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, 1998
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) (Zip Code)
(610) 878-7800
---------------------------------------------
(Registrant's telephone number, including area code)
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.
48,470,316 Shares of Common Stock, par value $.01 per share, were outstanding on
October 30, 1998.
<PAGE>
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I - Financial Information:
Item 1. Consolidated Financial Statements 3
Consolidated Balance Sheets - 3
December 31, 1997 and September 30, 1998 (unaudited)
Consolidated Statements of Operations - 4
Three and Nine Months Ended September 30, 1997 and 1998
(unaudited)
Consolidated Statements of Cash Flows - 5
Nine Months Ended September 30, 1997 and 1998 (unaudited)
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
Part II - Other Information:
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except per share data)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
ASSETS 1997 1998
- ------ ------------ ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents, including restricted
cash of $193 and $231, respectively $ 17,828 $ 6,921
Short term investments 7,976 35,159
Accounts receivable, net of allowance for
uncollectable accounts of $897 and $954, respectively 3,058 2,799
Inventories 12,284 11,862
Other current assets 5,428 5,910
--------- ---------
Total current assets 46,574 62,651
--------- ---------
Property, plant and equipment, net of accumulated
depreciation of $11,454 and $14,121, respectively 11,373 9,964
Patents, net of accumulated amortization of
$5,579 and $6,334, respectively 9,292 9,767
Long term deposits 519 526
Other 1,605 1,620
--------- ---------
22,789 21,877
--------- ---------
$ 69,363 $ 84,528
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current portion of long term debt $ 869 $ 766
Accounts payable 8,223 4,577
Accrued compensation and related expenses 6,013 5,955
Deferred revenue 3,461 4,523
Other accrued expenses 5,105 6,400
--------- ---------
Total current liabilities 23,671 22,221
--------- ---------
LONG TERM DEBT 3,591 3,204
--------- ---------
OTHER LONG TERM LIABILITIES 3,596 716
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 2)
SHAREHOLDERS' EQUITY:
Preferred Stock, $ .10 par value, 14,399 shares authorized-
$2.50 Convertible Preferred, 102 shares issued and
outstanding 10 10
Common Stock, $.01 par value, 75,000 shares authorized,
48,230 shares and 48,427 shares issued and
outstanding 482 484
Additional paid-in capital 234,765 235,457
Accumulated deficit (196,752) (177,564)
--------- ---------
Total shareholders' equity 38,505 58,387
--------- ---------
$ 69,363 $ 84,528
========= =========
</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,
-------------------- --------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Product 1,933 2,569 $ 42,151 $ 6,331
Licensing and alliance 1,227 2,280 5,182 55,036
-------- -------- -------- --------
3,160 4,849 47,333 61,367
-------- -------- -------- --------
OPERATING EXPENSES:
Cost of product 2,181 3,005 37,912 10,644
Sales and marketing 1,362 878 5,553 2,932
General and administrative 1,576 1,235 5,606 4,116
Patents administration and licensing 1,294 1,836 3,902 8,591
Product development 5,469 4,481 18,171 12,184
-------- -------- -------- --------
11,882 11,435 71,144 38,467
-------- -------- -------- --------
Income (loss) from operations (8,722) (6,586) (23,811) 22,900
OTHER INCOME (EXPENSE):
Interest income 745 651 1,768 1,674
Interest and financing expenses (81) (75) (309) (274)
-------- -------- -------- --------
Income (loss) before income taxes (8,058) (6,010) (22,352) 24,300
INCOME TAX PROVISION -- (14) (34) (4,920)
-------- -------- -------- --------
Net income (loss) (8,058) (6,024) (22,386) 19,380
PREFERRED STOCK DIVIDENDS (64) (64) (192) (192)
-------- -------- -------- --------
NET INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS $ (8,122) $ (6,088) $(22,578) $ 19,188
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE - BASIC $ (0.17) $ (0.13) $ (0.47) $ 0.40
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC 48,167 48,427 48,148 48,349
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE - DILUTED $ (0.17) $ (0.13) $ (0.47) $ 0.39
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - DILUTED 48,167 48,427 48,148 48,782
======== ======== ======== ========
</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,
---------------------------------------
1997 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $(22,385) $ 19,188
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities-
Depreciation and amortization 3,546 3,422
