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2 0 0 7 a nnu a l r e port
This is a
green
ANNUAL REPORT
www.GreenAnnualReport.com
™
InterDigital, Inc. saved the following resources
by producing this Green Annual Report™:
18.78 trees
preserved for
the future
54.23 lbs
water-borne
waste not
created
7,977 gals
wastewater
flow saved
883 lbs solid
waste not
generated
1,738 lbs net
greenhouse
gases
prevented
13,302,075
million BTUs
energy not
consumed
XX%
The Life Inside
We create advanced designs for wireless connectivity that enable today’s
devices to perform in ways that in the past had seemed improbable.
InterDigital’s patented inventions and designs are used in every digital
cellular phone today. We continue to shape the evolution of global standards,
enhancing the performance of wireless chips, adding new capabilities to
mobile devices, optimizing wireless networks, and ultimately connecting
billions of people around the world. Today, we are building on our heritage
by bringing our cutting-edge SlimChip™ Mobile Broadband Modem solutions
to the market—the wireless engines that will drive many of tomorrow’s
exciting new devices used by people all over the world. More than ever,
InterDigital puts the life inside your phone, your game, your notebook.
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Modem IP
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0001010001
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Baseband ICs
Develop your own chip—
Complete mobile broadband
2G/3G modem Intellectual
Property (IP) is proven
best-in-class technology.
Design your own mobile device—
Our high performance modem on
an integrated circuit (IC) provides
a flexible wireless engine for any
mobile broadband device.
Reference
Platforms
Turn a proven wireless platform
into your own—Pre-certified
designs, software, and support
deliver all the pieces and the
guidebook—“ready-to-wear”
or tailored to your own needs.
Corporate Information
AnnuAl Meeting of ShAreholderS
inveStor relAtionS
Thursday, June 5, 2008
11:00 a.m. EDT
Radisson Valley Forge
1160 First Avenue
King of Prussia, Pennsylvania
Janet M. Point
Executive Vice President,
Communications & Investor Relations
+1 610.878.7866
e-mail: janet.point@interdigital.com
CoMMon StoCk inforMAtion
The primary market for InterDigital’s
common stock is the NASDAQ Global
Select Market (SM). InterDigital trades
under the ticker symbol “IDCC”.
CorporAte offiCe And
developMent fACility
781 Third Avenue
King of Prussia, PA 19406 USA
+1 610 878 7800
regiStrAr And trAnSfer Agent
developMent fACilitieS
Shareholders with questions concerning
stock certificates, shareholder records, account
information, dividends, or stock transfer should
contact InterDigital’s transfer agent:
American Stock Transfer and Trust Co.
Customer Service
59 Maiden Lane
New York, NY 10038 USA
+1 800 937 5449
www.amstock.com
independent regiStered
puBliC ACCounting firM
PricewaterhouseCoopers LLP
Philadelphia, PA USA
Two Huntington Quadrangle, 4th Floor
Melville, NY 11747 USA
InterDigital Canada Ltée
1000 Sherbrooke Street West
10th Floor
Montreal, Quebec, Canada
H3A 3G4
WeB Site
www.interdigital.com
trAdeMArkS
InterDigital is a registered
trademark and SlimChip is a
trademark of InterDigital, Inc.
All other trademarks, service marks
and/or trade names appearing in
this Annual Report are the property
of their respective holders.
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Forward Looking Statements: Statements made in the introduction to the annual report and in the letter to shareholders that relate to future plans, events, financial results or performance, including without limitation, statements related to our SlimChip Mobile Broadband Modem solutions, our stock buy-back program, progress on resolution of disputes with key licensees, our media independent handover technology and its adoption within Korea and with other leading operators around the world, potential Infineon 3G chip sales, the completion of licensing deals with the top 5 handset manufacturers and Tier 2 and 3 manufacturers, the potential for increased revenue from our SlimChip Baseband IC sales and Modem IP licenses, the adoption of our inventions in worldwide leading standards bodies (especially in next generation technologies such as LTE, 4G and 802), our contributions to security technologies for wireless transmission, levels of operating profit, positive cash flow, our participation in evolving technology, our efforts to target and sell and/or license our IP to manufacturers of data cards and our
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Attractive Market
Excited Customers
With annual shipments exceeding
1 billion units, the mobile device market
offers significant opportunity to deliver
value from both patented inventions
and technology offerings.
At the end of the day, our expertise in
envisioning and designing wireless
connectivity puts the life inside your
mobile device, giving you the ability
to enjoy a rich mobile experience.
ability to develop power-efficient architectures that can be reconfigured for multiple air interfaces are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements are based upon current goals, estimates, information and expectations. Actual results may differ materially from those anticipated as a result of certain risks and uncertainties, including delays, difficulties, changed strategies, or unanticipated factors affecting the implementation of the company’s plans. You should carefully consider the risks and uncertainties outlined in greater detail in the accompanying Form 10-K, including “Item 1A –Risk Factors.” before making any investment decision with respect to our common stock. You should not place undue reliance on these forward-looking statements, which are only as of April 11, 2008. We undertake no obligation to revise or publicly update any forward-looking statement for any reason, except as otherwise required by law. Financial Highlights
Years ended December 31,
(in thousands, except per share data)
2007
2006
2005
Total revenue
$234,232
$480,466
$163,125
Income from operations
23,054
336,416
17,087
Net income applicable to common shareholders
20,004
225,222
54,685
Net income per common share—diluted
0.40
4.04
0.96
Total cash, cash equivalents and
short-term investments
177,467
263,966
105,708
Total assets
534,885
564,075
299,537
Total shareholders’ equity
137,067
275,476
174,314
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Over $1.5 billion in
cash generated from
patent licensing
Leading Brands License Our Patents
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Returned over $400 million to
shareholders via stock buybacks
over the past three years
Recurring Revenues
Share Repurchases
(in millions)
$250
(i n mil li ons)
$200
200
150
100
50
0
150
100
50
0
2005
2006 2007
2005 2006
2007
Technology Solu tio ns
Recurring Royaltie s
Greetings Fellow Shareholders
During 2007, we strengthened all
critical aspects of our business.
We significantly matured our patent
licensing business, successfully
brought our SlimChip family of
mobile broadband modem solutions
to market, and continued to create
new inventions defining the wireless
world of tomorrow.
Financially, we turned in another very
solid year in 2007 reporting net income
of $20.0 million, or $0.40 per diluted
share. Recurring patent licensing
revenues were $216.1 million posting an
increase of $10.0 million over 2006. Total
revenues of $234.2 million compared to
$480.5 million in 2006 decreased due
to the inclusion of $253.0 million
and $12.0 million related to the
resolution of matters with Nokia
and Panasonic, respectively, in
2006’s results.
We also continued to maintain a
very strong balance sheet. We ended
the year with $177.5 million in cash
and short-term investments, which
represents $3.59 per share. Our
free cash flow for the full year
2007 was $91.3 million.
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Based on our strong balance sheet and
our high level of confidence in our ability
to build value, our Board of Directors
authorized a new $100 million common
stock repurchase program in fourth
quarter 2007. That program is in addition
to the completion of a $350 million
authorization during first half 2007.
PATENT LICENSING
Throughout the year, we made
progress in establishing the validity and
defensibility of our intellectual property
rights and expanded the patent portfolio.
We added some very high quality
licensees, including the makers of the
popular iPhone and BlackBerry devices,
and greatly improved our position in
the market through a number of
successes in the defense of our
patents. We also continued
to enhance the strength of
our internal licensing team.
Today, our patent license agreements
cover about one-third of the 3G market.
We remain committed to expanding our
market coverage through licensing the
top 5 handset manufacturers and adding
licenses with the other established
and emerging mobile device makers.
Towards that end, we are pressing
forward both on reaching resolution
with some key potential licensees, and
in defending our patents at the ITC.
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STEP ONE
Inventing Wireless
Technologies
For over 35 years, we
have created digital cellular
modem designs for the
wireless engine in billions of
mobile phones used today,
and for the exciting mobile
devices of tomorrow.
STEP TWO
Contributing to
Standards
We are key contributors to
the leading standards bodies
for 2G, 3G, 4G, and beyond to
wireless LAN and initiatives
on mobility solutions for
converged devices, offering
working, innovative solutions.
STEP FOUR
Developing Products
We offer complete mobile
broadband modem solutions
in the form of complete
modem IP, baseband chips,
and pre-certified reference
platforms.
STEP THREE
Licensing Patents
We are highly successful
in licensing our patented
technologies to leading
manufacturers. Our
patents have generated
over $1.5 billion.
MOBILE BROADBAND
MODEM PRODUCTS
2007 was a strong year for our product
business. Among our successes, we:
Developed our family of SlimChip
Mobile Broadband Modem products.
Our ongoing customer field trials are
proceeding exceptionally well and
we already signed a key 3G technology
license agreement for our SlimChip
Broadband IP with a leading Asian
fabless semiconductor company.
Completed the delivery of our
HSDPA technology to NXP for
integration into their chipset, which
they showcased at the 2008 Mobile
World Congress in February.
Extended our strategic
relationship with SK Telecom in
Korea involving our media
independent handover
technology— a leading-edge
solution that provides seamless
mobility between devices using
different air interface technologies,
such as WCDMA, WiBro, WiMax, or
WiFi. SK Telecom has plans to promote
the adoption of this solution within
Korea and with other leading operators
around the world.
Continued our strong technical
cooperation with Infineon on the
3G protocol stack for use in their
3G chipsets. We also are very
encouraged by their opportunities
for 3G chip sales this year, which will
generate additional royalties for us.
Generated some promising
innovations in core wireless and
related strategic technologies for
the next generation and beyond. We
continued to have our innovations
accepted into the next releases of
cellular systems, mainly 3GPP WCDMA
improvements to 3G and LTE for 4G,
as well as in some very important
emerging 802 technologies.
While it has taken significant investment
on our part, we are successfully hitting
our milestones and are engaging in
valuable dialog with prospects around
the world.
We delivered solid earnings and
positive cash flow in 2007 while
making sizable investments both in
defending our intellectual property
and in bringing our product platform to
market. This was deliberately planned,
carefully managed and we delivered the
results that we expected.
GREAT EXPECTATIONS FOR 2008
Our principal goal for 2008 is
completing licensing deals with top
5 handset manufacturers, while also
securing licenses with Tier 2 and 3
manufacturers. By year end, we also
would like to generate increased
product revenue contributions from
our SlimChip Baseband IC sales and
Modem IP licenses.
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With over 35 years of designing pioneering digital
wireless modems, InterDigital’s technologies are the
powerful wireless engines used in every cellular phone
today. We continue to build and design the technologies
that will drive wireless connectivity in the future.
Similar to past years, we will also
have the goal to drive the adoption
of our inventions worldwide. We
will continue to focus on the next
generation technologies for cellular
systems, most importantly LTE. We are
also moving forward with some of
the security technologies that we
have been incubating over the past
three years.
Lastly, on the financial side, we continue
to have very high expectations given the
significant amount of operating leverage
in our business model. With success in
licensing one or more of the top 5, we
expect to see a significant increase in
the level of operating profit and positive
cash flow, as the results of those deals
should go directly to the bottom line.
All of that, we believe, spells a
very bright future for InterDigital.
Last year was largely a year of
investment as we positioned
ourselves to deliver significant
value from the 3G market.
In 2008, we are working to
generate significant returns from
those investments.
Thank you for your continued
support as we head into a very
important year for us.
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Harry G. Campagna
Chairman of the Board
William J. Merritt
President and
Chief Executive Officer
Mobile Broadband Everywhere
We believe — as do other visionaries
—that this is only the beginning
and only our imagination will be the
limit. InterDigital is well positioned to
capitalize on this exciting future — helping
to define the core system architectures
that connect the world without wires.
Our inventions and products power
the wireless engine inside your mobile
device. We continue to be among the
industry pioneers in bringing mobile
broadband to the masses, pushing
higher data rates, increasing network
capacity, improving power consumption,
and extending coverage. Mobile
Broadband Everywhere.
It would be hard to imagine a world
without mobile phones. Indeed, over
one billion devices shipped last year
and over three billion subscribers are
on a wireless network. Today, the
wireless industry is changing faster
than ever before with new technologies,
products, applications, and services
being introduced daily. In a growing
number of countries, wireless devices
now outnumber wired telephones.
Every day, billions of text messages are
exchanged over wireless devices. Far
beyond voice calling and texting, today’s
wireless devices offer video streaming,
interactive gaming, music downloads,
and surfing the internet which is quickly
becoming common place, in any place.
Global Handset Sales
by Technology (1)
1,500
1,000
500
0
2006
2007
2008
2009
2010
2011
2012
3G (WCDMA)(2)
3G (CDMA)(3)
2G/2.5G(4)
Total
92
160
747
999
167
170
785
240
188
783
344
201
731
457
204
645
590
208
542
735
211
409
1,122
1,211
1,276
1,306
1,340
1,355
(1) Source: Strategy Analytics, Inc. July 2007. Data for 2007 through 2012 represents estimates of handset sales.
(2) Includes: WCDMA/HSPA, LTE, and TD-SCDMA.
(3) Includes: cdma2000 and its evolutions, such as EV-DO.
(4) Includes: GSM/GPRS/EDGE and Analog, iDEN, TDMA, PHS and PDC.
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Mobile Broadband Modem Solutions
Early in 2008, we unveiled our SlimChip
family of high performance mobile
broadband solutions with HSDPA
and HSUPA capabilities.
The set of SlimChip products includes:
high performance baseband ICs
broadband modem IP, and
complete reference platforms
InterDigital’s SlimChip products feature
a “slim” modem architecture where the
modem— which provides core wireless
connectivity— is separated from the
applications processor and peripheral
functions. This approach allows mobile
device manufacturers to customize the
pre-certified modem — quickly and
cost-effectively — to specific mobile
broadband devices such
as data cards, smart phones,
or other mobile devices.
We are targeting data card
manufacturers with our baseband chips.
Several recent industry reports project
strong growth for mobile broadband
devices such as data cards, notebooks,
and ultra mobile PCs. In addition, we
bring our advanced modem IP to
market through relationships with
semiconductor manufacturers. In
first quarter 2008, we licensed our 3G
modem technology to a leading Asian
fabless semiconductor company, giving
us a strong foothold at the very heart of
the world wireless industry. In addition
to this new relationship, our SlimChip
solutions generated a great amount of
interest at the Mobile World Congress
in Barcelona in February as a very
attractive way to participate in the
rapidly growing market for mobile
broadband devices.
“ In our performance tests there were seven solutions from six companies that we tested
at Category 6 HSDPA (3.6 Mbps), and six solutions from three companies that we
tested at Category 8 HSDPA (7.2 Mbps). InterDigital’s solution performed very
well in the Category 8 tests, and its best results seemed to occur in more challenging
network conditions. With further optimization of its solution, InterDigital’s
SlimChip Reference Platform should be strongly positioned to compete for
design wins within the embedded and external communications modem market.”
Michael Thelander
Founder and CEO of Signals Research Group,
commenting on InterDigital’s SlimChip
performance results in independent field testing.
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The SlimChip Mobile Broadband
Modem features InterDigital’s
advanced receiver technology with
receive diversity, delivering superior
interference mitigation and higher
data rates and better coverage,
especially at the cell-edge.
SlimChip Mobile Broadband Modems
deploy advanced power-saving
techniques, including the use of
hardware accelerators to reduce
MIPS in the ARM processor, voltage
islands and optimum clock gating.
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Our pioneering work in developing designs
for wireless connectivity has helped to build
a substantial portfolio of patented inventions.
Today, our talented engineers are making
contributions to the leading standards bodies
for 3G improvements, LTE, 4G, and 802,
while also enhancing mobility among the
ever-increasing variety of air interfaces.
We are actively researching cooperative
communication technology where
terminals work together to improve
network performance. This exciting area
promises to further increase data rates,
capacity, and coverage beyond the
advanced coding, MIMO, and OFDM
techniques that are nearing maturity.
Everyone must have confidence in
the security and integrity of their
data and transactions on wireless
devices for mobile commerce to
flourish. We are on the leading edge
of inventing unique enhanced security
methods that will protect a wireless
device, its data, and software from
tampering, viruses, and other
unauthorized access.
We are developing innovative mobile
terminal architectures drawing on
Software Defined Radio (SDR)
technology to achieve the lofty goal of
a cost- and power-efficient device that
can be re-configured for multiple air
interfaces. Looking further into the
future, we see Cognitive Radio
technology that promises to use the
flexibility of a smart terminal to adapt
the radio and network configuration
to, for example, better utilize
spectral “white space.”
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The Life Inside
We create advanced designs for wireless connectivity that enable today’s
devices to perform in ways that in the past had seemed improbable.
InterDigital’s patented inventions and designs are used in every digital
cellular phone today. We continue to shape the evolution of global standards,
enhancing the performance of wireless chips, adding new capabilities to
mobile devices, optimizing wireless networks, and ultimately connecting
billions of people around the world. Today, we are building on our heritage
by bringing our cutting-edge SlimChip™ Mobile Broadband Modem solutions
to the market—the wireless engines that will drive many of tomorrow’s
exciting new devices used by people all over the world. More than ever,
InterDigital puts the life inside your phone, your game, your notebook.
1001010110
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1001010110
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0001010001
1110101110
0101100101
1001010110
1101010010
0001010001
1110101110
0101100101
Baseband ICs
Develop your own chip—
Complete mobile broadband
2G/3G modem Intellectual
Property (IP) is proven
best-in-class technology.
Design your own mobile device—
Our high performance modem on
an integrated circuit (IC) provides
a flexible wireless engine for any
mobile broadband device.
Reference
Platforms
Turn a proven wireless platform
into your own—Pre-certified
designs, software, and support
deliver all the pieces and the
guidebook—“ready-to-wear”
or tailored to your own needs.
Corporate Information
AnnuAl Meeting of ShAreholderS
inveStor relAtionS
Thursday, June 5, 2008
11:00 a.m. EDT
Radisson Valley Forge
1160 First Avenue
King of Prussia, Pennsylvania
Janet M. Point
Executive Vice President,
Communications & Investor Relations
+1 610.878.7866
e-mail: janet.point@interdigital.com
CoMMon StoCk inforMAtion
The primary market for InterDigital’s
common stock is the NASDAQ Global
Select Market (SM). InterDigital trades
under the ticker symbol “IDCC”.
CorporAte offiCe And
developMent fACility
781 Third Avenue
King of Prussia, PA 19406 USA
+1 610 878 7800
regiStrAr And trAnSfer Agent
developMent fACilitieS
Shareholders with questions concerning
stock certificates, shareholder records, account
information, dividends, or stock transfer should
contact InterDigital’s transfer agent:
American Stock Transfer and Trust Co.
Customer Service
59 Maiden Lane
New York, NY 10038 USA
+1 800 937 5449
www.amstock.com
independent regiStered
puBliC ACCounting firM
PricewaterhouseCoopers LLP
Philadelphia, PA USA
Two Huntington Quadrangle, 4th Floor
Melville, NY 11747 USA
InterDigital Canada Ltée
1000 Sherbrooke Street West
10th Floor
Montreal, Quebec, Canada
H3A 3G4
WeB Site
www.interdigital.com
trAdeMArkS
InterDigital is a registered
trademark and SlimChip is a
trademark of InterDigital, Inc.
All other trademarks, service marks
and/or trade names appearing in
this Annual Report are the property
of their respective holders.
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Forward Looking Statements: Statements made in the introduction to the annual report and in the letter to shareholders that relate to future plans, events, financial results or performance, including without limitation, statements related to our SlimChip Mobile Broadband Modem solutions, our stock buy-back program, progress on resolution of disputes with key licensees, our media independent handover technology and its adoption within Korea and with other leading operators around the world, potential Infineon 3G chip sales, the completion of licensing deals with the top 5 handset manufacturers and Tier 2 and 3 manufacturers, the potential for increased revenue from our SlimChip Baseband IC sales and Modem IP licenses, the adoption of our inventions in worldwide leading standards bodies (especially in next generation technologies such as LTE, 4G and 802), our contributions to security technologies for wireless transmission, levels of operating profit, positive cash flow, our participation in evolving technology, our efforts to target and sell and/or license our IP to manufacturers of data cards and our
Financial Summary 2007
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Table oF conTenTS
Glossary of Terms
PART I
Item 1.
Business
General
Wireless Communications Industry Overview
Evolution of Wireless Standards
InterDigital’s Strategy
InterDigital’s Technology Position
Business Activities
Competition
Employees
Executive Officers
Risk Factors
Item 1A.
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Properties
Legal Proceedings
Nokia
Samsung
Other
Federal
Submission of Matters to a Vote of Security Holders
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
PART III
Item 11.
Item 12.
Item 13.
Item 14.
Market for Company’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Executive Compensation
Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
Certain Relationships and Related Transactions,
and Director Independence
Principal Accountant Fees and Services
PART Iv
Item 15.
Exhibits and Financial Statement Schedules
Signatures
Page
ii
1
1
3
4
6
7
8
18
19
19
21
29
29
29
29
32
34
34
35
35
35
38
39
66
67
105
105
105
106
106
106
106
113
i
gloSSaRY oF TeRMS
1xEV-DO
“First Evolution Data Optimized.” An evolution of cdma2000.
2G
“Second Generation.” A generic term usually used in reference to voice-oriented digital wireless
products, primarily mobile handsets, that provide basic voice services.
2.5G
A generic term usually used in reference to fully integrated voice and data digital wireless
devices offering higher data rate services and features compared to 2G.
3G
“Third Generation.” A generic term usually used in reference to the generation of digital mobile
devices and networks after 2G and 2.5G, which provide high speed data communications
capability along with voice services.
3GPP
“3G Partnership Project.” A partnership of worldwide accredited Standards organizations the
purpose of which is to draft specifications for Third Generation mobile telephony.
802.11
An IEEE Standard for wireless LAN interoperability. Letter appendages (i.e., 802.11 a/b/g) identify
various amendments to the Standards which denote different features and capabilities.
Air Interface
The wireless interface between a terminal unit and the base station or between wireless
devices in a communication system.
ANSI
“American National Standards Institute.” The United States national standards accreditation and
policy agency. ANSI monitors and provides oversight of all accredited U.S. Standards
Development Organizations to ensure they follow an open public process.
ASIC
“Application Specific Integrated Circuit.” A computer chip developed for a specific purpose and
frequently designed using a microprocessor core and integrating other functions unique to the
application in which the chip will be used. Many SOC designs are ASICs.
ATIS
“Alliance for Telecommunications Industry Solutions.” An ANSI-accredited U.S.-based Standards
association which concentrates on developing and promoting technical/operational standards
for the communications and information technology industries worldwide.
Bandwidth
A range of frequencies that can carry a signal on a transmission medium, measured in Hertz
and computed by subtracting the lower frequency limit from the upper frequency limit.
Base Station
The central radio transmitter/receiver, or group of central radio transmitters/receivers, that
maintains communications with subscriber equipment sets within a given range (typically a
cell site).
ii
Category 10
The HSDPA Standard contains different “categories,” ranging from category 1 through category
10, to define specific configurations and performances. Category 10 is the fastest mode of
HSDPA and is capable of achieving 14Mbps.
CDMA
“Code Division Multiple Access.” A method of digital spread spectrum technology wireless
transmission that allows a large number of users to share access to a single radio channel by
assigning unique code sequences to each user.
cdmaOne
A wireless cellular system application based on 2G narrowband CDMA technologies (e.g., TIA/
EIA-95).
cdma2000®
A Standard which evolved from narrowband CDMA technologies (i.e., TIA/EIA-95 and
cdmaOne). The CDMA family includes, without limitation, CDMA2000 1x, CDMA 1xEV-DO,
CDMA2000 1xEV-DV and CDMA2000 3x. Although CDMA2000 1x is included under
the IMT-2000 family of 3G Standards, its functionality is similar to 2.5G technologies.
CDMA2000® and cdma2000® are registered trademarks of the Telecommunications Industry
Association (TIA – USA).
Chip
An electronic circuit that consists of many individual circuit elements integrated onto a
single substrate.
Chip Rate
The rate at which information signal bits are transmitted as a sequence of chips. The chip rate
is usually several times the information bit rate.
Circuit
The connection of channels, conductors and equipment between two given points through
which an electric current may be established.
Digital
Information transmission where the data is represented in discrete numerical form.
Digital Cellular
A cellular communications system that uses over-the-air digital transmission.
Duplex
A characteristic of data transmission; either full duplex or half duplex. Full duplex permits
simultaneous transmission in both directions of a communications channel. Half duplex means
only one transmission at a time.
EDGE
“Enhanced Data rates for GSM Evolution.” Technology designed to deliver data at rates up to
473.6 Kbps, triple the data rate of GSM wireless services, and built on the existing GSM
Standard and core network infrastructure. EDGE systems built in Europe are considered a
2.5G technology.
ETSI
“European Telecommunications Standards Institute.” The Standards organization which drafts
Standards for Europe.
iii
Fabless
Fabrication carried out by another party under a contract.
FDD
“Frequency Division Duplex.” A duplex operation using a pair of frequencies, one for
transmission and one for reception.
FDMA
“Frequency Division Multiple Access.” A technique in which the available transmission
bandwidth of a channel is divided into narrower frequency bands over fixed time intervals
resulting in more efficient voice or data transmissions over a single channel.
Frequency
The rate at which an electrical current or signal alternates, usually measured in Hertz.
GHz
“Gigahertz.” One gigahertz is equal to one billion cycles per second.
GPRS
“General Packet Radio Systems.” A packet-based wireless communications service that enables
high-speed wireless Internet and other data communications via GSM networks.
GSM
“Global System for Mobile Communications.” A digital cellular Standard, based on TDMA
technology, specifically developed to provide system compatibility across country boundaries.
Hertz
The unit of measuring radio frequency (one cycle per second).
HSDPA
“High Speed Downlink Packet Access.” An enhancement to WCDMA/UMTS technology
optimized for high speed packet-switched data and high-capacity circuit switched capabilities. A
3G technology enhancement.
HSUPA
“High Speed Uplink Packet Access.” An enhancement to WCDMA technology that improves the
performance of the radio uplink to increase capacity and throughput, and to reduce delay.
iDEN®
“Integrated Dispatch Enhanced Network.” A proprietary TDMA Standards-based technology
which allows access to phone calls, paging and data from a single device. iDEN is a registered
trademark of Motorola, Inc.
IEEE
“Institute of Electrical and Electronic Engineers.” A membership organization of engineers that
among its activities produces data communications standards.
IEEE 802
A Standards body within the IEEE that specifies communications protocols for both wired and
wireless local area and wide area networks (LAN/WAN).
IC
“Integrated Circuit.” A multifunction circuit formed in or around a semiconductor base.
i v
Internet
A network comprised of numerous interconnected commercial, academic and governmental
networks in over 100 countries.
IPR
“Intellectual Property Right.”
ISO
“International Standards Organization.” An international organization, which sets international
electrical and electronics standards. The U.S. member body is ANSI.
ITU
“International Telecommunication Union.” An international organization established by the
United Nations with membership from virtually every government in the world. Publishes
recommendations for engineers, designers, OEMs, and service providers through its three
main activities: defining and adoption of telecommunications standards; regulating the use of
the radio frequency spectrum; and furthering telecommunications development globally.
ITC
“InterDigital Technology Corporation,” one of our wholly-owned Delaware subsidiaries.
Kbps
“Kilobits per Second.” A measure of information-carrying capacity (i.e., the data transfer rate)
of a circuit, in thousands of bits per second.
Km
“Kilometer.”
Know-How
Technical information, technical data and trade secrets that derive value from the fact that they
are not generally known in the industry. Know-how can include, but is not limited to, designs,
drawings, prints, specifications, semiconductor masks, technical data, software, net lists,
documentation and manufacturing information.
LAN
“Local Area Network.” A private data communications network linking a variety of data devices
located in the same geographical area and which share files, programs and various devices.
LTE
“Long Term Evolution.” Generic name for the 3GPP project addressing future improvements to
the 3G Universal Terrestrial Radio Access Network (UTRAN).
MAC
“Media Access Control.” Part of the 802.3 (Ethernet LAN) standard which contains specifications
and rules for accessing the physical portions of the network.
MAN
“Metropolitan Area Network.” A communication network which covers a geographic area such
as a city or suburb.
Mbps
“Megabits per Second.” A measure of information – carrying capacity of a circuit; millions of
bits per second.
v
MIMO
“Multiple Input Multiple Output.” A method of digital wireless transmission where the
transmitter and/or receiver uses multiple antennas to increase the achievable data rate or
improve the reliability of a communication link.
