UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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 52,696,162
-------------------------------------- ----------------------------
Class Outstanding at July 31, 2000
<PAGE>
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGES
-----
Part I - Financial Information:
<S> <C>
Item 1. Consolidated Financial Statements (unaudited): 3
Consolidated Balance Sheets -
June 30, 2000 and December 31, 1999 3
Consolidated Statement of Operations -
Three and Six Months Ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2000 and 1999 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 12
Part II - Other Information:
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item I. FINANCIAL STATEMENTS
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 2000 1999
------ ------------ --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 25,145 $ 14,592
Short term investments 69,145 68,550
Accounts receivable 13,652 10,884
Inventories -- 3,092
Other current assets 10,917 11,625
----------- -----------
Total current assets 118,859 108,743
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET 9,054 7,393
PATENTS, NET 9,703 9,723
LONG TERM DEPOSITS 227 284
OTHER 425 428
----------- -----------
19,409 17,828
----------- -----------
TOTAL ASSETS $ 138,268 $ 126,571
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt $ 409 $ 446
Accounts payable 1,956 2,454
Accrued compensation and related expenses 3,187 4,326
Deferred revenue 6,666 69
Foreign and domestic taxes payable 1,229 1,093
Other accrued expenses 3,433 4,857
----------- -----------
Total current liabilities 16,880 13,245
LONG-TERM DEBT 2,364 2,559
LONG-TERM DEFERRED REVENUE 27,198 --
OTHER NON-CURRENT LIABILITIES -- 1,260
----------- -----------
TOTAL LIABILITIES 46,442 17,064
----------- -----------
COMMITMENTS & CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock $.10 par value, 14,399 shares authorized-
$2.50 Convertible Preferred, 55 and 102 shares issued and
outstanding 5 10
Common Stock, $.01 par value, 100,000 shares authorized,
53,650 shares and 50,985 shares issued and
outstanding 537 510
Additional paid-in capital 266,282 249,976
Accumulated deficit (163,459) (133,588)
Unearned Compensation (5,907) (1,769)
----------- -----------
97,458 115,139
Less Treasury stock, 1,042 held at cost 5,632 5,632
----------- -----------
Total shareholders' equity 91,826 109,507
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 138,268 $ 126,571
=========== ===========
</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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Product $ 1,076 $ 427 $ 5,634 $ 1,524
Licensing and strategic partner 10,556 11,919 19,842 45,964
-------- -------- -------- --------
11,632 12,346 25,476 47,488
-------- -------- -------- --------
COST OF PRODUCT AND OPERATING EXPENSES:
Cost of product 1,374 1,302 5,200 2,997
Sales and marketing 727 711 2,248 1,666
General and administrative 3,206 1,922 5,874 3,440
Patents administration and licensing 1,746 1,527 1,337 4,324
Development 6,445 5,108 11,888 10,706
Repositioning Charges -- 1,213 -- 1,213
-------- -------- -------- --------
13,498 11,783 26,547 24,346
-------- -------- -------- --------
Income (loss) from operations (1,866) 563 (1,071) 23,142
INTEREST INCOME (EXPENSE):
Interest income 1,376 973 3,027 1,805
Interest and financing expenses (68) (83) (135) (173)
-------- -------- -------- --------
Income (loss) before income taxes (558) 1,453 1,821 24,774
INCOME TAX PROVISION (511) (29) (1,091) (2,125)
-------- -------- -------- --------
Net income (loss) (1,069) 1,424 730 22,649
PREFERRED STOCK DIVIDENDS (35) (64) (69) (128)
-------- -------- -------- --------
NET INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (1,104) 1,360 661 22,521
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE -- -- (30,532) --
-------- -------- -------- --------
NET INCOME (LOSS) $ (1,104) $ 1,360 $(29,871) $ 22,521
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE
BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE - BASIC $ (0.02) $ 0.03 $ 0.01 $ 0.46
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE - BASIC $ (0.02) $ 0.03 $ (0.58) $ 0.46
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - BASIC 51,654 48,323 51,472 48,433
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE
BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE - DILUTED $ (0.02) $ 0.03 $ (0.01) $ 0.46
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE - DILUTED $ (0.02) $ 0.03 $ (0.58) $ 0.46
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - DILUTED 51,654 48,323 51,472 48,433
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $(29,802) $ 22,649
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and patent amortization 2,123 2,443