Other (2,627) (2,880)
Decrease (increase) in assets-
Receivables 7,232 259
Inventories 2,813 422
Other current assets (6,680) (482)
Increase (decrease) in liabilities-
Accounts payable (11,056) (3,646)
Accrued compensation 1,398 (58)
Deferred revenue (1,552) 1,062
Other accrued expenses 96 1,295
-------- --------
Net cash provided by (used for) operating activities $(29,215) $ 18,582
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in short-term investments $ 26,258 $(27,183)
Additions to property and equipment, net of non-cash additions
of $141 and $190, respectively (2,092) (1,068)
Additions to patents (764) (1,230)
Other non-current assets (404) (22)
-------- --------
--------
Net cash provided by (used for) investing activities $ 22,998 $(29,503)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sales of Common Stock
and exercises of stock options and warrants $ 251 $ 694
Payments on long-term debt, including capital lease obligations (795) (680)
-------- --------
Net cash provided by (used for) financing activities $ (544) $ 14
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS $ (6,761) $(10,907)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,954 17,828
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,193 $ 6,921
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 107 $ 263
======== ========
Income taxes paid $ 127 $ 4,847
======== ========
</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, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION:
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal,
recurring adjustments) necessary to present fairly InterDigital Communication
Corporation's (the "Company" or "InterDigital") financial position as of
September 30, 1998 and the results of their operations for the three and nine
month periods ended September 30, 1997 and 1998 and the cash flows for the nine
month periods ended September 30, 1997 and 1998. 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. These financial statements should be read in
conjunction with the financial statements and notes thereto contained in the
Company's annual report for the year ended December 31, 1997, on Form 10-K filed
with the Securities and Exchange Commission on March 31, 1998. 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.
2. CONTINGENCIES:
The Company and InterDigital Technology Corporation ("ITC"), a wholly-owned
subsidiary, are parties to a certain patent-related litigation in which ITC is
asserting that a certain third party infringes ITC's patents. ITC generally is
seeking injunctive relief and monetary damages. The alleged infringer generally
seeks declarations that ITC's patents are invalid and/or that its products do
not infringe ITC's patents as well as monetary damages. 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.
3. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
The Company considers investments purchased with a remaining 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,
1997 1998
----------- --------------
Money market funds and demand deposits $ 8,979 $ 6,243
Repurchase agreements 7,856 428
Commercial paper 993 250
--------- ------------
$ 17,828 $ 6,921
========= ============
The repurchase agreements are fully collateralized by United States Government
securities and are stated at cost which approximates fair market value.
6
<PAGE>
Short-term investments available for sale as of December 31, 1997 consisted of
$2.6 million in government-issued discount notes, and $5.3 million in corporate
debt securities as of December 31, 1997. Short-term investments available for
sale as of September 30, 1998 consisted of $19.4 million in government-issued
discount notes, and $15.7 million in corporate debt securities.
4. MAJOR CUSTOMERS AND GEOGRAPHIC DATA:
Product Revenue:
In fiscal 1997, the Company's Indonesian and Philippine customers represented
75% and 7%, respectively, of UltraPhone(R) product sales. Late in 1997,
InterDigital began shipping prototype units of its new True Link(TM) wireless
local loop product based on its B-CDMA(TM) technology to its alliance partners.
For the three months ended September 30, 1997, the Company's Indonesian customer
and Siemens Aktiengesellschaft ("Siemens") accounted for 43% and 31%
respectively, of product revenues. For the three months ended September 30,
1998, 86% of the Company's product revenue was for shipments to Namibia through
an alliance partner. For the nine months ended September 30, 1997, the Company's
Indonesian customer accounted for 78% of product revenues. For the nine months
ended September 30, 1998, product revenue from sales to its partners accounted
for 75% of the Company's product revenue.