Modem
A combination of the words modulator and demodulator, referring to a device that modifies a
signal (such as sound or digital data) to allow it to be carried over a medium such as wire or
radio.
Multiple Access
A methodology (e.g., FDMA, TDMA, CDMA) by which multiple users share access to a
transmission channel. Most modern systems accomplish this through “demand assignment”
where the specific parameter (frequency, time slot or code) is automatically assigned when a
subscriber requires it.
ODM
“Original Design Manufacturer.” Independent contractors that develop and manufacture
equipment on behalf of another Company using another Company’s brand name on the
product.
OEM
“Original Equipment Manufacturer.” A manufacturer of equipment (e.g., base stations,
terminals) that sells to operators.
OFDM
“Orthogonal Frequency Division Multiplexing.” A method of digital wireless transmission that
distributes a signal across a large number of closely spaced carrier frequencies.
OFDMA
“Orthogonal Frequency Division Multiple Access.” A method of digital wireless transmission
that allows a multiplicity of users to share access by assigning sets of narrowband carrier
frequencies to each user. It is an extension of OFDM to multiple users.
OSI Reference Model
A seven layer network architecture model developed by ISO and ITU. Each layer specifies
particular network functions.
PCMCIA
“Personal Computer Memory Card International Association.” An international industry group
that promotes standards for credit card-sized memory card hardware that fits into computing
devices such as laptops.
PDC
“Personal Digital Cellular.” The Standard developed in Japan for TDMA digital cellular mobile
radio communications systems.
PHS
“Personal Handyphone System.” A digital cordless telephone system and digital network based
on TDMA. This low-mobility microcell Standard was developed in Japan. Commonly known as
PAS in China.
vi
PHY
“Physical Layer.” The wires, cables, and interface hardware that connect devices on a wired or
wireless network. It is the lowest layer of network processing that connects a device to a
transmission medium.
Platform
A combination of hardware and software blocks implementing a complete set of functionalities
that can be optimized to create an end product.
Protocol
A formal set of conventions governing the format and control of interaction among
communicating functional units.
Reference Platform
A reference platform consists of the baseband integrated circuit, related software and
reference design.
RF
“Radio Frequency.” The range of electromagnetic frequencies above the audio range and below
visible light.
Smart Antenna
Antennas utilizing multiple elements with signal processing capabilities which enhance desired,
or reduce undesired, transmission to or from wireless products.
SOC
“System-on-a-chip.” The embodiment on a single silicon chip of the essential components that
comprise the operational core of a digital system.
Standards
Specifications that reflect agreements on products, practices or operations by nationally or
internationally accredited industrial and professional associations or governmental bodies in
order to allow for interoperability.
TDD
“Time Division Duplexing.” A duplex operation using a single frequency, divided by time, for
transmission and reception.
TD/FDMA
“Time Division/Frequency Division Multiple Access.” A technique that combines TDMA and
FDMA.
TDMA
“Time Division Multiple Access.” A method of digital wireless transmission that allows a
multiplicity of users to share access (in a time ordered sequence) to a single channel without
interference by assigning unique time segments to each user within the channel.
TD-SCDMA
“Time Division Synchronous CDMA.” A form of TDD utilizing a low Chip Rate.
vii
Terminal/Terminal Unit
Equipment at the end of a wireless voice and/or data communications path. Often referred to
as an end-user device or handset. Terminal units include mobile phone handsets, PCMCIA and
other form factors of data cards, personal digital assistants, computer laptops and modules
with embedded wireless communications capability and telephones.
TIA/EIA-54
The original TDMA digital cellular Standard in the United States. Implemented in 1992 and then
upgraded to the TIA/EIA-136 digital Standard in 1996.
TIA/EIA-95
A 2G CDMA Standard.
TIA/EIA-136
A United States Standard for digital TDMA technology.
TIA (USA)
The Telecommunications Industry Association.
UMB
“UltraMobile Broadband.” A generic term used to describe the next evolution of the 3GPP2
cdma2000 air interface standard. It is based on OFDMA technology.
WAN
“Wide Area Network.” A data network that extends a LAN outside of its coverage area, via
telephone common carrier lines, to link to other LANs.
WCDMA
“Wideband Code Division Multiple Access” or “Wideband CDMA.” The next generation of
CDMA technology optimized for high speed packet-switched data and high-capacity circuit
switched capabilities. A 3G technology.
WiMAX
A commercial brand associated with products and services using IEEE 802.16 Standard
technologies for wide area networks broadband wireless.
Wireless
Radio-based systems that allow transmission of information without a physical connection,
such as copper wire or optical fiber.
Wireless LAN (WLAN)
“Wireless Local Area Network.” A collection of devices (computers, networks, portables, mobile
equipment, etc.) linked wirelessly over a limited local area.
WTDD
“Wideband TDD” or “Wideband Time Division Duplex.” A form of TDD utilizing a high
Chip Rate.
vi i i
PaRT I
ITeM 1. bUSIneSS
Legal Entity Reorganization
On July 2, 2007, for the purpose of reorganizing into a holding Company structure, InterDigital
Communications Corporation executed a Plan of Reorganization and an Agreement and Plan of
Merger (“Merger”) with InterDigital, Inc., a newly formed Pennsylvania corporation and
another newly formed Pennsylvania corporation owned 100% by InterDigital, Inc. As a result of
the Merger, InterDigital Communications Corporation became a wholly-owned subsidiary of
InterDigital, Inc. These transactions are herein referred to collectively as the “Reorganization.”
As a result of the Reorganization, neither the business conducted by InterDigital, Inc.
and InterDigital Communications Corporation in the aggregate, nor the consolidated assets
and liabilities of InterDigital, Inc. and InterDigital Communications Corporation, in the
aggregate, changed.
By virtue of the Merger, each share of InterDigital Communications Corporation’s outstanding
common stock has been converted, on a share-for-share basis, into a share of common stock of
InterDigital, Inc. As a result, each shareholder of InterDigital Communications Corporation has
become the owner of an identical number of shares of common stock of InterDigital, Inc.
Further, each outstanding stock option and restricted stock unit (RSU) with respect to the
acquisition of shares of InterDigital Communications Corporation’s common stock now
represents a stock option or RSU, as the case may be, with respect to the acquisition of an
identical number of shares of InterDigital, Inc.’s common stock, upon the same terms and
conditions as the original stock option or RSU.
Immediately following the Merger, the provisions of the articles of incorporation and bylaws of
InterDigital, Inc. were the same as those of InterDigital Communications Corporation prior to
the Merger. Immediately following the Merger, the authorized capital stock of InterDigital, Inc.,
the designations, rights, powers and preferences of such capital stock and the qualifications,
limitations and restrictions thereof were also the same as the capital stock of InterDigital
Communications Corporation immediately prior to the Merger. Immediately following the
Merger, the directors and executive officers of InterDigital, Inc., were the same individuals who
were directors and executive officers, respectively, of InterDigital Communications Corporation
immediately prior to the Merger.
In this document, the words “we,” “our,” “ours,” “us,” “the Company,” or “InterDigital” refer to
InterDigital, Inc. and its subsidiaries, individually and/or collectively.
General
We design and develop advanced digital wireless technologies for use in digital cellular and
wireless IEEE 802 related products. We actively participate in and contribute our technology
solutions to worldwide organizations responsible for the development and approval of
Standards to which digital cellular and IEEE 802 compliant products are built, and our
contributions are regularly incorporated into such Standards. We offer licenses to our patents
to equipment producers that manufacture, use and sell digital cellular and IEEE 802 related
products. In addition, we offer for license or sale our SlimChip family of mobile broadband
modem solutions (which includes modem IP know-how, baseband ICs and Reference Platforms)
to mobile device manufacturers, semiconductor companies and other equipment producers
that manufacture, use and sell digital cellular products. We have built our suite of technology
and patent offerings through independent development, joint development with other
companies and selected acquisitions.
1
Currently, we generate revenues primarily from royalties received under our patent license
agreements. We also generate revenues by licensing our technology solutions and providing
related development support. We plan to increase our revenues through the organic growth of
our current customers, by adding new patent license agreements and by generating sales of
our SlimChip solutions.
As an early participant in the digital wireless market, we developed pioneering solutions for
the two primary cellular air interface technologies in use today: TDMA and CDMA technologies.
That early involvement, as well as our continued development of advanced digital wireless
technologies, has enabled us to create our significant worldwide portfolio of patents and patent
applications. Included in that portfolio are a number of patents and patent applications, which
we believe are or may be essential, or may become essential to 2G and 3G cellular Standards,
and other wireless Standards such as IEEE 802. Accordingly, we believe that companies
making, using or selling products compliant with these Standards require a license under our
essential patents, and will require licenses under essential patents that may issue from our
pending patent applications. In conjunction with our participation in certain Standards bodies,
we have filed declarations stating that we believe we have or may have essential patents and
that we agree to make our essential patents available for use and license on fair, reasonable
and non-discriminatory terms or similar terms consistent with the requirements of the
respective Standards organizations.
Third party products incorporating our patented inventions include:
• Mobile devices, including cellular phones, wireless personal digital assistants and notebook
computers, PCMCIA cards, and similar products
• Base stations and other wireless infrastructure equipment
• Components for wireless devices
We also incorporate our inventions into our own mobile broadband modem solutions,
including our SlimChip IP, SlimChip ICs, and SlimChip Reference Platforms designed for
advanced performance in emerging high speed 3G networks. In addition to conforming to
applicable Standards, our solutions also include proprietary implementations for which we
seek patent protection. We believe that our technology solutions provide performance, time-to-
market and cost advantages to our customers.
Our investments in the development of advanced digital wireless technologies and related
products and solutions include sustaining a highly specialized engineering team and providing
that team with the equipment and advanced software platforms necessary to support the
development of technologies. Over each of the last three years, our cost of development has
ranged between 44% and 47% of our total operating expenses exclusive of non-recurring
contingency accruals and repositioning charges. The largest portion of this cost has been
personnel costs. As of December 31, 2007, we employed 261 engineers, 93% of whom hold
advanced degrees and 45 of those hold PhDs.
InterDigital Communications Corporation incorporated in 1972 under the laws of the
Commonwealth of Pennsylvania and it conducted its initial public offering in November 1981.
Following an internal corporate reorganization in July 2007, InterDigital Communications
Corporation became the wholly-owned operating subsidiary of InterDigital, Inc. InterDigital
Communications Corporation is now known as InterDigital Communications, LLC. Our
corporate headquarters and administrative offices are located in King of Prussia, Pennsylvania,
USA. Our research and technology and product development teams are located in the following
locations: King of Prussia, Pennsylvania, USA; Melville, New York, USA; and Montreal,
Quebec, Canada.
2
Our Internet address is www.interdigital.com where, in the “Investing” section, we make
available, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, certain other reports required to be filed under the Securities
Exchange Act of 1934 and all amendments to those reports as soon as reasonably practicable
after such material is filed with the United States Securities and Exchange Commission (SEC).
The information contained on or connected to our website is not incorporated by reference
into this annual report.
Wireless Communications Industry Overview
Participants in the wireless communications industry include original equipment manufacturers
(OEMs), semiconductor manufacturers, original design manufacturers (ODMs), and a variety of
technology suppliers, applications developers, and operators that offer communications
services and products to consumers and businesses. To achieve economies of scale and allow
for interoperability, products for the wireless industry have typically been built to wireless
Standards. These Standards have evolved in response to large demand for services and
expanded capabilities of mobile devices. Although the cellular market initially delivered voice-
oriented and basic data services (commonly referred to as Second Generation or 2G), over the
past five years, the industry transitioned to providing voice and multimedia services that take
advantage of the higher speeds offered by the newer technologies, commonly referred to as
Third Generation or 3G technologies. Concurrently, non-cellular wireless technologies, such as
IEEE 802.11, have emerged as a means to provide wireless Internet access for fixed and
nomadic use. Industry participants anticipate a proliferation of converged devices that
incorporate multiple air interface technologies and functionalities, and provide seamless
operation. As an example, such converged devices may provide seamless operation between a
3G network and a WLAN network.
1000
1500
500
0
Over the course of the last ten years, the cellular communications industry has experienced
rapid growth worldwide. Total worldwide cellular wireless communications subscribers rose
from slightly more than 200 million at the end of 1997 to approximately 2.6 billion at the end of
2007. In several countries, mobile telephones now outnumber fixed-line telephones. Market
analysts expect that the aggregate number of global wireless subscribers could exceed
4.5 billion in 2012.
Global Handset Sales by Technology(1)
s
t
i
n
u
M
1,500
1,000
500
0
2006
2007
2008
2009
2010
2011
2012
3G (WCDMA)(2)
3G (CDMA)(3)
2G/2.5G(4)
Total
92
160
747
999
167
170
785
240
188
783
344
201
731
457
204
645
590
208
542
735
211
409
1,122
1,211
1,276
1,306
1,340
1,355
(1) Source: Strategy Analytics, Inc. July 2007. Data for 2007 through 2012 represents estimates of handset sales.
(2) Includes: WCDMA/HSPA, LTE, and TD-SCDMA.
(3) Includes: cdma2000 and its evolutions, such as EV-DO.
(4) Includes: GSM/GPRS/EDGE and Analog, iDEN, TDMA, PHS and PDC.
3
actual graph
For layout
The growth in new cellular subscribers, combined with existing customers choosing to replace
their mobile phones, helped fuel the growth of mobile phone sales from approximately 115
million units in 1997 to approximately one billion units in 2007. We believe the combination of a
broad subscriber base, continued technological change, and the growing dependence on the
Internet, e-mail and other digital media sets the stage for continued growth in the sales of
wireless products and services over the next five years. For these reasons, shipments of
3G-enabled phones, which represented approximately 25% of the market in 2006, are predicted
to increase to approximately 70% of the market by 2012. Moreover, recent advances in
3G tehnologies that support devices offering higher data rates have met with rapid
consumer uptake.
In addition to the advances in digital cellular technologies, the industry has also made
significant advances in non-cellular wireless technologies. In particular, IEEE 802.11 WLAN has
gained momentum in recent years as a wireless broadband solution in the home, office and in
public areas. IEEE 802.11 technology offers high-speed data connectivity through unlicensed
spectrum within a relatively modest operating range. Since its introduction in 1998,
semiconductor shipments of products built to the IEEE 802.11 Standard have nearly doubled
every year. While relatively small compared to the cellular market (approximately 300 million
IEEE 802.11 wireless ICs shipped in 2007), the affordability and attractiveness of the technology
has helped fuel rapid market growth. In addition, the IEEE wireless Standards bodies are
creating sets of Standards to enable higher data rates, provide coverage over longer distances
and enable roaming. These Standards are establishing technical specifications for high data
rates, such as IEEE 802.16 (WiMAX) as well as technology specifications to enable seamless
handoff between different air interfaces (IEEE 802.21).
Evolution of Wireless Standards
Wireless communications Standards are formal guidelines for engineers, designers,
manufacturers and service providers that regulate and define the use of the licensed radio
frequency spectrum in conjunction with providing specifications for wireless communications
products. A primary goal of the Standards is to assure interoperability of products, marketed
by multiple companies, built to a common Standard. A number of international and regional
wireless Standards Development Organizations (SDOs), including the International
Telecommunications Union (ITU), the European Telecommunications Standards Institute (ETSI),
the Telecommunications Industry Association (TIA), the Alliance for Telecommunications
Industry Solutions (ATIS), and the American National Standards Institute (ANSI), have
responsibility for the development and administration of wireless communications Standards.
New Standards are typically adopted with each new generation of products, are often
compatible with previous generations of the Standards and are defined to ensure
interoperability.
SDOs typically ask participating companies to declare formally whether they believe they hold
patents or patent applications essential to a particular Standard and whether they are willing to
license those patents on either a royalty-bearing basis on fair, reasonable and nondiscriminatory
terms or on a royalty-free basis. To manufacture, have made, sell, offer to sell or use such
products on a non-infringing basis, a manufacturer or other entity doing so must first obtain a
license from the holder of essential patent rights. The SDOs do not have enforcement authority
against entities that fail to obtain required licenses, nor do they have the ability to protect the
intellectual property rights of holders of essential patents.
4
Digital Cellular Standards
The defined capabilities of the various technologies continue to evolve within the SDOs.
Deployment of 3G services allows operators to take advantage of additional radio spectrum
allocations and through the use of higher data speeds than 2.5G, deliver additional applications
to their customers. Operators began to deploy 3G services in 2000. The five specifications
under the 3G standard (generally regarded as being the ITU “IMT-2000” Recommendation)
include the following forms of CDMA technology: FDD and TDD, (collectively referred to in the
industry as WCDMA), and Multichannel CDMA (cdma2000 technology). In addition, TD-SCDMA,
a Chinese variant of TDD technology, has been included in the Standard’s specifications.
The principal Standardized digital cellular wireless products in use today are based on TDMA
and CDMA technologies with 3G capable-products beginning to replace 2G-only products. The
Standardized 2G TDMA-based technologies include GSM, TIA/EIA 54/136 (commonly known as
AMPS-D, United States-based TDMA, which is currently being phased out in conjunction with
the U.S. FCC-mandated conversion from analog-based cellular service), PDC, PHS, DECT and
TETRA. Of the TDMA technologies, GSM is the most prevalent, having been deployed in
Europe, Asia, Africa, the Middle East, the Americas and other regions. In 2007, approximately
68% of total mobile device sales conform to the 2G and 2.5G TDMA-based Standards. WCDMA-
enabled devices accounted for an additional 15% of total sales. Thus, the combined sales of
GSM-enabled devices and devices with 3G WCDMA technology accounted for approximately
83% of worldwide handset sales.
Narrowband 2G CDMA-based technologies include TIA/EIA-95 (more commonly known as
cdmaOne) and cdma2000 technologies and serve parts of the United States, Japan, South
Korea and several other countries. Similar to the TDMA-based technologies, the CDMA-based
technologies are migrating to 3G. In 2007, about 15% of worldwide handset sales were based
on these 2G / 2.5G CDMA technologies plus its 3G evolution.
The Standards groups continue to advance the performance and capabilities of their respective
air interfaces. Chief among the most recent enhancements are High Speed Downlink Packet
Access and High Speed Uplink Packet Access (HSDPA/HSUPA), an evolution of WCDMA, and
First Evolution Data Optimized (1xEV-DO), an evolution of cdma2000. At year end 2007, over
150 operators had launched HSDPA networks.
The continued advances to the WCDMA cellular air interface standards are being made under a
program within 3GPP entitled “Long Term Evolution” (LTE). There is a similar long term
evolution program underway within 3GPP2 for cdma2000 (referred to as Ultra Mobile
Broadband (UMB)). Both of these evolution programs are based on OFDM/OFDMA technology.
Cellular Air Interface Technology Evolution
2G
3G
GSM
GPRS
EDGE
WCDMA
HSDPA
HSUPA
4G
LTE
TIA/EIA-95A
TIA/EIA-95B/C
CDMA2000
1X EV-DO
UMB
5
IEEE 802-Based Standards
The wireless Standard, IEEE 802.11, was first ratified in 1997. Since that time, the IEEE 802.11
Working Group has continued to update and expand the basic IEEE 802.11 Standard to achieve
higher data rates, accommodate additional operating frequencies and provide additional
features. Equipment conforming to these Standards (i.e., IEEE 802.11a/b/g) is in the marketplace
today. Intended for short range applications, operating in unlicensed frequency bands and
requiring a modest amount of infrastructure, IEEE 802.11 Standards-based equipment has
seen substantial market growth, especially in consumer home networking applications.
Similar to 3G, this Standard also continues to evolve toward higher data rates and improved
service capabilities.
The wide area network community has also established the IEEE 802.16 Working Group to
define air interface Standards for longer distance (2 to 50 km) Metropolitan Area and Wide Area
Networks (MAN/WAN). The first 802.16 Standard was published in 2002. Specifying operating
frequencies from 10 to 66 GHz, it is primarily aimed toward very high speed wide area point to
multipoint fixed applications. In 2003, an amendment to the 802.16 Standard (802.16a) was
published which added operation in the 2 to 11 GHz frequency bands. This addition made the
Standard much more suitable for providing wireless broadband high-speed Internet access for
residential and small office applications. In 2004, 802.16a and several other amendments to the
base 802.16 Standard were combined into a single document which was published as
802.16-2004 and which was ultimately adopted by the WiMAX Business Forum for fixed use
deployments. Equipment conforming to the 802.16-2004 fixed Standard was initially introduced
in 2006. Concurrent with this revision of the fixed Standard, the 802.16 Working Group
embarked on defining a mobile version of the Standard (referred to as 802.16e). The mobile
version of the Standard was completed and published in February 2006 and initial equipment
certification by the WiMAX Forum commenced in late 2007.
The WiMAX Forum adopted a specific form of the 802.16e Standard for development and
deployment as “mobile WiMAX” The 802.16e mobile standard is being further developed as
802.16m to further improve its performance and capabilities. 802.16m is specifically targeted to
meet the ITU requirements for “IMT-Advanced,” a follow-on to the earlier IMT-2000
Recommendation mentioned above.
More recently, the IEEE 802 community has begun to address the question of handover
between the different IEEE 802 technologies, both wired and wireline, as well as handover to
external non-802 networks, such as cellular. This new group, IEEE 802.21, entitled Media
Independent Handover Services anticipates that their initial Standard will be published in mid
2008. The IEEE 802.21 technology is specifically oriented towards the future all-IP Next
Generation Network that merges existing fixed and mobile networks into a single homogeneous
integrated network capable of supporting all envisioned advanced fixed and mobile services
including voice, data and video.
InterDigital’s Strategy
A core component of our strategy is the ability to develop advanced digital wireless
technologies. We will continue to develop those technologies, contribute our ideas into the
Standards bodies and bring those technologies to market, generating revenues from patent
licensing as well as product sales. Our goal is to derive revenue on every 3G mobile device
sold, either in the form of patent licensing revenues, product related revenues, or a combination
of these elements. In recent years, our patent license agreements have contributed the majority
of our cash flow and revenues. As of December 2007, we recorded patent royalties on
approximately one-third of all 3G mobile devices sold worldwide. In addition, our technology
product solutions offer an additional means to generate revenue from 3G mobile devices.
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Our strategy for achieving our goal is as follows:
• Continue to fund significant technology development
• Maintain substantial involvement in key worldwide Standards bodies, contributing to
the ongoing definition of wireless Standards and incorporating our inventions into
those Standards
• License our patented technology to wireless equipment producers worldwide, maximizing
realizable value in our 3G licenses by investing the time necessary to negotiate appropriate
economic terms for 3G products
• Vigorously defend our intellectual property and related contractual rights
• Offer to both semiconductor producers and mobile device manufacturers a family of mobile
broadband modem solutions that include intellectual property (IP) know-how, 2G/3G
dual-mode baseband ICs fabricated by third parties, and complete reference platforms
• Examine opportunities to acquire related or complementary technologies and capabilities
• Establish strategic relationships to facilitate time-to-market advantages and gain competitive
access to both complementary technologies and IC production capabilities
InterDigital’s Technology Position
Cellular Technologies
We have a long history of developing cellular technologies including those related to CDMA
and TDMA technologies, and more recently, OFDMA and MIMO technologies. A number of our
TDMA-based and CDMA-based inventions are being used in all 2G, 2.5G and 3G wireless
networks and mobile terminal devices.
We led the industry in establishing TDMA-based TIA/EIA-54 as a digital wireless U.S. Standard
in the 1980s. We developed a substantial portfolio of TDMA-based patented inventions. These
inventions include or relate to fundamental elements of TDMA-based systems in use around
the world. Some of our more central inventions are:
• The fundamental architecture of commercial Time Division/Frequency Division Multiple Access
(TD/FDMA) systems
• Methods of synchronizing TD/FDMA systems
• A flexible approach to managing system capacity 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, which allows
for more robust performance
• Initializing procedures that enable roaming
We also have developed and patented innovative CDMA technology solutions. Today, we hold
a significant worldwide portfolio of CDMA patents and patent applications. Similar to our
TDMA inventions, we believe that a number of our CDMA inventions are essential to the
implementation of CDMA systems in use today. Some of our CDMA inventions include or
relate to:
• 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
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• Power control: Highly efficient schemes for controlling the transmission output power of
terminal and base station devices, a vital feature in a CDMA system
• Joint detection and interference cancellation techniques for reducing interference
• 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)
• High speed packet data channel coding
• High speed packet data delivery in a mobile environment, including enhanced uplink
The cellular industry has ongoing initiatives aimed at technology improvements. We have
engineering development projects to build and enhance our technology portfolio in many of
these areas, including the Long Term Evolution (LTE) project for 3GPP radio technology, further
evolution of the 3GPP WCDMA Standard (including HSPA+), and continuing improvements to
the legacy GSM-EDGE Radio Access Network (GERAN). The common goal is to improve the
user experience and reduce the cost to operators via increased capacity, reduced cost per bit,
increased data rates and reduced latency. Of the above technologies, LTE is the most advanced
in that it uses the newer OFDMA/MIMO technologies.
IEEE 802-based Wireless Technologies
With our strong wireless background, we have expanded our engineering and corporate
development activities to focus on solutions that apply to other wireless market segments.
These segments primarily fall within the continually expanding scope of the IEEE 802 family of
Standards. We are building a portfolio of technology related to the WLAN, WMAN and digital
cellular area that includes, for example, improvements to the IEEE 802.11 PHY and MAC to
increase peak data rates (i.e., IEEE 802.11n), handover among radio access technologies (IEEE
802.21), mesh networks (IEEE 802.11s), radio resource measurements (IEEE 802.11k), wireless
network management (IEEE 802.11v), wireless network security and broadband wireless (IEEE
802.16, including WiMAXTM wireless technology).
Business Activities
Patent Licensing
Our Patent Portfolio
As of December 31, 2007, our patent portfolio consisted of 932 U.S. patents (163 of which
issued in 2007), and 3,266 non-U.S. patents (942 of which issued in 2007). We also have
numerous patent applications pending worldwide. As of December 31, 2007, we had 1,328
pending applications in the U.S. and 8,679 pending non-U.S. patent applications. The patents
and applications comprising our portfolio relate specifically to digital wireless radiotelephony
technology (including, without limitation, TDMA and/or CDMA) and expire at differing times
ranging from 2007 through 2027. A significant part of our TDMA patent portfolio, representing
some of the Company’s “pioneering” TDMA patents, expired during 2006.
The United States Patent and Trademark Office (USPTO) permits the filing of “provisional”
applications for, among other reasons, preserving rights to an invention prior to filing a formal
“non-provisional” application. Typically, the filing of a provisional application is followed with
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the filing of a “non-provisional” application, which may add content, such as claim language,
to the provisional application, or may combine multiple provisional applications. The USPTO,
along with other international patent offices, also permits the filing of “continuation” or
“divisional” applications, which are based, in whole or in part, on a previously filed
non-provisional patent application. Most of our foreign patent applications are single treaty
application filings, which can lead to patents in all of the countries that are parties to a
particular treaty. During 2007, we filed 626 U.S. patent applications consisting of 143 first filed,
U.S. non-provisional, non-continuation patent applications, 388 U.S. provisional applications
and 95 U.S. continuation, continuation-in-part or divisional applications. Typically, each
new U.S. non-provisional application is used as the basis for the later filing of one or more
foreign applications.
Patent Licenses
Currently, numerous manufacturers supply digital cellular equipment conforming to 2G and 3G
Standards. We believe that any of those companies that use our patented inventions will
require licenses from us. While some companies seek licenses before they commence
manufacturing and/or selling devices that use our patented inventions, most do not.
Consequently, we approach companies and seek to establish license agreements. We expend
significant effort identifying potential users of our inventions and negotiating patent license
agreements with companies that may be reluctant to take licenses. We are in active discussions
with a number of companies regarding the licensing of our 2G and 3G-related patents on a
worldwide basis. During negotiations, unlicensed companies may raise different defenses and
arguments as to their need to enter into a patent license with us, to which we respond. In the
past year, these defenses and arguments have included positions by companies: (i) as to the
essential nature of our patents, (ii) that their products do not infringe our patents and/or that
our patents are invalid and/or unenforceable, and (iii) concerning the impact of litigation
between us and other third parties. If we believe that a third party is required to take a license
to our patents in order to manufacture and sell products, we might commence legal action
against the third party if they refuse to enter into a patent license agreement.
