UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO THE SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO THE 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 of Incorporation) (I.R.S. Employer Identification Number)
781 Third Avenue, King of Prussia, Pennsylvania 19406
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 610-878-7800
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 Per Share
Series B Junior Participating Preferred Stock Rights
$2.50 Cumulative Convertible Preferred Stock, Par Value $0.10 Per Share
(Title of class)
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 short 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not herein contained, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
On March 21, 2002 the aggregate market value of the registrant's Common
Stock, $0.01 par value, held by non-affiliates of the registrant was
approximately $510,498,936.
On March 21, 2002 there were approximately 52,496,918 shares of the
registrant's Common Stock, $0.01 par value, outstanding.
Documents Incorporated by Reference
Portions of the Registrant's definitive proxy statement to be filed in
connection with the annual meeting of shareholders to be held in 2002 are
incorporated by reference into Items 10 through 13 inclusive.
PART I
Item 1. BUSINESS
General
InterDigital Communications Corporation (collectively with its
subsidiaries referred to as InterDigital, the Company, we, us and our),
specializes in the architecture, design and delivery of wireless technology and
product platforms. Over the course of our corporate history, we have amassed a
substantial and significant library of digital wireless systems experience and
know-how and we hold an extensive worldwide portfolio of patents in the wireless
systems field.
We market our technologies and solutions primarily to wireless
communications equipment producers and related suppliers. Our inventions are
embedded into products targeted for the following wireless telecommunications
applications:
- Mobile phones
- Personal digital assistants
- Mobile computing devices
- Other terminal-end wireless devices
- Base stations and other infrastructure equipment
In addition, we license our Time Division Multiple Access (TDMA) and
Code Division Multiple Access (CDMA) patents to equipment manufacturers
worldwide. We are continuing to broaden and deepen our extensive patent
portfolio and body of technical know-how related to wireless technologies and
systems through continuous invention and innovation, while also linking our
licensing activities to emerging product development efforts, particularly in
the area of Wideband CDMA (WCDMA) standards.
The Company was incorporated in Pennsylvania in 1972. Our corporate and
administrative offices are located in King of Prussia, Pennsylvania, USA. Our
research and technology and product development teams are located in King of
Prussia, Pennsylvania, USA; Melville, New York, USA; Montreal, Quebec, Canada;
and Munich, Germany.
Wireless Communications Industry Overview
We are focused on the wireless communications industry, serving the
needs of manufacturers and operators who supply consumers with advanced
communications services and devices that utilize radio frequency-based systems
(as opposed to wireline or fiber) to digitally transmit voice and data.
The industry participants include equipment manufacturers, a variety of
technology suppliers and the service providers or operators that deliver
communications products and services to the consumer. These products are either
standards-based products, leveraging a common technology across a broader
segment of the market, or proprietary products, focused on niche geographic
regions or services. In order to achieve economies of scale, many market
participants have increasingly focused on the standards-based solutions. The
wireless market is in the early stage of a shift from voice-oriented wireless
products, primarily mobile handsets which provide basic voice services (commonly
referred to as Second Generation or 2G), to fully integrated voice and data
devices offering higher data rate services and enhanced Internet access
(commonly referred to as 2.5G), to new mobile devices that provide voice and
substantially higher rate data-oriented services (commonly known as Third
Generation or 3G).
Over the course of the last decade, the wireless communications
industry has experienced rapid worldwide growth. Total worldwide wireless
communications subscribers rose from slightly more than 200 million at the end
of 1997 to more than 900 million at the end of 2001. In several countries mobile
telephones now outnumber the number of fixed-line telephones. Market analysts
expect that the aggregate number of global wireless subscribers will exceed 1.3
billion by 2003.
The growth in new subscribers coupled with the replacement market
(existing users upgrading to new mobile devices) helped fuel the annual sales
growth of mobile devices in the aggregate from approximately 115 million in 1997
to approximately 400 million in 2000. During 2001, the number of subscribers
continued to grow, while at a slower rate, and unit sales of mobile terminal
devices declined approximately 5% from the prior year.
Many industry experts speculate that a slowdown in the growth of sales
of wireless terminal products in 2001 can be attributed, in part, to consumers
waiting for the next generation of mobile communication products to come on the
market. The slowdown of sales growth also corresponds with the slowdown in the
addition of new subscribers as markets in Western Europe became saturated (60%+
penetration), as well as to the sluggishness of the global economy. Nonetheless,
while the rate of new subscriber additions is growing at a slower pace, the
total number of wireless subscribers continues to expand.
2
We believe the combination of a broad subscriber base and accelerating
technological change sets the stage for growth in the sales of wireless products
and services through the balance of this decade. The introduction of mobile
technologies that permit the delivery of enhanced data-oriented services such as
messaging and robust Internet access should fuel the sales of wireless products
that would provide the consumer with access to such services. These products are
likely to include a broad range of mobile terminal-end products, including
handsets, personal digital assistants, and laptop or notebook computers. Over
the next decade, demand for mobile devices capable of delivering advanced
services as a result of technological change is projected to grow faster than
the market for voice mobile products and services.
The 3G market is expected to emerge over the course of several years.
The pace and growth of this market will depend upon a variety of factors, the
most important of which may be the introduction of new services designed to use
the enhanced data capability. Wireless service providers are installing 3G
network infrastructure in stages, starting in markets of heavy use. Major
manufacturers have reaffirmed their intention to bring new 3G handset products
to market during 2002. The first WCDMA 3G commercial products and services were
introduced in Tokyo, Japan in October 2001. Operators are conducting WCDMA 3G
field trials in parts of Asia and Europe during 2002. During 2001 and 2002,
operators in South Korea and the United States began to deploy CDMA2000 (a
competing narrowband, Frequency Division Duplex (FDD) multi-carrier CDMA
technology, incompatible with the WCDMA standard).
Evolution of Wireless Standards
Wireless communications standards are formal guidelines for engineers,
designers, manufacturers and service providers which regulate the use of the
radio frequency spectrum for wireless communications products and services used
in the marketplace. The vast majority of wireless products are manufactured and
services are provided to comply with standards adopted by a particular group
representing a geographic region or as a global conglomeration of regionally
sponsored standards. New standards are typically adopted with each new
generation of products.
First generation mobile wireless products and services were introduced
in the 1980s and deliver primarily voice services utilizing analog technology.
Although analog subscribers have declined steadily since 1998, first generation
wireless systems still remain in use worldwide for voice-only services. 2G
products and services were introduced in the early 1990s, taking advantage of
new digital technology that greatly increased the capacity, quality of service
and flexibility of wireless networks. 2G wireless products and services deliver
primarily voice services. In 2G, several competing and incompatible versions of
digital wireless technologies were deployed as operators around the world
constructed their networks.
The principal 2G digital wireless technologies in use today are TDMA
and CDMA. The TDMA-based technologies serve over 80% of wireless subscribers
worldwide. These TDMA technologies include GSM (Global System for Mobile
Communications), IS 54/136 (the U.S. Digital Cellular Standard, AMPS-D), PDC
(Pan Asian Digital Cellular), PHS (Personal Handyphone System), DECT (Digital
European Cordless Telephone), and TETRA (Terrestrial Trunked Radio) standards.
Of the TDMA technologies, GSM is the most prevalent technology, has been
deployed in Europe, Asia, Africa, the Middle East, parts of North America and
other regions, and serves over 60% of all wireless subscribers as of year-end
2001. Because of its predominance in Europe, GSM permits inter-country roaming
for its customers. The IS 54/136 technology has been deployed in North, Central
and South America. The PDC technology is deployed in Japan while PHS
technologies are deployed in Japan, the People's Republic of China and Taiwan.
DECT is a digital cordless standard that operates primarily in Europe. TETRA is
an open digital trunked radio standard widely deployed in Europe to meet the
needs of professional mobile radio users such as railways and utilities. 2G
CDMA-based technologies, which represent approximately 15% of worldwide wireless
subscribers, include IS-95 (a form of narrowband CDMA), which was commercialized
in the 1990s and serves parts of the United States, South Korea and several
other countries. The remaining 5% of worldwide wireless subscribers continue to
use First Generation analog technology.
In 2001, 2.5G systems (such as general packet radio systems (GPRS))
began to be deployed offering substantially higher data rate services. However,
2.5G systems do not make use of additional radio spectrum, and as such, may face
capacity restraints as data rich applications become widely used.
3
Deployment of 3G services is expected to allow operators to take
advantage of additional spectrum and, through the use of higher data speeds,
deliver additional rich voice and data applications to their customers. The
International Telecommunications Union (ITU), an international organization
established by the United Nations with membership from virtually every
government in the world, defines and adopts telecommunications standards and
furthers telecommunications developments. In late 1999, the ITU established
IMT-2000, a set of standards for 3G technologies. IMT-2000 defined five sets of
alternative specifications, which can be selected or aggregated by equipment
manufacturers to produce standards-compliant 3G wireless products for their
customers. The five specifications under the standard include three forms of
CDMA technology: FDD and Time Division Duplex (TDD) (both commonly referred to
as WCDMA), and CDMA2000. The 3G standard also includes two forms of TDMA
technology: DECT and UWC-136 (EDGE), an evolved form of the U.S. TIA/EIA-136
digital cellular TDMA standard. In 2001, the ITU modified the TDD specification
to include Narrowband TDD (NTDD). Of the GSM service providers in Europe that
have selected a 3G air interface, all have selected WCDMA. A select number of
operators in South Korea, Japan and the United States have selected CDMA2000 as
their 3G air interface. CDMA2000 is being deployed in certain markets in Asia
and the United States. TD-SCDMA, a form of NTDD, is being evaluated as a
wireless technology for the People's Republic of China. Products built to one or
more of these specifications are being designed to deliver a varying range of
high bandwidth wireless services, including high-speed Internet access,
multimedia communications, video conferencing and other forms of data
transmission.
Strategy
Our strategic objective is to position the Company as a preferred
provider of integrated circuits, software and know-how for existing and future
wireless markets to wireless communications equipment suppliers and related
suppliers, leveraging our long heritage of digital wireless expertise. We intend
to create value through technology transfer to customers, the delivery of
software and hardware products, and the licensing of our intellectual property
worldwide. To do so, we are actively participating in worldwide 3G markets, with
the following objectives:
- Invest in architecture, design and delivery of 3G core wireless
technologies. We possess longstanding core competencies in digital air
interface design and the development of solutions for wireless
products. We have and continue to pursue agreements to provide product
manufacturers with access to our developed know-how, with the goal of
providing our customers with cost and reduced risk solutions that
accelerate their time-to-market and meet market demands, while, at the
same time allowing us to take advantage of technology re-use
opportunities. Where appropriate, we will pursue agreements with
leading companies to transfer our technology, to support those
companies seeking to outsource the development and/or modification of
technology as well as offer WCDMA technology integration and
implementation assistance.
- Focus on standardized technology and product innovation while placing
our technology and intellectual property rights into 3G standards and
products. We have been a leader in developing and promoting key
industry standards starting with 2G in the 1980s and continuing with 3G
WCDMA standards development. By actively participating in standards
development, we build recognition of our technical competence, and
secure positions for our intellectual property within the technology
standards.
- Combine our intellectual property licensing with product offerings
worldwide. Our substantial portfolio of patented TDMA and CDMA
inventions is a valuable asset. Licensed access to these inventions,
and the technological know-how they represent, has proven valuable to
producers of wireless devices and components around the world. We
intend to further leverage our intellectual property by combining it
with advanced products for the 3G market, including software products
(such as Layer 2/3 software protocol stacks) and hardware products
(such as advanced system-on-a-chip ASICs (Application Specific
Integrated Circuits)). These products can be sold directly to our
customers or through partnerships where we would receive royalties.
- Build a base of strategic and customer relationships. To further
strengthen our position in the 3G market and enhance our growth
opportunities, we intend to expand our network of customer/partner
relationships. Our potential partners include semiconductor producers,
original equipment manufacturers and suppliers of technology that bring
complementary production capabilities, technologies, and market access
or that seek to outsource the development of core air interface
technologies.
4
InterDigital's Technology Position
We have a strong history developing TDMA and CDMA technologies. With
regard to TDMA, we have lead the industry in establishing IS-54 as a wireless
standard in the United States in the 1980s and, through standards-related
innovation, have created a substantial portfolio of patented inventions. Our
core TDMA inventions include or relate to (among others):
- The fundamental architecture of commercial Time
Division/Frequency Division Multiple Access (TD/FDMA)
systems
- Methods of synchronizing the operation of TD/FDMA
systems
- A unique approach of managing system capacity and
maintaining agility through the reassignment of
online subscriber units to different time slots
and/or frequencies in response to system conditions
- The design of a multi-component base station
utilizing distributed intelligence that allows for
more robust performance
- Initializing procedures that enable roaming
A number of our core TDMA inventions are being used in a broad range of 2G
wireless networks and terminal-end mobile and fixed devices. (See, "-Business
Activities, Patent and Technology Licensing".)
Similar to our TDMA inventions, we have lead industry innovation and
patented our resulting CDMA inventions and today hold a significant worldwide
portfolio of patents and patent applications for CDMA technology. Similar to our
TDMA inventions, we believe that certain of our inventions are essential to the
implementation of the 2G CDMA systems in use today. Our key CDMA inventions
include or relate to (among others):
- Global pilot: The use of a common pilot channel to
synchronize sub-channels in a multiple access
environment
- Bandwidth allocation: Techniques including
multi-channel and multi-code mechanisms
- Power control: Highly efficient schemes for
controlling transmission power output of terminal and
base station devices vital in a CDMA system
- Overlay techniques for communications systems, which
allow new wireless systems to be deployed with
existing wireless technologies without frequency
reallocation
- Joint detection and interference cancellation for
reducing multiple access interference in a physical
receiver
- Soft handover enhancement techniques between
designated cells
- Various sub-channel access and coding techniques
- Packet data
- Fast handoff
- Geo-location for calculating the position of terminal
users
- Multi-user detection (MUD)
Our reputation as an inventor and innovator positions us well to
influence the content and direction of the 3G wireless technology standards. To
the extent that we provide technology solutions that are incorporated into the
standards, we can, and by our standards declarations are obligated to, license
essential solutions to others. Our competitive advantage is derived from the
fact that we would have both the intimate knowledge of the innovation as well as
any intellectual property rights that may attach to such innovations. Our
ability to influence the standards development process also helps to create a
climate for the growth of business opportunities by both enhancing our image as
a key innovator, as well as providing early intelligence on technologies. Our
activities in the standards processes should positively impact our future
revenue opportunities.
To facilitate our position as a contributor to emerging wireless
technologies, we are active in the Third Generation Partnership Projects (3GPP)
through our membership in the European Telecommunications Standards Institute
(ETSI), and have been an active member of various standards development
organizations including the ITU, the Telecommunications Industry Association
(TIA), the Engineering Subcommittee T1P1 (T1P1), and the American National
Standards Institute (ANSI). For 3G, we have submitted more than 500 proposed
concepts and methodologies to standards bodies worldwide, of which over 60% have
been adopted. We have also taken leadership positions in certain of these
standards bodies. Our Senior Vice President for Standards is the Chair of a task
force under the Institute of Electrical and Electronic Engineers (IEEE) that is
developing standards for broadband wireless access systems, and one of our
senior engineers is the Vice Chair of a 3GPP working group. In addition to our
participation in various standards bodies, we are also active in various
technology forums that foster our business interests. For example, our Chief
Technology Officer (CTO) chairs the Universal Mobile Telecommunications System
(UMTS) Forum Task Force on TDD and Wireless LANs. A member of our CTO Office is
the Co-chair of the GSM Association's Wireless LANs Task Force. Further, we are
a Council Member (a senior level position held by a limited number of members)
of the TD-SCDMA Forum, a body focused on the application of NTDD, and an active
member in the TDD Coalition, an industry consortium which promotes TDD airlink
technology.
5
Based on our history of invention and our extensive participation in
the standards bodies, together with extensive cross use of technology innovation
across different standards, we believe we that our patent portfolio (including
patents applied for) is applicable to all of the air interface protocols
described in the IMT-2000 standard. We have indicated to the appropriate
standards setting bodies that we hold patents and patent applications that are
either essential or commercially important for implementation of the present 3G
standards specifications in products, and have, in conjunction with such
indication, declared that our patented inventions will be available for license
under the general principles for each standards body. (See, "-Business
Activities, Patent and Technology Licensing".)
Business Activities
Core Technology and Product Development
Our current technology development programs are focused on creating
intellectual property and hardware and software products for the WCDMA
specifications of the 3G standard. We have focused on this market segment
because we expect that WCDMA technology (as opposed to the other 3G
specifications) will be the dominant technology in the 3G marketplace. Of the
GSM service providers in Europe that have selected a 3G air interface, all have
selected WCDMA because its adoption offers them the most sensible route to 3G
services worldwide as a result of lower expected costs and faster time to
market. Given the dominant global market position today of the GSM service
providers, analysts expect that they will maintain a similarly strong market
position in the next generation wireless environment. We believe technology
providers or enablers such as InterDigital which are serving this market by
transferring or licensing their technology to companies producing silicon,
software or products, will benefit from a leading market position for WCDMA. We
believe that our heritage of know-how and patented wireless inventions based
upon both TDMA and CDMA differentiates us among current enabling 3G technology
providers.
The principal focus of our business activity involves the development
of technology platforms for the two modes of WCDMA: FDD and TDD. We are making
significant investments in both technologies and expect to monetize our
investment through a combination of intellectual property licensing and product
sales. While global market demand for FDD-related licensing and products is
growing in tandem with the emerging market demand for 3G generally, market
demand for TDD-related licensing and products is trailing FDD emergence in
accordance with our initial expectations.
With respect to our FDD focus, for the past several years we have been
engaged in a research and development effort to develop FDD protocol stacks for
WCDMA products. FDD technology supports two-way radio communication using paired
radio frequencies. In the FDD format, one frequency supports transmission from a
base station to a mobile terminal (downlink) while the other frequency supports
transmission in the reverse (uplink) direction. Because of the paired
frequencies, simultaneous communication in both directions is possible. Both
frequencies typically have the same capacity. This technique is useful for high
volume mobile voice traffic and is the traditional public mobile radio spectrum
allocation. FDD technology provides high-quality voice transmission and can
support high-speed wireless Internet access and multimedia imaging, but it is
inefficient in these unbalanced traffic applications.
In March 2001, we entered into a broad, long-term cooperative
relationship with Infineon Technologies AG (Infineon) involving the development
of FDD (Layer 2/3) software (Joint 3G Protocol Stack) for use with Infineon's
terminal unit 3G system-on-a-chip integrated circuits (ICs). Each party will own
the technology it develops under the co-development agreement. The agreement
provides for us to be compensated on a per unit royalty basis on sales of
Infineon standard ICs containing the Joint 3G Protocol Stack. The agreement also
provides that we will serve as Infineon's sole source of certain portions of the
FDD Access Stratum in its 3G terminal unit ICs except where Infineon customers
require use of their own or a third party's protocol stack. If we commence a FDD
Access Stratum development effort with another semiconductor company for
terminal unit applications, Infineon may engage a third party for the
development or modification of a new FDD Access Stratum. The agreement provides
for joint marketing of the Joint 3G Protocol Stack in terminal unit
applications, as mutually agreed, subject to certain time-to-market restrictions
as regards each new software version. Each party is permitted to independently
market and use their own respective portions of the Joint 3G Protocol Stack
without restriction. Infineon has committed to cooperate in enabling us to
design custom 3G ASICs based on an Infineon platform for both infrastructure and
selected terminal unit applications where Infineon would serve as the foundry.
Infineon is permitted to sell our custom ASICs within its portfolio of products
and to re-use our reference design in non-competitive products. We are permitted
to market Infineon's custom ICs which are not a part of the co-development
agreement and would receive a commission fixed at then current standard rates.
Under the agreement, the parties have cross-licensed to each other a limited set
of patents, in our case, generally applicable to the jointly developed software
and related products for specified purposes. The parties have also agreed to a
framework for determining royalties in other 2G and 3G products.
