for both
infrastructure and selected terminal units applications where Infineon would
serve as the foundry.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL REQUIREMENTS
We generated positive cash flow from operating activities of $14.0
million in the first nine months of 2001 compared to $5.1 million in the same
period of 2000. The increased level of operating cash flow in the first nine
months of 2001 resulted from net cash receipts of approximately $27.5 million of
advance royalties related to licensing agreements with Matsushita Communications
Industrial Co., Ltd. and Sharp Corporation. These receipts were 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 nine 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.
Net cash used in investing activities during the first nine months of
2001 was $12.6 million as compared $12.2 in the same period of 2000. In the
first nine months of 2001, we invested in property and equipment as well as
patents at a higher level than in the first nine months of 2000 due to
accelerated development activity on 3G related programs. This was largely offset
by a lower level of additional investment of funds in short-term highly liquid
securities ($3.7 million in the first nine months of 2001 versus $6.4 million in
the first nine months of 2000).
9
During the first nine months of 2001, net cash provided by financing
activities was $0.9 million as compared to $11.5 million in the first nine
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
nine months of 2001 versus $11.9 million in the first nine months of2000).
As of September 30, 2001, we had $95.0 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 $4.3 million at
September 30, 2001 from a negative $1.3 million at December 31, 2000. The
increase mainly resulted from a reduction of $4.2 million in the amount of
current deferred revenue reflected on the September 30, 2001 balance sheet,
reflecting revised estimates of such amounts.
We are capable of supporting our operating requirements for the near
term 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 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 fair value of our patents is at least equal to the
book value included in the September 30, 2001 balance sheet.
RESULTS OF OPERATIONS
Third Quarter of 2001 Compared to the Third Quarter of 2000
Revenues
Revenue in third quarter of 2001 totaled $14.5 million, compared to
$12.8 million in last year's third quarter. Third quarter 2001 recurring royalty
revenue increased to $9.9 million from $8.4 million in the same period last
year. Specialized engineering services revenue increased to $4.7 million from
$4.4 million in the comparable period of 2000.
Operating Expenses
Sales and marketing expenses of $1.2 million in the third quarter of
2001 increased 50% from $0.8 million in last year's third quarter. The increase
in the third quarter of 2001 was due to additional headcount in key positions
filled since last year in support of pre-3G activities.
General and administrative expenses for the third quarter of 2001
increased 6% to $3.4 million from $3.3 million in the third quarter of 2000. The
increase was related to personnel costs for expanded management infrastructure.
Patents administration and licensing expenses increased to $2.9 million
in the third quarter of 2001 from $1.8 million in the comparable period of 2000.
The increase was due to expansion of patent licensing activities, including
patent related enforcement activities.
Development expenses in the third quarter of 2001 increased 86% to
$11.9 million from $6.4 million in the third quarter of 2000. This increase over
last year's third quarter was due primarily to increased staff and activity
levels devoted to development of 3G WCDMA technology platforms.
10
Other Income and Expense
Interest income of $1.1 million decreased 32% from $1.6 million in last
year's third quarter primarily due to lower yields available in 2001 as compared
to 2000.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended
September 30, 2000
Revenues
Revenue for the nine months ended September 30, 2001 increased to $44.2
million from $41.0 million for the nine months ended September 30, 2000,
primarily due to increased revenue from specialized engineering services. For
the first nine months of 2001, recurring royalty revenue was $24.8 million and
specialized engineering service revenue, related to technology development work
being performed for Nokia, was $19.4 million. Licensing and strategic partner
revenue for the nine months ended September 30, 2000 included $12.5 million from
engineering development services, $22.9 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 nine months 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
nine months ended September 30, 2000 was $5.2 million.
Operating Expenses
Sales and marketing expenses increased to $3.5 million during the nine
months ended September 30, 2001 compared to $3.1 million during the nine months
ended September 30, 2000. The increase is primarily due to increased personnel
and professional services in support of pre-3G sales and marketing activities.
General and administrative expenses for the nine months ended September
30, 2001 increased 19% to $10.9 million from $9.1 million for the nine months
ended September 30, 2000. The increase is primarily due to higher personnel and
depreciation costs related to infrastructure and resources needed for expansion.
Patents administration and licensing activities expense increased 104%
in the nine months ended September 30, 2001 to $6.6 million compared to $3.2
million in the first nine months of 2000. The increase was due in large part to
the recognition in the same period last year of an insurance recovery related to
the cost of ongoing patent litigation with 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. In addition, we have experienced higher costs in
2001 related to patent related enforcement activities.
Development expenses increased 85% for the nine months ended September
30, 2001 to $33.7 million from $18.3 million for the nine months ended September
30, 2000. The increase over the prior year period is due primarily to increases
in professional staff and activity levels devoted to development of 3G WCDMA
technology platforms.
Other Income and Expense
Interest income for the nine months ended September 30, 2001 was $4.0
million as compared to $4.6 million for the same period in 2000 due mainly to
lower interest rates in 2001 as compared to 2000. Interest expense for the nine
month period ended September 30, 2001 was similar to costs incurred in the same
period in 2000.
11
Expected Trends
Given our strong commitment to aggressive positioning in the 3G market,
we expect to continue our investment in technology development on a steady basis
for the near term, while managing our expenses and staffing levels to maintain
our strong financial health. Based on conservative estimates and current market
conditions, we now believe that fourth quarter 2001 revenues and earnings,
absent one-time revenue from past infringement or other licensing sources, are
likely to be lower than reported in the third quarter of 2001. We are making
reasonable progress with various companies on licensing discussions. However,
the timing of any new agreement is always difficult to predict.