Product revenues by geographic area are as follows (in thousands):
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
1997 1998 1997 1998
---- ---- ---- ----
Domestic $ 377 $ 181 $ 951 $ 651
Foreign 1,556 2,388 41,200 5,680
------- ------- ------- -------
$ 1,933 $ 2,569 $42,151 $ 6,331
======= ======= ======= =======
Licensing and Alliance Revenue:
During the three months ended September 30, 1997, ITC recognized $704,000
related to agreements with Samsung Electronics Co., Ltd. ("Samsung"), and
$523,000 of royalty revenue from one licensee under ITC's TDMA related patents.
During the three months ended September 30, 1998, licensing and alliance
revenues included $852,000 from Samsung, $1.3 million from Alcatel Espana
("Alcatel") and $112,000 in recurring royalty revenue. During the nine months
ended September 30, 1997, licensing and alliance revenues include $2.1 million
from Samsung, $1.6 million from Siemens, and $1.5 million of royalty revenue
from one licensee under its TDMA related patents. During the nine months ended
September 30, 1998, licensing and alliance revenues included $2.6 million from
Samsung, $3.9 million from Alcatel, $478,000 in recurring royalty revenues, and
$48.1 million in new licensing revenue.
5. NET INCOME (LOSS) PER COMMON SHARE:
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share", effective the year ended December 31, 1997. This statement
requires the disclosure of both basic and diluted earnings per share and
requires retroactive restatement of prior years' per share disclosures. The
following tables reconcile the numerator and denominator of the basic and
diluted net income (loss) per share computations:
7
<PAGE>
<TABLE>
<CAPTION>
(in thousands)
Three Months Ended Three Months Ended
September 30, 1997 September 30, 1998
------------------------------------------- ----------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income (Loss) per Share -Basic:
Income (loss) available to common
stockholders $(8,122) 48,167 $ (0.17) $(6,088) 48,427 $ (0.13)
Effect of Dilutive Options and
Warrants $ -- -- $ -- -- -- $ --
------- ------ -------- ------- ------ --------
Income (Loss) per Share-Diluted:
Income (loss) available to
common stockholders +
assumed conversions $(8,122) 48,167 $ (0.17) $(6,088) 48,427 $ (0.13)
======= ====== ======== ======= ====== ========
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1998
------------------------------------------- ------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Income (Loss) per Share - Basic:
Income (loss) available to
common stockholders $(22,578) 48,148 $ (0.47) $ 19,188 48,349 $ 0.40
Effect of Dilutive Options and
Warrants -- -- -- -- 433 $ 0.01
-------- ------ -------- -------- ------ --------
Income (Loss) per Share-Diluted
Income (loss) available to
common stockholders +
assumed conversions $(22,578) 48,148 $ (0.47) $ 19,188 48,782 $ 0.39
======== ====== ======== ======== ====== ========
</TABLE>
6. INVENTORIES:
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1998
----------------- ------------------
(in thousands)
<S> <C> <C>
Component parts and work-in-progress $ 10,249 $ 10,049
Finished goods 2,035 1,813
----------- ----------
$ 12,284 $ 11,862
=========== ==========
</TABLE>
Inventories are stated net of valuation reserves of $5.8 million and $9.3
million as of December 31, 1997 and September 30, 1998, respectively.
8
<PAGE>
7. INCOME TAXES:
For the three months ended September 30, 1997 no income tax provision was
recorded. The income tax provision for the three months ended September 30, 1998
consists of a provision for state taxes of $14,000. For the nine months ended
September 30, 1997, the income tax provision consisted of a current state tax
provision of $34,000. The income tax provision for the nine months ended
September 30, 1998 consists of a current state tax provision of $91,000, a
foreign withholding tax provision of $4.9 million, partially offset by a state
tax refund of $49,000 from a prior period. At December 31, 1997, the Company had
net operating loss carryforwards of approximately $135 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, 1998.
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, 1998.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The following discussion should be read in conjunction with the Consolidated
Financial Statements and notes thereto, contained elsewhere in this 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, InterDigital 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.