Deferred revenue 33,795 (2,380)
Amortization of Unearned Compensation 861 --
Repositioning charges -- 1,213
Decrease (increase) in assets -
Receivables (2,768) 10,995
Inventories 3,092 1,073
Other current assets 708 (870)
Increase (decrease) in liabilities
Accounts payable (498) (3,034)
Accrued compensation (1,139) (1,212)
Other accrued expenses (2,548) (1,701)
-------- --------
Net cash provided by operating activities 3,824 29,176
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of short-term investments, net (595) (39,255)
Purchase of property and equipment (3,002) (958)
Patent costs (762) (429)
Other non-current assets 60 31
-------- --------
Net cash provided by (used in) investing activities (4,299) (40,611)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sales of Common Stock
and exercises of stock options and warrants 11,329 194
Lease obligations incurred -- --
Payments on long-term debt, including capital lease obligations (232) (442)
Cash dividends on Preferred Stock (69) (56)
Purchase of Treasury Stock -- (1,237)
-------- --------
Net cash provided by (used in) financing activities 11,028 (1,541)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,553 (12,976)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 14,592 20,059
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 25,145 $ 7,083
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 131 $ 159
======== ========
Income taxes paid, including foreign withholding taxes $ 456 $ 3,711
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(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
June 30, 2000, and the results of its operations for the three and six month
periods ended June 30, 2000 and 1999, and cash flows for the six month periods
ended June 30, 2000 and 1999. 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.
2. LITIGATION:
-----------
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.
Also, InterDigital is party to litigation in which a former distributor of
UltraPhone(R) systems is claiming a breach of contract to team to supply, and to
supply UltraPhone(R) systems in Kenya and for fraudulent representation as to
our future plans for the product. The plaintiff seeks both injunctive relief as
well as damages in the form of direct, indirect and consequential damages. We
have asserted a counterclaim for past due balances. The case is in the process
of being scheduled for trial.
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. MODIFICATION OF REVENUE RECOGNITION POLICY:
------------------------------------------
In the second quarter of 2000, we modified our recognition policy in
response to Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements" that was issued by the Securities and Exchange Commission
("SEC") in December, 1999. SAB No. 101 expresses the views of the SEC Staff in
applying generally accepted accounting principles to certain transactions,
including licensing agreements involving non-refundable up-front payments.
Historically, we have recorded such fees as revenue upon the signing of the
applicable license agreement because the Company had delivered the license and
had no remaining obligations. Following SAB No. 101 guidance, we reflected in
our six months results a net after tax cumulative effect of change in accounting
principle of $30.5 million to defer the net portion of up-front payments that
represents amounts which have not been exhausted through product sales by
licensees as of January 1, 2000. In the first half of 2000, we recognized
approximately $3.3 million and $2.7 million of revenue and earnings,
respectively, on a post-SAB No. 101 basis related to the deferred amounts. The
impact in the first and second quarters of 2000 of these amounts was equal.
Going forward, we will continue to recognize the revenue and net earnings
associated with the deferred amounts as licensee product sales occur.
6
<PAGE>
4. REVENUES:
---------
The Company generates the vast majority of its revenues from licensees and
other customers located outside the United States. These revenues are paid in
U.S. dollars and are not subject to foreign exchange transaction risk.
In the three months ended June 30, 2000, 91% of InterDigital's total
revenues were derived from licensing and strategic partner activities. These
revenues consisted of $5.8 million from recurring royalties ($4.2 million on a
pre-SAB No. 101 basis) and $4.7 million related to development activities for
Nokia. During the same period of 1999, licensing and strategic partner revenues
accounted for 97% of InterDigital's total revenues and consisted of $0.2 million
in recurring royalties, $3.8 million from development work and $7.9 million from
new licensing agreements.
