Rule No. 424(b)(1)
Registration No. 333-10521
PROSPECTUS
INTERDIGITAL COMMUNICATIONS CORPORATION
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1,499,905 Shares of Common Stock
Par Value $.01 Per Share
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The shares of common stock, par value $.01 per share (the
"Common Stock"), of InterDigital Communications Corporation ("InterDigital" or
the "Company") to be issued pursuant to this Prospectus are being issued solely
to certain holders of common stock of InterDigital Patents Corporation ("IPC"),
an approximately 94%-owned subsidiary of the Company, and are being issued in
connection with the merger of IP Acquisition Corp. ("MergerCo"), a wholly-owned
subsidiary of InterDigital, with and into IPC (the "Merger").
At the effective time of the Merger (the "Effective Time"),
each outstanding share of IPC common stock, other than shares of IPC held by the
Company, and other than shares of IPC held by stockholders who perfect their
appraisal rights under Delaware law, will be converted into that number of
shares of the Common Stock of the Company (the "Merger Consideration") equal to
(i) $7.33 divided by (ii) $8.003, the average closing price per share of
InterDigital Common Stock as reported by the American Stock Exchange for the 30
calendar days ending on the last trading day prior to the date the Registration
Statement on Form S-4 of which this Prospectus is a part was declared effective
by the Securities and Exchange Commission (the "Average Price"). No brokerage
commissions or discounts are being paid in connection with the issuance of the
Common Stock pursuant to the Merger. See "The Merger - The Plan of Merger -
Payment for IPC Common Stock."
The Common Stock is quoted on the American Stock Exchange
under the symbol "IDC." On September 11, 1996, the last reported sale price
of the Common Stock, as shown on the American Stock Exchange Composite Tape,
was $7 7/8.
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NO PROXIES ARE BEING SOLICITED IN CONNECTION WITH THE MERGER.
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THE SHARES OF COMMON STOCK TO BE ISSUED HEREBY HAVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 14.
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THE SHARES OF INTERDIGITAL COMMUNICATIONS CORPORATION COMMON STOCK HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THE INFORMATION CONTAINED IN THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Holders of IPC common stock will be required to complete and
submit a Letter of Transmittal in order to receive the Common Stock to be issued
pursuant to this Prospectus.
The Date of this Prospectus is September 12, 1996.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files annual and quarterly reports, proxy statements and
other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other information filed by the
Company may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
and at the Commission's regional offices located at Seven World Trade Center,
Suite 1300, New York, New York 10048, and at Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60611. Copies of such
material also may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. In addition, registration statements and certain other filings made with
the Commission through its Electronic Data Gathering Analysis and Retrieval
("EDGAR") system are publicly available through the Commission's site on the
Internet's World Wide Web, located at http://www.sec.gov. The Common Stock of
the Company is traded on the American Stock Exchange. Reports, proxy statements
and other information concerning the Company may be inspected at the offices of
the American Stock Exchange at 86 Trinity Place, New York, New York 10006.
The Company has filed with the Commission through EDGAR a
Registration Statement on Form S-4 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Act"), with respect to the Common Stock
offered hereby. As permitted by the rules and regulations of the Commission,
this Prospectus omits certain information, exhibits, schedules and undertakings
set forth in the Registration Statement. For further information pertaining to
the Company and the Common Stock, reference is made to the Registration
Statement and the exhibits and schedules thereto, which may be inspected without
charge at the public reference facilities of the Commission or may be obtained
from the Commission at prescribed rates by writing to the Public Reference
Section of the Commission at such addresses.
INFORMATION INCORPORATED BY REFERENCE
The following documents filed with the Commission pursuant to
the Exchange Act with respect to InterDigital (File No. 1-11152) are hereby
incorporated by reference into this Prospectus:
1. InterDigital's Annual Report on Form 10-K for the year
ended December 31, 1995;
2. InterDigital's Annual Report on Form 10-K/A for the year
ended December 31, 1995;
3. InterDigital's Quarterly Report on Form 10-Q for the
period ended March 31, 1996;
4. InterDigital's Quarterly Report on Form 10-Q for the
period ended June 30, 1996;
5. InterDigital's Current Report on Form 8-K dated
August 19, 1996;
6. The description of the Common Stock contained in the
Company's Registration Statement on Form 8-A dated
April 28, 1987, including any amendments or reports
filed for the purpose of updating such description.
All documents filed by InterDigital with the Commission
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the
termination of this offering shall be deemed to be incorporated by reference
herein from their respective dates of filing. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes hereof to the extent that a
statement contained herein (or in any other subsequently filed document which
also is incorporated or deemed to be incorporated by reference herein) modifies
or supersedes such statement. Any statement so modified or superseded shall not
be deemed to constitute a part hereof except as so modified or superseded.
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<PAGE>
All information appearing in this Prospectus is qualified in
its entirety by the information and financial statements (including notes
thereto) appearing in the documents incorporated herein or deemed to be
incorporated herein by reference.
The Company will furnish, without charge, to any person to
whom a copy of this Prospectus is delivered, upon such person's written or oral
request, a copy of any and all of the documents that have been incorporated by
reference in the Registration Statement and herein (not including exhibits to
such documents, unless such exhibits are specifically incorporated by reference
into such documents). Any such request should be directed to the Executive Vice
President, General Counsel and Secretary, InterDigital Communications
Corporation, 781 Third Avenue, King of Prussia, Pennsylvania 19406-1409;
telephone number: (610) 878-7800.
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NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE
SECURITIES TO WHICH IT RELATES IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY OR IPC, OR ANY OF
THEIR AFFILIATES OR SUBSIDIARIES FROM THE DATE HEREOF.
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Table of Contents
<TABLE>
<S> <C>
PROSPECTUS SUMMARY........................................................................ 4
RISK FACTORS.............................................................................. 14
THE MERGER................................................................................ 20
COMPARISON OF RIGHTS OF HOLDERS OF IPC COMMON STOCK AND INTERDIGITAL
COMMON STOCK.............................................................................. 31
DIVIDEND POLICY........................................................................... 39
BUSINESS OF IPC........................................................................... 40
SELECTED FINANCIAL DATA FOR IPC........................................................... 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF IPC......................................................................... 46
INFORMATION RELATING TO MERGERCO ......................................................... 49
PRINCIPAL STOCKHOLDERS OF IPC............................................................. 50
CERTAIN LEGAL MATTERS, EXPERTS AND REGULATORY APPROVALS................................... 51
ANNEX I - PLAN OF MERGER BY AND AMONG INTERDIGITAL COMMUNICATIONS
CORPORATION, INTERDIGITAL PATENTS CORPORATION AND IP ACQUISITION CORP.
ANNEX II - OPINION OF HOWARD, LAWSON & CO.
ANNEX III - APPRAISAL RIGHTS STATUTE
</TABLE>
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<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial data appearing elsewhere in this Prospectus
or incorporated by reference herein. IPC stockholders are urged to read this
Prospectus and the annexes hereto in their entirety. As used in this Prospectus,
except where the context otherwise requires, the terms "InterDigital" and the
"Company" refer to InterDigital Communications Corporation and all of its
subsidiaries. This Prospectus contains certain statements of a forward-looking
nature relating to future events or the future financial performance of the
Company. Prospective investors are cautioned that such statements are only
predictions and that actual events or results may differ materially. In
evaluating such statements, prospective investors should specifically consider
the various factors identified in this Prospectus, including the matters set
forth under the caption "Risk Factors," which could cause actual results to
differ materially from those indicated by such forward-looking statements.
The Company and IPC
InterDigital 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 offers its customers, licensees and alliance partners
what it believes is unique access to both Time Division Multiple Access ("TDMA")
and Broadband Code Division Multiple Access(TM) ("B-CDMA(TM)") proprietary
digital wireless technology.
The Company's principal product is the UltraPhone(R) system, a
radio telephone system providing businesses and households access to basic
telephone service through a wireless local loop. The UltraPhone system offers
greater flexibility and ease of installation than conventional wireline-based
systems and is designed to provide higher transmission quality, capacity and
spectrum efficiency than other wireless systems presently in use. The UltraPhone
system, which incorporates the Company's TDMA technology, is sold predominantly
to foreign telephone companies to provide basic telephone service to their
customers, primarily in rural and near-urban areas, where the cost of, or time
required for, installing, upgrading or maintaining conventional wireline
telephone service supports selection of an UltraPhone system. Sales of
UltraPhone systems accounted for approximately 88%, 40%, 20% and 21%,
respectively, of the total revenues of the Company during 1993, 1994, 1995 and
the six month period ended June 30, 1996. Since 1987, the Company has sold over
250 UltraPhone systems worldwide, with aggregate UltraPhone sales totaling over
$140 million.
The Company's objective is to become a significant global
supplier of digital wireless communications technology and systems based on its
proprietary TDMA and B-CDMA technologies. To achieve that objective, the Company
has developed an alliance program under which it intends to align itself with
key entities in the telecommunications industry. Two key objectives of the
Company's alliance program, if fully and successfully implemented, are to
generate licensing revenues as well as to improve the Company's UltraPhone
product business by (i) making the Company and its UltraPhone products more
credible competitors in large scale telecommunications infrastructure programs,
(ii) expanding the depth and coverage of UltraPhone marketing efforts around the
world, (iii) facilitating greater focus in the Company's direct sale activities,
and (iv) funding and facilitating engineering changes and alternative supply and
production sources to attempt to significantly reduce costs and expand product
capabilities.
The third key objective of the alliance program is to bolster
the Company's on-going efforts to develop its B-CDMA air interface technology
and to spread the commercialization of B-CDMA-based wireless local loop
applications and start the development of wireless Personal Communication
Service ("PCS") applications. The successful commercial development and
deployment of such products is dependent upon technological achievement,
including the continued validation of the theories upon which the new technology
is being designed, the continued availability of debt, equity, alliance or
partner funding sufficient to maintain an increasing level of efforts over
several years and, ultimately, market acceptance of the resultant product.
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<PAGE>
In December 1994, InterDigital completed the initial
implementation of the alliance program by entering into an integrated series of
agreements with Siemens Aktiengesellschaft ("Siemens") covering UltraPhone
system product marketing and product development, B-CDMA technology development,
patent licensing and other areas of cooperation. InterDigital continued its
implementation of the alliance program when it signed a series of agreements
with Samsung Electronics Co., Ltd. ("Samsung") in February 1996. These
agreements cover B-CDMA development, patent licensing, product development,
technology transfer and other areas of cooperation.
InterDigital Technology Corporation ("ITC"), being a
wholly-owned subsidiary of IPC, is an indirect approximately 94%-owned
subsidiary of the Company. Both the Company and IPC (through ITC), together,
offer non-exclusive, royalty bearing patent, technology and know-how licenses to
telecommunications manufacturers that manufacture, use or sell, or intend to
manufacture, use or sell, equipment that utilizes their extensive portfolio of
TDMA and Code Division Multiple Access ("CDMA") proprietary and patented
technologies. The Company believes that, through ITC's patent portfolio, and the
Company's TDMA and B-CDMA research and development capabilities and resultant
know how, both it and ITC are positioned to take advantage of the present
evolution in wireless telecommunications to digital technology from analog
technology, which represents a substantial portion of the worldwide installed
base. ITC implemented a strategy commencing in 1993 of negotiation and
litigation with certain entities which it believed were representative of the
broader number of entities infringing ITC's patents. These efforts resulted in
patent license agreements with twelve entities as of August 8, 1996, the
recognition by IPC of $28.7 million, $64.3 million and $16.4 million of
licensing revenue in fiscal 1994, fiscal 1995 and the six month period ended
June 30, 1996, respectively, and the initiation of litigation against major
telecommunications companies. See "Risk Factors - Adverse Results in Motorola
Trial."
As an adjunct to its primary business, the Company had
provided advanced digital wireless research and development services to
government and business organizations. The Company also directly provided
telecommunications services to businesses and households through the ownership
and operation of telephone operating companies ("TELCO's") in certain rural
areas of the United States. The Company began to withdraw from the contract
services market during 1994 and it sold the TELCO operations during 1994.
Since its inception, the Company has expended substantial sums
to develop its proprietary and patented technologies, to establish and upgrade
ITC's patent portfolio, to develop and commercialize products delivering the
advantages afforded by its technologies, and to establish a market for those
products. The Company had an accumulated deficit of $145.8 million as of June
30, 1996.
The Company was incorporated in Pennsylvania in 1972 and IPC
was incorporated in Delaware in 1992. The executive offices of both InterDigital
and IPC are located at 781 Third Avenue, King of Prussia, Pennsylvania 19406-
1409 and their telephone number is 610-878-7800.
The Merger
Terms of the Merger. The Plan of Merger, a copy of which is
attached as Annex I and incorporated herein by this reference, provides for the
merger of MergerCo with and into IPC (the "Merger") with IPC being the surviving
corporation in the Merger (the "Surviving Corporation"). At the effective time
of the Merger, which will occur on or about September 13, 1996 upon the filing
of a Certificate of Merger in Delaware (the "Effective Time"), each outstanding
share of IPC common stock, par value $.001, per share, other than shares of IPC
held by the Company (the "Excluded Shares"), and other than shares of IPC held
by stockholders who perfect their appraisal rights under Delaware law (the
"Dissenting Shares"), will be converted into that number of shares (the
"Conversion Number") of the Common Stock of the Company (the "Merger
Consideration") equal to (i) $7.33 divided by (ii) $8.003, the average closing
price per share of InterDigital Common Stock as reported by the American Stock
Exchange for the 30 calendar days ending on the last trading day prior to the
date the Registration Statement was declared effective by the Commission (the
"Average Price"). Based on the Average Price of the Common Stock of $8.003 per
share, 1,499,905 shares of Common Stock will be issued to the holders of IPC
common stock (the "Investors") (assuming the exercise of all outstanding options
to purchase IPC common stock
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<PAGE>
immediately prior to the Merger), other than holders of Excluded Shares or
Dissenting Shares in the Merger, representing approximately 3.1% of the shares
of Common Stock to be issued and outstanding immediately after consummation of
the Merger based on the shares outstanding as of September 11, 1996. As a result
of the Merger, each outstanding share of MergerCo will be converted into a share
of the Surviving Corporation.
Exchange of IPC Common Stock for the Merger Consideration. In
order to receive the Merger Consideration, each holder of a certificate
theretofore representing IPC common stock will be required to surrender his or
her stock certificate, together with a duly executed and properly completed
letter of transmittal (the "Letter of Transmittal") and any other required
documents, to the Company by following the procedures described under "The Plan
of Merger -- Payment for IPC Common Stock." Each Investor will receive a number
of whole shares of Common Stock determined by multiplying the number of shares
of IPC common stock owned by such Investor at the Effective Time by the
Conversion Number. Investors will be paid cash in lieu of any fractional shares
of Common Stock which they would otherwise be entitled to receive. See "The Plan
of Merger -- Payment for IPC Common Stock."
Approval by the IPC and InterDigital Board of Directors and
the stockholders of MergerCo and IPC. On August 15, 1996, meetings of the Boards
of Directors of IPC (the "IPC Board") and InterDigital (the "InterDigital
Board") were held for the purpose of considering the Merger, including reviewing
the fairness of the Merger Consideration to be paid in the Merger. The IPC Board
engaged Howard, Lawson & Co. ("Howard Lawson") to serve as its independent
financial advisor for the transaction and to render an opinion as to the
fairness of the Merger Consideration, from a financial point of view, to the
Investors. The IPC Board also engaged the law firm of Archer & Greiner, a
Professional Corporation to advise the IPC Board as to certain legal issues
regarding the Merger. See "The Merger -- Approval of the IPC Board, InterDigital
Board and stockholders of MergerCo and IPC."
After considering all relevant information, including the
opinion of Howard Lawson to the effect that the Merger Consideration to be
received by the Investors is fair, from a financial point of view, to each
Investor, the IPC Board voted unanimously to approve the terms of the Merger and
the Plan of Merger. In addition, after considering all relevant information, the
InterDigital Board voted unanimously to approve the terms of the Merger and the
Plan of Merger on behalf of itself, but not in its capacities as the sole
stockholder of MergerCo and the majority stockholder of IPC. Approval of
InterDigital as the sole stockholder of MergerCo and the majority stockholder of
IPC remains a condition precedent to the Merger. Investors should be aware that
all members of the IPC Board have certain interests which may present them with
potential conflicts of interest in connection with the Merger, including the
fact that the IPC Board consists of persons, all of whom are members of the
Company's board of directors, some of whom are executive officers of the
Company, and one of which is a stockholder of IPC. See "The Merger -- Interests
of Certain Persons in the Merger."
Purpose, Structure and Certain Effects of the Merger. The
purpose of the Merger is to facilitate the further development and
implementation of the Company's and ITC's alliance program, eliminate potential
conflicts of interest, corporate governance and corporate opportunity issues
that may arise in connection with the operation of a subsidiary which is not
100% owned by the Company, and simplify the negotiation of multi-faceted
licensing and technology transfer arrangements between the Company, ITC and
third parties. At the same time, the Merger is intended to give the Investors
the opportunity to own, in a tax-free exchange, a stock with greater liquidity,
as well as to share in the prospects of the combined organization. As a result
of the Merger, the separate existence of MergerCo will cease to exist, IPC will
become a wholly-owned subsidiary of the Company and the stockholders of IPC will
become shareholders of the Company. See "The Merger -- Purpose and Structure of
the Merger and Certain Effects of the Merger."
Recommendation of the Financial Advisor. On August 15, 1996,
Howard Lawson delivered to the IPC Board its opinion, confirmed by a written
opinion dated August 15, 1996, to the effect that, as of the respective dates
and based upon and subject to certain matters as stated in its written opinion,
the Merger Consideration to be received by the Investors in the Merger is fair,
from a financial point of view, to the Investors. The full text of the August
15, 1996 Howard Lawson written opinion setting forth the assumptions made,
matters considered and scope of review undertaken
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<PAGE>
in connection therewith is attached as Annex II to this Prospectus and should
be read in its entirety. See "The Merger -- Opinion of Financial Advisor."
Action Required to Approve the Merger. Under applicable law,
the only corporate approvals required in order to effect the Merger are those of
the respective Boards of Directors of MergerCo and IPC, and the approval of the
Board of Directors of InterDigital on its own behalf, as the sole stockholder of
MergerCo and as the majority stockholder of IPC. Shareholder approval of
InterDigital is not required to effect the Merger. No proxies are being
solicited in connection with the Merger. In addition, InterDigital has the
right, which it may exercise in its sole discretion, to terminate or abandon the
Merger prior to the Effective Time, if the average closing price per share of
InterDigital Common Stock as reported by the American Stock Exchange for the 30
calendar days ending on the last trading day prior to the date the Registration
Statement is declared effective by the Commission is less than or equal to $5.86
per share (i.e., eighty percent of $7.33). The Merger will become effective on
or about September 13, 1996 upon the filing of a Certificate of Merger with the
Delaware Secretary of State.
Certain Benefits of the Merger. The Board of Directors of
IPC has identified a number of potential benefits of the Merger to IPC
stockholders. See "The Merger Background and Reasons for the Merger;
Recommendation of the IPC Board." These benefits include, among others:
* The opportunity for IPC stockholders to participate, as
holders of Company Common Stock, in a larger, more
diversified company;
* Increase in liquidity for IPC stockholders;
* The terms and structure of the Merger, including its
structure as a tax-free exchange; and
* Certain strategic and business management benefits
that the Merger will provide to InterDigital and IPC
including, but not limited to, facilitating the
further development and implementation of the
Company's and ITC's alliance program, eliminating
potential conflicts of interest and potential
corporate governance and corporate opportunity
issues, and simplifying the negotiation of
multi-faceted licensing and technology transfer
arrangements between the Company, ITC and third
parties.
Certain Federal Income Tax Considerations. IPC and the Company
have received an opinion of Pepper, Hamilton & Scheetz, the Company's outside
counsel ("Special Tax Counsel") that the Merger, with the Investors receiving
Company Common Stock, will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"). The opinion of Pepper, Hamilton & Scheetz
relating to the Merger is conditioned upon certain facts, representations and
assumptions provided to Pepper, Hamilton & Scheetz by the Company and IPC and is
subject to certain qualifications and other matters set forth therein. Provided
the Merger qualifies as a reorganization, then for federal income tax purposes:
(i) no gain or loss would be recognized by any of IPC, MergerCo or the Company
as a result of the Merger and (ii) no gain or loss would be recognized by a
stockholder of IPC upon the receipt of Company Common Stock in exchange for IPC
common stock in the Merger, except that gain or loss would be recognized on
receipt of any cash in lieu of fractional shares or because of the exercise of
dissenters' rights. See "Certain Federal Income Tax Consequences of the Merger."
Because of the complexities of the federal income tax laws and
because the tax consequences may vary depending upon an IPC stockholder's
individual circumstances or tax status, it is recommended that each IPC
stockholder consult with his or her tax advisor concerning the federal (and any
applicable state, local or other) tax consequences of the Merger.
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<PAGE>
Comparison of Stockholder Rights. As a result of the Merger,
shares of IPC common stock, which are issued by a Delaware corporation, will be
converted into the right to receive shares of InterDigital Common Stock, which
are issued by a Pennsylvania corporation. As a result of the differences between
Delaware and Pennsylvania law, and between the governing instruments of IPC and
InterDigital, there are differences in terms of, and rights of holders with
respect to, IPC common stock and Company Common Stock. For a discussion of the
various differences between the rights of IPC stockholders, as holders of IPC
common stock, and the rights of InterDigital stockholders, as the holders of the
Company Common Stock, see "Comparison of Stockholder Rights."
Appraisal Rights. Holders of record of shares of IPC common
stock have the right to have the "fair value" of their shares of IPC held at the
Effective Time to be judicially determined and to have such value paid in cash.
To do so, the holder of the IPC shares must comply with the requirements of
Section 262 of the DCL, a copy of which is attached as Annex III to the
Prospectus. See "Terms of the Merger - Appraisal Rights."
Regulatory Approvals. No federal or state regulatory
requirements remain to be complied with in order to consummate the Merger. See
"Certain Legal Matters, Experts and Regulatory Approvals."
Accounting Treatment of the Merger. The acquisition of the
minority interest of IPC by InterDigital will be accounted for using the
purchase method of accounting and, accordingly, the purchase price will be
allocated by InterDigital to the assets purchased and the liabilities assumed
based upon the fair values at the date of acquisition.
Share Information
InterDigital Common Stock Being Sold (1)..............................1,499,905
InterDigital Common Stock Outstanding After the Merger (1)(2)........47,939,198
AMEX Symbol.................................................................IDC
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(1) Based upon the Merger Consideration.
(2) Excludes approximately 8.0 million shares of InterDigital Common Stock
which may be issued upon the exercise of outstanding options and
warrants and approximately 3.9 million shares of InterDigital Common
Stock which may be issued upon exercise of options which may be granted
pursuant to the Company's existing stock option plans.
Market Price Data
On September 11, 1996, the last reported trading day prior to
the public announcement of the Merger, the closing sale price for the
InterDigital Common Stock, as reported on the American Stock Exchange Composite
Tape, was $7 7/8 per share, and there were approximately 2,600 record holders of
the Common Stock.
No active trading market exists for the IPC common stock and,
accordingly, there are no published market quotations available for such shares
of stock. As of September 11, 1996, there were seventeen record holders of IPC
common stock including the Company.
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Summary Selected Financial Data
InterDigital Communications Corporation
<TABLE>
<CAPTION>
Historical
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For the Year Ended December 31,
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1991 1992(1) 1993 1994 1995
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<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
(In thousands, except per share data)(6)
Revenues:
UltraPhone $ 31,482 $ 34,348 $ 11,748 $ 20,086 $ 16,581
Licensing and Alliance -- 3,015 -- 28,709 67,693
Contract services 2,140 2,347 1,551 1,171 681
--------- --------- --------- --------- ---------
Total revenues 33,622 39,710 13,299 49,966 84,955
Nonrecurring items(2) 925 (15,088) -- -- --
Income (loss) from continuing operations (6,179) (20,342) (32,929) (13,753) 34,605
Discontinued operations(6) (60) (2,283) (1,728) (295) --
Net income (loss) before preferred dividends (6,239) (22,625) (34,657) (14,048) 34,605
Net income (loss) applicable to common
shareholders $ (7,743) $ (22,917) $ (34,939) $ (14,330) $ 34,340
========= ========= ========= ========= =========
Net income (loss) per share
Net income (loss) from continuing operations $ (0.39) $ (0.86) $ (1.05) $ (0.37) $ 0.74
Net income (loss) - discontinued operations -- (0.09) (0.06) (0.01) --
--------- --------- --------- --------- ---------
Net income (loss) per common share $ (0.39) $ (0.95) $ (1.11) $ (0.38) $ 0.74
========= ========= ========= ========= =========
Weighted average number of shares outstanding 19,828 24,113 31,515 37,463 46,503
========= ========= ========= ========= =========
Operations and Other Date:
Number of UltraPhone systems sold 50 45 10 34 24
Number of UltraPhone subscriber stations sold 5,826 7,160 2,304 8,570 5,474
</TABLE>
<TABLE>
<CAPTION>
Historical
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December 31,
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1991 1992 1993 1994 1995
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<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data (in thousands):
Cash and cash equivalents (3) $ 4,595 $ 9,146 $ 8,211 $ 6,264 $ 9,427
Short Term Investments -- -- -- -- 55,060
Working capital (deficit) (3,248) 10,340 8,064 10,118 59,008
Total assets 15,031 35,550 32,326 43,830 83,167
Short-term debt (4) 1,194 154 256 233 430
Long-term debt 158 150 650 520 631
Accumulated deficit (112,479) (135,396) (170,335) (184,665) (150,325)
Total shareholders' equity (5) 1,806 15,056 14,004 14,872 62,440
<CAPTION>
Historical Pro Forma
--------------------------- -----------
Six Six Six
Months Months Months
Ended Ended Ended
Pro Forma June 30, June 30, June 30,
1995(7) 1995 1996(7) 1996(7)
--------- --------- --------- ---------
Consolidated Statement of Operations Data:
(In thousands, except per share data)(6)
Revenues:
UltraPhone $ 16,581 $ 11,456 $ 6,834 $ 6,834
Licensing and Alliance 67,693 62,093 24,707 24,707
Contract services 681 445 -- --
--------- --------- --------- ---------
Total revenues 84,955 73,994 31,541 31,541
Nonrecurring items(2) -- -- -- --
Income (loss) from continuing operations 36,411 40,793 4,707 5,244
Discontinued operations(6) -- -- -- --
Net income (loss) before preferred dividends 36,411 40,793 4,707 5,244
Net income (loss) applicable to common
shareholders $ 36,146 $ 40,659 $ 4,575 $ 5,112
========= ========= --------- =========
Net income (loss) per share
Net income (loss) from continuing operations $ 0.75 $ 0.88 $ 0.10 $ 0.10
Net income (loss) - discontinued operations -- -- -- --
--------- --------- --------- ---------
Net income (loss) per common share $ 0.75 $ 0.88 $ 0.10 $ 0.10
========= ========= --------- =========
Weighted average number of shares outstanding 48,003 46,195 47,931 49,431
========= ========= ========= =========
Operations and Other Date:
Number of UltraPhone systems sold 8 17
Number of UltraPhone subscriber stations sold 1,889 705
<CAPTION>
Historical Pro Forma
---------- ---------
June 30, June 30,
1996 1996(7)
--------- ---------
Consolidated Balance Sheet Data (in thousands):
Cash and cash equivalents (3) $ 20,306 $ 20,306
Short Term Investments 62,322 62,322
Working capital (deficit) 74,712 74,712
Total assets 115,550 122,630
Short-term debt (4) 484 484
Long-term debt 3,142 3,142
Accumulated deficit (145,750) (145,750)
Total shareholders' equity (5) 75,656 87,468
</TABLE>
(see footnotes on next page)
-9-
<PAGE>
- ---------------------------------------
(1) Includes the results of operations of SCS Telecom, Inc. and SCS
Mobilcom, Inc. ("SCS") from October 15, 1992, the respective date
of acquisition by the Company.