We offer non-exclusive, royalty-bearing patent licenses to companies that manufacture, use or
sell, or intend to manufacture, use or sell, equipment that implements the inventions covered
by our portfolio of patents. We have entered into numerous non-exclusive, non-transferable
(with limited exceptions) patent license agreements with companies around the world. When
we enter into a new patent license agreement, the licensee typically agrees to pay consideration
for sales made prior to the effective date of the license agreement and also agrees to pay
royalties or license fees on covered products that it will sell or anticipates selling during the
term of the agreement. We expect that, for the most part, new license agreements will follow
this model. Our patent license agreements are structured on a royalty-bearing basis, paid-up
basis or combination thereof. Most of our patent license agreements are royalty bearing. Most
of these agreements provide for the payment of royalties on an ongoing basis, based on sales
of covered products built to a particular Standard (convenience based licenses). Others provide
for the payment of royalties on an ongoing basis if the manufacture, sale or use of the licensed
product infringes one of our patents (infringement based licenses).
Our license agreements typically contain provisions which give us the right to audit our
licensees’ books and records to ensure compliance with the licensees’ reporting and payment
obligations under those agreements. From time to time, these audits reveal underreporting or
underpayments under the applicable agreements. In such cases, we might enter into
negotiations or dispute resolution proceedings with the licensee to resolve the discrepancy,
either of which might lead to payment of all or a portion of the amount claimed due under the
audit or termination of the license.
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We recognize the revenue from per-unit royalties in the period when we receive royalty reports
from licensees. In circumstances where we receive consideration for sales made prior to the
effective date of a patent license, we typically recognize such payments as revenue in the
quarter in which the patent license agreement is signed. However, if the patent license
agreement is reached as part of the settlement of patent infringement litigation, we recognize
consideration for past sales as other income. Some of these patent license agreements provide
for the non-refundable prepayment of royalties which are usually made in exchange for
prepayment discounts. As the licensee reports sales of covered products, the royalties are
calculated and either applied against any prepayment, or become payable in cash. Additionally,
royalties on sales of covered products under the license agreement become payable or applied
against prepayments based on the royalty formula applicable to the particular license
agreement. These formulas include flat dollar rates per-unit, a percentage of sales, percentage
of sales with a per-unit cap and other similar measures. The formulas can also vary by other
factors including territory, covered Standards, quantity and dates sold.
Some of our patent licenses are paid-up, requiring no additional payments relating to
designated sales under agreed upon conditions. Those conditions can include paid-up licenses
for a period of time, for a class of products, under certain patents or for sales in certain
countries or a combination thereof. Licenses have become paid-up based on the payment of
fixed amounts or after the payment of royalties for a term. We recognize revenues related to
fixed amounts on a straight-line basis.
From time to time, some of our patent licenses may contain “most favored licensee” (MFL)
clauses which permit the licensee to elect to apply the terms of a subsequently executed
license agreement with another party that are more favorable than those of the licensee’s
original agreement. The application of the MFL clause may affect, and generally acts to reduce,
the amount of royalties payable by the licensee. The application of an MFL clause can be
complex, given the varying terms among patent license agreements. One key license
agreement that contains an MFL clause is our 1996 patent license agreement (Samsung
Agreement) with Samsung Electronics Co. Ltd. (Samsung), to the extent that latter MFL clause
has survived. Additionally, in first quarter 2007, NEC gave notice of its intent to enforce the MFL
provision under its worldwide, non-exclusive, generally non-transferable, royalty-bearing,
narrowband CDMA and 3G patent license agreement with ITC. The parties entered into an
Amendment to this patent license agreement in July 2007 to, among other things, gradually
reduce the rates applicable to sales of covered products under that agreement and eliminate
NEC’s most favored licensee rights applicable to such products.
Expenditures relating to maintaining our current licenses (other than enforcement and
arbitration proceedings) are not material, and are predominantly administrative in nature. Cash
flows from patent license agreements have been used for general corporate purposes,
including substantial reinvestment in Standards contributions, technology development
and productization. Revenues generated from royalties are subject to quarterly and
annual fluctuations.
During 2007, 2006 and 2005, revenue from our Asian-based licensees comprised 79%, 39%, and
71% of total revenues, respectively. For the same years, revenue from our European-based
licensees comprised 10%, 58%, and 14% of total revenues, respectively.
In addition to patent licensing, we actively seek to license know-how both to companies
with whom we have had strategic relationships (including alliance partners) and to
other companies.
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The achievement of our long term strategic objectives is based on securing 3G patent license
agreements with a substantial portion, if not all, of the mobile phone industry. Because the
vast majority of 3G mobile device sales are expected to occur in the future, we believe the
Company is best served by entering into patent license agreements on appropriate economic
terms, even if securing such terms results in completing the negotiation of any particular
license later than it otherwise could have been completed on less favorable terms.
2007 Patent License Activity
During third quarter 2007, we entered into a worldwide, non-transferable, non-exclusive, fixed-
fee royalty-bearing patent license agreement with Apple Inc. (“Apple”). Under the seven-year
license agreement, effective June 29, 2007, we granted a license to Apple under our patent
portfolios covering the current iPhoneTM and certain future mobile phones, if any.
In fourth quarter 2007, we entered into an amendment of the existing non-exclusive, worldwide,
royalty-bearing convenience-based patent license agreement with Research In Motion Limited.
Under the terms of the amendment, we extended the term of the patent license agreement
through December 31, 2012 and also expanded the scope of the patent license agreement to
cover 3G products.
In fourth quarter 2007, we entered into non-exclusive, worldwide, royalty-bearing, convenience-
based, patent license agreements with Giant Electronics covering the sale of terminal units and
infrastructure compliant with 2G, 2.5G, and 3G Standards.
Patent Licensees Generating 2007 Revenues Exceeding 10% of Total Revenues
In 2007, LG, Sharp Corporation of Japan (Sharp) and NEC were approximately 25%, 19%, and
14% of our total 2007 revenues, respectively.
Patent Licensees Generating 2007 Revenues Exceeding 10% of Recurring Revenues
The loss of revenues and cash payments from any of the licensees discussed below (with the
exception of the NEC 2G Agreement and the LG patent license agreement, for which all present
and anticipated cash has been received) would adversely affect either our cash flow or results
of operations and could affect our ability to achieve or sustain acceptable levels of profitability.
ITC is a party to a worldwide, non-exclusive, generally nontransferable, royalty-bearing,
narrowband CDMA and 3G patent license agreement with NEC. Pursuant to its patent license
agreement with ITC, NEC is obligated to pay royalties on a convenience basis on all sales of
products covered under the license. We recognize revenue associated with this agreement in
the periods we receive the related royalty reports. NEC and ITC are also parties to a separate
non-exclusive, worldwide, convenience-based, generally nontransferable, royalty-bearing
TDMA patent license agreement (2G). In 2002, the parties amended that agreement to provide
for the payment by NEC to ITC of $53.0 million, in exchange for which royalty obligations for
PHS and PDC products are considered paid-up. We recognized revenue associated with this
$53.0 million payment on a straight-line basis from the January 2002 agreement date through
February 2006, which was the expected period of use by NEC. It is unlikely that NEC would
have any further royalty payment obligations under that agreement based on existing paid-up
and other unique provisions. In 2007, we recorded revenues of $32.3 million from NEC, all of
which is attributable to our narrowband CDMA and 3G patent license agreement.
ITC is a party to a worldwide, non-exclusive, generally nontransferable, royalty-bearing,
convenience-based patent license agreement with Sharp (Sharp PHS/PDC Agreement) covering
sales of terminal devices compliant with TDMA-based PHS and PDC Standards. In fourth
quarter 2006, ITC and Sharp entered into an Amendment which extended the term of the Sharp
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PHS/PDC Agreement from April 2008 to April 2011. Sharp is obligated to make royalty payments
on sales of licensed products as covered products are sold. We recognize revenue associated
with this agreement in the periods we receive the related royalty reports.
ITC and Sharp are also parties to a separate worldwide, non-exclusive, convenience-based,
generally nontransferable, royalty-bearing patent license agreement (Sharp NCDMA/GSM/3G
Agreement) covering sales of GSM, narrowband CDMA and 3G products that expires upon the
last to expire of the patents licensed under the agreement. Under an amendment to that
agreement executed in first quarter 2004, which affects certain payment terms and other
obligations of the parties, Sharp made a royalty prepayment of approximately $17.8 million in
second quarter 2004, which was exhausted in the fourth quarter of 2004. Sharp is obligated to
make royalty payments on sales of licensed products, to the extent it does not have a royalty
credit, as covered products are sold. As part of the 2006 Amendment referred to in the
preceding paragraph, Sharp made additional lump-sum payments and agreed to prepay
estimated 2007 royalties on designated sales. We recognized revenue associated with this
agreement in the periods that the royalty reports were received. This license agreement expires
upon the last to expire of the patents licensed under this agreement. In 2007, we recorded
revenues of $44.5 million from Sharp of which approximately $1.2 million is attributable to the
Sharp PHS/PDC Agreement and approximately $43.3 million is attributable to the Sharp
NCDMA/GSM/3G Agreement.
We are also a party to a worldwide, non-exclusive, royalty-bearing, convenience-based patent
license agreement with LG Electronics, Inc. (“LG”) covering the sale of (i) terminal units
compliant with 2G and 2.5G TDMA-based and 3G Standards, and (ii) infrastructure compliant
with cdma2000 technology and its extensions up to a limited threshold amount. Under the
terms of the patent license agreement, LG paid us $95 million in each of the first quarters of
2006, 2007, and 2008. The agreement expires at the end of 2010 upon which LG will receive a
paid-up license to sell single-mode GSM/GPRS/EDGE terminal units under the patents included
under the license, and become unlicensed as to all other products covered under the
agreement. We are recognizing revenue associated with this agreement on a straight-line basis
from the inception of the agreement until December 31, 2010.
Patent Oppositions
In high technology fields characterized by rapid change and engineering distinctions, the
validity and value of patents are sometimes subject to complex legal and factual challenges
and other uncertainties. Accordingly, our patents are subject to uncertainties typical of patent
enforcement generally. Third parties have challenged and continue to challenge the validity of
some of our patents in various jurisdictions. While, in a few cases, our patents have been
invalidated or substantially narrowed, this has not impaired our patent license program. If a
party successfully asserts that some of our patents are invalid, unenforceable, or not infringed,
we do not believe there would be a material adverse impact on our ongoing revenues from
existing patent license agreements. However, there could be an adverse impact on our ability
to generate new royalty streams. The cost of enforcing and protecting our patent portfolio is
significant.
Patent Infringement and Declaratory Judgment Proceedings
From time to time, if we believe any party is required to license our patents in order to
manufacture and sell certain digital cellular products and such party has not done so, we may
institute legal action against them. This legal action typically takes the form of a patent
infringement lawsuit or an administrative proceeding such as a Section 337 proceeding before
the U.S. International Trade Commission (“USITC”). In a patent infringement lawsuit, we would
typically seek damages for past infringement and an injunction against future infringement.
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In a USITC proceeding, we would typically seek an exclusion order to bar infringing goods
from entry into the United States, as well as a cease and desist order to bar further sales of
infringing goods that have already been imported into the United States. The response from
the subject party can come in the form of challenges to the validity, enforceability, essentiality
and/or applicability of our patents to their products. In addition, a party might file a Declaratory
Judgment action to seek a court’s declaration that our patents are invalid, unenforceable, not
infringed by the other party’s product, or are not essential. Our response to such a Declaratory
Judgment action may include claims of infringement. When we include claims of infringement
in a patent infringement lawsuit, a favorable ruling for the Company can result in the payment
of damages for past sales, the setting of a royalty for future sales or issuance by the court of an
injunction enjoining the manufacturer from manufacturing and/or selling the infringing product.
An adverse ruling in a patent infringement lawsuit or a USITC proceeding, in terms of having
patents declared invalid, non-infringed or unenforceable, could result in difficulty securing new
licenses to the extent such a ruling affects a significant portion of our patent portfolio related to
any particular wireless Standard. Regardless of the actual outcome of the litigation, the cost of
such litigation can be significant. As part of a settlement of a patent infringement lawsuit
against a third party, we could typically seek to recover consideration for past infringement,
and grant a license under the patent(s) in suit (as well as other patents) for future sales. Such a
license could take any of the forms discussed above.
Contractual Arbitration Proceedings
We and our licensees, in the normal course of business, may have disagreements as to the
rights and obligations of the parties under the applicable license agreement. For example, we
could have a disagreement with a licensee as to the amount of reported sales and royalties.
Our license agreements typically provide for audit rights as well as private arbitration as the
mechanism for resolving disputes. Arbitration proceedings can be resolved through an award
rendered by the arbitrators or by settlement between the parties. Parties to an arbitration might
have the right to have the Award reviewed in a court of competent jurisdiction. However, based
on public policy favoring the use of arbitration, it is difficult to have arbitration awards vacated
or modified. The party securing an arbitration award may seek to have that award converted
into a judgment through an enforcement proceeding. The purpose of such a proceeding is to
secure a judgment that can be used for, if need be, seizing assets of the other party.
Technology and Product Development
We have designed, developed and placed into operation a variety of advanced digital wireless
technologies, systems and products since our inception in the early 1970s. Over the course of
our history, our strength has been our ability to explore emerging technologies, identify needs
created by the development of advanced wireless systems and building technologies for those
new requirements.
Today, we are focusing our product development efforts on advanced cellular technologies.
This includes developing 3G WCDMA technologies, in particular HSDPA/HSUPA implementations,
and the 3GPP Long Term Evolution (LTE) project based on OFDMA/MIMO. Our SlimChip family
of mobile broadband modem solutions integrates 2G GSM/GPRS/EDGE solutions, which we
have licensed from Infineon with our advanced 3G technology (WCDMA/HSDPA/HSUPA). Our
SlimChip mobile broadband modem solutions consists of SlimChip IP (broadband modem
intellectual property know-how), SlimChip ICs (high performance baseband ICs) and SlimChip
Reference Platforms (chipsets, software, and reference designs).
We also develop advanced IEEE 802 wireless technologies, in particular, technology related to
WLAN and digital cellular applications that include data rate and latency improvements to IEEE
802.11, handover among radio access technologies (IEEE 802.21) and wireless network
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management and security. For example, we have developed a mobility solution based on
802.21 that greatly improves handover performance between WiBro (a Korean version of
mobile WiMax) and UMTS networks.
We recorded expenses of $87.1 million, $65.4 million, and $63.1 million during 2007, 2006, and
2005, respectively, related to our research and development efforts. These efforts foster
inventions which are the basis for many of our patents. As a result of such patents and related
patent license agreements, in 2007, 2006 and 2005, we recognized $230.8 million, $473.6 million
and $144.1 million of patent licensing revenue, respectively. In addition, in 2007, 2006, and
2005, we recognized technology solutions revenues totaling $3.4 million, $6.9 million, and
$19.0 million, respectively.
3G WCDMA/FDD Technology and Product Development
We have developed for sale or license the SlimChip family of mobile broadband solutions,
which supports digital cellular functionality for 2G and 3G, including HSDPA and HSUPA. This
IC family supports functionality compliant with R6 HSDPA and HSUPA technologies. The family
of SlimChip products includes:
SlimChip High Performance Baseband ICs
• Slim modem architecture optimized for mobile broadband devices
• Advanced receiver technology and receive diversity for superior cell-edge performance and
interference mitigation
• Power-efficient design using advanced battery saving techniques
SlimChip Reference Platforms
• Complete chipsets, software and reference designs for mobile broadband devices, such as
ExpressCards, USB sticks and mini cards for notebooks and UMPCs
• Production tools for calibration, debug, software upgrades
• Integration, verification, certification, and testing support plus on-going maintenance
program
SlimChip Modem IP that is proven in silicon
• 2G and 3G physical layers
• Dual mode protocol stack with InterRAT
• Optimized integration of GSM/GPRS/EDGE/WCDMA/HSDPA/HSUPA
Our SlimChip products feature a “slim” modem architecture where the modem—which
provides core wireless connectivity—is separated from the applications processor and
peripheral functions. This approach allows terminal unit manufacturers to customize the
modem, in a rapid and cost-efficient manner, to specific mobile broadband devices such as
data cards, smart phones or feature phones.
SlimChip products feature advanced receiver technology with receive diversity, providing
superior interference mitigation resulting in higher data speeds and better coverage. In pre-
customer trials, the SlimChip Reference Platform in an Express Card form factor has delivered
true mobile broadband performance with data speeds of up to 7.2 Mbps in the downlink and
1.5 Mbps in the uplink. The SlimChip design supports speeds up to 10 Mbps in the downlink
and 5.7 Mbps in the uplink.
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The Company continues to conduct interoperability testing against various 2G/3G network
vendor’s equipment, pre-certification efforts of its SlimChip modem chipset and reference
platform, including ETSI conformance tests for GCF (Global Certification Forum) certification
testing and continues to conduct additional customer evaluations and testing.
WCDMA/TDD Technology and Product Development
During the period 1999 through 2003, the Company was actively engaged in the development
and standardization of technology related to the TDD mode 3G standard. Our TDD technology
development effort resulted in the Company developing a validated and fully Standards
compliant WTDD technology solution. We delivered TDD technology building blocks to Nokia
for use in 3G wireless products for which they paid an aggregate amount of approximately
$58.0 million.
As a result of this and prior technology development efforts, the Company established a
significant patent portfolio related to TDD-based wireless systems, including without limitation
the TDD mode of WCDMA and the TD-SCDMA systems being deployed in the People’s Republic
of China. As part of its license agreements, the Company typically includes TDD-based
Standards (like TD-SCDMA) as a covered Standard. In addition, the Company has expended
and continues to expend appropriate resources targeted to generate revenue from the roll-out
of TD-SCDMA products in the People’s Republic of China.
Continuing Technology and Standards Development
Recognizing the need continually to improve data rates, coverage and capacity, work is
currently underway within 3GPP on further evolution of the WCDMA Standards, including
evolution of HSPA (HSDPA/HSUPA) to downlink data rates of 20-40 Mbps and uplink data rates
of approximately 10 Mbps. Releases 7 and 8 are expected to address incremental performance
improvements to WCDMA and HSPA (HSDPA/HSUPA) including the incorporation of MIMO and
other data throughput and latency improvements and power saving features.
In addition, work continues on a longer term initiative, Evolved UTRA/UTRAN (UMTS Terrestrial
Radio Access/ UMTS Terrestrial Radio Access Network), also known at Long Term Evolution or
LTE. The objectives of this initiative are more ambitious, targeting peak data rates of 300 Mbps
in the downlink and 75 Mbps in the uplink, improved spectrum efficiency, significantly reduced
data latency, and scaleable bandwidths from as low as 1.25 MHz to as high as 20 MHz. We are
actively participating in the HSDPA/HSUPA and LTE Standards activities and have launched
internal projects to develop the technology necessary to support the new performance
requirements.
Wireless LAN, Mobility and Security
As part of our broader technology development activities, we are developing solutions
addressing WLAN technology and mobility between WLAN and cellular networks. These
projects support activities within the IEEE 802, ITU and 3GPP network architecture working
groups. Technology development areas include improvements to the 802.11 PHY and MAC
to increase peak data rates (i.e., IEEE 802.11n), handover between radio access technologies
(i.e., IEEE 802.21), mesh networks, wireless network management, and wireless network and
device security.
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3G FDD / WCDMA Technology Product Customers and Partners
Infineon Technologies AG
We jointly developed and continue to support a 3G protocol stack for use in terminal units
under our 2001 cooperative development, sales and alliance agreement with Infineon
Technologies AG (Infineon). This 3G protocol stack interfaces with existing GSM/GPRS/EDGE
protocol stack software to provide dual-mode (2G/3G) protocol stack functionality, supports
Infineon’s 3G baseband processor, and is portable to other baseband processors. Together with
Infineon, we completed the full dual-mode WCDMA/FDD release 99 protocol stack in 2003. This
protocol stack solution has been commercially deployed and continues to be offered to 3G
mobile phone and semiconductor producers. The technology is operating in commercial
production in Japan. We have supported Infineon with interoperability testing and continue to
support product launch and certification with field support, software support and lab testing. In
fourth quarter 2005, we extended our 3G protocol stack relationship with Infineon to include
the joint development and commercialization of upgraded, Standards-compliant Release 5
protocol stacks with HSDPA functionality. In the first quarter of 2006, we further extended our
3G protocol stack relationship with Infineon to include joint development and commercialization
of an upgraded, Standards-compliant Release 6 protocol stack to include HSUPA functionality.
Also in fourth quarter 2005, we entered into a new agreement with Infineon permitting us
independently to offer a complete dual-mode GSM/GPRS/EDGE and WCDMA/HSDPA integrated
protocol stack to the market. Under the agreement, we have licensed Infineon’s legacy GCF-
certified GSM/GPRS/EDGE protocol stack, which we are now able to license to customers in
combination with our evolving 3G protocol stack and baseband offering. This provides us the
ability to offer a comprehensive Standards-compliant WCDMA Release 5 dual-mode protocol
stack, as well as a complete 3G physical to application layer modem solution. In addition to
GCF certification, the GSM/GPRS/EGDE protocol stack has 75 type approvals and has completed
interoperability testing with more than 80 operators in 40 countries worldwide.
In fourth quarter 2006, we announced an additional expansion of our relationship with Infineon,
whereby we have licensed Infineon’s field-proven GSM/GPRS/EDGE baseband modem, the
S-GOLD® 3, and have also licensed the layer one control software (in addition to the protocol
stack software which had previously been licensed). This provides us for the first time with the
ability to offer a comprehensive Standards-compliant 2G/3G modem solution. Under the terms
of the extended agreement with Infineon, we have the right to use the Infineon 2G technology
in our own modem offering or to sublicense the technology to third parties developing their
own 2G/3G modem offerings. We also gain access to all of the applicable design specifications,
source code and other design data for Infineon’s integrated GSM/GPRS/EDGE baseband and
protocol stack technology, including the S-GOLD® 3 baseband processor ASIC design with
support for Infineon’s RF, Power Management and Connectivity modules as well as
related components.
General Dynamics C4 Systems
In December 2004, we entered into an agreement with General Dynamics C4 Systems (formerly
known as General Dynamics Decision Systems, Inc.) (General Dynamics) to serve as a
subcontractor on the Mobile User Objective System (MUOS) program for the U.S. military.
MUOS is an advanced tactical terrestrial and satellite communications system utilizing 3G
commercial cellular technology to provide significantly improved high data rate and assured
communications for U.S. war fighters.
16
Under the Software License Agreement (SLA), we delivered to General Dynamics Standards-
compliant WCDMA modem technology, originating from the technology we developed under
our original agreement with Infineon, for incorporation into handheld terminals. The SLA
provided for the payment of $18.5 million in exchange for delivery of, and a limited license to,
our commercial technology solution for use within the U.S. Government’s MUOS and Joint
Tactical Radio System programs. Maintenance and product training were also covered by this
amount. A majority of our MUOS program deliverables and related payments occurred during
2005. We completed delivery of our technology solution in 2006. In addition to the deliverables
specifically identified in the SLA, we originally agreed to provide software maintenance
services for a period of three years and additional future services as requested by General
Dynamics. In fourth quarter 2006, General Dynamics agreed to amend the SLA to release us
from our maintenance obligations over the final two years of the SLA, in exchange for a $0.5
million reduction to their remaining payments and provision of limited engineering support
services. We recognized approximately $0.9 million in fourth quarter 2006 as a result
of this amendment.
NXP Semiconductors B.V. (formerly Philips Semiconductors)
In August 2005, we entered into an agreement with NXP (formerly Philips Semiconductors
B.V.) to deliver our physical layer HSDPA technology solution to NXP for integration into its
family of Nexperia™ cellular system chipsets. Under the agreement, we will also agree to
assist NXP with chip design and development, software modification and system integration
and testing to implement our HSDPA technology solution into the NXP chipset. Subsequent to
our delivery of portions of our HSDPA technology solution, we agreed to provide NXP support
and maintenance over an aggregate estimated period of approximately two years.
SK Telecom
As part of our technology development, from time to time we develop technology solutions for
customers that are complimentary to our existing development programs. For example, in
December 2006, we announced that SK Telecom, Korea’s leading mobile communications
Company, had chosen InterDigital to develop an advanced mobility solution for nationwide
session continuity. The mobility solution, based on IEEE 802.21 Standards, will support
nationwide handover for SK Telecom’s customers when moving between WiBro (a Korean
version of mobile WiMax) and UMTS networks throughout the country. InterDigital’s solution,
based on the IEEE 802.21 Standard for Media Independent Handoff, includes both the system
design and the software solution for dual mode WiBro/UMTS terminal units.
In January of 2008, the Company and SK Telecom extended the collaboration to develop
additional mobile wireless handover capability adding features to enhance a seamless mobility
between different radio technologies including WiBro, UMTS and cmda2000.
All of the above programs have provided validation of the technology and access to third party
facilities and resources, and helped to broaden the awareness of the Company as a developer
of advance wireless inventions.
Other Technology – Customers
In January 2008, the Company licensed its SlimChip modem technology to a leading Asian
fabless semiconductor company for integration into the licensee’s dual-mode ICs. Under the
licensing agreement, we will provide complete UMTS 3GPP Release 6 modem technology and
customer support.
The Company is also in active dialog and testing with several potential customers for both its
SlimChip modem IP, and its SlimChip baseband IC solutions.
17
Future Technology Partnerships and Acquisitions
In addition to our internal research and development programs, we pursue a number of
channels to investigate, develop and acquire new architectures and technologies for wireless
systems. For example, national and international university relationships have provided us
additional opportunities to explore new technologies and license intellectual property
advancements that we sponsored.
We maintain an active corporate development program that seeks further investment
opportunities in technologies that can enhance the attractiveness and profitability of our
technology solutions. We have also engaged in selective acquisitions to enhance our intellectual
property portfolio and/or accelerate our time-to-market. For example, in July 2003, when we
acquired substantially all the assets of Windshift Holdings, Inc. (formerly known as Tantivy
Communications, Inc., “Windshift”) we acquired patents, patent applications, know-how, and
other assets related to cdma2000, Smart Antenna, wireless LAN and other wireless
communications technologies.
In first quarter 2005, we acquired selected patents, intellectual property blocks and related
assets which are designed to improve the range, throughput and reliability of wireless LAN and
other wireless technology systems. Our strategic investments also included the acquisition in
first quarter 2007 of a minority equity interest, through a $5 million participation in a round of
funding, in Kineto Wireless, a key innovator and leading supplier of Unlicensed Mobile Access
(UMA) technology.
Competition
We compete in a wireless communications market characterized by rapid technological change,
frequent product introductions, evolving industry Standards and, in many products, price
erosion. Further, 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. The communications industry continues to
be dominated by entities with substantial market share. That share advantage provides pricing
advantages, brand strength and technological influence. In addition, the combination of the
market dynamics described above is driving many industry participants to consolidate. This
consolidation may affect the timing or ability of third parties to purchase products or license
technology from us.
Our success in licensing our technology solutions as well as selling our modem offering will
depend on (i) our ability to continue to develop, introduce and sell products and to make
technology enhancements on a timely, consistent and cost effective basis, (ii) our ability to
keep pace with technological developments, satisfy varying customer requirements, price our
products competitively and achieve market acceptance, and (iii) our ability to resolve patent
licensing disputes that may impede product negotiations. We are well positioned in this market
to deliver competitive products because of our broad systems capability; the depth of our
experience in developing physical layer, protocol stack and component design solutions; the
depth of our technology and intellectual property portfolio; our financial strength and our
ability to deliver time-to-market and cost advantages to our customers. However, new
competitive solutions may surface. Such alternative solutions may be made available at a
lower cost, may incorporate a more advanced technology or may be a more comprehensive
solution. Our products and services also face competition from existing companies developing
product and technology offerings comparable to or more advanced than our solutions.
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We also face competition from the in-house development teams at the semiconductor and
wireless device manufacturing companies that may be developing technology that is
competitive with our offering. In addition, new competitors may enter the market. Some
manufacturers that develop the technology for their own products may choose to license that
technology to other manufacturers. In addition as a greater proportion of wireless 3G cellular
devices incorporate traditional computing applications and IEEE wireless technologies (e.g.,
802.11, 802.15, 802.16), semiconductor companies that have traditionally focused on providing
chipsets to these industries may enter the 3G cellular market with baseband solutions as well.
