<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 June 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 44,274,213
Class Outstanding at August 9, 1995
<PAGE>
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGES
<S> <C> <C>
Part I - Financial Information:
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - 3-4
December 31, 1994 and June 30, 1995 (unaudited)
Consolidated Statements of Operations 5
Three and Six Months Ended June 30, 1994 and 1995 (unaudited)
Consolidated Statements of Cash Flows - 6-7
Six Months Ended June 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 19-21
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 23
</TABLE>
2
<PAGE>
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
ASSETS 1994 1995
------ ----------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents, including restricted
cash of $471 and $567, respectively $ 6,264 $ 67,191
License fees receivable 20,900 5,800
Accounts receivable, net of allowance for
uncollectable accounts of $2,333 and $1,817, respectively 3,683 3,858
Inventories 5,014 3,886
Deposits on inventory purchases 539 759
Other current assets 860 1,121
Total current assets 37,260 82,615
PROPERTY AND EQUIPMENT:
Machinery and equipment 3,780 4,120
Computer equipment 3,476 3,860
Furniture and fixtures 1,521 1,529
Leasehold improvements 831 896
9,608 10,405
Less-accumulated depreciation and amortization (7,333) (7,775)
Net property and equipment 2,275 2,630
OTHER ASSETS:
Patents, net of accumulated amortization of
$2,946 and $3,201 respectively 2,588 2,551
Deferred software costs, net of accumulated amortization
of $503 and $672, respectively 922 902
Other 785 686
Total other assets 4,295 4,139
$ 43,830 $ 89,384
</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, JUNE 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1994 1995
------------------------------------ ------------ --------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long term debt $ 233 $ 190
Due to Hughes Network Systems, Inc. 7,003 -
Accounts payable 9,536 3,506
Accrued compensation 2,904 4,491
Purchase commitment reserve 1,304 843
Deferred revenue 665 2,067
Income and foreign withholding taxes payable 1,573 1,693
Accrued distributor commissions 616 224
Accrued warranty costs 765 753
Other accrued expenses 2,543 2,300
Total current liabilities 27,142 16,067
LONG TERM DEBT 520 526
MINORITY INTEREST 1,296 5,114
COMMITMENTS AND CONTINGENCIES (Note 3)
SHAREHOLDERS' EQUITY:
Preferred Stock, $ .10 par value, 14,399 shares authorized-
$2.50 Convertible Preferred, 113 shares and 106 shares
issued and outstanding 11 11
Common Stock, $.01 par value, 75,000 shares authorized,
41,811 shares and 44,199 shares issued and
outstanding 418 442
Additional paid-in capital 199,158 211,230
Accumulated deficit (184,665) (144,006)
14,922 67,677
Deferred compensation (50) -
Total shareholders' equity 14,872 67,677
$ 43,830 $ 89,384
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -----------------------
1994 1995 1994 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
REVENUES:
UltraPhone $2,367 $6,145 $3,373 $11,456
Licensing 2,497 30,974 2,542 62,093
Contract Services 354 141 550 445
5,218 37,260 6,465 73,994
OPERATING EXPENSES:
Cost of UltraPhone revenues 2,724 5,884 4,129 11,729
Contract service costs 426 259 723 512
Sales and marketing 1,062 975 2,280 2,068
General and administrative 3,612 4,154 6,985 8,569
Research and development 1,984 2,028 3,549 3,854
9,808 13,300 17,666 26,732
Income (loss) from operations (4,590) 23,960 (11,201) 47,262
OTHER INCOME (EXPENSE):
Interest income 37 821 81 1,224
Interest and financing expenses (215) (443) (299) (610)
Income (loss) from continuing operations before income
taxes and minority interest (4,768) 24,338 (11,419) 47,877
INCOME TAX PROVISION - (1,831) - (3,307)
Income (loss) from continuing operations before minority interest (4,768) 22,507 (11,419) 44,570
MINORITY INTEREST (62) (1,918) (5) (3,777)
Net income (loss) from continuing operations (4,830) 20,589 (11,424) 40,793
DISCONTINUED OPERATIONS:
Loss from discontinued operations - - (216) -
Provision for losses prior to expected disposal date - - (200) -
0 - (416) -
Net income (loss) (4,830) 20,589 (11,840) 40,793
PREFERRED STOCK DIVIDENDS (71) (68) (142) (134)
NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS $ (4,901) $ 20,521 $(11,982) $ 40,659
NET INCOME (LOSS) PER SHARE - CONTINUING OPERATIONS $ (0,14) $ 0.45 $ (0,33) $ 0.88
NET INCOME (LOSS) PER SHARE - DISCONTINUED OPERATIONS - - (0.01) -
NET INCOME (LOSS) PER COMMON SHARE $ (0.14) $ 0.45 $ (0.34) $ 0.88
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 35,110 45,475 35,054 46,195
(Note 7)
</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 Six Months Ended June 30,
---------------------------------
1994 1995
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $(11,424) $ 40,793
Adjustments to reconcile net income(loss) to net
cash used for operating activities-
Minority interest in subsidiary 5 3,818
Depreciation and amortization 868 836
Compensation on stock issued
and stock options granted 57 50
Loss from discontinued operations (416) --
Cash provided by discontinued operations 152 --
Other (126) (13)
Decrease (increase) in assets-
Receivables 89 14,925
Inventories (2,406) 1,128
Deposits on inventory purchases (264) (220)
Other current assets (248) (261)
Increase (decrease) in liabilities-
Accounts payable 4,060 (6,030)
Reserve for Hughes Network Systems, Inc. 20 (7,003)
Accrued compensation -- 1,587
Purchase commitment reserve -- (461)
Deferred revenue -- 1,402
Income and foreign witholding taxes payable -- 120
Accrued distributor commissions -- (392)
Accrued warranty costs -- (12)
Other accrued expenses (50) (243)
Net cash provided by (used for)
operating activities $(9,683) $ 50,024
</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 Six Months Ended June 30,
-----------------------------------
1994 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment $ (346) $ (669)
Capitalized software development costs (370) (149)
Additions to patents (286) (218)
Other non-current assets (370) --
Net cash used for investing activities (1,372) (1,036)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sales of Common Stock 256 12,076
and exercises of stock options and warrants
Proceeds from short-term debt 4,441 --
Payments on long-term debt (125) (137)
Net cash provided by financing activities 4,572 11,939
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,483) 60,927
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,211 6,264
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,728 $ 67,191
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid (excludes HNS settlement $ 118 16
Income taxes paid, primarily Foreign
Withholding Taxes -- 1,850
-------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(UNAUDITED)
1. BACKGROUND:
InterDigital Communications Corporation ("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 15.5% during the first half
of 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 from April 1994 through August 9,
1995, and the recognition of $28.7 million of licensing revenue in 1994 and
$62.1 million during the first half of 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 $12.2 million was paid as of
August 9, 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 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 June 30, 1995 and the
results of their operations for the three and six month periods ended June 30,
1994 and 1995 and cash flows for the six month periods ended June 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 six month periods
ended June 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, ITC
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 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 six months ended June 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, June 30,
1994 1995
---------- --------
<S> <C> <C>
Cash, money market and demand deposits $ 124 $ 1,675
Certificates of deposit 340 415
Repurchase agreements 5,800 20,629
Marketable Securities -- 44,472
$ 6,264 $67,191
</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 second quarter of
1994, Fidocoldex, the Company's Columbia, South America customer, accounted for
54.9% and GTE accounted for 13.8% of UltraPhone sales, respectively. During the
second quarter of 1995, the Company's Russian and Indonesian customer accounted
for 53.1% and 18.9% of UltraPhone revenues, respectively. During the six months
ended June 30, 1994, Telmex and GTE accounted for 38.5% and 20.5% of UltraPhone
sales, respectively. For the six month periods ended June 30, 1994 and 1995, the
Company's Indonesian and Russian customer accounted for 48.4% and 28.5%,
respectively of UltraPhone revenue, respectively.
