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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _________
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Commission File Number 1-11152
INTERDIGITAL COMMUNICATIONS CORPORATION
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1882087
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
781 Third Avenue, King of Prussia, PA 19406
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(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (610) 878-7800
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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 No x
--- ---
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 48,531,498 shares
- ---------------------------------------- -------------------------------
Class Outstanding at April 30, 1999
<PAGE>
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
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INDEX
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PAGES
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Part I - Financial Information:
Item 1. Consolidated Financial Statements (unaudited) 3
Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 3
Consolidated Statement of Operations -
Three Months Ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative And Qualitative Disclosure
About Market Risk 13
Part II - Other Information:
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
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>
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
- ------ --------- ---------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents, including restricted
cash of $209 and $143, respectively $ 4,080 $ 20,059
Short term investments 77,403 32,218
Accounts receivable, net of allowance for
uncollectable accounts of $975 2,395 14,983
Inventories 4,462 5,102
Other current assets 3,047 3,056
--------- ---------
Total current assets 91,387 75,418
--------- ---------
Property, plant and equipment, net of accumulated
depreciation of $15,810 and $14,961, respectively 9,591 9,697
Patents, net of accumulated amortization of
$7,075 and $6,701 respectively 9,733 9,948
Long term deposits 2,934 2,934
Other 1,544 1,526
--------- ---------
23,802 24,105
--------- ---------
$ 115,189 $ 99,523
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt $ 634 $ 723
Accounts payable 5,458 5,973
Accrued compensation and related expenses 1,635 2,959
Deferred revenue 2,382 3,936
Foreign and domestic taxes payable 1,171 2,249
Other accrued expenses 4,050 4,826
--------- ---------
Total current liabilities 15,330 20,666
--------- ---------
LONG TERM DEBT 2,890 3,049
--------- ---------
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,
48,474 shares and 48,427 shares issued and
outstanding 484 484
Additional paid-in capital 235,631 235,631
Accumulated deficit (138,878) (160,039)
========= =========
97,247 76,086
Treasury stock, 50 shares held at cost (278) (278)
--------- ---------
Total shareholders' equity 96,969 75,808
--------- ---------
$ 115,189 $ 99,523
========= =========
</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
----------------------
ENDED MARCH 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
REVENUES:
Product $ 1,097 $ 2,163
Licensing and strategic partner 34,045 7,914
-------- --------
35,142 10,077
-------- --------
OPERATING EXPENSES:
Cost of product 1,695 2,602
Sales and marketing 955 1,067
General and administrative 1,518 1,333
Patents administration and licensing 2,797 2,621
Development 5,598 3,883
-------- --------
12,563 11,506
-------- --------
Income (loss) from operations 22,579 (1,429)
OTHER INCOME (EXPENSE):
Interest income 832 375
Interest and financing expenses (90) (102)
-------- --------
Income (loss) before income taxes 23,321 (1,156)
INCOME TAX PROVISION (2,096) (523)
-------- --------
Net income (loss) 21,225 (1,679)
PREFERRED STOCK DIVIDENDS (64) (64)
-------- --------
NET INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS $ 21,161 $ (1,743)
======== ========
NET INCOME (LOSS) PER COMMON SHARE - BASIC $ 0.44 $ (0.04)
======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC 48,424 48,237
======== ========
NET INCOME (LOSS) PER COMMON SHARE - DILUTED $ 0.43 $ (0.04)
======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - DILUTED 48,855 48,237
======== ========
</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 THREE MONTHS
ENDED MARCH 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 21,161 $ (1,743)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities-
Depreciation and amortization 1,222 1,244
Deferred revenue (1,554) 3,940
Decrease (increase) in assets-
Receivables 12,588 (5,046)
Inventories 640 (1,501)
Other current assets 9 (10)
Increase (decrease) in liabilities-
Accounts payable (515) 632
Accrued compensation (1,324) (428)
Other accrued expenses (1,854) (158)
-------- --------
Net cash provided by (used in) operating activities 30,373 (3,070)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of short-term investments, net (45,185) (5,098)
Purchases of property and equipment (742) (201)
Patent Costs (159) (460)
Other non-current assets (18) 287
-------- --------
Net cash used in investing activities (46,104) (5,472)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sales of Common Stock
and exercises of stock options and warrants -- 48
Lease obligations incurred -- 120
Payments on long-term debt, including capital lease obligations (248) (218)
-------- --------
Net cash used in financing activities (248) (50)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (15,979) (8,592)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,059 17,828
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,080 $ 9,236
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 84 $ 78
======== ========
Income taxes paid $ 3,175 $ 19
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(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 the financial position of
InterDigital Communications Corporation (the "Company" or "InterDigital") as of
March 31, 1999, the results of its operations for the three month periods ended
March 31, 1999 and 1998, and its cash flows for the three month periods ended
March 31, 1999 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. 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. Certain prior
period amounts have been reclassified to conform to the 1999 presentation.