6
With respect to our TDD focus, as we develop TDD technology and
products, we are exploring alternative market strategies to promote the use and
proliferation of TDD. We have licensed our TDD technology and patents to various
companies (See, "-Business Activities, Patent and Technology Licensing"), and
many operators have received an unpaired frequency band that could be used for
TDD. As manufacturers and operators begin to evaluate their use of unpaired
spectrum following a period of concentration on deployment of technology in the
paired spectrum, although no manufacturer or operator has yet to commit to the
deployment of TDD, we have experienced varying degrees of interest among certain
manufacturers and operators. We are pursuing a global, TDD development strategy
that could ultimately include the development and productization of both
Wideband TDD (WTDD), (also called high chip rate TDD), and narrowband TDD (also
called low chip rate TDD or, subject to variations, TD-SCDMA) - or their
eventual harmonization in integrated or complimentary applications and services.
Our development partnership with Nokia Corporation (Nokia) in WTDD and our
recent election as a Council Member in the TD-SCDMA Forum, a body focused on the
application of NTDD, are important elements of our broad TDD development
strategy.
TDD technology operates by using a single frequency band to transmit
signals alternately in the downlink and uplink direction (sometimes referred to
as "ping-pong" operation). In the TDD design, the relative capacity of the
downlink and uplink can be altered in favor of one direction or the other
(usually the downlink). This is accomplished by giving a greater time allocation
to transmission intervals going in one direction over the other direction.
Exploitation of this asymmetric capability, which leverages the availability of
unpaired spectrum, is very useful for communication processes characterized by
unbalanced information flow. One important application of this technique is
Internet access where users typically send short messages (such as a URL
address) and receive large information payloads such as a full web page.
Importantly, due to the fact that only one radio channel is used, frequency
re-use is enhanced and network planning is simplified.
In 1999, we entered into a strategic technology development arrangement
with Nokia involving the development and validation of the fully standards
compliant WTDD technology. Under this arrangement, we have been delivering
technology building blocks to Nokia for use in 3G wireless products. This
development effort is continuing and includes the delivery of a test platform
that should enable demonstration of the technology in 2002 to wireless
operators, equipment and component producers, and applications developers. In
turn, Nokia has been funding the project and maintaining an active role in the
development plan. Under the Nokia agreement, we own all of the developed
technology and have the ability to license the technology to other companies, as
well as design, manufacture, sell and use products and components that utilize
the resulting technology. During the third quarter of 2001, InterDigital and
Nokia agreed to refine the pace and scope of the program. Nokia agreed to forego
its right to terminate the project for convenience and committed to a project
maximum of approximately $58 million, up from the original estimate of
approximately $40 million. Once we reach the project maximum, we intend to
self-fund any work required to complete the project. In addition, beyond the
scope of the Nokia project, we are self-funding additional work required to
develop a robust WTDD platform. We believe that a substantial amount of our WTDD
platform applies to FDD and NTDD technologies, such as TD-SCDMA.
Based on FDD and TDD technology platforms, we intend to develop 3G
products for sale to telecommunications equipment manufacturers either directly,
through our partners, or through other third parties. The products are expected
to include ASICs, software and combined RF/Baseband boards, and others. Our
business plan is to develop the products either alone or through partnering
relationships with appropriate companies. We also seek to license the technology
to third parties on a royalty-bearing basis, (See, "-Business Activities, Patent
and Technology Licensing") and we are continuing to seek additional partnerships
with wireless communication market leaders resulting in technology or product
development or sales relationships.
In connection with our goal to bring WCDMA technology and
system-on-a-chip ASICs to market in time to meet the emergence of the mass
market for 3G products, we are developing the necessary technology leading to a
TDD ASIC platform, as well as multi-mode ASICs incorporating TDD and FDD
functionality along with GSM/GPRS technologies. We expect to target the initial
TDD ASICs to mobile handsets; we may also extend our TDD ASIC offering to the
infrastructure market segment. We are also developing the software protocol
stacks that will enable FDD system-on-a-chip solutions, which can be embedded
into a wide range of wireless products. In 2001, we made substantial progress in
both of these technology development programs, hitting certain key milestones in
algorithm, software, layer one implementation and systems development. In early
2002, we demonstrated the fundamental technology capabilities of some of our TDD
and FDD products operating on pre-production target platforms, but we will not
participate in or subject the Company to the risk profile of the initial product
market.
InterDigital recorded expenses of $44.5 million, $26.0 million and
$20.5 million during 2001, 2000 and 1999, respectively, related to all of its
research and development efforts for 3G, TDMA and CDMA based product and
technology development. Revenues recognized in 2001, 2000 and 1999 associated
with development efforts were $21.8 million, $17.2 million and $13.9 million,
respectively. In 2001, 2000 and 1999, respectively, 42%, 31% and 60% of our
total revenue was from our customer, Nokia, in Finland.
7
Patent and Technology Licensing
Since our inception, we have employed an aggressive program of
developing and protecting our intellectual property. Our wholly-owned
subsidiary, InterDigital Technology Corporation (ITC), currently holds
approximately 200 United States patents and approximately 415 foreign patents
relating specifically to digital wireless radiotelephony technology (TDMA and/or
CDMA) which expire at various times primarily beginning in 2001 and ending in
2021. ITC has a total of approximately 210 United States patent applications and
approximately 665 foreign patent applications, which we anticipate will result
in approximately 3,300 foreign patents for a variety of countries under single
treaty filings. Both our U.S. and foreign patent applications relate primarily
to CDMA or TDMA technologies. During 2001, ITC received 44 new patents, 27 of
which are in the United States (the majority of which were for CDMA inventions),
and applied for more than 256 new patents worldwide. ITC's patents have
effective terms of up to 20 years from the date of their first filing.
For the past ten years, we have been intensively involved in a
comprehensive patent licensing program, with the ultimate objective of realizing
licensing revenues from use by third parties of inventions covered by ITC's
patent portfolio. ITC believes that, in many instances, licenses for certain of
its patents are required for third parties to manufacture and sell digital
cellular products in compliance with TDMA and CDMA-based standards currently in
use worldwide. Those standards include, but are not limited to, IS-54/136,
narrowband CDMA (IS-95 and similar standards), GSM, PDC, PHS and DECT. We also
believe that our patent portfolio is or will be, when applications result in
granted patents, applicable to all of the air interface protocols described in
the IMT-2000 3G standard as well as the specifications being developed under the
3GPP, 3GPP2 and comparable or related standards adopted by the Association of
Radio Industries and Broadcasting (ARIB), ETSI, the Telecommunications
Technology Association (TTA), TIA, T1P1, and CWTS (Chinese Wireless
Telecommunications Standards group). Currently, numerous manufacturers supply
digital cellular equipment conforming to such standards.
ITC offers non-exclusive, royalty bearing patent licenses to
telecommunications manufacturers that manufacture, use or sell, or intend to
manufacture, use or sell, equipment that utilizes our extensive portfolio of
intellectual property. In 2001, 2000 and 1999, respectively, 50%, 51% and 15% of
our total revenue was derived from licensees in Japan.
While discussions with unlicensed companies are proceeding, significant
negotiation issues arise from time to time, including issues relating to
substantial unlicensed past sales. We have maintained a policy of being both
aggressive and creative in structuring broad-based agreements that enable
unlicensed companies to meet their obligations to us and position us as a value
added partner, although there can be no assurance that these discussions will
result in new licensing agreements. If, in order to protect the integrity of our
intellectual property, we must include litigation as a tool, we will do so
selectively, but generally only after we have exhausted other options. The cost
of patent litigation can be significant. In addition, certain existing license
agreements may be renegotiated or restructured based on most favored licensee
(MFL) or other provisions contained in the applicable license agreement. MFL
clauses can be typical in patent licensing arrangements. For example, our patent
license agreement with Nokia, provided that, in exchange for a payment of $31.5
million, Nokia's royalty obligation to ITC had been paid-up generally with
respect to certain 2G and certain 3G covered products through the end of 2001.
This agreement provides that the parties will agree to the royalty payments to
be made thereafter. In the absence of agreement on royalty rates between the
parties, the MFL provision provides that Nokia's royalty obligations will be
defined by and subject to certain risks and uncertainties of the relevant
licensing terms applicable to certain other leading manufacturers of wireless
telecommunications equipment, none of whom are yet licensed by ITC. Nokia also
has the option to elect to apply the relevant licensing terms applicable to
certain other manufacturers, but has not yet done so. The license agreement
provides that until such time as the royalty rate is determined, royalties for
the period commencing in 2002 will accrue.
Also, ITC and its licensees, in the normal course of business, may have
disagreements as to the rights and obligations of the parties under the
applicable license agreement, including without limitation, application of MFL
clauses. The license agreements typically provide for private arbitration as the
mechanism for resolving disputes. ITC is currently involved in one such
arbitration with Samsung Electronics Co., Ltd. (Samsung). (See, "Item 3. Legal
Proceedings".)
In 2001, we also were involved in an arbitration with NEC Corporation
(NEC) over NEC's under-reporting of TDMA-based sales in Japan. That case was
settled by agreement of the parties entered into on January 15, 2002, prior to
the arbitration panel rendering its decision. (See, "Item 3. Legal
Proceedings".)
8
At December 31, 2001, ITC had granted to 26 licensees a total of 28
non-exclusive, non-transferable, perpetual, royalty-bearing or paid-up licenses
to use its patents covering 2G and/or 3G standards. These include, 18 licenses
relating only to TDMA patents, 2 licenses relating only to 2G CDMA patents,
2 licenses relating to 2G CDMA and TDMA patents, 5 licenses relating to
both 2G and 3G patents, and 1 relating to 3G patents only. In 2001, all
royalty revenues recognized were attributable to 2G covered products sold by
licensees.
We anticipate that we will be able to generate, over time, significant
revenue from the licensing of patents for 3G products. Based on standards as
adopted, we believe we have a number of patents essential to the implementation
of all the technology specifications incorporated in the current 3G standards.
We also expect that many of our patents or patents issuable from existing
applications will be commercially important in the actual product
implementations.
In March 2001, ITC signed a worldwide, royalty-bearing CDMA patent
license agreements with Matsushita Communications Industrial Co., Ltd.
(Matsushita), for Matsushita to manufacture, have manufactured, distribute and
sell 2G and 3G terminal units, test equipment and infrastructure. Under the
Matshushita license agreement, ITC received an up-front payment of $19.5 million
as an advance against future royalties. After the initial prepayment is
exhausted through product sales, Matsushita has agreed to pay additional
recurring royalties to ITC as Matsushita (or its subsidiaries) sells products
using ITC's patents issued around the world. Also, in 2001, ITC signed an
additional worldwide, royalty-bearing GSM, narrowband CDMA and 3G license
agreement with Sharp Corporation (Sharp). In the first quarter of 2002, ITC
signed a worldwide, royalty-bearing NCDMA and 3G license agreement with both
Japan Radio Corporation (JRC) and NEC. Under their respective agreements, Sharp
paid $11.1 million and NEC is obligated to pay $19.5 million in advance
royalties. Upon the exhaustion of the applicable pre-payment, NEC and Sharp are
obligated to pay royalties on all sales of products covered under their
licenses. JRC must also pay royalties as it reports to ITC, sales of products.
We are in active discussions with companies on a worldwide basis regarding the
licensing of our 3G-related patents.
In addition to the 3G licensees listed above, some of our older license
agreements include certain rights as to 3G products. For example, our license
agreements with Nokia, Siemens AG (Siemens) and Qualcomm, Inc. (Qualcomm)
include a license under certain of our patents to manufacture and sell products
compliant with 3G standards, with some limitations. All of our current essential
patents for 3G standards are licensed to Nokia under one of the following
licensing scenarios. The Nokia license arrangement was paid-up, generally, with
respect to certain 2G and certain 3G covered products through the end of 2001
with a structure for determining the royalties thereafter. In addition, as part
of our development project with Nokia (See, "Business Activities, Core
Technology and Product Development"), Nokia is licensed on a perpetual,
royalty-free basis under patents developed in the project. Nokia is also
licensed on the same basis with respect to patents technically necessary to
implement TDD technology; however, such license does not extend to non-TDD
functionality. The Siemens and Qualcomm license agreements are fully paid-up
with regard to the rights granted, which include certain rights as to 3G
products. The Siemens agreement does not include any rights under patents
issuing from patent applications filed after December 15, 1999. The Qualcomm
agreement excludes, among other things, any rights under our patents as regards
TDMA standards, any rights under our patent applications filed after March 7,
1995, as well as patents relating to cellular overlay and interference
cancellation. Based on these limitations, the Siemens and the Qualcomm
agreements do not provide a license under all the ITC patents which we believe
to be essential to 3G, or all of the inventions which we believe will be
essential and which are contained in pending patent applications. The Qualcomm
license agreement grants Qualcomm the paid-up right to grant sub-licenses under
certain of our patent and patent applications to Qualcomm's customers. For
certain ITC patents, Qualcomm's sublicensing rights are limited to those
situations where Qualcomm is selling ASICs to the customer. For a limited number
of patents, Qualcomm may grant licenses under ITC's patents regardless of
whether the customer is also purchasing an ASIC from Qualcomm.
In high technology fields characterized by rapid change and engineering
distinctions, the validity and value of patents are often subject to complex
legal and factual challenges and other uncertainties. Accordingly, ITC's patent
claims are subject to uncertainties which are typical of patent enforcement
generally. The validity of certain of ITC's key patents has been challenged in
patent opposition proceedings in various jurisdictions, including Germany,
Sweden, Japan, and Finland. While in certain cases, ITC patents have been
invalidated or substantially narrowed, ITC benefits from the fact that its
patent licensing program in both 2G and 3G is based on a broad portfolio of
patents, held worldwide, and not on a single patent or invention. Nonetheless,
if any third party successfully asserts that certain of our patent claims are
not valid or do not cover their products, or if products are implemented in a
way such that patents that we believe to be commercially important are not
infringed, our licensing potential and revenues could be adversely affected. The
cost of enforcing and protecting our patent portfolio can be significant.
Typical of patent review and enforcement proceedings, in October 2001, the
Japanese Patent Office (JPO) issued decisions to revoke ITC's Nos. JP 2,816,349
(`349) and JP 2,979,064 (`064) Japanese TDMA System Patents. ITC has filed a
notice of appeal with the Tokyo High Court, and also intends to file for a Trial
for Correction with the JPO. In the appeal, the Tokyo High Court will conduct a
legal and technical de novo review to assess whether the JPO's decisions should
be upheld or reversed. In the Trial for Correction, ITC will seek to restrict
the patent claims in a manner that overcomes the invalidity decision. Based on
advice of counsel, ITC understands that the `349 and `064 patents remain valid
until all appeals are exhausted. ITC has a portfolio of 17 other issued TDMA
patents in Japan, including patents that ITC believes are essential to the
implementation of TDMA standards, and also has a number of TDMA patent
applications pending in Japan, none of which are effected by the JPO decisions.
ITC has also received notice that another of its essential Japanese system
patents is the subject of an opposition. ITC has not received any indication
from the JPO as to whether it intends to deny the opposition or permit the
opposition to go forward.
9
In addition to the above actions, we are currently in litigation with
Ericsson, Inc. (Ericsson), which is seeking the court's declaration that
Ericsson's products do not infringe ITC's United States TDMA patents, that
certain of ITC's United States TDMA patents are invalid and that certain of
ITC's United States TDMA patents are unenforceable. Ericsson has also asserted
claims of tortious interference with contractual and business relations,
defamation and commercial disparagement, violation of ss. 43 (A) of the Lanham
Act, breach of contract as a third-party beneficiary, and fraud and negligent
misrepresentation for which Ericsson seeks an unspecified amount of actual
damages, cost and attorneys' fees. We are vigorously contesting each of
Ericsson's allegations. In addition, ITC has counterclaimed against Ericsson
alleging that Ericsson is willfully infringing certain United States TDMA
patents owned by ITC. ITC seeks permanent injunction against Ericsson's
infringement of these patents, and an unspecified amount of actual and exemplary
damages, costs and attorneys' fees. (See, "Item 3. Legal Proceedings
-Ericsson".)
In addition to patent licensing, we have been actively engaged in the
licensing of know-how both to companies with whom we have had strategic
relationships (including alliance partners) and to other companies. In 1999, we
signed a technology transfer and licensing agreement with Nokia involving TDD
technology. In 2001, we entered into a strategic relationship with Infineon
involving 3G technologies. (See, "-Business Activities, Core Technology and
Product Development".)
10
The following table summarizes the technology areas in which we have
granted licenses under our patents and technology.
IS-54/136 GSM PHS
American Telephone & Telegraph American Telephone & Telegraph American Telephone & Telegraph
Hitachi, Ltd. Hitachi, Ltd. Denso Corporation
Hughes Network Systems Japan Radio Company Hitachi, Ltd.
Kyocera Corporation Kyocera Corporation Iwatsu America, Inc.
Matsushita Electrical Co, Ltd. Matsushita Electrical Co, Ltd. Japan Radio Company
Mitsubishi Electric Corp. Mitsubishi Electric Corp. Kokusai Electric Co., Ltd.
NEC Corporation NEC Corporation Kyocera Corporation
Nokia Corporation Nokia Corporation Matsushita Electrical Indus. Co, Ltd.
Oki Electric Industry, Ltd. Oki Electric Industry, Ltd. Mitsubishi Electric Corp.
Pacific Comm. Sciences, Inc. Pacific Comm. Sciences, Inc. NEC Corporation
Robert Bosch GmbH Robert Bosch GmbH Nokia Corporation
Samsung Electronics Co. Ltd. Samsung Electronics Co. Ltd. Oki Electric Industry, Ltd.
Sanyo Electric Corporation Sanyo Electric Corporation Robert Bosch GmbH
Siemens AG Sharp Corporation Samsung Electronics Co. Ltd.
Toshiba Corporation Shintom Company Sanyo Electric Corporation
UbiNetics Ltd. Siemens AG Sharp Corporation
Toshiba Corporation Shintom Corporation
UbiNetics Ltd. Siemens AG
Toshiba Corporation
PDC B-CDMA Technology and Patents UbiNetics Ltd.
American Telephone & Telegraph Advanced Digital Technologies
Denso Corporation Alcatel Espana
Hitachi, Ltd. Samsung Electronics Co. Ltd.
Japan Radio Company Siemens AG
Kokusai Electric Company, Ltd. IS-95
Kyocera Corporation DECT American Telephone & Telegraph
Matsushita Electrical Indus. Co, Ltd. Kyocera Corporation Japan Radio Company
Mitsubishi Electric Corp. Matsushita Electrical Co., Ltd. Matsushita Electrical Indus. Co., Ltd.
NEC Corporation Nokia Corporation NEC Corporation
Nokia Corporation Sanyo Electric Corporation Nokia Corporation
Oki Electric Industry, Ltd. Siemens AG Oki Electric Industry, Ltd.
Pacific Comm. Sciences, Inc. Toshiba Corporation Qualcomm, Inc.
Robert Bosch GmbH Sharp Corporation
Samsung Electronics Co. Ltd. WCDMA Siemens AG
Sanyo Electric Corporation Infineon Technologies AG
Sharp Corporation Japan Radio Company TETRA
Siemens AG Matsushita Comm. Indus. Co., Ltd. Japan Radio Company
Toshiba Corporation NEC Corporation Matsushita Electrical Co., Ltd.
UbiNetics Ltd. Nokia Corporation Nokia Corporation
Qualcomm, Inc. Siemens AG
Sharp Corporation
CDMA 2000 Siemens AG
Infineon Technologies AG
Japan Radio Company
Matsushita Comm. Indus. Co., Ltd.
NEC Corporation
Nokia Corporation
Qualcomm, Inc.
Sharp Corporation
Siemens AG
11
Employees
As of March 18, 2002, we had 319 full-time employees consisting of
approximately 237 research and development personnel, 10 patent administration
and licensing personnel and 72 other personnel, as well as 18 part-time
employees. None of our employees are represented by a collective bargaining
unit. In addition to our own employees who perform technology development, we
utilize the efforts of outside engineering resources. Further development of
InterDigital's technologies may require additional technical and administrative
support.