InterDigital's operations from 1987 through 1992 were characterized by
increasing revenues accompanied by significant operating losses. In late 1992,
InterDigital acquired by merger two related companies whose business included
research and development activities related to CDMA wireless digital
communications technology. Since that time, InterDigital has invested
substantial amounts in its B-CDMA development efforts. In 1997, InterDigital and
its alliance partners started to engage in pre-market planning activities
associated with their new B-CDMA-based wireless local loop products. During
1997, InterDigital had approximately $1.1 million of sales related to prototype
TrueLink products and component sales to its alliance partners. These sales
included B-CDMA ASICs (Application Specific Integrated Circuits) and other
components sold for integration into the alliance partners' pre-production
products. In January 1998, InterDigital announced that it had restructured its
operations to more fully concentrate on the commercialization of its B-CDMA
technology. As part of that restructuring, InterDigital announced its plans to
curtail its level of spending relating to the re-engineering and next generation
development efforts on the UltraPhone system and has not undertaken additional
UltraPhone product redesign efforts. The UltraPhone product does, however,
continue to be marketed to niche markets. In March 1998, InterDigital's TrueLink
system was unveiled for commercial launch at the CEBIT show. Field trials of the
TrueLink product are underway.
In addition to its UltraPhone and B-CDMA business activities, in 1993,
InterDigital, together with ITC implemented a comprehensive license strategy
designed to capitalize upon the revenue potential of ITC's extensive TDMA and
CDMA patent portfolio. This strategy has resulted in the establishment of
strategic alliances with Siemens, Samsung and Alcatel and patent licenses with a
total of seventeen licensees through September 30, 1998. It resulted in license
and alliance revenues of over $180 million since 1993, including $54.6 million
through September 30, 1998. Despite these successes, revenues from alliance
partners and licensees have been, thus far, primarily in the form of up-front,
non-refundable payments. This coupled with the fact that new license and/or
alliance agreements are not entered into on a regular, predictable basis has
been a major factor in the significant fluctuations in the Company's revenues
and operating results from quarter to quarter. InterDigital expects the
variability in licensing and alliance revenues and, consequently, in cash flow
to continue unless and until significant recurring royalties are received under
the applicable license and alliance agreements.
Liquidity
The Company had working capital of $40.4 million at September 30, 1998
compared to working capital of $22.9 million at December 31, 1997. The increase
in working capital since December was due primarily to the receipt of $43
million of cash from three new patent licensees in the first half of 1998.
Demands on working capital in 1998 and beyond are expected to increase, in the
context of careful cash management and cost containment, primarily as a result
of significant increases in B-CDMA technology development expenditures to
commercialize, update and expand applications for the Company's technology. As
the commercial development effort for the current product nears completion,
substantial 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. Marketing, administrative, and
other costs are expected to increase as well as the Company seeks to more
effectively support its alliance program. Further, the cost of prosecuting
patent applications worldwide, defending the validity of ITC's patents, and
litigating patent infringement actions related to ITC's patents can be
substantial.
The Company's working capital requirements will depend on numerous additional
factors, including but not limited to the success of furthering the alliance and
licensing strategy, the extent of the niche market and related margins for
10
<PAGE>
the UltraPhone system, the ability to generate license fees and royalties, and
the need to expend funds in connection with its patent enforcement activities.
The Company does not presently maintain bank lines of credit. The Company may,
at some future date, find it desirable to obtain additional debt or equity
capitalization to fully support its technical and product development and
marketing activities and/or to fund its patent enforcement activities. There can
be no assurances that the Company will be able to obtain any such debt or equity
financing, or that it will be able to do so on terms favorable to the Company.
The Company believes that inventories and non-current assets at December 31,
1997 and September 30, 1998 are realizable 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 for lack of use or
technological obsolescence. With respect to other assets, the Company believes
that the value of its patents is at least equal to the value included in the
December 31, 1997 and September 30, 1998 balance sheets.
Backlog
At September 30, 1998 backlog of orders for the Company's telephone equipment
and services was $355,000. At September 30, 1997, the Company's backlog of
orders for UltraPhone telephone equipment and services was $888,000. The
Company's May 16, 1997 contract with the Myanma Posts and Telecommunications
valued at $250 million has not been included in backlog. While the contract is
still in place, the Company currently believes that it is unlikely the contract
will be performed due to the lack of progress in securing financing and, as a
result, in obtaining government permits.
