<PAGE>
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, 1995
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.)
2200 Renaissance Boulevard, Suite 105, King of Prussia, PA 19406
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (610) 278-7800
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 44,386,846
- -------------------------------------- --------------------------------
Class Outstanding at November 10, 1995
<PAGE>
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C>
PAGES
Part I - Financial Information:
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - 3-4
December 31, 1994 and September 30, 1995 (unaudited)
Consolidated Statements of Operations 5
Three and Nine Months Ended September 30, 1994 and 1995 (unaudited)
Consolidated Statements of Cash Flows - 6-7
Nine Months Ended September 30, 1994 and 1995 (unaudited)
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-18
Part II - Other Information:
Item 1. Legal Proceedings 19-20
Item 6. Exhibits and Reports on Form 8-K 21
</TABLE>
2
<PAGE>
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
ASSETS 1994 1995
- ------ ------------ -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents, including restricted
cash of $471 and $787, respectively $ 6,264 $ 69,549
License fees receivable 20,900 800
Accounts receivable, net of allowance for
uncollectable accounts of $2,333 and $1,844, respectively 3,683 3,341
Inventories 5,014 4,413
Deposits on inventory purchases 539 307
Other current assets 860 1,299
-------- --------
Total current assets 37,260 79,709
-------- --------
PROPERTY AND EQUIPMENT:
Machinery and equipment 3,780 4,866
Computer equipment 3,476 3,995
Furniture and fixtures 1,521 1,535
Leasehold improvements 831 895
-------- --------
9,608 11,291
Less-accumulated depreciation and amortization (7,333) (8,000)
-------- --------
Net property and equipment 2,275 3,291
-------- --------
OTHER ASSETS:
Patents, net of accumulated amortization of
$2,946 and $3,329 respectively 2,588 2,536
Deferred software costs, net of accumulated amortization
of $503 and $757, respectively 922 817
Other 785 1,564
-------- --------
Total other assets 4,295 4,917
-------- --------
$ 43,830 $ 87,917
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1994 1995
- ------------------------------------ ------------ -------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 233 $ 351
Due to Hughes Network Systems, Inc. 7,003 -
Accounts payable 9,536 2,890
Accrued compensation 2,904 4,679
Purchase commitment reserve 1,304 855
Deferred revenue 665 3,521
Income and foreign withholding taxes payable 1,573 1,384
Accrued distributor commissions 616 294
Accrued warranty costs 765 619
Other accrued expenses 2,543 2,152
--------- ---------
Total current liabilities 27,142 16,745
--------- ---------
CAPITAL LEASE OBLIGATIONS 520 724
--------- ---------
MINORITY INTEREST 1,296 5,359
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 3)
SHAREHOLDERS' EQUITY:
Preferred Stock, $.10 par value, 14,399 shares authorized-
$2.50 Convertible Preferred, 113 shares and 105 shares
issued and outstanding 11 11
Common Stock, $.01 par value, 75,000 shares authorized,
41,811 shares and 44,356 shares issued and
outstanding 418 443
Additional paid-in capital 199,158 211,963
Accumulated deficit (184,665) (147,328)
--------- ---------
14,922 65,089
Deferred compensation (50) -
--------- ---------
Total shareholders' equity 14,872 65,089
--------- ---------
$ 43,830 $ 87,917
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1994 1995 1994 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
UltraPhone $ 7,074 $ 1,629 $10,447 $13,085
Licensing 657 4,000 3,199 66,093
Contract Services 368 212 918 657
------- ------- ------ -------
8,099 5,841 14,564 79,835
------- ------- ------ -------
OPERATING EXPENSES:
Cost of UltraPhone revenues 7,193 3,794 11,322 15,523
Contract service costs 218 242 941 754
Sales and marketing 1,067 723 3,347 2,791
General and administrative 3,929 2,575 10,914 11,144
Research and development 2,119 2,532 5,668 6,386
------- ------- ------ -------
14,526 9,866 32,192 36,598
------- ------- ------ -------
Income (loss) from operations (6,427) (4,025) (17,628) 43,237
OTHER INCOME (EXPENSE):
Interest income 25 916 106 2,140
Interest and financing expenses (198) (14) (497) (623)
------- ------- ------ -------
Income (loss) from continuing operations before
income taxes and minority interest (6,600) (3,123) (18,019) 44,754
INCOME TAX (PROVISION) BENEFIT - 113 - (3,195)
------- ------- ------ -------
Income (loss) from continuing operations before
minority interest (6,600) (3,010) (18,019) 41,559
MINORITY INTEREST 38 (246) 33 (4,022)
------- ------- ------ -------
Net income (loss) from continuing operations (6,562) (3,256) (17,986) 37,537
------- ------- ------ -------
DISCONTINUED OPERATIONS 121 - (295) -
------- ------- ------ -------
Net income (loss) (6,441) (3,256) (18,281) 37,537
------- ------- ------ -------
PREFERRED STOCK DIVIDENDS (70) (66) (212) (200)
------- ------- ------ -------
NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS $(6,511) $(3,322) $(18,493) $37,337
======= ======= ======= =======
NET INCOME (LOSS) PER SHARE - CONTINUING OPERATIONS $(0.17) $(0.08) $(0.50) $0.81
NET INCOME (LOSS) PER SHARE - DISCONTINUED OPERATIONS - - (0.01) -
------- ------- ------ -------
NET INCOME (LOSS) PER COMMON SHARE $(0.17) $(0.08) $(0.51) $0.81
======= ======= ====== =======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (Note 7) 38,178 44,287 36,106 46,333
======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
1994 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(18,281) $ 37,537
Adjustments to reconcile net income (loss) to net
cash used for operating activities-
Minority interest in subsidiary (33) 4,063
Depreciation and amortization 1,360 1,304
Compensation on stock issued
and stock options granted 86 50
Loss from discontinued operations (416) --
Cash provided by discontinued operations 371 --
Other (133) (107)
Decrease (increase) in assets-
Receivables (4,210) 20,442
Inventories 1,408 601
Deposits on inventory purchases (1,158) 232
Other current assets (445) (439)
Increase (decrease) in liabilities-
Accounts payable 2,217 (6,645)
Due to Hughes Network Systems, Inc. 86 (7,003)
Accrued compensation 331 1,775
Purchase commitment reserve - (449)
Deferred revenue 201 2,856
Income and foreign withholding taxes 11 (189)
Accrued distributor commissions (120) (322)
Accrued warranty costs 127 (146)
Other accrued expenses 713 (391)
-------- --------
Net cash provided by (used for) operating activities $(17,885) $ 53,169
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES: 1994 1995
- ------------------------------------- ---- ----
<S> <C> <C>
Additions to property and equipment $ (424) $ (1,156)
Capitalized software development costs (427) (149)
Additions to patents (380) (331)
Net proceeds on sale of discontinued operations 2,411 -
Other non-current assets (414) (880)
-------- --------
Net cash used for investing activities 766 (2,516)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sales of Common Stock
and exercises of stock options and warrants 9,886 12,810
Proceeds from short-term debt 2,402 --
Payments on long-term debt (184) (178)
-------- --------
Net cash provided by financing activities 12,104 12,632
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,015) 63,285
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,211 6,264
-------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,196 $ 69,549
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid (excludes HNS settlement) $ 188 $ 26
======== ========
Income taxes paid, primarily withholding taxes -- $ 1,883
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(UNAUDITED)
1. BACKGROUND:
InterDigital Communications Corporation (the "Company" or "IDC") develops
and markets advanced digital wireless telecommunications systems using
proprietary technologies for voice and data communications and has developed an
extensive patent portfolio related to those technologies. The Company's
principal product is the UltraPhone, a telephone system providing business and
households access to basic telephone service through a wireless local loop.