Executive Officers
The executive officers of InterDigital are:
NAME AGE POSITION
---- --- --------
Howard E. Goldberg 56 President and Chief Executive Officer
Charles "Rip" Tilden 48 Executive Vice President and Chief Operating Officer
Richard J. Fagan 45 Executive Vice President and Chief Financial Officer
William J. Merritt 43 Executive Vice President, General Patent Counsel and President of InterDigital Technology
Corporation
Alain C. Briancon 42 Executive Vice President and Chief Technology Officer
Mark A. Lemmo 44 Executive Vice President, Product Management and Business Development
Brian G. Kiernan 55 Senior Vice President, Standards
William C. Miller 47 Senior Vice President, Programs and Engineering
Lawrence F. Shay 43 Vice President, General Counsel and Corporate Secretary
Guy M. Hicks 46 Vice President, Corporate Communications and Investor Relations
Howard E. Goldberg was promoted to Chief Executive Officer and
appointed as a Director of the Company in November 2000, and was named President
in January 2001. Mr. Goldberg had served as Interim President since September
1999. Prior to becoming Chief Executive Officer, Mr. Goldberg also held the
position of Executive Vice President - Strategic Alliances from October 1998 to
September 1999. Mr. Goldberg also held the positions of Executive Vice
President, General Counsel and Secretary from May 1995 to October 1998.
Charles "Rip" Tilden was promoted to the position of Chief Operating
Officer in December 2001. Mr. Tilden continues in the position of Executive Vice
President of the Company, a position he has held since March 1998. Prior to
that, Mr. Tilden held the position of Senior Vice President from May 1997 and
Vice President from November 1996 until May 1997. Before joining InterDigital,
Mr. Tilden served as Vice President, Corporate Affairs at Alco Standard
Corporation in Wayne, Pennsylvania, an office products and paper distribution
company, since December 1994.
Richard J. Fagan joined InterDigital as a Senior Vice President and
Chief Financial Officer in November 1998, and was promoted to Executive Vice
President in September 1999. Prior to that, Mr. Fagan served as Controller and
Treasurer of Quaker Chemical Corporation, a Pennsylvania corporation, since 1994
and as Assistant Corporate Controller of that corporation from 1993 to 1994.
William J. Merritt was promoted to General Patent Counsel of the
Company and President of ITC in July 2001. Mr. Merritt continues in the position
of Executive Vice President of the Company, a position he has held since
September 1999. Prior to that, Mr. Merritt held the position of Senior Vice
President, General Counsel and Secretary since October 1998 and Vice President-
Legal and Assistant Secretary since January 1996.
12
Dr. Alain C. Briancon joined InterDigital as Executive Vice President
and Chief Technology Officer in January 2001. From 1996 through December 2000,
Dr. Briancon served as Vice President and General Manager of Motorola Inc., with
the Advanced Services Applications Platform Division within the Semiconductor
Product Sector from 1999 to December 2000, the Digital Experience within the
Personal Communication Sector from 1998 to 1999, and the FLEX(TM) Information
Networking Division Messaging Systems Product Group during 1998. Prior to that,
he served as Vice President and Director of Motorola's FLEX(TM) Architecture,
Protocols and Standards Group from 1995 to 1997.
Mark A. Lemmo was named Executive Vice President, Product Management
and Business Development in April 2000. Prior to that, Mr. Lemmo held the
position of Executive Vice President, Engineering and Product Operations since
October 1996 and Vice President, Sales and Marketing since June 1994.
Brian G. Kiernan was promoted to Senior Vice President, Standards in
July 1997. Prior to that, Mr. Kiernan held the position of Vice President,
Marketing Support from January 1993.
William C. Miller joined InterDigital as Senior Vice President,
Programs and Engineering in July 2000. Before joining InterDigital, Mr. Miller
served as Vice President, Programs with Telephonics Corporation, an aircraft and
mass transit communications systems corporation located in Farmingdale, New
York, since 1993.
Lawrence F. Shay joined InterDigital as Vice President, General Counsel
and Corporate Secretary in November 2001. Before joining InterDigital, Mr. Shay
served as General Counsel and Corporate Secretary with U.S. Interactive, Inc., a
multi-national publicly-held Internet professional services corporation, from
June 1999 to June 2001, Executive Vice President from September 2000 until June
2001, and Senior Vice President from June 1999 until September 2000. U.S.
Interactive, Inc. filed a Chapter 11 bankruptcy petition in January 2001 and a
reorganization plan was confirmed in September 2001. Prior to June 1999, Mr.
Shay was a partner in the corporate group of Dilworth Paxson LLP, a major
Philadelphia law firm, where he practiced law from 1985 until 1999.
Guy M. Hicks joined InterDigital as Vice President, Corporate
Communications and Investor Relations in December 2001. Before joining
InterDigital, Mr. Hicks served as Vice President, Corporate Communications with
Structural Dynamics Research Corporation, Cincinnati, Ohio, an international
enterprise development software corporation, from August 1999 until December
2001. Mr. Hicks previously served as Vice President, Corporate Communications
with Epicor Software Corporation, an enterprise resource planning software
company located in Irvine, California from April 1998 until August 1999. Mr.
Hicks also served as Corporate Director, Executive Communications with Northrop
Grumman Corporation, an aerospace company located in Los Angeles, California,
from January 1996 until April 1998.
InterDigital's executive officers are elected to the offices set forth
above to hold office until their successors are duly elected and have qualified.
All of such persons are parties to agreements which provides for severance pay
and continuation of certain benefits. Mr. Goldberg's agreement generally
provides for the payment of severance of up to a maximum of eighteen months
salary and up to a maximum of eighteen months continuation of medical and dental
benefits. The other executives' agreements generally provide for the payment of
severance up to a maximum of one year's salary and up to a maximum of one year's
continuation of medical and dental benefits. In addition, with respect to all of
these agreements, in the event of a termination or resignation within one year
following a change of control, which is defined as the acquisition (including by
mergers or consolidations, or by the issuance by InterDigital of its securities)
by one or more persons in one transaction or a series of related transactions,
of more than fifty percent (50%) of the voting power represented by the
outstanding stock of InterDigital, the executive would generally receive two
years of salary and the immediate vesting of all restricted stock and stock
options.
13
Risk Factors
Item 1, "Business" and Item 7, "Management's Discussion and Analysis"
contained within this Annual Report on Form 10-K contain forward-looking
statements reflecting, among other things, (i) our current strategic objectives
to (a) position ourself in the marketplace as a preferred provider of wireless
communications products, (b) invest in and develop 3G wireless technologies and
develop 3G products, (c) focus on standardized technologies and products while
placing our technology and intellectual property rights into 3G standards and
products, (d) capitalize on the value of our intellectual property through
patent licensing, product sales and a combination thereof, (e) bring to market,
with strategic partners or on our own, 3G solutions and products; (ii) analysts'
and experts' beliefs and forecasts as to the market for wireless products and
services, 3G market growth, the nature and performance of 3G products and
services, (iii) our current beliefs and expectations as to 3G product and
technological capability, the successful development and the applications for
our technology and potential products, growth in the 3G market growth, product
sales, demand for 3G products, timing of 3G market development, our competition,
the impact of our standards activities on revenues, the applicability of our
patents to various standards, and expected levels of revenues, cash flow and
operating expenses; (iv) manufacturers intentions to bring 3G products to the
market during 2002; and (v) our ability to enter into new customer and partner
relationships, enter into new licenses, bring 3G products to market on a timely
basis or at all, secure patent protection for our inventions, reuse WTDD in
other technologies, create a return on our investment in 3G technologies,
collect royalties under existing license agreements, and derive revenues from
our patents. Words such as "expect", "anticipate", "speculate", "believe",
"should", "likely", "predict", "strategy", "objective", "pursuing", "goal",
"intend", "could", "plan", "may", and "trends", 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
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 statements.
You should not place undue reliance on these forward-looking statements which
apply on or as of the date of this report. Certain of these risks and
uncertainties are described in greater detail below. It should be noted that
risks described as affecting one forward-looking statement may affect other
forward-looking statements. In addition, other factors may exist that are not
detailed below 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.
Our Technologies May Not Be Widely Deployed.
Our activities are focused on next-generation technologies and products
and therefore begin as research and development work. Accordingly, we are
subject to the risks typically associated with such activities. New
technological innovations generally require a substantial investment before they
are commercially viable, and we may make substantial, non-recoverable
investments in new technologies that may not result in meaningful revenues. For
example, in order to generate revenues and profits from sales of 3G products, we
must continue to make substantial investments and technological innovations. A
significant assumption in our strategic plan is that WCDMA will be widely
deployed in the 3G market. WCDMA may not be deployed as widely as we expect
which could reduce revenue opportunities. A second significant assumption in our
strategic plan is that TDD will be adopted and widely used in the 3G market.
While our inventions and know-how can apply across a broad range of
technologies, our detailed technology and development efforts are primarily
focused on WTDD and FDD. Other digital wireless technologies, particularly
CDMA2000, Wireless LAN (W-LAN), FDD used in data applications, FDD high speed
downlink, and NTDD are expected to be competitive with WTDD. CDMA2000 has been
deployed in parts of Asia and the United States, and such deployment could cause
CDMA2000 to gain significant market share and reduce the opportunities for
WCDMA. W-LAN, which enables users to connect laptops and PDAs to the Internet,
is already being marketed worldwide and is competitive with TDD. If the initial
deployment of FDD for data applications obtains significant market share, or if
FDD high speed downlink gains market acceptance, the niche targeted for WTDD
could be reduced or eliminated. All of these competing technologies also could
impair multi-vendor and operator support for WTDD, key factors in defining
opportunities in the wireless market. There can be no assurance that our
technology will ultimately have market relevance or be selected by wireless
service providers for their networks or equipment manufacturers. If we determine
that WTDD will not be adopted at all or in a time period we expect, or adopted
in a manner which justifies our continuing investment in the technology, we may
change our strategic plan to reduce or eliminate such continuing investment
and/or to capture more lucrative market opportunities. Additionally, if WTDD is
not adopted and widely used, our strategic plan will require a significant shift
and a portion of our anticipated revenue may be impaired.
14
Our Future Operating Results are Likely to Fluctuate.
Our financial condition and operating results have fluctuated
significantly in the past and may fluctuate significantly in the future. These
operating results may continue to fluctuate because (i) our markets are subject
to increased competition from other products and technologies and announcements
of new products and technologies by our competitors; (ii) it is difficult to
predict the timing and amount of licensing revenue associated with past
infringement and new licenses, or the timing, nature or amount of revenues
associated with strategic partnerships; (iii) we may not be able to enter into
additional or expanded strategic partnerships or license agreements, either at
all or on acceptable terms; (iv) the strength of our patent portfolio could be
weakened through patents being declared invalid, our claims being narrowed,
design-arounds, changes to the standards, and adverse court decisions; and (v)
our revenues are in large part dependent on sales by our licensees which is
outside of our control. General economic and other conditions causing a downturn
in the market for our products in development or technology could also adversely
affect our operating results. Nevertheless, we base our decisions regarding our
operating expenses and capital expenditures on a combination of current cash
balances, anticipated cash flow trends and the level of expenditures required to
execute our strategic plan. Because the base level of many of our expenses is
relatively fixed, revenue from a small number of customers could cause our
operating results to vary from quarter to quarter and result in operating
losses. In addition, increased expenses which could result from factors such as
increased litigation costs or actions designed to keep pace with technology and
product market targets could adversely impact near-term profitability. The
foregoing factors are difficult to forecast and these, as well as other factors,
could adversely affect our quarterly or annual operating results.
We Have Substantial Global Competition.
Competition in the wireless telecommunications industry is intense.
There can be no assurance that we will be able to successfully compete in our
efforts to license our technology and/or sell our future products, or that our
competitors will not develop new technologies and products that are more
commercially effective than our own. Our products and services face competition
from existing companies providing services comparable to ours and companies
developing and marketing other digital and wireless technologies. (See, "-Our
Technologies May Not Be Widely Deployed".) We face competition from the in-house
development teams at semiconductor corporations and telecommunication equipment
suppliers. It is also possible that new competitors may enter the market. Many
current and potential competitors may have advantages over us, including (a)
existing royalty-free cross-licenses to competing and emerging technologies; (b)
longer operating histories and presence in key markets; (c) greater name
recognition; (d) access to larger customer bases; and (e) greater financial,
sales and marketing, manufacturing, distribution channels, technical and other
resources. As a result of these factors, these competitors may be more
successful than us. In addition, the slowdown in the global economy and the
anticipated rollout of 3G has forced, and may continue to force, realignment
within the semiconductor industry. Such vertical and horizontal consolidation
could result in increased competition for partnership opportunities.
We Need to Effect Further Technology and Product Development in a Timely Manner.
Our future success will depend on our ability to continue to develop,
introduce and sell new products, technology and enhancements on a timely basis.
Our future success will also depend on our ability to keep pace with
technological developments, satisfy varying customer requirements, price our
products competitively and achieve market acceptance. The introduction of
products embodying new technologies and the emergence of new industry standards
could render our products and technology currently under development obsolete
and unmarketable. If we fail to anticipate or respond adequately to
technological developments or customer requirements, or experience any
significant delays in development, introduction or shipment of our products and
technology in commercial quantities, our competitive position could be damaged.
Our positioning for the 3G market will require continued significant
investment in research and development. We cannot be sure that we will have
sufficient resources to make such investments, that we will be able to make the
technological advances necessary to achieve these goals, or that the costs
associated with such efforts will be acceptable. Our business, financial
condition and operating results could be materially adversely affected if we are
unable to respond to the need for technological change or if these products or
technologies do not achieve market acceptance when released.
We may experience technical, financial or other difficulties or delays
related to the further development of our technologies. Delays can be costly,
and if such development efforts are not successful or delays are serious, our
existing and potential strategic relationships could suffer or these strategic
partners could be hampered in marketing efforts of products containing our
technologies. We could experience reduced royalty revenues on such
organizations' products containing our technology and we could miss a critical
market window. Further, failure to meet material obligations under our existing
or potential contracts could result in the other party terminating the
relationship and/or seeking to hold us liable for breach. Moreover, our
technologies are in the development stage, and have not been fully tested in
commercial use. It is possible that they may not perform as expected or may not
be market relevant. In such case, our business, financial condition and
operating results could be adversely affected.
15
Our Markets are Unpredictable and Subject to Rapid Technological Change.
We are positioning our current development projects for the emerging 3G
market. These projects do not have direct bearing on the 2.5G, GPRS, or any
other market which might develop after the 2G market but prior to the
development of the 3G market. The 3G market has and may continue to develop at a
slower rate or pace than we have and do expect and may be of a smaller size than
we expect. For example, the potential exists for 3G preemption by the hangover
of 2.5G solutions now being bought, tested and fielded. In addition, there could
be fewer applications for our technology and products than we expect. Many
factors could affect the rate and pace of 3G market development including, but
not limited to, economic conditions, customer buying patterns, timeliness of
equipment development, pricing of 3G infrastructure and mobile products,
continued growth in telecommunications services that would be delivered on 3G
devices, and availability of capital for and the high cost of infrastructure
improvements. Failure of the 3G market to materialize to the extent or at the
rate which we expect would reduce our opportunities for sales and licensing and
could materially adversely affect our business, financial condition and
operating results.
The entire wireless communications market in which we compete is
characterized by rapid technological change, frequent product introductions and
evolving industry standards. Existing technology and products become obsolete
and unmarketable when products using new technologies are introduced and new
industry standards emerge. As a result, marketability and the potential life
cycles of the products and technologies that we are developing cannot be assured
and are difficult to estimate. In addition, new industry standards, falling
prices or technology changes may render the products and/or technologies
obsolete or non-competitive. New technologies and products can fail to become
commercially viable due to lack of market relevance. (See, "-Our Technologies
May Not Be Widely Deployed" above.) To be successful, we must continue to
develop new products and technologies that successfully respond to such changes.
We may not be able to successfully predict the market or form strategic
relationships, either at all or on acceptable terms, to enable us to develop
such new products and technologies. Even if we do, we may not be able to
introduce such products or technologies successfully in a timely manner. Missing
a critical market window could reduce or eliminate our ability to capitalize on
the technology and products as to which the window applies.
Certain Events Will Occur Under Two Contracts in the Next Two Years Which Could
Adversely Affect Our Cash Flow And Our Ability to Achieve or Sustain Acceptable
Levels of Profitability.
Revenues attributable to Nokia, a strategic engineering partner,
comprised approximately 42% of total revenue in 2001. In the third quarter of
2001, we amended our development program agreement with Nokia to, among other
things, provide for Nokia's funding of the project up to a maximum of
approximately $58 million (See, "Business Activities, Core Technology and
Product Development".) Previous to the amendment, revenue had been reported on a
time and materials basis and we had billed Nokia approximately $46 million under
the contract leaving approximately $12 million of revenue to be recognized.
After the amendment, we recognize revenue under the contract on a percentage of
completion basis. Of the $12 million remaining under the contract after the
amendment, approximately $6.2 million was recognized in 2001, and we expect to
recognize the balance in 2002. We have not, at this time, entered into any
arrangements with Nokia to extend our development relationship and there should
be no expectation that we will do so in the future. Should our costs associated
with the development effort exceed the maximum funding committed by Nokia, we
will continue the development effort needed to complete our contract commitments
on a self-funded basis and this could adversely affect both our cash flow and
our ability to achieve acceptable levels of profitability.
Revenues attributable to Sharp, one of our TDMA patent licensees,
comprised approximately 30% of total revenue in 2001. This license agreement
with Sharp covers PDC and PHS products and expires in mid 2003. Although we will
seek to extend the term of this license with Sharp, there can be no assurance
that we will be successful, either at all or on favorable or comparable terms.
The inability to extend the license could adversely affect both our cash flow
and our ability to achieve or sustain acceptable levels of profitability for the
years beyond 2002.
We Rely and Intend to Rely on Relationships with Third Parties.
The successful execution of our strategic plan is partially dependent
on the establishment and success of relationships with equipment producers and
other third parties. Our plan contemplates that these third parties will give us
access to product capability, markets and additional libraries of technology. We
currently have a limited number of such third party relationships. To date we
have not entered into any semi-conductor partnership relating to our TDD
technology. We have only one semi-conductor partner in our FDD technology
development effort, Infineon, and if we commence a FDD Access Stratum
development effort with another semiconductor company for terminal unit
applications, Infineon may engage a third party for the development or
modification of a new FDD Access Stratum. Our failure to enter into such
additional relationships, either on acceptable terms or at all, or our failure
to successfully execute such relationships, could impair our ability to
introduce portions of our technology and resulting products. Further, the
failure to maintain existing relationships and to establish new relationships,
all on satisfactory terms with capable partners, could also adversely affect our
future operating results. In addition, delays in entering into such
relationships could cause us to miss critical market windows.
16
Our ability to derive revenues from our FDD development project is
currently largely dependent on Infineon's success in developing the ICs that
incorporate the Joint 3G Protocol Stack, and on Infineon's and our success in
marketing and selling the Joint 3G Protocol Stack independently. Moreover, while
we may independently market and use our own portions of the Joint 3G Protocol
Stack being jointly developed with Infineon, the other anticipated benefits of
the Infineon relationship may be impacted by economic conditions affecting
semi-conductor companies in general and their ability to compete effectively,
Infineon's financial condition and engineering resources, and the market timing
and technological success of the Infineon platform upon which our designs are
based.
From time to time, certain companies may also assert that their patent,
copyright and other intellectual property rights are also important to the
industry or to us. In that regard, from time to time third parties provide us
with copies of their patents relating to digital wireless technologies and offer
licenses to such technologies. We in turn evaluate such patents and the
advisability of obtaining such licenses. If any of our products were found to
infringe on protected technology, we could be required to redesign such
products, license such technology, and/or pay damages to the infringed party. If
we are unable to license protected technology used in our products and/or if we
cannot economically redesign such products, we could be prohibited from
marketing such products. In such case, our prospects for realizing future income
could be adversely affected.