For the six months ended June 30, 2000, 78% of InterDigital's total
revenues were derived from licensing and strategic partner activities. These
revenues consisted of $11.8 million from recurring royalties ($8.5 million on a
pre-SAB No. 101 basis) and $8.1 million related to development activities for
Nokia. In addition, $5.6 million of product revenue was generated in the first
half of 2000 related to final orders of Ultraphone systems. During the same
period of 1999, licensing and strategic partner revenues accounted for 97% of
InterDigital's total revenues and consisted of $0.8 million in recurring
royalties, $5.7 million from development work and $39.4 million from new
licensing agreements.
5. NET INCOME PER SHARE:
---------------------
The following table sets forth a reconciliation of the shares used in the
basic and diluted net income per share computations:
<TABLE>
<CAPTION>
(In thousands, except per share data)
Three Months Ended June 30, 2000 Three Months Ended June 30, 1999
------------------------------------------- ---------------------------------------------
Income (Loss) Shares Per-Share Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------- ------------- --------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income per Share-Basic:
Income (Loss) available to
Common stockholders $(1,104) 51,654 $(0.02) $1,360 48,323 $0.03
Effect of Dilutive Options and
Warrants -- -- -- -- 258 --
------- ------ ------ ------ ------ -----
Income per Share-Diluted:
Income (Loss) available to
Common stockholders +
dilutive effects of options
and warrants $(1,104) 51,654 $(0.02) $1,360 48,581 $0.03
======= ====== ====== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
(In thousands, except per share data)
Six Months Ended June 30, 2000 Six Months Ended June 30, 1999
------------------------------------------- ---------------------------------------------
Income (Loss) Shares Per-Share Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------- ------------- --------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income per Share-Basic:
Income available to
Common stockholders $(29,871) 51,472 $(0.58) $22,521 48,310 $0.46
Effect of Dilutive Options and
Warrants -- -- -- -- 345 --
-------- ------ ------ ------- ------ -----
Income per Share-Diluted:
Income available to
Common stockholders +
dilutive effects of options
and warrants $(29,871) 51,472 $(0.58) $22,521 48,778 $0.46
======== ====== ====== ======= ====== =====
</TABLE>
7
<PAGE>
Options, warrants and restricted stock were outstanding in the three
months and six months ended June 30, 2000, but were not included in the
computation of diluted net income/loss per share because they were antidilutive.
During the three months and the six months ended June 30, 1999, an
additional 5.1 million options and 1.9 million warrants to purchase common stock
outstanding were excluded from the computation of diluted earnings per share
because they were antidilutive.
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 in addition to the Company's latest Annual Report on Form 10-K filed
with the Securities Exchange Commission.
We commenced operations in 1972. Since that time, we have been primarily
engaged in research and development activities related to wireless digital
communications technology, principally TDMA and CDMA technologies. We have
established a substantial and significant library of patents and technology
know-how related to such technologies.
Through 1999, we were also engaged in the development, marketing, sales and
servicing of Wireless Local Loop ("WLL") equipment utilizing our technology. We
developed, marketed and sold a proprietary TDMA-based WLL system known as the
UltraPhone system. We also developed a proprietary CDMA-based WLL system, known
as the Truelink(TM) system, which utilized wideband CDMA technology. As part of
our WLL development and marketing efforts, we entered into strategic alliance
agreements with Siemens AG (in 1994), Samsung Electronics Co., Ltd. (in 1996),
and Alcatel Espana (in 1998) involving the Company's proprietary wideband CDMA
WLL technology, which it trademarked B-CDMA(TM) technology.
In the first half of 1999, we made a major shift in our business strategy
by dedicating our resources into the emerging Third Generation ("3G") market.
The proposed 3G technologies incorporate wideband CDMA protocols as well as
other CDMA and TDMA technologies. Industry analysts project that the first 3G
products and services will be introduced in Japan in 2001, with services being
offered in other parts of Asia, Europe and North America throughout this decade.