(2) Nonrecurring items for 1991 include a gain of $8,125,000 on the sale of
a cellular license and a loss of $7,200,000 on the cancellation of a
purchase commitment with Hughes Network Service Inc. ("HNS").
Nonrecurring items for 1992 include the expending of $13,120,000 of
research and development costs acquired as part of the acquisition of
SCS and a loss of $1,968,000 on a revaluation of equipment acquired as
part of a cancellation of the purchase commitment referred to above.
(3) Including $6,710,000, $2,424,000, $471,000, $1,200,000 and $1,002,000
of restricted cash as at December 31, 1992, 1993, 1994 and 1995 and
June 30, 1996, respectively.
(4) Includes the current portion of long-term debt.
(5) The Company has not declared or paid any dividends on the Common Stock
since its inception.
(6) The accompanying selected financial data has been restated to present
the Company's TELCO operations as discontinued operations.
(7) The pro forma summary information gives effect to the Merger as if it
occurred at the beginning of the periods presented for the results of
operations information and at the end of the latest reporting period
for the balance sheet information. See InterDigital Communications
Corporation Pro Forma Consolidated Financial Statements.
-10-
<PAGE>
INTERDIGITAL PATENTS CORPORATION AND SUBSIDIARY
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
CONSOLIDATED STATEMENT OF OPERATIONS DATA (1)
<TABLE>
<CAPTION>
For the
Six Months Ended
For the Year Ended December 31, June 30,
------------------------------------------------------- ----------------------
1992(2) 1993 1994 1995 1995 1996
-------- -------- -------- --------- -------- --------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Licensing revenue $ 3,015 $ -- $ 28,709 $ 64,293 $ 60,093 $ 16,400
Operating income (loss) 1,483 (3,626) 18,720 56,612 54,340 14,447
Net income (loss) 984 (2,357) 12,277 39,040 36,530 10,704
Net income (loss) per share $ 0.04 ($ 0.10) $ 0.51 $ 1.62 $ 1.51 $ 0.44
Shares used in computing net
income (loss) per share 24,006 24,072 24,137 24,137 24,137 24,137
Dividends paid to common stockholders 2,500(3) -- 3,104 -- -- --
</TABLE>
CONSOLIDATED BALANCE SHEET DATA (1)
<TABLE>
<CAPTION>
December 31, June 30,
-------------------------------------------------------------- --------
1992 1993 1994 1995 1996
------- -------- ------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments $ 5,382 $ 2,341 $ 2,402 $59,287 $68,824
Working capital 5,238 1,753 11,947 51,261 61,978
Patents (net) 2,362 2,477 2,569 2,386 2,376
Total assets 7,781 4,915 26,063 62,980 74,054
Due to (Due from) InterDigital 798 (598) 4,891 5,246 6,966
Retained earnings (deficit) -- (2,357) 6,816 45,856 56,560
Stockholders' equity 6,829 4,887 14,669 53,709 64,413
</TABLE>
- ---------------------------------------
(1) In February 1992, InterDigital formed InterDigital Technology
Corporation ("ITC"), as a wholly-owned subsidiary, and transferred all
of its patents, patent applications and rights to file patent
applications on certain future inventions to ITC. During the third
quarter of 1992, InterDigital formed IPC and contributed to IPC its
entire ownership in ITC in return for 100% of IPC's common stock.
Subsequently, InterDigital sold a 5.76% interest in IPC to the current
stockholders of IPC (except for InterDigital) for net proceeds of $5.2
million. IPC started operating as an active company during 1993. See
Note 1 to IPC's Consolidated Financial Statements.
(2) Operating results for 1992 include interest earned on IPC's cash
balances and ITC's patent enforcement activity beginning in February
1992. Prior to February 1992, InterDigital's patent portfolio
management activity was included in the operating results of
InterDigital. Prior period comparable data is not readily available.
(3) This amount represented a dividend paid by ITC to InterDigital in 1992
prior to the formation of IPC.
-11-
<PAGE>
Comparative Per Share Data
The following table sets forth historical per share data for
InterDigital and IPC, pro forma per share data for InterDigital giving effect to
the Merger and equivalent pro forma per share data for IPC. The information
presented should be read in conjunction with the historical financial statements
and notes thereto of InterDigital and IPC and the unaudited pro forma condensed
Consolidated Financial Statements and related notes thereto of InterDigital,
included or incorporated by reference in this Prospectus. Pro forma and
equivalent pro forma per share data reflect the consolidated results of
InterDigital and IPC, after giving effect to the Merger as if the event had
occurred on June 30, 1996 in the case of book value data, and on January 1,
1995, in the case of operations data. The pro forma per share data are not
necessarily indicative of actual results had the Merger occurred on such date or
of future expected results. See "Incorporation of Certain Documents by
Reference" for the incorporation by reference of certain InterDigital financial
statements, the Unaudited InterDigital Pro Forma Condensed Consolidated
Financial Statements, Audited and Unaudited InterDigital Patents Corporation and
Subsidiary Financial Statements included elsewhere in this Prospectus and "Risk
Factors -- Accumulated Deficit and History of Operating Losses."
<TABLE>
<CAPTION>
Year Ended Six months ended
December 31, 1995 June 30, 1996
----------------- -------------
Pro Forma Pro Forma
Historical InterDigital Historical InterDigital
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
IDC
- ---
Net Income per common share (1) $0.74 (1) $0.75 $0.10 $0.10
Cash dividends declared per common share --- --- --- ---
Book value per common share at period end (2) $1.35 N/A $1.58 $1.77
</TABLE>
<TABLE>
<CAPTION>
Equivalent Equivalent
Pro Forma Pro Forma
Historical IPC (3) Historical IPC (3)
---------- ------- ---------- ----------
<S> <C> <C> <C> <C>
IPC
- ---
Income per common share (1) $1.62 $1.77 $0.44 $0.48
Cash dividends declared per common share --- --- --- ---
Book value per common share at period end (4) $2.23 N/A $2.67 $2.92
</TABLE>
- -------------------------
(1) The number of shares used to compute the historical net income per
share is based upon weighted average shares outstanding and common
stock equivalents. The number of shares used to compute pro forma net
income per share is equal to the number used to calculate historical
net income per share increased by shares issued in the Merger.
(2) Computed by dividing historical or pro forma stockholders' equity less
the redemption value of the preferred stock by the historical or pro
forma number of shares outstanding at the end of the periods presented.
Taking into account the effect of common stock equivalents under the
treasury method, the net book value per share would be $1.28, $1.52 and
$1.71 as of December 31, 1995 historical, June 30, 1996 historical, and
June 30, 1996 pro forma.
(3) The shares used in computing the equivalent pro forma net income per
share and equivalent pro forma book value per share are obtained by
multiplying the shares used in the respective historical calculation by
the ratio equal to (i) $7.33 divided by (ii) $8.003, the average
closing price per share of InterDigital Common Stock as reported by the
American Stock Exchange for the 30 calendar days ending on the last
trading day prior to the date the Registration Statement was declared
effective by the Commission.
-12-
<PAGE>
(4) Computed by dividing historical stockholders' equity by the historical
number of shares outstanding at the end of the periods presented. For
purposes of this calculation, options outstanding to purchase 262,625
shares of IPC common stock have been considered outstanding.
-13-
<PAGE>
RISK FACTORS
In addition to the other information contained or incorporated
by reference in this Prospectus, the following factors should be considered
carefully in evaluating an investment in the Common Stock offered hereby.
Accumulated Deficit and History of Operating Losses. The
Company has experienced losses from its inception in 1972 through the third
quarter of 1994 and in selected periods thereafter, and, as of June 30, 1996,
the Company's accumulated deficit was $145.8 million. In recent years, the
Company has incurred significant increases in expenses associated with its
UltraPhone business activities, the development of related product enhancements,
the acquisition and development, as applicable, of its TDMA and B-CDMA digital
wireless technologies, and the enforcement of ITC's patents. There can be no
assurance that the Company will realize revenues and gross profits sufficient to
achieve or sustain profitability on a quarterly or annual basis in the future.
In the event it fails to do so, the Company's operations could be adversely
affected and investors in the Common Stock could face the loss of part or all of
their investment.
Need for Expansion and Increased Profitability of UltraPhone
Sales. Prior to 1994, sales of the UltraPhone system historically accounted for
a substantial majority of the Company's revenues. During 1994, 1995 and the
first half of 1996, licensing and alliance revenues constituted the majority of
the total revenues of the Company. The Company's future profitability may, in
the event of any significant decline in licensing and alliance revenues, depend
significantly on the expansion of UltraPhone system sales by increasing sales to
its existing customers, broadening the Company's customer base, or both. Since
1993, the Company has experienced negative gross profit margins in its
UltraPhone product operations as a result of insufficient production volumes and
higher than desired variable costs relative to declining selling prices in such
operations. More specifically, the Company has accepted major orders for 1996
and 1997 delivery and is actively marketing the UltraPhone system in certain
opportunities, at sales prices which are expected to generate little, if any,
margin based on the current cost characteristics of the system configurations
being proposed. There can be no assurance that the Company will be able to
increase UltraPhone system sales and decrease UltraPhone system variable
operating costs sufficiently to achieve profitability in its UltraPhone system
operations. Moreover, many of the Company's contracts for UltraPhone product
sales contain provisions which could result in the imposition of liquidated
damages for late performance or the drawing of performance bonds for defaults.
Either of these events would put further downward pressure on UltraPhone product
profitability. Unless the Company is able to achieve positive profit margins in
its UltraPhone system operations, investors in the Common Stock could lose part
or all of their investment.
Dependence on a Limited Number of Customers, Alliance Partners
and Licensees. A substantial majority of UltraPhone system sales have
historically been concentrated among only a few major customers, and it is
anticipated that such concentration will continue for the foreseeable future.
Customers engaged in multi-year telecommunications infrastructure programs
traditionally purchase different types of telephone equipment in the various
phases of a program and therefore typically would not purchase a consistent
number of UltraPhone systems in each year of the program. Transitions to
different phases of acquisition programs by significant customers, other
reductions in purchases from those customers (unless replaced by other new
orders), or the loss of such customers could have a material adverse effect on
the Company. Similarly, the Company's licensing and alliance revenues have been
generated from only a relatively few licensees and alliance partners. There can
be no assurance that ITC will enter into patent license agreements with any
additional entities or that additional licensing revenue will be generated from
ITC's existing patent license agreements. There can be no assurance that the
Company will enter into additional alliances or that its current alliances will
generate additional revenues. The failure of ITC to enter into additional
license agreements or of the Company to achieve its alliance objectives could
have a material adverse effect on the Company. In either of such cases, the
Company's operations could be adversely affected and investors in the Common
Stock could lose part or all of their investment.
Quarterly Fluctuations in Financial Results. Historically, the
fact that new license agreements are not entered into on a regular, predictable
basis has been a factor in the significant fluctuations in the Company's
revenues and operating results from quarter to quarter, and there can be no
assurance that the Company's licensing activities will not diminish or cease
during any relevant time interval. Likewise, the concentration of UltraPhone
product sales to a few major customers and the signing of patent license
agreements providing for up-front license fees with a few licensees also
contributes to quarterly fluctuations in the Company's financial results.
UltraPhone product sales are expected to continue
-14-
<PAGE>
to be concentrated among only a few major customers who purchase UltraPhone
systems at sometimes unpredictable levels and intervals. As an example of the
fluctuation of quarterly financial results, the Company was profitable in the
first and second quarters of 1995 and unprofitable in the third and fourth
quarters of 1995. The variability of 1995 and 1996 quarterly operating results
was due to the revenue related to up-front license payments. The Company's
UltraPhone product sales and patent and technology licensing revenues may also
fluctuate as a result of other factors, including increased competition from
other products or technologies, announcements of new products or technologies by
the Company or its competitors, equipment acquisition and replacement patterns
of the Company's customers, general domestic and global economic and political
conditions, and perception of the strength and enforceability of the Company's
patent portfolio. As a result, the value of a Common Stock purchaser's
investment could be adversely affected.
Competition in the Telecommunications Industry. Competition in
the communications industry is intense. Generally, a number of entities, many of
which are substantially larger and have substantially greater financial,
technical, marketing and other resources than the Company, sell or may introduce
products which compete both domestically and internationally with the UltraPhone
system. Further, certain competing wireless telecommunications technologies
offer a lower-cost product as compared to the UltraPhone system as currently
configured and other wireless technologies offer or purport to offer certain
features not currently supported by the UltraPhone system. There can be no
assurance that the Company's competitors will not market competitive wireless
communications systems in an increasingly aggressive manner, which could
materially and adversely continue to affect the Company's UltraPhone system
business in the future. If this were to happen, the Company's assets could
diminish and the Company could experience an increase in accumulated deficit.
Such results could adversely affect the value of an investment in the Common
Stock.
Need for UltraPhone Engineering Modifications. The Company has
experienced and may continue to experience engineering delays and incur costs
related to engineering modifications in the introduction of new subscriber units
and other new enhancements or features. There can be no assurance that such
engineering delays or the costs of making any required engineering modifications
will not be substantial or that any required engineering modifications will be
successfully designed or implemented on a timely basis for any particular
application. The failure of any such engineering modifications to be
successfully and timely designed or implemented could have a material adverse
effect upon the Company's financial condition and results of operations. Such a
result could adversely affect the value of a Common Stock purchaser's
investment.
Reliance on Sole Source Suppliers. The Company currently
obtains certain critical components for the UltraPhone system from sole source
suppliers. The failure of the Company to develop and enter into acceptable
contracts with alternative sources for other critical components, or to obtain
sufficient sole or limited source components of acceptable quality, as required,
could result in delays or reductions in product shipments which could adversely
affect the Company's business prospects and relations with its customers. This,
in turn, could adversely affect the value of a Common Stock purchaser's
investment.
Dependence on Alliance Program. The Company has entered into
an alliance program designed, among other things, to enhance its UltraPhone
product marketing efforts and to promote its B-CDMA efforts. For example, in
December 1994, the Company entered into an alliance agreement with Siemens which
has begun to market the UltraPhone product. In February 1996, the Company
entered into an alliance agreement with Samsung, under which Samsung has made a
financial contribution to the Company and is participating, in the development
of B-CDMA technology and the marketing of the UltraPhone system. The elements of
the alliance strategy are interdependent and the failure to successfully achieve
any of the objectives would adversely affect the success of the overall strategy
and could have a material adverse effect upon the Company's financial position
and results of operations. This, in turn, could adversely affect the value of a
Common Stock purchaser's investment. See "--Dependence on a Limited Number of
Customers, Alliance Partners and Licensees."
Dependence on Patented and Proprietary Technology. The
Company's UltraPhone product business depends substantially upon its proprietary
technology, including technology covered by patents owned by ITC. ITC's
licensing opportunities depend upon its ability to enforce its patents against
third parties. In high technology fields, the validity and enforceability of
patents are often subject to complex legal and factual challenges and other
uncertainties. There
-15-
<PAGE>
can be no assurance that ITC's existing patents or any patents that may be
issued to ITC in the future will not be declared invalid, or that ITC's patents
will afford the Company the required protection against competitors with similar
technology; nor can there be any assurance that ITC's patents will not be
infringed upon, or circumvented through design changes, by others. See "Adverse
Results in Motorola Trial" below. In addition, in the normal course of business,
third parties have asserted, and may assert in the future, that the Company is
engaged in the infringing use of such third party's patents or proprietary
technology. If any such third party successfully asserts that the Company is
engaged in any such infringing use, the Company may be required to contest the
validity of such patents or proprietary technology, to acquire licenses to use
such patented or proprietary technology and/or to redesign the Company's
products to avoid further infringement. There can be no assurance that such
licenses can be obtained or that the Company would prevail in any such contests.
Furthermore, the Company relies upon non-competition and non-disclosure
agreements for the protection of certain other proprietary technology. There can
be no assurance that these agreements will prove adequate to enforce the
Company's proprietary rights in such technology. If ITC's patents were declared
invalid or the Company's proprietary technology were otherwise used by third
parties without licensing such patents and technologies from the Company and/or
ITC, the Company's financial position and results or operations would be
materially adversely affected. This could substantially affect the Company's
prospects for realizing future income and, thereby, investors in the Common
Stock could lose part or all of their investment.
Adverse Results in Motorola Trial. In March 1995, a trial
involving ITC and Motorola, Inc., ended with the jury's verdict that the
Motorola products involved in the suit did not infringe ITC's patent claims at
issue in the case and that the 24 patent claims were invalid. ITC filed a motion
requesting that the jury verdict be overturned or, in the alternative, that a
new trial be granted. Motorola filed a motion requesting attorneys' fees and
expenses aggregating between $6 and $7 million. On June 17, 1996, the U.S.
District Court for the District of Delaware affirmed that portion of the jury's
verdict regarding infringement. The U.S. District Court further sustained the
jury's determination of invalidity with respect to 21 of the 24 patent claims,
but ruled that three patent claims are valid notwithstanding the jury's
determination. The U.S. District Court denied Motorola's motion for attorneys'
fees and expenses. On June 17, 1996 Motorola filed an appeal from the ruling by
the U.S. District Court for the District of Delaware with the U.S. Court of
Appeals for the Federal Circuit (Appeal No. 96-1408) and on June 21, 1996 the
Company filed its appeal (Appeal No. 96-1428). It is anticipated that the
parties will file their appeal briefs during the remainder of 1996 and that the
appeals will be argued and decided within approximately 12 to 18 months after
all of the briefs have been filed. The Company believes that there are
substantial grounds for reversal of the jury's invalidity determination and the
granting of a new trial regarding infringement. In the short term, the jury
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. This, in turn,
could adversely affect the value of a Common Stock purchaser's investment. The
ultimate outcome of the Motorola case may also temporarily or permanently
adversely affect ITC's pending U.S. patent infringement litigation against
Ericsson GE Mobile Communications, Inc. and certain of its affiliates
(collectively, "Ericsson") and its ability to realize royalties under certain of
its license agreements. In addition, an adverse ruling on appeal with regard to
Motorola's motion for legal fees could adversely affect the Company's cash
position. There can be no assurance that the Motorola verdict will be reversed
and any reversal of the verdict should be expected to occur in the intermediate-
to long-term rather than in the near future. In the event that the Motorola
verdict is not overturned or reversed, the Company's future prospects could be
materially adversely affected and investors in the Common Stock could lose part
or all of their investment.
Protecting Patents and Proprietary Technology. ITC is
currently in litigation or involved in administrative proceedings, both in the
United States and abroad, over certain of its patents. In the event any of these
proceedings were to have unfavorable results, or if any of ITC's patents were to
be declared invalid, it could have a material adverse effect on ITC's patent
licensing opportunities, if any. This could adversely affect the Company's
ability to realize additional licensing revenues. Such unfavorable results could
also adversely affect ITC's pending patent litigation against Ericsson and its
ability to realize royalty revenue. In such event, the Company's prospects could
be materially adversely affected and investors could lose part or all of their
investment.
Dependence on Foreign Sales. InterDigital expects that sales
of UltraPhone systems to foreign customers will continue to account for a
substantial portion of the Company's total product revenues. Sales of UltraPhone
systems to foreign customers accounted for approximately 65%, 79%, 84% and 86%,
respectively, of the Company's UltraPhone
-16-
<PAGE>
product revenues for 1993, 1994, 1995 and the six month period ended June 30,
1996. Foreign sales of UltraPhone systems are subject to local economic and
political factors which may result in delays in completing sales or the
inability to complete sales. Foreign sales of UltraPhone systems may be affected
by changes in demand resulting from fluctuations in currency exchange rates, as
well as by risks such as tariff and quota regulations and difficulties in
obtaining export or import licenses, among other things. The Company's
UltraPhone product sales usually depend upon a customer's ability to obtain
financing for the purchase, and there can be no assurance that the Company's
existing or prospective customers will be able to qualify for or obtain the
financing necessary to purchase UltraPhone systems. Failure to do so could
adversely affect the Company's cash flow and profitability. This, in turn, could
adversely affect the value of the Company's Common Stock.
Risk of International Operations. The Company's ability to
conduct business in certain areas outside the United States and its revenues
derived from foreign licensees may be adversely affected by certain risks
inherent in international operations. In conducting business in foreign
jurisdictions the Company may be subject, in addition to the effects of
government regulation, to the effects of tariffs and any other applicable trade
barriers, currency control regulations, political instability, potential adverse
tax consequences, and general delays in remittance and difficulties of
collection of foreign payments, among other things. Also, currency conversion
gains and losses could contribute to fluctuations in InterDigital's operating
results. If for any reason exchange or price controls or other restrictions on
the conversion or repatriation of foreign currencies were imposed,
InterDigital's revenues derived from any foreign customers or licensees could be
adversely affected. In such event, the value of a Common Stock purchaser's
investment could be adversely affected.
Lack of Technological Change and Product Development. The
telecommunications industry is characterized by rapid technological change,
frequent product introductions and evolving domestic and international industry
standards. The Company believes that its potential for future success will
depend on, among other things, whether it will be able to (i) meet evolving
customer and country-specific requirements through continued refinements to the
UltraPhone system (including frequency modifications) and B-CDMA technology
development projects, and (ii) reduce product costs to allow for more aggressive
UltraPhone product pricing and increased gross profit margin and for continued
B-CDMA technology development projects. Such efforts will necessitate continued
significant investment by the Company in research and development and in sales
and marketing. There can be no assurance that the Company will have sufficient
resources to make such investments, that the Company will be able to make the
technological advances necessary to achieve these goals and thereby capture a
level of sales sufficient to achieve its future success, or that the costs of
such efforts will be acceptable to the Company. There can be no assurance that
the Company's products will not be rendered obsolete or noncompetitive by new
industry standards or changing technology or that the Company will be able
successfully to increase UltraPhone system sales or to develop and successfully
market new products. In such event, the Company's operations could be
jeopardized and investors in the Common Stock could lose part or all of their
investment.
Regulatory and Standards Compliance. In general, the
telecommunications industry is subject to continued regulation on the federal,
state and international levels and, in many cases, domestic, regional and
international organizations, including financing agencies, impose standards for
acceptance or type certification of telecommunications products. Changes in
these regulations or standards may adversely impact the Company's ability to
sell UltraPhone systems or impose additional costs and/or time delays with
respect to such sales. In such event, the value of a Common Stock holders's
investment could be adversely affected.
Changes to Government Regulations. The commercial potential
for the Company's proprietary technologies may be materially affected by
regulations and actions of various governmental agencies, including the Federal
Communications Commission ("FCC"), state public service and utility commissions,
the United States Congress and the courts relating to the regulation of
competition, rate tariffs and/or frequency use, which could affect the market,
demand and availability of communications systems. These restrictions, and those
imposed by counterpart agencies in foreign jurisdictions, may be important
factors in decisions by telephone companies, cellular system operators and other
authorized service providers concerning utilization of the Company's proprietary
technologies. Such restrictions could adversely affect the Company's sales and,
in turn, could adversely affect the value of the Common Stock.
-17-
<PAGE>
Effect of Litigation on Cash Position. The Company and ITC are
currently in patent and other litigation, both as plaintiffs and defendants, in
the United States, and are involved in administrative proceedings abroad, over
certain of its patents. The legal fees and costs associated with such litigation
are substantial. A judicial determination of liability requiring the Company to
pay substantial amounts could adversely affect the Company's cash position. In
addition, an adverse or inconclusive result in the Company's and ITC's pending
patent-related litigation against Motorola or Ericsson or any of the
patent-related administrative proceedings could adversely affect the Company's
efforts to generate further revenue and cash flow from its patent portfolio and
could impair generally the Company's ability to raise additional funds. Either
of these results, in turn, could adversely affect the value of a Common Stock
purchaser's investment.
Need for Additional Financing. The Company's operations to
date have required substantial amounts of working capital, and the Company
expects to spend substantial funds to support its UltraPhone operations, to
develop improvements and enhancements to the UltraPhone system, to further
expand its research and development activities relating to its B-CDMA technology
and to fund its patent enforcement activities. The Company's working capital
requirements will depend on numerous factors, including but not limited to the
level of demand for the UltraPhone system, the progress of the Company's
research and development programs, the ability to generate patent and technology
license fees and royalties, and the need to expend funds in connection with its
patent protection activities. To the extent that cash on hand and funds
generated from operations are insufficient, the Company will have to raise
additional funds to meet its working capital requirements. Continued
availability of working capital will be dependent on the financial condition of
the Company, and there is no assurance that additional financing will be
available or, if available, that it will be available on acceptable terms. In
the event sufficient working capital is not obtained or maintained, the
Company's operations could be substantially and adversely disrupted. This, in
turn, could adversely affect the value of a Common Stock purchaser's investment.
Dependence on and Availability of Key Personnel. The Company's
business will continue to depend upon certain key Company personnel, none of
whom currently are parties to agreements that require them to provide services
to the Company for any minimum period of time. The Company believes that to
succeed in the future it will be required to continue to attract, retain and
motivate a significant number of talented and qualified management, sales and
technical personnel. There can be no assurance that the Company will be able to
retain its key employees, or that the Company will be able to continue to
attract, assimilate and retain other skilled management, sales and technical
personnel. The loss of any of its existing key personnel or the inability to
attract and retain a sufficient number of key employees in the future could have
a material adverse effect on the Company. This, in turn, could adversely affect
the value of the Common Stock of the Company.
Adverse Effects to Common Stock Upon Issuance of Additional
Preferred Stock. InterDigital is authorized to issue 14,398,600 shares of its
preferred stock, par value $.10 per share ("Preferred Stock"), of which
approximately 105,000 shares were issued and outstanding as of June 30, 1996.
The InterDigital Board, without any further action by InterDigital's
shareholders, may issue from time to time the authorized and unissued shares of
Preferred Stock in one or more series, and may determine as to each series the
designation and number of shares to be issued and the relative rights,
preferences and limitations of the shares of each series, including provisions
with respect to voting powers, redemption, conversion, dividend rights and
liquidation preferences. The issuance of Preferred Stock could adversely affect
the voting power of the holders of Common Stock, deny holders of Common Stock
the receipt of a premium on their Common Stock and have a depressive effect on
the market price of the Common Stock. The issuance of Preferred Stock could also
have the effect of deterring or delaying any attempt by a person or group to
obtain control of InterDigital.
Volatility of Securities Prices. Historically, market prices
for securities of companies involved in the wireless telecommunications industry
have been volatile. In addition, market prices for the Common Stock have
historically been particularly volatile due, in part, to the Company's history
of quarterly fluctuations of revenues and operating results. Announcements of,
among other things, technological innovations or new commercial products by the
Company or its competitors, developments concerning proprietary technologies,
results of patent enforcement activities, regulatory developments in both the
United States and other countries, and global and national economic and
political factors, as well as period-to-period fluctuations in financial
results, may have a significant impact on the market price of the Common Stock.
See " - Adverse Effects to Common Stock Upon Issuance of Additional Preferred
Stock."
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Lack of Dividends on Common Stock. InterDigital has not
declared or paid cash dividends on the Common Stock since its inception. It is
anticipated that in the foreseeable future, no cash dividends will be declared
or paid on the Common Stock and any cash otherwise available for such dividends
will be reinvested in the Company's business.
Anti-Takeover Provisions. Unsolicited changes in control of
InterDigital could be deterred, delayed or made more expensive as a result of
applicable statutory protections (relating to transactions with certain
"interested persons" and "controlling persons"), the statutory authorization for
the InterDigital Board to consider the interests of constituent groups (other
than InterDigital's shareholders) when determining whether a particular action
is in the best interests of InterDigital, provisions of InterDigital's Bylaws
establishing a classified InterDigital Board, and certain provisions in
InterDigital's Articles of Incorporation. Accordingly, these provisions and
protections may have a depressive effect on the price of InterDigital's
securities.