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:
InterDigital 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. Based on
current information, Management believes that the outcomes of these matters will
not have a material impact on the Company's financial position or results of
operations.
3. NOKIA AGREEMENT:
On January 22, 1999, InterDigital entered into an agreement with Nokia
Corporation ("Nokia") involving the development of new technology for third
generation wireless telecommunications products designed for high data rate
applications, such as Internet access. The agreement includes royalty bearing
TDMA and CDMA patent licenses, which are paid up generally through the project
period, and provides a structure for determining the royalty payments
thereafter. InterDigital recorded $31.5 million as licensing revenue and $1.1
million of on-going strategic partner revenue in the first quarter associated
with this agreement.
4. 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):
6
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- --------
<S> <C> <C>
Repurchase agreements $ 1,391 $ 3,160
Money market funds and demand
deposits 703 516
Commercial paper 1,986 16,383
------- -------
$ 4,080 $20,059
======= =======
</TABLE>
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 March 31, 1999 consisted of
$40.0 million in government-issued discount notes and $37.4 million in corporate
debt securities. Short-term investments available for sale as of December 31,
1998 consisted of $18.2 million in government-issued discount notes and $14.0
million in corporate debt securities.
5. REVENUES BY GEOGRAPHY:
Revenues by geographic area are as follows (in thousands):
Three Months
Ended
March 31,
------------------
1999 1998
---- ----
U.S. $ 325 $ 459
Non U.S. 34,817 9,618
======== =======
$ 35,142 $10,077
======== =======
In the three months ended March 31, 1999, more than 96% of InterDigital's
total revenues were derived from licensing and strategic partner activities.
These revenues consisted of $0.6 million from recurring royalties, $31.5 million
from new licensing agreements and the recognition of $1.9 million related to
development activities from Nokia, Alcatel and Samsung. During the same period
in 1998, licensing and strategic partner revenue accounted for more than 78% of
InterDigital's total revenue and consisted of $0.1 million in recurring
royalties, and the recognition of $2.2 million from strategic partners and $5.6
million from new licensing agreements.
6. NET INCOME (LOSS) PER SHARE:
The following table sets forth a reconciliation of the shares used in the
basic and diluted net income (loss) per share computations:
<TABLE>
<CAPTION>
(In thousands, except per share data)
Three Months Ended March 31, 1999 Three Months Ended March 31, 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 $21,161 48,424 0.44 (1,743) 48,237 (0.04)
Effect of Dilutive Options and
Warrants -- 431 (0.01) -- -- --
------- ------- ---- ------- ------- ----
Income (loss) per Share-Diluted:
Income (loss) available to
common stockholders +
assumed conversions $21,161 48,855 0.43 (1,743) 48,237 (0.04)
======= ======= ==== ======= ======= ====
</TABLE>
7
<PAGE>
During the three months ended March 31, 1999, there were 4.8 million
options and 1.9 million warrants to purchase common stock outstanding that were
excluded from the computation of diluted earnings per share because they are
antidilutive. Options and warrants to purchase Common Stock were outstanding
during the three months ended March 31, 1998, but were not included in the
computation of diluted net income/loss per share because they were antidilutive.