10
<PAGE>
UltraPhone revenues by geographic area are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1994 1995 1994 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Domestic $ 988 $ 608 $ 1,637 $ 1,365
Foreign 1,379 5,537 1,736 10,091
$ 2,367 $ 6,145 $ 3,373 $ 11,456
</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 1995 computation since their effect
would be dilutive. (See Item 6, Exhibit 11 Computation of Net Income Per Share.)
8. LICENSING REVENUES AND AGREEMENTS:
During the second quarter of 1995, ITC entered into a royalty bearing license
agreement with NEC Corporation under its patent portfolio for the manufacture,
use and sale of TDMA based subscriber units and infrastructure equipment. This
agreement contained advance payment obligations pursuant to which ITC received
in excess of $20 million, which was recognized as revenue during the second
quarter of 1995. An additional $4.0 million of revenue was recognized during the
second quarter of 1995 pursuant to the Siemens agreements.
9. INVENTORIES:
<TABLE>
<CAPTION>
December 31, June 30,
1994 1995
------- -------
(In thousands)
<S> <C> <C>
Component parts and work-in-progress $ 3,864 $ 3,310
Finished goods 1,150 576
$ 5,014 $ 3,886
</TABLE>
Inventories are stated net of valuation reserves of $7.5 million and $7.8
million as of December 31, 1994 and June 30, 1995, respectively. In addition,
inventory purchase commitment reserves were $1.3 million and $843,000 as of
December 31, 1994 and June 30, 1995.
10. 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
11
<PAGE>
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. 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 June 30, 1995, consists of
a current foreign withholding tax provision of $1.4 million, a current state and
local tax provision of $41,000 and a Federal Alternative Minimum Tax provision
of $420,000. 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 June 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.
12. 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. The use of the credits
cannot currently be predicted by the Company and therefore willl be charged to
earnings as they are used.
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 and 1994, 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 first half of 1995, the Company recognized $62.1 million of licensing
revenue and generated $40.7 million of net income which decreased the Company's
accumulated deficit as of June 30, 1995 to $144.0 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.
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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 initial shipments of more
fully-featured subscriber unit during the first half of 1996. The Company
anticipates that reductions in product costs will be most fully realized in
cluster systems and will be realized, 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 due to industry demands and such industry demands 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 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
Aktiengesellschaft ("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 UltraPhone revenues 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 - Second Quarter of 1995 Compared to the
Second Quarter of 1994
Total Revenues. Total revenues in the second quarter ended June 30, 1995
increased to $37.3 million from $5.2 million in the second quarter ended June
30, 1994 primarily due to the recognition of $31.0 million of licensing
revenue in the 1995 period as compared to $2.5 million in the comparable
quarter of 1994. UltraPhone sales increased 159.6% in the second quarter of
1995 to $6.1 million from $2.4 million in the comparable quarter of 1994.
During the second quarter of 1995, ITC entered into royalty bearing license
agreements with one licensee under its patent portfolio for the manufacture, use
and sale of TDMA based subscriber units and infrastructure equipment. This
agreement contained advance payment obligations pursuant to which ITC received
in excess of $20 million, which was recognized as revenue during the second
quarter of 1995. Additionally, the Company recognized revenue of $4.0 million 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 second quarter in both 1994 and 1995. During
the second quarter of 1995, the Company had $141,000 of contract revenue as
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compared to $354,000 during the second 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.
Cost of UltraPhone Sales. The cost of UltraPhone sales for the second quarter of
1995 increased 116.0% to $5.9 million from $2.7 million for the second quarter
of 1994. The Company had a positive gross margin on UltraPhone sales of 4.2% for
the three months ended June 30, 1995 as compared to a negative gross margin of
15.1% for the three month period ended June 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 39.2% to $259,000 in
the three month period ended June 30, 1995 from $426,000 in the second quarter
of 1994, primarily due to the shutdown of the facilities and the termination of
employees, accrued for in the prior year, 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 8.2% to $975,000 during the second
quarter of 1995 as compared to $1.1 million during the second quarter of 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 three month period of 1995.
General and administrative expenses for the second quarter of 1995 increased
15.0% to $4.2 million from $3.6 million for the second quarter of 1994. Expenses
related to the protection and exploitation of the Company's patents, including
legal costs of the Motorola trial, increased by approximately $980,000 in the
1995 period compared to the 1994 period. The increased patent expenses were
offset by the elimination of the administrative costs of the contract services
operation which were $485,000 in the prior year period.
Research and development expenses were comparable between the second quarter
of 1995 and the second quarter of 1994. 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 second half of 1995, were
comparable between the periods. 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
periods ended June 30, 1994 and 1995 by $220,000 and $102,000, respectively.
Other Income and Expense. Interest income for the second quarter of 1995 was
$821,000 as compared to $37,000 for the second 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 June 30, 1995 was
$453,000 as compared to $215,000 for the three month period ended June 30, 1994.
The increase is due primarily to the additional interest expense recorded due to
the settlement of the HNS obligation.
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 $1.9 million as an increase in minority
interest in the second quarter of 1995 representing the minority interest's
portion of the net income of Patents Corp. for the second quarter of 1995.
During the comparable 1994 period, the Company recorded an increase of $62,000
in minority interest representing the minority interest's portion of the net
income of Patents Corp. for the second quarter of 1994.