We also face competition in the licensing of our patent portfolio. We believe that licenses under
a number of our patents are required to manufacture and sell 2G and 3G products. However,
numerous companies also claim that they hold essential 2G and 3G patents. To the extent that
multiple parties all seek royalties on the same product, the manufacturers may claim to have
difficulty in meeting the financial requirements of each patent holder. In the past, certain
manufacturers have sought antitrust exemptions to act collectively, on a voluntary basis. In
addition, certain manufacturers have sought to limit aggregate 3G licensing fees or rates for
essential patents.
Repositioning Activities
In fiscal 2005, we closed our Melbourne, Florida design center. Of the thirty-three full or part-
time employees at this facility, five accepted offers of continued employment elsewhere within
our organization. In first quarter 2006, we terminated our lease obligations associated with this
facility. We estimate that the repositioning resulted in annual pre-tax cost savings of $6.0 million.
Employees
As of December 31, 2007, we employed 380 employees, 275 of which are full-time individuals,
consisting of approximately 278 engineering and product development personnel, 20 patent
administration and licensing personnel and 82 other personnel. None of our employees are
represented by a collective bargaining unit.
Executive Officers
The information regarding our executive officers is included pursuant to Part III, Item 10 of this
Annual Report on Form 10-K as follows:
Name
Age
Position
William J. Merritt
Scott A. McQuilkin
Richard J. Brezski
49
53
35
President and Chief Executive Officer and President
of InterDigital Technology Corporation
Chief Financial Officer
Chief Accounting Officer
Gary D. Isaacs
48
Chief Administrative Officer
Brian G. Kiernan
61
Executive Vice President, Standards
Mark A. Lemmo
William C. Miller
James J. Nolan
Janet Meenehan Point
Lawrence F. Shay
50
52
47
49
49
Executive Vice President,
Business Development and Product Management
Executive Vice President, Programs and Customer Support
Executive Vice President, Engineering
Executive Vice President, Communications and Investor Relations
Chief Legal Officer & Government Affairs/Executive Vice President,
Intellectual Property and Chief Intellectual Property Counsel
19
William J. Merritt was promoted to Chief Executive Officer and President and appointed as a
Director of the Company in May, 2005. Mr. Merritt held the position of General Patent Counsel
of the Company from July 2001 to May 2005.
Mr. Merritt held the position of Executive Vice President of the Company from September 1999
to January 2004. The title distinctions among Vice Presidents at the executive level were
eliminated and the title nomenclature of all such individuals was revised effective January 1,
2004 without a change to responsibilities. As a result, Executive Vice President was deleted
from Mr. Merritt’s title.
Scott A. McQuilkin joined InterDigital as Chief Financial Officer in July 2007. Prior to joining
InterDigital, Mr. McQuilkin served as Executive Vice President and Chief Financial Officer of
GHR Systems, Inc., a Pennsylvania corporation, from February 2000 until June 2007, and was
responsible for all financial activities including accounting, budgeting/forecasting, capital
planning, cash management, strategic planning, mergers and acquisitions, tax, purchasing and
payables. In August 2006, GHR Systems, Inc. was acquired by Metavante Corporation, a
wholly-owned subsidiary of Marshall & Ilsley Corporation, a publicly traded Company. GHR
Systems, Inc. was retained as a wholly-owned affiliate of Metavante Corporation.
Richard J. Brezski joined InterDigital as Director and Controller in May 2003. In July 2006, Mr.
Brezski was promoted to Sr. Director and as of February 8, 2007 was appointed Chief
Accounting Officer. Prior to joining InterDigital, Mr. Brezski served as an audit manager for
PricewaterhouseCoopers in its technology practice.
Gary D. Isaacs joined InterDigital as Director of Human Resources in September 1998. Mr.
Isaacs was promoted to Vice President of Human Resources in April 1999. As of February 8,
2007, Mr. Isaacs was named Chief Administrative Officer responsible for overseeing the
company’s corporate resources and information systems functions.
Brian G. Kiernan was promoted to Senior Vice President, Standards in July 1997. As of February
8, 2007, Mr. Kiernan’s title was revised to Executive Vice President, Standards without a change
in responsibilities.
Mark A. Lemmo has been the Company’s Executive Vice President, Business Development and
Product Management since April 2000.
William C. Miller joined InterDigital as Senior Vice President, Programs and Engineering in July
2000. As of February 8, 2007, Mr. Miller’s title was revised to Executive Vice President, Programs
and Customer Support without a change in responsibilities.
James J. Nolan joined InterDigital in 1996 and, until his election as Senior Engineering Officer
in May 2006, has held a variety of engineering positions including Vice President of Systems
Engineering. As of February 8, 2007, Mr. Nolan’s title was revised to Executive Vice President,
Engineering without a change in responsibilities. Mr. Nolan has led the Company’s technology
and product development programs for modems, protocol software and radio designs for
multiple wireless standards.
Janet Meenehan Point joined InterDigital in January of 2000 as Director of Investor Relations.
In January 2004, she was promoted to Senior Director, Investor Relations. In January 2006, she
was promoted to Senior Communications Officer for the Company, responsible for corporate
communications, investor relations, and marketing. As of February 8, 2007, Ms. Point’s title was
revised to Executive Vice President, Communications and Investor Relations without a change
in responsibilities.
Lawrence F. Shay joined InterDigital as Vice President and General Counsel in November 2001
and served as Corporate Secretary from November 2001 to September 2004. As of February 8,
2007, Mr. Shay’s title was revised to Chief Legal Officer and Government Affairs without a
20
change in responsibilities. As of January 18, 2008, in addition to being Chief Legal Officer and
Government Affairs, Mr. Shay was appointed President of the Company’s patent holding
subsidiaries and was appointed Executive Vice President of Intellectual Property and Chief
Intellectual Property Counsel.
InterDigital’s executive officers are appointed to the offices set forth above to hold office until
their successors are duly elected and qualified.
ITeM 1a. RISK F acT oRS
We face a variety of risks that may affect our business, financial condition, operating results or
any combination thereof. Although many of the risks discussed below are driven by factors
that we cannot control or predict, you should carefully consider the identified risks before
making an investment decision with respect to our common stock. In addition to the risks and
uncertainties identified elsewhere in this annual report as well as other information contained
herein, each of the following risk factors should be considered in evaluating our business and
prospects. If any of the following risks or uncertainties occur or develop, our business, results
of operations and financial condition could change. In such an event, the market price of our
common stock could decline and you could lose all or part of your investment. The following
discussion addresses those risks that management believes are the most significant and which
may affect our business, financial condition or operating results, although there are other risks
that could arise, or may become more significant than anticipated. The following risk factors
are not listed in any order of importance or priority.
The Price of Our Common Stock Could Continue to be Volatile.
Historically, we have had large fluctuations in the price of our common stock and such
fluctuations could continue. From January 1, 2003 to December 31, 2007, our common stock
has traded as low as $11.65 per share and as high as $36.91 per share. Factors that may
contribute to fluctuations in our stock price include, but are not limited to, general stock market
conditions, general market conditions for the wireless communications industry, investor
perceptions as to the likelihood of achievement of near-term goals, changes in market share of
significant licensees, announcements concerning litigation, arbitration and other legal
proceedings in which we are involved, announcements concerning licensing and product
matters, or our operating results.
Our Revenue and Cash Flow Could Decline Depending Upon the Success of Our
Licensing Program.
Our ability to recognize revenue and generate cash flow from licensing is subject to a number
of risks:
Results of Samsung and Nokia Disputes
We are engaged in (i) a dispute with Samsung over the enforcement of an Arbitral Award
(“Samsung Award”) rendered in connection with a dispute between Samsung and ITC over the
application of the MFL provision in a license agreement between the parties, as well as (ii) a
combined proceeding against Samsung and Nokia in the USITC alleging that both Samsung
and Nokia engage in unfair trade practices by selling for importation, importing into the United
States, and selling after importation certain 3G handsets and components that infringe certain
InterDigital patents. If we are delayed or unsuccessful in some or all of these matters, we may
be delayed in collecting, collect less than we expect, or be unable to collect royalties from
Samsung on its sales of covered 2G products in accordance with the Samsung Award or
otherwise, and we may be delayed in collecting, collect less than we expect, or be unable to
collect royalties from Samsung or Nokia on their sales of 2G/3G and 3G products.
21
Challenges to Existing License Agreements
Revenue and cash flow from existing and potential licensees may also be affected by
challenges to our interpretation of provisions of license agreements or difficulties in
renegotiating current license agreements. Such challenges or difficulties could result in
rejection or modification of license agreements or the termination, reduction, and suspension
of payments.
Ability to Enter into New License Agreements
We face challenges in entering into new patent license agreements. During discussions with
unlicensed companies, significant negotiation issues arise from time to time. For example,
manufacturers and sellers of 2G products can be reluctant to enter into a license agreement
because such companies might be required to make a significant lump sum payment for
unlicensed past sales. Also, certain of the inventions we believe will be employed in 3G
products are the subject of our patent applications where no patent has been issued yet by the
relevant patent reviewing authorities. Certain prospective licensees are unwilling to license
patent rights prior to a patent’s issuance. Additionally, in the ordinary course of negotiations, in
response to our demand that they enter into a license agreement, manufacturers raise different
defenses and arguments including, but not limited to, (i) claims by third parties challenging the
essential nature of our patents, (ii) claims that their products do not infringe our patents or that
our patents are invalid or unenforceable, and (iii) the potential impact that any litigation or
arbitration in which we are involved may have on such manufacturers. We can not be assured
that all prospective licensees will be persuaded during negotiations to enter into a patent
license agreement with us, either at all or on terms acceptable to us.
Defending and Enforcing Patent Rights
Major telecommunications equipment manufacturers have challenged, and we expect will
continue to challenge the validity of our patents. In some instances, certain of our patent claims
have been declared invalid or substantially narrowed. We cannot assure that the validity of our
patents will be maintained or that any of the key patents will be determined to be applicable to
any particular product. Any significant adverse finding as to the validity or scope of our 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.
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 patent license and confidentiality agreements, or determine the validity
and scope of proprietary rights of others. In addition, third parties could commence litigation
against us seeking to invalidate our patents or have determined that our patents are not
infringed, invalid or unenforceable. As a result of any such litigation, we could lose our
proprietary rights or incur substantial unexpected operating costs. Any action we take to
protect our intellectual property rights could be costly and could require significant amounts of
time by key members of executive management and other personnel that, in turn, could
negatively affect our results of operations. Moreover, third parties could circumvent certain of
our patents through design changes. Any of these events could adversely affect our prospects
for realizing future revenue.
Our Future Financial Condition and Operating Results Could Fluctuate Significantly.
Our financial condition and operating results have fluctuated significantly in the past and might
fluctuate significantly in the future. Many of the factors causing such quarterly and/or annual
fluctuations are not within our control. Our financial condition and operating results could
continue to fluctuate because (i) our licensing revenues are currently dependent on sales by
22
our licensees which are outside of our control and which could be negatively impacted by a
variety of factors including global economic conditions, buying patterns of end users,
competition for our licensees’ products, and any decline in the sale prices our licensees receive
for their covered products; (ii) the strength of our patent portfolio could be weakened through
patents being declared invalid, our claims being narrowed, changes to the Standards and
patent laws and regulations, and adverse court or arbitration decisions; (iii) it is difficult to
predict the timing and amount of licensing revenue associated with past infringement and new
licenses, and the timing, nature or amount of revenues associated with strategic partnerships;
(iv) we may not be able to enter into additional or expanded strategic partnerships or license
agreements, either at all or on acceptable terms; and (v) our markets are subject to increased
competition from other products and technologies. In addition, our operating results also could
be affected by (i) general economic and other conditions that cause a downturn in the market
for the customers of our products or technologies; or (ii) increased expenses which could result
from factors such as increased litigation and arbitration costs, actions designed to keep pace
with technology and product market targets, or strategic investments. Further, due to the fact
that our expenses are relatively fixed, variations in revenue from a small number of customers
could cause our operating results to vary from quarter to quarter. The foregoing factors are
difficult to forecast and could adversely affect both our quarterly and annual operating results
and financial condition.
Our revenue and cash flow also could be affected by: (i) the unwillingness of any licensee to
satisfy all of their royalty obligations on the terms we expect or a decline in the financial
condition of any licensee; or (ii) the failure of 2G/2.5G and 3G sales to meet market forecasts
due to global economic conditions, political instability, competitive technologies, or otherwise.
Our Revenues Are Derived Primarily from a Small Number of Patent Licensees.
Over the past several years, a majority of our royalty revenues have been generated by a small
number of licensees. For example, we recognized $253 million of revenue in 2006 associated
with the resolution of certain disputes with Nokia. This was 53% of our total revenue and the
largest portion of our 2006 non-recurring patent license revenue of $267.4 million. Revenues
from patent license agreements with LG, NEC and Sharp accounted for approximately 61% of
our recurring revenue in both 2007 and 2006 and 52% of our total revenues in 2005. In the
event NEC or Sharp fail to meet their payment or reporting obligations under their respective
license agreements, our future revenue and cash flow could be materially adversely impacted.
Additionally, many of our licensees (accounting for approximately 79% of our 2007 recurring
revenues) are based in Japan, and our future level of revenue or cash flow from these
companies could be affected by general economic conditions in Japan and each company’s
respective success in selling covered products in markets both inside and outside of Japan.
Further, our revenues from our patent license agreement with LG accounted for approximately
26% of our recurring revenues in 2007. Such revenues continue only through the term of that
agreement which expires in 2010, at which time most of the products licensed thereunder
become unlicensed. If we are unable to extend the term of this agreement or enter into a new
agreement with LG, our future revenue and cash flow could be materially adversely impacted.
Royalty Rates Could Decrease.
Certain licensees and others in the wireless industry, individually and collectively, are
demanding that royalty rates for 2G and 3G patents be lower than historic royalty rates, and in
some cases, that the aggregate royalty rates for 2G and 3G products be capped. A number of
companies have made claims as to the essential nature of their patents with respect to
products for the 3G market. Additionally, for example, certain members of the European
Telecommunications Standards Institute (ETSI) have previously sought to require all members
23
that hold essential patents to agree upon a predetermined cumulative cap for royalties on the
cost of all components of the next version of the 3GPP-based radio standard commonly
referred to as “Long-Term Evolution” or “LTE.” Certain other members of ETSI have sought to
require, for licensing purposes, consideration of maximum aggregate royalties in determining
what constitutes a “fair and reasonable” royalty payment. Both the increasing number of
patent holders of 3G and future technology and the efforts, if successful, by certain industry
members and groups to reduce and/or place caps on royalty rates could result in a decrease in
the royalty rates we receive for use of our patented inventions, thereby decreasing future
anticipated revenue and cash flow.
Changes to Our Current Calculation of Tax Liabilities.
The calculation of tax liabilities involves significant judgment in estimating the impact of
uncertainties in the application of complex tax laws. We are subject to examinations by the
Internal Revenue Service (“IRS”) and other taxing jurisdictions on various tax matters,
including challenges to various positions we assert in our filings. With our January 1, 2007
adoption of FIN 48, certain tax contingencies are recognized when they are determined to be
more likely than not to occur. Although we believe we have adequately accrued for tax
contingencies that meet this criteria, we may be required to pay taxes in excess of the amounts
we have accrued. As of December 31, 2007 and 2006, there were certain tax contingencies that
did not meet the applicable criteria to record an accrual. In the event that the IRS or another
taxing jurisdiction levies an assessment in the future, it is possible the assessment could have
an adverse effect on our consolidated financial condition or results of operations.
The Impact of Potential Domestic Patent Reform Legislation, USPTO Reforms, Imposed
International Patent Rules and Third Party Legal Proceedings May Impact Our Patent
Prosecution and Licensing Strategies.
Changes to certain US patent laws and regulations may occur in the future, some or all of
which may impact our patent costs, the scope of future patent coverage we secure, and
damages we may be awarded in patent litigation, and may require us to re-evaluate and
modify our patent prosecution, licensing and enforcement strategies. Specifically, on Aug. 21,
2007, the United States Patent and Trademark Office USPTO issued final administrative rule
changes affecting the US patent application process, including among other things, the current
practice regarding continuation applications. The rule changes were set to take effect on Nov. 1,
2007; however, in the course of a lawsuit filed by Glaxo Smith Kline on Tuesday, Oct. 9, 2007, in
the United States Federal District Court for the Eastern District of Virginia, one day before the
rule changes were to take effect, the judge in that case ruled to preliminarily enjoin the USPTO
from implementing these changes. The US Congress is also considering modification of select
patent laws relating to, among other things, how patent damages are calculated and the
procedures for challenging issued patents and where patent lawsuits can be filed in the US.
Specifically, The Patent Reform Act of 2007 (S.1145 and H.R.1908) is currently being considered
for passage by Congress. S.1145, as amended, was reported out of committee on July 19, 2007.
H.R.1908, as amended, was reported out of committee on July 18, 2007, and was debated and
passed by the House on September 7, 2007. Additionally, there have been recent US Supreme
Court and other court rulings relating to, among other things, the standard for determining
whether an invention is obvious, which is a key issue when assessing patentability, the ability
of a patent holder to obtain injunctive relief against infringers, and the ability of patent
licensees to challenge the patents under which they are licensed. The ruling concerning
injunctions may make it more difficult, under some circumstances, for us to obtain injunctive
relief against a party that has been found to infringe one or more of our patents, and the ruling
regarding patent challenges by licensees could potentially make it easier for our licensees to
24
challenge our patents even though they have already agreed to take a license. In addition, the
potential effect of rulings in legal proceedings between third parties may impact our licensing
program. We continue to monitor and evaluate our prosecution and licensing strategies with
regard to these proposals and changes.
Due to the Nature of Our Business, We Could Be Involved in a Number of Litigation,
Arbitration and Administrative Proceedings.
While some companies seek licenses before they commence manufacturing and/or selling
devices that use our patented inventions, most do not. Consequently, we approach companies
and seek to establish license agreements for using our inventions. We expend significant effort
identifying potential users of our inventions and negotiating license agreements with
companies that may be reluctant to take licenses. However, if we believe that a third party is
required to take a license to our patents in order to manufacture, sell, or use products, we
might commence legal or administrative action against the third party if they refuse to enter
into a license agreement. As a result of enforcing our IPR, we could be subject to significant
legal fees and costs, including the costs and fees of opposing counsel in certain jurisdictions if
we are unsuccessful. In 2007, we spent approximately $36.9 million on patent litigation,
arbitration and administrative proceedings fees and related costs and accrued $24.4 million of
additional costs associated with contingent liabilities. In addition, litigation, arbitration and
administrative proceedings require significant key employee involvement for significant
periods of time which could divert such employees from other business activities.
Our Technologies May Not Be Adopted By the Market or Widely Deployed.
We invest significant engineering resources in the development of advanced wireless
technology and related products. These investments may not be recoverable or not result in
meaningful revenue if products based on the technologies in which we invest are not widely
deployed. Competing digital wireless technologies could reduce the opportunities for
deployment of technologies we develop. If the technologies in which we invest are not adopted
in the mainstream markets or in time periods we expect, or we are unable to secure partner
support for our technologies, our business, financial condition and operating results could be
adversely affected. For example, our ability to capitalize on our investments in WCDMA
solutions depends upon market interest in such technologies. There are emerging wireless
technologies, such as WiMAX, that may compete with WCDMA. If deployments of such other
competing technologies obtained significant market share, the market size for WCDMA
products could be reduced. All of these competing technologies also could impair multi-vendor
and operator support for WCDMA, key factors in defining opportunities in the wireless market.
Similarly, changes or delays in the implementation of new wireless Standards could limit our
opportunities in the wireless market.
Our Industry is Subject to Rapid Technological Change, Uncertainty, and
Shifting Market Opportunities.
Our market success depends, in part, on our ability to keep pace with changes in industry
Standards, technological developments, and varying customer requirements. Changes in
industry Standards and needs could adversely affect the development of, and demand for, our
technology, rendering our products and technology currently under development obsolete and
unmarketable. If we fail to anticipate or respond adequately to such changes, we could miss a
critical market opportunity, reducing or eliminating our ability to capitalize on our technology,
products or both.
25
The Markets for Our Technologies and Our Products May Fail to Materialize in the
Manner We Expect.
We are positioning our current development projects for the evolving advanced digital wireless
markets. Certain of these markets, in particular the 3G market, may continue to develop at a
slower rate or pace than we expect and may be of a smaller size than we expect. Additionally,
the development projects that target only the emerging 3G market do not have direct bearing
on the 2.5G or any other market which has developed or might develop after the 2G market,
but prior to the development of the 3G market. For example, the potential exists for a reduction
in the size of the 3G market due to the success of current or future 2.5G solutions and WLAN.
In addition, there could be fewer applications for our technology and products than we expect.
The development of the 3G and other advanced wireless markets also could be impacted by
general economic conditions, customer buying patterns, timeliness of equipment development,
pricing of 3G infrastructure and mobile devices, rate of growth in telecommunications services
that would be delivered on 3G devices, and the availability of capital for, and the high cost of,
radio frequency licenses and infrastructure improvements. Failure of the markets for our
technologies and/or our products to materialize to the extent or at the rate we expect could
reduce our opportunities for sales and licensing and could materially adversely affect our
longer-term business, financial condition and operating results.
Our Technology and Product Development Activities May Experience Delays.
We may experience technical, financial, resource or other difficulties or delays related to the
further development of our technologies and products. Delays may have adverse financial
effects and may allow competitors with comparable technology and/or product offerings to
gain a commercial advantage over us. There can be no assurance that we will continue to have
adequate staffing or that our development efforts will ultimately be successful. Further, if such
development efforts are not successful or delays are serious, strategic relationships could
suffer and strategic partners could be hampered in their marketing efforts of products
containing our technologies. As a result we could experience reduced revenues or we could
miss critical market opportunities. Moreover, our technologies have not been fully tested in
commercial use, and it is possible that they may not perform as expected. In addition, we may
experience adverse effects due to potential delays or denials in obtaining export licenses for
the transfer of certain of our technologies, which may be deemed controlled technology under
U.S. export control laws, to certain countries. In such cases, our business, financial condition
and operating results could be adversely affected and our ability to secure new customers and
other business opportunities could be diminished.
We Face Substantial Competition from Companies with Greater Resources.
Competition in the wireless telecommunications industry is intense. We face competition from
companies developing other and similar technologies including existing companies with
in-house development teams and new competitors to the market (See, “-Our Technologies May
Not Be Adopted By the Market or Widely Deployed” ). 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. In
particular, our more limited resources and capabilities may adver sely impact
our competitive position if the market were to move towards the provision of an existing
complete technology platform solution which larger equipment manufacturers have the ability
to provide.
26
We Rely on Relationships with Third Parties to Develop and Deploy Products.
The successful execution of our strategic plan is partially dependent on the establishment and
success of relationships with equipment producers and other industry participants. With
respect to FDD products for example, our product plan contemplates that these third parties
will permit us to have access to product capability, markets, and additional libraries of
technology. We currently have two semiconductor partners, Infineon, in our FDD protocol stack
technology development effort and NXP for a 3G solution. Delays or failure to enter into
additional partnering relationships to facilitate other technology development efforts or delays
or failure to enter into technology licensing agreements to secure integration of additional
functionality, could impair our ability to introduce into the market portions of our technology
and resulting products, cause us to miss critical market windows, or remain competitive.
We Face Claims by Third Parties That We Infringe Their Intellectual Property.
A number of third parties publicly have claimed that they own patents essential to various
wireless Standards. Certain of our products are designed to comply with such Standards. If any
of our products are found to infringe the intellectual property rights of a third party, we could
be required to redesign such products, take a license from such third party, pay damages to the
third party, or indemnify a customer or supplier for its damages or other losses. If we are not
able to negotiate a license 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
revenue could be adversely affected. If we are required to obtain licenses and/or pay royalties
to one or more patent holders, this could have an adverse effect on the commercial
implementation of our wireless products. In addition, the associated costs to defend such
claims could be significant and could divert the attention of key executive management and
other personnel.
Our License Agreements Contain Provisions that Could Impair Our Ability to Realize
Licensing Revenues.
Certain of our licenses contain provisions that could cause the licensee’s obligation to pay
royalties to be reduced or suspended for an indefinite period, with or without the accrual of the
royalty obligation. For example, some of the existing license agreements may be renegotiated
or restructured based on MFL or other provisions contained in the applicable license
agreement. The assertion or validity of such provisions under the existing agreements could
affect our cash flow and/or the timing and amount of future recurring licensing revenue. We are
currently engaged in two legal proceedings involving the applicability and application of
Samsung’s MFL provision in the Samsung Agreement
We Face Risks From Doing Business in Global Markets.
A significant portion of our business opportunities exists in a number of international markets.
Accordingly, we could be subject to the effects of a variety of uncontrollable and changing
factors, including: difficulty in protecting our intellectual property in foreign jurisdictions;
enforcing contractual commitments in foreign jurisdictions or against foreign corporations;
government regulations, tariffs and other applicable trade barriers; currency control regulations;
political instability; natural disasters; acts of terrorism and war; potentially adverse tax
consequences; and general delays in remittance of and difficulties collecting non-U.S.
payments. In addition, we also are subject to risks specific to the individual countries in which
our customers, our licensees and we do business.
27
Consolidations in the Wireless Communications Industry
Could Adversely Affect Our Business.
The wireless communications industry has experienced consolidation of participants and sales
of participants or their businesses and these trends may continue. Any concentration or sale
within the wireless industry might reduce the number of licensing opportunities or, in some
instances, result in the loss or elimination of existing royalty obligations. Further, if wireless
carriers consolidate with companies that utilize technologies competitive with our technologies,
we could lose market opportunities.
We Depend on Key Senior Management, Engineering and Licensing Resources.
Competition exists for qualified individuals with expertise in licensing and with significant
engineering experience in emerging technologies such as WCDMA. Our ability to attract and
retain qualified personnel could be affected by any adverse decisions in any litigation or
arbitration and by our ability to offer competitive cash and equity compensation and work
environment conditions. The failure to attract and retain such persons with relevant and
appropriate experience could interfere with our ability to enter into new license agreements
and undertake additional technology and product development efforts, as well as our ability to
meet our strategic objectives.
Market Projections and Data are Forward-Looking in Nature.
Our strategy is based on our own projections and on analyst, industry observer and expert
projections, which are forward-looking in nature and are inherently subject to risks and
uncertainties. 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 could affect these
predictions. The inaccuracy of any of these projections could adversely affect our operating
results and financial condition. In addition, market data upon which we rely is based on third
party reports which may be inaccurate.
Unauthorized Use or Disclosure of Our Confidential
Information Could Adversely Affect Our Business.
We enter into contractual relationships governing the protection of our confidential and
proprietary information with our employees, consultants, and prospective and existing
customers and strategic partners. If we are unable to timely detect the unauthorized use or
disclosure of our proprietary or other confidential information or we are unable to enforce
our rights under such agreements, the misappropriation of such information could harm
our business.
If Wireless Handsets Are Perceived to Pose Health and Safety Risks,
Demand for Products 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 health concerns, such as brain tumors, other malignancies and
genetic damage to blood, and may interfere with electronic medical devices, such as
pacemakers, telemetry and delicate medical equipment. If concerns over radio frequency
emissions grow, this could discourage the use of wireless handsets and could cause a decrease
in demand for the products of our licensees and customers. In addition, concerns over safety
risks posed by the use of wireless handsets while driving and the effect of any resulting
legislation could reduce demand for the products of our licensees and customers.
28
ITeM 1b . UnReSol VeD ST aFF coM MenTS
None.
ITeM 2. PR oPeRTIeS
We own one facility, subject to a mortgage, of approximately 52,000 square feet, in King of
Prussia, Pennsylvania. We are also a party to a lease entered into in May 2007 for approximately
7,825 square feet of space in King of Prussia, Pennsylvania, that expires May 2009. We are also
a party to a lease, extended during 2006 to expire in November 2012, for approximately 56,125
square feet of space in Melville, New York. In addition, we are a party to a lease, expanded
during 2006 from approximately 11,918 square feet to 20,312 square feet of space, in Montreal,
Canada, and expiring June 2011. These facilities are the principal locations for our technology
development activities.
