UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _________
-------------------------------
Commission File Number 1-11152
INTERDIGITAL COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1882087
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
781 Third Avenue, King of Prussia, PA 19406
-------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (610) 878-7800
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No _____
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $.01 per share 48,023,324 shares
- -------------------------------------- -------------------------------
Class Outstanding at October 24, 1996
<PAGE>
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------
INDEX
-----
PAGES
-----
Part I - Financial Information:
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - 3
December 31, 1995 and September 30, 1996 (unaudited)
Consolidated Statements of Operations 4
Three and Nine Months Ended September 30, 1995 and 1996 (unaudited)
Consolidated Statements of Cash Flows - 5
Nine Months Ended September 30, 1995 and 1996 (unaudited)
Notes to Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-22
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K 23
<PAGE>
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
ASSETS 1995 1996
- ------ ------------ -------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents, including restricted
cash of $1,200 and $542 respectively $ 9,427 $ 16,011
Short term investments 55,060 51,421
License fees receivable 400 702
Accounts receivable, net of allowance for
uncollectable accounts of $340 and $389, respectively 2,757 11,946
Inventories 4,853 8,581
Other current assets 1,474 4,037
--------- ---------
Total current assets 73,971 92,698
--------- ---------
Property, plant and equipment, net of accumulated
depreciation of $5,969 and $7,474, respectively 4,452 10,794
Patents, net of accumulated amortization of
$3,456 and $3,843, respectively 2,405 9,622
Other 2,339 4,235
--------- ---------
$ 83,167 $ 117,349
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt $ 430 $ 589
Accounts payable 4,313 9,320
Accrued compensation and related expenses 4,335 3,326
Purchase commitment reserve 855 447
Distributor commission 196 1,043
Accrued warranty 625 1,251
Deferred revenue 1,597 6,622
Income and foreign withholding taxes payable 653 571
Other accrued expenses 1,959 1,732
--------- ---------
Total current liabilities 14,963 24,901
--------- ---------
LONG TERM DEBT 631 3,126
--------- ---------
LONG TERM PORTION OF DEFERRED REVENUE -- 8,362
--------- ---------
OTHER LONG TERM LIABILITIES 1,323 758
--------- ---------
MINORITY INTEREST 3,810 --
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 3)
SHAREHOLDERS' EQUITY:
Preferred Stock, $ .10 par value, 14,399 shares authorized,
$2.50 Convertible Preferred, 113 shares and 103 shares
issued and outstanding 11 10
Common Stock, $.01 par value, 75,000 shares authorized,
44,424 shares and 47,985 shares issued and
outstanding 444 480
Additional paid-in capital 212,310 233,798
Accumulated deficit (150,325) (154,086)
--------- ---------
Total shareholders' equity 62,440 80,202
--------- ---------
$ 83,167 $ 117,349
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- ----------------------
1995 1996 1995 1996
-------- -------- -------- -------
<S> <C> <C> <C> <C>
REVENUES:
UltraPhone $ 1,629 $ 7,522 $ 13,085 14,356
Licensing and Alliance 4,000 1,868 66,093 26,575
Contract Services 212 -- 657 --
-------- -------- -------- -------
5,841 9,390 79,835 40,931
-------- -------- -------- -------
OPERATING EXPENSES:
Cost of UltraPhone revenues 3,794 8,755 15,523 16,652
Contract service costs 242 -- 754 --
Sales and marketing 723 1,216 2,791 3,132
General and administrative 2,575 2,627 11,144 8,080
Product development costs 2,532 5,888 6,386 15,054
-------- -------- -------- -------
9,866 18,486 36,598 42,918
-------- -------- -------- -------
Income (loss) from operations (4,025) (9,096) 43,237 (1,987)
OTHER INCOME (EXPENSE):
Interest income 916 892 2,140 2,963
Interest and financing expenses (14) (55) (623) (132)
-------- -------- -------- -------
Income (loss) before income taxes and
minority interest (3,123) (8,259) 44,754 844
INCOME TAX PROVISION 113 (14) (3,195) (3,519)
-------- -------- -------- -------
Income (loss) before minority interest (3,010) (8,273) 41,559 (2,675)
MINORITY INTEREST (246) 1 (4,022) (890)
-------- -------- -------- -------
Net income (loss) (3,256) (8,271) 37,537 (3,565)
PREFERRED STOCK DIVIDENDS (66) (64) (200) (196)
-------- -------- -------- -------
NET INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS $ (3,322) $ (8,336) $ 37,337 (3,761)
======== ======== ======== =======
NET INCOME (LOSS) PER COMMON SHARE $ (0.07) $ (0.18) $ 0.81 (0.08)
======== ======== ======== =======
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 44,287 46,709 46,333 45,922
======== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the nine months ended September 30,
---------------------------------------
1995 1996
-------- ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 37,537 $ (3,565)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities-
Minority interest in subsidiary 4,063 890
Depreciation and amortization 1,304 2,179
Other (57) (145)
Decrease (increase) in assets-
Receivables 20,442 (9,491)
Inventories 601 (3,728)
Other current assets (207) (2,563)
Increase (decrease) in liabilities-
Accounts payable (6,645) 5,007
Due to Hughes Network Systems, Inc (7,003) --
Accrued compensation 1,775 (1,009)
Deferred revenue 2,856 12,822
Other accrued expenses (1,497) 756
-------- ---------
Net cash provided by operating activities $ 53,169 $ 1,153
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in short-term investments $(57,660) $ 3,639
Additions to property and equipment, net of non-cash additions
of $100 and $3,106, respectively (1,156) (4,746)
Additions to patents (331) (429)
Other non-current assets (1,029) (2,178)
-------- ---------
Net cash used for investing activities (60,176) (3,714)
-------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sales of Common Stock
and exercises of stock options and warrants 12,810 9,597
Payments on long-term debt, including capital lease obligations (178) (452)
-------- ---------
Net cash provided by financing activities 12,632 9,145
-------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,625 6,584
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,889 9,427
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,514 $ 16,011
======== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 16 $ 128
======== =========
Income taxes paid, excluding foreign witholding taxes $ 1,850 $ 389
======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
1. BACKGROUND:
InterDigital Communications Corporation ("IDC"), a public corporation
incorporated in the state of Pennsylvania, and its subsidiaries (collectively
with IDC, "InterDigital" or the "Company"), develop and market advanced digital
wireless telecommunications systems and technology. The Company's objective is
to become a significant global supplier of digital wireless communications
technology and systems based on its proprietary Time Division Multiple Access
("TDMA") and Broadband Code Division Multiple Access ("B-CDMA(TM)")
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 of the three 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 product 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 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 B-CDMA-based wireless Personal Communications Service ("PCS")
applications which the Company intends to promote as True PCS(TM). To date, the
Company has formed two such broad business alliances, with Siemens
Aktiengesellschaft ("Siemens") and Samsung Electronics Co., Ltd. ("Samsung").
(See Notes 5 and 6.)
Historically, the Company's principal product has been the UltraPhone
system, a radio telephone system providing business and households access to
basic telephone service through a wireless local loop. Since 1987, the Company
has sold over 270 UltraPhone systems worldwide, with aggregate UltraPhone
telephone system revenues totaling over $151 million. UltraPhone product
revenues accounted for approximately 20% of the total revenues of the Company
during 1995 and approximately 35% of revenues for the nine month period ended
September 30, 1996.
In addition to its UltraPhone telephone system business, the Company,
through InterDigital Technology Corporation ("ITC"), is seeking to capitalize
upon the revenue potential of its extensive TDMA and CDMA patent portfolio. ITC
implemented a strategy during 1993 of negotiation and litigation with certain
entities which it believed were infringing the Company's patents. These efforts
have resulted in patent license agreements with twelve entities as of October
24, 1996, the recognition of $28.7 million, $67.7 million and $26.6 million of
licensing and alliance revenue in fiscal 1994, 1995 and the nine month period
ended September 30, 1996, respectively, and the initiation of litigation with
major telecommunications companies.
Operations of the Company are subject to certain risks and uncertainties,
including, but not limited to, the achievement of its goals and objectives,
uncertainties related to intellectual property rights, the acceptance by
customers of the Company's technology, the development and commercialization of
new products, uncertainty and volatility of future profitability and access to
capital and dependence on alliance arrangements and key personnel.
6
<PAGE>
2. BASIS OF PRESENTATION:
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal,
recurring adjustments) necessary to present fairly the Company's financial
position as of September 30, 1996 and the results of their operations for the
three and nine month periods ended September 30, 1995 and 1996 and cash flows
for the nine month periods ended September 30, 1995 and 1996. The accompanying
unaudited consolidated financial statements have been prepared in accordance
with the instructions for Form 10-Q and accordingly do not include all of the
detailed schedules, information and notes necessary for a fair presentation of
financial condition, results of operations and cash flows in conformity with
generally accepted accounting principles. Therefore, these financial statements
should be read in conjunction with the financial statements and notes thereto
contained in the Company's latest annual report on Form 10-K filed with the
Securities and Exchange Commission. The results of operations for interim
periods are not necessarily indicative of the results to be expected for the
entire year.
The 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.
The Statement of Cash Flows for the nine months ended September 30, 1995
has been restated to conform with current period presentation.
3. CONTINGENCIES:
IDC and ITC are variously parties to certain patent-related litigation in
which ITC is asserting that certain third parties infringe ITC's patents. ITC
generally is seeking injunctive relief and monetary damages. The alleged
infringers generally seek declarations that their products do not infringe ITC's
patents. In one such action involving Motorola Inc., ITC has received an adverse
jury verdict and is in the post-trial appeal process. In another action, the
Court has stayed the proceeding, at the request of the parties, pending a
decision by the appeals court on the Motorola case. ITC is also involved in
administrative proceedings in which various parties have challenged the validity
of ITC's patents.
In addition to litigation associated with patent enforcement and licensing
activities and the other litigation described above, the Company is a party to
certain legal actions arising in the ordinary course of its business. Based upon
information presently available to the Company, the Company believes that the
ultimate outcome of these other actions will not materially affect the Company.
7
<PAGE>
4. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
The Company considers investments purchased with an original maturity of
three months or less to be cash equivalents for purposes of the statements of
cash flows. The Company invests its excess cash in various time deposits and
marketable securities, which are included in cash and cash equivalents, as
follows (in thousands):
December 31, September 30,
1995 1996
------- -------
Money market funds and demand deposits $ 2,096 $ 7,975
Certificates of deposit 966 751
Repurchase agreements 3,955 1,313
Commercial paper 2,380 5,972
------- -------
$ 9,427 $16,011
======= =======
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-term
investments available for sale as of September 30, 1996 consisted of $43.4
million in government-issued discount notes and $8.0 million in corporate debt
securities.
5. SIEMENS AGREEMENTS:
On December 16, 1994, the Company entered into a Master Agreement and a
series of four related agreements as elements of an integrated transaction
establishing a broad based marketing and technology alliance with Siemens. These
agreements were amended in February 1996 in connection with the Samsung
alliance. (See Note 6.)
As partial consideration for the rights and licenses granted by the
Company, Siemens agreed to pay $20 million, of which $14.8 million was paid as
of December 31, 1995. In connection with the Samsung alliance, the Company and
Siemens deferred the remaining payments and, in July 1996, offset the majority
of such payments against payments due to Siemens from InterDigital in
conjunction with the Samsung alliance. (See Note 6.)
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. In 1995 the Company recognized $13.6 million of the
revenue under this agreement based on the progress of the completed work. The
remaining $6.4 million of revenue is expected to be recognized through June
1997, the expected date of completion of functional testing at the system
component level.
8
<PAGE>
6. SAMSUNG AGREEMENTS:
On February 9, 1996, the Company 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 royalty prepayments), less applicable withholding taxes.
All payments from Samsung were received by June 30, 1996. In July 1996, the
Company made, via offset (see Note 5) certain payments to Siemens, which in
turn, committed to provide additional technical assistance. The net upfront
amount received by the Company, after giving effect to the receipt of certain
exemptions from Korean Service Withholding Tax granted by the Korean Ministry of
Information and Communications, was approximately $29 million. Samsung is also
obligated to provide engineering manpower for the development of the Company's
B-CDMA technology.
Samsung has received from InterDigital royalty-bearing licenses covering
InterDigital's TDMA and B-CDMA patent portfolio, its UltraPhone and B-CDMA
technologies and is licensed to use certain InterDigital trademarks.
InterDigital and Samsung anticipate that Samsung may manufacture and sell
privately labeled UltraPhone systems and may become a significant UltraPhone
equipment supplier to InterDigital, which would allow InterDigital to take
advantage of Samsung's expertise in low cost, high quality manufacturing.
The Company recognized $14 million as revenue during the first quarter of
1996 representing the non-refundable upfront patent licensing portion of the
agreements. The Company recognized $6 million in the second quarter of 1996
representing the consideration due for the UltraPhone equipment technology
transfer and manufacturing rights portions of the agreements. Also, during the
second and third quarters, the Company recognized approximately $1.5 million of
the net amount retained by the Company relating to the B-CDMA development
portion of the agreement. The balance of the revenue is expected to be
recognized through fiscal 1999, the expected date of completion of the
applicable development effort.
7. MAJOR CUSTOMERS AND GEOGRAPHIC DATA:
UltraPhone Equipment Revenue:
In fiscal 1995, the Company's Indonesian and Russian customers represented
37% and 20%, of UltraPhone product revenues, respectively. During the third
quarter of 1995, the Company's Myanmarian customer and Mexican distributor
accounted for 42% and 12% of UltraPhone product revenues, respectively. During
the third quarter of 1996, the Company's Philippine and Puerto Rican customer
accounted for 77% of UltraPhone product revenues. For the nine months ended
September 30, 1995, the Company's Indonesian and Russian customers accounted for
43% and 25% of UltraPhone product revenues, respectively. For the nine months
ended September 30, 1996, the Company's Philippine and Puerto Rican customers
accounted for 66% and 10% of UltraPhone product revenues, respectively.
UltraPhone product revenues by geographic area are as follows (in
thousands):
Three Months Nine Months
Ended Ended
September 30, September 30,
1995 1996 1995 1996
---- ---- ---- ----
Domestic $ 479 $ 581 $ 1,829 $ 1,521
Foreign 1,150 6,941 11,256 12,835
------ ------- ------- -------
$1,629 $ 7,522 $13,085 $14,356
====== ======= ======= =======
9
<PAGE>
Licensing and Alliance 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 5), Matsushita,
Sanyo, Pacific Communications Systems, Mitsubishi, Hitachi, Kokusai, OKI
Electric Industry Company, and Samsung (see Note 6). 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.
The Licensing and Alliance revenues for the nine months ended September 30,
1996 include $22.3 million from Samsung and $4.0 million from Siemens. During
the nine months ended September 30, 1995, ITC entered into royalty-bearing
license agreements with Pacific Communication Sciences, Sanyo, Mitsubishi,
Hitachi, together with its affiliate Kokusai, and NEC covering patents relating
to the manufacture, use and sale of TDMA-based subscriber units, in certain
instances, and infrastructure equipment. Each of these agreements contains
advance payment obligations pursuant to which ITC received an aggregate of
approximately $54.1 million, which was recognized as revenue during the nine
months ended September 30, 1995. An additional $12.0 million of revenue was
recognized for the nine months ended September 30, 1995 pursuant to the Siemens
agreements.
8. NET INCOME PER COMMON SHARE:
The net income per share is based upon the weighted average common shares
outstanding during the period adjusted for cumulative dividends on $2.50
Preferred Stock. Stock options and warrants have been considered as common stock
equivalents and have been included in the computation for the nine month period
for 1995 since their effect is dilutive. (See Item 6, Exhibit 11 - Computation
of Net Income Per Share.)
9. INVENTORIES:
December 31, September 30,
1995 1996
---- ----
(In thousands)
Component parts and work-in-progress $4,341 $8,097
Finished goods 512 484
------ ------
$4,853 $8,581
====== ======
Inventories are stated net of valuation reserves of $6.9 million and $7.1
million as of December 31, 1995 and September 30, 1996, respectively. In
addition, inventory purchase commitment reserves were $855,000 and
$447,000 as of December 31, 1995 and September 30, 1996, respectively.
10. LONG-TERM DEBT:
During the second quarter of 1996, the Company purchased its King of
Prussia facility for $3.7 million. The Company paid cash of $930,000 and
arranged a 16 year mortgage of $2.8 million with interest payable at a rate of
8.28% per annum. The entire cost of the land and buildings purchased, as well as
the improvements made to the building, have been classified as Land, Building
and Improvements within the property section of the balance sheet. The mortgage
has been classified as long-term debt on the balance sheet, with $88,000
classified as current portion of Long-term Debt.
10
<PAGE>
11. PATENTS CORP. MERGER:
During September 1996, InterDigital completed a merger (the "Merger") of IP
Acquisition Corp., a wholly owned subsidiary of the Company, with and into
Patents Corp., an approximately 94% owned subsidiary of the Company. Immediately
before the merger, IP Acquisition Corp. purchased the shares of Patents Corp.
not owned by the Company (approximately 1,600,000 shares) in exchange for shares
of InterDigital Communications Corp. stock (approximately 1,500,000 shares, with
a then current market value of approximately $12 million). As a result of the
Merger, Patents Corp. became a wholly owned subsidiary of InterDigital,
eliminating the minority shareholder interest.
In conjunction with the Merger, the excess of the fair market value of the
consideration paid over the recorded book value of the minority interest of
approximately $7 million was recorded as a write up of the value of its patents.
This increase in value of the patents will be amortized over the remaining
useful life of the patents.
12. INCOME TAXES:
Effective January 1, 1991, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes".
The income tax provision for the three months ended September 30, 1996
consists of a current state tax provision of $14,000. The income tax
provision for the three months ended September 30, 1995 consisted of a current
foreign withholding tax benefit of $53,000, a current state tax
benefit of $21,000 and a Federal Alternative Minimum Tax benefit of
$39,000. The income tax provision for the nine months ended September 30,
1996, consists of a current foreign withholding tax provision of $3.3 million,
a current state tax provision of $133,000 and a Federal
Alternative Minimum Tax provision of $87,000. The income tax provision for
the nine months ended September 30, 1995 includes a current foreign
withholding tax provision of $2.4 million, a current state provision of $79,000
and a Federal Alternative Minimum Tax provision of $820,000. At December 31,
1995, the Company had net operating loss carryforwards of approximately $102
million. Since realization of the tax benefits associated with these
carryforwards is not assured, a valuation allowance of 100% of the potential tax
benefit is recorded as of September 30, 1996.
Pursuant to the Tax Reform Act of 1986, annual use of the Company's net
operating loss and credit carryforwards may be limited if a cumulative change in
ownership of more than 50% occurs within a three-year period. The annual
limitation is generally equal to the product of (x) the aggregate fair market
value of the Company's stock immediately before the ownership change times (y)
the "long-term tax exempt rate" (within the meaning of Section 382(f) of the
Code) in effect at that time. The Company believes that no ownership change for
purposes of Section 382 occurred up to and including September 30, 1996. The
Company's calculations reflect the adoption of new Treasury Regulations which
became effective on November 4, 1992 and which have beneficial effects regarding
the treatment of options and other aspects of the ownership change calculation.