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Results of Operations - Six Months Ended June 30, 1995 Compared
to Six Months Ended June 30, 1994
Total Revenues. Total revenues in the six months ended June 30, 1995 increased
to $74.0 million from $6.5 million in the six months ended June 30, 1994
primarily due to the recognition of $62.1 million of licensing revenue in the
1995 period compared to $2.5 million in the six months ended June 30, 1994.
UltraPhone sales increased 239.6% in the six months ended June 30, 1995 to $11.5
million from $3.4 million for the six months ended June 30, 1994.
During the first half of 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 $62.1 million, which was recognized as revenue during
the first half of 1995. Additionally, the Company recognized revenue of $8.0
million 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 first half in both 1994 and 1995. During the
first half of 1995, the Company had $445,000 of contract revenue as compared to
$550,000 during the first half 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.
Cost of UltraPhone Sales. The cost of UltraPhone sales for the six months ended
June 30, 1995 increased 184.1% to $11.7 million from $4.1 million for the six
months ended June 30, 1994. The Company incurred a negative gross margin on
UltraPhone sales of 2.4% for the six months ended June 30, 1995 as compared to a
negative gross margin of 22.4% for the six month period ended June 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 29.2% to $512,000 in
the six month period ended June 30, 1995 from $723,000 in the six months ended
June 30, 1994, primarily due to the shutdown of the facilities and the
termination of employees, accrued for in the prior year, 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 9.3% to $2.1 million during the six
months ended June 30, 1995 as compared to $2.3 million during the six months
ended June 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 three month period of 1995.
General and administrative expenses for the six months ended June 30, 1995
increased 22.7% to $8.6 million from $6.4 million for the six months ended June
30, 1994. Expenses related to the protection and exploitation of the Company's
patents increased by approximately $3.3 million in the 1995 period compared to
the 1994 period. The increased patent expenses were offset by the elimination of
the administrative costs of the contract services operation which were $862,000
in the prior year period. The six months ended June 30, 1994 includes $560,000
of severance costs for terminated employees.
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Research and development expenses increased 8.6% for the six months ended June
30, 1995 to $3.9 million from $3.5 million for the six months ended June 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 second half of 1995. 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 six month periods ended June 30, 1994 and 1995 by $366,000 and $149,000,
respectively.
Other Income and Expense. Interest income for the six months ended June 30, 1995
was $1.2 million as compared to $81,000 for the six months ended June 30, 1994.
The increase is due primarily to greater average invested cash balances in 1995
compared to 1994. Interest expense for the six month period ended June 30, 1995
was $619,000 as compared to $299,000 for the six month period ended June 30,
1994. The increase is due primarily to the additional interest expense recorded
due to the settlement of the HNS obligation.
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 $3.8 million as an increase in minority
interest in the six months ended June 30, 1995 representing the minority
interest's portion of the net income of Patents Corp. for the six months ended
June 30, 1995. During the comparable 1994 period, the Company recorded an
increase of $5,000 in minority interest representing the minority interest's
portion of the net income of Patents Corp. for the six months ended June 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 and
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 $66.5 million at June 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 $75.7 million of cash received on
patent licensing agreements and $12.1 million received from stock option and
warrant exercises.
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 of 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
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increases in orders to be built to specification, it may create 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.
The Company believes that its investment in inventories and non-current assets
are stated on its June 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 June 30, 1995 balance sheet.
Changes in Cash Flows and Financial Condition:
The Company has experienced positive cash flows from operations during the six
months ended June 30, 1995. The positive cash flows from operations are
primarily due to the receipt of $75.7 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 six months
ended June 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 six month period ended June 30, 1995, the Company generated $11.9
million from financing activities. The funds were primarily generated by the
exercise of stock options and warrants.
Cash and cash equivalents of $67.2 million as of June 30, 1995 includes $60.1
million held by Patents Corp. and $567,000 of restricted cash. The UltraPhone
accounts receivable of $3.9 million at June 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 June 30, 1995, $276,000 has been collected through August 9, 1995. Of the
$5.8 million license fees receivable as of June 30, 1995, $5.0 million has been
received as of August 9, 1995.
Inventory levels have decreased at June 30, 1995 to $3.6 million from $5.0
million as of December 31, 1994, reflecting the sale of systems, principally to
Indonesia and Russia. Inventories at December 31, 1994 and June 30, 1995 are
stated net of valuation reserves of $7.5 million and $7.8 million, respectively.
Included in other accrued expenses at June 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.
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In February 1993, the Company was sued by HNS in the United States District
Court for the District of Maryland (Civil Action No. WN-93-576). HNS previously
produced the UltraPhone system on behalf of the Company pursuant to a series of
production agreements (the "Production Agreements"). In the lawsuit, HNS alleged
that the Company breached certain agreements which were entered into between HNS
and the Company in February 1992 relating to the termination of certain
UltraPhone production agreements and certain other remedies. HNS sought damages
approximating $7.5 million, plus interest, attorneys' fees and court costs.
The Company filed an answer to the complaint alleging a number of
counterclaims and affirmative defenses. In August 1994, HNS filed a motion for
partial summary judgment and a motion for entry of final judgment on Counts II
and III of its complaint, which involve the Company's purchase of certain Prod
III units, machinery and equipment from HNS. In February 1995, the Court granted
HNS's motion for partial summary judgment on both counts. The judge, however,
denied HNS's motion for entry of final judgment. The amount claimed under Count
II is $2,945,834 and the amount claimed under Count III is $2,700,000, for a
total of $5,645,834. In addition, HNS asked the Court for interest of
$1,269,962, for a total claim of $6,915,796 on the two claims on which summary
judgment was granted and advised the Court that it intended to seek attorneys'
fees at the end of the case. In February 1995, HNS filed a motion for summary
judgment on the remaining claims and counterclaims. IDC opposed the motion and
filed a cross-motion to stay Count I of the complaint regarding non-recurring
engineering charges.
Effective June 2, 1995, the Company entered into a Settlement Agreement and
Mutual Release (the "Settlement Agreement") with HNS. 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 Time Division Multiple Access 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.
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 has 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 are scheduled for hearing in August 1995.
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
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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 parent, 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,
selling or using of digital wireless telephone systems and/or related mobile
stations, Ericsson has infringed, contributed to the infringement of and/or
induced 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
attorneys' 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 the 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 August 15, 1995. 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.
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 petitions 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 application. An
appeal has been filed by Philips, Alcatel and Siemens and additional arguments
have been made based upon prior art and references not previously considered by
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the patent office. 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 assurance can be given as to the eventual outcome of
these patent challenges, ITC intends to vigorously defend its issued and pending
patents. If any of these patents are revoked, ITC's patent licensing
opportunities in such relevant foreign countries could be materially and
adversely affected.