ITeM 3. legal PR oceeDIngS
Samsung and Nokia U.S. International Trade Commission
Proceedings and Related Delaware District Court Proceedings
In March 2007, InterDigital, Inc.’s wholly-owned subsidiaries InterDigital Communications, LLC
and InterDigital Technology Corporation (collectively, the “Company,” “InterDigital,” “we,” or
“our”) filed a Complaint against Samsung Electronics Co. Ltd. and certain of its affiliates
(collectively, “Samsung”) in the United States International Trade Commission (“USITC”)
alleging that Samsung engages in unfair trade practices by selling for importation, importing
into the United States, and selling after importation certain 3G handsets and components that
infringe three of InterDigital’s patents. In May 2007 and December 2007, a fourth patent and
fifth patent, respectively, were added to our Complaint against Samsung. The Complaint
against Samsung seeks an exclusion order barring from entry into the U.S. infringing 3G
WCDMA handsets and components that are imported by or on behalf of Samsung. Our
Complaint also seeks a cease-and-desist order to bar sales of infringing Nokia products that
have already been imported into the United States.
In addition, on the same date as our filing of the Samsung USITC action referenced above, we
also filed a Complaint in the United States District Court for the District of Delaware (“Delaware
District Court”) alleging that Samsung’s 3G WCDMA handsets infringe the same three
InterDigital patents identified in the original Samsung USITC Complaint. The U.S. trade laws
provide for a mandatory stay of parallel district court proceedings at the request of a
respondent. In June 2007, the Delaware District Court entered a Stipulated Order staying this
Delaware District Court proceeding against Samsung. The Stipulated Order was agreed to by
the parties. The Stipulated Order stays the proceeding until the USITC’s determination in this
matter becomes final. The Delaware District Court has permitted InterDigital to add the fourth
and fifth asserted patents asserted against Samsung in the USITC action to this stayed
Delaware action.
In August 2007, we filed a USITC Complaint against Nokia Corporation and Nokia, Inc.
(collectively, “Nokia”) alleging that Nokia engaged in an unfair trade practice by making for
importation into the United States, importing, and selling after importation certain 3G mobile
handsets and components that infringe two of InterDigital’s patents. In November 2007 and
December 2007, a third patent and fourth patent, respectively, were added to our Complaint
against Nokia. The Complaint against Nokia seeks an exclusion order barring from entry into
the U.S. infringing 3G mobile handsets and components that are imported by or on behalf of
Nokia. Our Complaint also seeks a cease-and-desist order to bar further sales of infringing
Nokia products that have already been imported into the United States.
29
In addition, on the same date as our filing of the Nokia USITC action referenced above, we also
filed a Complaint in the Delaware District Court alleging that Nokia’s 3G mobile handsets and
components infringe the same two InterDigital patents identified in the original Nokia USITC
Complaint. This Delaware action was also stayed on January 10, 2008, pursuant to the
mandatory, statutory stay of parallel district court proceedings at the request of a respondent
in an ITC Investigation. Thus, this Delaware action is stayed until the USITC’s determination in
this matter becomes final. The Delaware District Court has permitted InterDigital to add
the third and fourth patents asserted against Nokia in the USITC action to this stayed
Delaware action.
Nokia, joined by Samsung, moved to consolidate the Samsung and Nokia ITC proceedings. On
October 24, 2007, the Honorable Paul J. Luckern, the Administrative Law Judge overseeing the
two USITC proceedings against Samsung and Nokia, respectively, issued an Order to
consolidate the two pending investigations. Pursuant to the Order, the schedules for both
investigations have been revised to consolidate proceedings and set a unified evidentiary
hearing on April 21-28, 2008, the filing of a single initial determination by Judge Luckern by
July 11, 2008, and a Target Date for the consolidated investigations of November 12, 2008, by
which date the USITC should issue its final determination.
On December 4, 2007, Nokia moved for an order terminating, or alternatively, staying the
USITC investigation as to Nokia, on the ground that Nokia and InterDigital must first arbitrate a
dispute as to whether Nokia is licensed under the patents asserted by InterDigital against Nokia
in the USITC investigation. On January 8, 2008, Judge Luckern issued an order denying Nokia’s
motion and holding that Nokia has waived its arbitration defense by instituting and participating
in the Investigation and other legal proceedings. On February 13, 2008, Nokia filed an action in
the U.S. District Court for the Southern District of New York, seeking to preliminarily enjoin
InterDigital from proceeding with the USITC action with respect to Nokia, in spite of Judge
Luckern’s ruling denying Nokia’s motion to terminate the Investigation. Nokia raises in this
preliminary injunction action the same arguments it raised in its motion to terminate the ITC
Investigation, namely that InterDigital allegedly must first arbitrate its dispute with Nokia and
that Nokia has not waived this defense. The Court has scheduled a preliminary injunction
hearing for March 20, 2008.
On February 8, 2008, Nokia filed a motion for summary determination that InterDigital cannot
show that a domestic industry exists in the United States as required to obtain relief. Samsung
joined this motion. InterDigital has opposed this motion. On February 14 and 26, 2008,
InterDigital filed its own motions for summary determination regarding the domestic
industry requirement. No schedule has been set by Judge Luckern as to when these motions
will be decided.
On February 27, 2008, Nokia filed a motion to extend the Target Date in the ITC proceeding.
InterDigital intends to vigorously oppose this motion.
Nokia UKII Action
In July 2005, Nokia filed a claim in the English High Court of Justice, Chancery Division, Patents
Court (“English High Court”) against ITC seeking a Declaration that thirty-one of ITC’s UMTS
European Patents registered in the UK are not essential IPR for the 3GPP Standard (“UKII”).
On December 21, 2007, the English High Court issued a judgment finding that European Patent
(UK) 0,515,610 (the ‘610 patent), owned by InterDigital Technology Corporation, is essential to
the 3G UMTS WCDMA European standard promulgated by the European Telecommunications
Standards Institute (ETSI) and that this patented invention is infringed by carrying out the
method described in the standard. The ‘610 patent relates to open loop power control, a
fundamental aspect of 3G technology. Foreign counterparts having identical or similar claim
30
language to the ‘610 patent have been issued in many parts of the world, including the United
States, Canada, Germany, France, Spain, Italy, and Sweden. The judicial determination of
essentiality is in addition to Nokia’s withdrawal of its challenge to the essentiality of another
patent, European Patent (UK) 0,515,675 relating to pilot codes, effectively conceding that that
patent is essential as well.
In the judgment, the English High Court ruled that one claim of the ‘610 patent was essential.
The English High Court ruled that a second claim of the ‘610 patent, as well as three additional
patents, were not essential. A declaration of non-essentiality is not a finding that a particular
third party product does not infringe an InterDigital patent, and no products were in issue
in these proceedings. The judgment is subject to appeal by either party if permission to appeal
is granted.
There will be a further hearing in April 2008 to determine the form of order to be made as well
as any orders relating to attorneys’ fees. Pursuant to UK law, it is customary for a party winning
a motion or the overall outcome of a case to receive reimbursement of attorneys fees from the
other party. Depending on the outcome of this hearing, this could result in a substantial
amount for the Company, Nokia or neither party.
Nokia UKIII Action
In December 2006, ITC filed a claim in the English High Court against Nokia seeking a
Declaration that thirty-four UMTS European Patents and one UMTS GB national patent all
registered in the UK and declared by Nokia to be essential IPR for the 3GPP Standard are not
essential. Nokia has since admitted in the proceedings that five of those patents are not
essential to the Standard. Since the proceedings began, an additional five of the patents have
been transferred to Nokia Siemens Networks Oy, which has been joined to the action as a
second defendant and which has admitted that one of the five patents is non-essential. The
Court has scheduled a preliminary hearing for no earlier than June 2008 with respect to
whether the Judge should exercise his discretion to issue the declaration being sought by
InterDigital. Trial in this action is scheduled to begin in the fourth quarter of 2008.
Nokia Delaware Proceeding
In January 2005, Nokia and Nokia, Inc. (collectively, “Nokia”) filed a Complaint in the United
States District Court for the District of Delaware (“Delaware District Court”) against InterDigital
Communications, LLC (“IDC”) and our wholly-owned subsidiary, InterDigital Technology
Corporation (“ITC”) (IDC and ITC collectively referred to as “InterDigital,” “we,” or “our”),
alleging that we have used false or misleading descriptions or representations regarding our
patents’ scope, validity, and applicability to products built to comply with 3G wireless phone
Standards (“Nokia Delaware Proceeding”). We subsequently filed counterclaims based on
Nokia’s licensing activities as well as Nokia’s false or misleading descriptions or representations
regarding Nokia’s 3G patents and Nokia’s undisclosed funding and direction of an allegedly
independent study of the essentiality of 3G patents.
On December 10, 2007, pursuant to a joint request by the parties, the Delaware District Court
entered an Order staying the proceedings pending the full and final resolution of the Company’s
ITC investigation against Nokia and Samsung. Specifically, the full and final resolution of the
ITC investigation includes any initial or final determinations of the Administrative Law Judge
overseeing the proceeding, the ITC, and any appeals therefrom. Pursuant to the Order, the
parties and their affiliates are generally prohibited from initiating against the other parties, in
any forum, any claims or counterclaims that are the same as the claims and counterclaims
pending in the Nokia Delaware Proceeding, and should any of the same or similar claims or
counterclaims be initiated by a party, the other parties may seek dissolution of the stay.
31
The Order does not affect any of the other legal proceedings between the parties including
the current ITC Investigation involving InterDigital, Nokia and Samsung, or the parallel
Delaware District Court proceedings also brought by InterDigital against Nokia and
Samsung individually.
Nokia ICC Arbitration
In November 2006, we filed a Request for Arbitration with the ICC against Nokia (“Nokia ICC
Proceeding”), claiming that certain presentations Nokia has attempted to use in support of its
claims in the Nokia Delaware Proceeding are confidential and, as a result, may not be used in
the Nokia Delaware Proceeding pursuant to the parties’ agreement.
The December 10, 2007, Order entered by the Delaware District Court to stay the Nokia
Delaware Proceeding described above, also stayed the Nokia ICC Proceeding pending the full
and final resolution of the ITC Investigation against Nokia and Samsung as described above.
Samsung Delaware Proceeding
In March 2007, Samsung Telecommunications America LLP (“Samsung Telecom”) and Samsung
Electronics Co., Ltd. (“Samsung Electronics”) filed an action against InterDigital Communications
Corporation (now “InterDigital Communications, LLC”), ITC and another affiliate, Tantivy
Communications, Inc. (collectively, “InterDigital,” “we,” or “our”), in the Delaware District Court,
alleging that InterDigital has refused to comply with its alleged contractual obligations to be
prepared to license our patents on fair, reasonable, and non-discriminatory (“FRAND”) terms,
and that InterDigital has allegedly engaged in unfair business practices. By their original
Complaint in the action, the Samsung entities sought damages and declaratory relief, including
declarations that: (i) InterDigital’s patents and patent applications allegedly promoted to
standards bodies are unenforceable; (ii) the Samsung entities have a right to practice
InterDigital’s intellectual property as a result of an alleged license from QUALCOMM
Incorporated; (iii) nine specified InterDigital patents are invalid and/or not infringed by
the Samsung entities; and (iv) InterDigital must offer the Samsung entities a license on
FRAND terms.
In September 2007, Samsung Electronics filed a First Amended Complaint (“Amended
Complaint”) in its proceeding in the Delaware District Court against InterDigital. The Amended
Complaint includes Samsung’s originally-pled claims concerning InterDigital’s alleged behavior
with respect to standards bodies and licensing practices, but omits all of Samsung’s previously
asserted claims for declaratory judgment that nine specified InterDigital patents are invalid
and/or not infringed. The Amended Complaint was filed only on behalf of Samsung Electronics
and, unlike the original Complaint, does not identify Samsung Telecom as a co-plaintiff.
InterDigital intends to vigorously defend itself against Samsung’s allegations in this matter. In
November 2007, InterDigital filed its Answer to the Amended Complaint, disputing Samsung’s
allegations and asserting counterclaims of infringement of two InterDigital patents. InterDigital
simultaneously filed a partial motion to dismiss Samsung’s claim alleging violation of
California’s Unfair Competition Law. No ruling has been made on InterDigital’s motion to
dismiss, and no scheduling order has been issued in the case. The Court has not yet set this
matter for an initial Case Management Conference, and discovery has not yet begun.
Samsung 2nd Arbitration and Related Confirmation Proceeding
In August 2006, an arbitral tribunal (“Tribunal”) operating under the auspices of the
International Court of Arbitration of the International Chamber of Commerce issued a final
award (“Award”) in an arbitration proceeding between InterDigital Communications, LLC and
InterDigital Technology Corporation (collectively, “InterDigital”), and Samsung Electronics. In its
32
Award, the Tribunal ordered Samsung Electronics to pay to InterDigital, pursuant to the parties’
1996 patent license agreement (“Samsung Agreement”), approximately $134 million in past
royalties plus interest on Samsung’s sale of single mode 2G GSM/TDMA and 2.5G GSM/GPRS/
EDGE terminal units through 2005 (“Award”). The Tribunal also established the royalty rates to
be applied to Samsung’s sales of covered products in 2006.
In September 2006, InterDigital filed an action seeking to enforce the arbitral Award in the U.S.
District Court for the Southern District of New York (the “Enforcement Action”). Subsequent to
that filing, in September 2006 Samsung Electronics filed an opposition to the enforcement
action, including filing a cross-petition to vacate or modify the Award and to stay the Award.
Oral arguments were held in November 2007.
On December 10, 2007, the Honorable Richard J. Sullivan, the Judge who is currently
overseeing the Enforcement Action, confirmed the Award in its entirety and directed that
Samsung pay InterDigital $150.25 million comprised of $134 million in royalties plus interest
less an approximate $6 million prepayment credit for sales of 2G terminal units through 2005,
plus pre-judgment interest calculated at a rate of 5% per annum. The Order of Judgment
denied all of Samsung’s petitions and motions and does not include a specified amount for
royalties owed for 2006 under the arbitration award.
On December 18, 2007, Samsung filed an appeal with the United States Court of Appeals for
the Second Circuit and posted an appeal bond, in the amount of approximately $166.7 million,
with the New York District Court. By posting the appeal bond, Samsung has stayed execution of
the Order of Judgment pending the appeal. Under the current schedule, oral argument before
the Second Circuit Court of Appeals will take place no earlier than the week of May 26, 2008.
On February 25, 2008, Samsung filed a motion to stay their appeal, and vacate the current
briefing schedule, pending the outcome of the Samsung 3rd Arbitration (described below). The
Company intends to oppose Samsung’s motion.
Samsung 3rd Arbitration
In October 2006, Samsung Electronics filed a request for a new ICC arbitration proceeding (the
“Samsung 3rd Arbitration”) relating to the ongoing patent royalty dispute between Samsung
and InterDigital. In the Samsung 3rd Arbitration, Samsung Electronics seeks to have a new
arbitration panel determine new royalty rates for Samsung’s 2G/2.5G GSM/GPRS/EDGE product
sales based on the April 2006 Nokia Settlement, which implemented a June 2005 Nokia
arbitration Award. Samsung has purported to have elected the Nokia Settlement under the
most favored licensee (“MFL”) clause in the Samsung Agreement. Samsung contends that it
has the right to have a new rate, based on the Nokia Settlement, applied to its sales in the
period from January 1, 2002 through December 31, 2006 in lieu of the royalty rates that have
been determined by the Tribunal in the Samsung 2nd Arbitration for that period. In addition to
seeking relief based on the Nokia Settlement, Samsung has expressly reserved a purported
right to make an MFL election of another specified license agreement between InterDigital and
a third party, and to add claims relating to that agreement. In the Samsung 3rd Arbitration
proceeding, we have denied that Samsung is entitled to receive any new royalty rate
adjustment based on the Nokia Settlement or the specified third party license agreement. We
have also counterclaimed, seeking an Award of the royalties Samsung owes for its 2G/2.5G
sales in 2006 at the royalty rate specified in the August 2006 Award in the Samsung
2nd Arbitration.
In February 2008, the Tribunal heard oral argument on the issue of whether Samsung is entitled
to elect the Nokia Settlement. The Tribunal has not indicated when it will render a decision on
this issue. The parties will need to present evidence and/or argument in a further phase of this
33
arbitration on the amount of royalties Samsung owes for its 2G/2.5G sales in 2006, and,
depending on the Tribunal’s decision as to whether Samsung is entitled to elect the Nokia
Settlement, possibly for earlier periods of time.
Other
We have filed patent applications in the United States and in numerous foreign countries. In
the ordinary course of business, we currently are, and expect from time-to-time to be, subject
to challenges with respect to the validity of our patents and with respect to our patent
applications. We intend to continue to vigorously defend the validity of our patents and defend
against any such challenges. However, if certain key patents are revoked or patent applications
are denied, our patent licensing opportunities could be materially and adversely affected.
We and our licensees, in the normal course of business, may have disagreements as to the
rights and obligations of the parties under the applicable patent license agreement. For
example, we could have a disagreement with a licensee as to the amount of reported sales of
covered products and royalties owed. Our patent license agreements typically provide for
arbitration as the mechanism for resolving disputes. Arbitration proceedings can be resolved
through an award rendered by an arbitration panel or through private settlement between
the parties.
In addition to disputes associated with enforcement and licensing activities regarding our
intellectual property, including the litigation and other proceedings described above, we are a
party to other disputes and legal actions not related to our intellectual property, but also arising
in the ordinary course of our business, including claims by us for insurance coverage involving
the Nokia Delaware Proceeding. Based upon information presently available to us, we believe
that the ultimate outcome of these other disputes and legal actions will not have a material
adverse affect on us.
Among the types of legal proceedings we encounter in the normal course of business, we are
engaged in the following action:
Federal
In May 2007, the Arbitrator in the arbitration proceeding between InterDigital Communications
Corporation (now “InterDigital Communications, LLC”) and InterDigital Technology Corporation
(collectively, “InterDigital,” “we,” or “our”) and Federal Insurance Company (“Federal”), and
relating to a Litigation Expense and Reimbursement Agreement signed in February 2000 by the
parties (“Reimbursement Agreement”), refused to award the full amount of Federal’s claim
which was in excess of $33 million. The Arbitrator did award Federal approximately $13 million,
pursuant to a formula set forth in the Reimbursement Agreement, for reimbursement of
attorneys’ fees and expenses previously paid to or on behalf of InterDigital by Federal, plus
approximately $2 million in interest. As additional reimbursement of attorneys’ fees and
expenses, the Arbitrator awarded $5 million, without interest, as Federal’s share under the
Reimbursement Agreement of “additional value” of the 2003 settlement between InterDigital
and Ericsson Inc. Further, the Arbitrator ruled that InterDigital must pay Federal 10% of any
additional payments InterDigital may receive as a result of an audit of Sony Ericsson’s sales. In
June 2007, we notified Federal that we had received $2 million from Sony Ericsson to resolve
Sony Ericsson’s payment obligations following an audit. The approximately $13 million portion
of the Award represents a percentage of the amounts InterDigital has received since March
2003 from Telefonaktiebolaget LM Ericsson and Ericsson Inc., and Sony Ericsson Mobile
Communications AB under their respective patent license agreements.
34
In June 2007, Federal moved to confirm the Award in the United States District Court for the
Eastern District of Pennsylvania. Also in June 2007, we filed an opposition to Federal’s motion
to confirm the arbitration Award and a cross motion to vacate a portion of the Award, totaling
approximately $14.5 million, on the ground that the Arbitrator exceeded the scope of her
authority. We also moved the Court to stay confirmation of the Award pending adjudication of
our recoupment defense whereby we are seeking to recoup the full amount of the Award
based on Federal’s bad faith breach of its contractual and fiduciary duties to us. In July 2007,
the Court heard oral arguments on Federal’s motion to confirm the Award, our opposition
thereto, our cross motion to vacate the Award, and to stay confirmation pending adjudication
of our recoupment defense. The Court has not yet ruled on these pending motions.
At the time of judgment we recorded an expense of approximately $16.6 million which
represents the total amount of the Award through third quarter 2007, less the amount of a
previously accrued liability of $3.4 million. We have also accrued post judgment interest of $0.7
million and reported such interest expense within the interest and other income, net line item
of our Statement of Income.
ITeM 4. SUbMISSIon oF Ma TTeRS T o a VoTe oF SecURITY H olDeRS.
During the fourth quarter of fiscal year ended December 31, 2007, no matters were submitted
to a vote of our security holders.
PaRT II
ITeM 5. MaRKeT FoR coMPan Y’S co MMon eQUITY, RelaTeD
STocKHolDeR MaTTeRS anD ISSUeR PURcHaSeS oF
eQUITY SecURITIeS
The following table sets forth the range of the high and low sales prices of our common stock
for the years 2007 and 2006, as reported by The NASDAQ Stock Market LLC.
2007
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2006
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$ 35.74
35.25
32.97
25.50
$ 30.51
31.04
19.55
16.47
High
Low
$ 27.52
$ 17.74
35.04
35.44
36.91
21.41
23.92
28.81
As of February 20, 2008, there were approximately 1,348 holders of record of our common stock.
35
We have not paid cash dividends on our common stock since inception. It is anticipated that in
the foreseeable future, without regard to any cash proceeds we may receive from any
settlement or resolution of outstanding arbitrations or litigations, no cash dividends will be
paid on our common stock and any cash otherwise available for such dividends will be
reinvested in our business or used to repurchase our common stock. When considering
whether or not to pay cash dividends, our Board assesses our earnings, any dividend
requirements on Preferred Stock if issued in the future, our capital requirements and other
relevant factors.
(a) Performance Graph
The following graph compares five-year cumulative total returns of the Company, the NASDAQ
Stock Market (U.S. companies) Index and the NASDAQ Telecommunications Stock Index. The
graph assumes $100 was invested in the common stock of InterDigital and each index of
December 31, 2002 and that all dividends were reinvested. During this period, InterDigital has
not declared or paid any dividends on its common stock.
Comparison of 5 Year Cumulative Total Return*
Among InterDigital Inc., The NASDAQ Composite Index and the NASDAQ Telecommunications Index
(cid:4)(cid:19)(cid:16)(cid:16)
(cid:4)(cid:18)(cid:21)(cid:16)
(cid:4)(cid:18)(cid:16)(cid:16)
(cid:4)(cid:17)(cid:21)(cid:16)
(cid:4)(cid:17)(cid:16)(cid:16)
(cid:4)(cid:21)(cid:16)
(cid:4)(cid:16)
12/02
(cid:18)(cid:21)(cid:19)(cid:14)(cid:17)(cid:18)
(cid:18)(cid:16)(cid:21)(cid:14)(cid:18)(cid:18)
(cid:17)(cid:22)(cid:16)(cid:14)(cid:18)(cid:19)
(cid:17)(cid:18)(cid:15)(cid:16)(cid:19)
(cid:17)(cid:18)(cid:15)(cid:16)(cid:20)
(cid:17)(cid:18)(cid:15)(cid:16)(cid:21)
(cid:17)(cid:18)(cid:15)(cid:16)(cid:22)
(cid:17)(cid:18)(cid:15)(cid:16)(cid:23)
Total Returns Index for:
12/02
12/03
12/04
12/05
12/06
12/07
n InterDigital, Inc.
★ NASDAQ
Composite
▲ NASDAQ
100.00
141.48
151.79
125.82
230.43
160.23
100.00
149.75
164.64
168.60
187.83
205.22
Telecommunications 100.00
188.21
199.04
192.18
244.38
253.12
*$100 invested on 12/31/02 in stock or index—including reinvestment of dividend. Fiscal year ending December 31.
36
(c) Issuer Purchases of Equity Securities
Repurchase of Common Stock
In 2006 our Board of Directors authorized the repurchase of up to $350.0 million of our
outstanding common stock. In October 2007, our Board of Directors authorized a new $100.0
million share repurchase program. The Company may repurchase shares under the programs
through open market purchases, pre-arranged trading plans or privately negotiated purchases.
During 2006 we repurchased approximately 6.5 million shares of common stock for $192.5
million. At December 31, 2006, we accrued accounts payable of approximately $7.6 million
associated with our obligation to settle late December repurchases. We completed the 2006
repurchase program in April 2007 through the repurchase of 4.8 million shares of common
stock for $157.7 million. Under the October 2007 authorization, we repurchased approximately
1.0 million shares of common stock for $18.5 million. At December 31, 2007, we accrued
accounts payable of approximately $0.8 million associated with our obligation to settle late
December repurchases. From January 1, 2008 through February 22, 2008, we repurchased an
additional 0.3 million shares for $7.9 million bringing the cumulative repurchase totals to
1.3 million shares at a cost of $26.4 million under the current program. Under a previous
repurchase program in 2005, we repurchased 2.0 million shares of common stock for
$34.1 million.
The following table provides information regarding the Company’s purchases of its Common
Stock, $0.01 par value, during the fourth quarter of 2007:
Total Number
of Shares
(or Units)
Purchased
as Part of
Publicly
Announced
Maximum
Number of
(or Approximate
Dollar Value)
of Shares that
May Yet Be
Purchased
Plans or Under the Plans
Programs
or Programs(1)
Total
Number
of Shares
(or Units)
Purchased
Average
Price paid
Per Share
(or Unit)
Period
October 1, 2007 – October 31, 2007
—
November 1, 2007 – November 30, 2007 300,000
657,026
December 1, 2007 – December 31, 2007
$ —
$ 18.37
$ 19.84
—
300,000
657,026
$ 100,000,000
$ 94,489,610
$ 81,454,652
Total
957,026
$ 19.38
957,026
$ 81,454,652
(1) As of February 22, 2008, we have repurchased a total of 1.3 million shares of our common stock under the October 2007 authorization
at a total cost of approximately $26.4 million.
37
ITeM 6. SelecTeD FInancIal D aTa
(in thousands, except per share data)
Consolidated statements of operations data:
2007
2006
2005
2004
2003
Revenues:(a)
Income (loss) from operations (b)
Other income (c)
Income tax (provision) benefit (d)
Net income applicable
to common shareholders
Net income per common
share—basic
Net income per common
share—diluted
Weighted average number
of common shares
outstanding—basic
Weighted average number
of common shares
outstanding—diluted
Consolidated balance sheet data:
Cash and cash equivalents
Short-term investments
Working capital
Total assets
Total debt
Total shareholders’ equity
$ 480,466
$ 163,125
$ 103,685
$ 114,574
$ 234,232
$ 23,054
—
$
$ (11,999)
$ 336,416
$ 17,087
$
—
$
—
$ (124,389)
$ 34,434
$ 20,004
$ 225,222
$ 54,685
$
$
0.42
0.40
$
$
4.22
4.04
$
$
1.01
0.96
$
$
$
$
$
$
(6,292) $ 29,541
—
$ 10,580
4,704
$
(7,269)
89
$ 34,332
—
$
0.62
—
$
0.58
47,766
53,426
54,058
55,264
55,271
49,489
55,778
57,161
59,075
59,691
$ 92,018
85,449
214,229
534,885
3,717
$ 137,067
$ 166,385
$ 27,877
$ 15,737
$ 20,877
97,581
77,831
116,081
85,050
332,574
125,181
106,784
112,325
564,075
299,537
241,920
205,165
1,572
1,922
1,884
1,970
$ 275,476
$ 174,314
$ 115,659
$ 97,485
(a) In 2006, we recognized $253 million of revenue related to the resolution of disputes with Nokia regarding our 1999 Patent License
Agreement. In third quarter 2004, we transitioned to reporting per-unit royalties in the period in which we receive our licensees’ royalty
reports rather than in the period in which our licensees’ sales of covered products occur. As a result of this transition, our results for 2004
include only three quarters of per-unit royalties.
(b) In 2007, our income from operations included non recurring charges to accrue contingent liabilities associated with an award in our arbitration
with Federal and the potential reimbursement for legal fees under our UK II matter with Nokia of $16.6 million and $7.8 million, respectively.
In 2005 and 2004, our income (loss) from operations included charges of $1.5 million and $0.6 million, respectively, associated with actions
to reposition the Company’s operations.
(c) In 2003, we recognized as other income, $14 million from the settlement of our litigation with Ericsson, net of an estimated $3.4 million
associated with a claim under an insurance agreement.
(d) Our income tax provision in 2005 included a benefit of approximately $43.7 million, primarily related to the fourth quarter 2005 reversal
of our Federal deferred tax asset valuation allowance. Our income tax provision in 2004 included a benefit of approximately $17 million
related to the third quarter 2004 partial reversal of our Federal deferred tax asset valuation allowance. In 2003, our income tax provision
was comprised primarily of non-U.S. withholding taxes and Alternative Minimum Tax. The volatility in our income tax provision, prior to
recognizing increases in the value of our deferred tax assets, was primarily due to changes in the level of royalty revenue subject to non-U.S.
withholding tax.