11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the Selected
Consolidated Financial Data, and the Consolidated Financial Statements and notes
thereto, contained elsewhere in this document.
InterDigital commenced operations in 1972 and until 1987 was primarily
engaged in research and development activities related to its TDMA wireless
digital communications technology. In 1986, the Company introduced the
UltraPhone system, a fixed digital wireless local loop telephone system
employing its patented and proprietary TDMA technology, which it began
installing in 1987. The Company's operations from 1987 through 1992 were
characterized by increasing revenues accompanied by significant operating
losses. During this period, significant costs were incurred related to the
commercialization and continued development of the UltraPhone system,
development of production sources and capacity, and the implementation of a
broad-based sales and marketing effort designed to promote regulatory and market
acceptance of the UltraPhone system. During 1993, 1994 and 1995, UltraPhone
system revenues were significantly lower than in 1992; losses increased
significantly in 1993 and 1994 as a result of the decline in UltraPhone product
revenues and gross margins and other increases in costs, such as the increased
investment in B-CDMA technology research and development, engineering of product
redesigns and enhancements, the increase in litigation costs and the costs
associated with enforcement of ITC's intellectual property rights. During 1994,
the Company began to realize positive results from its efforts to capitalize
upon the revenue potential of its TDMA and CDMA patent portfolio and recognized
$28.7 million of licensing revenue, representing over 57% of total revenues for
1994. During 1995, the Company recognized $67.7 million of licensing and
alliance revenue enabling the Company to report its first profitable fiscal year
since its inception. 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 quarterly operating results was due to the revenue
recognition accorded to the non-refundable payments associated with the license
agreements. Such variability has continued during 1996 and the Company expects
that such variability will continue to 1997 and beyond.
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 of the three 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 product 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 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 B-CDMA-based wireless Personal Communications 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 or alliance partner funding sufficient to
support an increasing level of efforts over several years and, ultimately,
market acceptance of the resultant product.
In December 1994, the Company completed the initial implementation of the
alliance program by entering into an integrated series of agreements with
Siemens Aktiengesellschaft ("Siemens") covering UltraPhone product marketing and
product development, B-CDMA technology development, patent licensing and other
areas of cooperation (See Note 5 to "Notes to Consolidated Financial
Statements"). The Company continued its implementation of the alliance program
when it signed a series of agreements
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with Samsung Electronics Co., Ltd ("Samsung") in February 1996. The agreements
cover B-CDMA technology development, patent licensing, product development,
technology transfer and other areas of cooperation.
To augment its efforts to achieve its goals, the Company has retained
investment banking and other outside resources to investigate acquisition and
other strategies designed to strengthen its competitive position.
ITC, a wholly-owned subsidiary, and the Company, 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 CDMA patented technologies. The Company believes that, through ITC's
patent portfolio, and the Company's TDMA and B-CDMA technology 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 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 October 24, 1996.
Historically through 1994, InterDigital's primary source of revenue was
derived from sales of the UltraPhone digital wireless local loop telephone
system. In recent years, foreign sales have represented a majority of the sales
of UltraPhone systems, and it is anticipated that foreign sales will represent a
majority of UltraPhone system sales for the foreseeable future. UltraPhone
system sales have, on a historical basis, varied significantly from quarter to
quarter due to the concentration of revenues from the Company's largest
customers over a few fiscal quarters. See Note 7 to "Notes to Consolidated
Financial Statements". Additionally, the Company expects that it may continue to
experience significant fluctuations in quarterly and annual revenues and
operating results due to variations in the amount and timing of license and
alliance-related revenue. Accordingly, the Company's cash flow may be expected
to fluctuate significantly for the foreseeable future.
The Company began to experience a significant decline in UltraPhone system
order volume during 1992. Beginning in 1992, competition for sales of wireless
telephone systems intensified as providers of both analog and digital cellular
systems, many of which have significantly greater resources than the Company,
more actively promoted their products for fixed site installations in the
Company's target markets. The Company sought to counter these competitive
pressures by emphasizing the advantages which it believes the UltraPhone system
offers over fixed cellular and other wireless systems, by lowering UltraPhone
system prices, and by offering the UltraPhone system through or in conjunction
with alliance partners. In addition, the Company is continuing to restructure
its sales and marketing efforts to focus on multi-year, large-scale
telecommunications infrastructure programs in which the UltraPhone product would
be positioned as a fundamental component in the rural and near-urban telephone
networks of such programs.
In order to support the flexible pricing generally required in multi-year
programs, the Company introduced a redesigned central office terminal which
expanded base station capacity by over 50% and a significantly lower-priced
cluster unit during the last half of 1994 and introduced a more fully-featured
subscriber unit during the first half of 1996. Reductions in product costs would
be most fully realized in cluster systems and, to a lesser degree, in other
non-cluster configurations in which there is a high ratio of subscriber units to
base stations. The Company has experienced and may continue to experience
engineering and production delays in the introduction of its new subscriber
units and/or other new enhancements or features.
The Company anticipates that it will continuously need to reduce prices and
expand product features due to industry demands which will result in continued
pressure upon gross profit margins until such time as the Company is able to
reduce product costs commensurate with price reductions. More specifically, the
Company has accepted major orders for 1996 and 1997 delivery (see "Backlog"),
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. In
these
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situations, and in any additional situations where the Company elects to accept
similarly margined orders, it would do so because of collateral profit
potential, as next enumerated, or because of other strategic positioning
considerations. The Company believes that any profit potential would primarily
relate to design engineering to reduce product costs, the expected positive
effects on vendor pricing of the increased production volume, change orders
(including post contract systems reconfiguration), post contract add-ons and
systems expansions and servicing, as well as follow on orders. Given the
possibility of engineering delays and difficulties, and the continuing inability
to sell UltraPhone systems with a high cluster utilization, the Company can give
no assurance that it will be able to achieve sufficient product cost reductions
or otherwise achieve satisfactory gross profit margins. In addition, there can
be no assurance that the development costs necessary to achieve such potential
product cost reductions will be acceptable to the Company.
The inability to competitively approach the aggressive pricing from fixed
cellular and other competitors, the significant additional complexities of, and
time required in, competing for large scale programs, as well as the
restructuring of the sales force, have all adversely impacted order volume and
revenues since 1993. Delays in introduction of the new subscriber unit may
further adversely affect order volume and timing of revenue recognition,
including timing of revenue recognition from the two major orders currently in
backlog (see "Backlog"). The Company is continuing to adjust its sales and
marketing strategies by focusing its direct efforts, improving its UltraPhone
system distribution network and pursuing various additional alliance partners.
In addition to the effects of varying selling prices and product materials
costs, the Company's gross profit margin ratios are ordinarily affected by the
relative proportions of direct and distributor sales, by the average number of
subscribers per system sold, by its ability to absorb manufacturing overhead
costs through generation of sufficient production volume, and by the field
service costs for installation, warranty, training and post-sale support.
Consistent with industry practices, distributor commissions have been included
in both revenues and cost of sales. Historically, the Company's gross profit
margin from UltraPhone system sales has been inadequate to support its operating
and other expenses. The low sales volumes experienced in recent years have
resulted in production volumes which were inadequate to fully absorb fixed
production overhead costs, producing negative gross margins.
On March 29, 1995, a trial involving ITC and Motorola, Inc. ended with the
jury's verdict that ITC's patent claims at issue in the case, involving four of
ITC's patents, are not infringed by the Motorola products involved in the case.
On June 17, 1996, the U.S. District Court Judge for the District of Delaware
affirmed that portion of the jury's verdict. The judge further sustained the
jury's invalidity finding as to 21 of the 24 patent claims at issue, but
reversed the jury's invalidity determination as to the three other claims,
finding no support in the record for the jury's determination. Both parties have
appealed the decision. While the Company believes that substantial grounds exist
to overturn the verdict, the ultimate resolution of this matter will likely
occur in the intermediate to long-term. Until there is a final judicial
determination the verdict may adversely affect the Company's level of revenue
and potential cash flow from ITC's patent portfolio and may impair generally the
Company's ability to raise additional funds for general corporate purposes. The
outcome of the jury trial may also temporarily or permanently adversely affect
ITC's pending U.S. litigation against Ericsson and its ability to realize
running royalties or specified installment payments under certain of its license
agreements. In addition, an adverse ruling (as to ITC) on Motorola's appeal on
its motion for attorneys' fees (which motion the U.S. District Court judge
denied) could adversely affect the Company's cash position.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL REQUIREMENTS
The Company had working capital of $67.8 million at September 30, 1996
compared to working capital of $59.0 million at December 31, 1995. The increase
in working capital since December is due primarily to the recognition of license
and alliance revenue from Samsung of $22.3 million and receipt of $9.4 million
from stock option and warrant exercises, offset by operating cash needs of the
Company. The Company had, prior to 1995, experienced liquidity problems due to
its lack of profits sufficient to generate cash at a level necessary to fund its
investment in additional equipment, its UltraPhone technology development, its
patent activities, its B-CDMA technology research and development activities,
and its
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operating losses. Since the fourth quarter of 1994, the Company has
substantially strengthened its cash position due its alliance and licensing
transactions.
Demands on working capital in 1996 and beyond are expected to increase. The
Company expects to significantly increase its B-CDMA technology development
expenditures to commercialize its technology as soon as possible. As the
development effort nears first stage completion, currently anticipated in early
1997, additional expenditures are expected to be incurred for marketing and
other activities and subsequent, substantial additional expenditures will be
required to support later stage development. Engineering efforts required to
support the UltraPhone product are also expected to increase significantly as
the Company continues its efforts to reduce the cost of the UltraPhone product
and increase its market share. Marketing and administrative, and other costs are
expected to increase as well as the Company seeks to more effectively support
its alliance program.
Certain emerging trends associated with product sales could also negatively
impact future working capital, should they occur. The Company has not offered
vendor financing to prospective customers, instead relying on its efforts to
assist prospective customers in obtaining financing from other sources. Should
the Company engage in a vendor financing program (it has no current plans to do
so), such a program would have a material impact on working capital needs. Many
current and prospective customers have required increasingly significant
delivery and performance guarantees of various types, including delay damage
clauses, performance bonds and performance guarantees. The working capital
required to provide such guarantees could be significant for large orders, and
the costs that might be incurred if any such guarantee were called upon could
have a material adverse impact on working capital. In addition, the Company
obtains some component parts from single sources, while other components are
available from multiple sources; changing sources of supply would likely cause a
disruption in supply. Any interruption in the supply of quality components could
have an adverse impact on working capital.
The Company's working capital requirements will depend on numerous
additional factors, including but not limited to the success of the Siemens and
Samsung relationships and the broader alliance strategy, the level of demand and
related margins for the UltraPhone system, the ability to generate license fees
and royalties, and the need to expend funds in connection with its patent
enforcement activities. In addition, when the Company builds to specification to
complete an order, it traditionally experiences negative cash flows from
inception of its production ordering through customer payment at the time of, or
increasingly subsequent to, order shipment. If the Company were to experience
additional sudden and significant increases in orders to be built to
specification, it would intensify the need for significant short to intermediate
term financing arrangements.
Accordingly, the Company may, at some future date subsequent to 1996,
require additional debt or equity capitalization to fully support its technical
and product development and marketing activities and to fund its patent
enforcement activities. The Company does not presently maintain bank lines of
credit and may therefore, in such event, seek to meet such needs through the
sale of debt or equity securities. There can be no assurances that the Company
will be able to sell any such securities, or, if it can, that it can do so on
terms acceptable to the Company.
In August 1996, the Company acquired a fifty (50) percent interest in an
office building located on Long Island, New York for possible use as its primary
location for B-CDMA development. The Company affected the acquisition of the
building through the creation of a New York Limited Liability Company, 60
Crossways, L.L.C., in which the Company holds a 50% interest. A local commercial
real estate owner, developer and building contractor holds the remaining
interest. The limited liability company purchased the building for approximately
$2.0 million. The Company and its partner have agreed to share equally the
acquisition and ownership costs of the limited liability company. The Company is
currently evaluating its short and long term space requirements and reviewing
various options for accommodating such needs.
The Company believes that its investment in inventories and non-current assets
are stated on its December 31, 1995 and September 30, 1996 balance sheets at
realizable values based on expected selling price and order volumes. Property
and equipment are currently being utilized in the Company's on-going business
activities, and the Company believes that no additional write-downs are required
at this time due to lack of
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use or technological obsolescence. With respect to other assets, the Company
believes that the value of its patents is at least equal to the value included
in the December 31, 1995 and September 30, 1996 balance sheets.
Backlog
At September 30, 1996, the Company's backlog of orders for UltraPhone telephone
equipment and services was $92.1 million, which includes the Company's first
order from its Pakistanian customer of $42.9 million, the balance of one order
from the Company's Philippine customer of $8.3 million and another order
from its Indonesian customer for $36.8 million. The Pakistan order is subject to
final commitment of financing and the Indonesian order is subject to completion
of financing documents. Over $15 million of the backlog is expected to be
delivered during the fourth quarter of fiscal year 1996, with the
balance expected to be delivered during fiscal 1997 and the first half of fiscal
1998. At September 30, 1995, the Company's backlog of orders for UltraPhone
telephone equipment and services was $2.3 million.
Changes in Cash Flows and Financial Condition
The Company has experienced positive cash flows from operations during the
nine months ended September 30, 1996. The positive cash flows from operations
are primarily due to the receipt of funds from the Samsung agreement offset by
expenses incurred for UltraPhone production and marketing, B-CDMA technology
development and the Company's general and administrative activities. Licensing
and Alliance revenue for Samsung of $22.3 million was recognized as revenue in
the nine month period ended September 30, 1996. (See Note 6 of the "Notes to
Consolidated Financial Statements".)
Net cash flows from investing activities were negative for the nine months
ended September 30, 1996 due primarily to the Company's purchase of its King of
Prussia, PA. and Long Island, N.Y. facilities, the payment of $2.6 million in
support of the Company's bonding requirements and its investment in property and
equipment. Notwithstanding the above, the amount of cash used in investing
activities has, historically, been low relative to cash used in operations.
During the nine month period ended September 30, 1996, the Company
generated $8.9 million from financing activities. The funds were primarily from
the exercise of stock options and warrants.
Cash, cash equivalents and short-term investments of $67.4 million as of
September 30, 1996 includes $1.1 million of restricted cash. The UltraPhone
accounts receivable of $12.4 million at September 30, 1996 reflect amounts due
from normal trade receivables, including non-domestic open accounts, as well as
funds to be remitted under letters of credit. Of the outstanding trade
receivables as of September 30, 1996, $4.0 million has been collected through
October 24, 1996.
Inventory levels at September 30, 1996 of $8.2 million have increased as
compared to $4.9 million as of December 31, 1995, reflecting the build-up of
inventory for the Indonesian order and the remaining Philippine shipments.
Inventories at December 31, 1995 and September 30, 1996 are both stated net of
valuation reserves of $6.9 million and $7.1 million, respectively.
Included in other accrued expenses at September 30, 1996 are professional
fees, consulting and other accruals as well as sales taxes payable.
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Results of Operations - Third Quarter of 1996 Compared to the Third Quarter of
1995
Total Revenues. Total revenues in the third quarter ended September 30, 1996
increased to $9.4 million from $5.8 million in the third quarter ended
September 30, 1996 primarily due to the increase in UltraPhone product sales.
UltraPhone product sales increased 362% in the third quarter of 1996 to $7.5
million from $1.6 million in the comparable quarter of 1995.
During the third quarter of 1996, the Company recognized $754,000 of
Samsung revenue that related to the UltraPhone B-CDMA technology development
portion of the agreement. The Company also recognized $314,000 of recurring
royalty revenue during the third quarter of 1996 from one of its licensees.
Additionally, the Company recognized revenue of $800,000 as part of the Siemens
series of agreements. During the third quarter of 1995, ITC entered into
royalty-bearing license agreements with one licensee under its patent portfolio
for the manufacture, use and sale of TDMA based subscriber units and
infrastructure equipment. The Company recognized $4.0 million as part of the
Siemens series of agreements during the third quarter of 1995.
The Company had contract revenue of $212,000 related to its U.S. Federal
government and other services contracts for the third quarter in 1995 as
compared to no revenue during the 1996 period. The decrease in revenue is due to
the completion of the remaining contracts for which the Company was obligated.
During the third quarter of 1994, the Company began withdrawing from the
contract services market in order to focus on its other core business
activities.
Cost of UltraPhone Sales. The cost of UltraPhone sales for the third quarter of
1996 increased 131% to $8.8 million from $3.8 million for the third quarter of
1995. The Company had approximately 16% negative gross margin on UltraPhone
system sales for the three months ended September 30, 1996 as compared to a
negative gross margin of 133% for the three month period ended September 30,
1995. Included in cost of UltraPhone system sales are costs of product assembly,
integration and testing, distributor commissions, freight and tariffs, and
expenses associated with installation, support and warranty services related to
the UltraPhone systems. Also included in the cost of sales are the overhead
expenses the Company has incurred in maintaining its production resources that
were not absorbed into inventory due to the low volume of production during the
quarter.
Contract Services Costs. Contract services costs were $242,000 in the three
month period ended September 30, 1995. The Company completed the shutdown of the
facilities and the termination of employees related to the contract services
segment of the business during 1995.
Other Operating Expenses. Other operating expenses include sales and marketing
expenses, general and administrative expenses and research and development
expenses.
Sales and marketing expenses increased 70% to $1.2 million during the third
quarter of 1996 as compared to $723,000 during the third quarter of 1995. The
increase is primarily due to increased staff and activity levels, and included
an increase in commission expense due to the increase in UltraPhone product
revenues in the three month period of 1996.
General and administrative expenses for the third quarter of 1996 increased
2% to $2.63 million from $2.57 million for the third quarter of 1995. The
increase is primarily due to an increase in expenses related to the investment
banking and marketing activities.
Research and development expenses for the third quarter of 1996 increased
132% to $5.9 million as compared to $2.5 million during the third quarter of
1995. Staff and activity levels devoted to the development of the B-CDMA
technology and the development of the Company's fourth generation UltraPhone
product have increased significantly.
Other Income and Expense. Interest income for the third quarter of 1996 was
$892,000 as compared to $916,000 for the third quarter of 1995. The Company had
similar average invested cash balances in both periods. Interest expense for the
three month period ended September 30, 1996 was $55,000 as compared
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to $14,000 for the three month period ended September 30, 1995. The increase is
due primarily to the mortgage interest related to the Company's purchase of its
King of Prussia facilities in the second quarter of 1996.
Minority Interest. In December 1992, the Company sold 5.76% of the common shares
of InterDigital Patents Corporation ("Patents Corp."), which had, prior thereto,
been a wholly-owned subsidiary of the Company. The Company recorded no change in
minority interest in the third quarter of 1996. During the comparable 1995
period, the Company recorded an increase of $246,000 in minority interest
representing the minority interest's portion of the net income of Patents Corp.
for the third quarter of 1995. In September 1996, the Company acquired the
shares of Patents Corp. that it did not currently own and as a result, Patents
Corp. became a wholly-owned subsidiary of InterDigital (See Note 11 to "Notes to
the Consolidated Financial Statements").