In connection with the proposed transaction with OFG, the Company commenced an
arbitration proceeding against OFG on December 30, 1994. The Company sought
repayment from OFG of a $250,000 facility fee paid to OFG that was "refundable"
under the terms of the commitment agreement to lend the Company $25 million in
1994 and 1995. The Company also sought compensatory damages for losses incurred
by the Company as a result of OFG's breach. The matter was arbitrated on May 11,
1995 and on July 11, 1995, the arbitration panel awarded the Company damages in
the amount of $250,000 plus interest. Such award remains uncollected and the
Company cannot presently determine whether it may be able to collect upon the
award. A receivable has not been recorded by the Company.
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.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on May 31, 1995 (the "Meeting"),
the Company's shareholders elected the two nominees for directors as set forth
in the Company's proxy statement dated April 28, 1995 (the "Proxy Statement").
The number of votes cast for such nominees and the number of votes withheld with
respect to such nominees were respectively as follows: Barney J. Cacioppo
40,159,017 and 1,153,540; and Harley L. Sims 40,160,751 and 1,151,806. The terms
of office, as a director, of William J. Burns and D. Ridgely Bolgiano continue
through the 1997 Annual Meeting of Shareholders and the term of office as a
director of Harry G. Campagna continues through the 1996 Annual Meeting of
Shareholders.
The shareholders also voted to adopt the Company's 1995 Stock Option Plan for
Employees and Outside Directors as described in the Proxy Statement, casting
15,492,533 votes for the Plan, 3,589,636 against and 788,133 abstentions. Broker
non-votes on this matter totaled 21,442,255. There were no broker non-votes with
respect to any other matters voted upon at the Meeting.
The appointment of Arthur Andersen LLP as the Company's independent
accountants to examine the Company's financial statements for the year ending
December 31, 1995, was ratified by the following share vote: 40,424,507 for;
618,424 against; and 269,626 abstaining.
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 3.1 - Amended and Restated Bylaws
Exhibit 11 - Computation of Net Income Per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended June 30, 1995, the Company filed a Current Report
on Form 8-K which was dated May 20, 1995 and related to the settlement of
the litigation with Hughes Network Systems, Inc. and the stay order that was
entered in the Ericsson Radio Systems, Inc. litigation. No financial
statements were filed with this report.
22
<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: August 9, 1995 /s/ William J. Burns
------------------------------------
William J. Burns, Chairman and Chief
Executive Officer
Date: August 9, 1995 /s/ James W. Garrison
------------------------------------
James W. Garrison, Vice President -
Finance, Chief Financial Officer and
Treasurer
<PAGE>
EXHIBIT 3.1
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
AMENDED AND RESTATED BYLAWS
INTERDIGITAL COMMUNICATIONS CORPORATION
(a Pennsylvania Corporation)
BY-LAWS
(as amended through May 1, 1995)
Section 1.1 Registered Office:
The Registered Office of the Corporation shall be at 2200
Renaissance Boulevard, Suite 105, King of Prussia, Pennsylvania until otherwise
changed by the Board of Directors.
Section 2.1 Place of Shareholders' Meetings:
Meetings of the shareholders shall be held at the
Registered Office of the Corporation or at such other place within or without
Pennsylvania as the Board of Directors may fix.
Section 2.2 Annual Meeting of Shareholders:
An Annual Meeting of shareholders shall be held in every
calendar year at such time as the Board of Directors may fix. At the Annual
Meeting of shareholders, directors shall be elected to serve for the ensuing
year or until their successors shall be duly elected and qualified, and there
shall be transacted such other business as may properly be brought before the
Meeting.
A financial report of the Corporation's business as of the
close of the preceding fiscal year shall be presented at the Annual Meeting, and
shall be sent to shareholders.
Section 2.3 Special Meetings of Shareholders:
Special Meetings of shareholders may be called at any time by
the Chairman of the Board, the President or the Board of Directors, or
shareholders entitled to cast not less than one-fifth of the votes which all
shareholders are entitled to cast at the particular meeting. At any time, upon
written request of any person entitled to call a Special Meeting, it shall be
the duty of the Secretary to fix the date of such Special Meeting to be held not
less than five or more than sixty days after the receipt of the request and to
give due notice thereof. If the Secretary shall neglect or refuse to fix the
date of the meeting and give notice thereof, the person or persons making the
request may do so.
Section 2.4 Notice of Shareholders' Meetings:
At least five days' written notice shall be given of any
meeting of shareholders, unless a greater period of notice is required by law.
Such notice shall specify the place, day and hour of the meeting, and in the
case of a Special Meeting of shareholders, the general nature of the business to
be transacted.
<PAGE>
Section 2.5 Waiver of Notice of Shareholders' Meetings:
Whenever written notice is required to be given by law, by the
Articles or these By-Laws, a written waiver thereof signed by the person or
persons entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice. Except in the
case of a Special Meeting of shareholders, neither the business to be transacted
nor the purpose of the meeting need be specified in the Waiver of Notice of such
Meeting.
Attendance of a person, either in person or by proxy, at any meeting
shall constitute a waiver of notice of such meeting, except where a person
attends a meeting for the express purpose of objecting to the transaction of any
business because the meeting was not lawfully called or convened.
Section 2.6 Quorum for Shareholders' Meetings:
The presence, in person or by proxy, of the shareholders
entitled to cast a majority of the votes which all shareholders are entitled to
cast on a matter to be voted upon at a meeting of shareholders shall constitute
a quorum, and the acts of such quorum, at a duly organized meeting of
shareholders, shall constitute the acts of all the shareholders. The
shareholders present at a duly organized meeting can continue to do business
until adjournment, notwithstanding the withdrawal of enough shareholders to
leave less than a quorum.
Section 2.7 Conduct of Shareholders' Meetings:
Meetings of the shareholders shall be presided over by the
Chairman of the Board, or if he is not present, by the President or, if he is
not present, by a Vice-President or, if none of the Chairman of the Board or the
President or Vice-President is present, by a Chairman to be chosen at the
meeting. The Secretary of the Corporation, or in his absence, an Assistant
Secretary or one temporarily designated as such shall act as Secretary of the
meeting.
Section 2.8 Shareholders Participation by Telephone:
One or more shareholders may participate in any meeting of
shareholders by means of conference telephone or similar communications
equipment by means of which all persons participating in such meeting can hear
each other.
Section 2.9 Voting by Shareholders:
Except as otherwise provided by law or in the Articles, every
shareholder of record shall have the right, at every shareholders' meeting, to
one vote for every share standing in his name on the books of the Corporation.
Every shareholder entitled to vote at a meeting of shareholders or to express
consent to corporate action in writing without a meeting may authorize another
person or persons to act for him by proxy.
All voting and elections shall be taken viva voce unless a
vote by ballot shall be demanded by a shareholder before the voting or election
begins, or unless otherwise required by law or by the Articles.