Our Revenue in the Short and Long Term Depends Upon Our Success in Enforcing
Patent Rights and Protecting Other Intellectual Property.
Our strategic plan depends, over the next several years, upon our
continued ability to generate patent licensing revenue related to the sale by
third parties of handsets and infrastructure compliant with the TDMA digital
cellular standards in use today, among them GSM, IS-54/136, PDC and PHS (2G
products). Our ability to collect such revenue is subject to a number of risks.
First, major telecommunications equipment manufacturers have challenged, and we
expect will continue to challenge, the validity of ITC's patents. In some
instances, certain of ITC's patent claims have been declared invalid or
substantially narrowed. While ITC continues to maintain a worldwide portfolio
of patents that it believes are valid and infringed, and while we intend to
vigorously defend and enforce such patents, we cannot assure that the validity
of our patents will be maintained or that any of our key patents will be
determined to be applicable to any 2G or 3G product. Any significant adverse
finding as to the validity or scope of ITC's key patents could result in the
loss of patent licensing revenue from existing licensees and could substantially
impair our ability to secure new patent licensing arrangements. Additionally,
while we license a portfolio of patents, 2G licensing revenues are or are
expected to be adversely impacted by the decline of the 2G market coupled with
the expiration of certain of our TDMA patents in the coming years.
In the long term, our strategic plan depends upon our ability to
generate patent licensing revenue from the sale by third parties of products
compliant with the standards adopted for 3G (3G Products). Our ability to
generate such revenue is subject to certain risks. First, many of the inventions
which we believe will be employed in 3G Products are the subject of patent
applications which have not yet been issued by the relevant patent reviewing
authorities. While we intend to vigorously defend such patents, we cannot assure
that these patent applications will be granted or that the resulting patents
will be infringed by 3G Products. Second, we expect that the validity of our
patents will be challenged, and that we will be required to enforce our patents
against parties that refuse to take a license under our patents. While we intend
to vigorously defend and enforce our patents, we cannot assure that the validity
of our patents will be maintained or that any of our patents will be determined
to be applicable to any 3G Product. Finally, our ability to generate 3G patent
licensing revenue is dependent on our licensees' success in selling 3G Products.
This, in turn, may be affected by many other factors, some of which are
described in this "Risk Factors" section, including global economic conditions,
buying patterns of end users, competition and the changing technology and market
landscapes.
In addition, the cost of defending our intellectual property has been
and may continue to be significant. Litigation may be required to enforce our
intellectual property rights, protect our trade secrets, enforce confidentiality
agreements, or determine the validity and scope of proprietary rights of others.
As a result of any such litigation, we could lose our proprietary rights and/or
incur substantial unexpected operating costs. Any action we take to protect our
intellectual property rights could be costly and could absorb significant
management time and attention which, in turn, could negatively impact our
results of operations. Moreover, third parties could circumvent the patents held
by our wholly-owned subsidiary, ITC, through design changes. Any of these events
could adversely affect our prospects for realizing future income.
Together with ITC, we are currently engaged in a significant patent
infringement litigation with Ericsson, Inc. (Ericsson) over certain of ITC'S
patents. During the course of this litigation (or a future yet unidentified and
unfiled litigation, should such litigation arise), certain of ITC's key patents
could be found to be invalid or not infringed or its patent claims could be
narrowed. Any such adverse finding as to the validity or scope of ITC's key
patents could result in the loss of patent licensing revenue from existing
licensees and could substantially impair our ability to secure new patent
licensing arrangements. (See, "Item 3. Legal Proceedings".)
17
Our License Agreements Contain Provisions which Could Impair Our Ability to
Realize Licensing Revenues.
Certain of our licenses contain provisions which could, in certain
events, cause the licensee's obligation to pay royalties to us to be reduced,
terminated or suspended for an indefinite period, with or without the accrual of
the royalty obligation. In addition, certain of our licensees had, in the past,
stated, among other things, that the outcome of a prior litigation over ITC's
patents materially impacted the royalties due under their license agreements and
have refused to pay royalties under their license agreements. While we believe
that these positions have been meritless, similar positions could be asserted in
the event that a licensee's obligation to pay royalties to us in the future is
either terminated or indefinitely suspended, or in the event that ITC's patents
are held invalid or unenforceable, and these positions could be found to have
merit. The assertion or validity of such positions could interfere with ITC's
ability to secure new licenses or to generate recurring licensing revenue under
the existing agreements.
We Face Risks From Doing Business in Global Markets.
A significant part of our strategy involves our continued pursuit of
growth opportunities in a number of international markets. In doing so, we are
subject to the effects of a variety of uncontrollable and changing factors,
including: difficulty in protecting our intellectual property in foreign
jurisdictions; inability to enter foreign markets; government regulations,
tariffs and other applicable trade barriers; currency control regulations;
social, economic and political instability; natural disasters, acts of terrorism
and war; potentially adverse tax consequences; inability to enforce contractual
commitments abroad; and general delays in remittance and difficulties of
collecting non-U.S. payments. In addition, we are also subject to risks specific
to the individual countries in which our customers, our licensees and we do
business.
A long lasting downturn in the global economy that impacts the wireless
communications industry could negatively affect our revenues and operating
results. The global economy is in a slowdown that has had wide-ranging effects
on our licensees and the markets that we target, particularly wireless equipment
manufacturers and network operators. In particular, recent economic weakness in
Japan, from which a significant portion of our 2001 revenue was derived, has and
may continue to lead to decreased sales of licensed products. This downturn has
had and is expected to continue to have a negative effect on, among other
things, the ability and willingness of companies to invest in technological and
product development, and the sales of our licensees (which, in turn, affects our
revenues). We cannot predict the depth or duration of this downturn, and if it
grows more severe or continues for a long period of time, our ability to
increase or maintain our revenues and other operating results may be impaired.
Consolidations in the Wireless Communications Industry Could Adversely Affect
Our Business.
The wireless communications industry has experienced consolidation of
participants, and this trend may continue. ITC's licensing opportunities are
affected by the increasing concentration of the wireless industry, particularly
as to infrastructure, which results in a substantial portion of the licensing
opportunities being concentrated in a small number of non-licensed
manufacturers, many of whom are opposing the validity of ITC's patents in
multiple forums. In addition, certain business combinations may result in the
loss or diminution of existing royalty obligations. Further, if wireless
carriers consolidate with companies that utilize technologies competitive to our
technologies, we may lose market opportunities.
We Depend on Sufficient Engineering Resources.
Competition for qualified and talented individuals with engineering
experience in emerging technologies, like WCDMA, is intense. There can be no
assurance that we will be able to attract and retain a satisfactory number of
such individuals. The failure to attract and retain highly qualified personnel
could interfere with our ability to undertake additional technology and product
development efforts as well as our ability to meet our strategic objectives.
Market Predictions are Forward-Looking in Nature.
Our market strategy is based on our own predictions and on analyst,
industry observer and expert predictions, which are forward-looking in nature
and are inherently subject to risks and uncertainties. Many factors could affect
these predictions including, but not limited to, the validity of their and our
assumptions, the timing and scope of the 3G market, economic conditions,
customer buying patterns, timeliness of equipment development, pricing of 3G
products, growth in wireless telecommunications services that would be delivered
on 3G devices, and availability of capital for infrastructure improvements. If
any of these predictions are wrong, our strategic plan may require a significant
shift and our operating results could be adversely affected.
We Face Risks from Terrorist, Cyber and Other Attacks.
None of our properties or data were damaged or compromised as a result
of the terrorist attacks that occurred in the United States on September 11,
2001. Our operations during the period that followed suffered only minor
disruption such as delayed travel. However, we could be impacted, in the future,
by a terrorist, cyber or other attack either directly or indirectly through our
customers or vendors.
18
If Wireless Handsets Pose Health and Safety Risks, Demand for Our Products in
Development and Those of Our Licensees and Customers Could Decrease.
Media reports and certain studies have suggested that radio frequency
emissions from wireless handsets may be linked to various health concerns and
may interfere with various electronic medical devices. If concerns over radio
frequency emissions grow, this could discourage the use of wireless handsets,
and cause a decrease in demand for our products and those of our licensees and
customers. There are also some safety risks associated with the use of wireless
handsets while driving. Concerns over these safety risks and the effect of any
legislation that may be adopted in response to these risks could reduce demand
for our products in development and those of our licensees and customers.
19
Item 2. PROPERTIES
InterDigital owns one facility, subject to a mortgage, in King of
Prussia, Pennsylvania. InterDigital is party to a lease expiring in 2007, for
approximately 67,000 square feet of space in Melville, New York. InterDigital is
a party to a lease expiring in 2006, for approximately 11,918 square feet of
space in Montreal, Canada. These facilities are the locations for our technology
development activities.
Item 3. LEGAL PROCEEDINGS
Ericsson
In September 1993, ITC filed a patent infringement action against
Ericsson GE Mobile Communications, Inc. (Ericsson GE), its Swedish parent,
Telefonaktieboleget LM Ericsson (LM Ericsson) and Ericsson Radio Systems, Inc.
(Ericsson Radio) (collectively, Ericsson or the Ericsson Defendants), in the
United States District Court for the Eastern District of Virginia (the Virginia
Action) which was subsequently transferred to the United States District
Court for the Northern District of Texas (the Texas Action) (collectively, the
Ericsson Action). The Ericsson Action seeks a jury's determination that in
making, selling or using, and/or in participating in the making, selling or
using of digital wireless telephone systems and/or related mobile stations,
Ericsson has infringed, contributed to the infringement of and/or induced the
infringement of eight patents from ITC's patent portfolio. The Ericsson Action
also seeks an injunction against Ericsson from infringement and seeks
unspecified damages based upon the Court's determination of what constitutes a
reasonable royalty for infringement, royalties, costs and attorney's fees.
Ericsson GE filed an answer to the Virginia Action in which it denied the
allegations of the complaint and asserted a Counterclaim seeking a Declaratory
Judgment that the asserted patents are either invalid or not infringed. On the
same day that ITC filed the Ericsson Action in Virginia, two of the Ericsson
Defendants, Ericsson Radio and Ericsson GE, filed a lawsuit against InterDigital
and ITC in the United States District Court for the Northern District of Texas
(the "Texas Action"). The Texas Action, which involves the same patents that are
the subject of the Ericsson Action, seeks the court's declaration that
Ericsson's products do not infringe ITC's patents, that ITC's patents are
invalid and that ITC's patents are unenforceable. The Texas Action also seeks
judgment against InterDigital and ITC for tortious interference with contractual
and business relations, defamation and commercial disparagement, and Lanham Act
violations. The Ericsson Action and the Texas Action have been consolidated. ITC
agreed to the dismissal without prejudice of LM Ericsson.
In December 1997, Ericsson Inc., the successor to Ericsson GE and
Ericsson Radio, filed an action against ITC in the United States District Court
for the Northern District of Texas (the "1997 Texas Action") seeking the court's
declaration that Ericsson Inc.'s products do not infringe two patents issued to
InterDigital earlier in 1997 as continuations of certain patents at issue in the
Texas Action. Later that month, Ericsson Inc. filed an amended Complaint seeking
to include these two new patents in the Texas Action in an effort to consolidate
the two cases. In January 1998, both Ericsson Inc. and InterDigital and ITC
filed motions requesting that Ericsson Inc.'s amended Complaint be allowed and
that the 1997 Texas Action be dismissed, to which the Court agreed. In 1998, the
United States District Court for the Northern District of Texas granted an ITC
Motion to amend its Counterclaim by adding four additional patents. During the
third quarter of 1999, Ericsson Inc. amended its Complaint to add causes of
action for breach of contract and fraud and negligent misrepresentation.
During the fourth quarter of 2001, Ericsson and ITC commenced a Court
ordered mediation, which is still in progress. InterDigital and ITC intend to
vigorously defend this lawsuit. If any of ITC's patents are held invalid or not
infringed, however, ITC's licensing opportunities and collections of royalty
revenues could be materially and adversely affected. In the lawsuit, ITC will
seek damages for past infringement in a significant amount, prejudgment
interest, treble damages for willful infringement, and injunctive relief. The
claims for relief are based on sales by Ericsson of infringing IS/54, IS/136 and
GSM products (principally infrastructure and handsets) manufactured or sold in
the United States by Ericsson from January 1992 forward. ITC can give no
assurance that the litigation will be decided in its favor. Further, even if ITC
is successful in the litigation, the Court could grant less than the relief
requested by ITC if the Court agrees with any of Ericsson's arguments. Moreover,
any consensual settlement could be at lower levels than the amount to be claimed
at trial. There can be no assurance that the mediation will result in a
resolution of the lawsuit or that any consensual settlement of the lawsuit will
be reached.
20
NEC
In March 2001, ITC filed a Complaint against NEC with the American
Arbitration Association. The Complaint alleged that NEC had failed to report
Japanese sales of TDMA products for which NEC is obligated to pay ITC royalties
pursuant to its TDMA Patent License Agreement with ITC executed in 1995. On
January 15, 2002, ITC and NEC agreed to settle the arbitration by amending the
TDMA Patent License Agreement to provide for the payment by NEC to ITC of $53
million. In exchange for those payments, NEC's royalty obligations for PHS and
PDC products under the TDMA Patent License Agreement is considered paid up.
Otherwise, the TDMA Patent License Agreement remains materially unaltered by the
settlement. Currently, NEC has no further royalty payment obligations under that
agreement based on existing pre-paid units and certain other unique provisions
included in the 1995 agreement. Concurrently with the settlement, ITC and NEC
entered into a worldwide royalty-bearing license agreement for sales of
wireless products compliant with all 3G and NCDMA standards under which NEC will
pay a $19.5 million royalty advance in the second quarter of 2002. Once that
advance is exhausted, NEC will be obligated to pay additional recurring
royalties to ITC as it sells licensed products.
Samsung
In February 2002, ITC filed a Complaint against Samsung with the
International Chamber of Commerce, International Court of Arbitration. The
dispute involves the applicability of the MFL clause contained in ITC's patent
license agreement with Samsung and Samsung's underreporting of, failure to
report and failure to pay royalties on its more recent covered sales. MFL
clauses typically permit a licensee to elect to apply the terms of a
subsequently executed license agreement that are more favorable than those of
the licensee's agreement. The application of the MFL clause may affect, and
generally acts to reduce, the amount of royalty obligations of the licensee. The
application of an MFL clause can be complex, given the varying terms among
patent license agreements. Based on the limited sales information that ITC has
been able to gather, ITC has alleged in its Complaint that past due royalties
presently owed by Samsung, absent the application of the MFL clause, could be in
excess of $100 million. Among the issues to be addressed in the arbitration is
whether Samsung can make use of its MFL rights and, if so, how such rights would
affect Samsung's royalty obligations. Under various MFL scenarios which we
expect Samsung to advance, including scenarios related to Nokia's paid-up $31.5
million license for the period ending December 31, 2001 (See, "Item 1. Business
Activities, Patent and Technology Licensing"), Samsung's ultimate royalty
obligation to ITC could be reduced, in some cases substantially, below the
amount in the Complaint. Under the patent license agreement, Samsung pre-paid
royalties of $17 million in 1996 and, in 1999, became entitled to an additional
royalty credit of $1.7 million. ITC also seeks an audit of information relating
to Samsung's covered sales and payment of royalties due. Samsung has not
responded to ITC's Complaint.
While ITC has advanced what it believes to be strong and persuasive
arguments regarding the application of the MFL clause, ITC can give no assurance
that the arbitration will be decided in its favor. Further, even if ITC is
successful in the arbitration, the arbitrators could grant substantially less
than the relief requested by ITC if they agree with any of Samsung's arguments.
Moreover, any consensual settlement would likely be at substantially lower
levels than the amount alleged in Complaint. There can be no assurance that any
consensual settlement of the arbitrated dispute will be reached.
Other
ITC has filed patent applications in numerous foreign countries. ITC is
and expects from time to time to be subject to challenges with respect to its
patents and patent applications in foreign countries. ITC intends to vigorously
defend its patents. However, if any of ITC's patents or applications are
revoked, ITC's patent licensing opportunities in the relevant foreign countries,
and possibly in other countries, could be materially and adversely affected.
In addition to litigation associated with patent enforcement and
licensing activities and the litigation described above, we are a party
to certain other legal actions also arising in the ordinary course of our
business. Based upon information presently available to us, we believe that the
ultimate outcome of these other actions will not materially affect us.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
21
PART II
Item 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the range of the high and low sales
prices of InterDigital's Common Stock as reported by The Nasdaq Stock Market.
High Low
2000 ---- ---
First Quarter $80.00 $20.63
Second Quarter 27.56 12.94
Third Quarter 25.00 12.00
Fourth Quarter 14.50 4.50
High Low
2001
First Quarter $14.56 $5.00
Second Quarter 15.81 8.06
Third Quarter 13.50 5.00
Fourth Quarter 11.76 6.50
As of March 21, 2002, there were approximately 1,858 holders of record
of our Common Stock.
We have not paid cash dividends on our Common Stock since inception. It
is anticipated that, in the foreseeable future, no cash dividends will be paid
on our Common Stock and any cash otherwise available for such dividends will be
reinvested in our business. The payment of cash dividends will depend on our
earnings, the prior dividend requirements on our remaining series of Preferred
Stock and other Preferred Stock which may be issued in the future, our capital
requirements and other factors considered relevant by our Board of Directors.
22
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
Consolidated Statements of Operations Data:
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Revenues:
Licensing and alliance $ 52,562 $ 51,244 $ 66,171 $ 92,470 $ 5,982
Product and services - 5,634 4,496 6,751 43,854
Total revenues $ 52,562 $ 56,878 $ 70,667 $ 99,221 $ 49,836
Net income (loss) applicable to common
shareholders before cumulative effect of
change in accounting principle $ (19,421) $ 5,564 $ 26,451 $ 36,713 $ (34,523)
Earnings (loss) per common share before
cumulative effect of change in accounting
principle - basic $ (0.36) $ 0.11 $ 0.55 $ 0.76 $ (0.72)
Earnings (loss) per common share before cumulative
effect of change in accounting principle - diluted $ (0.36) $ 0.10 $ 0.52 $ 0.75 $ (0.72)
Cumulative effect of change in accounting principle $ - $ (53,875) $ - $ - $ -
Net income (loss) applicable to common shareholders (19,421) (48,311) 26,451 36,713 (34,523)
Earnings (loss) per share - basic $ (0.36) $ (0.91) $ 0.55 $ 0.76 $ (0.72)
Earnings (loss) per share - diluted $ (0.36) $ (0.91) $ 0.52 $ 0.75 $ (0.72)
Weighted average number of shares outstanding - basic 53,446 52,855 48,357 48,380 48,166
Weighted average number of shares outstanding - diluted 53,446 57,306 50,495 48,771 48,166
Pro forma effect of change in accounting principle:
Net income (loss) applicable to common shareholders
before cumulative effect of change in accounting
principle NA NA $ 35,488 $ 4,573 $ (32,004)
Net income (loss) per share - basic NA NA $ 0.73 $ 0.09 $ (0.66)
Net income (loss) per share - diluted NA NA $ 0.70 $ 0.09 $ (0.66)
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 17,892 $ 12,343 $ 14,592 $ 20,059 $ 17,828
Short-term investments 72,471 76,644 68,550 32,218 7,976
Working capital 87,696 87,390 95,498 54,752 22,903
Total assets 148,381 141,625 126,571 99,523 69,363
Total debt 2,342 2,560 3,005 3,772 4,460
Accumulated deficit (201,320) (181,899) (133,588) (160,039) (196,752)
Total shareholders' equity $ 60,274 $ 73,910 $ 109,507 $ 75,808 $ 38,505
23
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the
Selected Consolidated Financial Data, and the Consolidated Financial Statements
and notes thereto, contained in this document.