Results of Operations - Nine Months Ended September 30, 1996 Compared to Nine
Months Ended September 30, 1995
Total Revenues. Total revenues for the nine months ended September 30, 1996
decreased 49% to $40.9 million from $80.0 million for the nine months ended
September 30, 1995 primarily due to a decrease in the amount of License and
Alliance revenues recognized offset by a small increase in UltraPhone equipment
revenues. License and Alliance revenues for the nine months ended September 30,
1996 includes $22.3 million as part of the Samsung Agreements (see Note 6 of the
Notes to Consolidated Financial Statements) and $4.0 million as part of the
Siemens Agreements (see Note 5 of the Notes to Consolidated Financial
Statements). During the first half of 1995, ITC entered into royalty-bearing
license agreements with Pacific Communication Sciences, Inc., a subsidiary of
Cirrus Logic, Inc., Sanyo Electric Company, Ltd., Mitsubishi Electric
Corporation, Hitachi Ltd. together with its affiliate Kokusai Electric Co., Ltd,
and NEC Corporation under its patent portfolio for the manufacture, use and sale
of TDMA based subscriber units and infrastructure equipment. These agreements
contain advance payment obligations pursuant to which ITC received an aggregate
of approximately $54.1 million, which was recognized as revenue during the first
half of 1995. Additionally, the Company recognized revenue of $12.0 million as
part of the Siemens series of agreements during the 1995 period. UltraPhone
equipment sales increased 10% during the nine months ended September 30, 1996 to
$14.4 million from $13.1 million in the comparable period of 1995.
During the nine months ended September 30, 1995, the Company had $657,000
of contract revenue related to its U.S. Federal government and other services
contracts as compared to no contract services revenue recognized in the 1996
period due to the completion of the remaining contracts for which the Company
was obligated during 1995.
Cost of UltraPhone Sales. The cost of UltraPhone equipment sales for the nine
months ended September 30, 1996 increased 7% to $16.7 million from $15.5 million
for the nine months ended September 30, 1995. The Company incurred a negative
gross margin on UltraPhone equipment sales of 16% for the nine months ended
September 30, 1996 as compared to a negative gross margin of 19% for the nine
month period ended September 30, 1995. Included in cost of UltraPhone equipment
sales are costs of product assembly, integration and testing, distributor
commissions, freight and tariffs, and expenses associated with installation,
support and warranty services related to the UltraPhone systems, as well as the
overhead expenses the Company has incurred in maintaining its production
resources that were not absorbed into inventory due to the low volume of
production. At low production levels, such as those experienced in the first
three quarters of 1996, the Company incurs substantial negative gross profit
margins because production costs are spread over only a limited number of units
of production.
Contract Services Costs. Contract services costs were $754,000 in the nine month
period ended September 30, 1995. There were no contract service costs incurred
during the nine months ended September 30, 1996 as the Company has withdrawn
from this line of business and has completed its obligations on any remaining
contracts.
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Other Operating Expenses. Other operating expenses include sales and marketing
expenses, general and administrative expenses and research and development
expenses.
Sales and marketing expenses increased 13% to $3.1 million during the nine
months ended September 30, 1996 compared to $2.8 million during the nine months
ended September 30, 1995. The increase is primarily due to increased commissions
expense, commensurate with the increase in UltraPhone system revenues.
General and administrative expenses for the nine months ended September 30,
1996 decreased 27% to $8.1 million from $11.1 million for the nine months ended
September 30, 1995. The reduction in general and administrative expense is due
primarily to a decrease in the Company's patent infringement and enforcement
costs of $3.9 million offset partially by higher activity levels. The 1995
period included costs for the Motorola suit as described in the Company's Annual
Report on Form 10-K for 1995.
Research and development expenses increased 136% for the nine months ended
September 30, 1996 to $15.1 million from $6.4 million for the nine months ended
September 30, 1995. The increase over the prior year period is due primarily to
increased staff and activity levels devoted to the development of the B-CDMA
technology and the development of the Company's fourth generation UltraPhone
product released during the first half of 1996.
Other Income and Expense. Interest income for the nine months ended September
30, 1996 was $3.0 million as compared to $2.1 million for the nine months ended
September 30, 1995. The increase is due primarily to greater average invested
cash and investment balances in 1996 compared to 1995. Interest expense for the
nine month period ended September 30, 1996 was $132,000 as compared to $623,000
for the nine month period ended September 30, 1995. The decrease is due
primarily to the settlement of the HNS obligation during the second quarter of
1995, partially offset by increased interest expense related to the King of
Prussia mortgage. Remaining interest is incurred on the Company's capital lease
obligations.
Minority Interest. In December 1992, the Company sold 5.76% of the common shares
of Patents Corp., which had, prior thereto, been a wholly-owned subsidiary of
the Company. The Company recorded $890,000 as an increase in minority interest
in the nine months ended September 30, 1996 representing the minority interest's
portion of the net income of Patents Corp. for the nine months ended September
30, 1996. During the comparable 1995 period, the Company recorded an increase of
$4.0 million in minority interest representing the minority interest's portion
of the net income of Patents Corp. for the nine months ended September 30, 1995.
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Statement Pursuant to The Private Securities Litigation Reform Act of 1995
The foregoing Management's Discussion and Analysis and discussion of the
Company's business contains various statements which are forward-looking
statements. Such forward-looking statements are made pursuant to the "safe
harbor" provisions of Section 21E of the Securities Exchange Act of 1934, as
amended, which were enacted as part of the Private Securities Litigation Reform
Act of 1995.
The Company cautions readers that the following important factors, among others,
in some cases have affected and, in the future, could materially adversely
affect the Company's actual results and cause the Company's actual results to
differ materially from the results expressed in any forward-looking statements
made by, or on behalf of, the Company:
General and specific economic conditions of the Company's customers,
potential customers and the wireless communications industry; reversal of
or slow-down in anticipated TELCO infrastructure spending, thereby
decreasing overall product demand below present forecasts; implementation
delay in the conversion from analog cellular technology to digital cellular
technology, whether caused by continuing sufficiency of capacity, new
methods for increasing analog capacity or customer funding, unwillingness
of TELCOs to fund infrastructure replacement or for other reasons.
The effects of, and changes in, foreign trade, monetary and fiscal
policies, laws and regulations, other activities of foreign governments,
agencies and similar organizations, and foreign social and economic
conditions, such as trade restrictions or prohibitions, inflation and
monetary fluctuations, import and other charges or taxes, the ability or
inability of the Company to obtain or hedge against foreign currency,
foreign exchange rates and fluctuations in those rates, adverse foreign tax
consequences, general delays in remittance and difficulties of collection
of foreign payments, efforts to nationalize foreign owned operations,
unstable governments and legal systems, and inter-governmental disputes, as
well as foreign governmental actions affecting frequency, use and
availability, type acceptance, spectrum authorizations and licensing.
Failure to enter additional sufficient strategic alliances necessary to
achieve the Company's business objectives; failure to fully and
successfully implement the alliance program; inadequacy or inability of
alliance partners to meet Company expectations; failure of alliance
partners to meet contractual obligations to the Company.
Lack of existing lines of credit to draw on to support technical and
product development and to fund patent enforcement activities, requiring
the possible sale of debt or equity securities.
The growth in the amount of, and the rate of increase of, the Company's
selling, general and administrative expenses.
Difficulties in the Company's business related to the market acceptance of
its products and/or technologies and any difficulties experienced by
current or future customers using the Company's products and/or
technologies.
Inability to retain existing, and/or hire new, appropriately qualified
administrative, sales and marketing personnel.
Increased and/or more aggressive marketing of competitive wireless
communications systems, in many cases by much larger and better financed
organizations.
Announcements of new products or technologies by the Company's competitors;
the ability of competitive products to achieve a perceived, absolute or
relative overall value advantage when compared to the Company's products or
technologies on the basis of features, quality and pricing;
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the inability of the Company to keep pace with technological developments
and/or respond in a timely manner to changes in customers' needs.
Increased pressure to engage in a vendor financing program.
Adverse trends in the equipment acquisition and replacement pattern of the
Company's customers.
Loss of customers.
Fluctuating demand for the Company's products; additional sudden and
significant increases in product orders requiring short term and
intermediate term financing.
Inability of the Company or its customers to secure acceptable financing
related to purchase and installation of the Company's products.
Lack of timely availability of the Company's products and the ability and
willingness of purchasers, in such circumstances, to acquire alternative
products.
Imposition of government or industry standards or competitive technological
developments which render any of the Company's technologies and/or products
obsolete or non-competitive.
Lack of frequency or bandwidth allocations within the technical
specifications of the Company's products or technology; engineering
problems in implementing new frequencies or operating with non-standard
bandwidths.
Manufacturing-related problems, including quality, cost or delivery
problems with vendors and component suppliers; unavailability of
alternative sources for component parts of the Company's products or
unavailability of components at competitive prices; longer than desirable
development time arising from the necessity to use alternative sources.
Unanticipated cash flow restrictions, continued or increased pressure to
lower the selling prices of the Company's products; failure to realize
revenues from orders on backlog; failure to increase future orders for and
revenue from UltraPhone products; failure to improve margins; failure to
achieve or maintain technical compliance with terms of customer contracts.
Difficulties or delays in the development, production, testing and
marketing of products or underlying communications technologies, including,
but not limited to (i) the failure to commercialize new products when
anticipated and the failure of manufacturing economies to develop when
planned, (ii) loss of the Company's key personnel, or inability to hire
sufficient number of qualified engineers to achieve technology development
objectives, (iii) the lack of availability or insufficiency of operating,
debt, equity or alliance related funds for research necessary to
effectively and timely complete product and technology development, or lack
of availability on terms acceptable to the Company, and (iv) increased
project engineering costs for future and current projects.
Substantial increased or continuing burdensome impact of the costs and
other effects of legal and administrative cases and proceedings (whether
civil, such as intellectual property and product-related matters, or
criminal), settlements and investigations, claims and changes in those
items, developments or assertions by or against the Company relating to
intellectual property rights and intellectual property licenses, including
but not limited to assertions that others infringe the Company's or ITC's
proprietary rights or that the Company's products infringe proprietary
rights of others.
Failure of the Company to successfully negotiate licensing agreements for
the Company's patents and other intellectual property; inability to enforce
patents against third parties; inability to enforce, or inadequacy of,
non-competition and non-disclosure agreements relating to Company's
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proprietary rights; adverse decision in the Company's outstanding or any
future intellectual property rights litigation, including but not limited
to declaration of invalidity of ITC patents.
Suspension of royalty revenues under existing or future license agreements,
with or without the accrual of royalty obligations.
Adverse effects from the Motorola judgment, including but not limited to
(i) adverse impacts on the level of revenue and potential cash flow from
ITC's patent portfolio (ii) the impairment of the Company's ability to
raise funds for general corporate purposes, and (iii) the temporary or
permanent impairment of ITC's pending U.S. litigation against Ericsson.
The failure of the appeals courts to reverse, vacate and/or remand the
Motorola judgment, recognizing that, notwithstanding the Company's belief
that substantial grounds exist for reversal, vacation and/or remand, the
Company carries the burden on appeal and, more often than not, jury
determinations are upheld.
An adverse decision in U.S. and foreign patenting forums regarding the
validity of ITC's patents, which could materially impact ITC patent
licensing opportunities, the Company's ability to realize licensing
revenue, and pending patent litigation. Such decision could include, but is
not limited to, the rejection of a patent in whole or in part, or the
material alteration or limitation of patent claims.
22
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following is a list of exhibits filed as part of the Form 10-Q.
Exhibit 3.1 -- Restated Articles of Incorporation
Exhibit 3.2 -- Bylaws of Amended on October 6, 1996
Exhibit 10.25 -- Amended 1995 Stock Option Plan
Exhibit 11 -- Computation of Net Income Per Share
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated August 16, 1996
under Item 5 - Other Events, relating to the Company's Agreement and
Plan of Merger with its 94% owned subsidiary, InterDigital Patents
Corporation. No financial statements were filed with this report. A
Registration Statement on Form S-4 to register the shares of
InterDigital's common stock was filed with and declared effective by the
Securities and Exchange Commission and contains consolidated financial
statements for both InterDigital Communications Corporation and
InterDigital Patents Corporation.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERDIGITAL COMMUNICATIONS CORPORATION
Date: November 8, 1996 /s/ William A. Doyle
---------------------------
William A. Doyle, President
Date: November 8, 1996 /s/ James W. Garrison
---------------------------
James W. Garrison,
Vice President -- Finance, Chief
Financial Officer and Treasurer
24
<PAGE>
InterDigital Communications Corporation
Amended & Restated
Articles of Incorporation
In compliance with the requirements of the Pennsylvania Business
Corporation Law of 1988, as amended, the Articles of Incorporation of
INTERDIGITAL COMMUNICATIONS CORPORATION are hereby amended and restated in their
entirety to read as follows:
First. The name of the Corporation is InterDigital Communications Corporation.
Second. The location and post office address of its registered office is
781 Third Avenue, King of Prussia, Pennsylvania 19406-1409.
Third. The Corporation is incorporated under the Business Corporation Law of the
Commonwealth of Pennsylvania for the purpose or purposes of engaging in or doing
any lawful act concerning any or all lawful business for which corporations may
be incorporated under the Pennsylvania Business Corporation Law, including but
not limited to manufacturing, owning, using, leasing and dealing in personal
property of every class and description, and acquiring, owning, using and
disposing of real property of any nature whatsoever.
Fourth. The term for which the Corporation is to exist is perpetual.
Fifth. The aggregate number of shares of all classes of stock which the
Corporation shall have authority to issue is 75,000,000 shares of Common Stock,
$0.1 par value per share ("Common Stock"), and 14,398,600 shares of Preferred
Stock ("Preferred Stock").
The voting rights, designations, preferences, qualifications,
privileges, limitations, options, conversion rights and other special rights
(the "Rights and Preferences") of the shares of the respective classes of stock
of the Corporation are and will be determined as follows:
A. Preferred Stock
The Board of Directors of the Corporation shall have full and
complete authority, by resolution from time to time, to establish one
or more series and to issue shares of Preferred Stock and to fix,
determine and vary the Rights and Preferences of each series of
Preferred Stock, including, but not limited to, dividend rates and
manner of payment, preferential amounts payable upon voluntary or
involuntary liquidation, voting rights, conversion rights, redemption
prices, terms and conditions and sinking fund and stock purchase
prices, terms and conditions.
B. Common Stock and Class Preferred Stock
The Rights and Preferences of the shares of Common Stock and
Class Preferred Stock, as between themselves only and subject to the
Rights and Preferences of Preferred Stock, are as follows:
(i) Definitions. For the purpose of this Article
Fifth, except as otherwise expressly provided herein or unless
the context otherwise requires, the following words and terms
shall have the following definitions:
<PAGE>
(a) "Net Income Per Share" means the net profit
per share of Common Stock for a fiscal year of the
Corporation, excluding items of extraordinary income
and expense, on a fully diluted basis, and after
provision for federal, state and local income taxes,
as determined by the Corporation's independent
certified public accountant, in accordance with
generally accepted accounting principles applied on a
basis consistent with prior periods.
(b) "Average Bid Price" means the average of the
daily reported closing price per share of Common
Stock during any period of 120 consecutive trading
days. If the Common Stock is listed for trading on an
organized stock exchange, the closing price shall be
the closing price as reported on said exchange; and
if the Common Stock is not listed for trading on any
such exchange, the closing price shall be the closing
bid price as reported by NASDAQ, and if not so
reported, the closing bid price as furnished by any
dealer in securities dealing in the Common Stock.
(c) "Conversion Number" means the number of
shares of Common Stock which a holder of Class
Preferred Stock is entitled to receive upon the
conversion of one share of Class Preferred Stock. The
initial Conversion Number shall be fifty (50). The
Conversion Number shall be subject to adjustment from
time to time as set forth in Paragraphs v(d) and
(e) hereof.
(d) "Expiration Date" means December 12, 1986.
(ii) Dividends. Holders of Common Stock shall be
entitled to receive dividends when and as declared by the
Board of Directors of the Corporation. Dividends shall be
payable out of the assets of the Corporation legally available
therefor and not otherwise. Holders of Class Preferred Stock
shall not be entitled to receive dividends, and no dividends
shall be declared or paid thereon.
(iii) Liquidation.
(a) Class Preferred Stock. In the event that the
Corporation shall be liquidated, dissolved or wound
up, whether voluntarily or involuntarily, after all
creditors of the Corporation shall have been paid in
full, the holders of Class Preferred Stock shall be
entitled to receive an amount equal to $.05 per share
before any amount shall be paid to the holders of
Common Stock. If the assets of the Corporation
available for distribution to the holders of Class
Preferred Stock shall be insufficient to permit
payment of an amount equal to $.05 per share to the
holders of Class Preferred Stock, then all such
assets of the Corporation shall be distributed, to
the exclusion of the holders of Common Stock, ratably
among the holders of Class Preferred Stock, according
to the amount which they respectively would be
entitled to receive if such assets were sufficient to
permit the payment in full of said amounts.
(b) Common Stock. The holders of Common Stock
shall be entitled to receive, pro rata, all of the
assets of the Corporation available for distribution
to its shareholders after distribution has been made
as aforesaid to holders of Class Preferred Stock.
(iv) Voting Rights
(a) Except as otherwise required herein or by law
or as may be provided to holders of Preferred Stock,
the holders of Common Stock shall
<PAGE>
possess full and exclusive voting power for the
election of directors and for all other purposes.
Every holder of Common Stock shall have the right to
one vote for each share of Common Stock owned. The
holders of Class Preferred Stock shall have no right
to vote at, to participate in, or to receive any
notice of any meeting of the shareholders of the
Corporation, unless and then only to the extent to
which their vote shall be required by law or by
Paragraph B(iv)(b) hereof. On any matter which the
holders of Class Preferred Stock shall be entitled to
vote, they shall be entitled to one vote for each
share of Class Preferred Stock owned.
(b) The Corporation shall not merge into or
consolidate with any other corporation, or sell all
or substantially all of its assets without the
consent, given in writing or by resolution adopted at
a meeting duly called for that purpose, of the
holders of a majority of all outstanding Common Stock
and Class Preferred Stock, voting as a single class,
with each share of Common Stock and Class Preferred
Stock, regardless of class, being entitled to one
vote; provided, however, that no holder of Class
Preferred Stock shall be entitled to vote on such
merger, consolidation or sale if, under the terms
thereof, each such holder of Class Preferred Stock,
in exchange for Class Preferred Stock, will receive
preferred stock of the surviving, resulting or
acquiring entity which shall, in the aggregate,
possess redemption, liquidation, voting and
conversion rights which are at least as favorable as
those possessed by the Class Preferred Stock held
immediately prior to the effective date of the
merger, consolidation or sale.