Section 2.10 Judges of Election:
In advance of any meeting of shareholders, the Board of
Directors may appoint Judges of Election, who need not be shareholders, to act
at such meeting or any adjournment thereof. If Judges of Election be not so
appointed, the Chairman of the meeting may, and on the request of any
shareholder or his proxy shall, make such appointment at the meeting. The number
of Judges shall be one or three, and no candidate shall act as a Judge. On
request of the Chairman of the meeting or of any shareholder or his proxy, the
Judges shall make a report in writing of any challenge or question or matter
determined by them and execute a certificate of any fact found by them.
<PAGE>
Section 2.11 Adjournment of Meetings:
Adjournment of any meeting may be taken, but any meeting at
which Directors are to be elected shall be adjourned only from day to day, or
for such longer periods not exceeding fifteen days each, as may be directed by
the holders of at least a majority of the shares entitled to be voted at an
election of directors, until such Directors have been elected. When a meeting is
adjourned, it shall not be necessary to give any notice of the adjourned meeting
or of the business to be transacted thereat, other than by announcement at the
meeting at which such adjournment is taken. In case of any meeting called for
the election of Directors, those who attend the second of such adjourned
meeting, although less than a quorum, shall nevertheless constitute a quorum for
the purpose of electing Directors.
Section 3.1 Board of Directors, Number, Qualification, Elections,
Term of Office and Compensation:
The business and affairs of the Corporation shall be managed
by a Board of not less than five (5) nor more than fifteen (15) Directors, as
may be fixed from time to time by the vote of a majority of the whole Board.
Directors shall be of full age, but need not be residents of Pennsylvania or
shareholders of the Corporation.
The Directors, other than any who may be elected by the
holders of shares of any class or series of stock entitled to elect Directors
separately pursuant to the terms of Articles Fifth of the Articles of
Incorporation or any resolution or resolutions providing for the issuance of
such stock adopted by the Board of Directors shall be classified, with respect
to the duration of the term for which they severally hold office, into three
classes as nearly equal as possible (each, individually a "Three Year Class",
and collectively the "Three Year Classes"). Such Three Year Class which shall be
elected at the Annual Meeting of Shareholders held in 1993 for a term expiring
at the Annual Meeting of Shareholders to be held in 1996 shall be designated as
"Class A"; the second Three Year Class to be elected at the Annual Meeting of
Shareholders held in 1994 for a term expiring at the Annual Meeting of
Shareholders to be held in 1997 shall be designated as "Class B"; and the third
Three Year Class to be elected at the Annual Meeting of Shareholders held in
1995 for a term expiring at the Annual Meeting of Shareholders to be held in
1998 shall be designated as "Class C". The Board of Directors shall increase or
decrease the number of Directors in one or more classes as may be appropriate
whenever it increases or decreases the number of Directors pursuant to this
Section 3.1, in order to ensure that the three Three Year Classes shall be as
nearly equal in number of possible. At each Annual Meeting of Shareholders, the
successors of the class of Directors whose term expires at that meeting shall be
elected to hold office for a term expiring at the Annual Meeting of Shareholders
held in the third year following the year of their election.
The Board of Directors shall have the authority to fix the
compensation of Directors for their services and to authorize payment for
expenses of attendance at meetings. A Director may also be a salaried officer or
employee of the Corporation.
Section 3.2 Quorum for Directors' Meetings:
A majority of the Directors in office shall be necessary to constitute a quorum
for the transaction of business, and the acts of a majority of the Directors
present at a meeting at which a quorum is present shall be the acts of the Board
of Directors. A Director who is present at a meeting shall be counted in
determining the presence of a quorum even though a contract or transaction
between the Corporation and such Director or another business in which such
Director has a financial interest is authorized at the meeting.
Section 3.3 Directors' Consent in Lieu of Meeting:
Any action which may be taken at a meeting of the Board of
Directors or of any Committee thereof may be taken without a meeting if a
consent or consents in writing, setting forth the action so taken, shall be
signed by all of the Directors or the members of the Committee, as the case may
<PAGE>
be, and shall be filed with the Secretary of the Corporation. One or more
Directors may participate in a meeting of the Board of Directors or a Committee
thereof by means of a conference telephone or similar communications equipment
by means of which all persons participating in such meeting can hear each other.
Section 3.4 Vacancies in Board of Directors:
Except as otherwise provided for or fixed pursuant to the
Articles of Incorporation of the Corporation, newly created directorships
resulting from an increase in the number of Directors, and any vacancies on the
Board of Directors resulting from death, resignation, disqualification, removal
or other cause shall be filled by the vote of a majority of the remaining
members of the Board, even though less than a quorum. Any person so elected
shall hold office for the remainder of the full term of the class of Directors
in which the directorship was created or the vacancy occurred and until such
Director's successor shall have been elected and qualified. No decrease in the
number of Directors constituting the Board of Directors shall shorten the term
of any incumbent Director.
Section 3.5 Place of Meeting of Board of Directors:
The meetings of the Board of Directors may be held at such
place within Pennsylvania, or elsewhere, as a majority of the Directors may from
time to time appoint or as may be designated in the notice calling the meeting.
Section 3.6 Organization Meeting of the Board of Directors:
After the election of Directors by the shareholders, the newly
elected Board may meet for the purpose of organization or otherwise:
(a) Immediately following their election, or at
such time and place as shall be fixed by vote of the
shareholders at the Annual Meeting (and in either such case no
notice of such meeting to the newly elected Directors shall be
necessary in order legally to constitute the meeting, provided
a majority of the whole Board shall be present); or
(b) At such time and place as may be fixed by
consent in writing of all the Directors.
Section 3.7 Regular Meetings of the Board of Directors:
Regular Meetings of the Board of Directors shall be held at
such time and place as shall be determined by a majority of the Board.
Section 3.8 Special Meetings of the Board of Directors:
Special Meetings of the Board of Directors may be called by
the Chairman of the Board, President or Secretary on at least two days' notice
to each Director, either personally or by mail or by telegram, of the time and
place of such Special Meeting. At the written request of two Directors, Special
Meetings shall be called by the Chairman of the Board or President or Secretary
in like manner and on like notice.
Section 3.9 Adjournments of Meetings of the Board of Directors:
If a meeting of the Board of Directors is adjourned, it shall
not be necessary to give any notice of the adjourned meeting, or of the business
to be transacted at an adjourned meeting, other than by announcement at the
meeting at which such adjournment is taken.
<PAGE>
Section 3.10 Powers of Board of Directors:
A. Organizational Meeting: At the first meeting of the Board of
Directors in each year (at which a quorum shall be present) held next
after the Annual Meeting of shareholders, it shall be the duty of the Board
of Directors to elect or appoint the officers of the Corporation.