UltraPhone revenues have historically accounted for the majority of the
Company's revenues, but accounted for only 40% of total revenues during 1994 and
only 16% during the nine month period ended September 30, 1995. Since 1987, the
Company has sold over 230 UltraPhone systems worldwide, with aggregate
UltraPhone revenues totaling over $130 million.
In addition to its UltraPhone business, the Company, through InterDigital
Technology Corporation ("ITC"), is seeking to capitalize upon the revenue
potential of its extensive TDMA and CDMA patent portfolio. ITC implemented a
strategy during 1993 of negotiation and litigation with certain entities which
it believed were infringing the Company's patents. These efforts have resulted
in patent license agreements with 11 entities in 1994 and through November 10,
1995, and the recognition of $28.7 million of licensing revenue in 1994 and
$66.1 million during the nine month period ended September 30, 1995.
On December 16, 1994, the Company formed its first business alliance based
upon its TDMA and B-CDMA technologies. On that date, the Company entered into a
Master Agreement and a series of four related agreements as elements of an
integrated transaction establishing a broad based marketing and technology
alliance with Siemens Aktiengesellschaft ("Siemens"). Under the UltraPhone OEM
Purchase Agreement, Siemens will be obligated to purchase its requirement of
wireless local loop products for certain specified applications from the Company
on an OEM basis. Under the TDMA/CDMA Development and Technical Assistance
Agreement, Siemens will provide technical assistance to accelerate the
commercialization and deployment of the Company's B-CDMA technology and the
parties will work on UltraPhone product improvements and enhancements when
product changes are required to satisfy market demands. The agreement provides
that Siemens will have an exclusive, royalty-bearing license of the Company's
Know-how associated with the B-CDMA ASIC chip, with a two year exclusive of
certain other B-CDMA technology. Pursuant to the know-how licenses, Siemens
shall pay to the Company a running royalty of five (5%) percent of all sales of
B-CDMA equipment worldwide which incorporates B-CDMA ASICs or otherwise
incorporates B-CDMA know-how. InterDigital will continue to maintain the right
to sell ASIC chips to other telecommunications manufacturers and/or license
certain specified non-ASIC specific technology and know-how embodied in the
B-CDMA systems. Under the Patent License Agreement, the parties granted
reciprocal, non-exclusive, world-wide, paid-up, perpetual licenses for the life
of their respective current TDMA and CDMA patents and future patents with an
effective filing date of not later than five years after the date of the Patent
License Agreement, subject to certain application limitations. Siemens may
additionally provide certain other benefits under the Cooperation Agreement.
As partial consideration for the rights and licenses granted by the Company,
Siemens is obligated to pay $20 million, of which $14.8 million was paid as of
November 10, 1995, with the remainder being payable in quarterly installments
through March 30, 1996. In accordance with accounting requirements, ITC has
begun to recognize the $20 million of revenue ratably over the 15 month payment
period that started in January 1995, due to the combined nature of the
contracts.
As an adjunct to its primary business, the Company provided advanced digital
wireless research and development services to government and business
organizations. During the third quarter of 1994, the Company substantially
withdrew from the contract services market in order to focus on its other core
business activities. Beginning in 1991, the Company also provided
telecommunications services to businesses and households through the ownership
and operation of Telephone Operating Companies ("TELCOs"), primarily Haviland
Telephone Company ("Haviland"), in rural areas of the United States. During
1994, the Company exited this business through the sale of its investments in
the TELCOs and accordingly has accounted for the TELCO operations as
discontinued operations. (See Note 4).
8
<PAGE>
On March 29, 1995, a trial involving ITC and Motorola, Inc. ended with the
jury's verdict, which is subject to varying interpretation, but which is
interpreted by the Company to mean that ITC's patent claims at issue in the
case, involving four of ITC's patents, are not infringed by Motorola and, if
construed to be infringed, are invalid. While the Company intends to appeal the
jury verdict and believes that a strong basis exists to overturn the verdict,
the ultimate resolution of this matter will likely occur in the intermediate to
long term. In the short term, the verdict may adversely affect the Company's
efforts to generate further revenue and cash flow from ITC's patent portfolio
and may impair generally the Company's ability to raise additional funds for
general corporate purposes. The outcome of the jury trial may also temporarily
or permanently adversely affect ITC's pending U.S. litigation against Ericsson
GE Mobile Communications, Inc. ("Ericsson GE") and Ericsson Radio Systems, Inc.
("Ericsson Radio, and together, "Ericsson") and its ability to realize running
royalties or specified installment payments under certain of its license
agreements.
2. BASIS OF PRESENTATION:
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal,
recurring adjustments) necessary to present fairly InterDigital Communications
Corporation and Subsidiaries' financial position as of September 30, 1995 and
the results of their operations for the three and nine month periods ended
September 30, 1994 and 1995 and cash flows for the nine month periods ended
September 30, 1994 and 1995. The accompanying unaudited consolidated financial
statements have been prepared in accordance with the instructions for Form 10-Q
and accordingly do not include all of the detailed schedules, information and
notes necessary for a fair presentation of financial condition, results of
operations and cash flows in conformity with generally accepted accounting
principles. Therefore, these financial statements should be read in conjunction
with the financial statements and notes thereto contained in the Company's
latest annual report on Form 10-K filed with the Securities and Exchange
Commission. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the entire year.