(v) Conversion into Common Stock. At any time on or
prior to the Expiration Date (and at no time after the
Expiration Date), shares of Class Preferred Stock shall be
convertible into Common Stock as follows:
(a) Class "A" Preferred Stock. If (x) during the
twenty-four (24) months following November 12, 1981,
the Average Bid Price shall be Sixteen and 50/100
($16.50) Dollars per share or more; or (y) after
twenty-four (24) months following November 12, 1981,
the Average Bid Price shall be Twenty-Five ($25.00)
Dollars per share or more (the amount of the Average
Bid Price which must be achieved to permit conversion
pursuant to Subparagraphs (a) (x) and (y) and
Subparagraphs (b) (x) and (y) hereof shall be
hereinafter referred to as the "Conversion Average
Bid Price"); or (z) for any fiscal year of the
Corporation ending on or before December 31, 1985,
the Corporation has net Income Per Share of One
($1.00) Dollar or more, (the amount of net Income Per
Share, which must be achieved in order to permit
conversion pursuant to Subparagraphs (a) (z) and (b)
(z) hereof, shall be hereinafter referred to as the
"Conversion Net Income Per Share"), then the holders
of Class "A" Preferred Stock, at their option, shall
have the right, exercisable at any time on or prior
to the Expiration Date, to convert their shares of
Class "A" Preferred Stock into shares of Common Stock
at the rate of the Conversion Number in effect on the
date the conversion right is exercised.
(b) Class "B" Preferred Stock. If (x) during the
twenty-four (24) months following November 12, 1981,
the Average Bid Price shall be Sixteen and 50/100
($16.50) Dollars per share or more; or (y) after
twenty-four (24) months following November 12, 1981,
the Average Bid Price shall be Twenty-Five ($25.00)
Dollars per share or more; or (z) for any fiscal year
of the Corporation ending on or before December 31,
1985, the corporation has Net Income Per Share of One
and 50/100 ($1.50) Dollars or more, then the holders
of Class "B" Preferred Stock, at their option, shall
have the right, exercisable at any time on or prior
to the Expiration Date, to convert their shares of
Class "B" Preferred Stock
<PAGE>
into shares of Common Stock at the rate of the
Conversion Number in effect on the date the
conversion right is exercised.
(c) The holder of any certificate for shares of
Class Preferred Stock desiring to convert any of such
shares pursuant to the provisions of Paragraph (v)
hereof shall surrender the holder's certificate at
the principal office of the Transfer Agent for the
Common Stock, with the form of written notice on the
certificate of such election to convert into Common
Stock duly complete and executed. The holder of the
shares so surrendered for conversion shall be
entitled to receive a certificate or certificates for
the number of shares of Common Stock to which the
holder shall be entitled upon such conversion,
registered in the name of such holder.
The Corporation shall not be required to deliver
certificates for shares of its Common Stock or new
certificates for unconverted shares of Class
Preferred Stock while the stock transfer books for
the respective classes of stock are duly closed for
any purpose, but the right of surrendering such
shares for conversion shall not be suspended during
any period that the stock transfer books of either of
such classes of stock are closed.
The conversion right shall be deemed to have been
exercised and the shares of Common Stock issuable
upon such conversion shall, subject to the provisions
of the first paragraph of this Subparagraph (c), be
deemed to have been issued on the date of the receipt
by the Transfer Agent for the Common Stock of the
certificate representing such shares of Class
Preferred Stock with the requirements for conversion
satisfied, except that if the transfer books for the
Common Stock are closed on the date of such receipt,
the conversion right shall be deemed to have been
exercised on the first date thereafter on which the
transfer books shall be open. The person entitled to
receive the Common Stock issuable upon such
conversion shall, on the date such conversion right
is deemed to have been exercised and thereafter, be
treated for all purposes as the record holder of such
Common Stock, and the record holder of the Class
Preferred Stock being converted shall, on the same
date, cease to be treated for any purpose as the
record holder of such Class Preferred Stock.
(d) The Conversion Number, the Conversion Average
Bid Price and the Conversion Net Income Per Share
shall be subject to adjustment from time to time as
follows:
(x) If the Corporation shall, at any time
prior to the Expiration Date, effect a
subdivision of as Common Stock, by
reclassification or otherwise, or if the
Corporation shall, at any time prior to the
Expiration Date, effect a combination of its
Common Stock, by reclassification or otherwise,
the Conversion Number in effect immediately prior
to such subdivision or combination shall be
increased or decreased, as the case may be, and
the Conversion Average Bid Price and the
Conversion Net Income Per Share shall be
decreased or increased, as the case may be, each
such change to be in proportion to the change in
the number of the then outstanding shares of
Common Stock. In each such case, the adjustment
in the Conversion Number, the Conversion Average
Bid Price and the Conversion Net Income Per Share
shall be effective on the date that such
subdivision or combination becomes effective.
<PAGE>
(y) If the Corporation shall at any time,
prior to the Expiration Date, declare a dividend
on Common Stock or make a distribution on Common
Stock payable in Common Stock, then, in each such
case, from and after the record date for
determining the shareholders entitled to receive
such dividend or distribution, the Conversion
Number, the Conversion Average Bid Price and the
Conversion Net Income Per Share in effect
immediately prior to such date shall be increased
or decreased proportionately, as the case may be.
(e) In the case of any reclassification or change
other than as set forth in Subparagraph (d) above of
the outstanding shares of Common Stock prior to the
Expiration Date (other than a change in par value, or
from par value to no par value, or from no par value
to par value, or a change of such shares into a
greater or lesser number of shares of the same or a
different par value or without par value), or in case
of any consolidation or merger of the Corporation
prior to the Expiration Date with or into any other
corporation (other than a merger in which the
Corporation is the surviving or continuing
corporation and which does not result in any
reclassification, conversion or change of the
outstanding shares of Common Stock), or in the case
of any sale or conveyance to another corporation of
all or substantially all the assets of the
Corporation, in connection with which shares or other
securities or cash or other property shall be
issuable, distributable, payable or deliverable for
outstanding shares of Common Stock, provision shall
be made so that holders of Class Preferred Stock
shall thereafter have the right to convert each share
of Class Preferred Stock into the kind and amount of
shares of stock and/or other securities or property
receivable upon such reclassification, change,
consolidation or merger by a holder of the number and
kind of shares of Common Stock into which such share
of Class Preferred Stock might have been converted,
subject to the terms of Paragraphs v(a) and (b)
hereof, immediately prior to such reclassification,
change, consolidation or merger. The foregoing
provisions of this Subparagraph (e) shall similarly
apply to successive reclassifications and changes of
shares of capital stock and to successive
consolidations or mergers.
(f) Whenever the Conversion Number, the
Conversion Average Bid Price and the Conversion Net
Income Per Share are required to be adjusted pursuant
to Paragraphs v(d) and (e) hereof, the Corporation's
independent certified public accountant shall compute
the Conversion Number, the Conversion Average Bid
Price and the Conversion Net Income Per Share are
adjusted, and shall prepare a certificate setting
forth such adjustments and the facts upon which such
adjustments are based, and such certificate shall
forthwith be filed with the Transfer Agent for the
Class Preferred Stock and the Common Stock. The
Corporation shall mail notice of such adjusted
Conversion Number, Conversion Average Bid Price and
Conversion Net Income Per Share to each holder of
Class Preferred Stock.
(g) Within thirty (30) days after conversion
privileges, as set forth in Paragraphs v(a) and/or
(b) hereof shall accrue, the Corporation shall cause
notice thereof to be mailed to the holders of record
of the Class "A" Preferred Stock and/or the Class "B"
Preferred Stock, as the case may be. Such holder
shall thereafter be entitled to receive all notices
mailed by the Corporation to holders of record of
Common Stock.
(h) The Corporation shall at all times prior to
the Expiration Date reserve from the authorized and
unissued shares of its Common Stock a
<PAGE>
sufficient number of shares to provide for the
conversion of the Class Preferred Stock. Shares of
Common Stock issued upon the conversion of Class
Preferred Stock shall be fully paid for an
non-assessable. Upon the conversion of any shares of
Class Preferred Stock, the Corporation's Retained
Earnings (Surplus) Account shall be charged with an
amount equal to the difference between the aggregate
par value of the shares of Class Preferred Stock
which are converted and the aggregate par value of
the shares of Common Stock which are issued upon such
conversion.
(i) Any and all issue taxes which may be imposed
in respect of any issue or delivery of stock upon the
conversion of any shares of Class Preferred Stock
into Common Stock, or of stock receivable upon
conversion thereof, shall be paid by the person or
persons surrendering such stock for conversion.
(vi) Redemption. Within six (6) months after the
Expiration Date, the Corporation shall redeem all Class
Preferred Stock then outstanding at a redemption price of $.05
per share. Holders of Class Preferred Stock shall, within
fifteen (15) days of the date fixed by the Corporation for
redemption, return all certificates evidencing said Class
Preferred Stock to the Corporation, and the only rights of
said holders shall be to receive the redemption price.
(vii) Prohibition Against Reissuance. Any shares of
Class Preferred Stock which shall be redeemed or otherwise
acquired by the Corporation, or which shall have been
converted into Common Stock, shall not be reissued, and the
authorized number of shares of Class Preferred Stock of the
Corporation shall be decreased by the number of shares of
Class Preferred Stock redeemed, otherwise acquired by the
Corporation or converted into Common Stock.
(viii) Elimination of Preemptive Rights. No holder of
securities of any class of the Corporation shall be entitled
as such, as a matter of right, to subscribe for or purchase
any part of any new or additional issue of securities of any
class of the Corporation, whether now or hereafter authorized,
except only as may be otherwise expressly provided with
respect to Preferred Stock.
Sixth. Shareholder's cumulative voting rights for the election of directors are
eliminated and denied.
Seventh. (a) The Directors, other than those who may be elected by the holders
of any class or series of stock entitled to elect directors separately, shall be
classified, with respect to the time for which they severally hold office, into
three classes, as nearly equal in number as possible, as shall be provided in
the manner specified in the By-laws of the Corporation, one class to be
originally elected for a term expiring at the annual meeting of shareholders to
be held in 1985, another class to be originally elected for a term expiring at
the annual meeting of shareholders to be held in 1986, and another class to be
originally elected for a term expiring at the annual meeting of shareholders to
be held in 1987, with each class to hold office until its successor is elected
and qualified. At each annual meeting of the shareholders of the Corporation,
the successors of the class of Directors whose term expires at that meeting
shall be elected to hold office for a term expiring at the annual meeting of
shareholders held in the third year following the year of their election.
(b) Except as otherwise provided for or fixed by or pursuant to the
provisions of Article Fifth hereof relating to the rights of the holders of any
class or series of stock entitled to elect Directors separately, newly created
directorships resulting from any increase in the number of Directors and
separately, newly created directorships resulting from any increase in the
number of Directors and any vacancies on the Board of Directors resulting from
death, resignation, disqualification, removal or other cause shall be filled by
the Directors in the manner provided in the By-laws of the Corporation, to hold
<PAGE>
office for the remainder of the full term of the class of Directors in which the
new directorship was created or the vacancy occurred and until such Director's
successor shall have been elected and qualified. No decrease in the number of
Directors constituting the Board of Directors shall shorten the term of any
incumbent Director.
(c) Except for the rights of any class or series of stock entitled to
elect Directors separately, any Director may be removed from office, without
assigning any cause, but only by the affirmative vote of the holders of 80
percent of the combined voting power of the then outstanding shares of stock
entitled to vote generally in the election of Directors, voting together as a
single class.
(d) Notwithstanding anything contained in the Articles of Incorporation
or By-laws to the contrary, and subject to the rights of any class or series of
stock entitled to elect Directors separately, the affirmative vote of the
holders of at least 80 percent or more 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, shall be required to alter, amend
or repeal this Article Seventh or to adopt any provision inconsistent herewith."
"Eighth. (a) The holders of all the shares outstanding and entitled to vote may,
by a majority vote, in the manner set forth in the By-laws, alter, amend or
repeal the By-laws of the Corporation, provided, however, that the affirmative
vote of the holders of 80 percent or more 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, shall be required to alter, amend
or repeal Sections 3.1, 3.4, 3.11 or 8.1 of the By-laws, as set forth in Exhibit
C to the Proxy Statement of April 27, 1984, of the Corporation, or to adopt any
provision inconsistent therewith.
(b) The Board of Directors, by a majority vote of the members thereof,
may make, alter, amend or repeal any provisions of the By-laws, in the manner
set forth in the By-laws. The shareholders shall have the right to change such
action by a majority vote of the shareholders entitled to vote thereon at any
Annual Meeting duly convened after notice to the shareholders of such purpose,
provided, however, that the vote of the holders of at least 80 percent of the
combined voting power of all of the then outstanding shares of stock entitled to
vote generally in the election of directors, voting together as a single class,
shall be required to change such action with respect to Sections 3.1, 3.4, 3.11
or 8.1."
(c) Notwithstanding anything contained in the Articles of Incorporation
to the contrary, and subject to the rights of any class or series of stock
entitled to elect Directors separately, the affirmative vote of the holders of
at least 80 percent of the combined voting power of the then outstanding shares
of stock entitled to vote generally in the election of directors, voting
together as a single class, shall be required to alter, amend or repeal this
Article Eighth or to adopt any provision inconsistent herewith."
Ninth. The vote of shareholders of the Corporation required to approve any
Business Combination shall be as set forth in this Article Ninth. The term
"Business Combination" shall have the meaning ascribed to it in (a)(B) of this
Article; each other capitalized term used in this Article shall have the meaning
ascribed to it in (c) of this Article.
(a)(A) In addition to any affirmative vote required by law or the
Articles of Incorporation or any resolution adopted pursuant to Article Fifth of
the Articles of Incorporation, and except as otherwise expressly provided in (b)
of this Article Ninth, a Business Combination shall not be consummated without
the affirmative vote of the holders of at least 80 percent of the combined
voting power of the then outstanding shares of stock of all classes and series
of the Corporation entitled to vote generally in the election of Directors
("Voting Stock"), in each case voting together as a single class (it being
understood that for purposes of this Article Ninth, each share of the Voting
Stock shall have the number of votes granted to it pursuant to Article Fifth of
the Article of Incorporation). Such affirmative vote shall be required
notwithstanding the fact that no vote may be required, or that a lesser
percentage may be specified, by
<PAGE>
law or by the Articles of Incorporation or any resolution or resolutions adopted
pursuant to Article Fifth of the Articles of Incorporation or in any agreement
with any national securities exchange or otherwise.
(B) The term "Business Combination" as used in this Article Ninth shall
mean:
(1) any merger of consolidation of the Corporation or any
Subsidiary with (i) any Interested Shareholder or (ii) any other
corporation or entity (whether or not itself an Interested Shareholder)
which is, or after each merger or consolidation would be, an Affiliate
of an Interested Shareholder; or
(2) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with
any Interested Shareholder or any Affiliate of any Interested
Shareholder of all or a Substantial Part of the assets of the
Corporation or any Subsidiary; or
(3) the issuance or transfer by the Corporation or any Subsidiary
(in one transaction or a series of transactions) of any securities of
the Corporation or any Subsidiary to any Interested Shareholder or any
Affiliate of any Interested Shareholder in exchange for cash,
securities or other property (or a combination thereof), other than the
issuance of securities upon the conversion of convertible securities of
the Corporation or any Subsidiary which were not acquired by such
interested Shareholder (or such Affiliate) from the Corporation or a
Subsidiary; or
(4) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an
Interested Shareholder or any Affiliate of any Interested Shareholder;
or
(5) any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any
other transaction (whether or not with or into or otherwise involving
an interested Shareholder) which in any such case has the effect,
directly or indirectly, of increasing the proportionate share of the
outstanding shares of any class or series of stock or securities
convertible into stock of the Corporation or any Subsidiary which is
directly or indirectly beneficially owned by any Interested Shareholder
or any Affiliate of any Interested Shareholder;
(b) The provisions of (a) of this Article Ninth shall not be applicable
to any Business Combination in respect of which all of the conditions specified
in either of the following paragraphs A and B are met, and such Business
Combination shall require only such affirmative vote as is required by law and
any other provision of the Articles of Incorporation and any resolution or
resolutions of the Board of Directors adopted pursuant to Article Fifth of the
Articles of Incorporation.
(A) Such Business Combination shall have been approved by a
majority of the Disinterested Directors, or
(B) Each of the six conditions specified in the following clauses
(1) through (6) shall have been met:
(1) the aggregate amount of the cash and the Fair Market Value
as of the date of the consummation of the Business Combination (the
"Consummation Date") of any consideration other than case to be
received by holders of Common Stock in such Business Combination
shall be at least equal to the higher of the following:
(i) (if applicable) the highest per share price (including
any brokerage commissions, transfer taxes and soliciting
dealers' fees) paid in order to acquire any shares of Common
Stock beneficially owned by the Interested
<PAGE>
Shareholder which were acquired beneficially by such Interested
Shareholder (x) within the two-year period immediately prior to
the Announcement Date or (y) in the transaction in which it
became an Interested Shareholder, whichever is higher; or
(ii) the Fair Market Value per share of Common Stock on the
Announcement Date or on the date on which the Interested
Shareholder became an Interested Shareholder (the Determination
Date), whichever is higher; and
(2) the aggregate amount of the cash and the Fair Market Value
as of the Consummation Date of any consideration other than cash to
be received per share by holders of shares of any other class or
series of Voting Stock shall be at least equal to the highest of
the following (it being intended that the requirements of this
clause (B)(2) shall be required to be met with respect to every
class and series of such outstanding Voting Stock, whether or not
the Interested Shareholder beneficially owns any shares of a
particular class or series of Voting Stock):
(i) (if applicable) the highest per share price (including
any brokerage commissions, transfer taxes and soliciting
dealers' fees) paid in order to acquire any shares of such
class or series of Voting Stock beneficially owned by the
Interested Shareholder which were acquired beneficially by such
Interested Shareholder (x) within the two-year period
immediately prior to the Announcement Date or (y) in the
transaction in which it became an interested Shareholder,
whichever is higher;
(ii) (if applicable) the highest preferential amount per
share to which the holders of shares of such class or series of
Voting Stock are entitled in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the
Corporation; and
(iii) the Fair Market Value per share of such class or
series of Voting Stock on the Announcement Date or the
Determination Date, whichever is higher; and
(3) the consideration to be received by holders of a particular
class or series of outstanding Voting Stock (including Common
Stock) shall be in cash or in the same form as was previously paid
in order to acquire beneficially shares of such class or series of
Voting Stock that are beneficially owned by the Interested
Shareholder and if the Interested Shareholder beneficially owns
shares of any class or series of Voting Stock that were acquired
with varying forms of consideration, the form of consideration to
be received by holders of such class or series of Voting Stock
shall be either cash or the form used to acquire beneficially the
largest number of shares of such class or series of Voting Stock
beneficially acquired by it prior to the Announcement Date; and
(4) after such Interested Shareholder has become an Interested
Shareholder and prior to the consummation of such Business
Combination:
(i) except as approved by a majority of the Disinterested
Directors, there shall have been no failure to declare and pay
at the regular dates therefor the full amount of any dividends
(whether or not cumulative) payable on any class or series of
stock having preference over the Common Stock as to dividends
or upon liquidation;
(ii) there shall have been (x) no reduction in the annual
rate of dividends paid on the Common Stock (except as necessary
to reflect any subdivision of the Common Stock), except as
approved by a majority of the Disinterested Directors, and (y)
an increase in such annual rate of dividends (as necessary to
prevent any such reduction) in the event of any
reclassification (including any reverse stock split)
recapitalization, reorganization or any similar transaction
which has the effect of reducing the number of outstanding
shares of the Common Stock, unless the failure so to increase
such annual rate was approved by a majority of the
Disinterested Directors; and
(iii) such Interested Shareholder shall not have become the
beneficial owner of any additional shares of Voting Stock
except as part of the transaction in which it became an
Interested Shareholder; and
(5) after such Interested Shareholder has become an Interested
Shareholder, such Interested Shareholder shall not have received
the benefit, directly or indirectly (except proportionately as a
shareholder), of any loans, advances, guarantees, pledges or other
financial assistance or tax credits or other tax advantages
provided by the Corporation, whether in anticipation of or in
connection with such Business Combination or otherwise; and
(6) a proxy or information statement describing the proposed
Business Combination and complying with the requirements of the
Securities Exchange Act of 1934 and the rules and regulations
thereunder (or any subsequent provisions replacing such Act, rules
or regulations) shall be mailed to public shareholders of the
Corporation at least 30 days prior to the consummation of such
Business Combination (whether or not such proxy or information
statement is required to be mailed pursuant to such Act or
subsequent provisions).