We develop advanced wireless technologies and products that facilitate
voice and data communications. Our current technology development programs are
focused on creating intellectual property and both hardware and software
products for the Wideband Code Division Multiple Access (WCDMA) air-interface
protocols of the Third Generation (3G) standards. We are currently developing
WCDMA Frequency Division Duplex (FDD) and WCDMA Time Division Duplex (TDD)
technology platforms. We market our technologies and solutions capabilities
primarily to wireless communications equipment producers and related suppliers.
In addition, we license our Time Division Multiple Access (TDMA) and Code
Division Multiple Access (CDMA) patents to equipment manufacturers worldwide. We
are continuing to broaden and deepen both our extensive body of technical
know-how and our patent portfolio related to wireless technologies and systems
through continuous invention and innovation, while also linking our licensing
activities to emerging product development efforts, particularly in the area of
WCDMA. Our strategic objective is to create substantial long-term value as one
of the leading developers and providers of advanced air-interface and full
system-on-a-chip technology for the wireless communications industry. We intend
to create a return on our investment in 3G technologies through technology
transfer to customers, the delivery (either alone or through alliances) of
software and hardware products and the licensing of our intellectual property
worldwide. The development of advanced wireless technologies focused on market
requirements is a fundamental element of our future strategic success and is key
to achieving these goals.
Within our current TDD and FDD development programs, we currently have
strategic relationships with Nokia Corporation (Nokia) and Infineon Technologies
AG (Infineon). The Nokia arrangement, established in 1999, involves the
development and validation of fully standards-compliant wideband TDD (WTDD)
technology. As part of the arrangement, we provide technology and know-how
development and will retain ownership rights of the technology we develop
thereunder. In the third quarter of 2001, Nokia and InterDigital agreed to
refine the pace and scope of the development arrangement and Nokia committed to
increase funding to a maximum of approximately $58 million, up from the original
estimate of $40 million. This modification was treated as a new contract for
accounting purposes and as a result, we changed the method of reporting revenue
related to the remainder of the program to the percentage of completion
accounting basis. Prior to the change, revenue had been reported on a time and
materials basis and we had billed Nokia approximately $46 million under the
contract, leaving approximately $12 million of revenue to be recognized on the
percentage of completion basis. Of the $12 million, approximately $6.2 million
was recognized in 2001. In March 2001, we entered into a long-term cooperative
relationship with Infineon involving the development of FDD (Layer 2/3) software
for use in Infineon's terminal unit 3G system-on-a-chip integrated circuits
(ICs) and for joint marketing as a stand-alone product. Under the agreement,
Infineon also committed to cooperate with us in the design of custom Application
Specific ICs based on an Infineon platform for both infrastructure and selected
terminal unit applications where Infineon would serve as the foundry.
With regard to our patent licensing program, in 2001 we signed a
worldwide, royalty-bearing CDMA patent license agreement with Matsushita
Communications Industrial Co., Ltd. (Matsushita), for Matsushita to manufacture,
have manufactured, distribute and sell 3G terminal units and test and
infrastructure equipment. Under the agreement, we received an up-front payment
of $19.5 million as an advance against future royalties of which none was
recognized as revenue in 2001. After this initial prepayment is exhausted
through product sales, Matsushita has agreed to pay additional recurring
royalties to us as it sells products utilizing our patents issued around the
world. In addition, we also signed worldwide, royalty-bearing narrowband CDMA
and 3G license agreements with both Sharp Corporation (Sharp) in 2001 and Japan
Radio Corporation (JRC) in January 2002. Under their license agreement, Sharp
paid an $11.1 million advance royalty. Once this pre-payment is exhausted, Sharp
is obligated to pay royalties on all sales of products covered under its
license. JRC must also pay royalties as it sells covered products.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Note 2 to our
consolidated financial statements, included in Item 8 of the Form 10-K. At this
time, the accounting policies that are particularly important to the portrayal
of the Company's financial condition and results, and that require the exercise
of management's subjective judgments, are those relating to revenue recognition
and income taxes.
24
Revenue Recognition: A substantial portion of our revenue can be
derived from patent licensing, know-how licensing and compensated development
agreements. Such agreements are often complex and multi-faceted. These
agreements can include, without limitation, elements related to the settlement
of past patent infringement liabilities, up-front license fees for the use of
patents and/or know-how, the establishment of patent and/or know-how licensing
royalty rates on covered products sold by licensees, cross licensing terms
between InterDigital and other parties, and ownership of intellectual property
rights associated with contractual development arrangements. Due to the combined
nature of some agreements and the difficulty in establishing reliable,
verifiable and objectively determinable evidence of the fair value of the
separate elements of the agreements, the total revenue resulting from such
agreements may sometimes be recognized over the combined performance period of
these agreements. In other circumstances, such as those agreements involving
payments for past and expected future patent royalty obligations, the
determination necessary to allocate revenue between past, current and future
years may be difficult to establish. In such instances, after considering the
facts and circumstances, we may apply certain subjective judgments in
determining the appropriate recording of revenue between periods. A different
set of decisions to recognize revenue associated with such transactions may
result in higher or lower revenue being recorded in particular years; however,
such decisions only affect the timing of revenue recognition and do not impact
our liquidity or financial position because, in general, payment terms in these
arrangements are fixed and based on objective contractual measures. In all
cases, revenue is only recognized either after cash has been received or
collectibility is reasonably assured within a short period.
Income Taxes: Our accumulated tax losses, which include allowable
deductions related to exercised employee stock options, have generated a
sizeable federal tax net operating loss (NOL) carryforward of approximately $149
million as of December 31, 2001. Generally accepted accounting principles
require that we establish a net deferred tax asset consisting of estimated
future benefits of existing NOLs, offset by a valuation allowance associated
with any portion of NOLs for which it is more likely than not that we will not
be able to utilize such NOLs to offset future taxes. Due to the size of our NOL
carryforward in relation to our NOL utilization history, we have not recognized
any of this net deferred tax asset. We currently provide for income taxes only
to the extent that we expect to pay cash taxes (primarily foreign withholding
taxes on patent license royalties, state taxes and the federal alternative
minimum tax) for current income. It is possible, however, that we could generate
taxable income in the future at levels which would cause management to conclude
that it is more likely than not that we will realize all or a portion of the NOL
carryforward benefit. Upon reaching such a conclusion, we would immediately
record the estimated realizable value of some or all of the deferred tax asset
and, after its utilization, would then provide for income taxes at a rate equal
to our combined federal and state effective rates, which would approximate 38%
to 40% under current tax laws. Subsequent revisions to the estimated realizable
value of the deferred tax asset could cause our provision for income taxes to
vary significantly from period to period, although our cash tax payments would
remain unaffected until the benefit of the then existing NOL was utilized.
RECENT SIGNIFICANT TRANSACTIONS
In January 2002, we entered into a worldwide royalty-bearing license
agreement (the 3G Agreement) with NEC Corporation of Japan (NEC) for sales of
wireless products compliant with all 3G and narrowband CDMA standards. We also
concurrently reached an amicable settlement of a Second Generation (2G) patent
licensing dispute (the 2G Dispute) with NEC in connection with a 1995 2G patent
license agreement (the 1995 Agreement).
The 3G Agreement provides that NEC is to pay us a royalty on each
licensed product sold by NEC. The 3G Agreement further provides that NEC is
obligated to pay us an advance royalty of $19.5 million in the second quarter of
2002. Once that advance is exhausted, NEC will be obligated to pay us additional
royalties as it sells licensed products. We will recognize revenue associated
with the $19.5 million advance royalty as licensed products are sold.
In settlement of the 2G Dispute, NEC has agreed to pay us $53 million
in four equal installments, payable in the second and fourth quarters of 2002
and 2003, respectively. In exchange for these payments, NEC's royalty obligation
for all PHS and PDC products sold under the 1995 Agreement will be considered
paid up. Otherwise, the 1995 Agreement will remain unaltered by the settlement.
Currently, NEC has no further royalty payment obligations under that agreement
based on existing prepaid units and certain other unique provisions included in
the 1995 Agreement. In connection with the $53 million settlement, we will
recognize revenue on a straight-line basis, from the January 2002 agreement date
until February 2006, which is the expected period of use by NEC. The $53 million
will be free and clear when received and we will have no further obligation or
contingency associated with the settlement of the 2G Dispute.
25
FINANCIAL POSITION, LIQUIDITY AND CAPITAL REQUIREMENTS
We generated positive cash flows from operating activities of $9.6
million in 2001 compared to $5.3 million in 2000. The positive operating cash
flow in 2001 arose principally from cash receipts of approximately $30.6 million
from 3G licensing agreements with Matsushita and Sharp that were offset, in
part, by cash outflows related to operating expenses in excess of cash revenues
sustained during the period. The positive operating cash flow in 2000 was mainly
due to changes in operating working capital related to inventory reduction and
cash receipts associated with completed performance bonds and insurance
recoveries generated during the period.
Net cash flows used in investing activities decreased to $6.3 million
in 2001 from $16.9 million in 2000. In 2001, we converted $4.4 million of
short-term, highly liquid securities into cash compared to $8.1 million of
investments in comparable securities in 2000. In addition, investments in
property, equipment, information systems and patents were $10.7 million in 2001
compared to $8.8 million in 2000. The increase in 2001 reflects accelerated
development program and patent prosecution investments.
During 2001, net cash provided by financing activities was $2.3 million
compared to $9.3 million in 2000. The decrease in 2001 primarily resulted from
lower net proceeds related to option and warrant exercises and employee stock
purchases ($2.6 million in 2001 versus $12.3 million in 2000).
As of December 31, 2001, we had $90.4 million of cash, cash equivalents
and short-term investments, compared to $89.0 million as of December 31, 2000.
As noted above, we expect to augment this balance during 2002 and 2003 with
payments from NEC totaling $72.5 million ($46 million in 2002 and $26.5 million
in 2003) related to the 3G Agreement and the settlement of the 2G Dispute. Our
working capital (excluding cash, cash equivalents, short-term investments,
current maturities of debt and current deferred revenue) decreased to $8.0
million at December 31, 2001 from $10.8 million at December 31, 2000. The
decrease was principally the result of a reduction in receivables associated
with lower revenues in the fourth quarter of 2001.
Consistent with our strategy to substantially invest in the development
of 3G technology and product platforms, we expect to see modest growth in
operating cash needs related to sustaining current staffing levels and continued
investments in enabling capital assets in 2002. Capital expenditures in 2002 for
hardware, software, patents and other items needed to support both technology
and product platform development programs and product positioning initiatives
are expected to range between $8 million and $11 million. Given anticipated
sources of cash in 2002 (including the NEC payments of $46 million), and absent
significant cash flow from past infringement or other licensing sources, we
expect the impact of these substantial investments during this period of heavy
investment for the future will result in slightly negative to breakeven total
cash flow in 2002. We are capable of supporting these and other operating
requirements for the near future through cash and short-term investments on
hand, as well as other internally generated funds, primarily from 2G patent
licensing royalties. At present, we do not anticipate the need to seek any
additional financing through either bank facilities or the sale of debt or
equity securities.
As of December 31, 2001, we had NOL carryforwards of approximately $149
million for which no deferred tax asset has been recorded. We expect that we
will continue to pay source withholding taxes to non-U.S. countries related to
royalties, local and state income taxes, and U.S. alternative minimum taxes when
applicable, but as a result of these NOLs, we do not expect to pay federal
income taxes for the near future.
Property and equipment are currently being utilized in our on-going
business activities, and we believe that no write-downs are required at this
time due to either lack of use or technological obsolescence. With respect to
patent assets, we believe that the fair value of our patents is at least equal
to the carrying value included in the December 31, 2001 balance sheet.
RESULTS OF OPERATIONS
Modification of Revenue Recognition Policy
Effective January 1, 2000, we modified our licensing revenue
recognition policy in response to Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements", that was issued by the SEC Staff
in December 1999. SAB No. 101 expresses the views of the Securities and Exchange
Commission (SEC) Staff in applying generally accepted accounting principles to
certain transactions, including licensing agreements involving non-refundable
up-front payments. These payments can cover either royalty prepayments that are
exhausted through future sales of licensee products or payments related to
paid-up licenses in which the licensee makes a single payment for a lifetime
patent license. Historically, we recorded such fees as revenue upon the signing
of the applicable license agreement because we had delivered the license and had
no remaining obligations. Following SAB No. 101 guidance, we reflected in our
2000 results a net after-tax cumulative effect of change in accounting principle
of $53.9 million to defer the net portion of up-front payments that represent
amounts which either had not yet been exhausted through product sales by
licensees as of January 1, 2000 or were expected to be recognized in the future
on a straight-line basis over the expected period of use by the licensee. In the
years 2001 and 2000, we recognized approximately $9.9 million and $12.5 million
of revenue and $8.1 million and $10.4 million of earnings, respectively, related
to the deferred amounts on a post-SAB No. 101 basis. Going forward, we will
continue to recognize the revenue and net earnings associated with the deferred
amounts either as licensee product sales occur or on a straight-line basis over
the expected period of use by the licensee.
26
2001 Compared With 2000
Revenues
Revenues in 2001 totaled $52.6 million, compared to $56.9 million
(including $5.6 million of final sales related to wireless local loop (WLL)
products) in 2000. Revenues from comparable activities increased $1.3 million in
2001 while the total decreased due to the discontinuance of WLL product sales in
2001. Recurring royalty revenues in 2001 decreased to $30.8 million ($21.0
million on a pre-SAB No. 101 basis) from $34.1 million ($21.6 million on a
pre-SAB No. 101 basis) in 2000. The decrease in 2001 was primarily due to the
impact of a weakened wireless market in the fourth quarter of 2001 on the sales
of wireless products by our licensees, particularly those in Japan. Specialized
engineering services revenue increased to $21.8 million in 2001 from $17.2
million in 2000 due to increased activity levels on the WTDD development program
work being performed for Nokia.
Cost of Product
There was no cost of product in 2001 due to the fact that we do not
currently sell any manufactured products. Cost of product in 2000, related to
the final sales of WLL products, was $5.2 million.
Operating Expenses
Development expenses increased 71% to $44.5 million in 2001 from $26.0
million in 2000. This increase over 2000 was due primarily to significant
increases in both professional staff (which increased by approximately 60 people
during 2001) and activity levels devoted to 3G WCDMA technology platform and
product development.
Sales and marketing expenses increased 20% to $4.7 million during 2001
as compared to $3.9 million in 2000. The increase was primarily due to increases
in both personnel and professional services in support of pre-3G sales and
marketing activities.
General and administrative expenses for 2001 increased 11% to $14.9
million from $13.4 million in 2000. The increase was due largely to higher
personnel levels and higher depreciation costs related to infrastructure and
resources necessary to support development program expansion and other strategic
initiatives.
Patents administration and licensing expenses increased 76% to $9.0
million compared to $5.1 million in 2000. The increase was due to higher costs
associated with patent related enforcement activities in 2001.
Other Income and Expense
Interest income for 2001 decreased to $4.9 million from $6.3 million in
2000 due mainly to lower interest rates in 2001 as compared to 2000.
2000 Compared With 1999
Revenues
Revenues in 2000 totaled $56.9 million, compared to $70.7 million in
1999. The decrease was due to lower licensing revenue related to past
infringement obligations of new licensees. During 1999, we recorded
approximately $42.0 million of revenues for such items as compared to zero in
2000. In 2000, we recognized revenue of $34.1 million from recurring royalties
($21.6 million on a pre-SAB No. 101 basis), $17.2 million from specialized
engineering services and $5.6 million from final sales of WLL products. This
compares with $9.4 million from recurring royalties, $10.8 million from
specialized engineering services and approximately $7.6 million from WLL product
sales and related strategic partnership activities in 1999. The increase in 2000
recurring royalty revenue was due to higher sales of wireless products by our
licensees, particularly in Japan, and the recognition of a portion of the
deferred revenue associated with the deferral resulting from the above-noted
cumulative effect adjustment pursuant to SAB No. 101 guidance. The increase in
revenue from specialized engineering services in 2000 resulted from higher
activity levels on the development program work for Nokia.
27
Cost of Product
Cost of product in 2000 decreased to $5.2 million from $5.9 million in
1999. Cost of product in 2000 reflected amounts associated with final product
sales in connection with our exit from the WLL product business. We experienced
negative gross margins in both years, as there were insufficient product sales
to absorb manufacturing overhead.
Operating Expenses
Development expenses increased 27% to $26.0 million from $20.5 million
in 1999. This increase over 1999 was due primarily to increased staff and
activity levels devoted to development of 3G WCDMA technology and product
platforms.
Sales and marketing expenses increased 8% to $3.9 million during 2000
compared to $3.6 million in 1999. The increase was primarily due to costs
associated with strategic marketing analysis activities.
General and administrative expenses for 2000 increased 73% to $13.4
million from $7.8 million in 1999. The increase was due largely to increased
resources necessary to support development program expansion, non-recurring
costs associated with severance for a departed executive, the settlement of a
dispute with a former employee and various corporate strategic initiatives.
Patents administration and licensing expenses decreased 4% to $5.1
million as compared to $5.3 million in 1999. The decrease was mainly due to a
decrease in net recognized costs related to ongoing litigation with Ericsson.
Other Income and Expense
Interest income for 2000 increased to $6.3 million from $3.9 million in
1999 due to higher average invested cash in 2000 compared to 1999. Interest
expense was $0.2 million in 2000 compared to $0.3 million in 1999 due to lower
overall debt in 2000 compared to 1999.
Expected Trends
In 2002, we expect our level of recurring royalties and cash flow to be
influenced by both sales trends in the mobile wireless market, particularly the
sales performance of leading Japanese equipment producers who represent a
significant portion of our licensees, and our ability to expand our licensee
base, enhance the level of payments from current licensees and succeed in other
patent enforcement activities. Also adding to overall revenues in 2002 should be
a small amount of specialized engineering service revenue associated with the
expected completion of WTDD technology contract deliverables for Nokia. Based on
expected recurring royalties, currently planned expenses and capital
investments, and our ongoing patent licensing and enforcement activities, we are
cautiously optimistic that for 2002 we will grow revenues 10% to 20% over 2001
revenues, absorb modest increases in expenses (as we stabilize our overall
staffing levels) and generate enough cash (without regard to one-time items
related to past infringement or other licensing sources) to finish the year with
slightly negative to breakeven total cash flow.
28
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Cash Equivalents and Investments
We do not use derivative financial instruments in our investment
portfolio. We place our investments in instruments that meet high credit quality
standards, as specified in our investment policy guidelines. This policy also
limits the amount of credit exposure to any one issue, issuer, and type of
instrument. We do not expect any material loss with respect to our investment
portfolio.
The following table provides information about our investment portfolio
as of December 31, 2001. For investment securities, the table presents principal
cash flows and related weighted average interest rates by expected maturity
dates. All investment securities are held as available for sale.
(in thousands)
Cash and demand deposits........................ $ 7,892
Average interest rate...................... 0.00%
Cash equivalents................................ $10,000
Average interest rate...................... 1.82%
Short-term investments.......................... $72,471
Average interest rate...................... 3.92%
Total portfolio................................. $90,363
Average interest rate...................... 3.34%
Long-Term Debt
The table below sets forth information about our long-term debt
obligation, by expected maturity dates.
Expected Maturity Date
December 31,
----------------------
(in thousands)
2007 and Total Fair
2002 2003 2004 2005 2006 Beyond Value
---- ---- ---- ---- ---- ------ -----
Fixed Rate $184 $189 $192 $176 $191 $1,410 $2,342
Weighted Average
Interest Rate 8.11% 8.16% 8.22% 8.28% 8.28% 8.28% 8.23%
29
Item 8. INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS PAGE NUMBER
-----------
Report of Independent Public Accountants 31
Report of Management 32
Consolidated Balance Sheets 33
Consolidated Statements of Operations 34
Consolidated Statements of Shareholders' Equity 35
Consolidated Statements of Cash Flow 36
Notes to Consolidated Financial Statements 37
SCHEDULES:
Schedule II - Valuation and Qualifying Accounts 50
All other schedules are omitted because they are either not required or
applicable or equivalent information has been included in the financial
statements and notes thereto.