The Consolidated Statement of Operations for the three and nine month periods
ended September 30, 1994 have been reclassified to conform with the current
period expense presentation.
3. CONTINGENCIES:
IDC and ITC are variously parties to patent related litigation. ITC
is the plaintiff in two actions alleging patent infringement (in one such
action, IDC has received an adverse jury verdict and is in the post trial appeal
process) and, in each such instance, is or was seeking damages and equitable
remedies. IDC and ITC are or were variously defendants in two actions filed by
the alleged infringers seeking declaratory relief, damages, and, in some
instances, variously attempting to enjoin IDC and ITC from prospectively
asserting equitable and legal claims arising from any additional, alleged patent
infringement (In one such action, ITC has received an adverse jury verdict and
is in the post trial appeal process. In that action, the plaintiff has filed a
motion requesting attorney's fees and costs.) The Company and its subsidiary
intend to vigorously pursue and defend the lawsuits. (See Part II, Item 1. Legal
Proceedings.)
On November 7, 1994, a purported class action complaint was filed against the
Company and its former chief executive officer alleging certain violations of
the disclosure requirements of the federal securities laws. The Company believes
that the complaint is without merit and intends to contest it vigorously. (See
Part II, Item 1. Legal Proceedings.)
9
<PAGE>
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 upon
information presently available to the Company, the Company believes that the
ultimate outcome of these other actions will not materially affect the Company.
(See Part II, Item 1. Legal Proceedings.)
4. SALE OF TELEPHONE OPERATING COMPANIES
During the first quarter of 1994, the Company committed to a formal plan to
sell its interests in the TELCOs. The Company entered into a definitive
agreement of sale of Haviland on September 26, 1994. The Company sold its
remaining interest in another TELCO during December 1994. The results of
operations of the TELCOs for the three and nine months ended September 30, 1994
have been classified as discontinued operations and the Company recorded a
provision of $200,000 during the first quarter of 1994 for expected losses
through the disposal date.
5. CASH AND CASH EQUIVALENTS:
The Company considers investments purchased with an original 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):
<TABLE>
<CAPTION>
December 31, September 30.
1994 1995
---- ----
<S> <C> <C>
Cash, money market and demand deposits $ 124 $ 1,894
Certificates of deposit 340 496
Repurchase agreements 5,800 9,500
Marketable Securities -- 57,659
---------- -----------
$ 6,264 $ 69,549
========== ===========
</TABLE>
The repurchase agreements are fully collateralized by United States Government
securities and are stated at cost which approximates fair market value.
Investments in Marketable Securities are made in highly liquid, investment grade
securities which can include U.S. government backed securities, money market
funds, time deposits, corporate debt securities and Eurodollars.
6. MAJOR ULTRAPHONE CUSTOMERS:
In fiscal 1994, the Company's Indonesian and Myanmarian customers represented
54% and 12%, of UltraPhone revenues, respectively. During the third quarter of
1995, the Company's Myanmarian customer and Mexican distributor accounted for
42% and 12%, respectively of UltraPhone revenues. During the third quarter of
1994, Myanmar, Indonesia and San Francisco/International Teleport, the Company's
Russian customer, accounted for 34%, 32% and 17% of UltraPhone sales,
respectively. For the nine month period ended September 30, 1995, the Company's
Indonesian and Russian customer accounted for 43% and 25%, respectively of
UltraPhone revenues. During the nine months ended September 30, 1994, Myanmar,
Indonesia, Fidocoldex, the Company's Columbia, South American customer and
Russia, accounted for 23%, 22%, 12% and 11% of UltraPhone sales, respectively.
10
<PAGE>
UltraPhone revenues by geographic area are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------------- ---------------------
1994 1995 1994 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Domestic $ 1,050 $ 479 $ 2,687 $ 1,829
Foreign 6,024 1,150 7,760 11,256
-------- -------- -------- ---------
$ 7,074 $ 1,629 $ 10,447 $ 13,085
======== ======== ======== =========
</TABLE>
7. NET INCOME (LOSS) PER COMMON SHARE:
The net income (loss) per share is based upon the weighted average common
shares outstanding during the period adjusted for cumulative dividends on $2.50
Preferred Stock. Stock options and warrants have been considered as common stock
equivalents and have been included in the year-to-date 1995 computation since
their effect would be dilutive. (See Item 6, Exhibit 11 - Computation of Net
Income (Loss) Per Share.)
8. INVENTORIES:
<TABLE>
<CAPTION>
December 31, September 30,
1994 1995
---- ----
(In thousands)
<S> <C> <C>
Component parts and work-in-progress $ 3,864 $ 3,630
Finished goods 1,150 783
------- -------
$ 5,014 $ 4,413
======= =======
</TABLE>
Inventories are stated net of valuation reserves of $7.5 million and $7.8
million as of December 31, 1994 and September 30, 1995, respectively. In
addition, inventory purchase commitment reserves were $1.3 million and $855,000
as of December 31, 1994 and September 30, 1995, respectively.
9. SHORT-TERM BORROWINGS:
In March 1994, the Company entered into a $3.0 million secured borrowing
arrangement, evidenced by Promissory Notes, in connection with a proposed
long-term financing arrangement. The Promissory Notes, which bore interest at
11% per annum, were repaid in 2 installments in June and July, 1994 when the
parties to the long-term financing arrangement agreed not to proceed.
During the second quarter of 1994, the Company received $2.4 million in
proceeds from the issuance of a series of Promissory Notes. The Notes were
collateralized by the proceeds from the sale of Haviland, accrued interest at a
rate of 11% which was payable at maturity and had initial terms of 90 days, with
original maturities occurring during August and September 1994. At maturity, the
holder could elect to have the repayment of principal, in whole or in part, in
the form of Common Stock at the conversion price of $3.75 per share. In the
event of such election, the Company's obligation to pay interest to noteholders
was to be waived. Additionally, as an inducement to enter into the note
agreement, the noteholders were granted 280,000 warrants with a term of 10 years
and an exercise price of $3.75 per share. At September 30, 1994, $2.3 million of
the Notes were extended in consideration for a reduction in the conversion rate
to $1.78 per share and a reduced exercise price in the warrants. As of December
31, 1994, $2.2 million of the Notes had been repaid and $189,000 had converted
in exchange for 106,000 shares of Common Stock.