Cash Flows and Financial Condition
The Company has generated cash flows from operations of $18.6 million during
the nine months ended September 30, 1998. The positive cash flows from
operations are primarily due to the payments received from new licensees.
Net cash used for investing activities for the nine months ended September 30,
1998 was $29.5 million. Notwithstanding the above, the amount of cash used in
investing activities has, historically, been low relative to cash used in
operations.
During the nine months ended September 30, 1998, the Company generated cash
flows of $14,000 from financing activities. Proceeds from the exercise of stock
options and warrants and the sale of stock through the Company's Employee Stock
Purchase Plan were partially offset by payments on long term debt (including
capital lease obligations).
Cash and cash equivalents of $6.9 million as of September 30, 1998 includes
$231,000 of restricted cash. The product accounts receivable of $2.8 million at
September 30, 1998 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, 1998, $1.1
million has been collected through October 30, 1998.
Results of Operations - Third Quarter of 1998 Compared to the Third Quarter
of 1997
Total Revenues. Total revenues in the third quarter ended September 30, 1998
increased 53.4% to $4.8 million from $3.2 million in the third quarter ended
September 30, 1997. Product sales increased in the third quarter of 1998 to $2.6
million from $1.9 million in the comparable quarter of 1997.
During the third quarter of 1998, the Company recognized $852,000 as part of
the Samsung agreements, $1.3 million from Alcatel, and $112,000 of royalty
revenue from one of its licensees. During the third quarter of 1997, the Company
recognized $704,000 of Samsung revenue related to B-CDMA technology development.
The Company also recognized $523,000 of royalty revenue during the third quarter
of 1997 from one of its licensees.
11
<PAGE>
Cost of Product Revenues. Cost of product revenues for the third quarter of 1998
increased to $3.0 million from $2.2 million for the third quarter of 1997,
primarily due to the increase in product revenues. The Company had approximately
17% negative gross margin on product sales for the quarter ended September 30,
1998 as compared to a negative gross margin of 13% for the quarter ended
September 30, 1997. The Company did not achieve product revenues sufficient to
fully absorb manufacturing overhead costs at standard, acceptable absorption
rates. Included in cost of product revenues 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 any manufacturing
overhead expenses the Company has incurred that are not absorbed into inventory
based on the low volume of production during the quarter.
Other Operating Expenses. Other operating expenses include sales and marketing
expenses, general and administrative expenses, patent administration and
licensing, and product development expenses.
Sales and marketing expenses decreased 35.5% to $878,000 for the third quarter
of 1998 as compared to $1.4 million during the third quarter of 1997. The
decrease is primarily due to a decrease in activity levels but was partially
offset by increased commission expense due to the increase in UltraPhone product
revenues in the three month period of 1998.
General and administrative expenses for the third quarter of 1998 decreased
21.6% to $1.2 million from $1.6 million for the third quarter of 1997. The
decrease is primarily due to the timing of certain costs and cost containment
measures.
Patents administration and licensing activities expense increased 41.9% to
$1.8 million for the third quarter of 1998 as compared to $1.3 million for the
third quarter of 1997 primarily due to an increase in the Company's activities
in support of its licensing strategy of offering non-exclusive, royalty bearing
patent, technology, know-how and trademark licensees.
Product development expenses for the third quarter of 1998 decreased 18.1% to
$4.5 million as compared to $5.5 million during the third quarter of 1997. The
decrease over the prior year period is due primarily to decreased staff and
activities levels devoted to the further development of the Company's UltraPhone
product and to the timing of certain costs related to the Company's B-CDMA
technology.
Other Income and Expense. Interest income for the third quarter of 1998 was
$651,000 as compared to $745,000 for the third quarter of 1997. The decrease was
due to lower interest rates on shorter term instruments. Interest expense for
the quarter ended September 30, 1998 was $75,000 as compared to $81,000 for the
quarter ended September 30, 1997. The decrease is due primarily to a decrease in
the Company's long term debt.