38
ITeM 7. ManageMenT’S DI ScUSSIon anD analYSIS oF
FInancIal conD ITIon anD ReSUl TS oF oPeRa TIo nS
Overview
The following discussion should be read in conjunction with the Selected Financial Data, the
Consolidated Financial Statements and the notes thereto contained in this document. Please
refer to the Glossary of Terms immediately following the Table of Contents for a listing and
detailed description of the various technical, industry and other defined terms that are used in
this annual report.
Business
We design and develop advanced digital wireless technologies for use in digital cellular and
wireless IEEE 802 related products. We actively participate in and contribute our technology
solutions to worldwide organizations responsible for the development and approval of
Standards to which digital cellular and IEEE 802 compliant products are built, and our
contributions are regularly incorporated into such Standards. We offer licenses to our patents
to equipment producers that manufacture, use and sell digital cellular and IEEE 802 related
products. In addition, we offer for license or sale our SlimChip family of mobile broadband
modem solutions (which includes modem IP know-how, baseband ICs and Reference Platforms)
to mobile device manufacturers, semiconductor companies and other equipment producers
that manufacture, use and sell digital cellular. We have built our suite of technology and patent
offerings through independent development, joint development with other companies and
selected acquisitions.
Our goal is to derive revenue on every 3G mobile device sold, either in the form of patent
licensing revenues, product related revenues, or a combination of these elements. In recent
years, our patent license agreements have contributed the majority of our cash flow and
revenues. As of December 2007, we recorded patent royalties on approximately one-third of all
3G mobile devices sold worldwide. In addition, our technology product solutions offer an
additional means to generate revenue from 3G mobile devices.
In 2007, 2006 and 2005 our revenues were $234.2 million, $480.5 million and $163.1 million,
respectively and our recurring revenues were $219.5 million, $213.1 million and $152.9 million,
respectively. The increase in recurring revenues over the last two years is attributable to both
an increase in the number of licensees and higher royalties from existing licensees, based on
increased sales of covered 3G products.
Industry Overview
Our revenue and cash flows are dependent, in large part, on our licensees sales of wireless
products. Over the course of the last ten years, the cellular communications industry has
experienced rapid growth worldwide. Total worldwide cellular wireless communications
subscribers rose from slightly more than 200 million at the end of 1997 to approximately 2.6
billion at the end of 2007. In several countries, mobile telephones now outnumber fixed-line
telephones. Market analysts expect that the aggregate number of global wireless subscribers
could exceed 4.5 billion in 2012.
39
actual graph
For layout
1500
1000
500
0
Global Handset Sales by Technology(1)
1,500
1,000
500
0
2006
2007
2008
2009
2010
2011
2012
3G (WCDMA)(2)
3G (CDMA)(3)
2G/2.5G(4)
Total
92
160
747
999
167
170
785
240
188
783
344
201
731
457
204
645
590
208
542
735
211
409
1,122
1,211
1,276
1,306
1,340
1,355
(1) Source: Strategy Analytics, Inc. July 2007. Data for 2007 through 2012 represents estimates of handset sales.
(2) Includes: WCDMA/HSPA, LTE, and TD-SCDMA.
(3) Includes: cdma2000 and its evolutions, such as EV-DO.
(4) Includes: GSM/GPRS/EDGE and Analog, iDEN, TDMA, PHS and PDC.
The growth in new cellular subscribers, combined with existing customers choosing to replace
their mobile phones, helped fuel the growth of mobile phone sales from approximately 115
million units in 1997 to over one billion units in 2007. We believe the combination of a broad
subscriber base, continued technological change, and the growing dependence on the Internet,
e-mail and other digital media sets the stage for continued growth in the sales of wireless
products and services over the next five years. For these same reasons, shipments of
3G-enabled phones, which represented approximately 25% of the market in 2006, are predicted
to increase to approximately 70% of the market by 2012. Moreover, recent advances in
3G technologies that support devices offering higher data rates have met with rapid
consumer uptake.
In addition to the advances in digital cellular technologies, the industry has also made
significant advances in non-cellular wireless technologies. In particular, IEEE 802.11 WLAN has
gained momentum in recent years as a wireless broadband solution in the home, office and in
public areas. IEEE 802.11 technology offers high-speed data connectivity through unlicensed
spectrum within a relatively modest operating range. Since its introduction in 1998,
semiconductor shipments of products built to the IEEE 802.11 Standard have nearly doubled
every year. While relatively small compared to the cellular market (approximately 300 million
IEEE 802.11 wireless ICs shipped in 2007), the affordability and attractiveness of the technology
has helped fuel rapid market growth. In addition, the IEEE wireless Standards bodies are
creating sets of Standards to enable higher data rates, provide coverage over longer distances
and enable roaming. These Standards are establishing technical specifications for high data
rates, such as IEEE 802.16 (WiMAX) as well as technology specifications to enable seamless
handoff between different air interfaces (IEEE 802.21).
We Have Substantially Replaced Expired 2G Patent License Revenue
The amortization of $53 million of royalty payments associated with our 2G patent license
agreement with NEC Corporation of Japan (NEC) was completed in February 2006.
Telefonaktiebolaget LM Ericsson and Ericsson Inc.’s (Ericsson) obligation to pay royalties under
its 2G/2.5G patent license agreement ceased after the recent remittance of its final fixed
payment of $1.5 million related to fourth quarter 2006 covered infrastructure sales. Sony
40
Ericsson Mobile Communications AB’s (Sony Ericsson) obligation to pay royalties under its
2G/2.5G patent license agreement ended in first quarter 2007. Together, these three 2G/2.5G
licenses contributed approximately $24.9 million or 12% of our recurring revenue in 2006 and
$8.7 million or 4% of recurring revenue in 2007. We do not expect to recognize any additional
revenue in 20 08 related to the above noted agreements with NEC, Ericsson and
Sony Ericsson.
We continue to place substantial focus on both expanding our base of patent licensees and
resolving our outstanding patent license litigation with Samsung. We also continue to seek
customers for our technology products and solutions. In 2007, we concluded new agreements
and amendments to existing agreements that, combined with growth from existing licensees,
contributed revenue that more than offset the reductions noted above.
Repurchase of Common Stock
In 2006 our Board of Directors authorized the repurchase of up to $350.0 million of our
outstanding common stock. In October 2007, our Board of Directors authorized a new $100.0
million share repurchase program. The Company may repurchase shares under the programs
through open market purchases, pre-arranged trading plans or privately negotiated purchases.
During 2006 we repurchased approximately 6.5 million shares of common stock for $192.5
million. At December 31, 2006, we accrued accounts payable of approximately $7.6 million
associated with our obligation to settle late December repurchases. We completed the 2006
repurchase program in April 2007 through the repurchase of 4.8 million shares of common
stock for $157.7 million. Under the October 2007 authorization, we repurchased approximately
1.0 million shares of common stock for $18.5 million. At December 31, 2007, we accrued
accounts payable of approximately $0.8 million associated with our obligation to settle late
December repurchases. From January 1, 2008 through February 22, 2008, we repurchased an
additional 0.3 million shares for $7.9 million bringing the cumulative repurchase totals to
1.3 million shares at a cost of $26.4 million under the current program. Under a previous
repurchase program in 2005, we repurchased 2.0 million shares of common stock for
$34.1 million.
Intellectual Property Rights Enforcement
From time-to-time, if we believe that a third party is required to license our patents in order to
manufacture and sell certain digital cellular products and such third party has not done so, we
might institute legal action against the third party. These legal actions typically take the form of
a patent infringement lawsuit or an administrative proceeding such as a Section 337 proceeding
before the U.S. International Trade Commission. In addition, we and our licensees, in the
normal course of business, might seek to resolve disagreements between the parties with
respect to the rights and obligations of the parties under the applicable license agreement
through arbitration or litigation.
In 2007, our patent litigation and arbitration costs increased to $36.9 million from $21.4 million
in 2006. This represented 55% of our total patent administration and licensing costs of $67.6
million. Patent litigation and administration costs will vary depending upon activity levels and
it is likely they will continue to be a significant expense for us in the future.
Development
Our investments in the development of advanced digital wireless technologies and related
products include maintaining a highly specialized engineering team and providing that team
with the equipment and advanced software platforms necessary to support the development of
technologies. Over each of the last three years, our cost of development has ranged between
41
44% and 47% of our total operating expenses exclusive of non-recurring contingency accruals
and repositioning charges. The largest portion of our cost of development has been personnel
costs. As of December 31, 2007, we employed 261 engineers, 93% of whom hold advanced
degrees and 45 of those hold PhDs.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements are based on the selection and application of accounting
principles, generally accepted in the United States of America, which require us to make
estimates and assumptions that affect the amounts reported in both our consolidated financial
statements and the accompanying notes thereto. Future events and their effects cannot be
determined with absolute certainty. Therefore, the determination of estimates requires the
exercise of judgment. Actual results could differ from these estimates and any such differences
may be material to the financial statements. Our significant accounting policies are described
in Note 2 to our consolidated financial statements and are included in Item 8 of this annual
report. We believe the accounting policies that are of particular importance to the portrayal of
our financial condition and results and that may involve a higher degree of complexity and
judgment in their application compared to others, are those relating to patents, contingencies,
revenue recognition, compensation and income taxes. If different assumptions were made or
different conditions had existed, our financial results could have been materially different.
Patents
We capitalize external costs, such as filing fees and associated attorneys’ fees, incurred to
obtain issued patents and patent license rights. We expense costs associated with maintaining
and defending patents subsequent to their issuance. We amortize capitalized patent costs on a
straight-line basis over the estimated useful lives of the patents. Ten years represents our best
estimate of the average useful life of our patents relating to technology developed directly by
us. The ten year estimated useful life of internally generated patents is based on our assessment
of such factors as the integrated nature of the portfolios being licensed, the overall makeup of
the portfolio over time and the length of license agreements for such patents. The estimated
useful lives of acquired patents and patent rights, however, have been and will continue to be
based on a separate analysis related to each acquisition and may differ from the estimated
useful lives of internally generated patents. We assess the potential impairment to all capitalized
net patent costs when events or changes in circumstances indicate that the carrying amount of
our patents portfolio may not be recoverable. Amortization expense related to capitalized
patent costs was $9.3 million, $7.8 million and $6.3 million in 2007, 2006 and 2005, respectively.
As of December 31, 2007 and 2006, we had capitalized gross patent costs of $132.1 million and
$106.2 million, respectively, which were offset by accumulated amortization of $45.0 million
and $35.7 million, respectively. Our capitalized gross patent costs in 2005 included $8.1 million
of patents acquired from third parties. The weighted average estimated useful life of
our capitalized patent costs at December 31, 2007 and 2006 was 11.0 years and 11.2
years, respectively.
Contingencies
We recognize contingent assets and liabilities in accordance with Statement of Financial
Accounting Standards (SFAS) No. 5 Accounting for Contingencies.
In second quarter 2007, we recorded a $16.6 million charge to increase a $3.4 million contingent
liability to $20 million. Subsequently we have accrued $0.7 million of post judgment interest
expense. This accrual relates to an arbitration with Federal over an insurance reimbursement
agreement. In fourth quarter 2007, we accrued $7.8 million for the potential reimbursement of
legal fees associated with our UKII matter with Nokia.
42
Revenue Recognition
We derive the majority of our revenue from patent licensing. The timing and amount of revenue
recognized from each licensee depends upon a variety of factors, including the specific terms
of each agreement and the nature of the deliverables and obligations. 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 and non-refundable
license fees for the use of patents and/or know-how, patent and/or know-how licensing
royalties on covered products sold by licensees, cross licensing terms between us and other
parties, the compensation structure and ownership of intellectual property rights associated
with contractual technology development arrangements, and advanced payments and fees for
service arrangements. Due to the combined nature of some agreements and the inherent
difficulty in establishing reliable, verifiable and objectively determinable evidence of the fair
value of the separate elements of these agreements, the total revenue resulting from such
agreements may sometimes be recognized over the combined performance period. In other
circumstances, such as those agreements involving consideration for past and expected future
patent royalty obligations, the determining factors necessary to allocate revenue across past,
current, and future years may be difficult to establish. In such instances, after consideration of
the particular facts and circumstances, the appropriate recording of revenue between periods
may require the use of judgment. Generally, we will not recognize revenue or establish a
receivable related to payments that are due greater than twelve months from the balance sheet
date. In all cases, revenue is only recognized after all of the following criteria are met: (1)
written agreements have been executed; (2) delivery of technology or intellectual property
rights has occurred or services have been rendered; (3) fees are fixed or determinable; and (4)
collectibility of fees is reasonably assured.
Patent License Agreements
Upon signing a patent license agreement, we provide the licensee permission to use our
patented inventions in specific applications. We have no material future obligations associated
with such licenses, other than, in some instances, to provide such licensees with notification of
future license agreements pursuant to most favored licensee rights. Under our patent license
agreements, we typically receive one or a combination of the following forms of payment as
consideration for permitting our licensees to use our patented inventions in their applications
and products:
Consideration for Prior Sales: Consideration related to a licensee’s product sales from prior
periods may result from a negotiated agreement with a licensee that utilized our patented
inventions prior to signing a patent license agreement with us or from the resolution of a
disagreement or arbitration with a licensee over the specific terms of an existing license
agreement. In each of these cases, we record the consideration as revenue. We may also
receive consideration from the settlement of patent infringement litigation where there was no
prior patent license agreement. We record the consideration related to such litigation as
other income.
Fixed Fee Royalty Payments: Up-front, non-refundable royalty payments that fulfill the
licensee’s obligations to us under a patent license agreement, for a specified time period or for
the term of the agreement.
Prepayments: Up-front, non-refundable royalty payments towards a licensee’s future obligations
to us related to its expected sales of covered products in future periods. Our licensees’
obligations to pay royalties extend beyond the exhaustion of their Prepayment balance. Once a
licensee exhausts its Prepayment balance, we may provide them with the opportunity to
make another Prepayment toward future sales or it will be required to make Current
Royalty Payments.
43
Current Royalty Payments: Royalty payments covering a licensee’s obligations to us related to
its sales of covered products in the current contractual reporting period.
We recognize revenues related to Consideration for Prior Sales when we have obtained a
signed agreement, identified a fixed or determinable price and determined that collectibility is
reasonably assured. We recognize revenues related to Fixed Fee Royalty Payments on a
straight-line basis over the effective term of the license. We utilize the straight-line method
because we have no future obligations under these licenses and we cannot reliably predict in
which periods, within the term of a license, the licensee will benefit from the use of our
patented inventions.
Licensees that either owe us Current Royalty Payments or have Prepayment balances provide
us with quarterly or semi-annual royalty reports that summarize their sales of covered products
and their related royalty obligations to us. We typically receive these royalty reports subsequent
to the period in which our licensees’ underlying sales occurred. Consideration for Prior Sales,
the exhaustion of Prepayments and Current Royalty Payments are often calculated based on
related per-unit sales of covered products.
During 2007, we recognized revenue of $5.2 million related to unpaid patent licensee royalties.
We based our recognition of this revenue on royalty reports received, despite the fact that the
licensee has expressed its belief that it does not have a current payment obligation. We believe
that we are entitled to these royalty payments and the eventual collection of these amounts is
reasonably assured. If we had determined that there was a reasonable chance that we would
not collect these royalties, we would have recorded up to $5.2 million less revenue in 2007.
Technology Solutions Revenue
Technology solutions revenue consists primarily of revenue from software licenses and
engineering services. Software license revenues are recognized in accordance with the
American Institute of Certified Public Accountants Statement of Position (SOP) 97-2 Software
Revenue Recognition and SOP 98-9 Modification of SOP 97-2, Software Revenue Recognition.
When the arrangement with the customer includes significant production, modification or
customization of the software, we recognize the related revenue using the percentage-of-
completion method in accordance with SOP 81-1 Accounting for Performance of Construction-
Type and Certain Production-Type Contracts. Under this method, revenue and profit are
recognized throughout the term of the contract, based on actual labor costs incurred to date as
a percentage of the total estimated labor costs related to contract. Changes in estimates for
revenues, costs and profits are recognized in the period in which they are determinable. When
such estimates indicate that costs will exceed future revenues and a loss on the contract exists,
a provision for the entire loss is recognized at that time.
We recognize revenues associated with engineering service arrangements that are outside the
scope of SOP 81-1 on a straight-line basis under Staff Accounting Bulletin No. 104 Revenue
Recognition, unless evidence suggests that the revenue is earned or obligations are fulfilled in
a different pattern, over the contractual term of the arrangement or the expected period during
which those specified services will be performed, whichever is longer. In such cases we often
recognize revenue using proportional performance and measure the progress of our
performance based on the relationship between incurred contract costs and total estimated
contract costs. Our most significant cost has been labor and we believe both labor hours and
labor cost provide a measure of the progress of our services. 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 probable and reasonably estimable.
44
When technology solutions agreements include royalty payments, we recognize revenue from
the royalty payments using the same methods described above under our policy for
recognizing revenue from patent license agreements.
Deferred Charges
From time-to-time, we use sales agents to assist us in our licensing activities. We often pay a
commission related to successfully negotiated license agreements. The commission rate varies
from agreement to agreement. Commissions are normally paid shortly after our receipt of cash
payments associated with the patent license agreements.
We defer recognition of commission expense related to both Prepayments and Fixed Fee
Royalty Payments and amortize these expenses in proportion to our recognition of the related
revenue. In 2007, 2006 and 2005, we paid cash commissions of approximately $1.7 million,
$18.8 million and $3.1 million, respectively, and recognized commission expense of $4.7
million, $8.4 million, and $4.5 million, respectively, as part of patent administration and
licensing expense. At December 31, 2007, 2006 and 2005 we had deferred commission expense
of approximately $4.1 million, $4.1 million and $1.4 million, respectively, included within
prepaid and other current assets and $8.8 million, $12.0 million and $4.4 million, respectively,
included within other non-current assets.
Compensation Programs
We use a variety of compensation programs to both attract and retain employees and more
closely align employee compensation with Company performance. These programs include,
but are not limited to, an annual bonus tied to performance goals, cash awards to inventors for
filed patent applications and patent issuances, restricted stock unit (RSU) awards for non-
managers and a long-term compensation program (LTCP), covering managers, that includes
RSUs and a performance-based cash incentive component. The LTCP was originally designed
to include three year cycles that overlap by one year. However, the first cycle under the
program covered the period from April 1, 2004 through January 1, 2006 (Cycle 1). The second
cycle originally covered the period from January 1, 2005 through January 1, 2008 (Cycle 2). In
second quarter 2005, the Compensation Committee of our Board of Directors amended the
LTCP to revise the performance-based cash award portion of Cycle 2 to cover a 3-1/2 year
period from July 1, 2005 through January 1, 2009 (Cycle 2a), and authorized a pro-rated interim
payment, of approximately $0.9 million, related to first half 2005. The third RSU cycle
(RSU Cycle 3) began on January 1, 2007 and runs through January 1, 2010. The third
performance-based cash award cycle (Cash Cycle 3) began on January 1, 2008 and runs
through January 1, 2011.
We recognized $3.9 million, $3.5 million and $6.5 million of compensation expense in 2007,
2006 and 2005, respectively, related to the performance-based cash incentive under our LTCP,
discussed below. We also recognized share-based compensation expense of $9.8 million, $7.0
million and $9.8 million in 2007, 2006 and 2005, respectively. The majority of the share-based
compensation expense, for all years, related to RSU awards granted to managers under our
LTCP. In 2006, share-based compensation expense also included a non-recurring charge of $1.0
million to correct our accounting related to share-based grants awarded to two non-employee,
non-director consultants in 1998. We previously accounted for these non-employee grants
similarly to share-based employee grants, using the intrinsic value method. The charge reflects
the incremental cost that would have been recognized by correctly treating these grants as
non-employee grants using the fair value method. Due to the structure of the different cycles in
the LTCP, we expect that 2008 expenses associated with the performance-based cash incentive
and RSUs will be approximately $0.3 million more than 2007. However, the amount recorded
45
could either increase or decrease dependent upon both the number of employees that qualify
for the LTCP and our future assessment of the expected attainment of pre-established
performance goals.
At December 31, 2007, accrued compensation expenses associated with the performance-based
cash incentive was based on an estimated 100% payout for Cycle 2a. Under the program, 100%
achievement of the goals set by the Compensation Committee of the Board of Directors results
in a 100% payout of the performance-based cash incentive target amounts. For each 1% change
above or below 100% achievement, the payout is adjusted by 2.5 percentage points with a
maximum payout of 225% and no payout for performance that falls below 80% of target
results. The following table provides examples of the performance-based cash incentive payout
that would be earned based on various levels of goal achievement:
Goal Achievement
Less than 80%
80%
100%
120%
150% or greater
Payout
0%
50%
100%
150%
225%
If we had assumed that the Company’s Cycle 2a goal achievement would be either 120% or
80%, we would have accrued either $4.6 million more or less, respectively, of related
compensation expense through December 31, 2007. However, our estimated accrual could
either increase or decrease in the future dependent upon our future assessment of the expected
attainment against pre-established performance goals.
During 2006, fourteen members of our senior management voluntarily exchanged approximately
56,000 Cycle 2 time-based RSUs for an equal number of Cycle 2 performance-based RSUs. The
Company ultimately satisfied these performance-based RSUs in early 2008 through the
issuance of approximately 11,000 shares, based upon senior management’s performance
against specified goals. During 2006, the LTCP was amended such that, beginning with the
January 1, 2007 grant, executives now receive 50% of their RSU grant as performance-based
RSUs and 50% as time-based. Under the amendment the Company’s managers now receive
25% of their RSU grant as performance-based RSUs and 75% as time-based.
Under the program, 100% achievement of the goals set by the Compensation Committee of the
Board of Directors results in a 100% payout of the performance-based RSU incentive target
amounts. For each 1% change above or below 100% achievement, the payout is adjusted by 4
percentage points with a maximum payout of 300%. For performance that falls below 80% of
target, no share payout would occur. The following table provides examples of the performance-
based RSU payout that would be earned based on various levels of goal achievement:
Goal Achievement
Less than 80%
80%
100%
120%
150% or greater
Payout
0%
20%
100%
180%
300%
At December 31, 2007, we did not meet criteria specified by SFAS No.123R to accrue
performance-based equity compensation associated with the Cycle 3 RSU grant. If we had
determined that we met such criteria, we would have accrued $1.2 million of related
compensation expense through December 31, 2007. We will establish an accrual for these
46
performance RSUs in the future if our future assessment of the expected attainment against
pre-established performance goals meets certain criteria for performance-based share
compensation established by SFAS No.123R.
In fourth quarter 2005, we accelerated the vesting of all stock options which were scheduled to
vest on or after January 1, 2006. As a result, options to purchase approximately 0.8 million
shares of our common stock, which would otherwise have vested at various times over the
next six years, became fully vested. We recorded a charge of approximately $0.2 million related
to this acceleration. The charge was based, in part, on our estimate that approximately 12% of
the accelerated options would have been forfeited had the acceleration not occurred. The
charge would have been approximately $1.6 million if we had estimated that 100% of the
options would have been forfeited had the acceleration not occurred. The acceleration
eliminated a non-cash charge of approximately $7.1 million that would have been recognized
under SFAS No. 123 (R) Share-Based Payments between 2006 and 2011. We will continue to
recognize expense for our remaining equity-based incentive programs.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under this method,
deferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying values of existing assets
and liabilities and their respective tax bases, and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in
which those temporary differences are expected to be recovered or settled. The effect of a
change in tax rates on deferred tax assets and liabilities is recognized in the Consolidated
Statement of Operations in the period that includes the enactment date. A valuation allowance
is recorded to reduce the carrying amounts of deferred tax assets if management has
determined that it is more likely than not that such assets will not be realized.
In addition, the calculation of tax liabilities involves significant judgment in estimating the
impact of uncertainties in the application of complex tax laws. We are subject to examinations
by the Internal Revenue Service (IRS) and other taxing jurisdictions on various tax matters,
including challenges to various positions we assert in our filings. Effective January 1, 2007 the
Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN
48). This interpretation clarifies the criteria for recognizing income tax benefits under FASB
Statement No. 109, Accounting for Income Taxes, and requires additional disclosures about
uncertain tax positions. Under FIN 48 the financial statement recognition of the benefit for a tax
position is dependent upon the benefit being more likely than not to be sustainable upon audit
by the applicable tax authority. If this threshold is met, the tax benefit is then measured and
recognized at the largest amount that is greater than 50 percent likely of being realized upon
ultimate settlement. As a result of the implementation, we recognized a $2.1 million increase to
reserves for uncertain tax positions. This increase, related to federal tax credits, was accounted
for as a reduction to retained earnings on the balance sheet. Including this cumulative effect
adjustment, on January 1, 2007 we had $6.2 million of net federal tax benefits that, if
recognized, would reduce our effective income tax rate in the period recognized. Prior to the
adoption of FIN 48, we accrued for tax contingencies that had met the probable and reasonably
estimable criteria. As of December 31, 2007 and 2006, there are certain tax contingencies that
did not meet the applicable criteria to record an accrual. In the event that the IRS or another
taxing jurisdiction levies an assessment in the future, it is possible the assessment could have
an adverse effect on our consolidated financial condition or results of operations.
Based on judgments associated with determining the annual limitation applicable to us under
Internal Revenue Code Section 382, we did not include all federal NOL carryforwards in the
computation of our gross deferred tax assets. We also excluded a portion of the federal
47
research and experimental credits that may be available to us from the computation of gross
deferred tax assets based upon estimates of the final credit that may be realized. Had we
included all federal NOL carryforwards and research and experimental credits in the
computation of gross deferred tax assets, the gross deferred tax assets at December 31, 2006
would have been approximately $10.2 million greater and our income tax provision would
have decreased by the same amount. We recorded a FIN 48 reserve of approximately $3.6
million during 2007 upon the utilization of these gross deferred tax assets.
In 2006, we began to credit foreign source withholding tax payments against our U.S. Federal
Income Tax Liability. Prior to 2006, we recognized deferred tax assets related to deferred
revenue for both U.S. Federal Income Tax purposes and non-U.S. jurisdictions that assess a
source withholding tax on related royalty payments. We expense these deferred tax assets as
we recognize the revenue and the related temporary differences reverse.
Between 1999 and 2005 we paid approximately $30.7 million of foreign taxes. During this
period we were in a net operating loss position for U.S. federal income tax purposes and
elected to deduct these foreign tax payments as expenses on our U.S. federal income tax
returns rather than take them as foreign tax credits. We elected this strategy because a) we had
no U.S. cash tax obligations at the time and b) net operating losses can be carried forward
significantly longer than foreign tax credits. We utilized most of our net operating losses in
2006 and began to generate U.S cash tax obligations. At that time, we began to treat our
foreign tax payments as foreign tax credits on our U.S. federal income tax return.
We are currently evaluating the possibility of amending our U.S. federal income tax returns for
the periods 1999–2005 to determine if we are able to take the foreign tax payments we made
during that period as foreign tax credits instead of deductions. The process to amend these
returns is complicated including aggregating information that was not previously required and
may not be available and involves tax treaty competent authority procedures including both
U.S. and foreign tax authorities. It is possible that we may be unable to establish a basis to
support amending the returns, but it is estimated that a maximum benefit could be a refund
claim of approximately $20 million. We can not yet predict the amount, if any, of potential
refund and we do not anticipate being in a position to file any amended returns until 2009,
although it is possible that we could file amended returns sooner. No benefit has been
recorded for this contingent gain.
SIgnIFIcanT agReeMenTS anD eVenTS
2005 Repositioning
In August 2005, we announced plans to close our Melbourne, Florida design facility. We ceased
development activity at this facility in third quarter 2005 and relocated certain development
efforts and personnel to other Company locations. We closed this facility in fourth quarter 2005.
On the date of the announced closing, there were thirty-three full or part-time employees at
this facility, of which five full-time employees accepted offers of continued employment
elsewhere within our organization. We estimate the repositioning resulted in annual pre-tax
cost savings of approximately $6.0 million.
In connection with the closure, we recognized repositioning charges totaling approximately
$1.5 million in 2005, comprised of severance and relocation costs of $1.0 million and facility
closing costs of $0.5 million. The facility closing costs include lease termination costs, fixed
asset writeoffs and costs to wind down the facility. We believe that our financial obligations
associated with this repositioning are complete.