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THE MERGER
Background and Reasons for the Merger
In the fourth quarter of 1994, the IPC Board, the InterDigital
Board and the management of IPC and InterDigital commenced a comprehensive and
continuing review of the Company's organizational structure in order to better
address management requirements regarding the companies' intellectual property
portfolio and prospective alliance activities. In their review, the Boards and
management of the two companies sought to address various issues which might
result from bundled licenses of such companies' patent, trademark and know-how
rights. The Boards and management of the two companies concluded that both
companies would benefit from the Merger of the companies by facilitating
licensing negotiations, easing the burden of redundant administrative,
accounting and financial operations, and providing the minority stockholders of
IPC with liquidity in respect to their investment in the common stock of IPC.
After management of the Company met with representatives of the minority
stockholders of IPC, by the end of the first quarter of 1995, the management of
IPC and InterDigital had concluded that the most effective way to combine the
two companies and address the objectives described above was to effect a
tax-free stock-for-stock combination.
On May 4, 1995, management of IPC met with several investment
banking firms to determine whether such firms should be retained to provide the
company investment advisory services in connection with the proposed
combination. After such meetings, IPC retained the services of Howard Lawson to
provide investment advisory services in connection with the Merger. Management
of IPC met with Howard Lawson several times between May 4, 1995 and August 23,
1995. On August 23, 1995, Howard Lawson presented its preliminary analyses as to
indications of value of the IPC common stock based on then existing conditions.
However, no valuation report was issued at such time. InterDigital management
and directors determined at such time that the merger transaction required
additional analysis.
On February 2, 1996 and February 27, 1996, members of IPC's
management met with Howard Lawson to discuss the status of the Merger and to
provide Howard Lawson a description of recent material events. On March 15,
1996, the IPC Board met with Howard Lawson to discuss the status of the Merger
and Howard Lawson's revised preliminary analyses as to indications of value of
the IPC common stock based upon then existing conditions. However, due to
demands on the time and attention of IPC management resulting from the
negotiation of the Samsung alliance, the opposition proceeding in Germany
regarding one of ITC's TDMA system patents and certain management changes at
InterDigital, the preliminary estimates of the range of value of the IPC common
stock were neither finalized nor acted upon at such time.
On June 25, 1996 and July 12, 1996, members of IPC's
management again met with Howard Lawson to discuss the status of the Merger and
to provide a summary of recent material events. On August 15, 1996, the
InterDigital and IPC Boards met individually to discuss the progress of the
Merger. On such date, the IPC Board met with Howard Lawson to discuss the Merger
consideration and the structure of the Merger. Howard Lawson presented its
opinion concerning the range of values of the IPC common stock based on then
existing conditions. See "The Merger--Opinion of Financial Advisor." In
addition, the Boards reviewed a draft of the Registration Statement on Form S-4
and the Plan of Merger to be filed with the Commission in connection with the
Merger. At such meetings, each of the InterDigital and the IPC Boards approved
the Merger, subject to the approval of the majority stockholder of IPC and the
sole stockholder of MergerCo, as required by Delaware law. The InterDigital
Board also approved the filing of the Registration Statement on Form S-4 in
connection with the Merger. The Registration Statement on Form S-4 was filed
with the Commission on August 19, 1996.
On August 6, 1996, the Company incorporated MergerCo in the
state of Delaware. On August 15, 1996, the Board of Directors of MergerCo
approved the execution of the Plan of Merger, the effectiveness which is subject
to the approval of the Company as the majority stockholder of IPC and the sole
stockholder of MergerCo. The Plan of Merger was executed by all parties on
August 15, 1996. It is anticipated that the Company as the sole stockholder of
MergerCo and the majority stockholder of IPC will approve the Merger after the
Commission declares the Registration Statement effective.
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Purpose and Structure of the Merger and Certain Effects of the Merger
The reason for the Merger is to facilitate the further
development and implementation of the Company's and ITC's alliance program,
eliminate potential conflicts of interest which may arise between ITC and the
Company, eliminate corporate governance and corporate opportunity issues that
may arise in connection with the operation of a subsidiary that is not wholly
owned by the Company and simplify the negotiation of multi-faceted licensing and
technology transfer arrangements between the Company, ITC and third parties. The
Merger will also allow the Investors the opportunity to own stock with a greater
liquidity.
Conduct of the Business of the Surviving Corporation After the Merger
Following the Merger, the Surviving Corporation will be a
wholly owned subsidiary of InterDigital. The Surviving Corporation will exist
and operate under the name "InterDigital Patents Corporation." The Surviving
Corporation's Certificate of Incorporation will be the same as that of IPC as in
effect immediately prior to the Effective Time. The Surviving Corporation's
board of directors and management will be the same as that of IPC as in effect
immediately prior to the Effective Time.
Approval by the IPC Board and InterDigital Board
On August 15, 1996, meetings of the IPC Board and the
InterDigital Board were held for the purpose of considering the Merger including
reviewing the fairness of the Merger Consideration to be paid in the Merger. The
IPC Board had previously engaged Howard Lawson to serve as its independent
financial advisor for the transaction and to render an opinion as to the
fairness of the Merger Consideration, from a financial point of view, to the
Investors. In addition, Archer & Greiner advised counsel to IPC as to the
fiduciary duties of IPC's Board of Directors. After considering all relevant
information, including the opinion of Howard Lawson to the effect that the
Merger Consideration to be received by the Investors is fair, from a financial
point of view, to the Investors, the IPC Board voted unanimously that it approve
the terms of the Merger and the Plan of Merger. In addition, after considering
all relevant information, the InterDigital Board voted unanimously that it
approve the terms of the Merger and the Plan of Merger on behalf of itself.
Investors should be aware that all of the members of the IPC Board have certain
interests which may present them with potential conflicts of interest in
connection with the Merger including, the fact that the IPC Board consists of
persons, all of whom are either members of the Company's board of directors,
some of whom are executive officers of the Company, and one of which is an
Investor of IPC. See "The Merger -- Interests of Certain Persons in the Merger."
Opinion of Financial Advisor
Howard Lawson was retained by the IPC Board to act as its
financial advisor and to render a fairness opinion in connection with the
Merger. Pursuant to such engagement, the IPC Board requested that Howard Lawson
evaluate the fairness, from a financial point of view, to the Investors of the
consideration to be received in the Merger by the Investors. On August 15, 1996,
Howard Lawson delivered to the IPC Board its oral opinion, confirmed by a
written opinion dated August 15, 1996, to the effect that, as of the respective
dates and based upon and subject to certain matters as stated in its written
opinion, the consideration to be received by the Investors in the Merger was
fair, from a financial point of view, to the Investors.
The full text of the written opinion of Howard Lawson dated
August 15, 1996, which sets forth assumptions made, factors considered and
limitations on the review undertaken by Howard Lawson, is attached to and made
part of this Prospectus as Annex II. Investors are urged to read such opinion
carefully and in its entirety.
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No limitations were imposed by the IPC Board on the scope of
Howard Lawson's investigation or the procedures to be followed by Howard Lawson
in rendering its opinion, except that the IPC Board did not authorize Howard
Lawson to solicit, and Howard Lawson did not solicit, any indications of
interest from any third party with respect to the purchase of all or a part of
IPC's business. Howard Lawson was not requested to and did not make, any
recommendations to the IPC Board as to the form of the Merger Consideration. In
arriving at its opinion, Howard Lawson did not ascribe a specific value to IPC,
but instead made its determination as to the fairness, from a financial point of
view, of the per share price received by the Investors from InterDigital, on the
basis of a financial analysis described below. Howard Lawson's opinion is
directed to the IPC Board only and does not constitute a recommendation to any
Investor. Howard Lawson was not requested to opine as to, and its opinion does
not address, the underlying business decision to proceed with or the effect of
the Merger.
In arriving at its opinion, Howard Lawson reviewed the
following financial and other information, including but not limited to:
(i) Draft of the Form S-4 Registration Statement dated August 14, 1996;
(ii) IPC and InterDigital Confidential Private Placement Memorandum
dated October 1, 1992; (iii) InterDigital Annual Reports and Forms 10-K for the
fiscal years ending December 31, 1992, 1993, 1994 and 1995 and Forms 10-Q for
the quarterly periods ended March 31, 1996 and June 30, 1996; (iv) Press
Releases, Commission filings and other publicly available information regarding
InterDigital and IPC; (v) InterDigital, 1995 Goals and Budget dated December 14,
1994 and 1996 Forecasted Profit dated April 30, 1996; (vi) InterDigital and
subsidiaries internal consolidating financial statements for fiscal 1992, 1993,
1994 and 1995 and the period ended June 30, 1996; (vii) historical prices and
trading volume of the Common Stock of InterDigital; (viii) information on ITC's
patents and patent applications and litigation regarding those patents; and
(ix) information on the wireless telecommunications equipment industry,
including market reports, analysts' reports, and information on companies in
the industry.
In addition, Howard Lawson had discussions with the management
of InterDigital and IPC concerning the respective businesses, operations,
assets, financial condition and prospects of InterDigital and IPC including, but
not limited to, their proprietary technology, development efforts, patents and
patent applications, licensing, alliance and other agreements, the prospects for
the adoption of their technology in various markets, and the status of
litigation regarding ITC's patents, and undertook such other studies, analyses
and investigations as it deemed appropriate.
In rendering its opinion, Howard Lawson assumed and relied
upon the accuracy and completeness of the financial and other information used
by it in arriving at its opinion without independent verification and further
relied upon the assurances of management of InterDigital and IPC that they were
not aware of any facts that would make such information inaccurate or
misleading. With respect to the projections of IPC prepared by Howard Lawson,
upon advice of IPC, Howard Lawson assumed that such projections were reasonably
prepared on the basis of assumptions which are reasonable given the economic and
business conditions under which IPC will operate in the future. In arriving at
its opinion, Howard Lawson did not conduct a physical inspection of the
properties and facilities of InterDigital or IPC and did not make nor obtain any
evaluations or appraisals of the assets (including intangible assets) or
liabilities of InterDigital or IPC. In addition, Howard Lawson was not
authorized to solicit, and did not solicit, any indications of interest from any
third party with respect to the purchase of all or a part of IPC's business.
Upon advice of IPC and its legal and accounting advisors, Howard Lawson assumed
that the proposed merger would be tax-free to the Investors. Howard Lawson's
opinion is necessarily based upon market, economic and other conditions as they
existed on, and could be evaluated as of, the date thereof.
Howard Lawson did not express an opinion as to the prices at
which the shares of InterDigital Common Stock will actually trade at any time.
The following paragraphs summarize the material financial
analyses performed by Howard Lawson in arriving at its opinion as to the
fairness, from a financial point of view, to the Investors of the Merger
Consideration. Howard Lawson delivered its written opinion on August 15, 1996.
The following does not purport to be a complete description of the analyses
performed, or the matters considered, by Howard Lawson in arriving at its
opinion. The preparation of a fairness opinion involves determinations as to the
most appropriate and relevant methods of financial analyses and the application
of those methods to the particular circumstances, and therefore such an opinion
is not readily
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susceptible to summary description. Furthermore, in arriving at its fairness
opinion, Howard Lawson did not attribute any particular weight to any analysis
or factor considered by it but, rather, made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Howard
Lawson believes that its analyses must be considered as a whole and that
considering any portion of such analysis without considering all analyses and
factors could create a misleading or incomplete view of the process underlying
the opinion. In its analyses, Howard Lawson made numerous assumptions with
respect to industry performance, general business and economic conditions,
discount rates and other matters, many of which are beyond the control of IPC.
Any estimates contained in these analyses are not necessarily indicative of
actual values or predictive of future results or values, which may be
significantly more or less favorable than as set forth therein. In addition,
analyses relating to the value of businesses do not purport to be appraisals or
to reflect the prices at which businesses actually may be sold.
In arriving at its opinion as to the fairness, from a
financial point of view, to the Investors of the Merger Consideration, Howard
Lawson reviewed the terms of the initial purchase of the shares of IPC by the
Investors. The shares were purchased as part of units consisting of (i) 62,500
common shares of IPC and (ii) ten year warrants to purchase 62,500 shares of
InterDigital Common Stock at $5.50 per share. Based on the application of a
number of option and warrant valuation models (including Black Scholes), Howard
Lawson determined that the value of IPC Common Stock implied by the price of the
units was approximately $1.38 per share in December 1992. Based on the August
14, 1996 closing price of InterDigital Common Stock, the current transaction
represents an annual return of approximately 57% to the Investors on the IPC
stock portion of their investment. In contrast, InterDigital Common Stock has
appreciated only 7% on an annual basis over the same period. Howard Lawson was
advised by IPC that there have been no significant third party sales or
purchases of IPC common stock since the original sales which would provide
subsequent reliable indications of the value of the Shares.
Howard Lawson reviewed the relative financial performance of
IPC and InterDigital since 1992 on both a consolidated and unconsolidated basis.
In making its analysis, Howard Lawson concluded that since 1992, the financial
performance of non-IPC components of InterDigital had deteriorated, primarily as
a result of larger losses in the UltraPhone product line and the costs
associated with the development of the Company's B-CDMA technology, which were
acquired in 1992. IPC, on the other hand, had greatly improved its financial
performance since 1992 and, as of 1994, began collecting significant royalty
payments related to ITC's patent portfolio.
Howard Lawson prepared an analysis of the value of IPC as
indicated by the current market capitalization of the Common Stock of
InterDigital. As IPC is 94.24% owned by InterDigital, the market capitalization
of InterDigital reflects in large part the market's perception of the value of
IPC. A review of the market price of InterDigital Common Stock since 1992
indicated that it is very responsive to announcements regarding IPC's business.
For example, following the March 29, 1995 decision in the Motorola litigation
regarding ITC's patents, InterDigital's stock price declined from $12 on March
29, 1995 to $6-1/8 on March 31, 1995. Howard Lawson prepared an allocation
analysis of InterDigital's current market capitalization, based on certain
assumptions as to the value of non-IPC businesses and, after considering a
discount to the value of IPC shares for the lack of a ready, liquid market,
Howard Lawson concluded that this analysis indicates an implied value for IPC
shares of $9.45 based on the market valuation of InterDigital Common Stock as of
August 14, 1996.
Howard Lawson also prepared a discounted cash flow analysis of
the value of IPC common stock. It prepared a forecast of cash flows through the
year 2010, based on independent forecasts for the wireless telecommunications
equipment industry and certain assumptions with respect to IPC's ability to
generate royalties and cash flows and also with respect to the final outcomes of
the Motorola litigation and other challenges to ITC's patents. The cash flows
were discounted at annual rates between 20% and 40% and for periods from seven
to 15 years. Howard Lawson concluded that such analysis indicated a value in the
range of $5.90 to $7.50 per share.
Howard Lawson also considered other valuation methodologies,
including a comparable company analysis and liquidation analysis, without coming
to any conclusion as to value. It concluded that such measures were not as
reliable as those discussed above and were not relied upon by Howard Lawson in
its analysis.
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The IPC Board selected Howard Lawson as its financial advisor
because Howard Lawson is a recognized investment banking firm with substantial
experience in transactions similar to the Merger. As part of its investment
banking business, Howard Lawson regularly engages in the valuation of businesses
and securities in connection with mergers acquisitions, private placements and
valuations for estate, corporate and other purposes.
In consideration of its services as financial advisor to the
IPC Board, Howard Lawson has received a fee of $55,000 for work performed prior
to July 1996 in connection with services related to the Merger and, in addition,
will receive an hourly fee for work performed since July 1996. IPC has also
agreed to reimburse Howard Lawson for its out-of-pocket expenses, including the
reasonable fees and expenses of its legal counsel, and to indemnify Howard
Lawson against certain liabilities which may arise out of or in connection with
the services rendered by Howard Lawson which may arise under the engagement
letter. Howard Lawson has performed investment banking services for InterDigital
in the past for which it received customary compensation. During the past five
years, these services included a valuation analysis with respect to the
acquisition of SCS Mobilcom, Inc. and SCS Telecom, Inc. in 1992 and financial
advisory services with respect to a proposed financing in 1994.
Appraisal Rights
Holders of shares of IPC common stock are entitled to
appraisal rights under Section 262 of the DCL ("Section 262"), provided that
they comply with the conditions established by Section 262. Section 262 is
reprinted in its entirety as Annex III to this Prospectus. The following
discussion is not a complete statement of the law relating to appraisal rights
and is qualified in its entirety by reference to Annex III. This discussion and
Annex III should be reviewed carefully by any IPC stockholder who wishes to
exercise statutory appraisal rights or who wishes to preserve the right to do
so, as failure to comply with the procedures set forth herein or therein will
result in the loss of appraisal rights.
Stockholders of record who desire to exercise their appraisal
rights must:
- hold shares of IPC common stock on the date of making a
demand for appraisal;
- continuously hold such shares through the Effective Time;
- deliver a properly executed written demand for appraisal
to IPC, as the Surviving Corporation, prior to the date
which is 20 days after the date of the mailing of this
Prospectus to such holder of record;
- file any necessary petition in the Delaware Court of
Chancery (the "Delaware Court"), as more fully
described below, within 120 days after the Effective
Time; and
- otherwise satisfy all of the conditions described more
fully below.
A record holder of shares of IPC common stock who makes the
demand described below with respect to such shares, who continuously is the
record holder of such shares through the Effective Time, and who otherwise
complies with the statutory requirements of Section 262 will be entitled to an
appraisal by the Delaware Court of the fair value of his shares of IPC common
stock. All references in Section 262 and in this summary of appraisal rights to
an "Investor," a "stockholder" or "holders of shares of IPC common stock" are to
the record holder or holders of shares of IPC common stock.
IPC stockholders who desire to exercise their appraisal rights
must deliver a separate written demand for appraisal to IPC as the Surviving
Corporation prior to the date which is 20 days after the date of the mailing of
the Prospectus to such holder of record. The mailing of this Prospectus shall
constitute the notice required to be given by IPC pursuant to Section 262. A
demand for appraisal must be executed by or on behalf of the stockholder of
record, fully and correctly, as such stockholder's name appears on the
certificate or certificates representing the shares of IPC common stock. A
person having a beneficial interest in shares of IPC common stock that are held
of record in the name of another person,
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such as a broker, fiduciary or other nominee, must act promptly to cause the
record holder to follow the steps summarized herein properly and in a timely
manner to perfect whatever appraisal rights are available. If the shares of IPC
common stock are owned of record by a person other than the beneficial owner,
including a broker, fiduciary (such as a trustee, guardian or custodian) or
other nominee, such demand must be executed by or for the record owner. If the
shares of IPC common stock are owned of record by more than one person, as in a
joint tenancy or tenancy in common, such demand must be executed by or for all
joint owners. An authorized agent, including an agent for two or more joint
owners, may execute the demand for appraisal for a stockholder of record;
however, the agent must identify the record owner and expressly disclose the
fact that, in exercising the demand, such person is acting as agent for the
record owner.
A record owner, such as a broker, fiduciary or other nominee,
who holds shares of IPC common stock as a nominee for others, may exercise
appraisal rights with respect to the shares held for all or less than all
beneficial owners of shares as to which such person is the record owner. In such
case, the written demand must set forth the number of shares covered by such
demand. Where the number of shares is not expressly stated, the demand will be
presumed to cover all shares of IPC common stock outstanding in the name of such
record owner.
An IPC stockholder who elects to exercise appraisal rights
should mail or deliver his or her written demand to: InterDigital Patents
Corporation, 781 Third Avenue, King of Prussia, Pennsylvania 19406-1409,
Attention: William J. Merritt, Associate General Counsel and Secretary. If
delivery is by mail, registered mail with return receipt requested, properly
insured, is recommended. The written demand for appraisal should specify the
stockholder's name and mailing address, the number of shares of IPC common stock
owned, and that the stockholder is thereby demanding appraisal of his or her
shares. Within ten days after the Effective Time, the Surviving Corporation must
provide notice of the Effective Time to all stockholders who have complied with
Section 262. The mailing of this Prospectus shall constitute the notice required
to be given by IPC pursuant to Section 262.
Within 120 days after the Effective Time, either the Surviving
Corporation or any IPC stockholder who has complied with the required conditions
of Section 262 may file a petition in the Delaware Court, with a copy served on
the Surviving Corporation in the case of a petition filed by a stockholder,
demanding a determination of the fair value of the shares of all dissenting
stockholders. The Surviving Corporation does not presently intend to file an
appraisal petition and stockholders seeking to exercise appraisal rights should
not assume that the Surviving Corporation will file such a petition or that the
Surviving Corporation will initiate any negotiations with respect to the fair
value of such shares. Accordingly, stockholders who desire to have their shares
appraised should initiate any petitions necessary for the perfection of their
appraisal rights within the time periods and in the manner prescribed in Section
262. Within 120 days after the Effective Time, any stockholder who has
theretofore complied with the applicable provisions of Section 262 will be
entitled, upon written request, to receive from the Surviving Corporation a
statement setting forth the aggregate number of shares of IPC common stock with
respect to which demands for appraisal were received by the Surviving
Corporation and the number of holders of such shares. Such statement must be
mailed within 10 days after the written request therefor has been received by
the Surviving Corporation or within 10 days after expiration of the time for
delivery of demands for appraisal under Section 262, whichever is later.
If a petition for an appraisal is timely filed, at the hearing
on such petition, the Delaware Court will determine which stockholders are
entitled to appraisal rights and will appraise the shares of IPC common stock
owned by such stockholders, determining the fair value of such shares exclusive
of any element of value arising from the accomplishment or expectation of the
Merger, together with a fair rate of interest, if any, to be paid upon the
amount determined to be the fair value. In determining fair value, the Delaware
Court is to take into account all relevant factors. In Weinberger v. UOP Inc.,
the Delaware Supreme Court discussed the factors that could be considered in
determining fair value in an appraisal proceeding, stating that "proof of value
by any techniques or methods which are generally considered acceptable in the
financial community and otherwise admissible in court" should be considered, and
that "fair price obviously requires consideration of all relevant factors
involving the value of a company." The Delaware Supreme Court stated that in
making this determination of fair value the court must consider market value,
asset value, dividends, earnings prospects, the nature of the enterprise and any
other facts which could be ascertained as of the date of the merger which throw
light on future prospects of the merged corporation. In Weinberger, the Delaware
Supreme Court stated that "elements of future value, including the nature of the
enterprise, which are known or susceptible of proof as of the date of
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the merger and not the product of speculation, may be considered." Section 262,
however, provides that fair value is to be "exclusive of any element of value
arising from the accomplishment or expectation of the merger."
Stockholders considering seeking appraisal should recognize
that the fair value of their shares determined under Section 262 could be more
than, the same as or less than the consideration they are to receive pursuant to
the Merger if they do not seek appraisal of their shares. The cost of the
appraisal proceeding may be determined by the Delaware Court and taxed against
the parties as the Delaware Court deems equitable in the circumstances. Upon
application, the Delaware Court may order that all or a portion of the expenses
incurred by any dissenting stockholder in connection with the appraisal
proceeding, including without limitation, reasonable attorney's fees and the
fees and expenses of experts, be charged pro rata against the value of all
shares of stock entitled to appraisal.
Any holder of shares of IPC common stock who has duly demanded
appraisal in compliance with Section 262 will not, after the Effective Time, be
entitled to vote for any purpose any shares subject to such demand or to receive
payment of dividends or other distributions on such shares, except for dividends
of distributions payable to stockholders of record at a date prior to the
Effective Time.
At any time within 60 days after the Effective Time, any
stockholder will have the right to withdraw such demand for appraisal and to
accept the terms offered in the Merger; after this period, the stockholder may
withdraw such demand for appraisal only with the consent of the Surviving
Corporation. If no petition for appraisal is filed with the Delaware Court
within 120 days after the Effective Time, stockholders' rights to appraisal
shall cease, and all holders of shares of IPC common stock will be entitled to
receive the Merger Consideration. Inasmuch as the Surviving Corporation has no
obligation to file such a petition, and has no present intention to do so, any
holder of shares of common stock who desires such a petition to be filed is
advised to file it on a timely basis.
Interests of Certain Persons in the Merger
IPC stockholders should be aware that certain members of IPC's
management and all members of the IPC Board have certain interests that may
present them with potential conflicts of interest in connection with the Merger.
D. Ridgely Bolgiano, Harry G. Campagna, Harley L. Sims, and William A. Doyle are
each directors of IPC and the Company and shareholders of the Company. William
A. Doyle, the President of the Company, and James W. Garrison, the Company's
chief financial officer, are also officers of IPC. D. Ridgely Bolgiano is also
an officer of IPC and the Company and a stockholder of IPC. See "The
Merger--Resales of Common Stock by Investors."
The Plan Of Merger
The terms of the Merger are contained in the Plan of Merger, a
copy of which is attached as Annex I to this Prospectus and incorporated herein
by reference. Statements in this Prospectus with respect to the terms of the
Merger are qualified in their entirety by reference to the full text of the Plan
of Merger. IPC stockholders are urged to read the full text of the Plan of
Merger.
General. Under the Plan of Merger, MergerCo will be merged
with and into IPC, and IPC, as the Surviving Corporation in the Merger, will
continue its corporate existence under the laws of Delaware under the name
"InterDigital Patents Corporation." The Surviving Corporation will be a wholly
owned subsidiary of InterDigital.
Effective Time of the Merger. The Effective Time of the Merger
will occur upon the filing of a Certificate of Merger with the Secretary of
State of the State of Delaware in accordance with applicable Delaware law. It is
anticipated that the Certificate of Merger will be filed on or about September
13, 1996 and, accordingly, the Merger will become effective on such date.
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Conversion of Stock. At the Effective Time, each outstanding
share of IPC common stock (other than the Excluded Shares which will be canceled
and the Dissenting Shares) shall be converted into the right to receive that
number of shares (the "Conversion Number") of the Common Stock of InterDigital
(the "Merger Consideration") equal to (i) $7.33 divided by (ii) $8.003, the
average closing price per share of InterDigital Common Stock as reported by the
American Stock Exchange for the 30 calendar days ending on the last trading day
prior to the date the Registration Statement was declared effective by the
Commission (the "Average Price"). As a result, holders of shares of IPC common
stock will have no continuing interests in or rights as stockholders of IPC.
Each share of MergerCo's common stock issued and outstanding immediately prior
to the Effective Time shall, by virtue of the Merger and without any action on
the part of InterDigital, be converted into one share of the Surviving
Corporation. Holders of shares of IPC common stock have the right under Section
251 of the DCL to dissent from the Merger and obtain an appraisal of the fair
value of such shares pursuant to Section 262 of the DCL. See "- Appraisal
Rights."
Payment for IPC Common Stock. In order to receive the Merger
Consideration, each holder of certificates representing IPC common stock (each,
a "Certificate") will be required to surrender his or her Certificate or
Certificates, together with a duly executed and properly completed Letter of
Transmittal and any other required documents, to the Company. The Company will
provide each stockholder with the requisite forms of the letter of transmittal
and other documents referred to above, together with instructions for their use.
Upon receipt of such Certificate or Certificates, together with a duly executed
and properly completed Letter of Transmittal and any other required documents
from a holder of IPC common stock, the Company will arrange for the issuance and
delivery to the person or persons entitled thereto of a certificate or
certificates representing that number of whole shares of InterDigital Common
Stock equal to the Conversion Number multiplied by the number of shares of IPC
common stock represented by the surrendered Certificate or Certificates. Shares
of InterDigital Common Stock will be issued only in whole shares. Stockholders
will not be entitled to receive fractions of shares of InterDigital Common Stock
("Fractional Shares") but, instead, will be entitled to receive promptly from
the Company a cash payment in lieu of Fractional Shares in an amount equal to
the Average Price multiplied by the Fractional Share in question.