7. INVENTORIES:
March 31, December 31,
1999 1998
------- --------
(In thousands)
Component parts and
work-in-progress $ 2,596 $ 2,958
Finished goods 1,866 2,144
======= ========
$ 4,462 $ 5,102
======= ========
Inventories are stated net of valuation reserves of $13.7 million as of
March 31, 1999 and December 31, 1998.
8. INCOME TAXES:
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes".
The income tax provision for the three months ended March 31, 1999 includes
a current foreign withholding tax of $1.6 million and a federal alternative
minimum tax provision of $0.5 million. The income tax provision for the three
months ended March 31, 1998 consisted primarily of foreign withholding taxes.
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $96.7 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 March 31, 1999.
9. SUBSEQUENT EVENTS:
On April 19, 1999, InterDigital entered into a TDMA patent license with
Robert Bosch GmbH. Under the terms of the agreement, InterDigital granted Bosch
a royalty-bearing license under ITC's TDMA patent portfolio for the sale of
telecommunications equipment made under the GSM, PDC, and IS-54/136 standards.
Pursuant to the agreement, InterDigital will recognize $7.9 million as revenue
in the second quarter related to an up-front payment made by Bosch. A portion of
the up-front payment is categorized as a royalty advance for Bosch's expected
sales through 1999. The agreement also provides for the payment by Bosch of
future royalties on the sale of TDMA-based digital wireless telephone equipment
after the portion of the up-front payment constituting advance royalties is
consumed.
On April 28, 1999 Alcatel informed InterDigital of its decision to withdraw
from the B-CDMA Alliance(TM). The two companies are in the process of working
together to define an orderly withdrawal.
8
<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(R) 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. 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 the mid-1990's InterDigital continued to experience losses caused by
(i) the failure to achieve sufficient sales volumes of UltraPhone systems to
cover associated overhead, (ii) substantial investments in UltraPhone product
redesigns and enhancements, (iii) substantial investment in B-CDMA(TM) research
and development, and (iv) significant litigation costs associated with
enforcement of ITC's intellectual property rights. At the same time that
InterDigital was experiencing these losses, it began to realize positive results
from its efforts to capitalize upon the revenue potential of its TDMA and CDMA
patent portfolio and to align itself with key telecommunication companies.
During 1994, 57% of InterDigital's total revenues resulted from licensing
revenues, including revenue related to InterDigital's first B-CDMA Alliance
agreement with Siemens. During 1995, InterDigital reported its first profitable
fiscal year since its inception due to licensing and strategic partner revenue.
During 1996, InterDigital completed its second major B-CDMA Alliance with
Samsung, and licensing and strategic partner revenue constituted 53% of total
revenues for the year. However, since licensing and strategic partner revenue
had been based upon the receipt of up-front, non-refundable payments pursuant to
license and alliance agreements entered into at sporadic intervals,
InterDigital's profit and loss status varied from quarter to quarter. In 1997,
InterDigital was unprofitable, primarily due to substantially increased
investment in the development of its B-CDMA technology. 1997 revenues of $49.8
million included $4.4 million from licensing revenue from its B-CDMA Alliance
partners, $1.6 million of recurring royalty fees from one licensee, and $43.8
million from product sales.