Results of Operations - Nine Months Ended September 30, 1998 Compared to
Nine Months Ended September 30, 1997
Total Revenues. Total revenues for the nine months ended September 30, 1998
increased 29.6% to $61.4 million from $47.3 million for the nine months ended
September 30, 1997 due to an increase in licensing and alliance revenues,
partially offset by decreasing product revenues. Product revenues decreased 85%
during the nine months ended September 30, 1998 to $6.3 million from $42.2
million in the comparable period of 1997 primarily due to the completion of
shipments of the Indonesian order in 1997. Also included in product revenues for
the nine months ended September 30, 1997 is approximately $600,000 related to
sales of prototype TrueLink product to Siemens. Licensing and alliance revenues
for the nine months ended September 30, 1998 includes $2.6 million from
Samsung, $3.9 million from Alcatel, $48.1 million from new licensees and
$478,000 in recurring royalties. License and alliance revenues for the nine
months ended September 30, 1997 includes $2.1 million as part of the Samsung
agreements, $1.6 million as part of the Siemens agreements and $1.5 million of
royalty revenue from one licensee.
Cost of Product Revenues. The cost of product revenues for the nine months ended
September 30, 1998 decreased 71.9% to $10.6 million from $37.9 million for the
nine months ended September 30, 1997. The Company incurred a negative gross
margin on product revenues of 68% for the nine months ended September 30, 1998
as compared to a positive gross margin of 10% for the nine month period ended
September 30, 1997. Included in cost of product revenues are costs of product
assembly, integration and testing, distributor commissions, freight and tariffs,
and
12
<PAGE>
expenses associated with installation, support and warranty services related
to the UltraPhone systems, increases in inventory reserves, 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 nine
months ended September 30, 1998, the Company incurs substantial negative gross
profit margins because production costs are spread over only a limited number of
units of production.
Other Operating Expenses. Other operating expenses include sales and marketing
expenses, general and administrative expenses, patent administration and
licensing, and product development expenses.
Sales and marketing expenses decreased 47.2% to $2.9 million for the nine
months ended September 30, 1998 compared from $5.6 million during the nine
months ended September 30, 1997. The decrease is primarily due to decreased
commissions expense, commensurate with the decrease in product revenues and
decreased levels of marketing and sales activities, related to the Company's
UltraPhone system.
General and administrative expenses for the nine months ended September 30,
1998 decreased 26.6% to $4.1 million from $5.6 million for the nine months ended
September 30, 1997. The decrease in general and administrative expenses is
primarily due to the cost containment measures and the timing of certain
administrative expenses.
Patents administration and licensing expenses increased 120.2% to $8.6 million
for the nine months ended September 30, 1998 as compared to $3.9 million for the
nine months ended September 30, 1997. The increase over the prior year period is
primarily due to expenses related to new patents and increased activity related
to capitalizing on the revenue potential of InterDigital's extensive TDMA and
CDMA patent portfolios.
Product development expenses decreased 32.9% for the nine months ended
September 30, 1998 to $12.2 million from $18.2 million for the nine months ended
September 30, 1997. The decrease over the prior year period is due primarily to
the discontinued development of the Company's UltraPhone product, and increased
staff and activity levels devoted to the development of the B-CDMA technology.
Other Income and Expense. Interest income for the nine months ended September
30, 1998 decreased slightly from $1.7 million as compared to $1.8 million for
the nine months ended September 30, 1997. The decrease is due primarily to lower
interest rates on shorter term instruments in the Company's portfolio. Interest
expense for the nine month period ended September 30, 1998 was $274,000 as
compared to $309,000 for the nine month period ended September 30, 1997. The
decrease is due to lower balances on long term debt.
Year 2000
The Company has also begun a planning process to implement a Year 2000
compliance program, consisting of auditing, assessing, remediating, testing, and
contingent planning, to ensure the Company's IT (Information Technology) and
non-IT systems will function properly beyond 1999. Such program is designed to
cover both systems operated by the Company as well as systems operated by third
parties that the Company considers to be critical to its operations. The Company
has established a committee consisting of members of management from various
disciplines to implement this program.