30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To InterDigital Communications Corporation:
We have audited the accompanying consolidated balance sheets of
InterDigital Communications Corporation (a Pennsylvania corporation) and
subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
and the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of InterDigital
Communications Corporation and subsidiaries as of December 31, 2001 and 2000,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
As explained in Note 2 to the consolidated financial statements,
effective January 1, 2000, the Company changed its method of recognizing
revenue.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material aspects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Philadelphia, Pennsylvania
February 14, 2002
31
REPORT OF MANAGEMENT
Management is responsible for the consolidated financial statements and
the other financial information contained in this Annual Report. The financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States considered appropriate in the circumstances to
present fairly the company's financial position, results of operations and cash
flows. The financial statements include some amounts that are based on
management's best estimates and judgments.
To provide reasonable assurance that assets are safeguarded against
loss from unauthorized use or disposition and accounting records are reliable
for preparing financial statements, management maintains a system of accounting
and other internal controls. Even an effective system of internal controls, no
matter how well designed, has inherent limitations, including the possibility of
human error and the circumvention or overriding of controls, and therefore can
provide only reasonable assurance with respect to financial statement
preparation and safeguarding of assets. The system of accounting and other
internal controls is continually assessed, modified and improved, where
appropriate and cost effective, in response to both changes in business
conditions and operations and recommendations made by the independent
accountants.
The Audit Committee of the Board of Directors, which is composed of
independent directors, meets periodically with management and the independent
accountants to review the manner in which these groups are performing their
responsibilities and to carry out the Audit Committee's oversight role with
respect to corporate accounting, financial reporting practices and integrity of
financial reports, as well as legal and regulatory compliance therewith. Both
management and the independent accountants periodically meet privately with the
Audit Committee and have access to its individual members.
The financial statements have been audited by the company's independent
accountants, Arthur Andersen LLP, in accordance with auditing standards
generally accepted in the United States. Their report is presented herein.
Howard E. Goldberg
President and Chief Executive Officer
Richard J. Fagan
Executive Vice President and Chief Financial Officer
King of Prussia, Pennsylvania
March 28, 2002
32
FINANCIAL STATEMENTS
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
DECEMBER 31, DECEMBER 31,
ASSETS 2001 2000
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 17,892 $ 12,343
Short-term investments 72,471 76,644
Accounts receivable, net of allowances of $-0- and $73 14,479 16,928
Other current assets 6,385 6,890
--------- ---------
Total current assets 111,227 112,805
--------- ---------
PROPERTY AND EQUIPMENT, NET 14,402 11,302
PATENTS, NET 11,334 10,102
OTHER NON-CURRENT ASSETS 11,418 7,416
--------- ---------
37,154 28,820
--------- ---------
TOTAL ASSETS $ 148,381 $ 141,625
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 184 $ 326
Accounts payable 4,412 4,482
Accrued compensation and related expenses 5,985 3,742
Deferred revenue 10,490 12,108
Foreign and domestic taxes payable 907 1,284
Other accrued expenses 1,553 3,473
--------- ---------
Total current liabilities 23,531 25,415
LONG-TERM DEBT 2,158 2,234
LONG-TERM DEFERRED REVENUE 62,418 40,066
--------- ---------
TOTAL LIABILITIES 88,107 67,715
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTES 7 AND 8)
SHAREHOLDERS' EQUITY:
Preferred Stock, $.10 par value, 14,399 shares authorized-
$2.50 Convertible Preferred, 55 shares issued and
outstanding, liquidation value of $1,375 5 5
Common Stock, $.01 par value, 100,000 shares authorized,
54,391 shares and 53,780 shares issued and
outstanding 544 538
Additional paid-in capital 271,682 267,936
Accumulated deficit (201,320) (181,899)
Unearned compensation (2,564) (4,597)
--------- ---------
68,347 81,983
Treasury stock, 1,500 shares of common stock held at cost 8,073 8,073
--------- ---------
Total shareholders' equity 60,274 73,910
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 148,381 $ 141,625
========= =========
The accompanying notes are an integral part of these statements.
33
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
2001 2000 1999
-------- -------- --------
REVENUES:
Licensing and alliance $ 52,562 $ 51,244 $ 66,171
Product - 5,634 4,496
-------- -------- --------
52,562 56,878 70,667
-------- -------- --------
COST OF PRODUCT AND OPERATING EXPENSES:
Cost of product - 5,200 5,876
Sales and marketing 4,698 3,919 3,614
General and administrative 14,898 13,408 7,761
Patents administration and licensing 8,959 5,095 5,330
Development 44,500 26,013 20,481
Repositioning charges - - 1,213
-------- -------- --------
73,055 53,635 44,275
-------- -------- --------
Income (loss) from operations (20,493) 3,243 26,392
OTHER INCOME (EXPENSE):
Interest income 4,885 6,300 3,883
Interest and financing expenses (258) (244) (323)
-------- -------- --------
Income (loss) before income taxes (15,866) 9,299 29,952
INCOME TAX PROVISION (3,418) (3,607) (3,246)
-------- -------- --------
Net income (loss) before cumulative effect of change in
accounting principle (19,284) 5,692 26,706
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX - (53,875) -
-------- -------- --------
Net income (loss) (19,284) (48,183) 26,706
PREFERRED STOCK DIVIDENDS (137) (128) (255)
-------- -------- --------
NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS $(19,421) $(48,311) $ 26,451
======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - BASIC $ (0.36) $ 0.11 $ 0.55
======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE - BASIC $ (0.36) $ (0.91) $ 0.55
======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC 53,446 52,855 48,357
======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - DILUTED $ (0.36) $ 0.10 $ 0.52
======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE - DILUTED $ (0.36) $ (0.91) $ 0.52
======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED 53,446 57,306 50,495
======== ======== ========
PRO FORMA EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (NOTE 2):
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS
BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ 35,488
NET INCOME PER SHARE - BASIC $ 0.73
NET INCOME PER SHARE - DILUTED $ 0.70
The accompanying notes are an integral part of these statements.
34
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except per share data)
$2.50 Additional
Convertible Common Paid-In Accumulated Unearned Treasury
Preferred Stock Stock Capital Deficit Compensation Stock Total
--------------- ------ ------- ------- ------------ ----- -----
BALANCE, DECEMBER 31, 1998 $ 10 $ 484 $ 235,631 $(160,039) $ - $ (278) $ 75,808
Exercise of Common Stock options - 17 9,536 - - - 9,553
Exercise of Common Stock warrants - 5 2,504 - - - 2,509
Dividend of Common Stock and
cash to $2.50 Preferred
shareholders - - 87 (255) - - (168)
Sale of Common Stock under Employee
Stock Purchase Plan - 1 324 - - - 325
Issuance of Restricted Common Stock - 3 1,894 - (1,897) - -
Amortization of unearned compensation - - - - 128 - 128
Treasury Stock acquired - - - - - (5,354) (5,354)
Net income - - - 26,706 - - 26,706
--------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 10 510 249,976 (133,588) (1,769) (5,632) 109,507
Exercise of Common Stock options - 7 3,706 - - - 3,713
Tax benefit related to Stock options - - 604 - - - 604
Exercise of Common Stock warrants - 16 8,012 - - - 8,028
Dividend of Common Stock and
cash to $2.50 Preferred
shareholders - - 53 (128) - - (75)
Conversion of Preferred Stock
to Common Stock (5) 1 4 - - - -
Sale of Common Stock under Employee
Stock Purchase Plan - 1 508 - - - 509
Issuance of Restricted Common Stock - 3 5,073 - (5,076) - -
Amortization of unearned compensation - - - - 2,248 - 2,248
Treasury Stock acquired - - - - - (2,441) (2,441)
Net loss - - - (48,183) - - (48,183)
--------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 5 538 267,936 (181,899) (4,597) (8,073) 73,910
Exercise of Common Stock options - 2 1,249 - - - 1,251
Exercise of Common Stock warrants - 1 335 - - - 336
Dividend of Common Stock and
cash to $2.50 Preferred
shareholders - - 44 (137) - - (93)
Sale of Common Stock under Employee
Stock Purchase Plan - 1 802 - - - 803
Issuance of Restricted Common Stock - 2 1,095 - (930) - 167
Amortization of unearned compensation - - - - 2,963 - 2,963
Unrealized gain on Short-term investments - - 221 - - - 221
Net loss - - - (19,284) - - (19,284)
--------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 $ 5 $ 544 $ 271,682 $(201,320) $ (2,564) $ (8,073) $ 60,274
======================================================================================
The accompanying notes are an integral part of these statements.
35
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
2001 2000 1999
--------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) before preferred dividends $ (19,284) $ (48,183) $ 26,706
Adjustments to reconcile net income (loss) to net
cash provided by operating activities-
Depreciation and amortization 6,375 4,491 4,670
Deferred revenue recognized (9,877) (12,500) (3,867)
Increase in deferred revenue 30,611 - -
Cumulative effect of change in accounting principle, net of tax - 53,875 -
Amortization of unearned compensation 2,963 2,248 128
Repositioning charges - - 1,213
Decrease (increase) in deferred charges (4,240) 1,685 3,748
Other (49) - -
Decrease (increase) in assets-
Receivables 2,449 (6,044) 4,099
Inventories - 3,092 2,010
Other current assets 743 6,964 (8,569)
Increase (decrease) in liabilities-
Accounts payable (70) 2,028 (3,519)
Accrued compensation 2,243 (584) 1,050
Other accrued expenses (2,297) (1,737) 35
--------- --------- --------
Net cash provided by operating activities 9,567 5,335 27,704
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of short-term investments, net 4,394 (8,094) (36,332)
Purchases of property and equipment (7,733) (6,806) (1,646)
Patent costs (2,974) (1,973) (1,291)
--------- --------- --------
Net cash used in investing activities (6,313) (16,873) (39,269)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of stock options and warrants
and employee stock purchase plan 2,606 12,250 12,387
Lease obligations incurred 117 - -
Payments on long-term debt, including capital lease obligations (335) (445) (767)
Cash dividends on preferred stock (93) (75) (168)
Purchase of treasury stock - (2,441) (5,354)
--------- --------- --------
Net cash provided by financing activities 2,295 9,289 6,098
--------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,549 (2,249) (5,467)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,343 14,592 20,059
--------- --------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,892 $ 12,343 $ 14,592
========= ========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 201 $ 235 $ 296
========= ========= ========
Income taxes paid, including foreign withholding taxes $ 5,485 $ 1,202 $ 4,403
========= ========= ========
The accompanying notes are an integral part of these statements.
36
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
1. BACKGROUND
InterDigital Communications Corporation (collectively with its
subsidiaries referred to as InterDigital, the Company, we, us and our) develops
advanced wireless technologies and products that facilitate voice and data
communications. In conjunction with our technology development, we have
assembled an extensive body of technical know-how, related product embodiments
and a broad patent portfolio of Time Division Multiple Access (TDMA) and Code
Division Multiple Access (CDMA) patents, which we license worldwide.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of
InterDigital and its subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Short-Term Investments
We consider all highly liquid investments purchased with remaining
maturities of three months or less to be cash equivalents. Investments are held
at amortized cost, which approximates market value. At December 31, 2001 and
2000, all of our short-term investments were classified as available-for-sale
with unrealized gains and losses included as a separate component of equity, net
of any related tax effect. Gross unrealized gains on short-term investments were
$0.2 million at December 31, 2001. There were no significant unrealized holding
gains or losses at December 31, 2000.
Cash and cash equivalents consist of the following (in thousands):
December 31,
------------
2001 2000
---- ----
Money market funds and demand accounts $ 16,231 $ 11,519
Repurchase agreements 1,661 824
-------- --------
$ 17,892 $ 12,343
======== ========
37
The repurchase agreements are fully collateralized by United States
Government securities and are stated at cost which approximates fair market
value.
Short-term investments consist of the following (in thousands):
December 31,
------------
2001 2000
---- ----
US Government agency instruments $ 38,857 $ 45,000
Corporate bonds 33,614 31,644
-------- --------
$ 72,471 $ 76,644
======== ========
Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization of property and equipment are provided using the straight-line
method. The estimated useful lives for computer equipment, machinery and
equipment, and furniture and fixtures are generally three to five years.
Leasehold improvements are being amortized over their lease term, which is
generally five to ten years. Buildings are being depreciated over twenty-five
years. Expenditures for major improvements and betterments are capitalized and
minor repairs and maintenance are charged to expense as incurred. Depreciation
expense was $4.6 million, $3.0 million and $3.2 million in 2001, 2000 and 1999,
respectively.
Internal-Use Software Costs
Under the provisions of the American Institute of Certified Public
Accountants (AICPA) Statement of Position (SOP) 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal-Use", we capitalize
certain costs associated with software for internal-use. Capitalization begins
when the preliminary project stage is complete and ceases when the project is
substantially complete and ready for its intended purpose. Capitalized costs
include both external direct costs of software and services and payroll and
payroll-related expenses for employees who are directly associated with
developing internal-use software. In accordance with SOP 98-1, for the years
ended December 31, 2001 and 2000, we capitalized $0.1 million and $1.8 million,
respectively, of costs associated with a new ERP system. Such costs are included
within property and equipment and are being amortized over three years.
Accumulated amortization expense was $0.6 million and $0.1 million at December
31, 2001 and 2000, respectively.
Patents
The costs to obtain certain patents for our TDMA and CDMA technologies
have been capitalized and are being amortized on a straight-line basis over 10
years. Amortization expense was $1.8 million, $1.5 million and $1.5 million in
2001, 2000 and 1999, respectively. Accumulated amortization was $11.6 million
and $9.9 million at December 31, 2001 and 2000, respectively.
Development
All engineering development expenditures are charged to expense in the
period incurred. In accordance with SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased or Otherwise Marketed," all costs incurred
related to the development of wireless software to be sold, embedded in our
products or otherwise marketed are expensed as incurred because costs qualifying
for capitalization under such pronouncement have not been significant.
Revenue Recognition
Licensing and alliance revenue includes patent licensing revenue and
strategic partner revenue. Patent licensing arrangements usually consist
primarily of up-front, one-time, non-refundable fees (including royalty
prepayments that are exhausted through future sales of licensee products,
payments related to past sales of licensee products or payments related to a
paid-up license in which the licensee makes a single payment for a lifetime
patent license) and recurring royalties. Strategic partner revenue is generated
by patent, technology and know-how licensing and development agreements, which
generally include license fees and specialized engineering services. Product
revenue includes sales of wireless local loop (WLL) products. As described in
Note 3, in the second quarter of 1999, we changed our strategy from sales and
development of WLL products to technology platform development for advanced
wireless applications.
38
Prior to 2000, we recorded revenue from up-front, non-refundable patent
license fees as revenue upon the signing of the applicable license agreement
because we had delivered the license and had no remaining obligations. Effective
January 1, 2000, we modified our licensing revenue 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) Staff in December 1999. Following SAB No. 101 guidance, we reflected in
our results for the year ended December 31, 2000 a net after-tax cumulative
effect of change in accounting principle of $53.9 million to defer the net
portion of up-front payments that relate to future periods as of January 1,
2000. Payments are now recognized as revenue as licensee product sales occur or
on a straight-line basis over the expected period of use by the licensee. For
the years ended December 31, 2001 and 2000, we recognized revenues of
approximately $9.9 million and $12.5 million, and earnings of $8.1 million and
$10.4 million, respectively, related to revenue that was recognized in prior
years and subsequently recorded as deferred revenue as of January 1, 2000 in
accordance with SAB No. 101. Pro forma data for the year ended December 31, 1999
presents the Company's net income before the cumulative effect of change in
accounting principle and the related per share amounts as if SAB No. 101 had
been adopted at the beginning of 1999. Following generally accepted accounting
principles, no prior period results were restated related to the cumulative
effect of change in accounting principle.
Royalty revenue is recognized as earned in accordance with the
specified terms of each license agreement. Revenue from patent, technology and
know-how licensing and development agreements is recognized based on the fair
value of the elements delivered, which generally include services and patent
license rights. Due to the combined nature of some agreements, the total revenue
from such agreements may be recognized over the combined period of the
agreements. For most compensated development arrangements, we generally
recognize revenue for specialized engineering services on a time and materials
basis. For one fixed price compensated development arrangement, revenue is
recognized using the percentage-of-completion method and is based on the
percentage that incurred contract costs to date bear to total estimated contract
costs, after giving effect to the most recent estimates of total contract costs.
(See, Note 4.) The effect of changes to total estimated contract costs is
recognized in the period such changes are determined. Estimated losses, if any,
are recorded when the loss first becomes apparent. WLL product revenue was
recognized upon shipment of systems. Revenue from installation, training and
other WLL services was recognized when the related services were complete.
Concentration of Credit Risk and Fair Value of Financial Instruments
Financial instruments that potentially subject us to concentration of
credit risk consist primarily of cash equivalents, short-term investments, and
accounts receivable. We place our cash equivalents and short-term investments
only in highly rated financial instruments and in United States Government
instruments. Our accounts receivable are derived principally from patent license
agreements and engineering services. We believe that the book value of our
financial instruments, which include cash and cash equivalents, short-term
investments, accounts receivable, accounts payable, accrued expenses and debt,
approximate their fair values.
Impairment of Long-Lived Assets
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," we evaluate
long-lived assets and certain intangible assets for impairment when factors
indicate that the carrying amount of an asset may not be recoverable. When
factors indicate that such assets should be evaluated for possible impairment,
we review the realizability of our long-lived assets by analyzing the projected
undiscounted cash flows in measuring whether the asset is recoverable. In 1999,
a $0.8 million charge was taken as part of a repositioning program. (See, Note
3.) No such adjustments were recorded in 2001 or 2000.
Net Income (Loss) Per Common Share
Basic earnings per share (EPS) is calculated by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if options, warrants or other securities with features that could
result in the issuance of Common Stock were exercised or converted to Common
Stock. The following tables reconcile the numerator and the denominator of the
basic and diluted net income (loss) per share computation (in thousands, except
for per share data):
39
(In thousands, except per share data) Income Shares Per-Share
Year Ended December 31, 2001 (Numerator) (Denominator) Amount
-----------------------------------------------------------------------------------------------------------------------------
Loss per Share - Basic:
Loss available to common shareholders $ (19,421) 53,446 $ (0.36)
Dilutive effect of options and warrants - - -
----------------------------------------
Loss per Share - Diluted:
Loss available to common shareholders + dilutive effects of options
and warrants $ (19,421) 53,446 $ (0.36)
========================================
(In thousands, except per share data) Income Shares Per-Share
Year Ended December 31, 2000 (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------------------------------
Income per Share - Basic:
Income before cumulative effect of change in accounting principle $ 5,692 - $ -
Preferred stock dividend (128) - -
----------------------------------------
Income available to common shareholders before cumulative effect
of change in accounting principle 5,564 52,855 0.11
Dilutive effect of options and warrants - 4,451 (0.01)
Income per Share - Diluted:
----------------------------------------
Income available to common shareholders before cumulative effect of
change in accounting principle + dilutive effects of options and warrants 5,564 57,306 0.10
Cumulative effect of change in accounting principle (53,875) - -
----------------------------------------
Loss per Share - Basic:
Loss available to common shareholders (48,311) 52,855 (0.91)
Dilutive effect of options and warrants - - -
Loss per Share - Diluted:
----------------------------------------
Loss available to common shareholders + dilutive effects
of options and warrants $ (48,311) 52,855 $ (0.91)
========================================
(In thousands, except per share data) Income Shares Per-Share
Year Ended December 31, 1999 (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------------------------------
Income per Share - Basic:
Income available to common shareholders $ 26,451 48,357 $ 0.55
Dilutive effect of options and warrants - 2,138 (0.03)
----------------------------------------
Income per Share - Diluted:
Income available to common shareholders + dilutive effects of options
and warrants $ 26,451 50,495 $0.52
========================================
Pro forma effect of change in accounting principle:
Income available to common shareholders before cumulative $35,488 48,357 $ 0.73
effect of change in accounting principle
Dilutive effect of options and warrants - 2,138 (0.03)
----------------------------------------
Income per Share - Diluted:
Income available to common shareholders + dilutive effects of
options and warrants $35,488 50,495 $ 0.70
========================================
40
For the years ended December 31, 2001 and 2000, all options and
warrants were excluded from the computation of diluted earnings per share (EPS)
as a result of a net loss reported in each period. For the year ended December
31, 2000, options to purchase 1.0 million shares were excluded from the
calculation of diluted EPS before the cumulative effect of change in accounting
principle, because the exercise prices of the options were greater than the
weighted-average market price of our Common Stock during the period and,
therefore, their effect would have been anti-dilutive. For the year ended
December 31, 1999, options and warrants to purchase approximately 1.6 million
shares of Common Stock were excluded from the computation of diluted EPS because
their effect was anti-dilutive.