The study group for International Telecommunications Union formally adopted the
3G standards in 1999, solidifying wideband CDMA as one of the fundamental
technologies for 3G.
As part of our shift, we sought to enter into arrangements with key
equipment providers involving 3G technology and products. Executing on our
business plan, we entered into a strategic engineering relationship with Nokia
in 1999 involving the development of high data-rate technology. As part of the
Nokia agreement, we will retain ownership rights over the technology we develop
for Nokia. Also, included in the Nokia agreement were certain TDMA and CDMA
licenses which are paid up generally through the project period. The agreement
also provides a structure for determining patent royalty payments thereafter.
In 1999, we also initiated a self-funded research and development effort to
develop building blocks for Frequency Division Duplex (FDD) technology, another
component of the wideband CDMA protocols included in the 3G Standard. The FDD
program builds off of our extensive B-CDMA technology development efforts.
We plan to market, either on our own or with a partner, system-on-a-chip
ASICs and components related to our FDD and Time Division Duplex (TDD)
technology to equipment producers worldwide. We also plan to generate revenues
from the licensing of the TDD and FDD technologies and patents to third parties,
as well as providing specialized engineering services to equipment producers
centered around these technologies. Our ability to derive future revenues will
be affected by other factors detailed elsewhere in this Quarterly Report. (See
"Statement Pursuant to the Securities Litigation Reform Act of 1995" below.)
As a result of the decline in the rural fixed and wireless access market
and the anticipated emergence of 3G standards in 1999, both Siemens and Alcatel
withdrew from the B-CDMA Alliance(TM) in 1999. As a consequence of our partners'
decisions and our own assessment of the WLL market, we decided to reduce our
resource commitment to B-CDMA technology development. In 1999, we also decided
to discontinue the manufacture of the UltraPhone system. We sustained
significant losses over the life of the UltraPhone product line due to our
inability to achieve sufficient sales volumes and the need to continue to
consistently upgrade and re-engineer the product, at significant expense. Final
shipments were completed in the second quarter of 2000 (excluding possible
shipments of spare parts reserved for certain customers), and we have now fully
exited the business.
9
<PAGE>
Over the course of the next few years, we expect the variability in our
revenues and, consequently, our cash flow to continue due mainly to the timing
and amount of sales by current and prospective TDMA and CDMA licensees. We
expect to continue to experience considerable fluctuations in quarterly and
annual operating results in the future due to variations in the amount and
timing of recognition of TDMA and CDMA license, royalty and development fees.
(See "Statement Pursuant to the Securities Litigation Reform Act of 1995"
below.)
FINANCIAL POSITION, LIQUIDITY AND CAPITAL REQUIREMENTS
We generated positive cash flows from operating activities of $3.8 million
in the first half of 2000 compared to $29.2 million in the same period in 1999.
The high level of positive operating cash flow in the first half of 1999
resulted from cash receipts arising principally from a 1999 license agreement
with Nokia. The positive operating cash flow in the first half of 2000 was
mainly due to the positive cash earnings (net income plus depreciation and
amortization) generated during the period.
Net cash used in investing activities decreased to $4.3 million in the
first half of 2000 from $40.6 million in the comparable period of 1999. The
decrease was due primarily to a lower level of additional investment of funds in
short-term, highly liquid assets in 2000. Investments in property and equipment
and patents increased to $3.8 million in the first half of 2000 from $1.4
million in the first half of 1999. The increase in 2000 reflects increased
development program and new information system investments.
During the first half of 2000, net cash provided by financing activities
was $11.0 million as compared to $1.5 million used in the first half of 1999.
The increase resulted from net proceeds of $11.3 million related to option and
warrant exercises.
As of June 30, 2000, we had $94.3 million of cash, cash equivalents and
short-term investments, compared to $83.1 million as of December 31, 1999. Our
working capital excluding cash, cash equivalents and short-term investments
decreased to $7.7 million from $12.4 at year-end 1999 principally as a result of
the depletion of inventory related to exiting the wireless local loop business
and the increase in deferred revenue resulting from changes recorded in response
to SAB No. 101.