(c) For the purposes of this Article Ninth:
(A) A "person" shall mean any individual, firm, corporation or
other entity.
(B) "Interested Shareholder" shall mean any person (other than
the Corporation or any Subsidiary) who or which:
(1) is the beneficial owner, directly or indirectly, of more
than 20 percent of the combined voting power of the then
outstanding shares of Voting Stock; or
(2) is an Affiliate of the Corporation and at any time within
the two-year period immediately prior to the date in question was
the beneficial owner, directly or indirectly, of 20 percent or more
of the combined voting power of the then outstanding shares of
Voting Stock; or
(3) is an assignee or has otherwise succeeded to the beneficial
ownership of any shares of Voting Stock that were at any time
within the two-year period immediately prior to the date in
question beneficially owned by any Interested Shareholder, if such
assignment or succession shall have occurred in the course of a
transaction or series of transactions not involving a public
offering within the meaning of the Securities Act of 1933.
(C) A person shall be a "beneficial owner" of any Voting Stock:
(1) which such person or any of its Affiliates or Associates
beneficially owns, directly or indirectly; or
(2) which such person or any of its Affiliates or Associates
has (a) the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or
otherwise, or (b) the right to vote or direct the vote pursuant to
any agreement, arrangement or understanding; or
(3) which are beneficially owned, directly or indirectly, by
any other person with which such person or any of its Affiliates or
Associates has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of any shares of
Voting Stock.
(D) For the purposes of determining whether a person is an
Interested Shareholder pursuant to (c)(B) of this Article Ninth, the
number of shares of Voting Stock deemed to be outstanding shall include
shares deemed owned through application of (c)(C) of this Article but
shall not include any other shares of Voting Stock that may be issuable
pursuant to any agreement, arrangement or understanding, or upon
exercise of conversion rights, warrants or options, or otherwise.
(E) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as in effect on
May 25, 1984.
(F) "Subsidiary" means any corporation of which more than 50
percent of the combined voting power of the then outstanding shares of
stock entitled to vote generally in the election of directors is owned,
directly or indirectly, by the Corporation or by a Subsidiary or by the
Corporation and one or more Subsidiaries; provided, however, that for
the purposes of the definition of Interested Shareholder set forth in
(c)(B) of this Article Ninth, the term "Subsidiary" shall mean only a
corporation of which a majority of the combined voting power of the
then outstanding shares of stock entitled to vote generally in the
election of directors is owned, directly or indirectly, by the
Corporation.
(G) "Disinterested Director" means any member of the Board of
Directors of the Corporation who is unaffiliated with, and not a
nominee of, the Interested Shareholder and was a member of the Board
prior to the time that the Interested Shareholder became an Interested
Shareholder, and any successor of a Disinterested Director who is
unaffiliated with, and not a nominee of, the Interested Shareholder and
who is recommended to succeed a Disinterested Director by a majority of
Disinterested Directors then on the Board of Directors.
(H) "Fair Market Value" means: (1) in the case of stock, the
highest closing sale price during the 30-day period immediately
preceding the date in question of a share of such stock on the
principal United States securities exchange registered under the
Securities Exchange Act of 1934 on which such stock is listed, or, if
such stock is not listed on any such exchange, the highest closing
sales price or bid quotation with respect to a share of such stock
during the 30-day period preceding the date in question as quoted by
the National Association of Securities Dealers, Inc. Automated
Quotations Systems or any system then in use, or if no such quotations
are available, the fair market value on the date in question of a share
of such stock as determined by a majority of the Disinterested
Directors in good faith; and (2) in the case of stock of any class or
series which is not traded on any United States registered securities
exchange nor in the over-the-counter market or in the case of property
other than cash or stock, the fair market value of such property on the
date in question as determined by a majority of the Disinterested
Directors in good faith.
(I) In the event of any Business Combination in which the
Corporation survives, the phase "other consideration to be received" as
used in (b)(B)(1) and (2) of this Article Ninth shall include the
shares of the Common Stock and/or the shares of any other class of
outstanding Voting Stock retained by the holders of such shares.
(J) "Announcement Date" means the date of first public announcement
of the proposed Business Combination.
(K) "Determination Date" means the date on which the Interested
Shareholder became an Interested Shareholder.
(L) "Substantial Part" means more than 50 percent of the book value
of the total assets of the entity in question, as of the end of its
most recent fiscal year ending period to the Consummation Date.
(d) A majority of the Disinterested Directors of the Corporation shall
have the right and power to determine, on the basis of information known to them
after reasonable inquiry, all facts necessary to determine compliance with this
Article Ninth, including, without limitation (A) whether a person is an
Interested Shareholder, (B) the number of shares of Voting Stock beneficially
owned by any person, (C) whether a person is an Affiliate or Associate of
another person and (D) whether the requirements of (b) of this Article Ninth
have been met with respect to any Business Combination. The good faith
determination of a majority of the Disinterested Directors on such matters shall
be conclusive and binding for all purposes of this Article Ninth.
(e) Nothing contained in this Article Ninth shall be construed to
relieve any Interested Shareholder from any fiduciary obligation imposed by law.
(f) Notwithstanding anything contained in the Articles of Incorporation
to the contrary, the affirmative vote of the holders of at least 80 percent of
the voting power of the Voting Stock, voting together as a single class, shall
be required to alter, amend, or repeal this Article Ninth or to adopt any
provision inconsistent herewith.
<PAGE>
INTERDIGITAL COMMUNICATIONS CORPORATION
(a Pennsylvania corporation)
BY-LAWS
(as amended through October 6, 1996)
Section 1.1 Registered Office:
The Registered Office of the Corporation shall be at 781 Third
Avenue, King of Prussia, Pennsylvania until otherwise changed by the Board of
Directors.
Section 2.1 Place of Shareholders' Meetings:
Meetings of the shareholders shall be held at the Registered
Office of the Corporation or at such other place within or without Pennsylvania
as the Board of Directors may fix.
Section 2.2 Annual Meeting of Shareholders:
An Annual Meeting of shareholders shall be held in every
calendar year at such time as the Board of Directors may fix. At the Annual
Meeting of shareholders, directors shall be elected to serve for the ensuing
year or until their successors shall be duly elected and qualified, and there
shall be transacted such other business as may properly be brought before the
Meeting.
A financial report of the Corporation's business as of the
close of the preceding fiscal year shall be presented at the Annual Meeting, and
shall be sent to shareholders.
Section 2.3 Special Meetings of Shareholders:
Special Meetings of shareholders may be called at any time by
the Chairman of the Board, the President or the Board of Directors, or
shareholders entitled to cast not less than one-fifth of the votes which all
shareholders are entitled to cast at the particular meeting. At any time, upon
written request of any person entitled to call a Special Meeting, it shall be
the duty of the Secretary to fix the date of such Special Meeting to be held
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not less than five or more than sixty days after the receipt of the request and
to give due notice thereof. If the Secretary shall neglect or refuse to fix the
date of the meeting and give notice thereof, the person or persons making the
request may do so.
Section 2.4 Notice of Shareholders' Meetings:
At least five days' written notice shall be given of any
meeting of shareholders, unless a greater period of notice is required by law.
Such notice shall specify the place, day and hour of the meeting, and in the
case of a Special Meeting of shareholders, the general nature of the business to
be transacted.
Section 2.5 Waiver of Notice of Shareholders' Meetings:
Whenever written notice is required to be given by law, by the
Articles or these By-Laws, a written waiver thereof signed by the person or
persons entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice. Except in the
case of a Special Meeting of shareholders, neither the business to be transacted
nor the purpose of the meeting need be specified in the Waiver of Notice of such
Meeting.
Attendance of a person, either in person or by proxy, at any meeting
shall constitute a waiver of notice of such meeting, except where a person
attends a meeting for the express purpose of objecting to the transaction of any
business because the meeting was not lawfully called or convened.
Section 2.6 Quorum for Shareholders' Meetings:
The presence, in person or by proxy, of the shareholders
entitled to cast a majority of the votes which all shareholders are entitled to
cast on a matter to be voted upon at a meeting of shareholders shall constitute
a quorum, and the acts of such quorum, at a duly organized meeting of
shareholders, shall constitute the acts of all the shareholders. The
shareholders present at a duly organized meeting can continue to do business
until adjournment, notwithstanding the withdrawal of enough shareholders to
leave less than a quorum.
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Section 2.7 Conduct of Shareholders' Meetings:
Meetings of the shareholders shall be presided over by the
Chairman of the Board, or if he is not present, by the President or, if he is
not present, by a Vice-President or, if none of the Chairman of the Board or the
President or Vice-President is present, by a Chairman to be chosen at the
meeting. The Secretary of the Corporation, or in his absence, an Assistant
Secretary or one temporarily designated as such shall act as Secretary of the
meeting.
Section 2.8 Shareholders Participation by Telephone:
One or more shareholders may participate in any meeting of
shareholders by means of conference telephone or similar communications
equipment by means of which all persons participating in such meeting can hear
each other.
Section 2.9 Voting by Shareholders:
Except as otherwise provided by law or in the Articles, every
shareholder of record shall have the right, at every shareholders' meeting, to
one vote for every share standing in his name on the books of the Corporation.
Every shareholder entitled to vote at a meeting of shareholders or to express
consent to corporate action in writing without a meeting may authorize another
person or persons to act for him by proxy.
All voting and elections shall be taken viva voce unless a
vote by ballot shall be demanded by a shareholder before the voting or election
begins, or unless otherwise required by law or by the Articles.
Section 2.10 Judges of Election:
In advance of any meeting of shareholders, the Board of
Directors may appoint Judges of Election, who need not be shareholders, to act
at such meeting or any adjournment thereof. If Judges of Election be not so
appointed, the Chairman of the meeting may, and on the request of any
shareholder or his proxy shall, make such appointment at the meeting. The number
of Judges shall be one or three, and no candidate shall act as a Judge. On
request of the Chairman of the meeting or of any shareholder or his
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proxy, the Judges shall make a report in writing of any challenge or question or
matter determined by them and execute a certificate of any fact found by them.
Section 2.11 Adjournment of Meetings:
Adjournment of any meeting may be taken, but any meeting at
which Directors are to be elected shall be adjourned only from day to day, or
for such longer periods not exceeding fifteen days each, as may be directed by
the holders of at least a majority of the shares entitled to be voted at an
election of directors, until such Directors have been elected. When a meeting is
adjourned, it shall not be necessary to give any notice of the adjourned meeting
or of the business to be transacted thereat, other than by announcement at the
meeting at which such adjournment is taken. In case of any meeting called for
the election of Directors, those who attend the second of such adjourned
meeting, although less than a quorum, shall nevertheless constitute a quorum for
the purpose of electing Directors.
Section 3.1 Board of Directors, Number, Qualification,
Elections, Term of Office and Compensation:
The business and affairs of the Corporation shall be managed
by a Board of not less than five (5) nor more than fifteen (15) Directors, as
may be fixed from time to time by the vote of a majority of the whole Board.
Directors shall be of full age, but need not be residents of Pennsylvania or
shareholders of the Corporation.
The Directors, other than any who may be elected by the
holders of shares of any class or series of stock entitled to elect Directors
separately pursuant to the terms of Articles Fifth of the Articles of
Incorporation or any resolution or resolutions providing for the issuance of
such stock adopted by the Board of Directors shall be classified, with respect
to the duration of the term for which they severally hold office, into three
classes as nearly equal as possible (each, individually a "Three Year Class",
and collectively the "Three Year Classes"). Such Three Year Class which shall be
elected at the Annual Meeting of Shareholders held in 1993 for a term expiring
at the Annual Meeting of Shareholders to be held in 1996 shall be designated as
"Class A"; the second Three Year Class to be elected at the Annual Meeting of
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Shareholders held in 1994 for a term expiring at the Annual Meeting of
Shareholders to be held in 1997 shall be designated as "Class B"; and the third
Three Year Class to be elected at the Annual Meeting of Shareholders held in
1995 for a term expiring at the Annual Meeting of Shareholders to be held in
1998 shall be designated as "Class C". The Board of Directors shall increase or
decrease the number of Directors in one or more classes as may be appropriate
whenever it increases or decreases the number of Directors pursuant to this
Section 3.1, in order to ensure that the three Three Year Classes shall be as
nearly equal in number as possible. At each Annual Meeting of Shareholders, the
successors of the class of Directors whose term expires at that meeting shall be
elected to hold office for a term expiring at the Annual Meeting of Shareholders
held in the third year following the year of their election.
The Board of Directors shall have the authority to fix the
compensation of Directors for their services and to authorize payment for
expenses of attendance at meetings. A Director may also be a salaried officer or
employee of the Corporation.
The Board of Directors may elect a Chairman who shall, when
present, preside at all meetings of the Board of Directors and at all meetings
of shareholders. The Chairman may appoint another member of the Board to preside
in his absence.
Section 3.2 Quorum for Directors' Meetings:
A majority of the Directors in office shall be necessary to
constitute a quorum for the transaction of business, and the acts of a majority
of the Directors present at a meeting at which a quorum is present shall be the
acts of the Board of Directors. A Director who is present at a meeting shall be
counted in determining the presence of a quorum even though a contract or
transaction between the Corporation and such Director or another business in
which such Director has a financial interest is authorized at the meeting.
Section 3.3 Directors' Consent in Lieu of Meeting:
Any action which may be taken at a meeting of the Board
of Directors or of any Committee thereof may be taken without a
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meeting if a consent or consents in writing, setting forth the action so taken,
shall be signed by all of the Directors or the members of the Committee, as the
case may be, and shall be filed with the Secretary of the Corporation. One or
more Directors may participate in a meeting of the Board of Directors or a
Committee thereof by means of a conference telephone or similar communications
equipment by means of which all persons participating in such meeting can hear
each other.
Section 3.4 Vacancies in Board of Directors:
Except as otherwise provided for or fixed pursuant to the
Articles of Incorporation of the Corporation, newly created directorships
resulting from an increase in the number of Directors, and any vacancies on the
Board of Directors resulting from death, resignation, disqualification, removal
or other cause shall be filled by the vote of a majority of the remaining
members of the Board, even though less than a quorum. Any person so elected
shall hold office for the remainder of the full term of the class of Directors
in which the directorship was created or the vacancy occurred and until such
Director's successor shall have been elected and qualified. No decrease in the
number of Directors constituting the Board of Directors shall shorten the term
of any incumbent Director.
Section 3.5 Place of Meeting of Board of Directors:
The meetings of the Board of Directors may be held at such
place within Pennsylvania, or elsewhere, as a majority of the Directors may from
time to time appoint or as may be designated in the notice calling the meeting.
Section 3.6 Organization Meeting of the Board of Directors:
After the election of Directors by the shareholders, the newly
elected Board may meet for the purpose of organization or otherwise:
(a) Immediately following their election, or at such
time and place as shall be fixed by vote of the shareholders
at the Annual Meeting (and in either such case no notice of
such meeting to the newly elected
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Directors shall be necessary in order legally to constitute
the meeting, provided a majority of the whole Board shall be
present); or
(b) At such time and place as may be fixed by consent
in writing of all the Directors.
Section 3.7 Regular Meetings of the Board of Directors:
Regular Meetings of the Board of Directors shall be held at
such time and place as shall be determined by a majority of the Board.
Section 3.8 Special Meetings of the Board of Directors:
Special Meetings of the Board of Directors may be called by
the Chairman of the Board, President or Secretary on at least two days' notice
to each Director, either personally or by mail or by facsimile transmission, of
the time and place of such Special Meeting. At the written request of two
Directors, Special Meetings shall be called by the Chairman of the Board or
President or Secretary in like manner and on like notice.
Section 3.9 Adjournments of Meetings of the Board of Directors:
If a meeting of the Board of Directors is adjourned, it shall
not be necessary to give any notice of the adjourned meeting, or of the business
to be transacted at an adjourned meeting, other than by announcement at the
meeting at which such adjournment is taken.
Section 3.10 Powers of Board of Directors:
A. Organizational Meeting: At the first meeting of the Board
of Directors in each year (at which a quorum shall be present) held next after
the Annual Meeting of shareholders, it shall be the duty of the Board of
Directors to elect or appoint the officers of the Corporation.
B. General Powers: The Board of Directors shall have all the
power and authority granted by law to Directors except as may be specifically
excepted by the Articles or by these By-Laws.
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C. Committees: The Board of Directors, by Resolution adopted
by a majority thereof, may designate an Executive Committee and one or more
other committees, each of which shall consist of at least two Directors and such
other Directors as shall be appointed by the Board of Directors to serve as
alternate members of any such Committee to replace any absent or disqualified
member at any Committee Meeting. In the event that any member of any such
Committee shall be absent from or disqualified at such Meeting, the member or
members thereof present at any such Meeting and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint another
Director to act at the Meeting in the place of any such absent or disqualified
member. Any such Committee shall have and exercise the authority of the Board of
Directors in the management of the business and affairs of the Corporation to
the extent provided in the Resolution creating such Committee.
Section 3.11 Removal of Directors by Shareholders:
Subject to the right of any class or series of stock entitled
to elect Directors separately, any Director may be removed from office, without
assigning any cause, but only by the affirmative vote of the holders of at least
80 percent of the combined voting power of the then outstanding shares of stock
entitled to vote generally in the election of Directors, voting together as a
single class.