Reclassification
Certain prior period amounts have been reclassified to conform to 2001
presentation.
3. REPOSITIONING
In the second quarter of 1999, we recorded a pre-tax repositioning
charge of $1.2 million in connection with a change in our strategy from sales
and development of WLL products to technology platform development for advanced
wireless applications. This action was taken after assessing our long-term
business prospects associated with continued investment in the development of
WLL systems. The repositioning charge included costs associated with workforce
reductions (approximately 27 employees) and asset impairment charges of $0.8
million for fixed assets associated with WLL activities. Management's efforts
with respect to this plan are complete.
4. STRATEGIC PARTNER AGREEMENTS AND MAJOR CUSTOMERS
Substantially all of the Company's revenue is derived from a limited
number of customers based outside of the United States (primarily Japan and
Europe). These revenues are paid in U.S. dollars and are not subject to any
substantial foreign exchange transaction risk. Revenue from Nokia, our customer
in Finland, represented 42%, 31% and 60% of total revenues in 2001, 2000 and
1999, respectively. During 2001, 2000 and 1999, revenue from our licensees in
Japan comprised 50%, 51% and 15% of total revenues, respectively.
Patent Licensing Revenue
In 2001, we recognized $30.8 million of royalty revenue, $9.9 million
of which was recognized in prior years, but was deferred as of January 1, 2000
related to SAB No. 101. (See, Note 2.) For the year ended December 31, 2001,
royalty revenue from one customer accounted for approximately 30% of total
revenue.
In 2001, we entered into two new worldwide license agreements with
Matsushita Communications Industrial Co., Ltd. and Sharp Corporation under our
CDMA patents. We received advance royalty payments totaling $30.6 million
related to these agreements that will be recognized as the licensees sell
covered product.
For the year ended December 31, 2000, we recognized $34.1 million of
royalty revenue, $12.5 million of which was recognized in prior years, but was
deferred as of January 1, 2000 related to SAB No. 101. (See, Note 2.) For the
year ended December 31, 2000, royalty revenue from one customer accounted for
approximately 32% of total revenue.
In 2000, we entered into a new licensing agreement with Ubinetics Ltd.
under our TDMA patents. Royalty revenue commenced in 2001 with the licensee's
commercial manufacture of covered units and infrastructure.
41
In 1999, we entered into four new TDMA license agreements with Robert
Bosch GmbH, Japan Radio Company, Ltd., Shintom Company, Ltd., and Iwatsu
American, Inc. and granted a combination TDMA and CDMA license to Nokia
Corporation (Nokia). In prior years, we had granted non-exclusive,
non-transferable, perpetual, worldwide, royalty-bearing licenses to use certain
TDMA patents (and, in certain instances, technology) to 13 additional
corporations. Additionally, in prior years, we had granted non-exclusive,
non-transferable, perpetual, worldwide, royalty-bearing licenses to use certain
CDMA patents (and, in certain instances, technology) to Alcatel Espana, Qualcomm
Inc., and Advanced Digital Technologies and to use TDMA and CDMA patents (and,
in certain instances, technology) to Siemens AG, Samsung Electronics Co. Ltd.
(Samsung) and American Telephone & Telegraph. Many of these licenses contain
most favored licensee (MFL) provisions, applied on a going forward basis only,
and provisions which could, in certain events, suspend, reduce, or terminate the
licensee's obligations to pay future royalties to InterDigital with or without
the accrual of the royalty obligation.
Initial revenues from new TDMA licensees in 1999 totaled $42.8 million,
including $31.5 million from Nokia. In 1999, we recognized $9.4 million in
recurring revenue from TDMA licensees.
Nokia Agreements
In February 1999, we entered into a multi-year arrangement with Nokia
for development of new technology for 3G wireless telecommunications products.
Under the multi-year arrangement, we are providing specialized engineering
services and technology and know-how development and we will retain ownership
rights of all of the technology we develop thereunder. Additionally, in February
1999, we entered into a patent license agreement with Nokia related to certain
TDMA and CDMA patents. In the third quarter of 2001, Nokia and the Company
agreed to refine the pace and scope of the development arrangement and Nokia
committed to increase funding to a maximum of approximately $58 million, up from
the original estimate of $40 million. This modification was treated as a new
contract for accounting purposes and as a result, we changed the method of
reporting revenue related to the remainder of the program to the percentage of
completion accounting basis. (See, Note 2.) Prior to the change, revenue had
been reported on a time and materials basis and we had billed Nokia
approximately $46 million under the contract, leaving approximately $12 million
of revenue to be recognized on the percentage of completion basis. Of the $12
million, approximately $6.2 million was recognized in 2001. For the years ended
December 31, 2001, 2000 and 1999, we recognized specialized engineering service
revenue related to the development arrangement of $21.8 million, $17.2 million
and $10.8 million, respectively.
Infineon Agreement
In March 2001, we entered into a long-term cooperative relationship
with Infineon Technologies AG (Infineon) involving the development of FDD (Layer
2/3) software for use in Infineon's terminal unit 3G system-on-a-chip integrated
circuits (ICs) and for joint marketing as a stand-alone product. Under the
agreement, Infineon also committed to cooperate with us in the design of custom
Application Specific ICs, based on an Infineon platform, for both infrastructure
and selected terminal unit applications where Infineon would serve as the
foundry.
B-CDMA Alliance
Prior to our 1999 strategic shift to focus on technology development
for the 3G market, our development group was focused primarily on technology
development for full systems to address needs in the fixed WLL market. As part
of that effort, we entered into a series of agreements with Samsung, Siemens and
Alcatel to develop our proprietary B-CDMA(TM) technology, a WCDMA technology,
and products that embodied that technology. In early 1999, after reassessing the
market potential of the residential WLL market, Siemens announced its withdrawal
from the B-CDMA(TM) development effort. In April of 1999, Alcatel also withdrew
from the B-CDMA(TM) development effort. Minimal activity took place with respect
to the Samsung B-CDMA(TM) relationship during most of 1999 and no activity has
taken place thereafter. We recognized revenue of $3.1 million associated with
these agreements in 1999.
42
5. PROPERTY AND EQUIPMENT
December 31,
------------
2001 2000
---- ----
(In thousands)
Land, building and improvements $ 5,446 $ 4,658
Machinery and equipment 8,630 9,746
Computer equipment and software 18,743 11,472
Furniture and fixtures 3,498 3,017
Leasehold improvements 1,633 1,324
------- -------
37,950 30,217
Less: Accumulated depreciation (23,548) (18,915)
------- -------
$14,402 $11,302
======= =======
6. LONG-TERM DEBT OBLIGATIONS
December 31,
------------
2001 2000
---- ----
(In thousands)
Mortgage debt $2,225 $2,341
Capitalized leases 117 219
------ ------
Total long-term debt obligations 2,342 2,560
Less - Current portion (184) (326)
------ ------
$2,158 $2,234
====== ======
During 1996, InterDigital purchased its King of Prussia, Pennsylvania
facility for $3.7 million, including cash of $0.9 million and a 16-year mortgage
of $2.8 million with interest payable at a rate of 8.28% per annum.
Capitalized lease obligations are payable in monthly installments at an
average rate of 6.2%, through 2005. The net book value of equipment under
capitalized lease obligations was $0.1 million and $0.2 million at December 31,
2001 and 2000, respectively.
Maturities of principal of the long-term debt obligations as of
December 31, 2001 are as follows (in thousands):
2002 $ 184
2003 189
2004 192
2005 176
2006 191
Thereafter 1,410
------
$2,342
======
43
7. COMMITMENTS AND CONTINGENCIES
Leases
We have entered into various operating lease agreements. Total rent
expense was $1.5 million, $1.4 million and $1.4 million in 2001, 2000 and 1999,
respectively, primarily for office space. Minimum future rental payments for
operating leases as of December 31, 2001 are as follows (in thousands):
2002 $2,578
2003 1,658
2004 1,286
2005 1,321
2006 1,282
Thereafter 207
------
$8,332
======
Employment Agreements
We have entered into agreements with certain employees that provide for
the payment of severance pay (in the aggregate, approximately $3.2 million at
December 31, 2001), among other things, in certain events of termination of
employment. All but one of these agreements generally provide for the payment of
severance up to a maximum of one year of salary and up to a maximum of one year
of continued medical and dental benefits. The other agreement generally provides
for the payment of severance up to a maximum of eighteen months of salary and up
to a maximum of eighteen months of continued medical and dental benefits. In all
of these agreements, in the event of a termination or resignation within one
year following a change of control, which is defined to include the acquisition
(including by merger or consolidation, or by the issuance by the Company of our
securities) by one or more persons in one transaction or a series of related
transactions of more than fifty percent (50%) of the voting power represented by
the outstanding stock of the Company, the employee would generally receive two
years of salary (approximately $5.8 million at December 31, 2001) and the
immediate vesting of all stock options.
8. LITIGATION
Ericsson
In September 1993, ITC filed a patent infringement action against
Ericsson GE Mobile Communications, Inc. (Ericsson GE), its Swedish parent,
Telefonaktieboleget LM Ericsson (LM Ericsson) and Ericsson Radio Systems, Inc.
(Ericsson Radio) (collectively, Ericsson or the Ericsson Defendants), in the
United States District Court for the Eastern District of Virginia (the Virginia
Action) which was subsequently transferred to the United States District Court
for the Northern District of Texas (the Texas Action) (collectively, the
Ericsson Action). The Ericsson Action seeks a jury's determination that in
making, selling or using, and/or in participating in the making, selling or
using of digital wireless telephone systems and/or related mobile stations,
Ericsson has infringed, contributed to the infringement of and/or induced the
infringement of eight patents from ITC's patent portfolio. The Ericsson Action
also seeks an injunction against Ericsson from infringement and seeks
unspecified damages based upon the Court's determination of what constitutes a
reasonable royalty for infringement, royalties, costs and attorney's fees.
Ericsson GE filed an answer to the Virginia Action in which it denied the
allegations of the complaint and asserted a Counterclaim seeking a Declaratory
Judgment that the asserted patents are either invalid or not infringed. On the
same day that ITC filed the Ericsson Action in Virginia, two of the Ericsson
Defendants, Ericsson Radio and Ericsson GE, filed a lawsuit against InterDigital
and ITC in the United States District Court for the Northern District of Texas
(the "Texas Action"). The Texas Action, which involves the same patents that are
the subject of the Ericsson Action, seeks the court's declaration that
Ericsson's products do not infringe ITC's patents, that ITC's patents are
invalid and that ITC's patents are unenforceable. The Texas Action also seeks
judgment against InterDigital and ITC for tortious interference with contractual
and business relations, defamation and commercial disparagement, and Lanham Act
violations. The Ericsson Action and the Texas Action have been consolidated. ITC
agreed to the dismissal without prejudice of LM Ericsson.
44
In December 1997, Ericsson Inc., the successor to Ericsson GE and
Ericsson Radio, filed an action against ITC in the United States District Court
for the Northern District of Texas (the "1997 Texas Action") seeking the court's
declaration that Ericsson Inc.'s products do not infringe two patents issued to
InterDigital earlier in 1997 as continuations of certain patents at issue in the
Texas Action. Later that month, Ericsson Inc. filed an amended Complaint seeking
to include these two new patents in the Texas Action in an effort to consolidate
the two cases. In January 1998, both Ericsson Inc. and InterDigital and ITC
filed motions requesting that Ericsson Inc.'s amended Complaint be allowed and
that the 1997 Texas Action be dismissed, to which the Court agreed. In 1998, the
United States District Court for the Northern District of Texas granted an ITC
Motion to amend its Counterclaim by adding four additional patents. During the
third quarter of 1999, Ericsson Inc. amended its Complaint to add causes of
action for breach of contract and fraud and negligent misrepresentation. During
the fourth quarter of 2001, Ericsson and ITC commenced a Court ordered
mediation, which is still in progress.
In the lawsuit, ITC will seek royalties for past infringement in a
significant amount, prejudgment interest, treble damages for willful
infringement, and injunctive relief. We have not recorded any contingencies
related to this litigation. We record expenses related to the litigation as they
are incurred net of expected reimbursements from our insurance carriers for
certain covered litigation expenses. Such expenses are included as patents
administration and licensing expense.
Samsung
In February 2002, ITC filed a Complaint against Samsung with the
International Chamber of Commerce, International Court of Arbitration. The
dispute involves the applicability of the MFL clause contained in ITC's patent
license agreement with Samsung and Samsung's underreporting of, failure to
report and failure to pay royalties on its more recent covered sales. MFL
clauses typically permit a licensee to elect to apply the terms of a
subsequently executed license agreement that are more favorable than those of
the licensee's agreement. The application of the MFL clause may affect, and
generally acts to reduce, the amount of royalty obligations of the licensee. The
application of an MFL clause can be complex, given the varying terms among
patent license agreements. Based on the limited sales information that ITC has
been able to gather, ITC has alleged in its Complaint that past due royalties
presently owed by Samsung, absent the application of the MFL clause, could be in
excess of $100 million. Among the issues to be addressed in the arbitration is
whether Samsung can make use of its MFL rights and, if so, how such rights would
affect Samsung's royalty obligations. Under various MFL scenarios which we
expect Samsung to advance, including scenarios related to Nokia's paid-up $31.5
million license for the period ending December 31, 2001, Samsung's ultimate
royalty obligation to ITC could be reduced, in some cases substantially, below
the amount in the Complaint. Under the patent license agreement, Samsung
pre-paid royalties of $17 million in 1996 and, in 1999, became entitled to an
additional royalty credit of $1.7 million. ITC also seeks an audit of
information relating to Samsung's covered sales and payment of royalties due.
Samsung has not responded to ITC's Complaint.
The ultimate resolution of the dispute could result in additional
royalty payments to us, but will not impact amounts previously paid by Samsung.
At December 31, 2001, our balance sheet contained $7.2 million of deferred
revenue associated with the Samsung license agreement, the future recognition of
which could be impacted by the ultimate resolution of this matter.
Other
In addition to the litigation described above, we are a party to
certain other legal actions arising in the ordinary course of our business.
Based upon information presently available to us, we believe that the ultimate
outcome of these other actions will not have a material effect on our results of
operations or financial condition.
9. RELATED PARTY TRANSACTIONS
In 2000, we engaged L.E.K. Consulting, a shareholder value consulting
firm and paid approximately $0.5 million for their services. One of our outside
directors is Chairman of the Advisory Board to L.E.K. Consulting. Our board
member did not receive any compensation or commissions related to the
engagement.
10. PREFERRED STOCK
The holders of the $2.50 Convertible Preferred Stock are entitled to
receive, when and as declared by our Board of Directors, cumulative annual
dividends of $2.50 per share payable in cash or Common Stock at the Company's
election (subject to a cash election right of the holder), if legally available.
Such dividends are payable semi-annually on June 1 and December 1. In the event
we fail to pay two consecutive semi-annual dividends within the required time
period, certain penalties may be imposed. The $2.50 Convertible Preferred Stock
is convertible into Common Stock at any time prior to redemption at a conversion
rate of 2.08 shares of Common Stock for each share of preferred. In 2001, 2000
and 1999, InterDigital declared and paid dividends on the $2.50 Preferred
Convertible Stock of $137,000, $128,000 and $255,000, respectively. These
dividends were paid with both cash of $93,000, $75,000 and $168,000, in 2001,
2000 and 1999, respectively, and with 3,260, 5,141, and 17,530 shares of Common
Stock in 2001, 2000 and 1999, respectively.
45
Upon any liquidations, dissolution or winding up of the Company, the
holders of the $2.50 Convertible Preferred Stock will be entitled to receive,
from the Company's assets available for distribution to shareholders, $25 per
share plus all dividends accrued, before any distribution is made to Common
shareholders. After such payments, the holders of the $2.50 Convertible
Preferred Stock would not be entitled to any other payments. The redemption
price for each share of the $2.50 Convertible Preferred Stock is $25 per share.
The $2.50 Convertible Preferred Stock is redeemable at our option.
The holders of the $2.50 Convertible Preferred Stock do not have any
voting rights except on those amendments to the Company's Articles of
Incorporation which would adversely affect their rights, create any class or
series of stock ranking senior to or not at parity with the $2.50 Convertible
Preferred Stock, as to either dividend or liquidation rights, or increase the
authorized number of shares of any senior stock. In addition, if two or more
consecutive semi-annual dividends on the $2.50 Convertible Preferred Stock are
not paid by the Company, the holders of the $2.50 Convertible Preferred Stock,
separately voting as a class, will be entitled to elect one additional director
of the Company.
11. COMMON STOCK COMPENSATION PLANS
Stock Compensation Plans
We have stock-based compensation plans under which, depending on the
plan, directors, employees, consultants and advisors can receive stock options,
stock appreciation rights, restricted stock awards and other stock unit awards.
Common Stock Option Plans
We have granted options under two incentive stock option plans, three
non-qualified stock option plans and two plans which provide for grants of both
incentive and non-qualified stock options (Pre-existing Plans) to non-employee
directors, officers and employees of the Company and certain others, depending
on the plan. No further grants are allowed under the Pre-existing Plans. In
2000, the shareholders approved the 2000 Stock Award and Incentive Plan (2000
Plan) that allows for the granting of incentive and non-qualified options, as
well as certain other securities. The 2000 Plan authorizes the offer and sale of
up to approximately 7.4 million shares of common stock. The Board of Directors
or the Compensation and Stock Option Committee of the Board determine the number
of options to be granted. Under the terms of the 2000 Plan, the option price
cannot be less than 100% of fair market value of the Common Stock at the date of
grant. Under all of these plans, options are generally exercisable for a period
of 10 years from the date of grant and may vest on the grant date, another
specified date or over a period of time. However, under both plans which provide
for both incentive and non-qualified stock options, grants most commonly vest in
six semi-annual installments. All incentive options granted under such plans
have exercise prices of not less than 100% of the fair market value of the
Common Stock on the grant date in accordance with Internal Revenue Code
requirements.
SFAS No. 123 Disclosure
We have adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation cost has
been recognized in the Statements of Operations for our stock option plans. Had
compensation cost been calculated based on the fair value at the grant date for
awards in 2001, 2000 and 1999, consistent with the provisions of SFAS No. 123,
our net income (loss) and net income (loss) per share would change to the
following pro forma amounts (in thousands, except per share amounts):
2001 2000 1999
---- ---- ----
Net income (loss) applicable to Common
Shareholders - as reported $(19,421) $(48,311) $26,451
Net income (loss) applicable to Common
Shareholders - pro forma (47,108) (78,898) 23,540
Net income (loss) per share - as reported - basic (0.36) (0.91) 0.55
Net income (loss) per share - as reported - diluted (0.36) (0.91) 0.52
Net income (loss) per share - pro forma - basic (0.88) (1.49) 0.49
Net income (loss) per share - pro forma - diluted (0.88) (1.49) 0.47
46
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2001, 2000 and 1999; no dividend yield; expected
volatility of 97% for 2001, 130% for 2000 and 125% for 1999, risk-free interest
rates of 4.59%, 6.33% and 5.66% for 2001, 2000 and 1999, respectively, and an
expected option life of 4.21 years for 2001, 3.93 years for 2000 and 4.40 years
for 1999. The weighted-average fair value at the date of grant for options
granted during 2001, 2000 and 1999 is estimated as $8.16, $21.23 and $6.61 per
share, respectively.