In late 1997 and early 1998, the continuing viability of UltraPhone
business was further impacted by intensified product and price competition,
chiefly due to the introduction into the market of the lower cost Digital
Enhanced Cordless Telephone system and by economic uncertainties in Asia. In
January 1998, InterDigital restructured its operations to cease all UltraPhone
development efforts and de-emphasize related sales efforts to devote its
resources to B-CDMA technology and product development. In March 1998,
InterDigital entered into its third B-CDMA Alliance with Alcatel. Also during
1998, InterDigital entered into four new TDMA licensing agreements and received
revenues under several other licensing agreements. Licensing and strategic
partner revenue totaled $92.5 million in 1998, $4.6 million of which was related
to the Alcatel agreement. In January 1999, InterDigital entered into a strategic
engineering relationship with Nokia involving the development of new technology
for 3G products designed for high data rate applications, such as Internet
access. The Nokia agreement includes royalty bearing TDMA and CDMA patent
licenses, which are paid up generally through the project period, and also
provides a structure for determining the royalty payments thereafter.
InterDigital recognized $31.5 million in licensing revenue in the first quarter
of 1999 related to paid-up royalties from the Nokia Agreement.
In February 1999, Siemens withdrew from InterDigital's development
of a cost-reduced B-CDMA product. (Field trials of completed and installed first
version B-CDMA systems have been conducted at various locations around the
world.) In April 1999, Alcatel informed InterDigital that Alcatel intends to
withdraw from this project. InterDigital has yet to negotiate the terms of
Siemens' and Alcatel's withdrawal from the project. InterDigital also
understands that Samsung is evaluating its commitment to its B-CDMA development
effort.
As a result of Alcatel's and Siemens' decisions, as well as InterDigital's
own assessment of the wireless local loop market, InterDigital intends to reduce
its resource commitment to B-CDMA development while honoring its current
commitments. InterDigital intends to refocus certain of its resources on
applications beyond fixed wireless access, such as Internet access, high data
and 3G applications.
9
<PAGE>
As regards the revenue impact of Siemens and Alcatel's decisions,
InterDigital had not anticipated recognizing any further revenue from Siemens in
1999, and had anticipated only a moderate level of revenue in future years.
InterDigital had expected to recognize revenue under the Alcatel agreement both
in 1999 and in future years. Based on Siemens' and Alcatel's withdrawal from the
project, InterDigital does not currently expect to recognize any further revenue
in 1999 or beyond under either the current Alcatel or Siemens agreements. As
regards Samsung, the Company is continuing to recognize revenue related to the
1996 Samsung agreements but is not currently anticipating any further payments
from Samsung under those agreements after 1999.
InterDigital believes that its principal opportunities for additional
revenue in 1999 will come from its patent licensing program and its engineering
services program with Nokia. The Company is pursuing new TDMA licensees, which
could generate revenue in the form of initial licensing payments. At the same
time, the Company expects recurring royalties from TDMA licensees to grow
modestly during the year. However, the Company can give no assurance as to when
or if it will receive any licensing revenues or the amount of any licensing
revenue that it will receive. The Company believes that licensing revenue, if
received, will vary throughout the year as it has done in the past. The
engineering development project for Nokia began in February 1999 and could
continue for several years. During the second quarter, the project is scheduled
to continue to ramp up and is presently expected to run at a steady or slightly
growing rate in the third and fourth quarters. InterDigital's agreement with
Nokia provides that Nokia will pay for engineering services provided by
InterDigital as they are delivered throughout the year.
InterDigital also expects to continue to derive limited revenues from its
product operations. During 1998, InterDigital had approximately $1.9 million of
sales related to InterDigital's TrueLink product. These sales included service
revenue to Samsung and B-CDMA ASIC and other component sales to Siemens for its
integration into pre-production products. For the remainder of 1999,
InterDigital may generate a modest level of revenues from the installation and
service of UltraPhone systems, although that product is no longer being actively
marketed outside of a few niche markets in developing countries.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL REQUIREMENTS
InterDigital experienced positive cash flow from operating activities of
$30.4 million in the first quarter of 1999 compared to a use of $3.1 million in
the same period in 1998. The increase principally resulted from higher levels of
cash receipts in the first quarter of 1999 associated with the success of the
patent licensing program.