No dividends or other distributions that are otherwise payable
on the shares of InterDigital Common Stock issued in connection with the Merger
will be paid to the holder of any unsurrendered Certificate until such
Certificate is properly surrendered to the Company.
If the Merger Consideration is to be paid to a person other
than the registered holder of the Certificates surrendered, it is a condition of
such issuance that the Certificate or Certificates so surrendered be properly
endorsed or otherwise be in proper form for transfer and that the person
requesting such payment or issuance either pay to the Company any transfer or
other taxes required by reason of the issuance to a person other than the
registered owner of the Certificate or Certificates surrendered, or shall
establish to the satisfaction of InterDigital that such tax has been paid or is
not applicable.
The Company will send instructions to the Investors with
regard to the procedure for surrendering Certificates in exchange for the Merger
Consideration, together with a letter of transmittal to be used for this
purpose, as promptly as practicable after the Effective Time. Investors should
surrender Certificates only with a letter of transmittal.
Effect of the Merger on IPC Stock Options. Robert S. Bramson,
a former employee of IPC, was granted an option to purchase 262,625 shares of
IPC common stock, all of which are fully vested. Mr. Bramson, the Company and
IPC have agreed that Mr. Bramson will fully exercise such option immediately
prior to the Merger. The shares of IPC common stock issued upon such exercise
shall be deemed outstanding at the Effective Time and shall be entitled to the
Merger Consideration. There are no other options outstanding for the purchase of
IPC common stock.
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Certificate of Incorporation, By-laws, Officers and Directors.
The Plan of Merger provides that, at the Effective Time, the Certificate of
Incorporation and the By-laws of IPC, each as in effect immediately prior to the
Effective Time, shall be the Certificate of Incorporation and the By-laws of the
Surviving Corporation. The Plan of Merger also provides that the officers and
directors of IPC at the Effective Time shall be the initial officers and
directors of the Surviving Corporation and shall serve until their respective
successors are duly elected or appointed and qualify in the manner provided in
the Certificate of Incorporation and the By-laws of the Surviving Corporation,
or as otherwise provided by law.
Action Required to Approve the Merger; Conditions to the
Merger. Under applicable law, since InterDigital owns in excess of 50% of the
outstanding common stock of IPC and IPC will be the Surviving Corporation, the
only approvals required in order to effect the Merger are those of (a) the
Boards of Directors of MergerCo and IPC and (b) InterDigital on its own behalf
and as the sole stockholder of MergerCo and the majority stockholder of IPC.
Shareholder approval of InterDigital is not required to effect the Merger. A
condition to the Merger is the declaration by the Commission of the
effectiveness of the Company's Registration Statement on Form S-4, of which this
Prospectus forms a part, and the approval of the sole stockholder of MergerCo
and the majority stockholder of IPC. No proxies are being solicited in
connection with the Merger. In addition, InterDigital has the right, which it
may exercise in its sole discretion, to terminate or abandon the Merger prior to
the Effective Time, if the average closing price per share of InterDigital
common stock as reported by the American Stock Exchange for the 30 calendar days
ending on the last trading day prior to the date the Registration Statement is
declared effective by the Commission is less than or equal to $5.86 per share
(i.e., eighty percent of $7.33). The Merger will become effective on or about
September 13, 1996.
Indemnification and D&O Insurance Coverage. In the Plan of
Merger, InterDigital has agreed that all rights to indemnification existing as
of the date of the Plan of Merger in favor of the employees, agents, directors
or officers of IPC and its subsidiaries (collectively, the "Indemnified
Parties"), as provided in their respective charters, codes of regulations, or
by-laws, by agreement or otherwise in effect on the date of the Plan of Merger,
shall survive the Merger and shall, with respect to any action or omission
occurring prior to the Effective Time, continue in full force and effect in
accordance with their terms. In addition, the Plan of Merger provides that if
any Indemnified Party becomes involved in any capacity in any action, proceeding
or investigation in connection with any matter, including the transactions
contemplated by the Plan of Merger occurring prior to, and including, the
Effective Time, IPC will periodically advance to such Indemnified Party its
legal and other expenses incurred in connection therewith.
InterDigital has also agreed to use its best efforts to cause
to be maintained in effect for a period of two years from the Effective Time
policies of the directors' and officers' liability insurance maintained by or
for the benefit of IPC with at least the same dollar policy limitation as those
currently in effect with respect to matters occurring prior to the Effective
Time.
Resales of Common Stock by Investors
Shares of Common Stock to be issued to the Investors pursuant
to this Prospectus have been registered under the Securities Act. All shares of
Common Stock received by the Investors upon consummation of the Merger will be
freely transferable by those Investors who, at the Effective Time, are not
deemed to be "Affiliates" of IPC for purposes of Rule 145 under the Securities
Act. "Affiliates" of IPC are generally defined as persons who control, are
controlled by or under common control with IPC (generally, certain executive
officers and directors).
Affiliates of IPC may not sell their shares of Common Stock
acquired in connection with the Merger, except pursuant to an effective
registration under the Securities Act covering such shares or in compliance with
Rule 145 (or Rule 144 under the Securities Act in the case of persons who are or
become Affiliates of InterDigital) or another applicable exemption from the
registration requirements of the Securities Act. In general, under Rule 145, for
two years following the Effective Time, an Affiliate of IPC (together with
certain related persons) would be entitled to sell shares of Common Stock
received in connection with the Merger only through unsolicited "broker
transactions" or in transactions directly with a "market maker" (as such terms
are defined in Rule 144). Additionally, the number of shares to be sold by
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an Affiliate of IPC (together with such Affiliate's related persons and others
who act in concert with such Affiliate) within any three-month period for
purposes of Rule 145 may not exceed the greater of 1% of the outstanding shares
of Common Stock or the average weekly trading volume of the Common Stock during
the four calendar weeks preceding such sale. Rule 145 would only remain
available to Affiliates of IPC so long as InterDigital remained current with its
informational filings with the Commission under the Exchange Act. Two years
after the Effective Time, an Affiliate of IPC would be able to sell the shares
of Common Stock received in the Merger without such manner of sale or volume
limitations provided that InterDigital was current with its Exchange Act
informational filings and such Affiliate of IPC was not then an Affiliate of
InterDigital. Three years after the Effective Time, an Affiliate of IPC would be
able to sell the shares of Common Stock received in the Merger without any
restrictions so long as such Affiliate of IPC had not been an Affiliate of
InterDigital for a least three months prior to the sale.
Financing Of The Merger; Source And Amount Of Funds
Out-of-pocket costs and expenses incurred by InterDigital and
IPC in connection with the Merger will be paid by the party incurring such costs
and expenses. The approximate fees and expenses expected to be incurred by
InterDigital and IPC in connection with the Merger are as set forth below:
InterDigital IPC
------------ --------
Investment Bankers' Fees and Expenses $ 40,000 $ 75,000
Attorneys' Fees and Expenses 125,000 6,000
Accountants' Fees and Expenses 20,000 20,000
AMEX Listing Fee 17,500 ---
Fee for Filing with the SEC 5,258 ---
Miscellaneous 12,242 9,000
-------- --------
TOTAL $220,000 $110,000
Expenses incurred by InterDigital and IPC in connection with
the Merger are expected to be paid out of available funds of InterDigital and
IPC, as applicable.
Certain Federal Income Tax Consequences Of The Merger
The federal income tax discussion set forth below is included
for general information only. The following represents the opinion of Special
Tax Counsel as to the material federal income tax consequences of the Merger to
IPC and the Investors. Neither this summary nor the opinion is intended to be a
complete description of the federal income tax consequences of the Merger. This
summary is included for general information purposes only. The federal income
tax laws are complex, and each Investor's individual circumstances may affect
the tax consequences to the Investor or may give rise to federal income tax
issues that are not addressed herein. In certain situations this discussion may
not be applicable to certain classes of taxpayers, including insurance
companies, securities dealers, financial institutions, foreign persons and
persons who acquired shares of IPC common stock pursuant to the exercise of
employee stock options or rights or otherwise as compensation. In addition, no
information is provided with respect to the tax consequences of the Merger under
the laws of any state, local or other taxing jurisdiction in the United States
or any taxing jurisdiction outside the United States. Consequently, each
Investor is urged to consult a tax adviser regarding the tax consequences of the
Merger to such Investor, including the applicability and effect of state, local
and other tax laws and any proposed changes in such laws.
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Tax Opinion
IPC and the Company have received an opinion of Special Tax
Counsel that, subject to the qualifications and other matters set forth therein,
the Merger will be treated as a reorganization within the meaning of Code
Section 368(a), with the material federal income tax consequences set forth
below.
Special Tax Counsel's opinion is based on laws, regulations,
rulings and judicial decisions as they currently exist, none of which squarely
addresses every precise factual circumstance present in connection with the
Merger but all of which, taken together, in Special Tax Counsel's opinion,
provide a sufficient legal basis for its opinions described below. The
possibility exists, however, that Special Tax Counsel's opinion as to the proper
application of the law to the facts of the Merger would not be accepted by the
Internal Revenue Service or would not prevail in court. In addition, the
authorities upon which Special Tax Counsel has relied upon in rendering its
opinion are all subject to change and such change may be made with retroactive
effect. Special Tax Counsel can give no assurance that, after any such change,
its opinion would not be different, and it has not undertaken any responsibility
to update or supplement its opinion.
Special Tax Counsel's opinion is based on the understanding
that the relevant facts are, and will be at the Effective Time, as set forth in
its opinion. If this understanding is incorrect or incomplete in any respect,
Special Tax Counsel's opinion could be affected. Special Tax Counsel's opinion
is based on the facts and the understandings, assumptions and representations
relied upon by Special Tax Counsel as set forth in its opinion.
Consummation of the Merger is conditioned upon Special Tax
Counsel's opinion not having been revoked as of the Effective Time.
Certain Consequences of Reorganization Status. Provided that
the Merger qualifies as a reorganization within the meaning of Code Section
368(a), then, for federal income tax purposes: (i) no gain or loss would be
recognized by any of IPC, MergerCo or InterDigital as a result of the Merger;
(ii) no gain or loss would be recognized by an Investor upon the receipt of
InterDigital Common Stock in exchange for IPC common stock in the Merger, except
as discussed below with respect to cash received in lieu of a fractional share
interest in InterDigital Common Stock or cash received by an Investor who
exercises dissenters' rights; (iii) the aggregate adjusted tax basis of the
shares of InterDigital Common Stock to be received by an Investor in the Merger
would be the same as the aggregate adjusted tax basis in the shares of IPC
common stock surrendered in exchange therefor; and (iv) the holding period of
the shares of InterDigital Common Stock to be received by an Investor in the
Merger would include the holding period of the shares of IPC common stock
surrendered in exchange therefor, provided that such shares of IPC common stock
are held by the Investor as capital assets at the Effective Time.
Consequences of Receipt of Cash in Lieu of Fractional Shares.
An Investor who receives cash in the Merger in lieu of a fractional share
interest in the InterDigital Common Stock will be treated for federal income tax
purposes as having received cash in redemption of such fractional share
interest. The receipt of such cash generally should result in capital gain or
loss in an amount equal to the difference between the amount of cash received
and the portion of such Investor's adjusted tax basis in the shares of IPC
common stock allocable to the fractional share interest. Such capital gain or
loss will be long-term capital gain or loss if the Investor holds the shares as
capital assets and the holding period for the fractional shares of the
InterDigital Common Stock deemed to be received and then redeemed is more than
one year.
Cash Received by Holders of IPC Common Stock who Dissent. An
Investor who perfects dissenters' rights under the laws of the State of Delaware
and who receives a cash payment of the fair value of his shares of IPC common
stock will be treated as having received such payment in redemption of such
shares. Such redemption will be subject to the conditions and limitations of
Code Section 302, including the attribution rules of Code Section 318. In
general, if the shares of IPC common stock are held by a dissenting Investor as
a capital asset at the Effective Time, the dissenting Investor will recognize
capital gain or loss measured by the difference between the amount of cash
received by such Investor and the Investor's basis for such shares. If, however,
such Investor owns, either actually or constructively, any other IPC common
stock or InterDigital Common Stock, the payment made to such Investor could be
treated as dividend income. In general,
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under the constructive ownership rules of the Code, an Investor may be
considered to own shares of stock that are owned, and in some cases
constructively owned, by certain related individuals or entities, as well as
stock that such Investor (or related individuals or entities) has the right to
acquire by exercising an option or converting a convertible security. Each IPC
stockholder who contemplates exercising his dissenters' rights should consult
his own tax advisor as to the possibility that the payment to him will be
treated as dividend income.
COMPARISON OF RIGHTS OF HOLDERS OF IPC COMMON STOCK
AND INTERDIGITAL COMMON STOCK
Upon the exchange of their shares for shares of Common Stock
pursuant to the Merger, the stockholders of IPC, a Delaware corporation, will
become shareholders of InterDigital, a Pennsylvania corporation, and
Pennsylvania law will govern shareholder rights after the Merger. Differences
between the Pennsylvania Business Corporation Law (referred to in this section
as the "PBCL") and the DCL and between IPC's existing Certificate of
Incorporation and Bylaws (respectively, the "IPC Certificate" and "IPC Bylaws")
and InterDigital's Articles of Incorporation and Bylaws (respectively, the
"InterDigital Articles" and "InterDigital Bylaws") will result in various
changes in the rights of stockholders of IPC.
The following is a summary of some of material differences
between the rights of InterDigital shareholders under Pennsylvania law and the
InterDigital Articles and InterDigital Bylaws, as compared with those of IPC
stockholders under Delaware law and the IPC Certificate and IPC Bylaws. This
summary does not purport to be a complete description of the provisions
discussed and is qualified in its entirety by the PBCL, DCL, IPC Certificate,
IPC Bylaws, InterDigital Articles and InterDigital Bylaws, to which IPC
stockholders are referred. The identification of specific differences is not
meant to indicate that other equally or more significant differences do not
exist.
Removal of Directors; Filling Vacancies on the Board of Directors
Under the DCL, directors generally may be removed, with or
without cause, by a vote of the holders of a majority of the shares being voted.
Under the PBCL, unless the articles of incorporation or bylaws provide
otherwise, directors may be removed by the shareholders of a corporation with or
without cause, and by the board of directors for any proper cause specified in
the bylaws. However, the InterDigital Articles and Bylaws provide that directors
may be removed without cause but only by the affirmative vote of the holders of
at least 80% 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.
The PBCL and the InterDigital Bylaws provide that vacancies on
the board of directors, including vacancies resulting from an increase in the
number of directors, may be filled by a majority of the remaining directors,
although less than a quorum, and such person shall be a director to serve for
the balance of the unexpired term unless otherwise restricted in the articles of
incorporation or bylaws. The IPC Bylaws provide, as permitted by the DCL, that a
vacancy on the board occurring during the course of the year, including a
vacancy created by an increase in the number of directors, shall be filled until
the next annual election of directors by a majority of the remaining directors
or by a sole remaining director. Thus, there will be no material change in the
rights of IPC stockholders in this respect as a result of the Merger.
Quorum of Stockholders
Under the DCL, a quorum consists of a majority of the shares
entitled to vote, present in person or represented by proxy, unless otherwise
provided in the charter or bylaws, but in no event can the quorum be less than
one-third of the outstanding shares entitled to vote. A quorum for a meeting of
IPC stockholders under the IPC Bylaws consists of the holders of a majority of
the shares issued and outstanding which are entitled to vote thereat, present in
person or represented by proxy. Under the PBCL, a quorum consists of a majority
of the shares entitled to vote, present in person
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or represented by proxy, unless otherwise provided in the bylaws. The
InterDigital Bylaws provide that a quorum for a meeting of holders of Common
Stock consists of a majority of the shares entitled to vote, present in person
or represented by proxy. Thus, there will be no material change in the rights of
IPC stockholders in this respect as a result of the Merger.
Adjournment and Notice of Stockholder Meetings
Both the InterDigital Bylaws and the IPC Bylaws provide that
if a quorum is not present or represented at a stockholders meeting, the
stockholders entitled to vote may adjourn the meeting without notice other than
an announcement at the meeting. The InterDigital Bylaws provide further that if
the meeting is to elect directors, such meeting may not be adjourned for periods
longer than 15 days each. The PBCL provides that notice of an adjourned meeting
need not be given to shareholders unless a new record date is fixed for the
adjourned meeting or notice of the business to be transacted at such adjourned
meeting had not been previously given.
Under the DCL and IPC Bylaws, notice of stockholder meetings
must be given between ten and sixty days before a meeting. Under the PBCL,
notice of shareholder meetings must be given more than ten days prior to any
meeting called to consider a fundamental corporate change or five days prior to
the meeting in any other case. The InterDigital Bylaws require notice to be
given at least five days before a shareholder meeting.
Call of Special Stockholder Meetings
Under the PBCL, special meetings of the shareholders may be
called by the board of directors, shareholders entitled to cast at least 20% of
the votes which all stockholders are entitled to cast at the particular meeting
unless otherwise provided in the articles of incorporation and by such officers
or other persons as may be provided in the bylaws. The InterDigital Bylaws
provide that a special meeting of shareholders may be called by InterDigital's
Chairman of the Board, the President of InterDigital, the board of directors or
by shareholders entitled to cast at least 20% of the votes at such a meeting.
Stockholders of a Delaware corporation do not have a right to call special
meetings unless it is conferred in the corporation's certificate of
incorporation or bylaws. The DCL provides that special meetings of stockholders
may be called by the board of directors or by a person authorized by the charter
or bylaws. The IPC Bylaws provide that special meetings of stockholders may be
called by the president, and shall be called by the president or secretary at
the written request of the chairman of the board, a majority of the board of
directors, or the written request of the majority of voting power of all
outstanding shares of voting stock.
Stockholder Consent in Lieu of Meeting
The DCL permits and the IPC Bylaws provide that action by
stockholders may be taken without a meeting if a consent in writing is signed by
the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize such action at a meeting at which all
shares entitled to vote thereon were present and voted. The PBCL permits action
which may be taken at a meeting of the shareholders may be taken without a
meeting if there is written consent of shareholders who would have been entitled
to cast the minimum number of votes that would be necessary to authorize the
action at a meeting at which all the shareholders were present and voting. Thus,
there will be no charge in the rights of stockholders to act by written consent
in lieu of a meeting.
Appraisal Rights
The DCL generally entitles a stockholder to exercise its
appraisal rights upon a merger or consolidation of the corporation effected
pursuant to the DCL if the holder complies with the requirements of Section 262
thereof. The DCL, however, does not provide (unless required by a charter
provision which the IPC Certificate does not include) appraisal rights for
stockholders of a corporation that engages in (a) a sale of substantially all of
its assets; (b) an
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amendment to its certificate of incorporation; (c) in the event of a merger or
consolidation of the corporation if the stock of the Delaware corporation is
listed on a national securities exchange or held of record by more than 2,000
stockholders; or (d) in the case of a merger in which a Delaware corporation is
the surviving corporation, if (i) the merger agreement does not amend the
surviving corporation's certificate of incorporation, (ii) each share of stock
of the surviving corporation outstanding immediately prior to the effective date
of the merger is to be an identical outstanding share of the surviving
corporation after the merger, and (iii) the increase in the outstanding shares
as a result of the merger does not exceed 20% of the shares of common stock of
the surviving corporation outstanding immediately prior to the effective date of
the merger. Under the PBCL, stockholders may perfect appraisal rights with
regard to corporate actions involving certain mergers; consolidations; the sale,
lease or exchange of substantially all the assets of the corporation (under
limited circumstances); or the elimination of cumulative voting.
Under the PBCL and DCL, appraisal rights are generally denied
when a corporation's shares are listed on a national securities exchange or held
of record by more than 2,000 persons. Therefore, because the Common Stock is
listed on a national securities exchange, the Investors of IPC, under
Pennsylvania law, will no longer have the right to seek appraisal with respect
to the shares of Common Stock received in the Merger, in connection with a
subsequent sale, lease, exchange or other disposition of the property and assets
of InterDigital that occurs outside the ordinary course after the Merger.
Derivative Action
Derivative actions may be brought in Delaware by a stockholder
on behalf of, and for the benefit of, the corporation. The DCL provides that a
stockholder must aver in the complaint that he was a stockholder of the
corporation at the time of the transaction of which he complains. However, no
action may be brought by a stockholder unless he first seeks remedial action on
his claim from his corporation's board of directors unless such a demand for
redress is excused. The board of directors of a Delaware corporation can appoint
an independent litigation committee to review a stockholder's request for a
derivative action and the litigation committee, acting reasonably and in good
faith, can terminate the stockholder's action subject to a court's review of
such committee's independence, good faith and reasonable investigation. Under
the DCL, the court in a derivative action may apply a variety of legal and
equitable remedies on behalf of the corporation which vary depending on the
facts and circumstances of the case and the nature of the claim brought.
Derivative actions may be brought under the PBCL by a
shareholder, even if the shareholder was not a shareholder at the time of the
alleged wrongdoing, if there is a strong prima facie case in favor of the claim
asserted and if the court determines in its discretion that serious injustice
will result without such action. With this exception, there will be no material
change in the rights of IPC stockholders to bring derivative actions as
InterDigital shareholders.
Dividends and Distributions
Subject to any restrictions in its bylaws, the PBCL generally
provides that a corporation may make distributions to its shareholders unless
after giving effect thereto (i) the corporation would not be able to pay its
debts as they become due in the usual course of business, or (ii) the
corporation's assets would be less than the sum of its total liabilities plus
the amount that would be needed upon the dissolution of the corporation to
satisfy the preferential rights, if any, of shareholders having superior
preferential rights to those shareholders receiving the distribution.
Subject to any restrictions contained in a corporation's
charter, the DCL generally provides that a corporation may declare and pay
dividends out of surplus (defined as the excess, if any, of net assets over
stated capital) or, when no surplus exists, out of net profits for the fiscal
year in which the dividend is declared and/or the preceding fiscal year.
Dividends may not be paid out of net profits if the stated capital of the
corporation is less than the amount of stated capital represented by the issued
and outstanding stock of all classes having a preference upon the distribution
of assets.
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Director Qualifications and Number
The articles or bylaws of a Pennsylvania corporation specify
the number of directors. If not otherwise fixed, a Pennsylvania corporation
shall have three directors. The PBCL provides that directors need not be state
residents or stockholders of the corporation to qualify to serve unless the
bylaws so require. Further, the bylaws may prescribe other qualifications for
directors. The InterDigital Certificate of Incorporation and Bylaws do not
impose more restrictive qualifications for directors. The InterDigital Bylaws
provide for a board consisting of not less than five nor more than fifteen
directors, the exact number to be determined by resolution of the board of
directors. The number of directors of a Delaware corporation shall be fixed by,
or in the manner provided in, the bylaws, unless the charter fixes the number of
directors. Under the DCL, a director need not be a state resident or a
stockholder of the corporation to qualify to serve unless so required by the
charter or bylaws. The IPC Bylaws provide for such number of directors as is
determined by action of a majority of the directors. As such, there is no
meaningful difference between InterDigital and IPC regarding director
qualifications and as to number of directors. IPC and InterDigital each
presently have five directors.
Indemnification of Officers and Directors
Both the DCL and the PBCL permit a corporation to indemnify
its directors and officers against expenses, judgments, fines and amounts paid
in settlement incurred by them in connection with any pending, threatened or
completed action or proceeding (other, in the case of a Delaware corporation,
than an action by or in the right of the corporation (a "derivative action"),
and permit such indemnification against expenses incurred in connection with any
pending, threatened or completed derivation action, if the director or officer
has acted in good faith and in a manner he or she reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal proceeding, had no reasonable cause to believe his or her conduct was
unlawful. Furthermore, both states' laws provide that expenses incurred in
defending any action or proceeding may be paid by the corporation in advance of
the final disposition upon receipt of an undertaking by or on behalf of the
director or officer to repay the amount if it is ultimately determined that the
director or officer is not entitled to be indemnified by the corporation.
In both states the statutory provisions for indemnification
and advancement of expenses are non-exclusive with respect to any other rights,
such as contractual rights (and in the case of a Pennsylvania corporation, under
a bylaw or vote of stockholders or disinterested directors), to which a person
seeking indemnification or advancement of expenses may be entitled. Such
contractual or other rights may, for example, under the PBCL, provide for
indemnification against judgments, fines and amounts paid in settlement incurred
by the indemnified person in connection with derivative actions. The PBCL
permits such derivative action indemnification in any case except where the act
or failure to act giving rise to the claim for indemnification is determined by
a court to have constituted willful misconduct or recklessness.
Both the DCL and the PBCL permit a corporation to purchase and
maintain insurance on behalf of any director or officer of the corporation
against any liability asserted against the director or officer and incurred in
such capacity, whether or not the corporation would have the power to indemnify
the director or officer against such liability. InterDigital and IPC has
directors' and officers' liability insurance underwritten by InterDigital has
directors' and officers' liability insurance underwritten by National Union Fire
Insurance (Primary), Zurich Insurance Company (first excess) and Agricultural
Excess and Surplus Insurance Company (second excess).
The IPC Certificate and Bylaws provide that directors,
officers, employees and agents of InterDigital are entitled to be indemnified to
the maximum extent permitted by the DCL. The InterDigital Bylaws provide that
directors, officers and agents of InterDigital are entitled to be indemnified to
the maximum extent permitted by the PBCL.
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Director Liability
The charter of a Delaware corporation may include a provision
which limits or eliminates the liability of directors to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided such liability does not arise from certain proscribed conduct,
including intentional misconduct and breach of the duty of loyalty. The IPC
Certificate contains such a provision limiting the liability of its directors.
The bylaws of a Pennsylvania corporation may include a
provision limiting the personal liability of directors for monetary damages for
actions taken as a director, except to the extent that the director has breached
or failed to perform his duties to the corporation and the breach or failure to
perform constitutes self-dealing, willful misconduct or recklessness. The
InterDigital Bylaws contain such a provision limiting the liability of its
directors.
Amendment to Certificate of Incorporation and Bylaws
The PBCL requires the affirmative vote of the holders entitled
to cast at least a majority of the votes actually cast on an amendment to amend
the articles of incorporation, provided that stockholder approval is not
required for certain non-material amendments, such as a change in the corporate
name, a provision for perpetual existence or, if the corporation has only one
class of shares outstanding, a change in the number and par value of authorized
shares to effect a stock split. Under Pennsylvania law the power to adopt, amend
or repeal bylaws may be vested by the bylaws in the directors, with certain
statutory exceptions for certain actions and subject to the power of
shareholders to change such action. Pennsylvania law provides that unless the
articles of incorporation otherwise provide, shareholders may change the bylaws
without the consent of the directors. The InterDigital Bylaws provide that the
InterDigital Bylaws may be amended by (i) a majority of the directors or (ii) a
majority of the InterDigital shareholders, except that the vote of the holders
of at least eighty percent of the combined voting power of all of the
outstanding shares entitled to vote generally in the election of directors,
voting together as a single class, shall be required to amend the provisions
relating to the number of directors, vacancies on the Board, removal of
directors by shareholders and amendment to the Bylaws.
The DCL requires the approval of the holders of a majority of
the outstanding stock entitled to vote for any amendment to the certificate of
incorporation, unless such level of approval is increased by the certificate of
incorporation. The IPC Certificate does not provide for an increased level of
approval. The DCL provides stockholders with the right to amend the bylaws, and
a corporation is permitted in its charter to give this right to the directors as
well, subject to any director action being amended or repealed by stockholders.
The IPC Certificate gives the directors this right, and the IPC Bylaws impose a
majority vote requirement for amendments by the board of directors.