Information with respect to stock options under the above plans is
summarized as follows (in thousands, except per share amounts):
Weighted
Available Outstanding Options Average
--------- ------------------- --------
BALANCE AT DECEMBER 31, 1998 6,015 5,845 $ .01-11.63 $ 6.05
Granted (688) 688 $4.38-11.00 $ 7.49
Canceled 395 (395) $5.25-10.50 $ 7.50
Exercised (1,655) $0.10-11.63 $ 5.77
BALANCE AT DECEMBER 31, 1999 5,722 4,483 $ .01-11.65 $ 6.26
Granted (2,514) 2,514 $5.19-39.00 $23.90
Canceled 392 (392) $4.50-39.00 $23.01
Exercised (686) $0.10-11.63 $ 5.41
2000 Plan Authorization 2,200
BALANCE AT DECEMBER 31, 2000 5,800 5,919 $5.19-39.00 $12.90
Granted (5,109) 5,109 $5.38-15.10 $10.47
Canceled 280 (280) $5.38-39.00 $17.30
Exercised (184) $6.80-15.38 $11.61
BALANCE AT DECEMBER 31, 2001 971 10,564 $ .01-39.00 $11.67
The following table summarizes information regarding the stock options
outstanding at December 31, 2001 (in thousands, except for per share amounts):
Weighted
Average
Range of Number Remaining Weighted Average Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Number Exercisable Exercise Price
--------------------------------------------------------------------------------------------------------------------------------
$ 0.01 - 5.31 757 7.36 $ 4.71 658 $ 4.68
$ 5.38 - 5.44 1,372 5.93 5.43 1,319 5.44
$ 5.50 - 7.69 1,181 5.89 6.42 1,099 6.40
$ 7.69 - 8.81 541 13.91 8.19 375 8.10
$ 8.88 - 9.60 2,047 9.96 9.58 344 9.57
$ 9.63 - 10.75 1,149 9.21 10.37 601 10.24
$10.86 - 12.40 1,357 13.50 11.89 496 11.72
$12.43 - 18.13 1,066 8.90 15.10 439 15.68
$18.25 - 37.00 439 8.29 24.74 359 25.00
$39.00 - 39.00 655 8.04 39.00 440 39.00
--------------------------------------------------------------------------------------------------------------------------------
$ 0.01 - 39.00 10,564 9.08 $ 11.67 6,130 $ 11.19
====== ==== = ===== ===== = =====
47
Common Stock Warrants
As of December 31, 2001, we had various warrants outstanding to
purchase 1.4 million shares of Common Stock at exercise prices ranging from
$2.50 to $9.65 per share, with a weighted average exercise price of $5.51 per
share. As of December 31, 2001, all of these warrants were currently
exercisable. These warrants expire in various years through 2004. The exercise
price and number of shares of Common Stock to be obtained upon exercise of
certain of these warrants are subject to adjustment under certain conditions.
Restricted Stock
In 1999, we adopted the 1999 Restricted Stock Plan, under which we can
issue up to 1,500,000 shares of restricted common stock and restricted stock
units to directors, employees, consultants and advisors. The restrictions on
issued shares lapse over periods generally ranging from 1 to 5 years from the
date of the grant. As of December 31, 2001 and 2000, we had 812,658 and 668,008
shares of restricted stock and restricted stock units, respectively, issued
under the plan. The balance of unearned compensation at December 31, 2001 was
$2.6 million, which will be amortized over vesting periods that are generally
from one to three years.
12. SHAREHOLDER RIGHTS PLAN
In December 1996, our Board of Directors declared a distribution under
its Shareholder Rights Plan (the Rights Plan) of one right for each outstanding
common share of the Company to shareholders of record as the close of business
on January 3, 1997. In addition, any new common shares issued after January 4,
1997 will receive one right for each common share. The Rights Plan was amended
in a number of respects in March 2000. As amended, each right entitles
shareholders to buy one-thousandth of a share of Series B Junior Participating
Preferred Stock at a purchase price of $250 per share, subject to adjustment.
Ordinarily, the rights will not be exercisable until 10 days after a non-exempt
person or group owns or acquires more than 10% of InterDigital's outstanding
Common Stock or after a non-exempt person or group begins an offer for 10% or
more of the Company's outstanding Common Stock or after a non-exempt person or
group publicly announces an intent to acquire control over InterDigital and
proposes, in a proxy or consent solicitation, to elect such a number of
directors which, if elected, would represent a majority of the directors when
compared with the Independent Directors continuing to serve on the Board. In
general, in the event that we are acquired in a merger or other business
combination interaction, each holder of a right will have the right to receive,
upon exercise, Units of Preferred Stock (or, in certain circumstances, Company
Common Stock, cash, property, or other securities of the Company) having a
current market value equal to two times the exercise price of the Right.
13. INCOME TAXES
The income tax expense for 2001, 2000 and 1999 includes a foreign
withholding tax provision of $3.2 million, $3.4 million and $2.6 million,
respectively. Also included in such expenses were provisions for federal
alternative minimum tax of $0.2 million, $0.2 million and $0.6 million,
respectively.
At December 31, 2001, we had net operating loss carryforwards of
approximately $149.2 million. Since realization of the tax benefits associated
with these carryforwards is not considered more likely than not, a valuation
allowance of 100% of the potential tax benefit is recorded as of December 31,
2001.
The net operating loss carryforwards are scheduled to expire as follows
(in millions):
2004 $ 7.1
2005 11.9
2006 1.9
2007 15.8
2008 .2
Thereafter 112.3
-------
$ 149.2
=======
Pursuant to the Tax Reform Act of 1986, annual use of our 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 our
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. We believe that no ownership change for purpose of Section 382
occurred up to and including December 31, 2001. Our calculations reflect the
adoption of new Treasury Regulations that became effective on November 4, 1992
and which have beneficial effects regarding the treatment of options and other
aspects of the ownership change calculation.
48
14. SUBSEQUENT EVENT
In January 2002, we entered into a worldwide royalty-bearing license
agreement (the 3G Agreement) with NEC Corporation of Japan (NEC) for sales of
wireless products compliant with all Third Generation (3G) and narrowband CDMA
standards. We also concurrently reached an amicable settlement of a Second
Generation (2G) patent licensing dispute (the 2G Dispute) with NEC in connection
with a 1995 patent license agreement (the 1995 Agreement).
The 3G Agreement provides that NEC is to pay us a royalty on each
licensed product sold by NEC. The 3G Agreement further provides that NEC is
obligated to pay us an advance royalty of $19.5 million in the second quarter of
2002. Once that advance is exhausted, NEC will be obligated to pay additional
royalties to us as it sells licensed products. We will recognize revenue
associated with the $19.5 million advance royalty as licensed products are sold.
In settlement of the 2G Dispute, NEC has agreed to pay us $53 million
in four equal installments, payable in the second and fourth quarters of 2002
and 2003, respectively. In exchange for these payments, NEC's royalty obligation
for all PHS and PDC products sold under the 1995 Agreement will be considered
paid up. Otherwise, the 1995 Agreement will remain unaltered by this settlement.
Currently, NEC has no further royalty payment obligations under that agreement
based on existing prepaid units and certain other unique provisions included in
the 1995 Agreement. In connection with the $53 million settlement, we will
recognize revenue on a straight-line basis, from the January 2002 agreement date
until February 2006, which is the expected period of use by NEC. The $53 million
will be free and clear when received and we will have no further obligation or
contingency associated with the settlement of the 2G Dispute.
15. SELECTED QUARTERLY RESULTS (Unaudited)
The table below presents quarterly data for the years ended December 31,
2001 and 2000:
2001
-----------------------------------------------------------------
Selected Quarterly Results First Second Third Fourth Full Year
----- ------ ----- ------ ---------
(in thousands, except per share amounts, unaudited)
Revenues $ 14,687 $ 14,953 $14,543 $ 8,379 $ 52,562
Net loss applicable to common shareholders $ (2,155) $ (2,459) $(5,012) $(9,795) $(19,421)
Net loss per share - diluted $ (0.04) $ (0.05) $ (0.09) $ (0.18) $ (0.36)
2000
----------------------------------------------------------------
Revenues $ 15,201 $ 12,988 $12,843 $ 5,846 $ 56,878
Net income applicable to common shareholders
before cumulative effect of change in accounting principle $ 2,902 $ 34 $ 1,199 $ 1,429 $ 5,564
Earnings per share before cumulative effect of change
in accounting principle - diluted $ 0.05 $ - $ 0.02 $ 0.03 $ 0.10
Item 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
49
INTERDIGITAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance, Beginning Charged to Costs and Balance, End of
Description of Period Expenses Deductions Period
----------- --------- -------- ---------- ------
2001
Allowance for
uncollectible accounts $73 ----- $73 -0-
2000
Allowance for
uncollectible accounts $975 ----- $902 $73
1999
Allowance for
uncollectible accounts $897 $87 $9 $975
50
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF INTERDIGITAL
Information concerning executive officers appears under the caption
"Item 1. Business, Executive Officers" in Part 1 of this Form 10-K. Information
concerning directors is incorporated by reference herein from the information
following the caption "ELECTION OF DIRECTORS - Nominees for Election to the
Board of Directors Three Year Term Expiring at 2005 Annual Meeting" to, but not
including, "-Committees and Meetings of the Board of Directors" in
InterDigital's proxy statement to be filed with the SEC within 120 days after
the close of InterDigital's fiscal year ended December 31, 2001 and forwarded to
shareholders prior to the 2002 annual meeting of shareholders (Proxy Statement).
Information in the two paragraphs immediately following the caption
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the
Proxy Statement is incorporated by reference herein.
Item 11. EXECUTIVE COMPENSATION
Information following the caption "Executive Compensation-Summary
Compensation Table" to, but not including, the caption "Shareholder Return
Performance Graph" and information in the section "Compensation Committee
Interlocks and Insider Participation" in the Proxy Statement is incorporated by
reference herein.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information following the caption "Security Ownership of Certain
Beneficial Owners" to, but not including, the caption "Compensation Committee
Interlocks and Insider Participation" in the Proxy Statement is incorporated by
reference herein.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
51
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT OF SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
(1) Financial Statements.
(2) Financial Statement Schedules.
(3) The Index to Financial Statements and Schedules and the Financial
Statements begin on page 30.
*3.1 Restated Articles of Incorporation (Exhibit 3.1 to InterDigital's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996).
3.2 By-laws, as amended March 21, 2002.
*4.1 Rights Agreement between InterDigital and American Stock Transfer
& Trust Co., ("AST") (Exhibit 4 to InterDigital's Current Report
on Form 8-K filed on January 2, 1997).
*4.2 Amendment No. 1 to the Rights Agreement between InterDigital and
AST (Exhibit 4.2 to InterDigital's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997 (the "June 1997 Form 10-Q")).
*4.3 Amendment No. 2 to the Rights Agreement between InterDigital and
AST (Exhibit 4.3 to the June 1997 Form 10-Q).
*4.4 Amendment No. 3 to the Rights Agreement between InterDigital and
AST (Exhibit 4.4 to the 1999 Form 10-K).
*10.1 Intellectual Property License Agreement between InterDigital and
Hughes Network Systems, Inc. (Exhibit 10.39 to InterDigital's
Registration Statement No. 33-28253 filed on April 18, 1989).
*10.2 1992 License Agreement dated February 29, 1992 between
InterDigital and Hughes Network Systems, Inc. (Exhibit 10.3 to
InterDigital's Current Report on Form 8-K dated February 29, 1992
(the "February 1992 Form 8-K")).
*10.3 E-TDMA License Agreement dated February 29, 1992 between
InterDigital and Hughes Network Systems, Inc. (Exhibit 10.4 to the
February 1992 Form 8-K).
*10.4 Non-Qualified Stock Option Plan, as amended (Exhibit 10.4 to
InterDigital's Annual Report on Form 10-K for the year ended
December 31, 1991).
*10.5 Amendment to Non-Qualified Stock Option Plan (Exhibit 10.31 to the
June 2000 Form 10-Q).
10.6 Amendment to Non-Qualified Stock Option Plan, effective October
24, 2001.
*10.7 1992 Non-Qualified Stock Option Plan (Exhibit 10.1 to
InterDigital's Current Report on Form 8-K dated October 21, 1992).
*10.8 Amendment to 1992 Non-Qualified Stock Option Plan (Exhibit 10.32
to the June 2000 Form 10-Q).
*10.9 1992 Employee Stock Option Plan (Exhibit 10.71 to InterDigital's
Annual Report on Form 10-K for the year ended December 31, 1992).
*10.10 Amendment to 1992 Employee Stock Option Plan (Exhibit 10.29 to the
June 2000 Form 10-Q).
10.11 Amendment to 1992 Employee Stock Option Plan, effective October
24, 2001.
52
*10.12 1995 Stock Option Plan for Employees and Outside Directors, as
amended (Exhibit 10.7 to InterDigital's Annual Report on Form 10-K
for the year ended December 31, 1997 (the "1997 Form 10-K")).
*10.13 Amendment to the 1995 Stock Option Plan for Employees and Outside
Directors (Exhibit 10.25 to the 1999 Form 10-K).
*10.14 Amendment to 1995 Stock Option Plan for Employees and Outside
Directors (Exhibit 10.33 to the June 2000 Form 10-Q).
10.15 Amendment to 1995 Stock Option Plan for Employees and Outside
Directors, effective October 24, 2001.
*10.16 1997 Stock Option Plan for Non-Employee Directors (Exhibit 10.34
to InterDigital's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997 (the "September 1997 Form 10-Q")).
*10.17 1997 Stock Option Plan for Non-Employee Directors, as amended
March 30, 2000 (Exhibit 10.42 to the June 2000 Form 10-Q).
*10.18 Amendment to 1997 Stock Option Plan for Non-Employee Directors
(Exhibit 10.34 to the June 2000 Form 10-Q).
10.19 Amendment to 1997 Stock Option Plan for Non-Employee Directors,
effective October 24, 2001.
*10.20 2000 Stock Award and Incentive Plan (Exhibit 10.28 to the June
2000 Form 10-Q).
*10.21 1999 Restricted Stock Plan, as amended April 13, 2000 (Exhibit
10.43 to the June 2000 Form 10-Q).
*10.22 Employee Stock Purchase Plan (Exhibit 10.52 to InterDigital's
Registration Statement No. 33-65630 filed June 6, 1993).
*10.23 Amendment #1 to the Employee Stock Purchase Plan (Appendix to
InterDigital's Proxy Statement filed May 23, 1996).
*10.24 Amendment #2 to the Employee Stock Purchase Plan (Exhibit 10.9 to
the 1997 Form 10-K).
*10.25 Amended and Restated Employment Agreement dated as of November 20,
2000 by and between InterDigital Communications Corporation and
Howard E. Goldberg (Exhibit 10.12 to InterDigital's Annual Report
on Form 10-K for the year ended December 31, 2000 (the "2000 Form
10-K")).
*10.26 Employment Agreement dated November 18, 1996 by and between
InterDigital Communications Corporation and Charles R. Tilden
(Exhibit 10.26 to the 1996 Form 10-K).
*10.27 Amendment dated as of April 6, 2000 by and between InterDigital
and Charles R. Tilden (Exhibit 10.39 to the June 2000 Form 10-Q).
*10.28 Employment Agreement dated May 7, 1997 by and between InterDigital
and Mark A. Lemmo (Exhibit 10.32 to InterDigital's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997).
*10.29 Amendment dated as of April 6, 2000 by and between InterDigital
and Mark Lemmo (Exhibit 10.37 to the June 2000 Form 10-Q).
*10.30 Employment Agreement dated September 3, 1998 by and between
InterDigital and William J. Merritt (Exhibit 10.23 to
InterDigital's Annual Report on Form 10-K for the year ended
December 31, 1998 (the "1998 Form 10-K")).
*10.31 Amendment dated as of April 6, 2000 by and between InterDigital
and William Merritt (Exhibit 10.38 to the June 2000 Form 10-Q).
53
*10.32 Employment Agreement dated November 16, 1998 by and between
InterDigital and Richard J. Fagan (Exhibit 10.24 to the 1998 Form
10-K).
*10.33 Amendment dated as of April 6, 2000 by and between InterDigital
and Richard J. Fagan (Exhibit 10.36 to the June 2000 Form 10-Q).
*10.34 Employment Agreement dated November 19, 1996 by and between
InterDigital and Brian G. Kiernan (Exhibit 10.37 to the 2000
Form 10-K).
*10.35 Amendment dated as of April 6, 2000 by and between InterDigital
and Brian G. Kiernan (Exhibit 10.38 to the 2000 Form 10-K).
*10.36 Employment Agreement dated July 24, 2000 by and between
InterDigital and William C. Miller (Exhibit 10.39 to the 2000 Form
10-K).
*10.37 Agreement dated January 2, 2001, by and between InterDigital and
Alain Briancon (Exhibit 10.41 to the 2000 Form 10-K).
10.38 Employment Agreement dated as of November 12, 2001 by and between
InterDigital and Lawrence F. Shay.
10.39 Employment Agreement dated as of December 3, 2001 by and between
InterDigital and Guy M. Hicks.
*10.40 Employment Agreement dated April 17, 2000 by and between
InterDigital and Mark Gercenstein (Exhibit 10.26 to InterDigital's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000
(the "June 2000 Form 10-Q")).
*10.41 Agreement dated December 6, 2000, by and between InterDigital and
Mark Gercenstein (Exhibit 10.40 to the 2000 Form 10-K).
*10.42 Employment Agreement dated June, 1997 by and between InterDigital
and Joseph Gifford (Exhibit 10.33 to the September 1997 Form
10-Q).
*10.43 Separation and Confidentiality Agreement dated June 30, 2000 by
and between InterDigital and Joseph Gifford (Exhibit 10.27 to the
June 2000 Form 10-Q).
*10.44 Amendment dated as of April 6, 2000 by and between InterDigital
and Joseph Gifford (Exhibit 10.40 to the June 2000 Form 10-Q).
*10.48 Agreement of Lease dated November 25, 1996 by and between
InterDigital and We're Associates Company (Exhibit 10.42 to the
2000 Form 10-K).
*10.49 Modification of Lease Agreement dated December 28, 2000 by and
between InterDigital and We're Associates Company (Exhibit 10.43
to the 2000 Form 10-K).
21 Subsidiaries of InterDigital.
23.1 Consent of Arthur Andersen LLP.
99 Letter to the Securities and Exchange Commission from InterDigital
dated March 29, 2002, regarding Arthur Andersen LLP's quality
control system for the U.S. accounting and auditing practice.
-------------------------
* Incorporated by reference to the previous filing indicated.
(b) Reports filed on Form 8-K during the last quarter of 2001:
None.
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, InterDigital has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 29th day of
March, 2002.
INTERDIGITAL COMMUNICATIONS CORPORATION
By: /s/ Howard E. Goldberg
---------------------------------------------------
Howard E. Goldberg
Director, President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ R. J. Fagan
----------------------------------------------------
Richard J. Fagan
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of InterDigital
and in the capacities and on the dates indicated.
Date: March 29, 2002 /s/ D. Ridgely Bolgiano
----------------------------------------------------
D. Ridgely Bolgiano, Director
Date: March 29, 2002 /s/ Harry G. Campagna
----------------------------------------------------
Harry G. Campagna, Director
Date: March 29, 2002 /s/ Steven T. Clontz
----------------------------------------------------
Steven T. Clontz, Director
Date: March 29, 2002 /s/ Joseph S. Colson, Jr.
----------------------------------------------------
Joseph S. Colson, Jr., Director
Date: March 29, 2002 /s/ R. S. Roath
----------------------------------------------------
Robert S. Roath, Director
Date: March 29, 2002 /s/ Howard E. Goldberg
----------------------------------------------------
Howard E. Goldberg, Director, President and Chief
Executive Officer (Principal Executive Officer)
Date: March 29, 2002 /s/ R. J. Fagan
----------------------------------------------------
Richard J. Fagan, Executive Vice President and Chief
Financial Officer (Principal Financial and
Accounting Officer)
55