B. General Powers: The Board of Directors shall have all the power
and authority granted by law to Directors except as may be specifically
excepted by the Articles or by these By-Laws.
C. Committees: The Board of Directors, by Resolution adopted by a
majority thereof, may designate an Executive Committee and one or more other
committees, each of which shall consist of at least two Directors and such other
Directors as shall be appointed by the Board of Directors to serve as alternate
members of any such Committee to replace any absent or disqualified member at
any Committee Meeting. In the event that any member of any such Committee shall
be absent from or disqualified at such Meeting, the member or members thereof
present at any such Meeting and not disqualified from voting, whether or not he
or they constitute a quorum, may unanimously appoint another Director to act at
the Meeting in the place of any such absent or disqualified member. Any such
Committee shall have and exercise the authority of the Board of Directors in the
management of the business and affairs of the Corporation to the extent provided
in the Resolution creating such Committee.
Section 3.11 Removal of Directors by Shareholders:
Subject to the right of any class or series of stock entitled
to elect Directors separately, any Director may be removed from office, without
assigning any cause, but only by the affirmative vote of the holders of at least
80 percent of the combined voting power of the then outstanding shares of stock
entitled to vote generally in the election of Directors, voting together as a
single class.
Section 4.1 Officers:
The Officers of the Corporation shall be a Chairman of the
Board, a President, a Secretary, and a Treasurer, all of whom shall be elected
or appointed by the Board of Directors. The Board of Directors may also elect
one or more Vice-Presidents, one or more Assistant Treasurers and one or more
Assistant Secretaries. Any two or more offices may be held by the same person.
The Board of Directors may at any time also elect or appoint
such other officers, assistant officers and agents as it shall deem necessary
and as the needs of the Corporation may require. Such other officers, assistant
officers and agents shall have such authority and shall perform such duties as
from time to time may be prescribed by the Board of Directors.
The Officers shall be elected each year at the organization
meeting of the Board of Directors, but if not so elected, they, and any
assistant officers or agents the Board of Directors shall desire to appoint, may
be elected from time to time during the year. It shall not be necessary for any
officer of the Corporation to be a Director.
Section 4.2 The Chairman of the Board - Powers and Duties:
The Chairman of the Board shall, when present, preside at all
meetings of the Board of Directors and at all meetings of shareholders. Unless
otherwise directed by the Board of Directors, the Chairman of the Board shall
have full power and authority on behalf of the Corporation to attend and act and
vote at any meeting of the shareholders of any corporation in which the
corporation may hold stock, and at any such meeting he shall possess and may
exercise any and all of the rights and powers incident to the ownership of such
stock which the Corporation, as the owner thereof, might have possessed and
exercised if present. The Board of Directors may, by resolution, from time to
time confer like powers upon any other person or persons. He shall also do and
perform such other duties as from time to time may be assigned to him by the
Board of Directors.
<PAGE>
Section 4.3 The President - Powers and Duties:
The President shall be the Chief Executive Officer of the
Corporation. He shall have the customary duties of a chief executive officer
with responsibility for general supervision and direction of the regular
business and operations of the Corporation, subject to the overall supervision
of the Board of Directors. He shall, when the Chairman of the Board is not
present, preside at all meetings of the Board of Directors and at all meetings
of the shareholders. Unless otherwise directed by the Board of Directors, the
President shall, in the absence of the Chairman of the Board, have full power
and authority on behalf of the shareholders of the Corporation to attend and act
and vote at any meeting of the shareholders of any corporation in which the
Corporation may hold stock, and at any such meeting shall possess and may
exercise any and all of the rights and powers incident to the ownership of such
stock which the Corporation, as the owner thereof, might have possessed and
exercised if present. Further, unless otherwise directed by the Board of
Directors, the President is authorized to execute in the name of the Corporation
contracts and other documents requiring the signature of the Corporation. He
shall also do and perform such other duties as from time to time may be assigned
to him by the Board of Directors.
Section 4.4 The Vice-President - Powers and Duties:
A Vice-President or Vice-Presidents shall be elected by the
Board of Directors, if the Board of Directors determines that such offices shall
be created. The Vice-President (or, if there are more than one, then each
Vice-President) shall have such powers and shall perform such duties as may from
time to time be assigned to him or them by the Board of Directors or by the
Chairman of the Board or by the President. Unless otherwise ordered by the Board
of Directors, the Vice-President (or Vice-Presidents in order of their numbered
designations) shall, in the case of death, resignation, absence or disability of
the President, perform the duties of that Officer, until the return of the
President, or until the disability shall have been removed or a new President
shall have been elected.
Section 4.5 Treasurer - Powers and Duties:
The Treasurer shall have the custody of all the funds and
securities of the Corporation which may come into his hands. When necessary or
proper (unless otherwise ordered by the Board of Directors) he shall (a) endorse
for collection on behalf of the Corporation, checks, notes and other
obligations, (b) deposit the same to the credit of the Corporation in such banks
or depositaries as the Board of Directors may designate and (c) sign all
receipts and vouchers for payments made by the Corporation. He shall, at all
reasonable times, exhibit his books and accounts to the Board of Directors of
the Corporation upon the request of any Director, and he shall also, if so
directed by the Board of Directors, annually prepare and submit to the Annual
Meeting of the shareholders a full statement of the assets and liabilities of
the Corporation and of its transactions during the preceding year, and he shall
have such other powers and shall perform such other duties as may be assigned to
him from time to time by the Board of Directors. He shall give such bond for the
faithful performance of his duties as may be required by the Board of Directors.
Section 4.6 Assistant-Treasurer - Powers and Duties:
Each Assistant-Treasurer shall have such powers and perform
such duties as may be assigned to him by the Board of Directors.
Section 4.7 Secretary - Powers and Duties:
Unless otherwise ordered by the Board of Directors, the
Secretary shall keep the minutes of all meetings of the shareholders and of the
Board of Directors in proper books to be kept for such purpose, and shall attend
to the giving of all notices by the Corporation, including notices of meetings
of shareholders and of the Board of Directors. He shall have charge of the share
certificate books, transfer books, capital stock ledger and such other books and
papers as the Board of Directors may direct. He shall in general perform all the
duties incident to the office of Secretary and shall have such other powers and
perform such other duties as may be assigned to him by the Board of Directors.
<PAGE>
Section 4.8 Assistant Secretary - Powers and Duties:
Each Assistant Secretary shall have such powers and perform
such duties as may be assigned to him or them by the Board of Directors.
Section 4.9 Removal and Vacancies:
The Board of Directors shall have power to remove any officer
from office at any time and shall also have the power to fill any vacancies in
any office occurring from whatever reason. Such power shall be exercised by a
majority vote of the Directors in office at the time of such removal or vacancy,
although less than a quorum.