Statutory Provisions Affecting Business Combinations and Similar Transactions
There are four "anti-takeover" sections of the PBCL which are
generally applicable to registered corporations and relate to (i) "control
transactions," (ii) "business combinations," (iii) "control-share acquisitions"
and (iv) "disgorgement of profits." Pursuant to amendments to its bylaws adopted
in accordance with the PBCL, InterDigital has opted out of the latter two
"anti-takeover" sections. Accordingly, these sections and the sections related
to severance compensation for employees terminated following certain
"control-share acquisitions" and to the effect of certain business combinations
on certain labor contracts of the PBCL are not applicable to InterDigital.
Pennsylvania law provides that any shareholder of a
corporation may demand fair value (as defined in the PBCL) for his shares if a
person or group of persons acquire voting power over voting shares of the
corporation that would entitle the holders thereof to cast at least 20% of the
votes that all shareholders would be entitled to cast in an election of
directors of the corporation (a "Control Transaction").
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Pennsylvania law provides that if a shareholder of a
corporation is a party to a sale of assets transaction, share exchange, merger
or consolidation involving the corporation or a subsidiary, or if a shareholder
is to be treated differently in a corporate dissolution from other shareholders
of the same class, then approval must be obtained of the shareholders entitled
to cast at least a majority of the votes which all shareholders other than the
interested shareholder are entitled to cast with respect to the transaction,
without counting the votes of the interested shareholders. Such additional
shareholder approval is not required if the consideration to be received by the
other shareholders in such transaction for shares of any class is not less than
the highest amount paid by the interested shareholder in acquiring shares of the
same class, or if the proposed transaction is approved by a majority of the
board of directors other than certain directors ("disqualified directors")
affiliated or associated with, or nominated by, the interested shareholder. The
PBCL provides that a director who has held office for at least 24 months prior
to the date of vote on the proposed transaction is not a disqualified director.
Delaware has enacted a business combination statute that is
contained in Section 203 of the DCL ("Section 203"). Section 203 provides that
any person who acquires 15% or more of a corporation's voting stock (thereby
becoming an "interested stockholder") may not engage in a wide range of
"business combinations" with that corporation for a period of three years
following the date that person became an interested stockholder, unless (i) the
board of directors of that corporation approved, prior to such date, either the
business combination or the transaction that resulted in that person becoming an
interested stockholder, (ii) upon consummation of the transaction that resulted
in that person becoming an interested stockholder, that person owns at least 85%
of that corporation's voting stock outstanding at the time the transaction
commenced (excluding for purposes of determining the number of shares
outstanding shares owned by persons who are directors and also officers of that
corporation and shares owned by employee stock plans in which participants do
not have the right to determine confidentially whether shares will be tendered
in a tender or exchange offer), or (iii) the business combination is approved by
the board of directors and authorized by the affirmative vote (at an annual or
special meeting and not by written consent) of the holders of at least 66-2/3%
of the outstanding shares of voting stock not owned by the interested
stockholder.
In determining whether a stockholder is the "owner" of 15% or
more of a corporation's voting stock for purposes of Section 203, ownership is
defined broadly to include the right, directly or indirectly, to acquire stock
or to control the voting or disposition of stock. A "business combination" is
also defined broadly to include (i) mergers or consolidations of a corporation
with an interested stockholder, (ii) sales or other dispositions of 10% or more
of the assets of a corporation with or to an interested stockholder,
(iii) certain transactions resulting in the issuance or transfer to an
interested stockholder of any stock of a corporation or its subsidiaries,
(iv) certain transactions which would result in increasing the proportionate
share of the stock of a corporation or its subsidiaries owned by an interested
stockholder, and (v) receipt by an interested stockholder of the benefit (except
proportionately as a stockholder) of any loans, advances, guarantees, pledges or
other financial benefits from, by or to a corporation or any of its
majority-owned subsidiaries.
The restrictions placed on an interested stockholder by
Section 203 do not apply under certain circumstances, including (but not limited
to): (i) if the corporation's original certificate of incorporation contains a
provision expressly electing not to be governed by Section 203, or (ii) if the
corporation, by action of its stockholders, adopts an amendment to its bylaws or
certificate of incorporation expressly electing not to be governed by Section
203; provided, that such an amendment is approved by the affirmative vote of the
holders of not less than a majority of the outstanding shares entitled to vote
and that such an amendment will not be effective until twelve months after its
adoption and will not apply to any business combination with a person who became
an interested stockholder at or prior to such adoption. Neither the IPC
Certificate nor the IPC Bylaws contains a provision expressly electing not to be
governed by Section 203.
Upon consummation of the Merger, the stockholders of IPC will
cease being subject to Section 203, and the corresponding "anti-takeover"
provisions of the PBCL noted above will become applicable.
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<PAGE>
Exchange Rules Affecting Certain Transactions
The rules of the American Stock Exchange (the "AMEX"), on
which Common Stock is listed, require InterDigital stockholder approval prior to
the issuance by InterDigital of any Common Stock, or securities convertible into
Common Stock ("Common Stock Equivalents"), if such shares are to be issued as
sole or partial consideration for an acquisition of the stock or assets of
another company, (i) if any director, officer or substantial shareholder of
InterDigital has a 5% or a greater interest, directly or indirectly, in the
company or assets to be acquired or in the consideration to be paid in the
transaction and the present or potential issuance of Common Stock or Common
Stock Equivalents could result in an increase in outstanding Common Stock of 5%
or more or (ii) where the present or potential issuance of Common Stock or
Common Stock Equivalents could result in an increase in outstanding common
shares of 20% or more. In addition the rules of the AMEX require shareholder
approval prior to the issuance by InterDigital of any Common Stock or Common
Stock Equivalents, if such shares are to be used in a transaction involving
(i) the sale or issuance by InterDigital of Common Stock or Common Stock
Equivalents at a price less than the greater of book or market value which
together with sales by officers, directors or principal shareholders of
InterDigital equals 20% of more of InterDigital's outstanding Common Stock or
(ii) the sale or issuance by InterDigital of Common Stock or Common Stock
Equivalents equal to 20% or more of InterDigital's outstanding Common Stock for
less than the greater of book or market value of the stock.
Cumulative Voting
The PBCL states that, except as otherwise provided in a
Pennsylvania corporation's articles of incorporation and except for certain
types of Pennsylvania corporations, in each election of directors every
shareholder entitled to vote will have the right to multiply the number of votes
which he may be entitled to vote on any other matter by the total number of
directors to be elected in that election and he may cast the whole number of his
votes for one candidate or he may distribute them among any two or more
candidates. The InterDigital Articles have eliminated such cumulative voting.
The DCL states that the certificate of incorporation of any
Delaware corporation may provide that at all or at certain elections of
directors each holder of stock entitled to vote may vote cumulatively for
directors. The IPC Certificate does not so provide.
Fiduciary Duty
Under Pennsylvania law a director may, in considering the best
interests of a corporation, consider (i) the effects of any action on
shareholders, employees, suppliers, customers and creditors of the corporation,
and upon communities in which offices or other facilities of the corporation are
located, (ii) the short-term and long-term interests of the corporation,
including the possibility that the best interests of the corporation may be
served by the continued independence of the corporation; (iii) the resources,
intent and conduct of any person seeking to take control of the corporation; and
(iv) all other pertinent factors. Delaware law contains no similar provisions.
Provisions with Possible Anti-Takeover Effects
The following provisions of the InterDigital Articles and the
InterDigital Bylaws may be considered to have anti-takeover implications:
(a) the ability of the board to fill (but only until the next annual meeting of
shareholders) the vacancies resulting from an increase in the number of
directors; and (b) the ability of the board of directors to establish the rights
of, and to issue, substantial amounts of preferred stock without the need for
shareholder approval which preferred stock, among other things, may be used to
create voting impediments with respect to changes in control of InterDigital or,
to dilute the stock ownership of holders of Common Stock seeking to obtain
control of InterDigital. In addition, the provisions of the InterDigital
Articles which provide for staggered election of directors through a classified
board of
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<PAGE>
directors may make it more difficult to effect a change in control of
InterDigital's Board, and therefore, may have an anti-takeover effect.
IPC also adopted provisions in its articles and bylaws which
may have anti-takeover effects. Therefore, the rights of IPC stockholders in
respect of such possible anti-takeover effects will not change after the Merger.
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<PAGE>
PRICE RANGE OF COMMON STOCK
InterDigital's Common Stock is traded on the American Stock
Exchange under the symbol "IDC." The following table sets forth the high and low
reported sale prices for the Common Stock for the Common Stock on the American
Stock Exchange for the periods indicated.
<TABLE>
<CAPTION>
High Low
---- ---
Year Ended December 31, 1994
<S> <C> <C>
First Quarter................................................. 5 5/8 3 3/4
Second Quarter................................................ 5 5/8 2 1/2
Third Quarter................................................. 4 1/4 2
Fourth Quarter................................................ 7 7/8 2 3/4
Year Ended December 31, 1995
First Quarter................................................. 12 7/8 5
Second Quarter................................................ 7 7/8 5 5/8
Third Quarter................................................. 9 3/16 6 3/8
Fourth Quarter................................................ 9 1/2 6 7/16
Year Ended December 31, 1996
First Quarter................................................. 10 3/8 7 5/16
Second Quarter................................................ 11 1/4 7 7/16
Third Quarter (through September 11, 1996). . ............ . 8 7/8 6 3/16
</TABLE>
On September 11, 1996, the last reported trading day prior to
the public announcement of the Merger, the closing sale price for the
InterDigital Common Stock, as reported on the American Stock Exchange Composite
Tape, was $7 7/8 per share, and there were approximately 2,600 record holders of
the Common Stock.
No active trading market exists for the IPC common stock and,
accordingly, there are no published market quotations available for such shares
of stock. As of September 11, 1996, there were seventeen record holders of IPC
common stock including InterDigital.
DIVIDEND POLICY
To date, neither the Company nor IPC has paid any dividends on
its common stock, except for a special dividend of $3.1 million paid by IPC in
1994 and $2.5 million paid by ITC in 1992. The Company has paid a $1.25 per
share bi-annual dividend to holders of its Preferred Stock. The Company
currently intends to retain any future earnings to fund operations and the
continued development of its business and, therefore, does not anticipate paying
any cash dividends on the InterDigital Common Stock in the foreseeable future.
Future cash dividends, if any, will be determined by the Board of Directors of
the Company, and will be based upon the Company's earnings, capital
requirements, financial condition and other factors deemed relevant by its Board
of Directors. IPC expects that during 1996 it will begin to pay dividends on its
common stock.
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<PAGE>
BUSINESS OF IPC
General
In February 1992, InterDigital transferred all of its patents,
patent applications and rights to file patent applications on certain future
inventions to ITC, a wholly-owned subsidiary of IPC. In December 1992, IPC sold
approximately 6% of its common stock in a private offering in order to fund
patent procurement, maintenance, licensing and enforcement activities, resulting
in net proceeds of approximately $5.2 million. ITC currently holds 65 United
States patents relating specifically to digital wireless spectrum-efficient
radiotelephony technology (both TDMA and CDMA) which expire at various times
beginning in 2004. ITC has also obtained patents, mostly related to TDMA
technologies, in 36 foreign countries. Thirty-eight other patent applications
have been filed by ITC in the United States Patent and Trademark Office and 160
other patent applications have been filed in numerous foreign countries
throughout the world, relating variously to the CDMA and TDMA technologies.
ITC's patents have effective terms that range between 14 and 20 years.
IPC (through ITC), offers non-exclusive, royalty bearing
patent licenses to telecommunications manufacturers that manufacture, use or
sell, or intend to manufacture, use or sell, equipment that utilizes ITC's
extensive portfolio of TDMA and CDMA patented technologies. IPC believes that,
through ITC's patent portfolio, and the Company's TDMA and B-CDMA research and
development capabilities and resultant know-how, IPC and the Company are
positioned to take advantage of the present evolution in wireless
telecommunications to digital technology from the analog technology, which
represents a substantial portion of the worldwide installed base. ITC
implemented a strategy during 1993 of negotiation and litigation with certain
entities which it believed were representative of the broader number of entities
infringing ITC's patents. These efforts have resulted in patent license
agreements with a total of twelve entities as of August 8, 1996, the recognition
of an aggregate of $28.7, $64.3 million and $24.7 million of licensing revenue
in 1994, 1995 and the six month period ended June 30, 1996, respectively, and
the initiation of litigation against major telecommunications companies.
In high technology fields characterized by rapid change and
engineering distinctions, the validity and value of patents are often subject to
complex legal and factual challenges and other uncertainties. Accordingly, ITC's
patent claims are subject to uncertainties which are typical of patent
enforcement generally. The cost of enforcing and protecting the patent portfolio
can be significant.
Siemens Agreements
On December 16, 1994, ITC together with its parent
InterDigital, entered into a Master Agreement and a series of four related
agreements as elements of an integrated transaction in which the Company
established a broad based marketing and technology alliance with Siemens. These
agreements were amended in February 1996 in connection with the Samsung
alliance. See "--Samsung Agreements."
As partial consideration for the rights and licenses granted
by the Company, Siemens agreed to pay $20 million, of which $14.8 million had
been paid by December 31, 1995. In connection with the Samsung agreements, the
Company and Siemens deferred the December 31, 1995 and March 31, 1996 payments
and, in July 1996, offset $4.9 million of such payments against payments due to
Siemens from InterDigital in conjunction with the Samsung alliance. The Company
expects the balance of the consideration ($300,000) to be paid by September 30,
1996. The Company did not recognize any revenue related to the agreements in
1994. In accordance with accounting requirements, the Company will recognize the
$20 million of revenue over the contract performance period due to the combined
nature of the contracts. Based on management's allocation, IPC's portion of the
agreements related to patent licenses is $15 million. In 1995, IPC recognized
$10.2 million of the revenue under this agreement based on the progress of the
completed work. The remaining $4.8 million of revenue is expected to be
recognized through December 1996, the expected date of completion of functional
testing at the system component level. As of December 31, 1995 and June 30,
1996, IPC owed InterDigital $3.4 million and $3.4 million, respectively, for
work performed pursuant to its portion of the agreements.
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<PAGE>
Samsung Agreements
On February 9, 1996, ITC, together with its parent
InterDigital, entered into a series of agreements with Samsung and amended its
agreements with Siemens as a second major step in implementing its alliance
strategy. Under the various agreements, Samsung made upfront payments to the
Company in excess of $35 million (of which approximately one-half constituted
patent and technology royalty prepayments), less applicable withholding taxes.
All payments from Samsung were received by June 30, 1996. The net amount
received by the Company was approximately $29 million. In July 1996,
InterDigital paid, via offset, $4.9 million to Siemens which, in turn, committed
to provide additional technical assistance to the Company. See "--Siemens
Agreements." Samsung will also be obligated to provide engineering manpower, to
the alliance for the development of the Company's B-CDMA technology. IPC
recognized $14 million of revenue in the first quarter of 1996 as part of the
Samsung agreement that represented the patent license portion of the agreement.
Patent Licensing
As part of its licensing strategy, ITC has identified
non-licensed entities which it believes are infringing its TDMA patents, and ITC
has undertaken a licensing and, where necessary, litigation program, the
ultimate objective of which is the realization of licensing revenues from its
patent portfolio. ITC intends to pursue such revenues through a process of
negotiation and, when necessary, litigation. ITC generally seeks to license its
patents on reasonable terms and conditions, including reasonable royalty rates.
ITC believes that making its patented digital wireless technologies available to
third parties will provide a potentially significant source of revenue. In 1990,
the initial digital cellular telephone standard known as IS-54 employing TDMA
technology was jointly adopted by the Telecommunications Industry Association
("TIA") and Electronics Industry Association ("EIA") as an interim standard. ITC
believes that licenses for certain of its patents are required in order for
third parties to manufacture and sell digital cellular products in compliance
with the TIA/EIA/IS-54-B Cellular System Dual-Mode Mobile Station-Base Station
Compatibility Standard (the "IS-54-B Standard") and the 800 MHZ Cellular System,
TDMA Radio Interface, Dual-Mode Mobile Station Base Station Compatibility
Standard (the "IS-136 Standard"). Currently, numerous manufacturers supply
digital cellular equipment conforming to standards employing TDMA technology,
such as the North American IS-54-B, Japanese JDC and European GSM standards.
ITC has granted non-exclusive, non-transferable, perpetual,
worldwide, royalty-bearing licenses to use certain TDMA patents (and in certain
instances, technology) to Hughes Network Systems ("HNS"), AT&T, Siemens,
Matsushita, Sanyo, Pacific Communications Systems, Mitsubishi, Hitachi, Kokusai,
OKI Electric Industry Company ("OKI") and Samsung. The licenses typically
contain "most favored nations" provisions, applied on a going forward basis
only, and other provisions which could, in certain events, cause the licensee's
obligation to pay royalties to the Company to be suspended for an indefinite
period, with or without the accrual of the royalty obligation.
In 1994, ITC also entered into a CDMA cross-license agreement
with Qualcomm Incorporated ("Qualcomm") to settle litigation filed in 1993. In
return for a one-time payment of $5.5 million, ITC granted to Qualcomm a
fully-paid, royalty free, worldwide license to use and sublicense certain
specified and existing ITC CDMA patents (including related divisional and
continuation patents) to make and sell products for IS-95-type wireless
applications, including, but not limited to, cellular, PCS, wireless local loop
and satellite applications. Qualcomm has the right to sublicense certain of
ITC's licensed CDMA patents so that Qualcomm's licensees will be free to
manufacture and sell IS-95-type CDMA products without requiring any payment to
ITC. Neither ITC's patents concerning cellular overlay and interference
cancellation nor its current inventions are licensed to Qualcomm. Under the
settlement, Qualcomm granted to InterDigital a royalty-free license to use and
to sublicense the patent that Qualcomm had asserted against InterDigital and a
royalty-bearing license to use certain Qualcomm CDMA patents in InterDigital's
B-CDMA products, if needed. InterDigital does not believe that it will be
necessary to use any of Qualcomm's royalty-bearing or non-licensed patents in
its B-CDMA system. In addition, Qualcomm agreed, subject certain restrictions,
to license certain CDMA patents on a royalty bearing basis to those InterDigital
customers that desire to use Qualcomm's patents. The license to InterDigital
does
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<PAGE>
not apply to IS-95-type systems, or to satellite systems. Certain of Qualcomm's
patents, relating to key IS-95 features such as soft and softer hand-off,
variable rate vocoding, and orthogonal (Walsh) coding, are not licensed to
InterDigital.
Patent Litigation
In September 1993, ITC filed a patent infringement action
against Ericsson GE Mobile Communications, Inc. ("Ericsson GE"), its Swedish
parent, Telefonaktieboleget LM Ericsson ("LM Ericsson") and Ericsson Radio
Systems, Inc. ("Ericsson Radio"), in the United States District Court for the
Eastern District of Virginia (Civil Action No. 93-1158-A (E.D.Va.)). 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 an
injunction against Ericsson from further infringement and seeks damages,
royalties, costs and attorneys' fees. Ericsson GE filed an answer to the
Virginia action 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 in Virginia, 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. 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 which was granted by the Court. Both Ericsson actions have been
consolidated in the United States Federal District Court for the Northern
District of Texas. ITC agreed to the dismissal without prejudice of LM Ericsson.
The Company and ITC intend to vigorously defend the Texas action. At the request
and with the consent of the parties, the District Judge has executed an order
indefinitely extending a stay of the proceedings until the U.S. Court of Appeals
for the Federal Circuit decides the appeals filed in the Motorola action.
In October 1993, Motorola, Inc. filed an action against ITC in
the United States District Court for the District of Delaware 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 an answer and
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
ITC patents. ITC also sought an injunction against Motorola from further
infringement and sought damages. 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
that the Motorola products involved in the suit did not infringe ITC's patent
claims at issue in the case and that the 24 patent claims were invalid. ITC
filed a motion requesting that the jury verdict be overturned or, in the
alternative, that a new trial be granted. Motorola filed a motion requesting
attorneys' fees and expenses aggregating between $5 and $7 million. On June 17,
1996, the U.S. District Court for the District of Delaware affirmed that portion
of the jury's verdict regarding infringement. The U.S. District Court further
sustained the jury's determination of invalidity with respect to 21 of the 24
patent claims, but ruled that three patent claims are valid notwithstanding the
jury's determination. The U.S. District Court denied Motorola's motion for
attorneys' fees and expenses. On June 17, 1996 Motorola filed an appeal from the
ruling by the U.S. District Court for the District of Delaware with the U.S.
Court of Appeals for the Federal Circuit (Appeal No. 96-1408) and on June 21,
1996 the Company filed its appeal (Appeal No. 96-1428). It is anticipated that
the parties will file their appeal briefs during the remainder of 1996 and that
the appeals will be argued and decided within approximately 12 to 18 months
after all of the briefs have been filed. The Company believes that there are
substantial grounds for reversal of the jury's invalidity determination and the
granting of a new trial regarding infringement.
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International Patents. 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. An appeal has been filed by Philips, Alcatel and Siemens
and additional arguments have been made based upon prior art not previously
considered by 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 patents. If any
of these patents are revoked, ITC's patent licensing opportunities in such
relevant foreign countries could be materially and adversely affected.
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SELECTED FINANCIAL DATA FOR IPC
The selected historical financial data presented below as of
December 31, 1993, 1994 and for each of the two years in the period ended
December 31, 1994 have been derived from the unaudited Consolidated Financial
Statements of the Company included elsewhere in this Prospectus. The selected
historical financial data as of December 31, 1995 and for the year ended
December 31, 1995 are derived from audited Consolidated Financial Statements of
IPC included elsewhere in this Prospectus. The selected historical financial
data as of December 31, 1992 and for the year ended December 31, 1992 are
derived from the unaudited financial statements of IPC not included in this
Prospectus. The selected financial data as of June 30, 1996 and for the six
months ended June 30, 1995 and 1996 are derived from unaudited financial
statements of the Company, which, in management's opinion, include all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of the information set forth therein. The results of
operations for prior periods, including the six months ended June 30, 1995 and
1996, are not necessarily indicative of the results that may be expected for
1996 or future years. The information set forth below should be read in
conjunction with IPC's financial statements and the notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
CONSOLIDATED STATEMENT OF OPERATIONS DATA(1)
<TABLE>
<CAPTION>
For the Six Months Ended
For the Year Ended December 31, June 30,
--------------------------------------------------- --------------------
1992(2) 1993 1994 1995 1995 1996
------- -------- ------- ------- ------- -------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Licensing revenue $ 3,015 $ --- $28,709 $64,293 $60,093 $16,400
OPERATING EXPENSES:
General and administrative 1,112 3,160 9,489 7,171 5,498 1,695
Amortization of patents 420 466 500 510 255 258
------- -------- ------- ------- ------- -------
TOTAL OPERATING EXPENSES 1,532 3,626 9,989 7,681 5,753 1,953
------- -------- ------- ------- ------- -------
Income (loss) from operations 1,483 (3,626) 18,720 56,612 54,340 14,447
INTEREST INCOME 9 116 45 2,751 1,076 1,940
------- -------- ------- ------- ------- -------
Income before income taxes 1,492 (3,510) 18,765 59,363 55,416 16,387
INCOME TAX PROVISION (BENEFIT) 508 (1,153) 6,488 20,323 18,886 5,683
------- -------- ------- ------- ------- -------
Net Income (loss) $ 984 $ (2,357) $12,277 $39,040 $36,530 $10,704
======= ======== ======= ====== ======= =======
DIVIDENDS PAID TO COMMON
STOCKHOLDERS 2,500(3) -- 3,104 -- -- --
Net income (loss) per share $ 0.04 ($ 0.10) $ 0.51 $ 1.62 $ 1.51 $ 0.44
======= ======== ======= ======= ======= =======
Shares used in computing net
income (loss) per share 24,006 24,072 24,137 24,137 24,137 24,137
</TABLE>
CONSOLIDATED BALANCE SHEET DATA(1)
<TABLE>
<CAPTION>
December 31, June 30,
---------------------------------------------- --------
1992 1993 1994 1995 1996
------ ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments $5,382 $ 2,341 $ 2,402 $59,287 $68,824
Working capital 5,238 1,753 11,947 51,261 61,978
Patents (net) 2,362 2,477 2,569 2,386 2,376
Total assets 7,781 4,915 26,063 62,980 74,054
Due to (receivable from) InterDigital 798 (598) 4,891 5,246 6,966
Retained earnings (deficit) -- (2,357) 6,816 45,856 56,560
Stockholders' equity 6,829 4,887 14,669 53,709 64,413
</TABLE>
- ---------------------
(1) In February 1992, InterDigital formed ITC, as a wholly-owned
subsidiary, and transferred all of its patents, patent applications and
rights to file patent applications on certain future inventions to ITC.
During the third quarter of 1992, InterDigital formed IPC and
contributed to IPC its entire ownership in ITC in return for 100% of
IPC's common stock. Subsequently, InterDigital sold a 5.76% interest in
IPC to the current stockholders of IPC (except for InterDigital) for
net proceeds of $5.2 million. IPC started operating as an active
company during 1993. See Note 1 to IPC's Consolidated Financial
Statements.
-44-
<PAGE>
(2) Operating results for 1992 include interest earned on IPC's cash
balances and ITC's patent enforcement activity beginning in February
1992. Prior to February 1992, InterDigital's patent portfolio
management activity was included in the operating results of
InterDigital. Prior period comparable data is not readily available.
(3) This amount represented a dividend paid by ITC to InterDigital in 1992
prior to the formation of IPC.
-45-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF IPC
In February 1992, InterDigital transferred all of its patents,
patent applications and rights to file patent applications on certain future
inventions to ITC, a wholly-owned subsidiary of IPC. In December 1992, IPC sold
approximately 6% of its common stock in a private offering in order to fund
patent procurement, maintenance, licensing and enforcement activities, resulting
in net proceeds of approximately $5.2 million. As part of its licensing
strategy, ITC has identified non-licensed entities which it believes are
infringing its TDMA patents, and ITC has undertaken a program, the ultimate
objective of which is the realization of licensing revenues from its patent
portfolio. ITC intends to pursue such revenues through a process of negotiation
and, when necessary, litigation. In addition, ITC and IDC have adopted a
strategy of pursuing patent license revenue in conjunction with IDC's alliance
strategy by offering patent licenses in conjunction with technology transfer,
manufacturing, sales or other rights available from IDC. ITC generally seeks to
license its patents on reasonable terms and conditions, including reasonable
royalty rates.
Results of Operations
Six Months Ended June 30, 1996 Compared With the Six Months Ended June 30, 1995
Total Revenues. Revenues decreased 73% from $60.0 million in
the six months ended June 30, 1995 to $16.4 million in the comparable 1996
period. ITC entered into license agreements during the 1995 period with five new
licensees, generating $54.0 million in revenue and recognized $6.0 million of
revenue related to the Siemens license granted in 1994. During the six months
ended June 30, 1996, only one (Samsung) new license was granted, generating
$14.0 million of revenue, and revenue recognized relating to Siemens was $2.4
million.
Non-refundable license payments clearly identified as such in
the applicable agreements are recognized as revenue when the agreements become
effective. Based on management's allocation, $15 million of the total cash
consideration paid by Siemens ($20 million) will be recognized as revenue by ITC
over the expected time period of performance of all of the Company's and IDC's
obligations under the Siemens agreements, and the remaining $5 million has been
allocated to IDC.
Operating Expenses. Operating expenses include general and
administrative expenses and amortization of patent acquisition costs. General
and administrative expenses decreased 69% from $5.5 million in the six months
ended June 30, 1995 to $1.7 million in the comparable 1996 period. Total
compensation costs, including charges to reserve the maximum potential payments
under bonus plans, decreased by $1.0 million. The remainder of the decrease
resulted primarily from a decrease in legal and professional fees incurred
during the six months ended June 30, 1996 as compared to the comparable period
in 1995. The Motorola litigation was responsible for the majority of such costs
incurred in 1995. See "Business of IPC -- Patent Litigation."