11
<PAGE>
10. INCOME TAXES:
Effective January 1, 1991, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes".
The income tax provision for the three months ended September 30, 1995,
consists of a current foreign withholding tax benefit of $53,000, a current
state and local tax benefit of $21,000 and a Federal Alternative Minimum Tax
benefit of $39,000. At December 31, 1994, the Company had net operating loss
carryforwards of approximately $130 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, 1995.
The net operating loss carryforwards are scheduled to expire as follows:
<TABLE>
<S> <C>
1995 $ --
1996 0.5 million
1997 0.5 million
1998 2.5 million
1999 5.2 million
thereafter 121.3 million
-----------------
$ 130.0 million
=================
</TABLE>
Pursuant to the Tax Reform Act of 1986, annual use of the Company's net
operating loss and credit carryforwards may be limited if a cumulative change in
ownership of more than 50% occurs within a three-year period. The annual
limitation is generally equal to the product of (x) the aggregate fair market
value of the Company's stock immediately before the ownership change times (y)
the "long-term tax exempt rate" (within the meaning of Section 382(f) of the
Code) in effect at that time. The Company believes that no ownership change for
purposes of Section 382 occurred up to and including June 30, 1995. The
Company's calculations reflect the adoption of new Treasury Regulations which
became effective on November 4, 1992 and which have beneficial effects regarding
the treatment of options and other aspects of the ownership change calculation.
11. HNS LITIGATION SETTLEMENT:
Effective June 2, 1995, the Company entered into a Settlement Agreement and
Mutual Release (the "Settlement Agreement") with Hughes Network Systems, Inc.
("HNS") in connection with the lawsuit filed against the Company by HNS in
February 1993. In the lawsuit, HNS alleged the Company breached certain
agreements which were entered into between HNS and the Company relating to
the termination of certain prior agreements between the parties. Under the
terms of the Settlement Agreement, the Company has paid HNS $7.5 million,
which amount had been substantially previously reserved by the Company,
and HNS has been granted credits aggregating $900,000 against royalty and other
payment obligations relating to the Company's proprietary TDMA technology
("Credits"). The Credits may be applied to any royalties becoming due to the
Company or its affiliates from HNS after the date of the Settlement Agreement
pursuant to the 1990 License Agreement dated October 23, 1990, the 1992
License Agreement, dated February 29, 1992 and any other agreement between
HNS and the Company or its affiliates relating to intellectual property
rights.
12
<PAGE>
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 Form 10-Q.
InterDigital commenced operations in 1972 and until 1987 was primarily
engaged in research and development activities related to its TDMA wireless
digital communications technology. In 1986, the Company introduced the
UltraPhone system, a fixed digital wireless local loop telephone system
employing its patented and proprietary TDMA technology, which it began
installing in 1987. The Company's operations from 1987 through 1992 were
characterized by increasing revenues accompanied by significant operating
losses. During this period, significant costs were incurred related to the
commercialization and continued development of the UltraPhone system,
development of production sources and capacity, and the implementation of a
broad-based sales and marketing effort designed to promote regulatory and market
acceptance of the UltraPhone system. During 1993, 1994 and for the nine months
ended September 30, 1995, UltraPhone revenues were significantly lower than in
1992; losses increased significantly as a result of the decline in UltraPhone
revenues and other increases in costs, such as the increased investment in
B-CDMA research and development, engineering of product redesigns and
enhancements, the increase in litigation costs and the costs associated with
enforcement of ITC's intellectual property rights. In 1994, the Company began to
realize positive results from its efforts to capitalize upon the revenue
potential of its TDMA and CDMA patent portfolio and recognized $28.7 million of
licensing revenue, representing over 57% of total revenues for 1994. The
licensing revenue and increased UltraPhone sales in 1994 over 1993 led to
reduced losses in 1994 compared to 1993 despite large increases in the costs of
litigation associated with enforcement of ITC's intellectual property rights and
other costs. During the nine months ended September 30, 1995, the Company
recognized $66.1 million of licensing revenue and generated $37.5 million of net
income for the period which decreased the Company's accumulated deficit as of
September 30, 1995 to $147.3 million.
On March 29, 1995, a trial involving ITC and Motorola, Inc. ended with the
jury's verdict, which is subject to varying interpretation, but which is
interpreted by the Company to mean that ITC's patent claims at issue in the
case, involving four of ITC's patents, are not infringed by Motorola and, if
construed to be infringed, are invalid. While the Company intends to appeal the
jury verdict and believes that a strong basis exists to overturn the verdict,
the ultimate resolution of this matter will likely occur in the intermediate to
long term. In the short term, the verdict may adversely affect the Company's
efforts to generate further revenue and cash flow from ITC's patent portfolio
and may impair generally the Company's ability to raise additional funds for
general corporate purposes. The outcome of the jury trial may also temporarily
or permanently adversely affect ITC's pending U.S. litigation against Ericsson
and its ability to realize running royalties or specified installment payments
under certain of its license agreements.
Historically, InterDigital's primary source of revenue was derived from sales
of the UltraPhone digital wireless local loop telephone system. In recent years,
foreign sales have represented a majority of the sales of UltraPhone systems,
and it is anticipated that foreign sales will represent a majority of UltraPhone
sales for the foreseeable future. UltraPhone sales have, on a historical basis,
varied significantly from quarter to quarter due to the concentration of
revenues from the Company's largest customers over a few fiscal quarters.
The Company began to experience a significant decline in UltraPhone order
volume during 1992. Beginning in 1992, competition for sales of wireless
telephone systems intensified as providers of both analog and digital cellular
systems, many of which have significantly greater resources than the Company,
more actively promoted their products for fixed site installations in the
Company's target markets. At the same time, the Company began to restructure its
sales and marketing efforts to focus on multi-year, large-scale
telecommunications infrastructure programs in which the UltraPhone would be
positioned as a fundamental component in the rural and near-urban telephone
networks of such programs.
13
<PAGE>
During 1993 and 1994, the Company sought to counter these competitive
pressures by emphasizing the advantages which it believes the UltraPhone offers
over fixed cellular and other wireless systems and by lowering UltraPhone system
prices.