Section 3.12 The Chairman of the Board - Powers and Duties:
The Chairman of the Board shall, when present, preside at all
meetings of the Board of Directors and at all meetings of shareholders. Unless
otherwise directed by the Board of Directors, the Chairman of the Board shall
have full power and authority on behalf of the Corporation to attend and act and
vote at any meeting of the shareholders of any corporation in which the
corporation may hold stock, and at any such meeting he shall possess and may
exercise any and all of the rights and powers incident to the ownership of such
stock which the Corporation, as the owner thereof, might have possessed and
exercised if present. The Board of Directors may, by resolution, from time to
time confer like powers upon any other person or persons. He shall also do and
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perform such other duties as from time to time may be assigned to him by the
Board of Directors.
Section 4.1 Officers:
The Officers of the Corporation shall be a Chief Executive
Officer, a President, a Secretary, and a Treasurer, all of whom shall be elected
or appointed by the Board of Directors. The Board of Directors may also elect
one or more Vice-Presidents, one or more Assistant Treasurers and one or more
Assistant Secretaries. Any two or more offices may be held by the same person.
The Board of Directors may at any time also elect or appoint
such other officers, assistant officers and agents as it shall deem necessary
and as the needs of the Corporation may require. Such other officers, assistant
officers and agents shall have such authority and shall perform such duties as
from time to time may be prescribed by the Board of Directors.
The Officers shall be elected each year at the organization
meeting of the Board of Directors, but if not so elected, they, and any
assistant officers or agents the Board of Directors shall desire to appoint, may
be elected from time to time during the year. It shall not be necessary for any
officer of the Corporation to be a Director.
Section 4.2 The Chief Executive Officer - Powers and Duties:
The Chief Executive Officer shall have responsibility for
general supervision and direction of the business of the Corporation, subject to
the overall supervision of the Board of Directors. Unless otherwise directed by
the Board of Directors, the Chief Executive Officer shall have full power and
authority on behalf of the Corporation to attend and act and vote at any meeting
of the shareholders of any corporation in which the Corporation may hold stock,
and at any such meeting he shall possess and may exercise any and all of the
rights and powers incident to the ownership of such stock which the Corporation,
as owner thereof, might have possessed and exercised if present. Further, unless
otherwise directed by the Board of Directors, the Chief Executive Officer is
authorized to execute in the name of the Corporation
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contracts and other documents requiring the signature of the Corporation. He
shall also do and perform such other duties as from time to time may be assigned
to him by the Board of Directors.
Section 4.3 The President - Powers and Duties:
The President shall have responsibility for day-to-day
supervision and direction of the regular business and operations of the
Corporation, subject to the overall supervision of the Board of Directors and
the Chief Executive Officer. Unless otherwise directed by the Board of
Directors, the President shall have full power and authority on behalf of the
shareholders of the Corporation to attend and act and vote at any meeting of the
shareholders of any corporation in which the Corporation may hold stock, and at
any such meeting shall possess and may exercise any and all of the rights and
powers incident to the ownership of such stock which the Corporation, as the
owner thereof, might have possessed and exercised if present. Further, unless
otherwise directed by the Board of Directors, the President is authorized to
execute in the name of the Corporation contracts and other documents requiring
the signature of the Corporation. He shall also do and perform such other duties
as from time to time may be assigned to him by the Board of Directors.
Section 4.4 The Vice-President - Powers and Duties:
A Vice-President or Vice-Presidents shall be elected by the
Board of Directors, if the Board of Directors determines that such offices shall
be created. The Vice-President (or, if there are more than one, then each
Vice-President) shall have such powers and shall perform such duties as may from
time to time be assigned to him or them by the Board of Directors or by the
Chairman of the Board or by the President. Unless otherwise ordered by the Board
of Directors, the Vice-President (or Vice-Presidents in order of their numbered
designations) shall, in the case of death, resignation, absence or disability of
the President, perform the duties of that Officer, until the return of the
President, or until the disability shall have been removed or a new President
shall have been elected.
Section 4.5 Treasurer - Powers and Duties:
The Treasurer shall have the custody of all the funds and
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securities of the Corporation which may come into his hands. When necessary or
proper (unless otherwise ordered by the Board of Directors) he shall (a) endorse
for collection on behalf of the Corporation, checks, notes and other
obligations, (b) deposit the same to the credit of the Corporation in such banks
or depositaries as the Board of Directors may designate and (c) sign all
receipts and vouchers for payments made by the Corporation. He shall, at all
reasonable times, exhibit his books and accounts to the Board of Directors of
the Corporation upon the request of any Director, and he shall also, if so
directed by the Board of Directors, annually prepare and submit to the Annual
Meeting of the shareholders a full statement of the assets and liabilities of
the Corporation and of its transactions during the preceding year, and he shall
have such other powers and shall perform such other duties as may be assigned to
him from time to time by the Board of Directors. He shall give such bond for the
faithful performance of his duties as may be required by the Board of Directors.
Section 4.6 Assistant-Treasurer - Powers and Duties:
Each Assistant-Treasurer shall have such powers and perform
such duties as may be assigned to him by the Board of Directors.
Section 4.7 Secretary - Powers and Duties:
Unless otherwise ordered by the Board of Directors, the
Secretary shall keep the minutes of all meetings of the shareholders and of the
Board of Directors in proper books to be kept for such purpose, and shall attend
to the giving of all notices by the Corporation, including notices of meetings
of shareholders and of the Board of Directors. He shall have charge of the share
certificate books, transfer books, capital stock ledger and such other books and
papers as the Board of Directors may direct. He shall in general perform all the
duties incident to the office of Secretary and shall have such other powers and
perform such other duties as may be assigned to him by the Board of Directors.
Section 4.8 Assistant Secretary - Powers and Duties:
Each Assistant Secretary shall have such powers and perform
such duties as may be assigned to him or them by the Board of Directors.
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Section 4.9 Removal and Vacancies:
The Board of Directors shall have power to remove any officer
from office at any time and shall also have the power to fill any vacancies in
any office occurring from whatever reason. Such power shall be exercised by a
majority vote of the Directors in office at the time of such removal or vacancy,
although less than a quorum.
Section 5.1 Share Certificates:
Every shareholder of record shall be entitled to a share
certificate representing the shares owned by him, provided that the shares
represented thereby shall have been fully paid for. Such share certificate shall
be signed by the Chairman of the Board, President, or a Vice-President, and by
the Secretary or Treasurer except where such share certificate is signed by a
transfer agent or a registrar, in which case the signature of any officer of the
Corporation upon such share certificate may be a facsimile, engraved or printed.
Section 5.2 Transfer of Share Certificates:
The transfer of a share certificate and the shares represented
thereby shall be made on the books of the Corporation only by the registered
owner thereof or by his attorney duly authorized in writing to make such
transfer, and only upon surrender of such share certificate, which shall be
canceled at the time of transfer.
The Corporation shall be entitled to treat the holder of
record of any share certificate or certificates and the shares represented
thereby as the holder in fact thereof, and accordingly shall not be bound to
recognize any equitable or other claim to or interest in such share certificate
or certificates and shares on the part of any other person, whether or not it
shall have express or other notice thereof, except as otherwise expressly
provided by law or by the Articles.
Section 5.3 Lost Share Certificate:
The holder of any certificate representing shares of
stock of the Corporation shall immediately notify the Corporation
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of any mutilation, loss or destruction thereof, and the Board of Directors may,
in its discretion, cause one or more new certificates for the same number of
shares in the aggregate to be issued to such holder upon the surrender of the
mutilated certificate, or in the case of loss or destruction of the certificate,
upon satisfactory proof of such loss or destruction and deposit of indemnity by
bond or otherwise in such form and amount and with such surety or sureties as
the Board of Directors may require to indemnify the Corporation against loss or
liability by reason of the issuance of such new certificate, but the Board may,
in its discretion, refuse to issue such new certificates save upon the order of
some court having jurisdiction in such matters.
Section 6.1 Fiscal Year:
The fiscal year of the Corporation shall be established by the
Board of Directors.
Section 7.1 Indemnification:
(a) The Corporation shall indemnify and hold harmless
to the fullest extent permitted under the Pennsylvania
Business Corporation Law, the Directors' Liability Act (the
"DLA") and other applicable law, as such laws existed on the
date this Section 7.1 was adopted by the Board Of Directors
or, except as provided in Section 7.1(f) hereof, as such laws
may thereafter be amended ("Pennsylvania Law"), any person who
was or is a party or was or is threatened to be made a party
to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or
investigative, including, without limitation, an action by or
in the right of the Corporation (collectively, for purposes of
this Section 7.1 and Section 7.2 hereof, "Proceeding"), by
reason of the fact that he is or was or has agreed to become a
director or officer of the Corporation, or is or was serving
or has agreed to serve at the request of the Corporation as a
director or officer of another corporation, or if a director
or officer of the Corporation, is or was serving or has agreed
to serve at the request of the Corporation as an employee or
agent of another corporation, partnership, joint venture,
trust or other enterprise, or by reason of
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any action alleged to have been taken or omitted in any such
capacity, and may indemnify and hold harmless to the fullest
extent permitted under Pennsylvania Law any person who was or
is a party or was or is threatened to be made a party to such
a Proceeding by reason of the fact that he is or was or has
agreed to become an employee or agent of the Corporation, or,
if any employee or agent of the Corporation, is or was serving
or has agreed to serve at the request of the Corporation as an
employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses,
liability and loss (including, without limitation, attorneys'
fees and disbursements, punitive and other damages, judgments,
fines, penalties, excise taxes assessed with respect to an
employee benefit plan, amounts paid or to be paid in
settlement and costs and expenses of any nature) incurred by
him in connection with such Proceeding and any appeal
therefrom: provided, that such indemnification shall not be
made in any case where the act or failure to act giving rise
to the claim for indemnification is determined by a court in a
final, binding adjudication to have constituted willful
misconduct or recklessness.
(b) The Corporation may indemnify and hold harmless to
the fullest extent permitted under Pennsylvania Law any person
who was or is a party or was or is threatened to be made a
party to any Proceeding, by reason of any of his actions in a
non-official capacity while serving as a director, officer,
employee or agent of the Corporation, against expenses,
liability and loss including, without limitation, attorneys's
fees and disbursements, punitive and other damages,
judgements, fines, penalties, excise taxes assessed with
respect to an employee benefit plan, amounts paid or to be
paid in settlement and costs and expenses of any nature
incurred by him in connection with such Proceeding and any
appeal therefrom: provided, that such indemnification shall
not be made in any case where the act or failure to act giving
rise to the claim for indemnification is determined by a court
in a final, binding adjudication to have constituted willful
misconduct or recklessness.
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(c) The termination of any Proceeding by judgment,
order, settlement, conviction, or upon a plea of guilty or
nolo contendere, or its equivalent, shall not, of itself,
create a presumption that the persons's conduct constituted
willful misconduct or recklessness.
(d) Expenses incurred by a director or officer in
defending a Proceeding shall be paid by the Corporation in
advance of the final disposition of the Proceeding, provided
that, if Pennsylvania Law requires, the payment of such
expenses shall be made only upon receipt of an undertaking by
or on behalf of the director or officer to repay such amount
if it shall ultimately be determined that he is not entitled
to be indemnified by the Corporation as mandated in this
Section 7.1 or otherwise. Expenses incurred by other employees
and agents may be so paid to the extent provided by the Board
of Directors, upon receipt of the foregoing undertaking by or
on behalf of the employee or agent.
(e) The indemnification provided by this Section 7.1
shall be in addition to and not exclusive of any other rights
to which those seeking indemnification may be entitled under
Pennsylvania Law, or under any By-Law, agreement executed by
the Corporation, insurance policy, fund of any nature
established by the Corporation, vote of shareholders or
disinterested directors or otherwise. The indemnification so
provided by this Section 7.1 or otherwise, may be granted
whether or not the Corporation would have the power to
indemnify such person under any provision of Pennsylvania Law
other than the DLA.
(f) The indemnification provisions of this Section 7.1
shall constitute a contract between the Corporation and each
of its directors, officers, employees and agents who are or
may be entitled to indemnification hereunder and who serve in
any such capacity at any time while such provisions are in
effect. Any appeal or modification of the indemnification
provisions of this Section 7.1 shall not limit any such
person's rights to indemnification (including the advancement
of expenses) then existing or arising out of events, acts or
omissions occurring prior to such repeal or modification,
including, without
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<PAGE>
limitation, the right to indemnification with respect to
Proceedings commenced after such repeal or modification based
in whole or in part upon any such event, act or omission.
(g) The Corporation may create a fund of any nature,
which may, but need not be, under the control of a trustee, or
otherwise may secure or insure in any manner its
indemnification obligations, whether arising under or pursuant
to this Section 7.1 or otherwise.
(h) The Corporation may purchase and maintain
insurance to insure its indemnification obligations on behalf
of any person who is or was or has agreed to become a
director, officer, employee or agent of the Corporation, or is
or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against
any expense, liability or loss asserted against him and
incurred by him or on his behalf in any such capacity, or
arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such
liability under the provisions of this Section 7.1 or under
any provision of Pennsylvania Law other than the DLA.
(i) The indemnification provided by this Section 7.1
shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of
the heirs, executors and administrators of such a person.
(j) If Section 7.1 or any portion thereof shall be
invalidated on any ground by any court of competent
jurisdiction, then the Corporation shall nevertheless
indemnify each director or officer, and may indemnify each
employee or agent of the Corporation, as to expenses,
liability and loss (including, without limitation, attorneys'
fees and disbursements, punitive and other damages, judgments,
fines, penalties, excise taxes assessed with respect to an
employee benefit plan, amounts paid or to be paid in
settlement and costs and expenses of any nature) incurred by
him in connection
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with any Proceeding, including an action by or in the right of
the Corporation, to the fullest extent permitted by any
applicable portion of this Section 7.1 that shall not have
been invalidated and to the fullest extent permitted by
applicable law.
Section 7.2 Limitation on Directors' Personal Liability:
(a) To the fullest extent permitted under the DLA, as
it existed on the date this Section 7.2 was adopted or, except
as provided in subsection 7.2(e), as such law may thereafter
be amended, a director of this Corporation shall not be
personally liable for monetary damages as a result of any
action or failure to act unless both: (1) the director has
breached or failed to perform the duties of his office under
Section 8363 of the DLA: and (2) the breach or failure to
perform constitutes self-dealing, willful misconduct or
recklessness.
(b) The provisions of this Section 7.2 shall not apply
to: (1) the responsibility or liability of a director pursuant
to any criminal statute: or (2) the liability of a director
for the payment of taxes pursuant to local, state or federal
law.
(c) The termination of any Proceeding by judgment,
order, settlement, conviction, or upon a plea of guilty or
nolo contendere, or its equivalent, shall not, of itself,
create a presumption that the director breached or failed to
perform the duties of his office under Section 8363 of the DLA
and that the breach or failure to perform constituted
self-dealing, willful misconduct or recklessness.
(d) Notwithstanding the date of adoption of this
Section 7.2, the provisions of Section 7.2 shall apply to any
action filed or breaches of performance of duty or any failure
of performance of duty by any director on or after January 27,
1987.
(e) No amendment to or repeal of this Section 7.2 or
the relevant provisions of the DLA shall reduce the limitation
on directors' personal liability for or with
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<PAGE>
respect to any events, acts or omissions of such director
occurring prior to such amendment or repeal, including,
without limitation, the limitation on personal liability with
respect to any Proceedings commenced after such repeal or
modification based in whole or in part upon any such event,
act or omission.
Section 8.1 Amendments to By-Laws:
The holders of all the shares outstanding and entitled to vote
may, by a majority vote, make, alter, amend or repeal any provision of these
By-Laws at any Annual or Special Meeting duly convened after notice to the
shareholder of the meeting to be held for such purpose, provided, however, that
the affirmative vote of the holders of at least 80 percent of the combined
voting power of all the then outstanding shares of stock entitled to vote
generally in the election of directors, voting together as a single class shall
be required to alter, amend or repeal Sections 3.1, 3.4, 3.11 or this Section
8.1, or to adopt any provision inconsistent therewith.
The Board of Directors, by a majority vote of the members
thereof, may make, alter, amend or repeal any provisions of these By-Laws at any
Regular or Special Meeting, duly convened after notice to the Directors of such
purpose. The shareholders shall have the right to change such action by a
majority vote of the shareholders entitled to vote thereon at any Annual Meeting
which may be duly convened for the purpose of changing such action, after notice
to the shareholders entitled to notice thereof, provided, however, that the vote
of the holders of at least 80 percent of the combined voting power of all of the
then outstanding shares of stock entitled to vote generally in the election of
directors, voting together as a single class, shall be required to change such
action with respect to Sections 3.1, 3.4, 3.11 or this Section 8.1.
Section 9.1 Control-Share Acquisitions:
Subchapter G - "Control-Share Acquisitions" of Chapter 25 of
Title 15 of the Pennsylvania Consolidated Statutes, as existing on July 18, 1990
or as may thereafter be amended, shall not be applicable to the Corporation.
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Section 10.1 Disgorgement by Certain Controlling Shareholders:
Subchapter H - "Disgorgement by Certain Controlling
Shareholders Following Attempts to Acquire Control" of Chapter 25 of Title 15 of
the Pennsylvania Consolidated Statutes, as existing on July 18, 1990 or as may
thereafter be amended, shall not be applicable to the Corporation.
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INTERDIGITAL COMMUNICATIONS CORPORATION
1995 STOCK OPTION PLAN FOR EMPLOYEES AND OUTSIDE DIRECTORS
(As amended June 24, 1996)
SECTION 1. PURPOSES.
The purposes of the Plan are (a) to recognize and compensate selected
Employees and Outside Directors of the Company and its Subsidiaries who
contribute to the development and success of the Company and its Subsidiaries;
(b) to maintain the competitive position of the Company and its Subsidiaries by
attracting and retaining qualified Employees and Outside Directors of the
Company; and (c) to provide incentive compensation to Employees based upon the
Company's performance as measured by the appreciation in Common Stock. The
Discretionary Options granted pursuant to the Plan are intended to constitute
either Incentive Stock Options within the meaning of Section 422 of the Code or
Non-Qualified Stock Options except that no Incentive Stock Option will be
granted to persons other than Employees as that term is specifically defined
with respect to Incentive Stock Options. The Non-Discretionary Options granted
pursuant to the Plan are intended to constitute Non-Qualified Stock Options. The
terms of this Plan shall be incorporated in any Option Agreement to be executed
by an Optionee and the type of Options granted will be specified in the
Agreement.
SECTION 2. DEFINITIONS.
(a) "Board" shall mean the Board of Directors of the Company, as
constituted from time to time.