Patent amortization costs increased by only 1% during the six
months ended June 30, 1996 compared with the comparable period in 1995. ITC
generally amortizes patent acquisition costs over 10 years on a straight-line
basis.
Interest Income. Interest income recognized during the six
months ended June 30, 1996 increased 80% to $1.9 million from $1.1 million
during the comparable 1995 period. The increase is primarily due to higher
average invested balances during the 1996 period compared to 1995.
Income Taxes. The provision for income taxes in the 1996 and
1995 periods includes $2.3 million and $2.4 million, respectively, of foreign
withholding taxes applicable to certain license revenues, provision for taxes
payable under a tax sharing agreement between IPC, ITC, InterDigital and
InterDigital's other subsidiaries of $3.3 million and $16.4 million,
respectively, and for state income taxes. The amount of foreign withholding
taxes varies depending on the tax rates,
-46-
<PAGE>
exemptions and other regulations in effect at the time of remittance in the
respective countries involved. See Note 6 to the Financial Statements.
1995 Compared With 1994
Total Revenues. Total revenues in 1995 increased 124% to $64.3
million from $28.7 million in 1994 primarily as a result of an increase in the
number of licenses granted and non-refundable advances against future royalties
received upon signing those agreements. License revenue in 1995 resulted from
license agreements with Mitsubishi, NEC, Hitachi, Kokusai, PCSI and Sanyo and
revenue of $10.2 million associated with the Siemens alliance. Revenues in 1994
resulted primarily from license agreements with AT&T and Matsushita and the
settlement of litigation with OKI and Qualcomm.
Operating Expenses. General and administrative expenses
decreased 24% to $7.2 million in 1995 from $9.5 million in 1994. The decrease
was due primarily to a decrease in legal and professional fees incurred in 1995
compared to 1994. Expenses in 1994 included significant costs associated with
the OKI/Qualcomm and Motorola actions. The OKI/Qualcomm litigation was settled
in 1994 and a jury verdict was reached in the Motorola action in March 1995. See
"Business of IPC -- Patent Licensing and Patent Litigation." Expenses in 1994
also included compensation costs of approximately $600,000 associated with
compensatory options to purchase IPC common stock. The charge relating to the
compensatory options was based on the difference between the deemed value for
accounting purposes of the shares subject to the options and the exercise price
of the option. Those decreases were partially offset by an increase of $1.25
million in charges to reserve the maximum potential payments under bonus plans.
Patent amortization costs increased by only 2% during 1995
compared with 1994. ITC generally amortizes patent acquisition costs over 10
years on a straight-line basis.
Interest Income. Interest income in 1995 was $2.8 million as
compared to $45,000 for 1994. The increase is due primarily to greater average
invested cash balances in 1995 compared to 1994 due to the receipt of cash and
investment of funds from licensing revenues.
Income Taxes. The provision for income taxes in 1995 and 1994
included $2.4 million and $900,000, respectively of foreign withholding taxes
applicable to certain license revenue, provision for taxes payable under a tax
sharing agreement between IPC, ITC, InterDigital and InterDigital's other
subsidiaries of $17.8 million and $5.5 million, respectively, and a provision
for state income taxes. The amount of foreign withholding varies depending on
the tax rates, exemptions and other regulations in effect at the time of
remittance in the respective countries involved.
1994 Compared With 1993
Total Revenues. Total revenues increased to $28.7 million
compared to no revenue in 1993. License revenue of $5.5 million in 1994 resulted
from the settlement of the Qualcomm litigation. The remaining license and
alliance revenue represents non-refundable royalty advances from AT&T and OKI
Electric, and revenue associated with a patent license granted to Matsushita.
Operating Expenses. General and administrative expenses of
$9.5 million were approximately three times the level of expenses incurred in
1993. Expenses in 1994 included charges of $750,000 to reserve the maximum
potential payments under bonus plans. The remainder of the increase was
primarily due to increased legal and professional fees associated with the
OKI/Qualcomm and Motorola litigation. See "Business of IPC -- Patent Licensing
and Patent Litigation."
Patent amortization costs increased by 7% during 1994 compared
with 1993. ITC generally amortizes patent acquisition costs over 10 years on a
straight-line basis.
-47-
<PAGE>
Interest Income. Interest income for 1994 was $45,000 as
compared to $116,000 for 1993. The decrease is primarily attributable to a
decrease in average invested balances in 1994 compared to 1993 reflecting
expenditure of the proceeds of the December 1992 sale of 6% of the common stock
of IPC to private investors.
Income Taxes. The Company recorded an income tax benefit of
$1.2 million in 1993 compared to a tax provision of $6.5 million in 1994. The
benefit represents recognition of a tax asset which was realized in 1994 through
a reduced provision for taxes payable pursuant to the tax sharing agreement
between InterDigital and its subsidiary companies. The 1994 provision includes
$900,000 and $5.5 million, respectively, of foreign withholding taxes applicable
to certain license revenues and a provision for taxes payable under the tax
sharing agreement.
Liquidity and Capital Resources
IPC had working capital of $62.0 million as of June 30, 1996
as compared to $51.3 million at December 31, 1995 and $11.9 million at December
31, 1994. The increase in working capital since December is due primarily to
$86.1 million and $13.1 million of cash received on patent licensing agreements
during 1995 and the six months ended June 30, 1996, respectively. IPC's capital
requirements will be determined largely by: (i) the extent of its involvement in
, and the outcome, of current and future litigation and administrative
proceedings; (ii) the extent, if any, of realization of additional licensing
revenue from current or future licensees; and (iii) the amount of payments made
to or received from its stockholders pursuant to various contractual
arrangements or by dividend.
IPC has experienced positive cash flows of $57.2 million and
$9.8 million from operations during 1995 and the six months ended June 30, 1996,
respectively. The positive cash flows from operations are primarily due to the
receipt of $82.9 million and $11.7 million related to ITC's patent licensing
activities, partially offset by income taxes paid to InterDigital.
Net cash flows used by investing activities for 1995 and the
six months ended June 30, 1996 include the investment of $55.1 million and $7.3
million of excess funds in short-term, highly liquid securities.
During 1995 and the six months ended June 30, 1996, financing
activities were not material.
Included in accounts payable and accrued expenses at June 30,
1996 are professional fees, consulting and other accruals and amounts payable in
the ordinary course of business.
-48-
<PAGE>
INFORMATION RELATING TO MERGERCO
General
MergerCo was organized by InterDigital on August 6, 1996 under
Delaware law in order to effect the Merger. MergerCo is a wholly owned
subsidiary of InterDigital. MergerCo has not engaged in any activities other
than those incident to its formation. If the Merger is consummated, MergerCo
will be merged into IPC and IPC will be the Surviving Corporation. MergerCo's
principal executive offices are located at the offices of InterDigital, 781
Third Avenue, King of Prussia, Pennsylvania 19406-1409 and its telephone number
is (610) 878-7800. See "Information Relating to MergerCo."
MergerCo does not have any assets or liabilities (other than
those arising under the Plan of Merger) or engage in any activities other than
those incident to its formation and capitalization and the Merger. As of the
date of this Prospectus, the authorized capital stock of MergerCo consists of
100 shares of common stock, par value $.01 per share, all of which are issued
and outstanding and owned by InterDigital. In the Merger, MergerCo will merge
with and into IPC with IPC being the Surviving Corporation.
Executive Officers and Directors of MergerCo
The following table sets forth certain information regarding
the directors and executive officers of MergerCo. All of such individuals are
U.S. citizens.
Name Age Position
---- --- --------
Harry G. Campagna 57 Chairman of the Board
William A. Doyle 47 Director and President
D. Ridgely Bolgiano 63 Director, Vice President and Treasurer
Harley L. Sims 68 Director
William J. Merritt 37 Secretary
Each director has been elected to serve until the next annual
meeting of MergerCo stockholders and until his successor is duly chosen and
qualified or until his prior death, resignation or removal. The term of office
of each executive officer is until the organizational meeting of the MergerCo
Board of Directors following the next annual meeting of MergerCo stockholders
and until his successor is elected and qualified or until his prior death,
resignation or removal.
-49-
<PAGE>
PRINCIPAL STOCKHOLDERS OF IPC
The following table sets forth as of August 15, 1996, certain
information with respect to the beneficial ownership of IPC common stock by
(i) each person known by InterDigital to own beneficially 5% or more of the
outstanding IPC common stock, (ii) each director of IPC, and (iii) all directors
and officers of IPC as a group. Each person listed has the sole voting and
investment power as to all of the shares of IPC common stock shown as being
beneficially owned by them. Unless otherwise indicated, the address of each
person named in the following table is: c/o IPC, 781 Third Avenue, King of
Prussia, PA 19406-1409.
<TABLE>
<CAPTION>
Name and Address Amount and Nature Percentage of
of Beneficial Owner of Ownership Outstanding Common Stock
- ------------------- ----------------- ------------------------
<S> <C> <C>
InterDigital Communications 22,500,000 94.24%
Corporation
781 Third Avenue
King of Prussia, PA 19406-1409
D. Ridgely Bolgiano 31,250 *
Harry G. Campagna -- --
William A. Doyle -- --
Harley L. Sims -- --
All Directors and Officers
as a group (7 persons) 31,250 *
</TABLE>
- ----------------------------------
*less than 1% of the outstanding shares.
-50-
<PAGE>
CERTAIN LEGAL MATTERS, EXPERTS AND REGULATORY APPROVALS
Federal and State Approvals
The Company's Registration Statement on Form S-4, of which
this Prospectus forms a part, has been declared effective by the Commission and
all state blue sky filings required in connection with the issuance of the
InterDigital Common Stock being sold hereby have been made. The shares of
InterDigital Common Stock being sold hereby have been admitted to trading on the
American Stock Exchange. No additional federal or state regulatory requirements
remain to be complied with in order to consummate the Merger.
Legal Opinions
The validity of the Common Stock offered hereby has been
passed upon for the Company by Jane S. Schultz, 781 Third Avenue, King of
Prussia, Pennsylvania 19406. Ms. Schultz is Associate General Counsel of the
Company. As of the date of this Prospectus, Ms. Schultz owns options to purchase
1,499 shares of InterDigital Common Stock which are currently vested and
exercisable.
Experts
The InterDigital audited consolidated financial statements and
related consolidated financial statement schedules incorporated by reference in
this Prospectus and elsewhere in the Registration Statement, to the extent and
for the periods indicated in their reports, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are incorporated in reliance upon the authority of said firm as
experts in giving said reports.
The IPC audited consolidated financial statements included in
this Prospectus and elsewhere in the Registration Statement, as of December 31,
1995 and the year then ended have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report thereto and is
included herein in reliance upon the authority of said firm as experts in giving
said report.
-51-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
InterDigital Communications Corporation Unaudited Pro Forma Consolidated Financial Statements F-2
Report of Independent Accountants F-5
InterDigital Patents Corporation and Subsidiary Consolidated Historical Financial Statements F-6
Notes to InterDigital Patents Corporation Consolidated Historical
Financial Statements F-10
IP Acquisition Corp. Unaudited Historical Balance Sheet F-18
</TABLE>
F-1
<PAGE>
INTERDIGITAL COMMUNICATIONS CORPORATION
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
(Unaudited)
The accompanying Pro Forma Consolidated Balance Sheet as of June 30,
1996, and the related Pro Forma Consolidated Statements of Operations for the
year ended December 31, 1995 and the six months ended June 30, 1996 give effect
to (i) the acquisition by InterDigital Communications Corporation of the
minority interest in InterDigital Patents Corporation (IPC) and (ii) the other
pro forma adjustments as described in the Notes to the Pro Forma Consolidated
Financial Statements, as if this transaction had occurred as of June 30, 1996 in
the case of the Pro Forma Consolidated Balance Sheet, or as of January 1, 1995
and January 1, 1996 in the case of the Pro Forma Consolidated Statements of
Operations.
The Pro Forma Consolidated Financial Statements have been prepared by
management and should be read in conjunction with the historical financial
statements of InterDigital and IPC. The Pro Forma Consolidated Financial
Statements are based on certain assumptions and preliminary estimates which are
subject to change. These statements do not purport to be indicative of the
financial position or results of operations that might have occurred, nor are
they indicative of future operating results.
F-2
<PAGE>
INTERDIGITAL COMMUNICATIONS CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Historical Pro forma
June 30, Pro forma June 30,
1996 Adjustments 1996
---------- ----------- ---------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 20,306 $ 20,306
Short term investments 62,322 62,322
License fees receivable 702 702
Accounts receivable 5,397 5,397
Inventories 4,751 4,751
Other current assets 5,670 5,670
--------- --------- ---------
Total current assets 99,148 -- 99,148
Other Assets:
Patents 2,395 7,080(A) 9,475
Property, net 8,975 8,975
Other 5,032 5,032
--------- ---------
Total other assets 16,402 7,080 23,482
--------- ---------
Total Assets $ 115,550 $ 7,080 $ 122,630
========= ========= =========
Current Liabilities:
Current portion of long term debt $ 484 $ 484
Accounts payable 6,681 6,681
Accrued Compensation 4,034 4,034
Purchase commitment reserve 505 505
Income taxes payable 614 614
Deferred Revenue 9,198 9,198
Other Accrued liabilities 2,920 2,920
--------- --------- ---------
Total current liabilities 24,436 -- 24,436
Long term debt 3,142 3,142
Other long term liabilities 7,584 7,584
Minority interest 4,732 (4,732)(A) --
Shareholders' Equity:
Preferred stock 11 11
Common stock 463 15(A) 478
Additional paid-in capital 220,932 11,797(A) 232,729
Accumulated deficit (145,750) (145,750)
--------- --------- ---------
Total shareholders' equity $ 75,656 $ 11,812 $ 87,468
Total liabilities & equity $ 115,550 $ 7,080 $ 122,630
========= ========= =========
</TABLE>
(A) Record purchase accounting for the purchase of the minority interest of IPC
for approximately $12 million (assume $7.875/share at 1,499,905 shares). To
the extent that the market price of InterDigital's Common Stock on the date
of the Effective Time of the Merger is different than $7.875 per share, the
amount of the purchase price would change.
F-3
<PAGE>
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Year Ended December 31, 1995 For the Six Months Ended June 30, 1996
------------------------------------------ ----------------------------------------
Pro forma Pro forma
Historical Adjustments Pro forma Historical Adjustments Pro forma
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income Statement
UltraPhone revenues $ 16,581 $ 16,581 $ 6,834 $ 6,834
Licensing and alliance 67,693 67,693 24,707 24,707
Contract services 681 681 -- --
-------- -------- -------- --------
Total revenues 84,955 -- 84,955 31,541 -- 31,541
Operating expenses:
Cost of UltraPhone 17,932 17,932 7,897 7,897
Contract services cost 762 762 -- --
Sales and Marketing 3,597 3,597 1,916 1,916
General and Administrative 14,838 708(B) 15,546 5,453 354(B) 5,807
Research and Development 9,738 9,738 9,166 9,166
-------- -------- -------- --------
46,867 708 47,575 24,432 354 24,786
-------- -------- -------- -------- -------- --------
Income from operations 38,088 (708) 37,380 7,109 (354) 6,755
Other:
Interest income 3,073 3,073 2,071 2,071
Interest expense (724) (724) (77) (77)
Income tax provision (3,318) (3,318) (3,505) (3,505)
Minority interest (2,514) 2,514(A) -- (891) 891(A) --
-------- -------- -------- -------- -------- --------
Net income 34,605 1,806 36,411 4,707 537 5,244
Preferred stock dividends (265) (265) (132) (132)
-------- -------- -------- --------
Net income applicable to $ 34,340 $ 1,806 $ 36,146 $ 4,575 $ 537 $ 5,112
common shareholders ======== ======== ======== ======== ======== ========
Weighted average shares 46,503 46,503 47,931 47,931
outstanding
Additional shares issued -- 1,500(C) 1,500 -- 1,500(C) 1,500
-------- -------- -------- -------- -------- --------
Weighted average shares
outstanding after Merger 46,503 1,500 48,003 47,931 1,500 49,431
======== ======== ======== ======== ======== ========
Net income per share $ 0.74 $ 0.75 $ 0.10 $ 0.10
======== ======== ======== ========
</TABLE>
(A) To remove minority interest
(B) Record pro forma amortization of additional value of patents assuming a ten
year average life
(C) Record issuance of shares (assume $7.875/share at 1,499,905 shares). To the
extent that the market price of InterDigital's Common Stock on the date of
the Effective Time of the Merger is different than $7.875 per share, the
amount of the purchase price and charge to expense would change.
F-4
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To InterDigital Patents Corporation:
We have audited the accompanying consolidated balance sheet of InterDigital
Patents Corporation and subsidiary (a Delaware corporation) as of December 31,
1995, and the related consolidated statements of income, stockholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principals used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Interdigital Patents
Corporation and subsidiary as of December 31, 1995, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Philadelphia, PA
August 14, 1996
F-5
<PAGE>
INTERDIGITAL PATENTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands except par value)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1995 1996
--------- --------- ---------
ASSETS (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,402 $ 4,227 $ 6,494
Short term investments - 55,060 62,330
License fees receivable 20,900 400 1,702
Other current assets 39 845 1,093
--------- --------- ---------
Total current assets 23,341 60,532 71,619
--------- --------- ---------
PROPERTY AND EQUIPMENT, net of accumulated 15 11 8
depreciation
OTHER ASSETS:
Patents, net of accumulated amortization of 2,569 2,386 2,376
$2,946, $3,456 and $3,714, respectively
Other 138 51 51
--------- --------- ---------
Total other assets 2,707 2,437 2,427
--------- --------- ---------
$ 26,063 $ 62,980 $ 74,054
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,119 $ 263 $ 510
Accrued compensation and related expenses 966 2,116 1,856
Income and foreign withholding taxes payable 173 121 --
Deferred revenue -- 1,200 --
Intercompany Payable to InterDigital 4,891 5,246 6,966
Other accrued expenses 1,245 325 309
--------- -------- --------
Total current liabilities 11,394 9,271 9,641
--------- -------- --------
STOCKHOLDERS' EQUITY:
Common Stock, $.001 par value, 45,000 shares authorized, 24 24 24
23,875 shares issued and outstanding
Additional paid-in capital 7,829 7,829 7,829
Retained earnings 6,816 45,856 56,560
--------- --------- ---------
Total stockholders' equity 14,669 53,709 64,413
--------- --------- ---------
$ 26,063 $ 62,980 $ 74,054
========= ========= =========
</TABLE>
F-6
<PAGE>
INTERDIGITAL PATENTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31, For the Six Months Ended June 30,
--------------------------------------- ---------------------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
LICENSING REVENUE $ -- $28,709 $64,293 $60,093 $16,400
OPERATING EXPENSES
General and administrative 3,160 9,489 7,171 5,498 1,695
Amortization of patents 466 500 510 255 258
-------- -------- ------- -------- -------
Total operating expenses 3,626 9,989 7,681 5,753 1,953
-------- ------- ------- -------- -------
Income (loss) from operations (3,626) 18,720 56,612 54,340 14,447
INTEREST INCOME 116 45 2,751 1,076 1,940
------- ------- ------- ------- -------
Income before income taxes (3,510) 18,765 59,363 55,416 16,387
INCOME TAX PROVISION (BENEFIT) (1,153) 6,488 20,323 18,886 5,683
------- ------- ------- ------- -------
Net income (loss) $(2,357) $12,277 $39,040 $36,530 $10,704
======= ======= ======= ======= =======
Net income (loss) per share ($0.10) $0.51 $1.62 $1.51 $0.44
======= ======= ======= ======= =======
Shares used in computing net income (loss)
per share 24,072 24,137 24,137 24,137 24,137
======= ======= ======= ======= =======
</TABLE>
F-7
<PAGE>
INTERDIGITAL PATENTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Year Ended For the Six Months Ended
December 31, June 30,
----------------------------------------- ---------------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,357) $ 12,277 $39,040 $ 36,530 $ 10,704
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities --
Depreciation and amortization 466 506 520 259 261
Issuance of stock options below deemed
accounting value 415 609 -- -- --
Other (13) (98) 87 79 --
Decrease (increase) in assets--
License fees receivables -- (20,900) 20,500 15,100 (1,302)
Other current assets (41) 2 (806) (202) (248)
Increase (decrease) in liabilities--
Accounts payable 463 3,619 (3,856) (3,918) 247
Accrued compensation 88 878 1,150 1,910 (260)
Deferred revenue -- -- 1,200 1,600 (1,200)
Intercompany payable to Interdigital (1,396) 5,480 355 7,107 1,720
Other accrued expenses (66) 1,378 (972) (528) (137)
--------- --------- ---------- ---------- --------
Net cash provided by (used in) operating
activities (2,441) 3,759 57,218 57,937 9,785
--------- --------- ---------- ---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in short-term investments -- -- (55,060) (44,472) (7,270)
Additions to property and equipment (19) (2) (6) (8) --
Additions to patents (581) (592) (327) (219) (248)
--------- --------- ---------- ---------- --------
Net cash used in investing activities (600) (594) (55,393) (44,699) (7,518)
--------- --------- ---------- ---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend to stockholders -- (3,104) -- -- --
--------- --------- ---------- ---------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (3,041) 61 1,825 13,238 2,267
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 5,382 2,341 2,402 2,402 4,227
--------- --------- ---------- ---------- --------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 2,341 $ 2,402 $ 4,227 $ 15,640 $ 6,494
========= ========= ========= ========== ========
</TABLE>
F-8
<PAGE>
INTERDIGITAL PATENTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Additional Retained
Stock Paid-In Capital Earnings (Deficit) Total
----- --------------- ------------------ -----
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992 $ 24 $ 6,805 $ --- $ 6,829
Issuance of stock options below --- 415 --- 415
deemed accounting value
Net loss --- --- (2,357) (2,357)
---- ------- ------- -------
BALANCE, DECEMBER 31, 1993 $ 24 $ 7,220 $(2,357) $ 4,887
(UNAUDITED)
Issuance of stock options below --- 609 --- 609
deemed accounting value
Dividend to Common Stockholders --- --- (3,104) (3,104)
Net income --- --- 12,277 12,277
---- ------- ------- -------
BALANCE, DECEMBER 31, 1994 $ 24 $ 7,829 $ 6,816 $14,669
(UNAUDITED)
Net income --- --- 39,040 39,040
---- ------- ------- -------
BALANCE, DECEMBER 31, 1995 $ 24 $ 7,829 $45,856 $53,709
Net income --- --- 10,704 10,704
---- ------- ------- -------
BALANCE, JUNE 30, 1996 $ 24 $ 7,829 $56,560 $64,413
==== ======= ======= =======
(UNAUDITED)
</TABLE>
The accompanying notes are an integral part of these statements.
F-9
<PAGE>
INTERDIGITAL PATENTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Information as of December 31, 1994 and June 30, 1996, for the years
ended December 31, 1993 and 1994 and for the six months
ended June 30, 1995 and June 30, 1996 is unaudited)
1. BACKGROUND:
InterDigital Patents Corporation, a Delaware Corporation ("IPC"),
through its wholly-owned subsidiary InterDigital Technology Corporation ("ITC"),
is seeking to capitalize upon the revenue potential of ITC's extensive Time
Division Multiple Access ("TDMA") and Code Division Multiple Access ("CDMA")
patent portfolio. ITC implemented a strategy during 1993 of negotiation and
litigation with certain entities which it believed were representative of a
number of entities infringing ITC's patents. These efforts have resulted in
patent license agreements with five entities in 1994, six entities in 1995 and a
twelfth entity during 1996, the recognition of $28.7 million, $64.3 million and
$16.4 million of licensing revenue in 1994, 1995 and the six months ended June
30, 1996 respectively, and the initiation of litigation with major
telecommunications equipment providers. ITC, along with IPC's parent
corporation, InterDigital Communications Corporation ("InterDigital" or together
with all of its subsidiaries "the Company") has also formed two business
alliances based upon its TDMA and Broadband Code Division Multiple Access(TM)
("B-CDMA(TM)") technologies. (See Notes 2, 3, 4 and 5).
In February 1992, InterDigital transferred all of its patents, patent
applications and rights to file patent applications on certain future inventions
to ITC. During the fourth quarter of 1992, InterDigital formed IPC and
contributed to IPC InterDigital's entire ownership interest in ITC in return for
100% of IPC's common stock. InterDigital had previously contributed all of its
past, present and future (conceived on or before February 2002) patent rights to
ITC. Subsequently, IPC issued 22 Units in a private placement at $250,000 per
Unit, receiving net proceeds of $5.2 million in return for 5.76% of the
ownership interest in IPC. Each Unit consisted of 62,500 shares of IPC Common
Stock and warrants to purchase 62,500 of InterDigital's Common Stock at an
exercise price of $5.50 per share.
The proceeds from licensing transactions are paid to ITC. (See Notes 3,
4 and 5). The availability of such funds for uses related to UltraPhone(R)
system marketing efforts, TDMA or B-CDMA product development efforts or other
InterDigital uses is dependent upon such funds being transferred from IPC to
InterDigital pursuant to contractual arrangements or in conjunction with a
dividend declaration.
IPC and its subsidiary are subject to certain risks and uncertainties,
including, but not limited to, the ability to effectively prosecute and enforce
patents, the willingness of other companies to enter into acceptable patent
license agreements that utilize this company technology, compliance by licensees
of the Company's technology, the development and commercialization of products
relying on ITC's patents, uncertainty and volatility of future profitability and
access to capital and dependence on license arrangements and key personnel.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of IPC and
its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
F-10
<PAGE>
INTERDIGITAL PATENTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Information as of December 31, 1994 and June 30, 1996, for the years
ended December 31, 1993 and 1994 and for the six months
ended June 30, 1995 and June 30, 1996 is unaudited)
Interim Financial Statements
The financial statements as of June 30, 1996 and for the six months
ended June 30, 1995 and 1996 are unaudited. In the opinion of the management of
IPC, the unaudited financial statements as of June 30, 1996 and for the six
months ended June 30, 1995 and 1996, include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation. The results of
operations for the six months ended June 30, 1996 are not necessarily indicative
of the results to be expected for the full year.
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Short-Term Investments
IPC considers all highly liquid investments purchased with remaining
maturities of three months or less to be cash equivalents. Investments are held
at amortized cost which approximates market value, and at December 31, 1995 and
June 30, 1996 are classified as short-term. At December 31, 1995 and June 30,
1996, all of the Company's short-term investments are classified as available
for sale pursuant to Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," (SFAS 115).
Therefore, any unrealized holding gains or losses should be presented in a
separate component of stockholders' equity. At December 31, 1995 and June 30,
1996, there were no significant unrealized holding gains or losses.
Cash and cash equivalents consisted of the following:
December 31,
---------------- June 30,
1994 1995 1996
---- ---- --------
Money market funds and demand accounts $2,402 $1,168 $1,515
Certificates of deposit -- -- --
Repurchase agreements -- 680 --
Commercial paper -- 2,379 4,979
------ ------ ------
$2,402 $4,227 $6,494
====== ====== ======
The repurchase agreements are fully collateralized by United States
Government securities and are stated at cost which approximates fair market
value.
Short-term investments available for sale as of December 31, 1995
consisted of $40.5 million in government-issued discount notes, $2.5 million in
municipal securities and $12.1 million in corporate debt securities. Short
F-11
<PAGE>
INTERDIGITAL PATENTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Information as of December 31, 1994 and June 30, 1996, for the years
ended December 31, 1993 and 1994 and for the six months
ended June 30, 1995 and June 30, 1996 is unaudited)
term investments available for sale as of June 30, 1996 consist of $51.4 million
in government-issued discount notes, and $10.9 million in corporate debt
securities.
The aggregate cash, cash equivalents and short-term investments held by
IPC was $68.8 million as of June 30, 1996. Such funds can be made available for
uses related to UltraPhone activities, 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.
Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization of property, plant and equipment are provided using the
straight-line method. The estimated useful lives for computer equipment,
furniture and fixtures are generally three to five years.
Patents
The costs to obtain certain patents for the Company's TDMA and CDMA
technologies have been capitalized and are being amortized on a straight-line
basis over their estimated useful lives, generally 10 years. Amortization was
$466,000, $500,000, $510,000 and $255,000 and $258,000 in the years ended
December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995 and
1996, respectively.
Revenue Recognition
Licensing revenues in 1994, 1995 and the six months period ended June
30, 1995 and 1996 consist of upfront, non-refundable fees which were recognized
at the time of the applicable agreement. Due to the combined nature of the
Siemens agreements, revenue is recognized over the performance period of the
Company's obligations under the agreements. (See Note 3.) Recurring royalty
revenues under licensing agreements may be recognized in the future according to
the terms of the agreements.
Concentration of Credit Risk
Financial instruments which potentially subject IPC to concentration of
credit risk consist primarily of cash equivalents, short-term investments and
accounts receivable. By policy, IPC places its cash equivalents and short-term
investments only with high quality financial institutions and in United States
Government obligations. The Company's accounts receivable are derived
principally from patent license agreements which provide for deferred and/or
installment payments.
New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long Lived Assets and for Long Lived Assets to be Disposed Of"
(SFAS No. 121). SFAS No. 121 establishes accounting standards for the impairment
of long lived assets, certain identifiable
F-12
<PAGE>
INTERDIGITAL PATENTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Information as of December 31, 1994 and June 30, 1996, for the years
ended December 31, 1993 and 1994 and for the six months
ended June 30, 1995 and June 30, 1996 is unaudited)
intangibles and goodwill. IPC has adopted SFAS No. 121 effective January 1,
1996. The adoption of SFAS No. 121 did not have a material effect on IPC's
patents, financial condition or results of operations.
Supplemental Cash Flow Information
The Company paid $3.3 million, $3.3 million and $2.3 million of foreign
withholding taxes during 1995 and the six months ended June 30, 1995 and 1996,
respectively. (See also Note 6.) Income taxes paid in 1993 and 1994 were not
material.
3. SIEMENS AGREEMENTS:
On December 16, 1994, ITC along with its parent InterDigital, entered
into a Master Agreement and a series of four related agreements as elements of
an integrated transaction in which the Company established a broad based
marketing and technology alliance with Siemens. These agreements were amended in
February 1996 in connection with the Samsung agreements. (See Note 4.)
As partial consideration for the rights and licenses granted by the
Company, Siemens agreed to pay $20 million, of which $14.8 million had been paid
by December 31, 1995. In connection with the Samsung alliance, the Company and
Siemens deferred the December 31, 1995 and March 31, 1996 payments and, in July
1996, offset $4.9 million of such payments against payments due to Siemens from
InterDigital in conjunction with the Samsung alliance. The Company expects the
balance of the consideration ($300,000) to be paid by September 30, 1996. The
Company did not recognize any revenue related to the agreements in 1994. In
accordance with accounting requirements, the Company will recognize the $20
million of revenue over the contract performance period due to the combined
nature of the contracts. Based on management's allocation, IPC's portion of the
agreements related to patent licenses is $15 million. In 1995, IPC recognized
$10.2 million of the revenue under this agreement based on the progress of the
completed work. The remaining $4.8 million of revenue is expected to be
recognized through December 1996, the expected date of completion of functional
testing at the system component level. As of December 31, 1995 and June 30,
1996, IPC owed InterDigital $3.4 million and $3.4 million, respectively, for
work performed pursuant to its portion of the agreements.
4. SAMSUNG AGREEMENTS:
On February 9, 1996, ITC, along with its parent InterDigital, entered
into a series of agreements with Samsung and amended its agreements with Siemens
as a second major step in implementing its alliance strategy. Under the various
agreements, Samsung made upfront payments to the Company in excess of $35
million (of which approximately one-half constituted patent and technology
royalty prepayments), less applicable withholding taxes. All payments from
Samsung were received by June 30, 1996. The net amount received by the Company
was approximately $29 million. In July 1996, InterDigital paid, via offset (see
Note 3) $4.9 million to Siemens which, in turn, committed to provide additional
technical assistance to the Company. Samsung will also be obligated to provide
engineering manpower, to the alliance for the development of the Company's
B-CDMA technology. IPC recognized $14 million of revenue in the first quarter of
1996 as part of the Samsung agreement that represented the patent license
portion of the agreement.
F-13
<PAGE>
INTERDIGITAL PATENTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Information as of December 31, 1994 and June 30, 1996, for the years
ended December 31, 1993 and 1994 and for the six months
ended June 30, 1995 and June 30, 1996 is unaudited)
5. MAJOR CUSTOMERS AND GEOGRAPHIC DATA:
Licensing Revenue:
ITC has granted non-exclusive, non-transferable, perpetual, worldwide,
royalty-bearing licenses to use certain TDMA patents (and in certain instances,
technology) to Hughes Network Systems, AT&T, Siemens (see Note 3), Matsushita,
Sanyo, Pacific Communications Systems, Mitsubishi, Hitachi, Kokusai, OKI
Electric Industry Company and Samsung (see Note 4). The licenses typically
contain "most favored nations" provisions, applied on a going forward basis
only, and other provisions which could, in certain events, cause the licensee's
obligation to pay royalties to ITC to be suspended for an indefinite period,
with or without the accrual of the royalty obligation.
The Licensing revenues for the six months ended June 30, 1996 contain
$14.0 million from Samsung and $2.4 million from Siemens. The 1995 Licensing
revenues contain $20.1 million from Mitsubishi, $10.2 million for Siemens and
$26.9 million from NEC. The 1994 licensing revenues contain $20.0 million from
Matsushita. Additionally, in 1994, ITC also entered into a CDMA license
agreement with Qualcomm Incorporated to settle litigation filed in 1993. In
return for one-time payment of $5.5 million, ITC granted to Qualcomm a
fully-paid, royalty free, worldwide license to use and sublicense ITC's existing
CDMA patents and certain future CDMA patents to make and sell products for
IS-95-type wireless applications, including, but not limited to, cellular, PCS,
wireless local loop and satellite applications. Qualcomm has the right to
sublicense ITC's CDMA patents so that Qualcomm's licensees will be free to
manufacture and sell IS-95-type CDMA products without requiring any payment to
ITC.
6. INCOME TAXES:
As of January 1, 1994, InterDigital Communications Corporation entered
into an income tax sharing agreement with all of its subsidiaries, including IPC
and ITC. This agreement allowed for the allocation of the federal income tax
liability to be shared amongst the companies included in the consolidated
federal income tax return. The agreement requires reimbursement from the
subsidiary for use of any Net Operating Loss ("NOL") that it generated and was
used in the consolidated return.
Income tax provisions (benefit) consists of the following:
For the Year Ended Six Months Ended
December 31, June 30,
--------------------------- -----------------
1993 1994 1995 1995 1996
------- ------ ------- ------- -------
Federal $(1,193) $5,455 $17,748 $16,399 $3,255
State 40 133 167 79 118
Foreign Withholding -- 900 2,408 2,408 2,310
------- ------ ------- ------- ------
$(1,153) $6,488 $20,323 $18,886 $5,683
======= ====== ======= ======= ======
F-14
<PAGE>
INTERDIGITAL PATENTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Information as of December 31, 1994 and June 30, 1996, for the years
ended December 31, 1993 and 1994 and for the six months
ended June 30, 1995 and June 30, 1996 is unaudited)
IPC's income tax provision has been calculated on a separate company
basis using the applicable Federal and state rules and regulations. IPC's
current Federal income tax provision is calculated based on book income or loss
and is paid on a current basis to InterDigital. IPC paid Federal taxes to
InterDigital of $20.8 million in December 1995 and $1.7 million in January 1996.
As of December 31, 1994 and 1995 and June 30, 1996, IPC had Federal income taxes
of $4.8 million, $1.7 million and $2.0 million, respectively, payable to
InterDigital, which are included in the Intercompany Due to InterDigital account
on the accompanying balance sheets.
7. BONUS INCENTIVE PLAN:
Three IPC employees were eligible to receive compensation under an IPC
Executive Bonus Plan ("Plan"). Bonus payments under the Plan were tied to the
profitability of IPC and the awarding of points, both of which were
prerequisites in order to qualify for bonus payments. The Plan was terminated in
1995.
As of June 30, 1996, two of the three employees have received their
bonus payments and have agreed that such amounts represent a final settlement
under the Plan. The third employee has received a partial bonus payment, but is
currently litigating the adequacy of such bonus and the propriety of terminating
the Plan. IPC has fully reserved the maximum amount payable under the Plan and
expects that the final resolution will not materially affect IPC's financial
position or results of operation.
During 1994 and 1995, the Company accrued approximately $750,000 and
$2.0 million to reserve for the maximum potential payments under the Plan.
8. EMPLOYEE STOCK OPTION AGREEMENT:
As part of the settlement of IPC's former president's employment
agreement, the grant of a five year option to purchase 262,625 shares of common
stock of IPC at an exercise price of $.01 per share (the "Option") was
confirmed. In addition, the former president has the right to participate
ratably in any buy-out of IPC in which InterDigital participates which has the
effect of reducing the number or percentage of IPC shares not owned by
InterDigital and the right to require IPC to purchase the stock issued or
issuable upon exercise of the Option for approximately one million dollars at
any time on or before June 30, 1998 if such shares are not purchased from him or
exchanged for shares of InterDigital prior to December 31, 1996. Pursuant to the
settlement agreement, the former president has agreed to exercise the Option
prior to the completion of the Merger as to which this Registration Statement
relates.
9. LITIGATION:
In September 1993, ITC filed a patent infringement action against
Ericsson GE Mobile Communications, Inc. ("Ericsson GE"), its Swedish parent,
Telefonaktieboleget LM Ericsson ("LM Ericsson") and Ericsson Radio Systems, Inc.
("Ericsson Radio"), in the United States District Court for the Eastern District
of Virginia (Civil Action No. 93-1158-A (E.D.Va.)). 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 an injunction against Ericsson from further
infringement and seeks damages, royalties, costs and
F-15
<PAGE>
INTERDIGITAL PATENTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Information as of December 31, 1994 and June 30, 1996, for the years
ended December 31, 1993 and 1994 and for the six months
ended June 30, 1995 and June 30, 1996 is unaudited)
attorneys' fees. Ericsson GE filed an answer to the Virginia action 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 in Virginia, 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.
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 which was
granted by the Court. 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. ITC agreed to the dismissal without prejudice of LM
Ericsson. The Company and ITC intend to vigorously defend the Texas action. At
the request and with the consent of the parties, the District Judge has executed
an order indefinitely extending a stay of the proceedings until April 23, 1996.
At the request and with the consent of the parties, the District Judge entered
an order further extending the stay until the U.S. Court of Appeals for the
Federal Circuit decides the appeals filed in the Motorola litigation.
In October 1993, Motorola, Inc. filed an action against ITC in
the United States District Court for the District of Delaware 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 an answer and
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
ITC patents. ITC also sought an injunction against Motorola from further
infringement and sought damages. 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
that the Motorola products involved in the suit did not infringe ITC's patent
claims at issue in the case and that the 24 patent claims were invalid. ITC
filed a motion requesting that the jury verdict be overturned or, in the
alternative, that a new trial be granted. Motorola filed a motion requesting
attorneys' fees and expenses aggregating between $6 and $7 million. On June 17,
1996, the U.S. District Court for the District of Delaware affirmed that portion
of the jury's verdict dealing with infringement. The U.S. District Court further
sustained the jury's determination of invalidity with respect to 21 of the 24
patent claims, but ruled that three patent claims are valid notwithstanding the
jury's determination. The U.S. District Court denied Motorola's motion for
attorneys' fees and expenses. On June 17, 1996 Motorola filed an appeal from the
ruling by the U.S. District Court for the District of Delaware with the U.S.
Court of Appeals for the Federal Circuit (Appeal No. 96-1408) and on June 21,
1996 the Company filed its appeal (Appeal No. 96-1428). It is anticipated that
the parties will file their appeal briefs during the remainder of 1996 and that
the appeals will be argued and decided within approximately 12 to 18 months
after all of the briefs have been filed. The Company believes that there are
substantial grounds for reversal of the jury's invalidity determination and the
granting of a new trial regarding infringement.
F-16
<PAGE>
INTERDIGITAL PATENTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Information as of December 31, 1994 and June 30, 1996, for the years
ended December 31, 1993 and 1994 and for the six months
ended June 30, 1995 and June 30, 1996 is unaudited)
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. An
appeal has been filed by Philips, Alcatel and Siemens and additional arguments
have been made based upon prior art not previously considered by 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 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 ITC's various patent infringement lawsuits, IPC has
entered into several contingent fee arrangements, principally with outside legal
counsel. Those agreements provided that, in the event of a successful outcome in
any of the various lawsuits, as defined in the agreements, IPC would owe
additional fees to its service providers. The agreements with outside counsel
have been terminated. IPC is currently discussing with its service providers
regarding any compensation that may be due. No provision has been made in the
financial statements for such contingent fee arrangements.
In addition to litigation associated with patent enforcement and
licensing activities and the other litigation described above, IPC and ITC are
parties to certain legal actions arising in the ordinary course of its business.
Based upon information presently available to IPC and ITC, IPC and ITC believe
that the ultimate outcome of these other actions will not materially affect the
Company.
10. RELATED-PARTY TRANSACTIONS:
From January 1993 through December 1994, Great Circle Communications
Ltd. Bda. ("Great Circle") provided consulting services to IPC for which Great
Circle has been remunerated, in the aggregate, $4,000 per month (including
reimbursement of certain out-of-pocket expenses). The President, and a director
of, Great Circle, served as a member of the Board of Directors of the Company
from November 1985 through June 1994 and as a member of the Board of Directors
of IPC from its inception to November 1994.
During the second quarter of 1994, InterDigital borrowed $1,500,000
from IPC pursuant to a promissory note, bearing interest at a rate of 11% per
annum. InterDigital repaid the note during the fourth quarter of 1994.
IPC and InterDigital are parties to a service agreement under which
InterDigital provides certain facilities, administrative and other services to
IPC for which IPC pays $2,000 per month.
See also Notes 3, 4 and 6 concerning license and income tax sharing
transactions with InterDigital.
F-17
<PAGE>
IP ACQUISITION CORP.
BALANCE SHEET
August 6, 1996
(Unaudited)
ASSETS........................................................ $ --
----
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value; 100 authorized,
100 shares issued and outstanding............................ $ 1
Additional Paid-In Capital................................... $ 99
Receivable from InterDigital Communications Corporation...... ($100)
-----
$ --
The accompanying notes are on integral part of this balance sheet.
F-18
<PAGE>
IP ACQUISITION CORP.
NOTES TO BALANCE SHEET
August 6, 1996
(Unaudited)
1. BASIS OF PRESENTATION:
IP Acquisition Corp. ("MergerCo") was incorporated in Delaware on
August 6, 1996 and has been an inactive wholly-owned subsidiary of InterDigital.
MergerCo was established to effectuate the merger discussed below (see Note 2).
2. PLAN OF MERGER:
On August 15, 1996, the respective Boards of Directors of InterDigital
Patents Corporation, an approximately 94% owned subsidiary of InterDigital
("IPC") and InterDigital, each unanimously approved and adopted an Agreement and
Plan of Merger (the "Plan of Merger"), providing for the merger of MergerCo with
and into IPC (the "Merger"), with IPC being the surviving corporation in the
Merger, and the issuance of InterDigital common stock to the holders of IPC
common stock.
At the effective time of the Merger, each outstanding share of IPC
common stock, other than shares of IPC common stock held by InterDigital and any
IPC dissenting stockholders, will be converted into that number of shares of
Common Stock of InterDigital equal to: (i) $7.33 divided by (ii) $8.003, the
average closing price per share of InterDigital Common Stock for the 30 calendar
days ending on the last trading day prior to the date of this Registration
Statement was declared effective by the Securities and Exchange Commission.
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ANNEX I
PLAN OF MERGER
BY AND AMONG
INTERDIGITAL COMMUNICATIONS CORPORATION,
INTERDIGITAL PATENTS CORPORATION
AND
IP ACQUISITION CORP.
Dated as of August 16, 1996
AGREEMENT AND PLAN OF MERGER, dated as of August 16, 1996
("Agreement"), by and among INTERDIGITAL COMMUNICATIONS CORPORATION, a
Pennsylvania corporation ("Parent"), IP ACQUISITION CORP., a Delaware
corporation ("Sub") and a wholly-owned subsidiary of Parent, and INTERDIGITAL
PATENTS CORPORATION, a Delaware corporation (the "Company") and an approximately
94%-owned subsidiary of Parent.
WHEREAS, the respective Boards of Directors of Parent, Sub and the
Company have declared the merger of the Sub into the Company (the "Merger")
pursuant to and subject to the terms and conditions of this Agreement to be in
the best interests of their respective companies and shareholders, have approved
the Merger, and have submitted the Merger to the shareholder of Sub and the
majority shareholder of the Company for their approval;
WHEREAS, the parties intend that the Merger qualify as a reorganization
pursuant to Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code");
NOW THEREFORE, in consideration of the foregoing premises and of the
mutual covenants, representations, warranties and agreements herein contained,
the parties, intending to be legally bound, hereby agree as follows:
1. THE MERGER AND RELATED MATTERS
1.1 The Merger.
(a) Subject to the terms and conditions of this Agreement, a
certificate of ownership and merger (the "Delaware Certificate of Merger")
acknowledged by Sub and the Company in accordance with the Delaware General
Corporation Law (the "DGCL") and, at the time of the Closing (as defined in
Section 1.9 hereof), shall be filed. The Merger shall become effective upon the
filing of the Delaware Certificate of Merger with the Secretary of State of the
State of Delaware in accordance with the provisions and requirements of the
DGCL, or at such other time as may be set forth, by mutual agreement of the
parties, in the Delaware Certificate of Merger. The date and time when the
Merger shall become effective is hereinafter referred to as the "Effective
Time."
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(b) At the Effective Time, the Sub shall be merged with and
into the Company and the separate corporate existence of the Sub shall cease,
and the Company shall continue as the surviving corporation under the laws of
the State of Delaware under the name of InterDigital Patents Corporation (the
"Surviving Corporation"). The Surviving Corporation shall have all the rights,
privileges, immunities and powers and be subject to all the duties and
liabilities granted or imposed by the DGCL. The Surviving Corporation shall also
thereupon and thereafter possess all the rights, privileges, immunities, powers
and franchises, of a public as well as of a private nature, of the Company and
the Sub; and all property, real, personal and mixed, and all debts due on
whatever account and all other choses in action and all and every other interest
of, or belonging to or due to, Company or the Sub, shall be deemed to be
transferred to and vested in such Surviving Corporation without further act or
deed; and the title to any real estate, or any interest therein, vested in
either of the merged companies shall not revert or in any way be impaired by
reason of such Merger. The Surviving Corporation shall thereafter be responsible
and liable for all of the liabilities and obligations of Company and the Sub;
any claim existing or action or proceeding pending by or against either of the
merged companies may be prosecuted to judgement as if such Merger had not taken
place, or the Surviving Corporation may be substituted in the place of Company.
Neither the rights of the creditors nor any liens upon the property of the
Company or Sub shall be impaired by such Merger but such liens shall be limited
to the property upon which they were liens immediately prior to the Effective
Date.
(c) From and after the Effective Time, the Merger shall have
the effects set forth in Section 259 of the DGCL.
1.2 Conversion of Stock.
(a) At the Effective Time, each share of Common Stock, $.001
par value, of the Company (the "Company Common Stock") then issued and
outstanding (other than (i) any shares of Company Common Stock which are held by
any subsidiary of the Company or in the treasury of the Company, or which are
held, directly or indirectly, by Parent or any subsidiary of Parent (including
Sub), all of which shall be canceled and none of which shall receive any payment
with respect thereto, and (ii) shares of Company Common Stock held by Dissenting
Shareholders (as defined in Section 1.3 hereof) shall, by virtue of the Merger
and without any action on the part of the holder thereof, be converted into and
represent the Per Share Merger Consideration (as defined in paragraph (b)
below); and each issued and outstanding share of common stock of Sub, $.01 par
value, shall be converted into and represent an issued and outstanding share of
common stock of the Surviving Corporation.
(b) As used herein, the term "Per Share Merger Consideration"
shall mean that number of shares (the "Conversion Number") of common stock, par
value $.01 per share, of Parent (the "Parent Stock") equal to (i) $7.33 divided
by (ii) the Average Closing Price of a share of Parent Stock (as defined in
Section 1.2(c) below). In the event that prior to the Effective Time the
outstanding shares of Parent Stock shall have been increased, decreased or
changed into or exchanged for a different number or kind of shares or securities
by reorganization, recapitalization, reclassification, stock dividend, stock
split or other like changes in Parent's capitalization, all without Parent
receiving adequate consideration therefor, then an appropriate and proportionate
adjustment shall be made in the Conversion Number and in the number and kind of
shares of Parent Stock to be thereafter delivered pursuant to this Agreement.
(c) Notwithstanding the foregoing, no fractional shares of
Parent Stock shall be issued to holders of Company Common Stock. In lieu
thereof, each holder of shares of Company Common Stock who would otherwise have
been entitled to receive a fraction of a share of Parent Stock (after taking
into account all certificates delivered by such holder at any one time) shall
receive an amount in cash equal to such fraction of a share of Parent Stock,
multiplied by the Average Closing Price of a share of Parent Stock. "Average
Closing Price of a share of Parent Stock" means the average of the closing price
per share of Parent Stock, as reported by the American Stock Exchange (as
reported by The Wall Street Journal or, if not reported thereby, by another
authoritative source), for the 30 calendar days ending on the last trading date
prior to the date the Registration Statement is declared effective by the SEC.
(d) The shares of the Parent Stock issued and outstanding
immediately prior to the Effective Time shall remain outstanding and unchanged
after the Merger.
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1.3 Dissenting Shareholders. Notwithstanding anything in this Agreement
to the contrary but only to the extent required by Section 262 of the DGCL,
shares of Company Common Stock that are issued and outstanding immediately prior
to the Effective Time and are held by holders who comply with all the provisions
of Delaware law concerning the right of holders of Company Common Stock to
dissent from the Merger and require appraisal of their shares of Company Common
Stock ("Dissenting Shareholders") shall not be converted into the Per Share
Merger Consideration but, instead, shall become the right to receive such
consideration as may be determined to be due such Dissenting Shareholders
pursuant to Delaware law; provided, however, that shares of Company Common Stock
outstanding immediately prior to the Effective Time and held by a Dissenting
Shareholder who shall, after the Effective Time, withdraw his or her demand for
appraisal or lose his or her right of appraisal, in either case pursuant to the
DGCL, shall thereupon be deemed to have been converted, as of the Effective
Time, into the Per Share Merger Consideration, without interest. The Company
shall give Parent (i) prompt notice of any written demands for appraisal,
withdrawals of demands for appraisal and any other related instruments received
by the Company, and (ii) the opportunity to direct all negotiations and
proceedings with respect to demands for appraisal under Delaware law. All
payments shall be made solely from funds of the Company. Except with the prior
written consent of Parent, the Company will not voluntarily make any payment
with respect to any demands for appraisal and will not settle or offer to settle
any demand.
1.4 Exchange Procedures.
(a) At and after the Effective Time, certificates previously
representing shares of Company Common Stock, taking into account all
certificates of a holder of Company Common Stock delivered by such holder at any
one time (taken together, a "Certificate"), shall represent (i) the number of
whole shares of Parent Stock (determined pursuant to Section 1.2 hereof) and
(ii) the right, if any, to receive cash in lieu of fractional shares into which
such Company Common Stock has been converted (determined pursuant to Section 1.2
hereof). Certificates previously representing shares of Company Common Stock
shall be exchanged for certificates representing whole shares of Parent Stock
and cash in lieu of fractional shares issued in consideration therefor upon the
surrender of such Certificates in accordance with this Section 1.4 without any
interest thereon.
(b) As of the Effective Time, for the benefit of the holders
of shares of Company Common Stock, Parent shall reserve, or shall cause to be
reserved for exchange in accordance with this Section 1.4, certificates
representing the shares of Parent Stock and the Parent shall cause to be
reserved cash in lieu of fractional shares (such cash and certificates for
shares of Parent Stock, together with any dividends or distributions with
respect thereto, being hereinafter referred to as the "Exchange Fund") issued
pursuant to Section 1.2 and to be paid pursuant to this Section 1.4 in exchange
for outstanding shares of Company Common Stock.
(c) Promptly after the Effective Time, Parent shall mail to
each holder of record of Certificates the following: (i) a letter of transmittal
specifying that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Parent,
which shall be in a form and contain any other provisions as Parent and the
Surviving Corporation may reasonably agree and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for certificates
representing shares of Parent Stock and cash in lieu of fractional shares. Upon
the proper surrender of a Certificate to Parent, together with a properly
completed and duly executed letter of transmittal, the holder of such
Certificate shall be entitled to receive in exchange therefor (x) a certificate
representing that number of whole shares of Parent Stock and (y) a check
representing the amount of cash in lieu of any fractional shares and unpaid
dividends and distributions, if any, which such holder has the right to receive
in respect of the Certificate surrendered pursuant to the provisions of Section
1.2, and the Certificate so surrendered shall forthwith be canceled. No interest
will be paid or accrued on the cash in lieu of fractional shares or on unpaid
dividends and distributions, if any, payable to holders of Certificates. In the
event of a transfer of ownership of any shares of the Company Common Stock not
registered in the transfer records of the Company, a certificate representing
the proper number of shares of Parent Stock, together with a check for the cash
to be paid in lieu of fractional shares, may be issued to the transferee if the
Certificate representing such Company Common Stock is presented to Parent,
accompanied by documents sufficient (1) to evidence and effect such transfer and
(2) to evidence that all applicable stock transfer taxes, if any, have been
paid.
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(d) Until surrendered in accordance with the provisions of
this Section 1.4, from and after the Effective Time each Certificate shall,
subject to this paragraph (d), be deemed for all purposes to evidence ownership
of the number of shares of Parent Stock into which the shares of Company Common
Stock represented by such Certificate have been changed or converted. Whenever a
dividend or other distribution is declared by Parent on the Parent Stock, the
record date for which is at or after the Effective Time, the declaration shall
include dividends or other distributions on all shares issuable pursuant to this
Agreement; provided that no dividend or other distribution declared or made on
the Parent Stock shall be paid to the holder of any unsurrendered Certificate
with respect to the shares of Parent Stock represented thereby until the holder
of such Certificate shall duly surrender such Certificate in accordance with
this Section 1.4. Following such surrender of any such Certificate, there shall
be paid to the holder of the certificates representing whole shares of Parent
Stock issued in exchange therefor, without interest, (i) at the time of such
surrender, the amount of dividends or other distributions having a record date
on or after the Effective Time theretofore payable with respect to such whole
shares of Parent Stock and not yet paid and (ii) at the appropriate payment
date, the amount of dividends or other distributions having (x) a record date on
or after the Effective Time but prior to surrender and (y) a payment date
subsequent to surrender payable with respect to such whole shares of Parent
Stock.
(e) From and after the Effective Time, there shall be no
transfers on the stock transfer records of the Company of any shares of the
Company Common Stock that were outstanding immediately prior to the Effective
Time. If, after the Effective Time, Certificates are presented to Parent for
transfer, they shall be canceled and exchanged for the shares of Parent Stock
and cash in lieu of fractional shares, if any, deliverable in respect thereof
pursuant to this Agreement in accordance with the procedures set forth in this
Section 1.4.