In order to support the flexible pricing generally required in multi-year
programs, the Company introduced a redesigned central office terminal which
expanded base station capacity by over 50% and a significantly lower-priced
cluster unit during the last half of 1994 and expects to introduce a more
fully-featured subscriber unit during the first half of 1996. Reductions in
product costs would be most fully realized in cluster systems and, to a lesser
degree, in other non-cluster configurations in which there is a high ratio of
subscriber units to base stations. The Company anticipates that it will
continuously need to reduce prices and expand product features due to industry
demands which will result in continued pressure upon gross profit margins until
such time as the Company is able to reduce product costs commensurate with price
reductions. The Company has experienced and may continue to experience,
engineering delays in the introduction of its new subscriber unit. Given the
possibility of engineering delays and difficulties and the failure, to date, to
sell UltraPhone systems with a high cluster utilization, there can be no
assurance that the Company will be able to achieve such product cost reductions,
or that the development costs necessary for such efforts will be acceptable to
the Company.
The inability to competitively approach the aggressive pricing from fixed
cellular and other competitors, the significant additional complexities of, and
time required in, competing for large scale programs, as well as the
restructuring of the sales force, have all adversely impacted order volume and
revenues since 1993. Delays in introduction of the new subscriber unit may
further adversely affect order volume and timing of revenue recognition,
including timing of revenue recognition from the $17 million Philippines order
announced during the second quarter of 1995. The Company is continuing to adjust
its sales and marketing strategies by focusing its direct efforts, improving its
UltraPhone distribution network and pursuing various alliance partners. The
Company entered into its first major alliance in December 1994 with Siemens. As
part of the relationship, Siemens has begun to market the UltraPhone product.
The Company does not currently anticipate that the Siemens relationship will
generate significant UltraPhone shipments and revenues in 1995 and expects that
the level of UltraPhone revenues sustained during the first two quarters of 1995
will decline in the second half of 1995 compared to the first half.
In addition to the effects of varying selling prices and product materials
costs, the Company's gross profit margin ratios are ordinarily affected by the
relative proportions of direct and distributor sales, by the average number of
subscribers per system sold, by its ability to absorb manufacturing overhead
costs through generation of sufficient production volume and by the field
service costs for installation, warranty, training and post-sale support.
Consistent with industry practices, distributor commissions have been included
in both revenues and cost of sales. Historically, the Company's gross profit
margin from sales has been inadequate to support its operating and other
expenses. The low sales volumes experienced in previous years have resulted in
production volumes, which were inadequate to fully absorb fixed production
overhead costs, resulting in negative gross margins; at current sale price
levels, UltraPhone gross profits would be positive if higher production and
sales volumes were achieved.
Results of Operations - Third Quarter of 1995 Compared to the
Third Quarter of 1994
Total Revenues. Total revenues in the third quarter ended September 30, 1995
decreased 27.9% to $5.8 million from $8.1 million in the third quarter ended
September 30, 1994 primarily due to a decrease in UltraPhone revenues offset by
the recognition of higher licensing revenue in the 1995 period. UltraPhone sales
decreased 77.0% in the third quarter of 1995 to $1.6 million from $7.1 million
in the comparable quarter of 1994. During the third quarter of 1995, ITC
recognized $4.0 million of revenue as part of the Siemens series of agreements.
The Company had contract revenue related to its U.S. Federal government and
other services contracts for the third quarter in both 1994 and 1995. During the
third quarter of 1995, the Company had $212,000 of contract revenue as compared
to $368,000 during the third quarter of 1994. The decrease in revenue is due to
the completion of the remaining contracts for which the Company was obligated.
During the third quarter of 1994, the Company began withdrawing from the
contract services market in order to focus on its other core business
activities.
14
<PAGE>
Cost of UltraPhone Sales. The cost of UltraPhone sales for the third quarter of
1995 decreased 47.3% to $3.8 million from $7.2 million for the third quarter of
1994. The Company incurred a negative gross margin on UltraPhone sales of 132.9%
for the three months ended September 30, 1995 as compared to a negative gross
margin of 1.7% for the three month period ended September 30, 1994. Included in
cost of UltraPhone sales are costs of product assembly, integration and testing,
distributor commissions, freight and tariffs, and expenses associated with
installation, support and warranty services related to the UltraPhone systems.
Also included in the cost of sales are the overhead expenses the Company has
incurred in maintaining its production resources that were not absorbed into
inventory due to the low volume of production.
Contract Services Costs. Contract services costs increased 11.0% to $242,000 in
the three month period ended September 30, 1995 from $218,000 in the third
quarter of 1994. The increase is due primarily to the additional costs of
shutdown of the facilities related to this segment of the business.
Other Operating Expenses. Other operating expenses include sales and
marketing expenses, general and administrative expenses and research and
development expenses.
Sales and marketing expenses decreased 32.2% to $723,000 during the third
quarter of 1995 as compared to $1.1 million during the third quarter of 1994.
The decrease is primarily due to reduced staff and activity levels during the
three month period of 1995 and reduced commissions expense, commensurate with
the reduction in UltraPhone revenues.
General and administrative expenses for the third quarter of 1995 decreased
34.4% to $2.6 million from $3.9 million for the third quarter of 1994. The
reduction in general and administrative expense is due to the elimination of the
administrative function of the Company's contract services group ($527,000) and
a decrease in the Company's legal costs of $548,000 due to the decreased level
of activities. Additionally, the third quarter of 1994 includes $440,000 of
severance costs for terminated employees.
Research and development expenses increased 19.5% for the third quarter of
1995 to $2.5 million from $2.1 million for the third quarter of 1994. The
increase over the prior year period is due primarily to increased staff and
activity levels devoted to the development of the B-CDMA technology and the
development of the Company's fourth generation UltraPhone product expected
during the first half of 1996. Statement of Financial Accounting Standards No.
86 requires capitalization of certain software development costs. The effects of
this statement reduced the research and development expenses for the three month
period ended September 30, 1994 by $57,000. No costs were capitalized in the
1995 period.
Other Income and Expense. Interest income for the third quarter of 1995 was
$916,000 as compared to $25,000 for the third quarter of 1994. The increase is
due primarily to greater average invested cash balances in 1995 compared to
1994. Interest expense for the three month period ended September 30, 1995 was
$14,000 as compared to $198,000 for the three month period ended September 30,
1994. The decrease is due primarily to the settlement of the HNS obligation
during the second quarter of 1995. Remaining interest is incurred on the
Company's capital lease obligations.