Net cash used in investing activities increased to $46.1 million in the
first quarter of 1999 from $5.5 million in the comparable period of 1998. The
increase was due primarily to higher purchases of short-term investments in
1999. Notwithstanding the above, the amount of cash used in investing has,
historically, been low relative to cash used in operations.
During the first quarter of 1999, the Company used $248,000 in financing
activities primarily to repay debt obligations.
InterDigital's working capital at March 31, 1999 was $76.1 million compared
to $54.8 million at December 31, 1998. The $21.3 million increase mainly
resulted from the receipt of cash from licensing agreements.
InterDigital had cash, cash equivalents and short-term investments of $81.5
million as of March 31, 1999 compared to $52.3 million at December 31, 1998.
Inventory levels at March 31, 1999 were $4.5 million, a slight decrease from
$5.1 million as of December 31, 1998, reflecting the shipment of first quarter
product sales.
InterDigital is capable of supporting its operating requirements during
1999 through internally generated funds. The Company is currently evaluating its
cash requirements beyond 1999 in light of changes in resource demands which may
result from a reduced resource commitment to B-CDMA development and a refocusing
of certain resources on other development efforts. Should the need arise to fund
new development activities, contingency resolution, external growth activities
or other matters, InterDigital may seek financing by means of a bank loan or
line of credit or through the sale of debt or equity securities. InterDigital
does not presently maintain bank lines of credit and can give no assurance that
it could secure a loan or line of credit, either at all or on acceptable terms.
In addition, there can be no assurances that InterDigital will be able to sell
any such securities, or, if it can, that it can do so on terms acceptable to
InterDigital.
InterDigital believes that its investment in inventories and non-current
assets are stated on its March 31, 1999 and December 31, 1998 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 write-downs are required at this
time due to lack of use or technological obsolescence. With respect to other
assets, the Company believes that the value of its patents is at least equal to
the value included in the December 31, 1998 and March 31, 1999 balance sheets.
10
<PAGE>
RESULTS OF OPERATIONS
First Quarter of 1999 Compared to the First Quarter of 1998
Revenues. Total revenues in the first quarter ended March 31, 1999 increased to
$35.1 million from $10.1 million in the first quarter ended March 31, 1998. The
increase was primarily due to an increase in licensing and strategic partner
revenues in the first quarter of 1999 to $34.0 million from $7.9 million in the
comparable quarter of 1998, partially offset by decreased TrueLink and
UltraPhone product sales.
Operating Expenses. Operating expenses include cost of product, sales and
marketing expenses, general and administrative expenses, patent administrative
and licensing services, and development expenses.
The cost of product sales for the first quarter of 1999 decreased to $1.7
million from $2.6 million in the first quarter of 1998 due to the decrease in
product revenues. Included in cost of product sales are costs of product
assembly, integration and testing, distributor commissions, freight and tariffs,
and expenses associated with installation, overhead, support and warranty
services.
Sales and marketing expenses decreased 10.5% to $955,000 during the first
quarter of 1999 as compared to $1.1 million during the first quarter of 1998.
The decrease is primarily due to decreased staff and activity levels, and
reduced commission expenses associated with lower product revenues in the first
quarter of 1999.
General and administrative expenses for the first quarter of 1999 increased
13.9% to $1.5 million from $1.3 million in the first quarter of 1998. The
increase is primarily due to personnel and travel costs and the timing of
certain administrative expenses.
Patents administration and licensing expenses increased 6.7% to $2.8
million during the first quarter of 1999 as compared to $2.6 million during the
same period in 1998. The increase is due primarily to expenses related to new
patents and increased activity related to capitalizing on the revenue potential
of InterDigital's extensive TDMA and CDMA patent portfolio.
Development expenses for the first quarter of 1999 increased 44.2% to $5.6
million as compared to $3.9 million during the first quarter of 1998. The
increase is due to higher staff and activity levels devoted to further
development of the B-CDMA technology increased as well as start up activity
levels devoted to 3G technology development.