We are capable of supporting our operating requirements during the
remainder of 2000 through internally generated funds. Should the need arise to
fund new development activities, external growth activities or other matters, we
may seek financing through bank facilities or the sale of debt or equity
securities.
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 patent assets, we believe that the value of our patents is at least
equal to the value included in the June 30, 2000 balance sheet.
RESULTS OF OPERATIONS
Modification Of Revenue Recognition Policy
In the second quarter of 2000, we modified our recognition policy in
response to Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements" that was issued by the Securities and Exchange Commission
("SEC") in December, 1999. SAB No. 101 expresses the views of the SEC Staff in
applying generally accepted accounting principles to certain transactions,
including licensing agreements involving non-refundable up-front payments.
Historically, we have recorded such fees as revenue upon the signing of the
applicable license agreement because the Company had delivered the license and
had no remaining obligations. Following SAB No. 101 guidance, we reflected in
our six months results a net after tax cumulative effect of change in accounting
principle of $30.5 million to defer the net portion of up-front payments that
represents amounts which have not been exhausted through product sales by
licensees as of January 1, 2000. In the first half of 2000, we recognized
approximately $3.3 million and $2.7 million of revenue and net earnings,
respectively, on a post-SAB No. 101 basis related to the deferred amounts. The
impact in the first and second quarters of 2000 of these amounts was equal.
Going forward, we will continue to recognize the revenue and net earnings
associated with the deferred amounts as licensee product sales occur.
Second Quarter of 2000 Compared to the Second Quarter of 1999
Revenues
Revenues in the second quarter of 2000 totaled $11.6 million compared to
$12.3 million in last year's second quarter. In 2000, we recognized $5.8 million
from recurring royalties ($4.2 million on a pre-SAB No. 101 basis), $4.7 million
in specialized engineering services and $1.1 million of product revenues related
to final orders of UltraPhone. In 1999, new license revenue
10
<PAGE>
related to an agreement with Robert Bosch Gmbh was $7.9 million, recurring
royalties were $0.2 million, strategic partner revenue was $3.8 million and
UltraPhone product revenue was $0.4 million.
Cost of Product
Cost of product for the second quarter of 2000 increased slightly to $1.4
million from $1.3 million in the second quarter of 1999 due to an increase in
product revenues.
Other Operating Expenses
Sales and Marketing costs of approximately $0.7 million in the second
quarter of 2000 remained fairly consistent with last year's spending in the same
quarter.
General and administrative expenses for the second quarter of 2000
increased 67% to $3.2 million from $1.9 million in the second quarter of 1999.
The increase is primarily due to higher costs related to various corporate
strategic initiatives.
Patents administration and licensing expenses increased slightly to $1.7
million during the second quarter of 2000 as compared to $1.5 million during the
same period in 1999. The increase is due to higher litigation costs.
Development expenses for the second quarter of 2000 increased 26% to $6.4
million as compared to $5.1 million during the second quarter of 1999. The
increase is due to further investment in resources to support 3G development
programs.
Other Income and Expense
Interest income for the second quarter of 2000 increased to $1.4 million
from $0.9 million in the second quarter of 1999 due to higher average invested
cash balances in the second quarter of 2000.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Revenues
Revenues for the six months ended June 30, 2000 decreased to $25.5 million
from $47.5 million for the six months ended June 30, 1999 primarily due to a
lower amount of licensing revenue from new sources. For the first half of 2000,
recurring royalty revenue was $11.8 million ($8.5 million on a pre-SAB No. 101
basis), specialized engineering service revenue was $8.1 million and the final
revenue related to the UltraPhone product was $5.6 million. Licensing and
strategic partner revenues for the six months ended June 30, 1999 included $39.4
million from new licensing agreements, $5.7 million from engineering development
services and $0.8 million in recurring royalties.
Cost of Product
Cost of product for the six months ended June 30, 2000 increased 74% to
$5.2 million from $2.9 million for the six months ended June 30, 1999 due to
increased product sales.