(f) If outstanding certificates for shares of Company Common
Stock are not surrendered or the payment for them not claimed prior to the date
on which such payments would otherwise escheat to or become the property of any
governmental unit or agency, the unclaimed items shall, to the extent permitted
by abandoned property and any other applicable law, become the property of
Parent, free and clear of all claims or interest of any person previously
entitled to such claims, except that any cash in lieu of fractional shares shall
become the property of the Surviving Corporation. Notwithstanding the foregoing,
neither Parent nor any other person shall be liable to any former holder of
Company Common Stock for any amount delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
(g) In the event any Certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required by
Parent, the posting by such person of a bond in such amount as Parent may direct
as indemnity against any claim that may be made against it with respect to such
Certificate, Parent will issue in exchange for such lost, stolen or destroyed
Certificate the shares of Parent Stock and cash in lieu of fractional shares
deliverable (and unpaid dividends and distributions) in respect thereof pursuant
to this Agreement.
1.5 Options and Warrants. Robert S. Bramson, a former employee of the
Company, was granted an option to purchase 262,625 shares of the Company's
Common Stock, all of which are fully vested (the "Bramson Options"). Mr.
Bramson, the Company and Parent have agreed that Mr. Bramson will fully exercise
such option immediately prior to the Merger. The shares of the Company's Common
Stock issued upon such exercise will be deemed outstanding at the Effective Time
and shall be entitled to the Per Share Merger Consideration. The Company hereby
represents and warrants that there are no other outstanding options, warrants or
other rights to purchase the Company's Common Stock, or other outstanding
securities which are convertible into or exchangeable for the Company's Common
Stock.
1.6 Certificate of Incorporation of the Surviving Corporation. The
Certificate of Incorporation of the Company, as in effect immediately prior to
the Effective Time, shall be the Certificate of Incorporation of the Surviving
Corporation.
1.7 Bylaws of the Surviving Corporation. The Bylaws of the Company, as
in effect immediately prior to the Effective Time, shall be the Bylaws of the
Surviving Corporation until thereafter amended as provided by law.
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1.8 Directors and Officers of the Surviving Corporation. At the
Effective Time, the directors of the Company shall be the directors of the
Surviving Corporation, each of such directors to hold office, subject to the
applicable provisions of the Certificate of Incorporation and Bylaws of the
Surviving Corporation, until the next annual stockholders' meeting of the
Surviving Corporation and until their respective successors shall be duly
elected or appointed and qualified. At the Effective Time, the officers of the
Company shall be the officers of the Surviving Corporation, each of such
officers to hold office, subject to the applicable provisions of the Certificate
of Incorporation and Bylaws of the Surviving Corporation, until their respective
successors shall be duly elected or appointed and qualified.
1.9 Closing. The closing of the Merger (the "Closing") shall take place
at the offices of Pepper, Hamilton & Scheetz, 3000 Two Logan Square,
Philadelphia, Pennsylvania, at 10:00 A.M., local time, on the day which is the
third business day after the day on which the last of the conditions set forth
in Section 5 hereof is fulfilled or waived (subject to applicable law), or at
such other time and place and on such other date as Sub, Parent and the Company
shall mutually agree (the "Closing Date").
2. Representations and Warranties.
2.1 Company Representations. The Company hereby represents and warrants
to the Parent and Sub follows:
(a) Organization. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has all requisite corporate power and authority to own and lease its
property. The Company is duly qualified to transact business as a foreign
corporation in each jurisdiction which would require its qualification.
(b) Capitalization and Subsidiaries. The authorized, issued
and outstanding capital stock of the Company consists of 45,000,000 shares of
Common Stock, of which 23,875,000 shares have been validly issued and
outstanding, fully paid and nonassessable, and 262,625 shares of which have been
reserved for issuance upon exercise of the Bramson Options.
Except InterDigital Technology Corporation ("ITC"), the
Company does not own or control any capital stock or other ownership interest in
any corporation, association, partnership, trust, joint venture or other entity
(each a "Subsidiary"). All shares of capital stock of ITC, which are owned by
the Company, are validly issued and outstanding, fully paid and nonassessable,
and not subject to any lien or encumbrance.
(c) Authorization and Enforceability. The execution, delivery
and performance by the Company of this Agreement and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
requisite action on the part of the Company. This Agreement has been duly
executed and delivered by the Company, enforceable in accordance with its
respective terms, except as enforcement thereof may be limited by fraudulent
conveyance, bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally or by general equitable principles and
except as rights to indemnity and contribution hereunder may be limited by
applicable law, and constitutes a valid and binding obligation of the Company.
The execution, delivery and performance of this Agreement, the execution, filing
and performance of the Delaware Certificate of Merger, and the compliance with
the provisions hereof and thereof by the Company, will not:
(i) violate any provision of law, statute, ordinance,
rule or regulation or any ruling, writ, injunction, order, judgment or decree of
any court, administrative agency or other governmental body to which the Company
or any subsidiary (or their respective properties or assets) is subject;
(ii) conflict with or result in any breach of any of
the terms, conditions or provisions of, or constitute (with due notice or lapse
of time, or both) a default (or give rise to any right of termination,
cancellation or acceleration) under (i) any agreement, document, instrument,
contract, understanding, arrangement, note, indenture,
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mortgage or lease to which the Company is a party, or under which the Company or
any subsidiary or any of their respective properties or assets is bound or
affected, (ii) the certificate of incorporation of the Company, or (iii) the
By-laws of the Company; or
(iii) result in the creation of any lien, security
interest, charge or encumbrance upon any of the properties or assets of the
Company or any subsidiary.
(d) Consents and Approvals. Except for the approval of the
Merger by Parent as the sole shareholder of Sub, no authorization, consent,
approval or other order of, or declaration to or filing with, any governmental
agency or body (other than filings required to be made under applicable federal
and state securities laws) or any other person, entity or association is
required for the valid authorization, execution, delivery and performance by the
Company of this Agreement. The Company has obtained all other consents that are
necessary to permit the consummation by it of the transactions contemplated
hereby and thereby.
(e) Pending Litigation, Proceedings or Investigations. Except
as disclosed in the Parent's filings with the Securities and Exchange Commission
(the "SEC") under the Securities Exchange Act of 1934, as amended (the "SEC
Filings"), there is no suit, action, claim, arbitration, litigation,
administrative or legal or other proceeding, or investigation pending, or, to
the Company's knowledge, threatened, against or related to the Company or any
Sub, whether or not fully covered by insurance which would have a material
adverse effect on the Company or its ability to execute and deliver this
Agreement and consummate the Merger.
2.2 Parent and Sub Representations. Parent and Sub hereby, jointly and
severally, represent and warrant to the Company as follows:
(a) Organization. Parent and Sub are each corporations duly
organized, validly existing and in good standing under the laws of the
respective jurisdictions of incorporation and each have all requisite corporate
power and authority to own and lease its property. Parent and Sub are each duly
qualified to transact business as a foreign corporation in each jurisdiction
which would require its qualification.
(b) Capitalization and Subsidiaries. As of August 8, 1996, the
authorized, issued and outstanding capital stock of the Parent consists of
(i) 75,000,000 shares of Common Stock, of which 46,437,793 shares have been
validly issued and outstanding, fully paid and nonassessable, and (ii)
14,398,600 shares of Preferred Stock par value $.10 purchase, of which
105,000 are issued and outstanding. The authorized, issued and outstanding
capital stock of the Sub consists of 100 shares of Common Stock, all of which
have been validly issued and outstanding and are fully paid and nonassessable.
(c) Authorization and Enforceability. The execution, delivery
and performance by each of Parent and the Sub of this Agreement and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by all requisite action on the part of Parent and the Sub. This
Agreement has been duly executed and delivered by Parent and the Sub and
constitutes a valid and binding obligation of each of the Parent and the Sub
enforceable in accordance with its respective terms, except as enforcement
thereof may be limited by fraudulent conveyance, bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights generally
or by general equitable principles and except as rights to indemnity and
contribution hereunder may be limited by applicable law. The execution, delivery
and performance of this Agreement, the execution, filing and performance of the
Delaware Certificate, and the compliance with the provisions hereof and thereof
by the each of the Parent and the Sub, will not:
(i) violate any provision of law, statute, ordinance,
rule or regulation or any ruling, writ, injunction, order, judgment or decree of
any court, administrative agency or other governmental body to which Parent and
the Sub (or their properties or assets) is subject;
(ii) conflict with or result in any breach of any of
the terms, conditions or provisions of, or constitute (with due notice or lapse
of time, or both) a default (or give rise to any right of termination,
cancellation or acceleration) under (i) any agreement, document, instrument,
contract, understanding, arrangement, note, indenture,
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mortgage or lease to which the Parent or the Sub is a party, or under which the
Parent or the Sub or any of their respective properties or assets is bound or
affected, (ii) the certificate of incorporation of the Parent or the Sub, or
(iii) the By-laws of the Parent or the Sub, or
(iii) result in the creation of any lien, security
interest, charge or encumbrance upon any of the properties or assets of the
Parent or the Sub.
(d) Consents and Approvals. Except for the approval of the
Merger by Parent as the sole shareholder of Sub, no authorization, consent
approval or other order of, or declaration to or filing with, any governmental
agency or body (other than filings required to be made under applicable federal
and state securities laws) or any other person, entity or association is
required for the valid authorization, execution, delivery and performance by
Parent or the Sub of this Agreement. Parent and the Sub have each obtained all
other consents that are necessary to permit the consummation by it of the
transactions contemplated hereby and thereby.
(e) Pending Litigation, Proceedings or Investigations. Except
as disclosed in the SEC Filings, there is no suit, action, claim, arbitration,
litigation, administrative or legal or other proceeding, or investigation
pending, or, to the Parent or Sub's knowledge, threatened, against or related to
the Parent or Sub, whether or not fully covered by insurance which would have a
material adverse effect on the Parent or the Sub, or their respective abilities
to execute and deliver this Agreement and consummate the Merger.
3. Further Assistance. From time to time, as and when required by the Surviving
Corporation or by its successors or assigns, there shall be executed and
delivered on behalf of the Company and the Sub such deeds and other instruments,
and there shall be taken or caused to be taken by all such further and other
action, as shall be appropriate, advisable or necessary in order to vest,
perfect or confirm, or record or otherwise, in the Surviving Corporation the
title to and possession of all property interests, assets, rights, privileges,
immunities, powers, franchises and authority of Sub and the Company, and
otherwise to carry out the purposes of these resolutions. The officers and
directors of the Surviving Corporation are fully authorized in the name and on
behalf of Sub and the Company or otherwise, to take any and all such action and
to execute and deliver any and all such deeds and other instruments.
4. Abandonment and Termination. The Merger may be abandoned and this Plan
terminated by the mutual consent of the Board of Directors of Parent, Sub and
the Company at any time prior to the Effective Date. In the event of the
abandonment and termination of the Merger and this Plan, this Plan shall become
void and have no effect, without any liability on the part of Parent, Sub and
the Company or the stockholders, directors or officers of any of them. In
addition, Parent shall have the right to terminate and abandon the Merger prior
to the Effective Time, which right may be exercised in its sole discretion, if
the Average Closing Price of a share of Parent Stock (as that term is defined
herein) is less than or equal to $5.86 per share (i.e., eighty percent of the
average closing price per share of Parent Common Stock as reported by the
American Stock Exchange for the 30 calendar days immediately prior to August 15,
1996).
5. Covenants.
5.1 Indemnification and Insurance.
(a) Subject to applicable law, the Company will indemnify the
present and former directors, officers, employees and agents of the Company and
its subsidiaries to the extent provided in their respective charters, codes of
regulations or bylaws, by agreement or otherwise in effect on the date hereof,
with respect to any action or omission occurring prior to the Effective Time and
will not amend, reduce or limit rights of indemnity afforded to them or the
ability of the Company to indemnify them, nor hinder, delay or make more
difficult the exercise of such rights of indemnity. For a period of two years
after the Effective Time, Parent shall use its best efforts to cause to be
maintained in effect directors' and officers' liability insurance policies
maintained by or for the benefit of IPC with at least the same dollar policy
limitation as those currently in effect, with respect to matters occurring prior
to the Effective Time.
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(b) The provisions of this Section 5.1 shall be
binding on any successor entity to the Company.
5.2 Registration Statement. As soon as practicable after the date
hereof, the Parent shall prepare and file with the SEC a registration statement
relating to the Parent Stock to be issued in the Merger (the "Registration
Statement"). As soon as practicable following receipt of final comments from the
staff of the SEC on the Registration Statement (or advice that such staff will
not review such filing), Parent shall use its best efforts to have the
Registration Statement declared effective by the SEC and to maintain the
effectiveness of such Registration Statement until completion of the Merger.
Promptly after the effectiveness of the Registration Statement, Parent shall
mail the prospectus forming a part of the Registration Statement to all holders
of Company Common Stock. Parent and the Company shall cooperate with each other
in the preparation of the Registration Statement and shall advise the other in
writing if, at any time prior to the Effective Time, any such party (including
it's officers) shall obtain knowledge of any facts that might make it necessary
or appropriate to amend or supplement the Registration Statement in order to
make the statements contained or incorporated by reference therein not
misleading or to comply with applicable law. Notwithstanding the foregoing, each
party shall be responsible for the information and disclosures which it makes or
incorporates by reference in all regulatory filings and the Registration
Statement.
5.3 Antitakeover Statutes. The Company shall take all steps reasonably
requested by Parent for the purpose of (i) compliance with the requirements of
any state antitakeover law by action of its board of directors or otherwise and
(ii) assistance in any challenge by Parent to the applicability to the Merger of
any state antitakeover law.
5.4 Listing. Parent shall use its best efforts to list on AMEX, upon
official notice of issuance, the Parent Stock to be issued in the Merger.
6. Conditions Precedent to Merger.
6.1 Conditions Precedent to Obligations of Parent, Sub and the Company.
The respective obligations of Parent and Sub, on the one hand, and the Company,
on the other hand, to effect the Merger are subject to the satisfaction or
waiver (subject to applicable law) at or prior to the Effective Time of each of
the following conditions:
(a) Registration Statement. The Registration Statement shall
have become effective in accordance with the provisions of the Securities Act
and no stop order suspending the effectiveness of the Registration Statement
shall have been issued by the SEC and remain in effect.
(b) Injunction. No preliminary or permanent injunction or
other order shall have been issued by any court or by any governmental or
regulatory agency, body or authority which prohibits the consummation of the
Merger and which is in effect at the Effective Time.
(c) Statutes. No statute, rule, regulation, executive order,
decree or order of any kind shall have been enacted, entered, promulgated or
enforced by any court or governmental authority which prohibits the consummation
of the Merger.
(d) AMEX. The Parent Stock, including the shares
issuable in the Merger, shall have been designated for inclusion on AMEX.
(e) Blue Sky Approvals. Parent shall have received all
state securities laws and "Blue Sky" permits and other authorizations necessary
to consummate the transactions contemplated hereby.
(f) Company Fairness Opinion. The Company shall have
received an opinion from Howard, Lawson & Co. to the effect that the Conversion
Number is fair to the Company's shareholders, from a financial point of view,
and such opinion shall not have been withdrawn as of the Effective Time.
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(g) Consent of Stockholders of the Company and Sub.
Parent, as the majority stockholder of the Company and the sole stockholder of
Sub, shall have reviewed, consented to and approved the Merger in accordance
with the applicable provisions of the laws of the state of Delaware.
(h) Tax Opinion. Parent and Company shall have
received an opinion from Pepper, Hamilton & Scheetz that, subject to the
qualifications and other matters set forth therein, the Merger will be treated
as a tax free reorganization within the meaning of Section 368(a) of the
Internal Revenue Code and such opinion shall not have been withdrawn as of the
Effective Date.
(i) Representations and Warranties. The
representations and warranties contained in Sections 2.1 and 2.2 shall be true
and correct at and as of the Effective Time.
7. Miscellaneous.
7.1 Survival. Only those agreements and covenants of the parties that
are applicable in whole or in part after the Effective Time shall survive the
Effective Time. All representations and warranties and other agreements and
covenants shall be deemed to be conditions of this Agreement and shall not
survive the Effective Time.
7.2 Waiver. Prior to the Effective Time, any provision of this
Agreement may be (i) waived by the party benefitted by the provision or by both
parties by a writing executed by an executive officer, or (ii) amended or
modified at any time (including the structure of the transaction) by an
agreement in writing between the parties hereto approved by their respective
boards of directors.
7.3 Entire Agreement; Etc. This Agreement represents the entire
understanding of the parties hereto with reference to the transactions
contemplated hereby and supersedes any and all other oral or written agreements
heretofore or contemporaneously made. All terms and provisions of this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective successors and assigns. Except for the provisions of Section
1.4, nothing in this Agreement is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
7.4 Assignment. This Agreement may not be assigned by any party hereto
without the written consent of the other parties, provided that Parent and Sub
may assign their rights and obligations hereunder to a direct or indirect
wholly-owned subsidiary, but no such assignment shall relieve Parent of its
obligations hereunder.
7.5 Headings. The descriptive headings of the several Articles and
Sections of this Agreement are inserted for convenience only, do not constitute
a part of this Agreement and shall not affect in any way the meaning or
interpretation of this Agreement.
7.6 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original, and all of which
together shall be deemed to be one and the same instrument.
7.7 Applicable Law. This Agreement and the legal relations between the
parties hereto shall be governed by and construed in accordance with the laws of
the State of Delaware, without regard to the conflict of laws rules thereof.
7.8 Severability. If any term, provision, covenant or restriction
contained in this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void, unenforceable or against its regulatory
policy, the remainder
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<PAGE>
of the terms, provisions, covenants and restrictions contained in this Agreement
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated.
IN WITNESS WHEREOF, the parties hereto, intending to be
legally bound hereby, have caused this Agreement to be executed as of this day
and year first above written.
INTERDIGITAL COMMUNICATIONS CORPORATION
By: /s/ William A. Doyle
-----------------------------------------
Name: William A. Doyle
Title: President
INTERDIGITAL PATENTS CORPORATION
By: /s/ D. Ridgely Bolgiano
-----------------------------------------
Name: D. Ridgely Bolgiano
Title: Executive Vice President
IP ACQUISITION CORP.
By: /s/ William A. Doyle
-----------------------------------------
Name: William A. Doyle
Title: President
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<PAGE>
ANNEX II
OPINION OF HOWARD, LAWSON & CO.
August 15, 1996
Board of Directors
InterDigital Patents Corporation
781 Third Avenue
King of Prussia, PA 19406
To the Members of the Board of Directors:
InterDigital Patents Corporation, a Delaware corporation, ("IPC") and
InterDigital Communications Corporation, a Pennsylvania corporation,
("InterDigital") have proposed an Agreement and Plan of Merger pursuant to which
a wholly-owned subsidiary of InterDigital will be merged with and into IPC in a
transaction (the "Merger") in which each share of IPC Common Stock not owned by
InterDigital or shareholders dissenting to the Merger will be converted into
that number of shares of the common stock of InterDigital equal to $7.33 (the
"Merger Consideration") divided by the average closing price per share of
InterDigital common stock for the 30 calendar days ending on the last trading
day prior to the date the Registration Statement or form S-4 relating to the
Merger is declared effective by the Securities and Exchange Commission.
You have asked us whether, in our opinion, the Merger Consideration is
fair, from a financial point of view, to IPC's shareholders, excluding
InterDigital.
Materials Reviewed and Activities Conducted
In arriving at our opinion, we reviewed and analyzed materials we
deemed relevant regarding the Merger, including the following:
1. Draft of the Form S-4 Registration Statement dated August
14, 1996, including the draft Agreement and Plan of
Merger;
2. IPC and InterDigital, Confidential Private Placement
Memorandum dated October 1, 1992;
3. InterDigital Annual Reports and Forms 10-K for the fiscal
years ended December 31, 1992, 1993, 1994, and 1995; Form
10-Q for the quarterly periods ended March 31, 1996 and
June 30, 1996;
4. Press releases, SEC filings, and other publicly available
information regarding InterDigital and IPC;
<PAGE>
Board of Directors
InterDigital Patents Corporation
August 15, 1996
Page 2
Materials Reviewed and Activities Conducted
5. InterDigital, 1995 Goals and Budget dated December 14,
1994 and 1996 Forecasted Profit dated April 30, 1996;
6. InterDigital and subsidiaries, internal consolidating
financial statements, 1992, 1993, 1994, and 1995 and for
the six months ended June 30, 1996;
7. Historical prices and trading volume of the common shares
of InterDigital;
8. Information on IPC's patents and patent applications and
litigation regarding those patents;
9. Information on the wireless telecommunications equipment
industry, including market reports, analysts' reports,
and information on companies in the industry; and,
10. Such other information, studies, analyses, inquiries, and
investigations as we deemed appropriate for the purposes
of this opinion.
We also conducted certain other activities we deemed relevant
regarding the Merger, including meetings with certain members of IPC and
InterDigital's senior management to discuss the businesses, operations, assets,
historical financial statements, and future prospects of IPC and InterDigital
including, but not limited to their proprietary technology, development efforts,
patents and patent applications, licensing, alliance and other agreements, the
prospects for the adoption of their technology in various markets, and the
status of litigation regarding IPC's patents.
<PAGE>
Board of Directors
InterDigital Patents Corporation
August 15, 1996
Page 3
Limiting Conditions
In rendering our opinion, we have not independently verified any of the
foregoing information provided to us by IPC and InterDigital (the "Companies")
or publicly available and we have relied on its completeness and accuracy in all
respects. We have not made independent appraisals or evaluations of the assets
of the Companies nor have we contacted any other prospective acquirers of IPC or
any of its assets. We have relied on managements' representations concerning the
Companies and the financial statements provided to us. We have also assumed that
information relating to the prospects of the Companies furnished to us by the
Companies reflects the best currently available estimates and judgments of the
managements of the Companies of the future financial performance of the
Companies and have relied upon the Companies to advise us promptly if any
information previously provided became inaccurate or was required to be updated
during the period of our review. Our opinion is necessarily based upon economic,
market and other conditions, and the information made available to us, as of the
date hereof.
We were not authorized to solicit, and did not solicit, any indications
of interest from any third party with respect to the purchase of all or part of
IPC's business. Upon advice of IPC and its legal and accounting advisors, we
assumed that the proposed merger would be tax free to IPC's shareholders.
Opinion
Based upon and subject to the foregoing, it is our opinion that the
Merger Consideration is fair, from a financial point of view, to IPC's
shareholders, excluding InterDigital.
HOWARD, LAWSON & CO.
<PAGE>
ANNEX III
APPRAISAL RIGHTS STATUTE
(a) Any stockholder of a corporation of this State who holds
shares of stock on the date of the making of a demand pursuant to subsection (d)
of this section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in favor
of the merger or consolidation nor consented thereto in writing pursuant to ss.
228 of this title shall be entitled to an appraisal by the Court of Chancery of
the fair value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a non-stock corporation; the words "stock" and "share"
mean and include what is ordinarily meant by those words and also membership or
membership interest of a member of a non-stock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any
class or series of stock of a constituent corporation in a merger or
consolidation to be effected pursuant to ss. 251 (other than a merger effected
pursuant to subsection (g) of ss. 251), ss. 252, ss. 254, ss. 257, ss. 258, ss.
263 or ss. 264 of this title:
(1) Provided, however, that no appraisal rights under
this section shall be available for the shares of any class or series of stock,
which stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or consolidation,
were either (i) listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or (ii) held of record by more
than 2,000 holders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent corporation surviving a
merger if the merger did not require for its approval the vote of the
stockholders of the surviving corporation as provided in subsection (f) of ss.
251 of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the shares of any
class or series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant to
ss.ss. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for such
stock anything except:
a. Shares of stock of the corporation surviving or
resulting from such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or
depository receipts in respect thereof, which shares of stock or depository
receipts at the effective date of the merger or consolidation will be either
listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock,
depository receipts and cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a., b. and c. of
this paragraph.
(3) In the event all of the stock of a subsidiary
Delaware corporation party to a merger effected under ss. 253 of this title is
not owned by the parent corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary Delaware corporation.
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(c) Any corporation may provide in its certificate of
incorporation that appraisal rights under this section shall be available for
the shares of any class or series of its stock as a result of an amendment to
its certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or substantially all
of the assets of the corporation. If the certificate of incorporation contains
such a provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which
appraisal rights are provided under this section is to be submitted for approval
at a meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the record
date for such meeting with respect to shares for which appraisal rights are
available pursuant to subsection (b) or (c) hereof that appraisal rights are
available for any or all of the shares of the constituent corporations, and
shall include in such notice a copy of this section. Each stockholder electing
to demand the appraisal of his shares shall deliver to the corporation, before
the taking of the vote on the merger or consolidation, a written demand for
appraisal of his shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of his shares. A proxy or vote against
the merger or consolidation shall not constitute such a demand. A stockholder
electing to take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved
pursuant to ss.228 or ss.253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of stock of
such constituent corporation who are entitled to appraisal rights of the
approval of the merger or consolidation and that appraisal rights are available
for any or all shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this section; provided
that, if the notice is given on or after the effective date of the merger or
consolidation, such notice shall be given by the surviving or resulting
corporation to all such holders of any class or series of stock of a constituent
corporation that are entitled to appraisal rights. Such notice may, and, if
given on or after the effective date of the merger or consolidation, shall, also
notify such stockholders of the effective date of the merger or consolidation.
Any stockholder entitled to appraisal rights may, within twenty days after the
date of mailing of such notice, demand in writing from the surviving or
resulting corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger of consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall be not more than 10 days prior to the
date the notice is given; provided that, if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock
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of all such stockholders. Notwithstanding the foregoing, at any time within 60
days after the effective date of the merger or consolidation, any stockholder
shall have the right to withdraw his demand for appraisal and to accept the
terms offered upon the merger or consolidation. Within 120 days after the
effective date of the merger or consolidation, any stockholder who has complied
with the requirements of subsections (a) and (d) hereof, upon written request,
shall be entitled to receive from the corporation surviving the merger or
resulting from the consolidation a statement setting forth the aggregate number
of shares not voted in favor of the merger or consolidation and with respect to
which demands for appraisal have been received and the aggregate number of
holders of such shares. Such written statement shall be mailed to the
stockholder within 10 days after his written request for such a statement is
received by the surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal under subsection
(d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder,
service of a copy thereof shall be made upon the surviving or resulting
corporation, which shall within 20 days after such service file in the office of
the Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded payment
for their shares and with whom agreements as to the value of their shares have
not been reached by the surviving or resulting corporation. If the petition
shall be filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine
the stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders who have
demanded an appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the Register in Chancery
for notation thereon of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Court may dismiss the
proceedings as to such stockholder.
(h) After determining the stockholders entitled to an
appraisal, the Court shall appraise the shares, determining their fair value
exclusive of any element of value arising from the accomplishment or expectation
of the merger or consolidation, together with a fair rate of interest, if any,
to be paid upon the amount determined to be the fair value. In determining such
fair value, the Court shall take into account all relevant factors. In
determining the fair rate of interest, the Court may consider all relevant
factors, including the rate of interest which the surviving or resulting
corporation would have had to pay to borrow money during the pendency of the
proceeding. Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted his certificates of stock to the Register
in Chancery, if such is required, may participate fully in all proceedings until
it is finally determined that he is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of
the shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple or
compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and the
case of holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree may
be enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this State or of any
state.
(j) The costs of the proceeding may be determined by the Court
and taxed upon the parties as the Court deems equitable in the circumstances.
Upon application of a stockholder, the Court may order all or
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a portion of the expenses incurred by any stockholder in connection with the
appraisal proceeding, including, without limitation, reasonable attorney's fees
and the fees and expenses of experts, to be charged pro rata against the value
of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded his appraisal rights as provided
in subsection (d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the stock
(except dividends or other distributions payable to stockholders of record at a
date which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal of
his demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to
which the shares of such objecting stockholders would have been converted had
they assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation.
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