48
Acquisition of Patents
In 2005, we acquired, for a purchase price of approximately $8.1 million, selected patents,
intellectual property blocks and related assets from an unrelated third party. These assets are
designed to improve the range, throughput and reliability of wireless LAN and other wireless
technology systems. The purchase price was allocated almost entirely to patent assets with a
nominal amount being allocated to other assets. Based on our assessment in connection with
the asset acquisition, we are amortizing these patents over their expected useful lives of
approximately 15 years.
New Accounting Standards
SFAS No. 157
In September 2006, the Financial Accounting Standard Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 157, Fair Value Measurements, which defines fair
value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. This statement does not
require any new fair value measurements, but provides guidance on how to measure fair value
by providing a fair value hierarchy used to classify the source of the information. For financial
assets and liabilities, SFAS No. 157 is effective for us beginning January 1, 2008. In February
2008, the FASB deferred the effective date of SFAS No. 157 for all non-financial assets and
non-financial liabilities, except those that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually) until January 1, 2009.
We believe the adoption of SFAS 157 will not have a material impact on our consolidated
financial statements.
SFAS No. 159
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, which provides companies with an option to report selected financial
assets and liabilities at fair value in an attempt to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by measuring related assets and
liabilities differently. This Statement is effective for us beginning January 1, 2008. We do not
anticipate electing the SFAS 159 option for our existing financial assets and liabilities and
therefore do not expect the adoption of SFAS 159 to have any impact on our consolidated
financial statements.
SFAS No. 141-R
In December 2007, the FASB issued SFAS No. 141-R, Business Combinations which revised
SFAS No. 141, Business Combinations. This pronouncement is effective for us beginning
January 1, 2009. Under SFAS No. 141, organizations utilized the announcement date as the
measurement date for the purchase price of the acquired entity. SFAS No. 141-R requires
measurement at the date the acquirer obtains control of the acquiree, generally referred to as
the acquisition date. SFAS No. 141-R will have a significant impact on the accounting for
transaction costs, restructuring costs as well as the initial recognition of contingent assets and
liabilities assumed during a business combination. Under SFAS No. 141-R, adjustments to the
acquired entity’s deferred tax assets and uncertain tax position balances occurring outside the
measurement period are recorded as a component of the income tax expense, rather than
goodwill. As the provisions of SFAS No. 141-R are applied prospectively, the impact to the
Registrants cannot be determined until the transactions occur.
49
lITIgaTIon anD legal PR oceeDIngS
Samsung and Nokia U.S. International Trade Commission Proceedings and
Related Delaware District Court Proceedings
In March 2007, InterDigital, Inc.’s wholly-owned subsidiaries InterDigital Communications, LLC
and InterDigital Technology Corporation (collectively, the “Company,” “InterDigital,” “we,” or
“our”) filed a Complaint against Samsung Electronics Co. Ltd. and certain of its affiliates
(collectively, “Samsung”) in the United States International Trade Commission (“USITC”)
alleging that Samsung engages in unfair trade practices by selling for importation, importing
into the United States, and selling after importation certain 3G handsets and components that
infringe three of InterDigital’s patents. In May 2007 and December 2007, a fourth patent and
fifth patent, respectively, were added to our Complaint against Samsung. The Complaint
against Samsung seeks an exclusion order barring from entry into the U.S. infringing 3G
WCDMA handsets and components that are imported by or on behalf of Samsung. Our
Complaint also seeks a cease-and-desist order to bar sales of infringing Nokia products that
have already been imported into the United States.
In addition, on the same date as our filing of the Samsung USITC action referenced above, we
also filed a Complaint in the United States District Court for the District of Delaware (“Delaware
District Court”) alleging that Samsung’s 3G WCDMA handsets infringe the same three
InterDigital patents identified in the original Samsung USITC Complaint. The U.S. trade laws
provide for a mandatory stay of parallel district court proceedings at the request of a
respondent. In June 2007, the Delaware District Court entered a Stipulated Order staying this
Delaware District Court proceeding against Samsung. The Stipulated Order was agreed to by
the parties. The Stipulated Order stays the proceeding until the USITC’s determination in this
matter becomes final. The Delaware District Court has permitted InterDigital to add the fourth
and fifth asserted patents asserted against Samsung in the USITC action to this stayed
Delaware action.
In August 2007, we filed a USITC Complaint against Nokia Corporation and Nokia, Inc.
(collectively, “Nokia”) alleging that Nokia engaged in an unfair trade practice by making for
importation into the United States, importing, and selling after importation certain 3G mobile
handsets and components that infringe two of InterDigital’s patents. In November 2007 and
December 2007, a third patent and fourth patent, respectively, were added to our Complaint
against Nokia. The Complaint against Nokia seeks an exclusion order barring from entry into
the U.S. infringing 3G mobile handsets and components that are imported by or on behalf of
Nokia. Our Complaint also seeks a cease-and-desist order to bar further sales of infringing
Nokia products that have already been imported into the United States.
In addition, on the same date as our filing of the Nokia USITC action referenced above, we also
filed a Complaint in the Delaware District Court alleging that Nokia’s 3G mobile handsets and
components infringe the same two InterDigital patents identified in the original Nokia USITC
Complaint. This Delaware action was also stayed on January 10, 2008, pursuant to the
mandatory, statutory stay of parallel district court proceedings at the request of a respondent
in an ITC Investigation. Thus, this Delaware action is stayed until the USITC’s determination
in this matter becomes final. The Delaware District Court has permitted InterDigital to add
the third and fourth patents asserted against Nokia in the USITC action to this stayed
Delaware action.
Nokia, joined by Samsung, moved to consolidate the Samsung and Nokia ITC proceedings. On
October 24, 2007, the Honorable Paul J. Luckern, the Administrative Law Judge overseeing the
two USITC proceedings against Samsung and Nokia, respectively, issued an Order to
50
consolidate the two pending investigations. Pursuant to the Order, the schedules for both
investigations have been revised to consolidate proceedings and set a unified evidentiary
hearing on April 21-28, 2008, the filing of a single initial determination by Judge Luckern by
July 11, 2008, and a Target Date for the consolidated investigations of November 12, 2008, by
which date the USITC should issue its final determination.
On December 4, 2007, Nokia moved for an order terminating, or alternatively, staying the
USITC investigation as to Nokia, on the ground that Nokia and InterDigital must first arbitrate a
dispute as to whether Nokia is licensed under the patents asserted by InterDigital against Nokia
in the USITC investigation. On January 8, 2008, Judge Luckern issued an order denying Nokia’s
motion and holding that Nokia has waived its arbitration defense by instituting and participating
in the Investigation and other legal proceedings. On February 13, 2008, Nokia filed an action in
the U.S. District Court for the Southern District of New York, seeking to preliminarily enjoin
InterDigital from proceeding with the USITC action with respect to Nokia, in spite of Judge
Luckern’s ruling denying Nokia’s motion to terminate the Investigation. Nokia raises in this
preliminary injunction action the same arguments it raised in its motion to terminate the ITC
Investigation, namely that InterDigital allegedly must first arbitrate its dispute with Nokia and
that Nokia has not waived this defense. The Court has scheduled a preliminary injunction
hearing for March 20, 2008.
On February 8, 2008, Nokia filed a motion for summary determination that InterDigital cannot
show that a domestic industry exists in the United States as required to obtain relief. Samsung
joined this motion. InterDigital has opposed this motion. On February 14 and 26, 2008,
InterDigital filed its own motions for summary determination regarding the domestic industry
requirement. No schedule has been set by Judge Luckern as to when these motions will
be decided.
On February 27, 2008, Nokia filed a motion to extend the Target Date in the ITC proceeding.
InterDigital intends to vigorously oppose this motion.
Nokia UKII Action
In July 2005, Nokia filed a claim in the English High Court of Justice, Chancery Division, Patents
Court (“English High Court”) against ITC seeking a Declaration that thirty-one of ITC’s UMTS
European Patents registered in the UK are not essential IPR for the 3GPP Standard (“UKII”).
On December 21, 2007, the English High Court issued a judgment finding that European Patent
(UK) 0,515,610 (the ‘610 patent), owned by InterDigital Technology Corporation, is essential to
the 3G UMTS WCDMA European standard promulgated by the European Telecommunications
Standards Institute (ETSI) and that this patented invention is infringed by carrying out the
method described in the standard. The ‘610 patent relates to open loop power control, a
fundamental aspect of 3G technology. Foreign counterparts having identical or similar claim
language to the ‘610 patent have been issued in many parts of the world, including the United
States, Canada, Germany, France, Spain, Italy, and Sweden. The judicial determination of
essentiality is in addition to Nokia’s withdrawal of its challenge to the essentiality of another
patent, European Patent (UK) 0,515,675 relating to pilot codes, effectively conceding that that
patent is essential as well.
In the judgment, the English High Court ruled that one claim of the ‘610 patent was essential.
The English High Court ruled that a second claim of the ‘610 patent, as well as three additional
patents, were not essential. A declaration of non-essentiality is not a finding that a particular
third party product does not infringe an InterDigital patent, and no products were in issue
in these proceedings. The judgment is subject to appeal by either party if permission to
appeal is granted.
51
There will be a further hearing in April 2008 to determine the form of order to be made as well
as any orders relating to attorneys’ fees. Pursuant to UK law, it is customary for a party winning
a motion or the overall outcome of a case to receive reimbursement of attorneys fees from the
other party. Depending on the outcome of this hearing, this could result in a substantial
amount for the Company, Nokia or neither party. At December 31, 2007, we accrued $7.8 million
for the potential reimbursement of legal fees associated with this matter.
Nokia UKIII Action
In December 2006, ITC filed a claim in the English High Court against Nokia seeking a
Declaration that thirty-four UMTS European Patents and one UMTS GB national patent all
registered in the UK and declared by Nokia to be essential IPR for the 3GPP Standard are not
essential. Nokia has since admitted in the proceedings that five of those patents are not
essential to the Standard. Since the proceedings began, an additional five of the patents have
been transferred to Nokia Siemens Networks Oy, which has been joined to the action as a
second defendant and which has admitted that one of the five patents is non-essential. The
Court has scheduled a preliminary hearing for no earlier than June 2008 with respect to
whether the Judge should exercise his discretion to issue the declaration being sought by
InterDigital. Trial in this action is scheduled to begin in the fourth quarter of 2008.
Nokia Delaware Proceeding
In January 2005, Nokia and Nokia, Inc. (collectively, “Nokia”) filed a Complaint in the United
States District Court for the District of Delaware (“Delaware District Court”) against InterDigital
Communications, LLC (“IDC”) and our wholly-owned subsidiary, InterDigital Technology
Corporation (“ITC”) (IDC and ITC collectively referred to as “InterDigital,” “we,” or “our”),
alleging that we have used false or misleading descriptions or representations regarding our
patents’ scope, validity, and applicability to products built to comply with 3G wireless phone
Standards (“Nokia Delaware Proceeding”). We subsequently filed counterclaims based on
Nokia’s licensing activities as well as Nokia’s false or misleading descriptions or representations
regarding Nokia’s 3G patents and Nokia’s undisclosed funding and direction of an allegedly
independent study of the essentiality of 3G patents.
On December 10, 2007, pursuant to a joint request by the parties, the Delaware District Court
entered an Order staying the proceedings pending the full and final resolution of the Company’s
ITC investigation against Nokia and Samsung. Specifically, the full and final resolution of the
ITC investigation includes any initial or final determinations of the Administrative Law Judge
overseeing the proceeding, the ITC, and any appeals therefrom. Pursuant to the Order, the
parties and their affiliates are generally prohibited from initiating against the other parties, in
any forum, any claims or counterclaims that are the same as the claims and counterclaims
pending in the Nokia Delaware Proceeding, and should any of the same or similar claims or
counterclaims be initiated by a party, the other parties may seek dissolution of the stay.
The Order does not affect any of the other legal proceedings between the parties including
the current ITC Investigation involving InterDigital, Nokia and Samsung, or the
parallel Delaware District Court proceedings also brought by InterDigital against Nokia and
Samsung individually.
52
Nokia ICC Arbitration
In November 2006, we filed a Request for Arbitration with the ICC against Nokia (“Nokia ICC
Proceeding”), claiming that certain presentations Nokia has attempted to use in support of its
claims in the Nokia Delaware Proceeding are confidential and, as a result, may not be used in
the Nokia Delaware Proceeding pursuant to the parties’ agreement.
The December 10, 2007, Order entered by the Delaware District Court to stay the Nokia
Delaware Proceeding described above, also stayed the Nokia ICC Proceeding pending the full
and final resolution of the ITC Investigation against Nokia and Samsung as described above.
Samsung Delaware Proceeding
In March 2007, Samsung Telecommunications America LLP (“Samsung Telecom”) and Samsung
Electronics Co., Ltd. (“Samsung Electronics”) filed an action against InterDigital Communications
Corporation (now “InterDigital Communications, LLC”), ITC and another affiliate, Tantivy
Communications, Inc. (collectively, “InterDigital,” “we,” or “our”), in the Delaware District Court,
alleging that InterDigital has refused to comply with its alleged contractual obligations to be
prepared to license our patents on fair, reasonable, and non-discriminatory (“FRAND”) terms,
and that InterDigital has allegedly engaged in unfair business practices. By their original
Complaint in the action, the Samsung entities sought damages and declaratory relief, including
declarations that: (i) InterDigital’s patents and patent applications allegedly promoted to
standards bodies are unenforceable; (ii) the Samsung entities have a right to practice
InterDigital’s intellectual property as a result of an alleged license from QUALCOMM
Incorporated; (iii) nine specified InterDigital patents are invalid and/or not infringed by
the Samsung entities; and (iv) InterDigital must offer the Samsung entities a license on
FRAND terms.
In September 2007, Samsung Electronics filed a First Amended Complaint (“Amended
Complaint”) in its proceeding in the Delaware District Court against InterDigital. The Amended
Complaint includes Samsung’s originally-pled claims concerning InterDigital’s alleged behavior
with respect to standards bodies and licensing practices, but omits all of Samsung’s previously
asserted claims for declaratory judgment that nine specified InterDigital patents are invalid
and/or not infringed. The Amended Complaint was filed only on behalf of Samsung Electronics
and, unlike the original Complaint, does not identify Samsung Telecom as a co-plaintiff.
InterDigital intends to vigorously defend itself against Samsung’s allegations in this matter. In
November 2007, InterDigital filed its Answer to the Amended Complaint, disputing Samsung’s
allegations and asserting counterclaims of infringement of two InterDigital patents. InterDigital
simultaneously filed a partial motion to dismiss Samsung’s claim alleging violation of
California’s Unfair Competition Law. No ruling has been made on InterDigital’s motion to
dismiss, and no scheduling order has been issued in the case. The Court has not yet set this
matter for an initial Case Management Conference, and discovery has not yet begun.
Samsung 2nd Arbitration and Related Confirmation Proceeding
In August 2006, an arbitral tribunal (“Tribunal”) operating under the auspices of the
International Court of Arbitration of the International Chamber of Commerce issued a final
award (“Award”) in an arbitration proceeding between InterDigital Communications, LLC and
InterDigital Technology Corporation (collectively, “InterDigital”), and Samsung Electronics. In its
Award, the Tribunal ordered Samsung Electronics to pay to InterDigital, pursuant to the parties’
1996 patent license agreement (“Samsung Agreement”), approximately $134 million in past
royalties plus interest on Samsung’s sale of single mode 2G GSM/TDMA and 2.5G GSM/GPRS/
EDGE terminal units through 2005 (“Award”). The Tribunal also established the royalty rates to
be applied to Samsung’s sales of covered products in 2006.
53
In September 2006, InterDigital filed an action seeking to enforce the arbitral Award in the U.S.
District Court for the Southern District of New York (the “Enforcement Action”). Subsequent to
that filing, in September 2006 Samsung Electronics filed an opposition to the enforcement
action, including filing a cross-petition to vacate or modify the Award and to stay the Award.
Oral arguments were held in November 2007.
On December 10, 2007, the Honorable Richard J. Sullivan, the Judge who is currently
overseeing the Enforcement Action, confirmed the Award in its entirety and directed that
Samsung pay InterDigital $150.25 million comprised of $134 million in royalties plus interest
less an approximate $6 million prepayment credit for sales of 2G terminal units through 2005,
plus pre-judgment interest calculated at a rate of 5% per annum. The Order of Judgment
denied all of Samsung’s petitions and motions and does not include a specified amount for
royalties owed for 2006 under the arbitration award.
On December 18, 2007, Samsung filed an appeal with the United States Court of Appeals for
the Second Circuit and posted an appeal bond, in the amount of approximately $166.7 million,
with the New York District Court. By posting the appeal bond, Samsung has stayed execution of
the Order of Judgment pending the appeal. Under the current schedule, oral argument before
the Second Circuit Court of Appeals will take place no earlier than the week of May 26, 2008.
On February 25, 2008, Samsung filed a motion to stay their appeal, and vacate the current
briefing schedule, pending the outcome of the Samsung 3rd Arbitration (described below). The
Company intends to oppose Samsung’s motion.
Samsung 3rd Arbitration
In October 2006, Samsung Electronics filed a request for a new ICC arbitration proceeding (the
“Samsung 3rd Arbitration”) relating to the ongoing patent royalty dispute between Samsung
and InterDigital. In the Samsung 3rd Arbitration, Samsung Electronics seeks to have a new
arbitration panel determine new royalty rates for Samsung’s 2G/2.5G GSM/GPRS/EDGE product
sales based on the April 2006 Nokia Settlement, which implemented a June 2005 Nokia
arbitration Award. Samsung has purported to have elected the Nokia Settlement under the
most favored licensee (“MFL”) clause in the Samsung Agreement. Samsung contends that it
has the right to have a new rate, based on the Nokia Settlement, applied to its sales in the
period from January 1, 2002 through December 31, 2006 in lieu of the royalty rates that have
been determined by the Tribunal in the Samsung 2nd Arbitration for that period. In addition to
seeking relief based on the Nokia Settlement, Samsung has expressly reserved a purported
right to make an MFL election of another specified license agreement between InterDigital and
a third party, and to add claims relating to that agreement. In the Samsung 3rd Arbitration
proceeding, we have denied that Samsung is entitled to receive any new royalty rate
adjustment based on the Nokia Settlement or the specified third party license agreement.
We have also counterclaimed, seeking an Award of the royalties Samsung owes for its
2G/2.5G sales in 2006 at the royalty rate specified in the August 2006 Award in the Samsung
2nd Arbitration.
In February 2008, the Tribunal heard oral argument on the issue of whether Samsung is entitled
to elect the Nokia Settlement. The Tribunal has not indicated when it will render a decision on
this issue. The parties will need to present evidence and/or argument in a further phase of this
arbitration on the amount of royalties Samsung owes for its 2G/2.5G sales in 2006, and,
depending on the Tribunal’s decision as to whether Samsung is entitled to elect the Nokia
Settlement, possibly for earlier periods of time.
54
Other
We have filed patent applications in the United States and in numerous foreign countries. In
the ordinary course of business, we currently are, and expect from time-to-time to be, subject
to challenges with respect to the validity of our patents and with respect to our patent
applications. We intend to continue to vigorously defend the validity of our patents and defend
against any such challenges. However, if certain key patents are revoked or patent applications
are denied, our patent licensing opportunities could be materially and adversely affected.
We and our licensees, in the normal course of business, may have disagreements as to the
rights and obligations of the parties under the applicable patent license agreement. For
example, we could have a disagreement with a licensee as to the amount of reported sales of
covered products and royalties owed. Our patent license agreements typically provide for
arbitration as the mechanism for resolving disputes. Arbitration proceedings can be resolved
through an award rendered by an arbitration panel or through private settlement between
the parties.
In addition to disputes associated with enforcement and licensing activities regarding our
intellectual property, including the litigation and other proceedings described above, we are a
party to other disputes and legal actions not related to our intellectual property, but also arising
in the ordinary course of our business, including claims by us for insurance coverage involving
the Nokia Delaware Proceeding. Based upon information presently available to us, we believe
that the ultimate outcome of these other disputes and legal actions will not have a material
adverse affect on us.
Among the types of legal proceedings we encounter in the normal course of business, we are
engaged in the following action:
Federal
In May 2007, the Arbitrator in the arbitration proceeding between InterDigital Communications
Corporation (now “InterDigital Communications, LLC”) and InterDigital Technology Corporation
(collectively, “InterDigital,” “we,” or “our”) and Federal Insurance Company (“Federal”), and
relating to a Litigation Expense and Reimbursement Agreement signed in February 2000 by the
parties (“Reimbursement Agreement”), refused to award the full amount of Federal’s claim
which was in excess of $33 million. The Arbitrator did award Federal approximately $13 million,
pursuant to a formula set forth in the Reimbursement Agreement, for reimbursement of
attorneys’ fees and expenses previously paid to or on behalf of InterDigital by Federal, plus
approximately $2 million in interest. As additional reimbursement of attorneys’ fees and
expenses, the Arbitrator awarded $5 million, without interest, as Federal’s share under the
Reimbursement Agreement of “additional value” of the 2003 settlement between InterDigital
and Ericsson Inc. Further, the Arbitrator ruled that InterDigital must pay Federal 10% of any
additional payments InterDigital may receive as a result of an audit of Sony Ericsson’s sales. In
June 2007, we notified Federal that we had received $2 million from Sony Ericsson to resolve
Sony Ericsson’s payment obligations following an audit. The approximately $13 million portion
of the Award represents a percentage of the amounts InterDigital has received since March
2003 from Telefonaktiebolaget LM Ericsson and Ericsson Inc., and Sony Ericsson Mobile
Communications AB under their respective patent license agreements.
In June 2007, Federal moved to confirm the Award in the United States District Court for the
Eastern District of Pennsylvania. Also in June 2007, we filed an opposition to Federal’s motion
to confirm the arbitration Award and a cross motion to vacate a portion of the Award, totaling
approximately $14.5 million, on the ground that the Arbitrator exceeded the scope of her
authority. We also moved the Court to stay confirmation of the Award pending adjudication of
our recoupment defense whereby we are seeking to recoup the full amount of the Award
55
based on Federal’s bad faith breach of its contractual and fiduciary duties to us. In July 2007,
the Court heard oral arguments on Federal’s motion to confirm the Award, our opposition
thereto, our cross motion to vacate the Award, and to stay confirmation pending adjudication
of our recoupment defense. The Court has not yet ruled on these pending motions.
At the time of judgment we recorded an expense of approximately $16.6 million which
represents the total amount of the Award through third quarter 2007, less the amount of a
previously accrued liability of $3.4 million. We have also accrued post judgment interest of
$0.7 million and reported such interest expense within the “Interest and other income, net” line
item of our Statement of Income.
FInancIal PoSITIon, lIQUIDITY
anD caPIT al ReQUIReMenTS
In 2007 and 2006, we generated net cash from operating activities of $152.7 million and $314.8
million, respectively. The positive operating cash flow in 2007 arose principally from receipts of
approximately $303.4 million related to 2G and 3G patent licensing agreements. These receipts
included $95.0 million from LG, $41.6 million from Sharp Corporation of Japan (Sharp), $32.4
million from NEC, $55.8 million from other licensees that signed new or amended patent
license agreements in 2007 and $78.6 million from other existing licensees. These receipts were
partially offset by cash operating expenses (operating expenses less depreciation of fixed
assets, amortization of intangible assets and non-cash compensation) of $179.4 million, cash
payments for foreign source withholding taxes of $16.1 million and changes in working capital
during 2007.
The positive operating cash flow in 2006 arose principally from receipts of approximately
$499.7 million related to 2G and 3G patent licensing agreements. These receipts included
$253.0 million from Nokia, $95.0 million from LG, $40.6 million from Sharp Corporation of
Japan (Sharp), $38.0 million from NEC, $15.9 million from a Taiwanese licensee, $15.5 million
from a Canadian licensee and $41.7 million from other licensees. These receipts were partially
offset by cash operating expenses (operating expenses less depreciation of fixed assets,
amortization of intangible assets and non-cash compensation) of $122.4 million, cash payments
for foreign source withholding taxes of $28.5 million, an estimated federal income tax payment
of $23.0 million and changes in working capital during 2006.
Our combined short-term and long-term deferred revenue balance at December 31, 2007 was
approximately $303.4 million, an increase of $71.8 million from December 31, 2006. We have
no material obligations associated with such deferred revenue. In 2007, we recorded gross
increases in deferred revenue of $191.4 million, $95 million of which relates to a payment
received from LG in first quarter 2008, $56.4 million related to new prepayments from existing
licensees and $40 million related to a prepayment and accrued receivable from a new licensee.
The gross increases in deferred revenue were offset, in part, by 2007 deferred revenue
recognition of $69.2 million related to the amortization of fixed-fee royalty payments,
$50.4 million related to per-unit exhaustion of prepaid royalties (based upon royalty reports
provided by our licensees) and the recognition of deferred revenue related to technology
solutions agreements.
In 2008, based on current license agreements, we expect the amortization of fixed-fee royalty
payments to reduce the December 31, 2007 deferred revenue balance of $303.4 million by
$78.9 million. Additional reductions to deferred revenue will be dependent upon the level of
per-unit royalties our licensees report against prepaid balances.
56
We used net cash in investing activities of $54.3 million and $52.4 million in 2007 and 2006,
respectively. We sold $12.8 million of short-term marketable securities, net of purchases, in
2007. We purchased $19.7 million of short-term marketable securities, net of sales, in 2006. This
change resulted from the investment of significant cash receipts from operating activities in
2006 offset in part by our activity under our share repurchase program. Purchases of property
and equipment increased to $13.8 million in 2007 from $11.2 million in 2006 due to continued
investment in both development tools and engineering related network infrastructure and
systems. We also paid $24.4 million and $2.7 million in 2007 and 2006, respectively, toward
technology licenses necessary for our SlimChip product family. Investment costs associated
with patents increased from $18.9 million in 2006 to $23.9 million in 2007. This increase reflects
higher patent application activity over the past several years, combined with the lag effect
between filing an initial patent application and the incurrence of costs to issue the patent in
both the U.S. and foreign jurisdictions.
Net cash used in financing activities in 2007 increased $48.9 million to $172.8 million from
$123.9 million. In 2007, we repurchased approximately 6.0 million shares of our common stock
for $183.1 million compared to 6.3 million shares of our common stock for $184.9 million in
2006. We received proceeds from option and/or warrant exercises of $6.5 million and $40.6
million in 2007 and 2006, respectively. In 2007 and 2006, we classified tax benefits from stock
options of $5.1 million and $20.7 million, respectively, as a cash flow from financing activities
in accordance with SFAS 123(R). In 2005, we had classified tax benefits from stock options of
$2.3 million as a cash flow from operating activities.
At December 31, 2007 and 2006, we had approximately 2.9 million and 4.0 million options
outstanding, respectively, that had exercise prices less than the fair market value of our stock
at each balance sheet date. These options would generate $33.1 million and $48.8 million of
cash proceeds to the Company if they were fully exercised.
As of December 31, 2007, we had $177.5 million of cash, cash equivalents and short-term
investments, compared to $264.0 million at December 31, 2006. Our working capital (adjusted
to exclude cash, cash equivalents, short-term investments, current maturities of debt and
current deferred revenue) decreased to $117.0 million at December 31, 2007 from $139.7 million
at December 31, 2006. This $22.7 million decrease is primarily due to an $18.9 million increase
in accounts payable primarily associated with contingency accruals.
In December 2005, we entered into a two-year $60 million unsecured revolving credit facility
(the Credit Agreement). The Credit Agreement was entered into by the Company, Bank of
America, N.A., as Administrative Agent, and Citizens Bank of Pennsylvania. On July 2, 2007, as
a result of the Company’s internal corporate reorganization, InterDigital Communications
Corporation, the Company, the Subsidiary Guarantors party thereto, the Lenders and Bank of
America, N.A., as Administrative Agent and L/C Issuer, entered into a First Amendment,
Consent and Joinder to Credit Agreement. We did not borrow against the Credit Agreement
during the initial two year term.