Looking forward to 2002, we expect our recurring royalty revenue to
grow as, and if, market conditions improve. Progress in signing new 2G licensees
may be slow due to the deteriorating financial condition of unlicensed
producers. As the current development program with Nokia moves into the
validation stage, we expect that specialized engineering service revenue from
that program will decrease in 2002 from the levels reported in 2001.
(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, the essential nature
of our patents, the effect of the JPO actions and our assertions on the NEC
arbitration, our expected near-term steady investment in technology development,
our ability to maintain our strong financial health, fourth quarter 2001
revenues and earnings, expected 2002 recurring royalty revenue, and expected
2002 revenue from Nokia. Words such as "believe" and "expect" are intended to
identify such forward-looking statements.
Such forward-looking statements are subject to risks and uncertainties. We
caution the reader 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 belief that our patents are essential to the
implementation of TDMA systems could be affected by legal determinations as to
the applicability of those patents to the relevant standard. Further, we cannot
provide assurance that the validity of those patents will ultimately be upheld.
Our belief as to the impact of the JPO's actions and the strength of our
assertions in the NEC arbitration is dependent on whether or not the arbitrators
agree with our position and the outcome of our intended appeal of the JPO's
rulings. Our steady investment in technology development and our ability to
maintain our financial health may be affected by the number and terms of any new
strategic partnerships we may enter, the performance of our strategic partners,
the results of the NEC arbitration, changes in technology preferences of
strategic partners, equipment manufacturers or consumers, the development of
substitute technologies and competition from competing technologies, limited or
no deployment of TDD technology, failure of the 3G market to materialize at all
or at the rate or pace that we expect, or termination of our strategic
partnerships. Expected fourth quarter revenues and earnings could be affected by
the results of the NEC arbitration and the payment or recognition of past
infringement royalties. Expected 2002 recurring royalty revenues could be
affected by Japanese market conditions, failure to enter into new license
agreements, failure of licensees to meet expectations or commitments, changes to
the 3G standard in a manner that adversely affects the applicability of our
patents to the standards, the ability of ITC to secure and maintain key patents
in key countries, including the outcome of administrative cases (at various
levels and in various countries) in which the validity of certain of ITC's
patents is being challenged, timing and accuracy of reports and guidance
provided by licensees, adverse developments in the Ericsson patent litigation,
results of the NEC arbitration, and the resolution of certain licensing
disputes. Expected 2002 revenues from Nokia could be affected by an expansion to
the scope of the program. 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).
13
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
NEC Arbitration
---------------
As reported in our Annual Report on Form 10-K for the year ended
December 31, 2000, ITC filed a Complaint against NEC with the American
Arbitration Association alleging that NEC failed to report Japanese sales of
TDMA products for which NEC is obligated to pay royalties pursuant to its TDMA
Patent License Agreement with ITC. An evidentiary hearing was held during the
third quarter of 2001, but a decision has not yet been rendered. ITC is seeking
payment of approximately $400 million in royalties, plus interest and costs. NEC
disputes ITC's claim that ITC is entitled to any past royalties as well as the
amount of royalties due, if any, based upon certain contractual provisions that,
in NEC's view, eliminate or, at a minimum, suspend or substantially decrease its
payment obligations. NEC has also argued that if the claims of ITC's Nos. JP
2,816,349 ('349) and JP 2,979,064 ('064) TDMA System Japanese Patents were
declared invalid by the Japanese Patent Office (JPO), NEC would be relieved of
any royalty obligation. Since the evidentiary hearing, we have been informed by
our Japanese Patent Counsel that, on October 23, 2001, the JPO as a first level
tribunal issued decisions to revoke two previously granted claims in the '349
patent, and possibly the entire patent, and to revoke all previously granted
claims in the '064 patent. ITC intends to appeal both decisions to the Tokyo
High Court which, in such matters, performs both a technical and legal de novo
review of the JPO decisions. ITC also believes that, based on specific
provisions within the NEC TDMA Patent License Agreement, the recent actions of
the JPO regarding these patents do not affect the royalties being sought. While
ITC has advanced what it believes to be strong and persuasive arguments, ITC can
give no assurance that the arbitration will be decided in its favor. Further,
even if ITC is successful in the arbitration, the arbitrators could grant
substantially less than the relief requested by ITC if they agree with any of
NEC's arguments. Moreover, any consensual settlement would likely be at
substantially lower levels than the maximum amount claimed. There can be no
assurance that any consensual settlement of the arbitrated dispute will be
reached.
Based on advice of counsel, ITC understands that the '349 and '064
patents remain valid until the appeal is exhausted. ITC has a portfolio of 15
issued TDMA patents in Japan, including patents that ITC believes are essential
to the implementation of TDMA standards, and also has a number of TDMA patent
applications pending in Japan, none of which are the subject of the JPO
decisions.
(See "Statement Pursuant to the Securities
Litigation Reform Act of 1995" above.)
14
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 14, 2001 /s/ Howard E. Goldberg
--------------------------------------------
Howard E. Goldberg
President and Chief Executive Officer
Date: November 14, 2001 /s/ R. J. Fagan
--------------------------------------------
Richard J. Fagan
Executive Vice President and Chief Financial
Officer
15