Other Operating Expenses
Sales and Marketing expenses increased 35% to $2.2 million during the six
months ended June 30, 2000 compared to $1.7 million during the six months ended
June 30, 1999. The increase is primarily due to costs associated with strategic
marketing analysis activities.
General and administrative expenses for the six months ended June 30, 2000
increased 71% to $5.9 million from $3.4 million for the six months ended June
30, 1999. The increase is primarily due to higher costs associated with a
variety of strategic planning initiatives.
Patents administration and licensing activities expense decreased 69% in
the six months ended June 30, 2000 to $1.3 million compared to $4.3 million in
the first half of 1999. The decrease reflects a net overall decrease in
recognized costs related to the Ericsson litigation. This includes recoveries
under our insurance policies of over $1.5 million recorded in the first quarter
2000 for litigation costs incurred in the prior year. In February of 2000, we
and our insurers defined a method, timing and limitation of recovery for covered
litigation expenses. Costs related to litigation are now recorded net of the
anticipated reimbursements from our insurance carrier.
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Development expenses increased 11% for the six months ended June 30, 2000
to $11.9 million from $10.7 million for the six months ended June 30, 1999. The
increase over the prior year period is due primarily to increased staff and
activity levels devoted to development of advanced 3G wireless applications.
Other Income and Expense
Interest income for the six months ended June 30, 2000 was $3.0 million as
compared to $1.8 million for the same period in 1999 as a result of higher than
average invested cash in 2000, as compared to 1999. Interest expense for the six
month period ended June 30, 2000 was $135,000 as compared to $173,000 for the
six month period ended June 30, 1999 due to lower overall debt in the first half
of 2000 as compared to the first half of 1999.
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, current beliefs and expectations as
to our ability to market system-on-a-chip ASICs and components and to generate
revenues through licensing, our ability to form strategic partnerships, timing
of 3G market development, 3G standards, sources of and variability in revenue
streams and operating results, and our ability to support our operating
requirements. Words such as "project", "plan", and "expect", 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. We caution 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, the timing and development of 3G markets depends on economic
conditions, customer buying patterns, pricing, growth of telecommunications
services, and availability of capital. The applicability of standards could be
affected by refinements in the standards, the validity of our patents, and
determinations as to applicability of our patents. Our ability to market
system-on-a-chip ASICs and components and to generate revenues through licensing
may be affected by general economic and industry specific conditions, our
ability to achieve our development goals and the abilities of certain third
parties to meet our expectations and/or commitments, our ability to enter into
additional alliances, strategic engineering relationships and/or licenses for
its patents and other intellectual property on acceptable terms, changes in
standards, adverse court decisions, impending or future litigation, adverse
developments in the Ericsson patent litigation and the costs related to
enforcement of our patent rights. Further, the Company's ability to pursue and
achieve its development activities, and consequently, to generate revenues
therefrom could be adversely affected by the Company's inability to retain its
technical personnel in the highly competitive wireless market and to engage
sufficient additional persons to pursue these activities. Sources and
fluctuations in revenues and operating results may be affected by the length and
variability of negotiating cycles for partnership and licensing agreements,
changes in markets for our technology arising from the rapid changes in
technology development generally, our ability to enter into new license or
partnership agreements either at all or on acceptable terms, our ability to
enforce existing license agreements and intellectual property rights, the
outcomes of patent related litigation and proceedings, including the current
Ericsson litigation, and the levels of sales by licensees. We may be unable to
enter into additional strategic relationships, either at all or on acceptable
terms or in a timely manner, which could impair our ability to introduce our
technology and resulting products. Our ability to support our operating
requirements could be affected by shifts in our strategies as well as the above
risk 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 us at this time. We undertake 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, 1999 Form 10-K.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
As reported in the Company's latest Annual Report on Form 10-K and
Quarterly Report for the first quarter of 2000, the Company is a party to a
lawsuit involving Cavalier Technologies and Consultants Ltd. in which Cavalier
seeks damages in the form of direct and indirect damages and lost profits.