Section 5.1 Share Certificates:
Every shareholder of record shall be entitled to a share certificate
representing the shares owned by him, provided that the shares represented
thereby shall have been fully paid for. Such share certificate shall be signed
by the Chairman of the Board, President, or a Vice-President, and by the
Secretary or Treasurer except where such share certificate is signed by a
transfer agent or a registrar, in which case the signature of any officer of the
Corporation upon such share certificate may be a facsimile, engraved or printed.
Section 5.2 Transfer of Share Certificates:
The transfer of a share certificate and the shares represented
thereby shall be made on the books of the Corporation only by the registered
owner thereof or by his attorney duly authorized in writing to make such
transfer, and only upon surrender of such share certificate, which shall be
canceled at the time of transfer.
The Corporation shall be entitled to treat the holder of
record of any share certificate or certificates and the shares represented
thereby as the holder in fact thereof, and accordingly shall not be bound to
recognize any equitable or other claim to or interest in such share certificate
or certificates and shares on the part of any other person, whether or not it
shall have express or other notice thereof, except as otherwise expressly
provided by law or by the Articles.
Section 5.3 Lost Share Certificate:
The holder of any certificate representing shares of stock of
the Corporation shall immediately notify the Corporation of any mutilation, loss
or destruction thereof, and the Board of Directors may, in its discretion, cause
one or more new certificates for the same number of shares in the aggregate to
be issued to such holder upon the surrender of the mutilated certificate, or in
the case of loss or destruction of the certificate, upon satisfactory proof of
such loss or destruction and deposit of indemnity by bond or otherwise in such
form and amount and with such surety or sureties as the Board of Directors may
require to indemnify the Corporation against loss or liability by reason of the
issuance of such new certificate, but the Board may, in its discretion, refuse
to issue such new certificates save upon the order of some court having
jurisdiction in such matters.
Section 6.1 Fiscal Year:
The fiscal year of the Corporation shall be established by the
Board of Directors.
<PAGE>
Section 7.1 Indemnification:
(a) The Corporation shall indemnify and hold
harmless to the fullest extent permitted under the
Pennsylvania Business Corporation Law, the Directors'
Liability Act (the "DLA") and other applicable law, as such
laws existed on the date this Section 7.1 was adopted by the
Board Of Directors or, except as provided in Section 7.1(f)
hereof, as such laws may thereafter by amended ("Pennsylvania
Law"), any person who was or is a party or was or is
threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, including, without
limitation, an action by or in the right of the Corporation
(collectively, for purposes of this Section 7.1 and Section
7.2 hereof, "Proceeding"), by reason of the fact that he is or
was or has agreed to become a director or officer of the
Corporation, or is or was serving or has agreed to serve at
the request of the Corporation as a director or officer of
another corporation, or if a director or officer of the
Corporation, is or was serving or has agreed to serve at the
request of the Corporation as an employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise, or by reason of any action alleged to have been
taken or omitted in any such capacity, and may indemnify and
hold harmless to the fullest extent permitted under
Pennsylvania Law any person who was or is a party or was or is
threatened to be made a party to such a Proceeding by reason
of the fact that he is or was or has agreed to become an
employee or agent of the Corporation, or, if any employee or
agent of the Corporation, is or was serving or has agreed to
serve at the request of the Corporation as an employee or
agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses, liability and
loss (including, without limitation, attorneys' fees and
disbursements, punitive and other damages, judgments, fines,
penalties, excise taxes assessed with respect to an employee
benefit plan, amounts paid or to be paid in settlement and
costs and expenses of any nature) incurred by him in
connection with such Proceeding and any appeal therefrom:
provided, that such indemnification shall not be made in any
case where the act or failure to act giving rise to the claim
for indemnification is determined by a court in a final,
binding adjudication to have constituted willful misconduct or
recklessness.
(b) The Corporation may indemnify and hold harmless
to the fullest extent permitted under Pennsylvania Law any
person who was or is a party or was or is threatened to be
made a party to any Proceeding, by reason of any of his
actions in a non-official capacity while serving as a
director, officer, employee or agent of the Corporation,
against expenses, liability and loss including, without
limitation, attorneys's fees and disbursements, punitive and
other damages, judgements, fines, penalties, excise taxes
assessed with respect to an employee benefit plan, amounts
paid or to be paid in settlement and costs and expenses of any
nature incurred by him in connection with such Proceeding and
any appeal therefrom: provided, that such indemnification
shall not be made in any case where the act or failure to act
giving rise to the claim for indemnification is determined by
a court in a final, binding adjudication to have constituted
willful misconduct or recklessness.
(c) The termination of any Proceeding by judgment,
order, settlement, conviction, or upon a plea of guilty or
nolo contendere, or its equivalent, shall not, of itself,
create a presumption that the persons's conduct constituted
willful misconduct or recklessness.
(d) Expenses incurred by a director or officer in
defending a Proceeding shall be paid by the Corporation in
advance of the final disposition of the Proceeding, provided
that, if Pennsylvania Law requires, the payment of such
expenses shall be made only upon receipt of an undertaking by
or on behalf of the director or officer to repay such amount
<PAGE>
if it shall ultimately be determined that he is not entitled
to be indemnified by the Corporation as mandated in this
Section 7.1 or otherwise. Expenses incurred by other employees
and agents may be so paid to the extent provided by the Board
of Directors, upon receipt of the foregoing undertaking by or
on behalf of the employee or agent.
(e) The indemnification provided by this Section
7.1 shall be in addition to and not exclusive of any other
rights to which those seeking indemnification may be entitled
under Pennsylvania Law, or under any By-Law, agreement
executed by the Corporation, insurance policy, fund of any
nature established by the Corporation, vote of shareholders or
disinterested directors or otherwise. The indemnification so
provided by this Section 7.1 or otherwise, may be granted
whether or not the Corporation would have the power to
indemnify such person under any provision of Pennsylvania Law
other than the DLA.
(f) The indemnification provisions of this Section
7.1 shall constitute a contract between the Corporation and
each of its directors, officers, employees and agents who are
or may be entitled to indemnification hereunder and who serve
in any such capacity at any time while such provisions are in
effect. Any appeal or modification of the indemnification
provisions of this Section 7.1 shall not limit any such
person's rights to indemnification (including the advancement
of expenses) then existing or arising out of events, acts or
omissions occurring prior to such repeal or modification,
including, without limitation, the right to indemnification
with respect to Proceedings commenced after such repeal or
modification based in whole or in part upon any such event,
act or omission.