Minority Interest. In December 1992, the Company sold 5.76% of the common
shares of InterDigital Patents Corporation ("Patents Corp."), which had, prior
thereto, been a wholly-owned subsidiary of the Company. The Company recorded
$246,000 as an increase in minority interest in the third quarter of 1995
representing the minority interest's portion of the net income of Patents Corp.
for the third quarter of 1995. During the comparable 1994 period, the Company
recorded a reduction of $38,000 in minority interest representing the minority
interest's portion of the net loss of Patents Corp. for the third quarter of
1994.
15
<PAGE>
Results of Operations - Nine Months Ended September 30, 1995 Compared to
Nine Months Ended September 30, 1994
Total Revenues. Total revenues in the nine months ended September 30, 1995
increased to $79.8 million from $14.6 million in the nine months ended September
30, 1994 primarily due to the recognition of $66.1 million of licensing revenue
in the 1995 period. UltraPhone sales increased 25.2% in the nine months ended
September 30, 1995 to $13.1 million from $10.4 million in the nine months ended
September 30, 1994.
During the nine months ended September 30, 1995, ITC entered into royalty
bearing license agreements with Pacific Communication Sciences, Inc., a
subsidiary of Cirrus Logic, Inc., Sanyo Electric Company, Ltd., Mitsubishi
Electric Corporation, Hitachi, Ltd. together with its affiliate Kokusai Electric
Co. Ltd., and NEC Corporation under its patent portfolio for the manufacture,
use and sale of TDMA based subscriber units and infrastructure equipment. These
agreements contained advance payment obligations pursuant to which ITC is
entitled to receive an aggregate of approximately $54.1 million, which was
recognized as revenue during the first two quarters of 1995. Additionally, the
Company recognized $12.0 million of revenue as part of the Siemens series of
agreements.
The Company had contract revenue related to its U.S. Federal government and
other services contracts for the nine months ended September 30, 1994 and 1995.
During the nine months ended September 30, 1995, the Company had $657,000 of
contract revenue as compared to $918,000 during the nine months ended September
30, 1994. The decrease in revenue is due to the completion of the remaining
contracts for which the Company was obligated. During the third quarter of 1994,
the Company began withdrawing from the contract services market in order to
focus on its other core business activities.
Cost of UltraPhone Sales. The cost of UltraPhone sales for the nine months ended
September 30, 1995 increased 37.1% to $15.5 million from $11.3 million for the
nine months ended September 30, 1994. The Company incurred a negative gross
margin on UltraPhone sales of 18.6% for the nine months ended September 30, 1995
as compared to a negative gross margin of 8.4% for the nine month period ended
September 30, 1994. Included in cost of UltraPhone sales are costs of product
assembly, integration and testing, distributor commissions, freight and tariffs,
and expenses associated with installation, support and warranty services related
to the UltraPhone systems. Also included in the cost of sales are the overhead
expenses the Company has incurred in maintaining its production resources that
were not absorbed into inventory due to the low volume of production.
Contract Services Costs. Contract services costs decreased 19.9% to $754,000 in
the nine month period ended September 30, 1995 from $941,000 in the nine months
ended September 30, 1994, primarily due to the shutdown of the facilities
related to this segment of business.
Other Operating Expenses. Other operating expenses include sales and
marketing expenses, general and administrative expenses and research and
development expenses.
Sales and marketing expenses decreased 16.6% to $2.8 million during the nine
months ended September 30, 1995 as compared to $3.3 million during the nine
months ended September 30, 1994. The decrease is primarily due to reduced staff
and activity levels, but was partially offset by an increase in commission
expense due to the increase in UltraPhone revenues in the nine month period of
1995.
General and administrative expenses for the nine months ended September 30,
1995 increased 2.1% to $11.1 million from $10.9 million for the nine months
ended September 30, 1994. Expenses related to the protection and exploitation of
the Company's patents, including legal costs of the Motorola trial, increased by
approximately $3.2 million in the 1995 period compared to the 1994 period. This
increase was offset by a reduction in expense due to the elimination of the
administrative function of the Company's contract services group ($1.4 million)
and a decrease in the Company's legal costs of $538,000 due to the decreased
level of activities. Additionally, the nine months ended September 30, 1994
includes $1.0 million of severance costs for terminated employees.
16
<PAGE>
Research and development expenses increased 12.7% for the nine months ended
September 30, 1995 to $6.4 million from $5.7 million for the nine months ended
September 30, 1994. The increase over the prior year period is due primarily to
increased staff and activity levels devoted to the development of the B-CDMA
technology and the development of the Company's fourth generation UltraPhone
product expected during the first half of 1996. Statement of Financial
Accounting Standards No. 86 requires capitalization of certain software
development costs. The effects of this statement reduced the research and
development expenses for the nine month periods ended September 30, 1994 and
1995 by $423,000 and $149,000, respectively.
Other Income and Expense. Interest income for the nine months ended September
30, 1995 was $2.1 million as compared to $106,000 for the nine months ended
September 30, 1994. The increase is due primarily to greater average invested
cash balances in 1995 compared to 1994. Interest expense for the nine month
period ended September 30, 1995 was $624,000 as compared to $497,000 for the
nine month period ended September 30, 1994. The increase is due primarily to the
additional interest expense recorded due to the settlement of the HNS obligation
during the second quarter of 1995.
Minority Interest. In December 1992, the Company sold 5.76% of the common shares
of Patents Corp., which had, prior thereto, been a wholly-owned subsidiary of
the Company. The Company recorded $4.0 million as an increase in minority
interest in the nine months ended September 30, 1995 representing the minority
interest's portion of the net income of Patents Corp. for the nine months ended
September 30, 1995. During the comparable 1994 period, the Company recorded a
reduction of $33,000 in minority interest representing the minority interest's
portion of the net loss of Patents Corp. for the nine months ended September 30,
1994.
Financial Position, Liquidity and Capital Requirements:
The Company had, prior to 1995, experienced liquidity problems due to its lack
of profits sufficient to generate cash at a level necessary to fund its
investment in additional equipment, its UltraPhone technology development, its
patent activities, its B-CDMA research and development activities, and its
operating losses. Since the fourth quarter of 1994, the Company has generated
operating profits and substantially strengthened its cash position through its
alliance and licensing transactions. Proceeds from licensing transactions, paid
to ITC, can be made available for uses related to UltraPhone marketing efforts,
product development efforts or other Company uses upon such funds being
transferred to InterDigital pursuant to contractual arrangements or in
conjunction with a dividend declaration.