(b) "Change of Control" shall mean the occurrence of any of
the following events:
(i) the acquisition in one or more transactions by any "Person" (as
the term person is used for purposes of Sections 13(d) or 14(d) of the Exchange
Act) of "Beneficial Ownership" (as the term beneficial ownership is used for
purposes of Rule 13d-3 promulgated under the Exchange Act) of fifty percent
(50%) or more of the combined voting power of the Company's then outstanding
voting securities (the "Voting Securities"), provided that for purposes of this
Section 2(b)(i), the Voting Securities acquired directly from the Company by any
Person shall be excluded from the determination of such Person's Beneficial
Ownership of Voting Securities (but such Voting Securities shall be included in
the calculation of the total number of Voting Securities then outstanding); or
(ii) approval by shareholders of the Company of (A) a merger,
reorganization or consolidation involving the Company if the shareholders of the
Company immediately before such merger, reorganization or consolidation do not
or will not own directly or indirectly immediately following
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such merger, reorganization or consolidation, more than fifty percent (50%) of
the combined voting power of the outstanding voting securities of the
corporation resulting from or surviving such merger, reorganization or
consolidation in substantially the same proportion as their ownership of the
Voting Securities immediately before such merger, reorganization or
consolidation, or (B) (1) a complete liquidation or dissolution of the Company
or (2) an agreement for the sale or other disposition of all or substantially
all of the assets of the Company; or
(iii) acceptance by shareholders of the Company of shares in a share
exchange if the shareholders of the Company immediately before such share
exchange do not or will not own directly or indirectly immediately following
such share exchange more than fifty percent (50%) of the combined voting power
of the outstanding voting securities of the corporation resulting from or
surviving such share exchange in substantially the same proportion as the
ownership of the Voting Securities outstanding immediately before such share
exchange.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(d) "Committee" shall mean the Compensation and Stock Option Committee of
the Board, or any committee of the Board performing similar functions, as
appointed from time to time by the Board. The Committee shall be constituted so
as to permit the Plan to comply with Rule 16b-3 promulgated under the Exchange
Act, as the same may be amended from time to time.
(e) "Company" shall mean InterDigital Communications Corporation, a
Pennsylvania corporation.
(f) "Common Stock" shall mean common stock of the Company, $.01 par value
per share.
(g) "Disability" or "Disabled" shall mean the inability of an Optionee to
render his or her normal services to the Company resulting from a mental or
physical illness, impairment or any other similar occurrence which can be
expected to result in death or which has lasted or can be expected to last for a
period of twelve (12) consecutive months, as determined by the Board of
Directors.
(h) "Discretionary Option" shall mean an Incentive Stock Option or a
Non-Qualified Stock Option (other than a Non-Discretionary Option).
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(i) "Employee" shall mean (i) any person (including directors and officers)
who is employed by the Company or a Subsidiary and is compensated for such
employment by a regular salary and (ii) any consultant or advisor engaged by the
Company or a Subsidiary (other than officers or directors), provided that bona
fide services shall be rendered by consultants or advisors and such services
must not be in connection with the offer or sale of securities in a
capital-raising transaction; except that an Employee for purposes of a
Discretionary Option that is an Incentive Stock Option shall mean only a person
(including officers and directors) who is employed by the Company or a
subsidiary and is compensated for such employment by a regular salary.
(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as in
effect from time to time.
(k) "Fair Market Value" shall mean the fair market value of a share of
Common Stock, as determined pursuant to Section 9 hereof.
(l) "Grant Date" shall mean July 1 of each year during the term of this
Plan commencing 1995.
(m) "Incentive Stock Option" shall mean any option intended to be and
designated as an incentive stock option within the meaning of Section 422 of the
Code.
(n) "Non-Discretionary Option" shall mean a Non-Qualified Stock Option to
purchase Common Stock that is granted to Outside Directors pursuant to Section 7
hereof.
(o) "Non-Qualified Stock Option" shall mean an Option which does not
qualify as an Incentive Stock Option.
(p) "Option" shall mean a Discretionary Option or an Non-Discretionary
Option.
(q) "Option Agreement" shall mean a written agreement in such form or forms
as the Committee (subject to the terms and conditions of this Plan) may from
time to time approve evidencing and reflecting the terms of a Option.
(r) "Optionee" shall mean any Participant to whom an Option has been
granted under the Plan.
(s) "Outside Director" shall mean any member of the Board who, on the date
of the granting of an Option hereunder, is not an officer or employee of the
Company.
(t) "Participant" shall mean each Employee, Outside Director, consultant
and advisor who is eligible to participate in the Plan.
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(u) "Plan" shall mean this 1995 Stock Option Plan for Employees and Outside
Directors, as amended from time to time.
(v) "Proprietary Information" shall mean any and all confidential,
proprietary, business and technical information or trade secrets of the Company
or of any Subsidiary or affiliate of the Company revealed, obtained or developed
in the course of Optionee's employment with the Company or in the course of
Optionee's performance of services for the Company in any other capacity. Such
Proprietary Information shall include but shall not be limited to, methods of
production and manufacture, research, marketing and development plans and
efforts, cost information, pricing information, marketing methods and plans,
identities of customers and suppliers, the Company's relationship with actual or
potential customers and the needs and requirements of any such actual or
potential customers, and any other confidential information relating to the
business of the Company. Proprietary Information shall not include (i) such
information as may be necessary or appropriate for an Optionee to disclose in
the course of his employment for the effective and efficient discharge of his
duties as an Employee of the Company or as may be required by law to be
disclosed; and (ii) such information as is readily available to the general
public so long as such information did not become available to the general
public as a direct or indirect result of Optionee's breach of his obligation to
maintain confidentiality.
(w) "Securities Act" shall mean the Securities Act of 1933, as in effect
from time to time.
(x) "Shares" shall mean shares of Common Stock.
(y) "Stock Purchase Agreement" shall mean an agreement in such form as the
Committee may from time to time approve (subject to the terms and conditions of
this Plan), which an Optionee may be required to execute as a condition of
purchasing Shares upon exercise of an Option.
(z) "Subsidiary" shall mean a subsidiary corporation of the Company,
whether now or hereafter existing, and whether direct or indirect, as defined in
Sections 424(f) and (g) of the Code.
SECTION 3. PARTICIPATION.
Options shall be granted to such Participants as may be selected from time
to time by either the Committee or the Board as set forth herein, each in its
sole discretion. Participants who are Employees shall be eligible to receive
Discretionary Options under the Plan except that no Discretionary Option that is
an Incentive Stock Option will be granted to a Participant
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other than an Employee as that term is specifically defined with respect to
Incentive Stock Options. Participants who are Outside Directors shall be
eligible only to receive Non-Discretionary Options under the Plan.
SECTION 4. ADMINISTRATION.
(a) Procedure. The portion of the Plan relating to the grant of
Discretionary Options shall be administered by the Committee. The portion of the
Plan relating to the grant of Non-Discretionary Options shall be administered
by the Board. All decisions, determinations and interpretations of the Committee
or the Board, as the case may be, shall be final and binding on the respective
Optionees and any other holders of any Options granted under the Plan.
(b) Powers of the Committee. Subject to the provisions of the Plan, the
Committee shall have the authority, in its discretion: (i) to grant
Discretionary Options; (ii) to determine the Fair Market Value per Share in
accordance with Section 9 of the Plan; (iii) to determine the exercise price of
the Discretionary Options to be granted in accordance with Sections 6 and 9 of
the Plan; (iv) to determine the Employees to whom, and the time or times at
which Discretionary Options shall be granted, and the number of Shares to be
subject to each such Discretionary Option as described in greater detail in
Section 6 hereof; (v) to prescribe, amend and rescind rules and regulations
relating to the Plan; (vi) to determine the terms and provisions of each
Discretionary Option granted under the Plan, each Option Agreement and each
Stock Purchase Agreement, if any (which need not be identical with the terms of
other Discretionary Options, Option Agreements and Stock Purchase Agreements)
and, with the consent of the Optionee, to modify or amend an outstanding
Discretionary Option, Option Agreement or Stock Purchase Agreement provided that
no Incentive Stock Option may be modified if such action would cause it to cease
to be an "Incentive Stock Option", unless the Optionee specifically acknowledges
and consents to the tax consequences of such action; (vii) to accelerate the
exercise date of any Discretionary Option; (viii) to determine whether any
Employee will be required to execute a stock repurchase agreement or other
agreement as a condition to the exercise of a Discretionary Option, and to
determine the terms and provisions of any such agreement (which need not be
identical with the terms of any other such agreement) and, with the consent of
the Optionee, to amend any such agreement; (ix) to interpret the Plan or any
agreement entered into with respect to the grant or exercise of Discretionary
Options; (x) to authorize any person to execute on behalf of the Company any
instrument required to effectuate the grant of a Discretionary Option previously
granted by the Committee or to take such other actions as may be necessary or
appropriate with
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respect to the Company's rights pursuant to Discretionary Options or agreements
relating to the grant or exercise thereof; and (xi) to make such other
determinations and establish such other procedures as it deems necessary or
advisable for the administration of the Plan, including without limitation any
early termination or extension of the Plan.
(c) Criteria for Award of Discretionary Options.
In determining the Employees to whom Discretionary Options may be granted,
the Committee may condition the grant of Discretionary Options upon the
fulfillment of performance goals applicable to the individual, a business unit,
or the Company as a whole, including, for example, stock price, market share or
penetration, sales, earnings per share, return on equity, decrease in costs,
operating cash flow or any other performance criteria.
(d) Powers of the Board. The granting of Non-Discretionary Options under
the Plan and the amount, price, vesting and timing of Non-Discretionary Options
shall be automatic, as described in Section 7 hereof. All questions of
interpretation of the Plan with respect to Non-Discretionary Options will be
determined by the Board.
(e) Limitation of Liability. Notwithstanding anything herein to the
contrary, no member of the Board or the Committee shall be liable for any good
faith determination, act or failure to act in connection with the Plan or any
Option granted hereunder.
SECTION 5. STOCK SUBJECT TO THE PLAN.
Subject to this Section 5 and to the provisions of Section 9 of the Plan,
the maximum aggregate number of Shares which may be subject to Options under the
Plan is Four Million (4,000,000). If an Option expires or becomes unexercisable
for any reason without having been exercised in full, the Shares subject to such
Option shall, unless the Plan shall have been terminated, return to the Plan and
become available for future grant under the Plan. The maximum number of shares
that shall be awarded to any Optionee over the term of the Plan shall be One
Hundred Fifty Thousand (150,000).
SECTION 6. TERMS AND CONDITIONS OF DISCRETIONARY OPTIONS.
Each Discretionary Option granted pursuant to the Plan shall be authorized
by the Committee and shall be evidenced by an Option Agreement. Each Option
Agreement shall incorporate by reference all other terms and conditions of the
Plan, and shall contain the following terms and conditions:
(a) Number of Shares. The number of Shares subject to the Discretionary
Option.
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(b) Option Price. Except as hereinafter provided, the price per Share
payable on the exercise of any Discretionary Option shall be stated in the
Option Agreement and shall be no less than the Fair Market Value per share of
Common Stock on the date such Option is granted, as determined by the Committee,
except that Discretionary Options that are Non-Qualified Stock Options granted
to consultants and advisors, and to any other Employee who shall be rewarded for
unusual and special achievements, shall be at any price determined by the
Committee equal to or exceeding $.01 per share of the Common Stock.
With respect to any Discretionary Option which is an Incentive Stock Option
granted to any Employee who, at the time of grant, owns stock possessing more
than ten percent of the total combined voting power of the Common Stock, the
price per share payable upon exercise shall be at an option price determined by
the Committee which at least equals 110% of the Fair Market Value of the Common
Stock on the date the Discretionary Option is granted and such Discretionary
Option, by its terms, may not be exercisable more than five years after the date
of grant.
(c) Consideration. The consideration to be paid for the Shares to be issued
upon exercise of a Discretionary Option may be paid to the Company: (i) in cash
or certified funds, (ii) by delivery of Shares having a Fair Market Value on the
date of surrender equal to the aggregate exercise price of the Shares as to
which said Discretionary Option shall be exercised, (iii) by means of a brokers'
cashless exercise procedure or (iv) any combination of such methods of payment.
Where payment of the option price is to be made with Shares acquired under
any compensation plan of the Company, such Shares will not be accepted as
payment unless the Optionee has acquired such shares at least six months prior
to such payment.
If the consideration for the exercise of an Option is the surrender of
previously acquired and owned Shares, the Optionee will be required to make
representations and warranties satisfactory to the Company regarding his title
to the Shares used to effect the purchase (the "Payment Shares"), including
without limitation, representations and warranties that the Optionee has good
and marketable title to such Payment Shares free and clear of any and all liens,
encumbrances, charges, equities, claims, security interests, options or
restrictions, and has full power to deliver such Payment Shares without
obtaining the consent or approval of any person or governmental authority other
than those which have already given consent or approval in a manner satisfactory
to the Company. The value of the Payment Shares shall be the Fair Market Value
of such Payment Shares on the date of exercise as determined by the Board in its
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sole discretion, exercised in good faith. If such Payment Shares were acquired
upon previous exercise of incentive stock options granted within two years prior
to the exercise of the Option or acquired by the Optionee within one year prior
to the exercise of the Option, such Optionee shall be required, as a condition
to using the Payment Shares in payment of the exercise price of the Option, to
acknowledge the tax consequences of doing so, in that such previously exercised
incentive stock options may have, by such action, lost their status as incentive
stock options, and the Optionee may have to recognize ordinary income for tax
purposes as a result.
(d) Form of Option. The Option Agreement shall state whether the
Discretionary Option granted is an Incentive Stock Option or a Non-Qualified
Stock Option, and will constitute a binding determination as to the form of the
Discretionary Option granted.
(e) Exercise of Options. Any Discretionary Option granted hereunder shall
be exercisable at such times and under such conditions as shall be set forth in
the Option Agreement (as may be determined by the Committee and as shall be
permissible under the terms of the Plan), which may include performance criteria
with respect to the Company and/or the Optionee. In the event that a holder of a
Discretionary Option is indebted to the Company on account of an advance, loan
or any other reason, as a condition to being permitted to exercise the
Discretionary Option, the holder will be required to satisfy the debt in a
manner satisfactory to the Committee, including being required to sell the
Shares received upon exercise of the Discretionary Option. A Discretionary
Option may be exercised in accordance with the provisions of this Plan as to all
or any portion of the Shares then exercisable under a Discretionary Option from
time to time during the term of the Discretionary Option. A Discretionary Option
may not be exercised for a fraction of a Share.
(f) Term and Vesting of Options.
(i) Notwithstanding any other provision of this Plan, no Discretionary
Option shall be (A) granted under this Plan after ten (10) years from the date
on which this Plan is adopted by the Board of Directors, or (B) exercisable more
than ten (10) years from the date of grant; provided, however, that with respect
to any Incentive Stock Option granted under this Plan to any person who, at the
time of the grant of such Discretionary Option, owns stock possessing more than
10% of the total combined voting power for all classes of the Company's stock,
the foregoing clause (B) shall be read by substituting "five (5) years" for the
term "ten (10) years" that appears therein.
(ii) No Discretionary Option granted to any Optionee shall be treated
as an Incentive Stock Option to the extent such Discretionary Option would cause
the aggregate Fair
A-8
<PAGE>
Market Value (determined as of the date of grant of each such Option) of the
Shares with respect to which
Incentive Stock Options are exercisable by such Optionee for the first time
during any calendar year to exceed $100,000. For purposes of determining whether
an Incentive Stock Option would cause the aggregate Fair Market Value of the
stock to exceed the $100,000 limitation, Incentive Stock Options shall be taken
into account in the order granted. For purposes of this subsection, Incentive
Stock Options include all Incentive Stock Options under all plans of the Company
that are Incentive Stock Option plans within the meaning of Section 422 of the
Code.
(iii) Except as otherwise provided herein, Discretionary Options
granted hereunder shall mature and become exercisable in whole or in part, in
accordance with such vesting schedule as the Committee shall determine, which
schedule shall be stated in the Option Agreement. Discretionary Options may be
exercised in any order elected by the Optionee whether or not the Optionee holds
any unexercised Discretionary Options under this Plan or any other plan of the
Company.
(g) Termination of Options.
(i) Unless sooner terminated as provided in this Plan, each
Discretionary Option shall be exercisable for the period of time as shall be
determined by the Committee and set forth in the Option Agreement, and shall be
void and unexercisable thereafter.
(ii) Except as otherwise provided herein or in the Option Agreement,
(1) upon the termination of the Optionee's employment with the Company or a
Subsidiary for any reason, Discretionary Options exercisable on the date of said
termination shall be exercisable by the Optionee (or in the case of the
Optionee's death subsequent to termination, by the Optionee's executor(s) or
administrator(s)) in the case of Incentive Stock Options, for a period of three
(3) months from the date of the Optionee's termination of employment, and in the
case of Non-Qualified Stock Options, for a period of six (6) months from the
date of the Optionee's termination of employment, and (2) the termination
provisions set forth in clause (1) above shall not apply to Options granted to
consultants or advisors (other than officers or directors of the Company).
(iii) Except as otherwise provided herein or in the Option Agreement,
upon the Disability or death of an Optionee while employed or engaged by the
Company or a Subsidiary, Discretionary Options held by such Optionee
A-9
<PAGE>
which are exercisable on the date of Disability or death shall be exercisable
for a period of twelve (12) months commencing on the date of the Optionee's
Disability or death, by the Optionee or his legal guardian or, in the case of
death, by his executor(s) or administrator(s); provided, however, that if such
Disabled Optionee shall commence any employment during such one (1) year period
with a competitor of the Company (including, but not limited to, full or
part-time employment or independent consulting work), as determined solely in
the judgment of the Board, all Options held by such Optionee which have not yet
been exercised shall terminate immediately upon the commencement thereof.
(iv) Options may be terminated at any time by agreement between the
Company and the Optionee.
(h) Forfeiture. Notwithstanding any other provision of this Plan, if the
Optionee's employment or engagement is terminated by the Company and the Board
makes a determination that the Optionee (i) has engaged in any type of
disloyalty to the Company, including without limitation, insubordination, fraud,
embezzlement, theft, or dishonesty in the course of his employment or
engagement, or (ii) has been convicted of a felony or (iii) has disclosed any
Proprietary Information without the consent of the Company or (iv) has breached
the terms of any written confidentiality agreement or any non-competition
agreement with the Company in any material respect, all unexercised
Discretionary Options held by such Optionee shall terminate upon the earlier of
the date of termination of employment or engagement for "cause" or the date of
such a finding.
SECTION 7. TERMS AND CONDITIONS OF NON-DISCRETIONARY OPTIONS.
(a) Number of Shares. On each Grant Date, each person who served as an
Outside Director from July 1 of the year preceding the Grant Date through the
Grant Date (herein called a "Full Year") shall receive a Non-Discretionary
Option to purchase 12,000 shares. Any person who served as an
Outside Director for less than a Full Year shall receive a pro rata portion of
the Non-Discretionary Options he would have received had he served as an Outside
Director for a Full Year, based on the number of days served by such person as
an Outside Director from July 1 of the year preceding the Grant Date through the
Grant Date.
(b) Committee Member. In addition to (a) above, on each Grant Date, a
Non-Discretionary Option to purchase (i) 2,000 Shares shall be granted to each
person who served as Chairman of a Board Committee as an Outside Director for a
Full Year, and (ii) 1,000 Shares shall be granted to each person who served on
any
A-10
<PAGE>
Committee of the Board as an Outside Director for a Full Year; provided,
however, that an Outside Director who receives a Non-Discretionary Option under
clause (i) above for service as Chairman on a particular Board Committee will
not receive an additional Non-Discretionary Option under clause (ii) above for
service on the same Committee. Any person who served for less than a Full Year
as Chairman or a member of a Board Committee while he was an Outside Director
shall receive a pro rata portion of the Non-Discretionary Options he would have
received had he served in such capacity for a Full Year, based on the number of
days he served as such from July 1 of the year preceding the Grant Date through
the Grant Date.