Cavalier also seeks injunctive relief preventing InterDigital from shipping
remaining inventory of UltraPhone equipment to other customers. During the
second quarter of 2000, InterDigital filed a motion for Summary Judgement, which
motion was denied. The case is in the process of being scheduled for trial.
The Company is a party to additional pending litigation, as reported in the
Company's latest Annual Report on Form 10-K and Quarterly Report for the first
quarter of 2000, for which there are no material updates.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
At our Annual Meeting of Shareholders held on June 1, 2000, our
shareholders elected Mr. D. Ridgely Bolgiano and Mr. Mark Gercenstein as
directors of the Company and ratified the appointment of Arthur Andersen LLP as
the Company's independent accountants for the year ending December 31,2000. Our
shareholders elected Mr. Bolgiano as a director by a vote of 53,309,621 in
favor, and 741,807 withheld. Our shareholders elected Mr. Gercenstein as a
director by a vote of 50,309,121 in favor, and 742,307 withheld. Messrs. Harry
G. Campagna, Steven T. Clontz, Joseph S. Colson, Jr. and Robert S. Roath also
continued to serve their terms as directors. The vote approving the adoption of
the Company's 2000 Stock Award and Incentive Plan was 45,564,010 shares for,
5,290,895 shares against and 196,523 shares abstaining. The vote ratifying the
appointment of Arthur Andersen LLP was 50,536,020 shares for, 397,484 shares
against and 117,924 shares abstaining. There were no broker non-votes with
respect to any matters voted on at this Meeting.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) The following is a list of exhibits filed as part of this quarterly
report on Form 10-Q:
Exhibit 10.26 Employment Agreement dated April 17, 2000 by and
between InterDigital and Mark Gercenstein.
Exhibit 10.27 Separation and Confidentiality Agreement dated June
30, 2000 by and between InterDigital and Joseph
Gifford.
Exhibit 10.28 2000 Stock Award and Incentive Plan.
Exhibit 10.29 Amendment to 1992 Employee Stock Option Plan.
Exhibit 10.30 Amendment to 1992 Incentive Stock Option Plan.
Exhibit 10.31 Amendment to Non-Qualified Stock Option Plan.
Exhibit 10.32 Amendment to 1992 Non-Qualified Stock Option Plan.
Exhibit 10.33 Amendment to 1995 Stock Option Plan for Employees and
Outside Directors.
Exhibit 10.34 Amendment to 1997 Stock Option Plan for Non-Employee
Directors.
Exhibit 10.35 Amendment to Incentive Stock Option Plan.
Exhibit 10.36 Amendment dated as of April 6, 2000 by and between
InterDigital and Richard J. Fagan.
Exhibit 10.37 Amendment dated as of April 6, 2000 by and between
InterDigital and Mark Lemmo.
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Exhibit 10.38 Amendment dated as of April 6, 2000 by and between
InterDigital and William Merritt.
Exhibit 10.39 Amendment dated as of April 6, 2000 by and between
InterDigital and Charles R. Tilden.
Exhibit 10.40 Amendment dated as of April 6, 2000 by and between
InterDigital and Joseph Gifford.
Exhibit 10.41 Amendment dated as of April 6, 2000 by and between
InterDigital and Howard E. Goldberg.
Exhibit 10.42 1997 Stock Option Plan for Non-Employee Directors, as
amended March 30, 2000.
Exhibit 10.43 1999 Restricted Stock Plan, as amended April 13,
2000.
Exhibit 27 Financial Data Schedule.
(b) The following is a list of Current Reports on Form 8-K filed during the
second quarter of 2000:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERDIGITAL COMMUNICATIONS CORPORATION
Date: August 14, 2000 /s/ Mark Gercenstein
---------------------------------
Mark Gercenstein, Chief Executive
Officer
Date: August 14, 2000 /s/ R. J. Fagan
--------------------------------
Richard J. Fagan, Executive Vice
President and Chief Financial
Officer
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