The Company had working capital of $63.0 million at September 30, 1995
compared to working capital of $10.1 million at December 31, 1994. The increase
in working capital since December is due primarily to $85.7 million of cash
received on patent licensing agreements and $12.8 million received from stock
option and warrant exercises offset by operating cash needs of the Company's
UltraPhone business, patent licensing and enforcement activities and general and
administrative functions.
The Company's operations to date have required substantial amounts of working
capital. The Company may, at some future date subsequent to 1995, require
additional debt or equity capitalization to fully support its product
development and marketing activities relating to its proprietary technologies
and to fund its patent enforcement activities. The Company does not presently
maintain bank lines of credit and may therefore, in such event, seek to meet
such needs through the sale of debt or equity securities. The Company's working
capital requirements will depend on numerous additional factors, including but
not limited to the success of the Siemens relationship and the broader alliance
strategy, the level of demand and related margins for the UltraPhone system, the
progress and cash requirements of the Company's research and product development
programs, the ability to generate patent license fees and royalties, and the
need to expend funds in connection with its patent enforcement activities. In
addition, when the Company builds to specification to complete an order, it
traditionally experiences negative cash flows from inception of its production
ordering through customer payment at the time of, or subsequent to, order
shipment. If the Company were to experience additional sudden and significant
increases in orders to be built to specification, it would intensify the need
for significant short-term financing arrangements. The Company is increasingly
marketing the UltraPhone System in urban and near-urban applications and has
received a $17 million order for such an application. It is likely that the
Company will expend funds for certain engineering modifications to the
UltraPhone System required to facilitate any such particular urban or near-urban
application and such engineering requirements could cause delays in fulfilling
related orders.
17
<PAGE>
The Company will be relocating all of its Pennsylvania operations and support
activities to a new location within the King of Prussia, Pennsylvania area
during December 1995. The Company is currently exploring both lease and
purchase alternatives for the new facility. If the Company were to select to
purchase the facility, the expected cost would be approximately $4 million
and would probably be partially or fully financed through a mortgage.
The Company believes that its investment in inventories and non-current assets
are stated on its September 30, 1995 balance sheet at realizable values based on
expected selling price and order volumes. Property and equipment are currently
being utilized in the Company's on-going business activities, and the Company
believes that no additional write-downs are required at this time due to lack of
use or technological obsolescence. With respect to other assets, the Company
believes that the value of its patents is at least equal to the value included
in the September 30, 1995 balance sheet.
Changes in Cash Flows and Financial Condition:
The Company has experienced positive cash flows from operations during the
nine months ended September 30, 1995. The positive cash flows from operations
are primarily due to the receipt of $85.7 million related to the Company's
patent licensing activities offset by expenses incurred for UltraPhone
production and marketing, B-CDMA technology development and the Company's
general and administrative activities.
Net cash flows from investing activities were negative for the nine months
ended September 30, 1995 due to the Company's investment in property and
equipment, software development costs and patents. Notwithstanding the above,
the amount of cash used in investing activities has, historically, been low
relative to cash used in operations.
During the nine month period ended September 30, 1995, the Company generated
$12.6 million from investing activities. The funds were primarily generated by
the exercise of stock options and warrants.
Cash and cash equivalents of $69.5 million as of September 30, 1995 includes
$60.2 million held by Patents Corp. and $787,000 of restricted cash. The
UltraPhone accounts receivable of $3.3 million at September 30, 1995 reflect
amounts due from normal trade receivables, including non-domestic open accounts,
as well as funds to be remitted under letters of credit. Of the outstanding
trade receivables as of September 30, 1995, $1.1 million has been collected
through November 10, 1995. Of the $800,000 license fees receivable as of
September 30, 1995, $400,000 has been received as of November 10, 1995.
Inventory levels have decreased at September 30, 1995 to $4.4 million from
$5.0 million as of December 31, 1994, reflecting the sale of systems,
principally to Indonesia. Inventories at December 31, 1994 and September 30,
1995 are stated net of valuation reserves of $7.5 million and $7.8 million,
respectively.
Included in other accrued expenses at September 30, 1995 are professional
fees, consulting and other accruals and deferred rent relating to the corporate
headquarters and manufacturing facilities, as well as sales taxes payable.
18
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On November 7, 1994, a complaint was filed in the United States District Court
for the Eastern District of Pennsylvania (Civil Action No. 94-CV-6751) against
the Company and its former chief executive officer alleging certain violations
of the disclosure requirements of the federal securities laws and seeking
damages on behalf of shareholders who purchased the Company's stock during the
class period stated to be March 31, 1994 to August 5, 1994. The alleged
violations relate to the disclosure of three proposed financing transactions:
(1) a revised financing offered through Prudential Securities Incorporated; (2)
a Purchase Agreement entered into on March 11, 1994 between the Company and a
proposed purchaser to sell $30 million of the Company's discounted common stock
and warrants, and a related $3 million loan to the Company; and (3) a $25
million loan to the Company from Oregon Financial Group, Inc. ("OFG"). On April
25, 1995, the Court entered an order certifying the case as a class action. The
Company believes that the complaint is without merit and intends to contest it
vigorously. The Company filed a motion for summary judgment in June 1995 and a
reply brief to the plaintiffs motion for summary judgment in July 1995.
Oral arguments on the motion were held in August 1995. On September 13, 1995,
the Court entered an order directing that all summary judgment matters be
submitted prior to the adjudication of defendants' motion. Accordingly, the
Court denied defendants' motion without prejudice so that defendants could
submit a supplemental brief and expert report. The defendants filed these papers
on October 16, 1995, adding an additional basis for the motion to the effect
that there was no statistically significant change in the stock price when the
"true" facts came out, indicating that as a matter of law there
were no material misstatements or omissions. The court has set the next
scheduling conference for December 7, 1995. Defendants have retained an expert
to prepare a report and to assist in the preparation of their supplemental
submission. Should summary judgment not be granted, the case will likely proceed
to trial in early 1996.