Other Income and Expense. Interest income for the first quarter of 1999 was
$832,000 as compared to $375,000 for the first quarter of 1998. The Company had
higher average invested cash balances in the first quarter of 1999 as compared
to the same period in 1998. Interest expense for the three month period ended
March 31, 1999 was $90,000 as compared to $102,000 for the three month period
ended March 31, 1998. This decrease is due to lower outstanding debt in the
period.
YEAR 2000
Many currently installed computer systems in many companies are not capable
of distinguishing 21st century dates from 20th century dates. As a result,
beginning on January 1, 2000, both IT (Information Technology) and non-IT
systems used by many organizations in a wide variety of industries (including
technology, transportation, utilities, finance and telecommunications) will
produce erroneous results or fail unless they have been modified or upgraded to
process date information correctly. Significant uncertainty exists concerning
the scope and magnitude of problems associated with the century change.
InterDigital recognizes the need to ensure our operations will not be adversely
affected by Year 2000 system failures. In this regard, InterDigital has begun to
implement a Year 2000 compliance program, consisting of auditing, assessing,
remediating, testing, and contingency planning, to ensure InterDigital's IT and
non-IT systems will function properly beyond 1999. The program is designed to
cover both systems operated by InterDigital as well as systems operated by third
parties that InterDigital considers to be material to its operations.
InterDigital has established a Committee consisting of members of management
from various disciplines to implement this program and has engaged a consultant
to assist the Committee.
11
<PAGE>
As part of its Year 2000 compliance program, InterDigital has engaged in a
comprehensive assessment of the potential overall impact of the impending
century change on its business, financial condition and operating results.
InterDigital has conducted a thorough audit of its systems, has been testing and
has begun to upgrade certain of its systems for Year 2000 compatibility. In
addition, InterDigital has been contacting certain third parties upon which it
relies to ensure that those third parties have assessed the Year 2000 issues on
their own systems and are taking steps to ensure that their systems are Year
2000 compatible. InterDigital's compliance program is focused on systems and
third parties which InterDigital's management views as High Risk, leaving
compliance efforts relating to other systems and third parties to be remediated
on a resource permitting basis. InterDigital believes that it will have the
ability to allocate adequate resources to address all systems categorized as
High Risk under its Year 2000 compliance program and expects any Year 2000
remediation applicable to its own High Risk systems to be completed on a timely
basis. However, InterDigital's assessment process is continuous to reflect
changing business circumstances, and InterDigital still has many systems that
must be brought into compliance, remediated and/or tested for Year 2000
compliance. In addition, InterDigital relies on third parties over which it has
no control. There can be no assurance that InterDigital's systems or the systems
of third parties upon which InterDigital relies will be identified or remediated
on a timely basis or successfully. Failure to achieve timely and successful Year
2000 compliance could cause delays or difficulties in development efforts or
result in a cessation of business. InterDigital hopes to have achieved
compliance or developed contingency plans for its High Risk systems prior to the
September 9, 1999 critical date; however, there can be no assurance that it will
be able to do so, either successfully or on a timely basis. Moreover,
InterDigital's products and components may be integrated into larger systems
that InterDigital cannot adequately evaluate for Year 2000 compliance.
InterDigital may face claims based on Year 2000 problems in other companies'
products, or issues arising from the integration of multiple products within an
overall system. InterDigital'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 InterDigital relies to properly
operate or manage dates associated with the impending century change.
To date, InterDigital has not incurred any material costs directly
associated with its Year 2000 compliance efforts. InterDigital has incurred the
compensation expense associated with its salaried employees who have devoted
some of their time to its Year 2000 assessment, remediation efforts and the cost
of its consultant. InterDigital does expect to expend additional resources on
its remediation efforts out of general corporate funds, but does not expect the
total cost of Year 2000 remediation efforts to be material to its business,
financial condition and operating results. Those costs have not yet been fully
assessed. During the months prior to the century change, InterDigital will
continue to evaluate, remediate and/or test its products and systems, as well as
certain products and systems provided to it by third parties, to the extent
reasonably practicable to determine whether they are Year 2000 compliant.