(g) The Corporation may create a fund of any
nature, which may, but need not be, under the control of a
trustee, or otherwise may secure or insure in any manner its
indemnification obligations, whether arising under or pursuant
to this Section 7.1 or otherwise.
(h) The Corporation may purchase and maintain
insurance to insure its indemnification obligations on behalf
of any person who is or was or has agreed to become a
director, officer, employee or agent of the Corporation, or is
or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against
any expense, liability or loss asserted against him and
incurred by him or on his behalf in any such capacity, or
arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such
liability under the provisions of this Section 7.1 or under
any provision of Pennsylvania Law other than the DLA.
(i) The indemnification provided by this Section
7.1 shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a
person.
(j) If Section 7.1 or any portion thereof shall be
invalidated on any ground by any court of competent
jurisdiction, then the Corporation shall nevertheless
indemnify each director or officer, and may indemnify each
employee or agent of the Corporation, as to expenses,
liability and loss (including, without limitation, attorneys'
fees and disbursements, punitive and other damages, judgments,
fines, penalties, excise taxes assessed with respect to an
employee benefit plan, amounts paid or to be paid in
settlement and costs and expenses of any nature) incurred by
him in connection with any Proceeding, including an action by
or in the right of the Corporation, to the fullest extent
permitted by any applicable portion of this Section 7.1 that
shall not have been invalidated and to the fullest extent
permitted by applicable law.
<PAGE>
Section 7.2 Limitation on Directors' Personal Liability:
(a) To the fullest extent permitted under the DLA,
as it existed on the date this Section 7.2 was adopted or,
except as provided in subsection 7.2(e), as such law may
thereafter be amended, a director of this Corporation shall
not be personally liable for monetary damages as a result of
any action or failure to act unless both: (1) the director has
breached or failed to perform the duties of his office under
Section 8363 of the DLA: and (2) the breach or failure to
perform constitutes self-dealing, willful misconduct or
recklessness.
(b) The provisions of this Section 7.2 shall not
apply to: (1) the responsibility or liability of a director
pursuant to any criminal statute: or (2) the liability
of a director for the payment of taxes pursuant to local,
state or federal law.
(c) The termination of any Proceeding by judgment,
order, settlement, conviction, or upon a plea of guilty or
nolo contendere, or its equivalent, shall not, of itself,
create a presumption that the director breached or failed to
perform the duties of his office under Section 8363 of the DLA
and that the breach or failure to perform constituted
self-dealing, willful misconduct or recklessness.
(d) Notwithstanding the date of adoption of this
Section 7.2, the provisions of Section 7.2 shall apply to any
action filed or breaches of performance of duty or any failure
of performance of duty by any director on or after January 27,
1987.
(e) No amendment to or repeal of this Section 7.2
or the relevant provisions of the DLA shall reduce the
limitation on directors' personal liability for or with
respect to any events, acts or omissions of such director
occurring prior to such amendment or repeal, including,
without limitation, the limitation on personal liability with
respect to any Proceedings commenced after such repeal or
modification based in whole or in part upon any such event,
act or omission.
Section 8.1 Amendments to By-Laws:
The holders of all the shares outstanding and entitled to
vote may, by a majority vote, make, alter, amend or repeal any provision of
these By-Laws at any Annual or Special Meeting duly convened after notice to the
shareholder of the meeting to be held for such purpose, provided, however, that
the affirmative vote of the holders of at least 80 percent of the combined
voting power of all the then outstanding shares of stock entitled to vote
generally in the election of directors, voting together as a single class shall
be required to alter, amend or repeal Sections 3.1, 3.4, 3.11 or this Section
8.1, or to adopt any provision inconsistent therewith.
The Board of Directors, by a majority vote of the members
thereof, may make, alter, amend or repeal any provisions of these By-Laws at any
Regular or Special Meeting, duly convened after notice to the Directors of such
purpose. The shareholders shall have the right to change such action by a
majority vote of the shareholders entitled to vote thereon at any Annual Meeting
which may be duly convened for the purpose of changing such action, after notice
to the shareholders entitled to notice thereof, provided, however, that the vote
of the holders of at least 80 percent of the combined voting power of all of the
then outstanding shares of stock entitled to vote generally in the election of
directors, voting together as a single class, shall be required to change such
action with respect to Sections 3.1, 3.4, 3.11 or this Section 8.1.
<PAGE>
Section 9.1 Control-Share Acquisitions:
Subchapter G - "Control-Share Acquisitions" of Chapter 25 of
Title 15 of the Pennsylvania Consolidated Statutes, as existing on July 18, 1990
or as may thereafter be amended, shall not be applicable to the Corporation.
Section 10.1 Disgorgement by Certain Controlling Shareholders:
Subchapter H - "Disgorgement by Certain Controlling
Shareholders Following Attempts to Acquire Control" of Chapter 25 of Title 15 of
the Pennsylvania Consolidated Statutes, as existing on July 18, 1990 or as may
thereafter be amended, shall not be applicable to the Corporation.
<PAGE>
EXHIBIT 11
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
COMPUTATION OF PRIMARY EARNINGS PER SHARE: JUNE 30, 1995 JUNE 30, 1995
------------------------------------------ ------------ ------------
<S> <C> <C>
Net Income Applicable to Common Shareholders $ 20,597 $ 40,735
Assumed interest income on excess proceeds of assumed
option and warrant exercises 24 --
$ 20,621 $ 40,735
Weighted Average of Primary Shares:
Common Stock 44,071 43,507
Assumed Conversion of Options and Warrants 1,404 2,688
45,475 46,195
Primary Earnings Per Share $ 0.45 $ 0.88
</TABLE>
A calculation for the three and six month periods ended June 30, 1994 have
not been presented since the effect of the options and warrants would be
anti-dilutive.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> ART. 5 FOR 2ND QUARTER 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 67,191
<SECURITIES> 0
<RECEIVABLES> 11,475
<ALLOWANCES> 1,817
<INVENTORY> 3,886
<CURRENT-ASSETS> 82,615
<PP&E> 10,405
<DEPRECIATION> 7,775
<TOTAL-ASSETS> 89,384
<CURRENT-LIABILITIES> 16,067
<BONDS> 526
<COMMON> 442
0
11
<OTHER-SE> 67,224
<TOTAL-LIABILITY-AND-EQUITY> 89,384
<SALES> 11,456
<TOTAL-REVENUES> 73,994
<CGS> 11,729
<TOTAL-COSTS> 12,241
<OTHER-EXPENSES> 3,854
<LOSS-PROVISION> (58)
<INTEREST-EXPENSE> 610
<INCOME-PRETAX> 47,877
<INCOME-TAX> 3,307
<INCOME-CONTINUING> 40,793
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,793
<EPS-PRIMARY> .88
<EPS-DILUTED> .88
</TABLE>