(c) Option Price. The exercise price of all Non-Discretionary Options shall
be the Fair Market Value of the Common Stock on the Grant Date of such
Non-Discretionary Options; provided, however, that the exercise price of all
Non-Discretionary Options granted on the Grant Date occurring in 1996 shall be
the lower of the Fair Market Value of the Common Stock on the Grant Date or the
Fair Market Value of the Common Stock on January 11, 1996.
(d) Consideration. The consideration to be paid for the Shares to be issued
upon the exercise of an Option may be paid to the Company (i) in cash or
certified funds, (ii) by delivery to the Company of Shares having a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, (iii) a brokers' cashless
exercise procedure, or (iv) any combination of such methods of payment. Where
payment of the option price is to be made with Shares acquired under any
compensation plan of the Company, such shares will not be accepted as payment
unless the Optionee has acquired the shares at least six months prior to such
payment.
(e) Exercise of Options. A Non-Discretionary Option may be exercised in
accordance with the provisions of this Plan as to all or any portion of the
Shares then exercisable under a Non-Discretionary Option from time to time
during the term of the Option. A Non-Discretionary Option may not be exercised
for a fraction of a Share.
(f) Term and Vesting of Non-Discretionary Options. Non-Discretionary
Options shall be exercisable in full or in part, and shall be fully vested, from
and after their respective Grant Dates except that no Non-Discretionary Option
shall be exercisable more than 10 years from the Grant Date.
(g) Termination of Non-Discretionary Options. If an Optionee ceases to be
an Outside Director for any reason (including death or Disability),
Non-Discretionary Options exercisable on the date of such event shall be
exercisable by the Optionee (or in the case of death or Disability, by his
executor(s), administrator(s) or legal guardian as the case may be) for a period
of one year from the date on which he ceases to be an Outside Director, but in
no event later than the date it would have expired had the Optionee continued to
be an Outside Director.
SECTION 8. STOCK APPRECIATION RIGHTS
(a) Stock Appreciation Rights. (a) The Committee may grant Stock
Appreciation Rights ("SAR"s) in conjunction with
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<PAGE>
Discretionary Options under the Plan such that, upon exercise of the SAR by an
Optionee, the Company shall pay, in cash, stock or both as determined by the
Committee in its sole discretion, an amount equal to the excess of the Fair
Market Value of a share of Common Stock on the date of exercise over the
exercise price, multiplied by the number of shares covered by the SAR.
(b) Exercise of an SAR for a certain number of shares shall reduce by such
number the number of shares exercisable under the Discretionary Option, and
exercise of the Option shall correspondingly reduce the number of shares
exercisable under the SAR. Except as otherwise provided herein, any exercise of
an SAR for cash in full or partial settlement thereof may be made only from the
third business day until the twelfth business day following the public release
of the Company's quarterly or annual sales and earnings.
SECTION 9. DETERMINATION OF FAIR MARKET VALUE OF COMMON STOCK.
(a) Except to the extent otherwise provided in this Section 9, the Fair
Market Value of a share of Common Stock shall be determined by the Committee in
its sole discretion.
(b) In the event that Shares are traded in the over-the-counter market, the
Fair Market Value of a share of Common Stock shall be the mean of the bid and
asked prices for a share of Common Stock on the relevant valuation date as
reported in The Wall Street Journal (or, if not so reported, as otherwise
reported by the National Quotation Bureau, Inc.) as applicable or, if there is
no trading on such date, on the next preceding trading date. In the event Shares
are listed on a national or regional securities exchange or traded on the Nasdaq
Stock Market ("Nasdaq"), the Fair Market Value of a share of Common Stock shall
be the closing price of a share of Common Stock on the exchange or on Nasdaq, as
reported in The Wall Street Journal on the relevant valuation date, or if there
is no trading on that date, on the next preceding trading date.
(c) "Adjusted Fair Market Value" shall mean in the event of a Change of
Control, the greater of (A) the highest price per share of Common Stock paid or
payable to holders of the Common Stock in any transaction (or series of
transactions) constituting or resulting (or as to which approval by shareholders
of the Company constitutes or results) in the Change of Control or (B) the
highest Fair Market Value of a share of Common Stock on any business day during
the ninety (90) day period ending on the date of the Change of Control.
SECTION 10. ADJUSTMENTS.
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<PAGE>
(a) Subject to required action by the shareholders, if any, the number of
Shares of Common Stock as to which Options may be granted under this Plan and
the number of Shares subject to outstanding Options and the option prices
thereof shall be adjusted proportionately for any increase or decrease in the
number of outstanding Shares of Common Stock of the Company resulting from stock
splits, reverse stock splits, stock dividends, reclassifications and
recapitalizations.
(b) No fractional shares of Common Stock shall be issuable on account of
any action mentioned in paragraph 9(a) above, and the aggregate number of shares
into which Shares then covered by the Option, when changed as the result of such
action, shall be reduced to the number of whole shares resulting from such
action, unless the Board, in its sole discretion, shall determine to issue scrip
certificates with respect to any fractional shares, which scrip certificates, in
such event, shall be in a form and have such terms and conditions as the Board
in its discretion shall prescribe.
SECTION 11. RIGHTS AS A SHAREHOLDER.
The Optionee shall have no rights as a shareholder of the Company and shall
have neither the right to vote nor receive dividends with respect to any Shares
subject to an Option until such Option has been exercised.
SECTION 12. TIME OF GRANTING DISCRETIONARY OPTIONS.
The date of grant of a Discretionary Option shall, for all purposes, be the
date on which the Committee authorizes the granting of such Option. Notice of
the grant shall be given to each Participant to whom an Option is so granted
within a reasonable time after the date of such grant.
SECTION 13. PROCEDURE FOR EXERCISE OF AN OPTION.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company at its principal executive office in
accordance with the terms of any Option Agreement by the person entitled to
exercise the Option and full payment for the Shares with respect to the Option
which is exercised has been received by the Company, accompanied by any
agreements required by the Company, including an executed Stock Purchase
Agreement. No adjustment shall be made for a dividend or other right for which
the record date is prior to the date the Option is exercised, except as provided
in Section 10 of the Plan.
As soon as practicable after any proper exercise of an Option in accordance
with the provisions of the Plan, the Company
A-13
<PAGE>
shall without transfer or issue tax to the Optionee, deliver to the Optionee at
the principal executive office of the Company or such other place as shall be
mutually agreed upon between the Company and the Optionee, a certificate or
certificates representing the Shares for which the Option shall have been
exercised. The time of issuance and delivery of the certificate(s) representing
the Shares for which the Option shall have been exercised may be postponed by
the Company for such period as may be required by the Company, with reasonable
diligence, to comply with any applicable listing requirements of any national or
regional securities exchange or any law or regulation applicable to the issuance
or delivery of such Shares.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
SECTION 14. CONDITIONS TO ISSUANCE OF SHARES UPON EXERCISE.
(a) The obligation of the Company to issue and sell Shares to an Optionee
upon the exercise of an Option granted under the Plan is conditioned upon (i)
the Company obtaining any required permit or order from appropriate governmental
agencies, authorizing the Company to issue and sell such Shares, and (ii) such
issuance and sale complying with all relevant provisions of law, including,
without limitation, the Securities Act, the Exchange Act, the rules and
regulations promulgated thereunder, and the requirements of any stock exchange
upon which the Shares may then be listed.
(b) At the option of the Board, the obligation of the Company to issue and
sell Shares to an Optionee upon the exercise of an Option granted under the Plan
may be conditioned upon obtaining appropriate representations, warranties and
agreements of the Optionee set forth in the Stock Purchase Agreement. Among
other representations, warranties, restrictions and agreements, the Optionee may
be required to represent and agree that the purchase of Shares of Common Stock
under the Option Agreement shall be for investment, and not with a view to the
public resale or distribution thereof, unless the Shares subject to the Option
are registered under the Securities Act and the issuance and sale of the Shares
complies with all other laws, rules and regulations applicable thereto. Unless
the issuance of such Shares is registered under the Securities Act, the Optionee
shall acknowledge that the Shares purchased on exercise of the Option are not
registered under the Securities Act and may not be sold or otherwise transferred
unless such Shares have been registered under the Securities Act in connection
with the sale or other transfer, or counsel satisfactory to the Company has
issued an opinion satisfactory to the Company that the sale or other transfer is
exempt from registration under the Securities Act, and unless said sale or other
transfer is in compliance with any
A-14
<PAGE>
other applicable laws, rules and regulations including all applicable federal
and state securities laws, rules and regulations. Unless the Shares subject to
an Option are registered under the Securities Act, the certificates representing
all Shares issued upon exercise of such Option shall contain the following
legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED OR ANY APPLICABLE STATE SECURITIES LAWS.
THESE SHARES HAVE NOT BEEN ACQUIRED WITH A VIEW TO DISTRIBUTION OR RESALE, AND
MAY NOT BE SOLD, ASSIGNED, EXCHANGED, MORTGAGED, PLEDGED, HYPOTHECATED OR
OTHERWISE TRANSFERRED OR DISPOSED OF, BY GIFT OR OTHERWISE, OR IN ANY WAY
ENCUMBERED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SHARES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE SECURITIES LAWS, OR
A SATISFACTORY OPINION OF COUNSEL SATISFACTORY TO INTERDIGITAL COMMUNICATIONS
CORPORATION THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT AND UNDER
APPLICABLE STATE SECURITIES LAWS.
SECTION 15. TRANSFERABILITY.
No Option shall be assignable or transferable otherwise than by will or by
the laws of descent and distribution or pursuant to a domestic relations order
as defined by the Code.
SECTION 16. OTHER PROVISIONS.
The Option Agreement and Stock Purchase Agreement may contain such other
provisions as the Committee in its discretion deems advisable and which are not
inconsistent with the provisions of this Plan.
SECTION 17. CHANGE OF CONTROL.
(a) For purposes of the Plan, "Option Cancellation Date" shall mean, as to
each Option, the later of: (i) the first business day after the expiration of a
period of six (6) months from the date of grant of the Option; (ii) in the event
of a Change of Control as defined in Section 2(b)(ii)(A) or 2(b)(ii)(B)(2), the
date on which the transaction approved by shareholders of the Company (as
provided in Section 2(b)(ii)) is consummated; and (iii) in the event of the
Change of Control as defined in Section 2(b)(i) or 2(b)(iii), the first business
day after the expiration of a period of sixty (60) days after the occurrence of
such event.
A-15
<PAGE>
(b) Upon a Change of Control, all Options (whenever granted) outstanding on
the date of such Change of Control shall be or become immediately and fully
exercisable.
(c) In the event of the Change of Control as defined in Section 2(b)(i),
2(b)(ii)(A), 2(b)(ii)(B)(2) or 2(b)(iii), all Options (whenever granted)
outstanding on the Option Cancellation Date which are not exercised on or before
the Option Cancellation Date shall be canceled on such date by the Company, and
the Company shall on such date pay to each holder of each such canceled Option a
cash amount equal to the excess, if any, in respect of each Option canceled, of
(i) the greater of (A) the Fair Market Value of the shares of Common Stock
subject to the Option on the business day immediately preceding the Option
Cancellation Date or (B) the Adjusted Fair Market Value of the Common Stock
subject to the Option over (ii) the aggregate purchase price for such shares of
Common Stock.
SECTION 18. AMENDMENT OF THE PLAN.
The Board is authorized to make such changes in the Plan as it may deem to
be in the best interests of the Company; subject, however, to the prior approval
of the stockholders of the Company if such alteration would: (a) materially
increase benefits to Participants, (b) materially increase the number of Shares
issuable under the Plan, or (c) materially modify the requirements as to
eligibility for participation in the Plan. Notwithstanding the foregoing, the
Plan shall not be amended with respect to non-Discretionary Options more than
once every six months, other than to comport with changes in the Code, the
Employee Retirement Income Security Act, or the rules thereunder. The Board may
at any time suspend or discontinue the Plan. No termination or amendment of the
Plan, however, shall adversely affect any Option theretofore granted under the
Plan without the consent of the Optionee.
SECTION 19. APPLICATION OF FUNDS.
The proceeds received by the Company from the sale of Shares pursuant to
the exercise of Options shall be used for general corporate purposes or such
other purpose as may be determined by the Company.
SECTION 20. NO OBLIGATION TO EXERCISE OPTION.
The granting of an Option shall impose no obligation upon the Optionee to
exercise such Option.
SECTION 21. RESERVATION OF SHARES.
A-16
<PAGE>
The Company, during the term of this Plan, shall at all times reserve and
keep available such number of Shares as shall be sufficient to satisfy the
requirements of the Plan.
The Company, during the term of this Plan, shall use its best efforts to
seek to obtain from appropriate regulator agencies any requisite authorization
in order to issue and sell such number of Shares as shall be sufficient to
satisfy the requirements of the Plan. The inability of the Company to obtain
from any such regulator agency having jurisdiction the requisite
authorization(s) deemed by the Company's counsel to be necessary for the lawful
issuance and sale of any Shares hereunder, or the inability of the Company to
confirm to its satisfaction that any issuance and sale of any Shares hereunder
will meet applicable legal requirements, shall relieve the Company of any
liability in respect to the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
SECTION 22. TAXES, FEES, EXPENSES AND WITHHOLDING OR TAXES.
(a) The Company shall pay all original issue and transfer taxes (but not
income taxes, if any) with respect to the grant of Options and/or the issue and
transfer of Shares pursuant to the exercise thereof, and all other fees and
expenses necessarily incurred by the Company in connection therewith, and will
from time to time use its best efforts to comply with all laws and regulations
which, in the opinion of counsel for the Company, shall be applicable thereto.
(b) The grant of Options hereunder and the issuance of Shares pursuant to
the exercise thereof is conditioned upon the Company's reservation of the right
to withhold in accordance with any applicable law, from any compensation or
other amounts payable to the Optionee, any taxes required to be withheld under
federal, state or local law as a result of the grant or exercise of such Option
or the sale of the Shares issued upon exercise thereof. To the extent that
compensation or other amounts, if any, payable to the Optionee is insufficient
to pay any taxes required to be so withheld, the Company may, in its sole
discretion, require the Optionee, as a condition of the exercise of an Option,
to pay in cash to the Company an amount sufficient to cover such tax liability
or otherwise to make adequate provision for the Company's satisfaction of its
withholding obligations under federal, state and local law.
SECTION 23. NOTICES.
Any notice to be given to the Company pursuant to the provisions of this
Plan shall be addressed to the Company in care of its Secretary (or such other
person as the Company may designate from time to time) at its principal
executive office, and any notice to be given to an Optionee shall be delivered
personally or addressed to him or her at the address given beneath his or her
signature on his or her Option Agreement, or
A-17
<PAGE>
at such other address as such Participant or his or her transferee (upon the
transfer of the Shares purchased upon exercise) may hereafter designate in
writing to the Company. Any such notice shall be deemed duly given when enclosed
in a properly sealed envelope or wrapper addressed as aforesaid, registered or
certified, and deposited, postage and registry or certification fee prepaid, in
a post office or branch post office regularly maintained by the United States
Postal Service. It shall be the obligation of each Optionee and each transferee
holding Shares purchased upon exercise of an Option to provide the Secretary of
the Company, by letter mailed as provided herein, with written notice of his or
her direct mailing address.
SECTION 24. NO ENLARGEMENT OF OPTIONEE RIGHTS.
This Plan is purely voluntary on the part of the Company, and the
continuance of the Plan shall not be deemed to constitute a contract between the
Company and any Optionee, or to be consideration for or a condition of the
employment or service of any Optionee. Nothing contained in this Plan shall be
deemed to give any Optionee the right to be retained in the employ or service of
the Company or any Subsidiary, or in the case of Outside Directors, obligate the
Company to nominate any Participant for election as a director, or to interfere
with the right of the Company or any Subsidiary to discharge or retire any
Optionee thereof at any time, subject to applicable law. No Optionee shall have
any right to or interest in Options authorized hereunder prior to the grant
thereof to such Optionee, and upon such grant he shall have only such rights and
interests as are expressly provided herein, subject, however, to all applicable
provisions of the Company's Certificate of Incorporation, as the same may be
amended from time to time.
SECTION 25. INVALID PROVISIONS.
With respect to persons subject to Section 16 of the Exchange Act,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent
any provision of the Plan or action by the Committee or Board fails to so
comply, it shall be deemed null and void, to the extent permitted by law and
deemed advisable by the Board.
In the event that any provision of this Plan is found to be invalid or
otherwise unenforceable under any applicable law, such invalidity or
unenforceability shall not be construed as rendering any other provisions
contained herein as invalid or unenforceable, and all such other provisions
shall be given full force and effect to the same extent as though the invalid or
unenforceable provision was not contained herein.
A-18
<PAGE>
SECTION 26. APPLICABLE LAW.
This Plan shall be governed by and construed in accordance with the laws of
the Commonwealth of Pennsylvania.
SECTION 27. PLAN ADOPTION AND TERM.
(a) This Plan shall become effective upon the later to occur of (i) its
adoption by the Board and (ii) its approval by the Company's stockholders at an
Annual Meeting of Stockholders.
(b) Subject to the provisions herein relating to amendment or
discontinuance, this Plan shall terminate ten years from its effective date as
determined by subparagraph (a) above.
A-19
<PAGE>
EXHIBIT 11
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NINE MONTHS
ENDED
COMPUTATION OF PRIMARY SEPTEMBER 30,
EARNINGS (LOSS) PER SHARE: 1995
- -------------------------- -------------
Net Income (Loss) Applicable to Common Shareholders $ 37,337
========
Weighted Average of Primary Shares:
Common Stock 43,770
Assumed Conversion of Options and Warrants 2,563
--------
46,333
========
Primary Earnings Per Share $ 0.81
========
A calculation for the three month periods ended September 30, 1995 and 1996 and
the nine month period ended September 30, 1996 have not been presented since the
effect of the options and warrants would be anti-dilutive.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 16,011
<SECURITIES> 51,421
<RECEIVABLES> 13,037
<ALLOWANCES> 389
<INVENTORY> 8,581
<CURRENT-ASSETS> 92,698
<PP&E> 18,268
<DEPRECIATION> 7,474
<TOTAL-ASSETS> 117,349
<CURRENT-LIABILITIES> 24,901
<BONDS> 3,126
0
10
<COMMON> 480
<OTHER-SE> 79,712
<TOTAL-LIABILITY-AND-EQUITY> 117,349
<SALES> 14,356
<TOTAL-REVENUES> 40,931
<CGS> 16,652
<TOTAL-COSTS> 16,652
<OTHER-EXPENSES> 15,054
<LOSS-PROVISION> 81
<INTEREST-EXPENSE> 132
<INCOME-PRETAX> 844
<INCOME-TAX> 3,519
<INCOME-CONTINUING> (3,565)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,565)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