As part of its Year 2000 compliance program, the Company has begun to
identify, test and upgrade its systems for Year 2000 compatibility. In addition,
the Company is in the process of identifying and contacting its alliance
partners and critical vendors to ensure that those third parties have assessed
the Year 2000 issues on their own systems (and in certain cases, to those of
such third parties' critical third parties) and are taking steps to ensure that
their systems are Year 2000 compatible. The Company believes that it will have
the ability to allocate adequate resources for its Year 2000 compliance program
and expects any Year 2000 remediation required to be made on its own systems to
be completed on a timely basis. However, there can be no assurance that these
systems or the systems of third parties upon which the Company's business relies
will be converted on a timely basis or successfully. The Company's business,
financial condition, or results of operations could be materially adversely
affected by the failure of its systems, or those operated by third parties upon
whom the Company relies to properly operate or manage dates beyond 1999. The
costs associated with the Year 2000 compliance program have not been fully
assessed, but are not expected to be material.
13
<PAGE>
Statement Pursuant to the Private Securities Litigation Reform Act of 1995
The foregoing Management's Discussion and Analysis contains forward looking
statements reflecting, among other things, InterDigital's current beliefs and
expectations as to variability in revenues and cash flow, demands on working
capital, Year 2000 program, and prospects for the Myanmar joint venture. Words
such as "expects", "scheduled", and "believes", variations of such words, and
words with similar meaning or connotations are intended to identify such forward
looking statements.
Such statements are subject to risks and uncertainties. InterDigital cautions
the readers that important factors in some cases have affected and, in the
future, could materially affect actual results and cause actual results to
differ materially from the results expressed in any such forward looking
statement. For example, working capital requirements may be affected by the
Company's ability to generate revenues, secure other sources of adequate capital
(or access thereto) to fund operations and to maintain capital, which in turn
may be affected by general economic and industry specific conditions, its
ability to successfully implement the alliance and the licensing programs, its
ability to successfully develop and commercialize product, ability to hire
qualified personnel, and the costs related to enforcement of its patent rights.
Receipt of expected revenues from alliances or royalties could be affected by
InterDigital's ability to enter into additional strategic alliances, the ability
of InterDigital's alliance partners to meet InterDigital's expectations or
contractual commitments, the ability of InterDigital to successfully negotiate
additional licensing agreements for its patents and other intellectual property
or to enforce its rights under its license agreements, the outcomes under legal
and administrative cases and proceedings relating to InterDigital's assertion of
its patents rights, the ability or success of InterDigital in protecting its
intellectual property rights, and the ability to successfully prove infringement
of its patents. The Year 2000 program could be affected by the Company's (or
third parties upon which the Company's business relies) ability to successfully
identify or remediate affected systems. The performance of the Myanmar contract
could be affected by the ability to procure financing, government permits and
other factors. In addition, factors affecting one forward looking statement may
affect other forward looking statements and other factors may exist that are not
listed above or that are not fully known to InterDigital at this time.
InterDigital undertakes no obligation to publicly update any forward looking
statements, whether as a result of new information, future events or otherwise.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As reported in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, InterDigital is a party to a lawsuit involving Ericsson Inc.
During the third quarter 1998, Ericsson Inc. filed a Motion for Partial Summary
Judgement, with respect to which InterDigital has subsequently replied. In
addition, during the third quarter of 1998, the United States District Court for
the Northern District of Texas granted InterDigital's Motion to amend its
Counterclaim by adding four additional patents.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following is a list of exhibits filed as part of this Form
10-Q:
Exhibit 27 Financial Data Schedule
(b) The following is a list of Current Reports on Form 8-K filed during the
third quarter of 1998:
None.
15
<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 12, 1998 /s/ William A. Doyle, President
--------------------------------------
William A. Doyle, President
Date: November 12, 1998 /s/ Loretta P. Brehony
--------------------------------------
Loretta P. Brehony, Vice President,
Finance
16
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