Despite this assessment, InterDigital may not identify and correct all
significant Year 2000 problems on a timely basis. Year 2000 compliance efforts
may involve significantly more time and expense than expected, and unremediated
problems could affect its business, financial condition and operating results.
InterDigital has started to develop contingency plans to address the risks
associated with unremediated Year 2000 problems to the extent reasonably
practicable, but has not yet completed or formalized any such plans.
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 its intention to refocus its resources on applications beyond
fixed wireless access, revenue from licensing and product operations, and Year
2000 compliance. Words such as "expects", "believes", "intends" and
"anticipates", 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, InterDigital's ability to refocus its resources on
expanded applications may be affected by general economic and industry specific
conditions, continuation of its development work for Nokia (which could itself
be affected by a large number of factors, including without limitation, Nokia's
business objectives, InterDigital's ability to achieve its development goals and
the abilities of certain third parties to meet InterDigital's expectations and
commitments), its ability to enter into additional alliances, strategic
engineering relationships and/or licenses for its patents and other intellectual
property on acceptable terms, its ability to successfully implement the
strategic partner and the licensing programs, its ability to retain or hire
adequate personnel, and the costs related to enforcement of its patent rights.
Revenues from licensing could be affected by the ability to enter into new
license agreements, the ability to enforce existing license agreements and
intellectual property rights, the outcomes of patent related litigation and
proceedings, and the levels of sales of licensees. Revenues from product
operations could be affected by shifts in InterDigital's strategies, the ability
to procure components from certain sole source suppliers, the effect of Siemens'
12
<PAGE>
and Alcatel's withdrawals, Samsung's success with its B-CDMA program, and the
intensified competition for sales of wireless local loop telephone systems. Year
2000 compliance could be affected by the failure of InterDigital or third
parties to successfully identify or remediate Year 2000 problems on a timely
basis or successfully; higher than expected Year 2000 remediation costs, and the
availability of resources (which itself could be affected by the level of
resources available or required for other projects). 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in quantitative and qualitative market
risk from the disclosure included in the December 31, 1998 Form 10-K.
13
<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, 1998, InterDigital is a party to a lawsuit involving Ericsson Inc.
During May 1999, the United States District Court denied Ericsson's Motion for
Partial Summary Judgement.
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 27 Financial Data Schedule
(b) The following is a list of Current Reports on Form 8-K filed during the
first quarter of 1999:
None.
14
<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: May 13, 1999 /s/ William A. Doyle
-------------------------------
William A. Doyle,
President
Date: May 13, 1999 /s/ R. J. Fagan
-------------------------------
Richard J. Fagan, Senior
Vice President and Chief Financial
Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Financial Data Schedule
(Unaudited)
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 4,080
<SECURITIES> 77,403
<RECEIVABLES> 2,395
<ALLOWANCES> 975
<INVENTORY> 4,462
<CURRENT-ASSETS> 91,387
<PP&E> 9,591
<DEPRECIATION> 15,810
<TOTAL-ASSETS> 115,189
<CURRENT-LIABILITIES> 15,330
<BONDS> 0
0
10
<COMMON> 484
<OTHER-SE> 96,475
<TOTAL-LIABILITY-AND-EQUITY> 115,189
<SALES> 1,097
<TOTAL-REVENUES> 35,142
<CGS> 1,695
<TOTAL-COSTS> 1,695
<OTHER-EXPENSES> 10,868
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 90
<INCOME-PRETAX> 23,321
<INCOME-TAX> 2,096
<INCOME-CONTINUING> 21,225
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,225
<EPS-PRIMARY> .44
<EPS-DILUTED> .43
</TABLE>