In October 1993, Motorola, Inc. filed an action against ITC seeking the
court's declaration that Motorola's products do not infringe certain ITC patents
and that these patents are invalid and unenforceable. ITC filed counterclaims
seeking a jury's determination that in making, selling, or using and/or
participating in the making, selling or using of digital wireless telephone
systems and/or related mobile stations, Motorola has infringed, contributed to
the infringement of and/or induced the infringement of certain patents from
ITC's patent portfolio. ITC also sought preliminary and permanent injunctions
against Motorola from further infringement and sought damages, royalties, costs
and attorneys' fees. A trial was held in United States District Court for the
District of Delaware (Civil Action No. 94-73 (D. Del.)) on the issue of validity
and infringement of 24 patent claims involving four ITC patents, U.S. Patent
Nos. 4,675,863; 4,817,089; 5,119,375 and 4,912,705. By stipulation of the
parties, the case was limited to certain TDMA products made, used and/or sold by
Motorola.
On March 29, 1995, the trial ended with the jury's verdict, which is subject
to varying interpretations, but which is interpreted by the Company to mean that
ITC's patent claims at issue in the case are not infringed by Motorola and, if
contrued to be infringed, are invalid. Motorola has filed a motion requesting
attorney's fees and costs aggregating between $6 and $7 million. The Company has
filed a motion with the U.S. District Court for the District of Delaware
requesting that the court overturn and/or clarify all or part of the jury
verdict or grant a new trial, and, if that motion is unsuccessful, intends to
appeal the jury verdict to the U.S. Court of Appeals of the Federal Circuit. The
Company believes that there are substantial grounds for reversal of the jury's
verdict or the granting of a new trial and that the motion for attorney's fees
and costs is without merit.
On September 9, 1993, ITC filed a patent infringement action against Ericsson
GE. and its Swedish patent Telefonaktieboleget LM Ericsson ("LM Ericsson"), in
the United States District Court for the Eastern District of Virginia (Civil
Action No. 93-1158-A (E.D.Va.)); by amendment on September 13, 1993, ITC added
as a defendant Ericsson Radio. The Ericsson action seeks a jury's determination
that in making, selling, or using, and/or in participating in the making,
19
<PAGE>
selling or using of digital wireless telephone systems and/or related mobile
stations, Ericsson has infringed, contributed to the infringement of and/or
induce the infringement of eight patents from ITC's patent portfolio. The
Ericsson action also seeks preliminary and permanent injunctions against
Ericsson from further infringement and seeks damages, royalties, costs and
attorney's fees. On September 22, 1993, Ericsson Radio and Ericsson GE filed a
motion to transfer ITC's action to the United States District Court for the
Northern District of Texas. On September 22, 1993, LM Ericsson and Ericsson
Radio filed a motion to dismiss the complaint against them for lack of personal
jurisdiction. Also, on September 30, 1993, Ericsson GE filed an answer in which
it denied the allegations of the complaint and asserted a counterclaim seeking a
declaratory judgment that the asserted patents are either invalid or not
infringed. On the same day that ITC filed the Ericsson action, two of the
Ericsson Defendants, Ericsson Radio and Ericsson GE. filed a lawsuit against the
Company and ITC in the United States District Court for the Northern District of
Texas (Civil Action No. 3-93CV1809-H (N.D.Tx.)) (the "Texas action"). The Texas
action, which involves the same patents that are subject of the Ericsson action,
seeks the court's declaration that Ericsson's products do not infringe ITC's
patents, that ITC's patents are invalid and that ITC's patents are
unenforceable. The Texas action also seeks judgment against the Company and ITC
for tortious interference with contractual and business relations, defamation
and commercial disparagement, and Lanham Act violations. The Company and ITC
intend to vigorously defend the Texas action. On October 8, 1993, the District
Court for the Eastern District of Virginia granted the motion to transfer that
was filed by Ericsson Radio and Ericsson GE. Both Ericsson actions have been
consolidated and are scheduled to go forward in the United States Federal
District Court for the Northern District of Texas. As a result of the transfer,
Ericsson Radio has withdrawn its motion to dismiss for lack of personal
jurisdiction. ITC agreed to the dismissal without prejudice of LM Ericsson. On
July 1, 1994, ITC filed a motion to transfer the Texas action to the United
States District Court for the District of Delaware. On October 4, 1994, this
motion was denied. Pursuant to an order of the District Court in Texas,
proceedings in the Ericsson action have been stayed until January 23, 1996. The
Company anticipates that if the present stay is not further extended, discovery
will resume and the parties will proceed to trial sometime in 1996 or 1997.
ITC has filed patent applications in numerous foreign countries. Typical of
the processes involved in the issuance of foreign patents, Philips, Alcatel and
Siemens each filed oppositions in the German Patent Office seeking to revoke the
issuance of ITC's basic German TDMA system patent granted on June 28, 1990. On
October 19, 1993, after formal opposition proceedings, the German Patent Office
confirmed the validity of the ITC basic German system patent. Alleged briefs
have been filed by Philips, Alcatel, Siemens and Ericsson and additional
arguments have been based upon prior art and references, some of which were not
previously considered by the German Patent Office. A formal hearing may be held
as early as March 1996 in this matter. ITC is and may from time to time be
subject to additional challenges with respect to its patents and patent
applications in foreign countries. Although no assurances can be given as to the
eventual outcome of these patent challenges, ITC intends to vigorously defend
its issued patents and pending applications. If any of these patents are
revoked, ITC's patent licensing opportunities in such relevant foreign countries
could be materially and adversely affected.
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 upon
information presently available to the Company, the Company believes that the
ultimate outcome of these other actions will not materially affect the Company.
20
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following is a list of exhibits filed as part of the Form 10-Q.
Exhibit 11 - Computation of Net Income (Loss) Per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the quarter
ended September 30, 1995.
21
<PAGE>
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 10, 1995 /s/ William J. Burns
------------------------------------
William J. Burns, Chairman and Chief
Executive Officer
Date: November 10, 1995 /s/ James W. Garrison
------------------------------------
James W. Garrison, Vice President -
Finance, Chief Financial Officer and
Treasurer
22
<PAGE>
EXHIBIT 11
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
COMPUTATION OF PRIMARY ENDED
EARNINGS (LOSS) PER SHARE: SEPTEMBER 30, 1995
-------------------------- ------------------
<S> <C>
Net Income (Loss) Applicable to Common Shareholders $ 37,337
==================
Weighted Average of Primary Shares:
Common Stock 43,770
Assumed Conversion of Options and Warrants 2,563
------------------
46,333
==================
Primary Earnings Per Share $ 0.81
==================
</TABLE>
A calculation for the three and nine month periods ended September 30, 1994
and the three month period ended September 30, 1995 have not been presented
since the effect of the options and warrants would be anti-dilutive.
23
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
[/LEGEND]
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
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0
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