In December 2007, we entered into a Second Amendment to Credit Agreement resulting in the
continuation of our two-year $60 million unsecured revolving credit facility (the Credit
Agreement) through December 2009. Under the Second Amendment, borrowings under the
Credit Agreement will, at the Company’s option, bear interest at either (i) LIBOR plus 65 basis
points or (ii) the higher of the prime rate or 50 basis points above the federal funds rate. The
customary restrictive financial and operating covenants under the Credit Agreement continue
in full force and effect and include, among other things, that the Company is required to (i)
maintain certain minimum cash and short-term investment levels, (ii) maintain minimum
financial performance requirements as measured by the Company’s income or loss before
taxes with certain adjustments, and (iii) limit or prohibit the incurrence of certain indebtedness
57
and liens, judgments above a threshold amount for which a reserve is not maintained, and
certain other activities outside of the ordinary course of business. Borrowings under the Credit
Agreement can be used for general corporate purposes including capital expenditures, working
capital, letters of credit, certain permitted acquisitions and investments, cash dividends and
stock repurchases. As of December 31, 2007, the Company did not have any amounts
outstanding under the Credit Agreement.
We expect our operating cash needs will level off in 2008 and our investments in capital assets
will decrease. We are capable of supporting these and other operating cash requirements,
including repurchases of our common stock, for the near future through cash and short-term
investments on hand, other operating funds such as patent license royalty payments or the
above-noted credit facility. At present, we do not anticipate the need to seek additional
financing through additional bank facilities or the sale of debt or equity securities.
Contractual Obligations
Other than $3.2 million in open purchase orders related to our SlimChip product family, we did
not have any significant purchase obligations outside our ordinary course of business at
December 31, 2007. We also had a FIN 48 reserve of $4.4 million at December 31, 2007.
The following is a summary of our consolidated debt and lease obligations at
December 31, 2007 (in millions):
Obligation
Debt
Operating leases
Total debt and operating lease obligations
Off-Balance Sheet Arrangements
Total
1-3 Years
4-5 Years Thereafter
$ 3.7
9.5
$ 13.2
$ 3.2
6.3
$ 9.5
$ 0.5
3.2
$ 3.7
$ 0.0
0.0
$ 0.0
We do not have any off-balance sheet arrangements as defined by regulation S-K 303(a)(4)
promulgated under the Securities Act of 1934.
ReSUlTS oF oPeRa TIonS
2007 Compared With 2006
Revenues
Per-unit royalty revenue
Fixed-fee and amortized royalty revenue
Recurring patent licensing royalties
Past infringement and other non-recurring royalties
Total patent licensing royalties
Technology solutions revenue
Total revenue
2007
2006
$ 136.9
79.2
216.1
14.7
230.8
3.4
$ 124.9
81.3
206.2
267.4
473.6
6.9
$ 234.2
$ 480.5
Revenues were $234.2 million in 2007, compared to $480.5 million in 2006. The decrease was
driven by the recognition in 2006 of $253 million and $12 million of non-recurring revenue
related to the resolution of patent licensing matters with Nokia and Panasonic, respectively,
and was partially offset by a $9.9 million increase in recurring patent licensing royalties in 2007.
The increase in recurring patent license royalties was related to a new agreement with Apple,
58
as well as new or higher contributions from other existing licensees, including RIM, Toshiba
and Sharp. Together, these factors more than offset the loss of recurring 2G royalties from NEC,
Ericsson and Sony Ericsson, which have no further 2G royalty obligations under their respective
patent license agreements.
Technology solution revenue decreased in 2007 to $3.4 million from $6.9 million in 2006. The
decline is primarily attributable to reduced activity under our HSDPA technology programs with
Philips Semiconductor B.V. (Philips) and Infineon.
In 2007, 6% of total revenue, or $14.7 million, was attributable to non-recurring revenue,
primarily associated with prior period sales of Sony Ericsson’s covered 2G products identified
during a routine audit. Of the remaining 94%, or $219.5 million, 61% was attributable to
companies that individually accounted for 10% or more of this amount, and included LG (26%),
Sharp (20%) and NEC (15%). In 2006, 56% of total revenue, or $267.4 million, was associated
with the resolution of patent licensing matters, primarily with Nokia and Panasonic. Of the
remaining 44%, or $213.1 million, 62% was attributable to companies that individually
accounted for 10% or more of this amount, and included LG (26%), NEC (19%) and
Sharp (17%).
Operating Expenses
Excluding one-time arbitration charges of $16.6 million and $7.8 million, associated with our
disputes with Federal and the on-going Nokia UK II case, respectively, operating expenses
increased from $144.1 million in 2006 to $186.8 million in 2007. The $42.7 million increase was
primarily due to increases/(decreases) in the following items (in millions):
Patent litigation and arbitration
Consulting services
Depreciation and amortization
Personnel related costs
Patent maintenance
Share-based compensation
Legal structure reorganization
Commissions
Other
Total increase in operating expense excluding arbitration and litigation contingencies
Arbitration and litigation contingencies
Total increase in operating expense
$ 15.4
9.1
7.2
5.7
3.1
2.7
0.9
(3.7)
2.3
$ 42.7
$ 24.4
$ 67.1
Patent litigation and arbitration increased primarily due to our consolidated U.S. International
Trade Commission proceeding against Samsung and Nokia, as well as increased activity
in other disputes with Nokia. Consulting services and personnel related costs increased
primarily due to the need for additional internal and external resources to develop our
SlimChip product family.
Patent amortization and patent maintenance costs both increased due to heightened levels of
internal inventive activity in recent years resulting in the expansion of our patent portfolio.
Other depreciation and amortization increased due to the recent acquisition of tools and
technology licenses to develop our SlimChip product family. The increase in share-based
compensation expense resulted from increased LTCP costs related to the effect of overlapping
RSU cycles in 2007 and was partly offset by a decrease resulting from a non-recurring charge
of $1.1 million in third quarter 2006 that related to share-based grants in 1998. Legal and
professional fees unrelated to patent litigation and arbitration increased due to both our 2007
legal entity reorganization and insurance disputes. These increases in operating expenses were
partly offset by a $3.7 million decrease in commission expense.
59
The following table summarizes the change in operating expenses by category (in millions):
Sales and marketing
General and administrative
Patents administration and licensing
Development
Litigation and arbitration contingencies
2007
2006
Increase
$
7.8
24.2
67.6
87.2
24.4
$
6.6
$ 1.2
15%
21.0
51.1
65.4
—
3.2
16.5
21.8
24.4
16
32
34
100
Total operating expense
$ 211.2
$ 144.1
$ 67.1
46%
Sales and Marketing Expense: The increase in sales and marketing expense was due to
increased travel and consulting costs ($0.5 million) primarily associated with the advanced
marketing of our SlimChip product family and overlapping RSU cycles ($0.6 million).
General and Administrative Expense: The increase in general and administrative expenses was
primarily due to increased legal and consulting services primarily associated with our legal
entity reorganization ($0.9 million), personnel costs associated with wage inflation and
temporary personnel ($0.8 million), increased taxes other than income ($0.6 million) and
overlapping RSU cycles ($0.9 million).
Patents Administration and Licensing Expense: The increase in patent administration and
licensing expenses resulted from the above noted increases in patent litigation and arbitration
($15.4 million), patent maintenance ($3.1 million), patent amortization expense ($1.5 million),
personnel related costs ($0.8 million) and overlapping RSU cycles ($0.4 million). These
increases were offset, in part, by the above noted decrease in commission expense
($3.7 million) and the non-recurring charge related to share-based grants in 1998 ($1.0 million).
Development Expense: The increase in development expense was primarily attributable to the
development of our SlimChip product family, including increased consulting services
($8.4 million), depreciation and amortization of development tools and technology licenses
($5.7 million), personnel costs ($3.7 million) and overlapping RSU cycles ($2.5 million).
Litigation and Arbitration Contingencies: In 2007, we accrued non-recurring charges of
$16.6 million and $7.8 million related to our contingent obligations to reimburse Federal under
an insurance reimbursement agreement and to reimburse Nokia for a portion of their legal
fees associated with the UK II case, respectively.
Interest and Investment Income, Net
Net interest and investment income of $8.9 million in 2007 decreased $4.2 million or 32% from
$13.2 million in 2006. The decrease primarily resulted from lower investment balances in 2007
due to the completion of our share repurchase program and post judgment interest expense of
$0.7 million which we accrued related to the Federal Arbitration Award.
Income Taxes
Our 2007 income tax provision consisted of the statutory federal tax rate plus book-tax
permanent differences related to the company’s research and development credits. Our 2006
income tax provision consisted of the statutory federal tax rate plus book-tax permanent
differences and $2.2 million of non-U.S. withholding taxes.
60
2006 Compared With 2005
Revenues
Per-unit royalty revenue
Fixed-fee and amortized royalty revenue
Recurring patent licensing royalties
Past infringement and other non-recurring royalties
Total patent licensing royalties
Technology solutions revenue
Total revenue
2006
2005
$ 124.9
$ 99.3
81.3
206.2
267.4
34.6
133.9
10.2
473.6
144.1
6.9
19.0
$ 480.5
$ 163.1
In 2006, revenues increased $317.4 million to $480.5 million from $163.1 million in 2005. This
increase was driven by both the recognition of $253 million and $12 million related to the
resolution of patent licensing matters with Nokia and Panasonic, respectively, and higher
recurring patent license royalties. The increase in recurring patent license royalties was related
to a new agreement with LG, as well as new or higher contributions from other existing
licensees, including Panasonic. 2005 revenues included non-recurring revenue of $10.2 million
related to past infringement, primarily associated with a new patent license agreement
with Kyocera.
Technology solution revenue decreased in 2006 to $6.9 million from $19.0 million in 2005, as
contributions from HSDPA technology programs with Philips Semiconductor B.V. (Philips) and
Infineon partially offset the decrease associated with the first quarter 2006 completion of
deliverables under an agreement with General Dynamics C4 Systems (formerly known as
General Dynamics Decision Systems, Inc.) (General Dynamics), supporting a program for the
U.S. military.
In 2006, 56% of total revenue, or $267.4 million, was associated with the resolution of patent
licensing matters, primarily with Nokia and Panasonic. Of the remaining 44%, or $213.1 million,
62% was attributable to companies that individually accounted for 10% or more of this amount,
and included LG (26%), NEC (19%) and Sharp (17%). In 2005, 6% of total revenue, or $10.2
million, was associated with payments for past sales by Kyocera ($10 million) and one other
licensee. Of the remaining 94%, or $152.9 million, 76% was attributable to companies that
individually accounted for 10% or more of this amount, and included NEC (32%), Sharp (23%),
General Dynamics (11%) and Sony Ericsson (10%).
61
Operating Expenses
Operating expenses decreased 1.0% from $146.0 million in 2005 to $144.1 million in 2006.
The $1.9 million decrease was primarily due to (decreases)/increases in the following items
(in millions):
Patent litigation and arbitration
Performance-based cash incentive
Share-based compensation
Executive severance & repositioning
Commissions
Depreciation and amortization
Consulting services
Patent maintenance
Other(a)
Total Decrease in Operating Expense
$ (5.9)
(3.0)
(2.8)
(2.7)
4.0
3.1
2.3
1.5
1.6
$ (1.9)
(a) The increase in other costs is primarily related to increased headcount in our engineering staff.
Patent litigation and arbitration costs decreased primarily due to changes in both the level and
mix of arbitration and litigation activity in 2006. The decreases in both performance-based cash
incentive costs and share-based compensation costs reflect the absence of overlapping LTCP
cycles in 2006 (i.e., 2005 expense included costs from both the last year of Cycle 1 and the first
year of Cycle 2). The decrease in 2006 share-based compensation cost associated with the LTCP
was partially offset by $1.5 million of amortization associated with a 2006 RSU grant to non-
management employees and a non-recurring charge of approximately $1.0 million to correct
our accounting related to share-based grants in 1998 to two non-employee, non-director
consultants. In 2005, we recorded severance costs of $1.2 million associated with changes in
our executive management and a repositioning charge of $1.5 million related to the closure of
our Melbourne, Florida design facility. These decreases in operating expenses were offset, in
part, by increases in commissions, consulting services, depreciation and amortization and
patent maintenance costs. The increase in commissions was associated with higher patent
license royalty revenue. Consulting services and other costs both increased primarily due to
our expanded development activities directed toward our complete 2G/3G dual-mode modem
ASIC offering. The increase in depreciation and amortization is attributable to higher carrying
values of property and equipment, and patents, respectively. A 33% increase in the number of
issued patents we held in 2006 resulted in increased patent maintenance costs.
The following table summarizes the change in operating expenses by category (in millions):
Sales and marketing
General and administrative
Patents administration and licensing
Development
Repositioning
2006
2005
(Decrease)/Increase
$
6.6
$
7.9
21.0
51.1
65.4
—
24.1
49.4
63.1
1.5
$ (1.3)
(3.1)
1.7
2.3
(16)%
(13)
3
4
(1.5)
(100)
Total operating expense
$ 144.1
$ 146.0
$ (1.9)
(1)%
Sales and Marketing Expense: The decrease in sales and marketing expense was primarily due
to a $1.0 million decrease in LTCP costs resulting from overlapping cycles in 2005.
General and Administrative Expense: The decrease in general and administrative expenses was
primarily due to a $1.7 million decrease in LTCP costs resulting from overlapping cycles in 2005
and the above-noted $1.2 million executive severance charge in 2005.
62
Patents Administration and Licensing Expense: The increase in patent administration and
licensing expenses resulted from the above-noted increases in commissions, patent
maintenance and patent amortization expense and the non-recurring charge related to
share-based grants from 1998. These increases were offset, in part, by the above noted
decrease in patent arbitration and litigation costs and a $0.6 million decrease in LTCP costs
resulting from overlapping cycles in 2005.
Development Expense: The increase in development expense is primarily attributable to
activities associated with our development of a complete 2G/3G dual-mode modem ASIC for
use in advance platforms. These increases were in the areas of personnel expenses, consulting
services and depreciation expense of development tools and licenses of $1.7 million,
$1.9 million and $1.8 million, respectively. These increases were offset, in part, by lower LTCP
costs of $3.2 million resulting from overlapping cycles in 2005.
Repositioning Expense: The $1.5 million repositioning charge in 2005 relates to the closure of
our Melbourne, Florida design facility during the third quarter 2005.
Interest and Investment Income, Net
Net interest and investment income of $13.2 million in 2006 increased $10.0 million from
$3.2 million in 2005. The increase resulted from higher investment balances and higher rates of
return on our investments in 2006.
Income Taxes
Our 2006 income tax provision consisted of a 34.9% provision for federal income taxes,
including book-tax permanent differences, plus $2.2 million of non-U.S. withholding taxes. Our
income tax provision in 2005 included benefits totaling $43.7 million, primarily related to the
fourth quarter 2005 reversal of our Federal deferred tax asset valuation allowance (a portion of
this reversal was credited directly to additional paid-in capital), which were offset, in part, by
$7.2 million of federal income tax and alternative minimum tax, and $2.1 million of foreign
source withholding tax.
The net income tax benefit associated with adjustments to the value of our deferred tax assets
in 2005 is comprised of the following components (in millions):
Reversal of U.S. Federal valuation allowance
Change in effective tax rate applied to U.S. Federal deferred tax assets
Other adjustments to deferred tax assets
Total adjustments related to U.S. Federal deferred tax asset valuation
$ (46.4)
(1.4)
4.1
$ (43.7)
The $46.4 million reversal of the U.S. Federal valuation allowance in 2005 was based on
expectations that we will generate sufficient future taxable income to utilize our U.S. Federal
deferred tax assets. The $1.4 million change in the effective tax rate applied to U.S. Federal
deferred tax assets was related to a change in the estimated tax rate we expect would apply
when these deferred tax assets reverse. The remaining $4.1 million adjustment of our deferred
tax assets reduces the recorded value of credits associated with federal NOL carryforwards and
research and development activities based on our assessment of the likelihood of realizing
such credits.
Expected Trends
In first quarter 2008, we expect to report recurring revenues from existing agreements in the
range of $53 million to $55 million. This increase over fourth quarter levels reflects improved
sales from our licensees and the contribution from our new Asian semiconductor customer.
This range does not include any potential impact from additional new agreements that may be
63
signed during first quarter 2008 or additional royalties identified in audits regularly conducted
by us. With respect to our first quarter 2008 expenses, we anticipate maintaining our staffing at
a level that is relatively flat with fourth quarter 2007. However, we do expect sequential
percentage growth in first quarter 2008 expenses, excluding patent arbitration and litigation
costs and contingencies, to be in the 5% to 10% range due to normal wage inflation and
seasonality related to vacation accruals and other personnel costs. We also currently expect
that our patent arbitration and litigation costs in first quarter 2008 will increase over fourth
quarter 2007 based on the expected level of activity. Lastly, we expect that our book tax rate for
the first quarter of 2008 will approximate 34% to 36%.
FoRW aRD-looKIng ST aTeMenTS
This Annual Report on Form 10-K, including “Item 1. Business” and “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations”, contains forward-
looking statements. Words such as “expect,” “will,” “believe,” “could,” “would,” “should,” “if,”
“may,” “might,” “anticipate,” “unlikely that,” “our strategy,” “future,” “target,” “goal,” “trend,”
“seek to,” “seeking,” “will continue,” “outcome,” “assuming,” “predict,” “estimate,” “due to
receive,” “likely,” “in the event” or similar expressions contained herein are intended to identify
such forward-looking statements. Although forward-looking statements in this annual report
reflect the good faith judgment of our management, such statements can only be based on
facts and factors currently known by us. These statements reflect, among other things, our
current beliefs, plans and expectations as to:
(i)
Our plans to offer a 2G/3G dual-mode modem ASIC and platform to customers in the
digital cellular terminal unit market and our ability to increase revenues by creating
synergies between our patent licensing and technology licensing businesses through the
sale of our ASIC and platform.
(ii) Our belief that:
(a) a number of our patented inventions are or may be essential, or may become
essential, to products built to 2G and 3G cellular Standards, and other Standards
such as IEEE 802 wireless Standards, and that companies making, using or selling
products compliant with these Standards are required to take a license under our
essential patents;
(b) our patent enforcement costs could continue to be a significant expense for us;
(c) there would not be any material adverse impact on our ongoing revenues under
existing patent license agreements, but there could be an impact on our ability to
generate new royalty streams if a party successfully asserted that some of our patents
are not valid, should be revoked or do not cover their products, or if products are
implemented in a manner such that patents we believe are commercially important
are not infringed; and
(d) the loss of revenues or cash payments from our licensees generating 2007 revenues
exceeding 10% of total revenues would adversely affect either our cash flow or results
of operations and could affect our ability to achieve or sustain acceptable levels
of profitability.
(iii)
The anticipated proliferation of converged devices and growth in global
wireless subscribers.
(iv)
Factors driving the continued growth of wireless product and services sales through the
end of the decade, including 3G enabled phones.
64
(v)
The types of licensing arrangements and various royalty structure models which we
anticipate using under our future license agreements, including the impact of current
trends in the industry which could result in reductions in and/or caps on royalty rates
under new license agreements.
(vi)
The possible outcome of audits of our license agreements when underreporting or
underpayment is revealed.
(vii) Our goal to derive revenue on every 3G mobile terminal unit sold and our strategy for
achieving this goal including:
(a) Licensing our patented technology to wireless equipment producers worldwide on
appropriate economic terms and vigorously defending our intellectual property and
related contractual rights;
(b) Offering our intellectual property rights and technology products on both a
complimentary and stand-alone basis;
(c) Continuing to fund substantial technology development;
(d) Offering technology blocks as well as a 2G/3G dual-mode modem ASIC and platform;
(e) Establishing key strategic relationships;
(f) Maintaining substantial involvement in key worldwide Standards bodies to contribute
to the ongoing definition of wireless standards and to incorporate our inventions into
those Standards; and
(g) Marketing our 2G/3G dual-mode modem ASIC and platform to data card manufacturers.
(viii) The impact of (a) a settlement, (b) a judgment in our favor, or (c) an adverse ruling in a
patent litigation, arbitration or administrative proceeding with regard to our costs, future
license agreements, and accounting recognition.
(ix)
(x)
Our plans to continue to pursue discussions and negotiate license agreements with
companies which we believe require a license under our patents, and to pursue legal
actions if negotiations do not result in license agreements.
The impact of (a) potential domestic patent reform legislation, (b) USPTO reforms,
(c) imposed international patent rules and (d) third party legal proceedings, on our patent
prosecution and licensing strategies.
(xi)
Our competition and factors necessary for us to remain successful in light of
such competition.
(xii) A potential material adverse effect on our consolidated financial position, results of
operations or cash flows in light of any potential adverse decision or settlement in the
Federal legal proceeding and our belief that an adverse resolution should not prevent us
from supporting our operating requirements for the near future and our belief that the
arbitration is non-binding.
(xiii) Our 2G/3G royalty mix, which is expected to shift to a higher percentage of 3G royalties
throughout this decade, as the 2G market declines and ongoing royalty and other
payment obligations under 2G license agreements expire.
(xiv) Our critical accounting policies, our accounting for contingencies under our legal proceeding
with Federal Insurance Company, and factors affecting our revenue recognition.
(xv) 2008 expense levels associated with our LTCP and our expense recognition with regard
to our other equity-based incentive programs.
65
(xvi) The adequacy of our accrual for tax contingencies, our assessment of the valuation
allowance associated with our Federal and state deferred tax assets, our future tax
paying status, and our expectation that we will provide for income taxes in 2008 at a rate
equal to our combined Federal and state effective rates plus an amount for foreign
source withholding tax expense, as applicable.
(xvii) Our expectations concerning fiscal year 2008 revenues, increase in expenses, book tax
rate, investment activity and patent litigation and arbitration expense.
(xviii) Fiscal year 2008 (and near future), capitalized patent costs, acquisitions of property and
equipment and technology rights, operating cash requirements and our ability to
repurchase our common stock.
(xix) Our lack of need to seek additional financing but possible introduction of debt in 2008.
(xx) Samsung’s estimated royalty obligation for 2007 and estimated interest obligation.
(xxi) Our belief that the ultimate outcome of current legal proceedings will not have a material
adverse effect on us.
(xxii) Our expectations as to the impact of amortization of fixed fee royalty payments on
deferred revenue balances in 2008.
(xxiii) Our ability to establish successful relationships with equipment producers and other
industry participants.
Consequently, forward-looking statements concerning our business, results of operations and
financial condition are inherently subject to risks and uncertainties. We caution readers that
actual results and outcomes could differ materially from those expressed in or anticipated by
such forward-looking statements. You should carefully consider the risks and uncertainties
outlined in greater detail in this annual report, including “Item 1A – Risk Factors.” before
making any investment decision with respect to our common stock. You should not place
undue reliance on these forward-looking statements, which are only as of the date of this
annual report. We undertake no obligation to revise or publicly update any forward-looking
statement for any reason, except as otherwise required by law.
ITeM 7a. QUanTITaTIVe anD QUalITaTIVe
DIScloSUReS aboUT MaRKe T 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 our 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.
66
The following table provides information about our cash and investment portfolio as of
December 31, 2007. For investment securities, the table presents balances and related weighted
average interest rates. All investment securities are classified as available for sale.
(in millions)
Cash and demand deposits
Average interest rate
Cash equivalents
Average interest rate
Short-term investments
Average interest rate
Total portfolio
Average interest rate
Long-Term Debt
$ 41.3
$ 50.7
$ 85.5
$ 177.5
4.22%
4.96%
4.82%
4.72%
The table below sets forth information about our long-term debt obligation, by expected
maturity dates.
Expected Maturity Date
(In millions)
December 31,
2008
2009
2010
2011
2012
2013
and
Beyond
Total
Fair
Value
Debt obligation
$ 1.3
.$ 1.3
$ 0.6
$ 0.3
$ 0.2
$ 0.0
$ 3.7
Interest rate
6.76%
.6.92%
7.41%
8.28%
8.28%
0.00%
7.02%
ITeM 8. FInancIal ST aTeMenTS anD
SUPPleMenT aRY DaTa
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2007 and 2006
Consolidated Statements of Income for each of the
three years ended December 31, 2007, 2006 and 2005
Consolidated Statements of Shareholders’ Equity and
Comprehensive Income for each of the three years ended
December 31, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for each of the
three years ended December 31, 2007, 2006 and 2005
Notes to Consolidated Financial Statements
Schedules:
Schedule II—Valuation and Qualifying Accounts
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.
68
70
71
72
73
74
106
67
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of InterDigital, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of InterDigital, Inc. and its subsidiaries at
December 31, 2007 and 2006 and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2007 in conformity with accounting
principles generally accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management
is responsible for these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in “Management’s Annual Report on Internal
Control over Financial Reporting” appearing under Item 9A. Our responsibility is to express
opinions on these financial statements, on the financial statement schedule, and on the
Company’s internal control over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in
all material respects. Our audits of the financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 2 to the consolidated financial statements, the Company changed the
manner in which it accounts for share-based compensation in 2006, and the manner in which it
accounts for uncertain tax positions in 2007.
68
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 29, 2008
69
conSolID aTeD balance SHee TS
InterDigital, Inc. and Subsidiaries
(in thousands, except per share data)
December 31,
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable
Deferred tax assets
Prepaid and other current assets
Total current assets
Property and equipment, net
Patents, net
Deferred tax assets, net
Other non-current assets, net
Total assets
Liabilities and shareholders’ equity
Current liabilities:
Current portion of long-term debt
Accounts payable
Accrued compensation and related expenses
Deferred revenue
Foreign and domestic taxes payable
Other accrued expenses
Total current liabilities
Long-term debt
Long-term deferred revenue
Other long-term liabilities
Total liabilities
Commitments and contingencies (Notes 6 & 7)
Shareholders’ equity:
Preferred stock, $0.10 par value, 14,399 shares authorized,
0 shares issued and outstanding
Common Stock, $.01 par value, 100,000 shares authorized, 65,292
and 64,393 shares issued and 46,497 and 51,347 shares outstanding
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
2007
2006
$ 92,018
$ 166,385
85,449
97,581
130,880
131,852
43,734
19,332
43,520
14,464
371,413
453,802
24,594
87,092
14,834
36,952
16,682
70,496
6,418
16,678
163,472
110,274
$ 534,885
$ 564,076
$
1,311
$
369
40,850
10,476
78,899
15,675
9,973
21,913
9,725
70,709
11,448
7,064
157,184
121,228
2,406
1,203
224,545
160,895
13,683
5,274
397,818
288,600
—
653
—
644
465,599
445,930
133,308
115,383
206
(46)
599,766
561,911
Treasury stock, 18,795 and 13,046 shares of common held at cost
462,699
286,435
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these statements.
70
137,067
275,476
$ 534,885
$ 564,076
conSolID aTeD STaTeMenTS oF IncoMe
InterDigital, Inc. and Subsidiaries
(in thousands, except per-share data)
For The Year Ended December 31,
2007
2006
2005
Revenues
Licensing and technology solutions
Operating expenses:
Sales and marketing
General and administrative
Patents administration and licensing
Development
Arbitration and litigation contingencies
Repositioning
Income from operations
Other income:
Interest and investment income, net
Income before income taxes
Income tax (provision) benefit
$ 234,232
$ 480,466
$ 163,125
7,828
24,210
67,587
87,141
24,412
—
6,610
7,914
20,953
24,150
51,060
49,399
65,427
63,095
—
—
—
1,480
211,178
144,050
146,038
23,054
336,416
17,087
8,949
13,195
3,164
32,003
(11,999)
349,611
20,251
(124,389)
34,434
Net income applicable to common shareholders
$ 20,004
$ 225,222
$ 54,685
Net income per common share—basic
$
0.42
$
4.22
$
1.01
Weighted average number of common shares
outstanding—basic
47,766
53,426
54,058
Net income per common share—diluted
$
0.40
$
4.04
$
0.96
Weighted average number of common shares
outstanding—diluted
The accompanying notes are an integral part of these statements.
49,489
55,778
57,161
71
conSolIDaTeD STaTeMenTS oF SHaReHolDeRS’
eQUITY anD coMPReHenSIVe IncoMe
InterDigital Inc. and Subsidiaries
(in thousands, except per share data)
2.50 Convertible
Preferred Stock
Shares Amount
Common Stock
Shares
Amount
Additional
Paid-In
Capital
(Accumulated
Deficit)
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury Stock
Shares
Amount
Total
Shareholders’
Equity
Total
Comprehensive
Income
Balance, December 31, 2004
Net income
Net change in unrealized loss
on short-term investments
Total comprehensive income
—
—
$ —
—
—
—
59,662
$ 597
$ 339,475
$
(164,524)
$
(66)
—
—
—
—
—
—
54,685
—
—
(126)
Exercise of common stock options
—
—
519
5
4,824
—
—
Sale of common stock under
employee stock purchase plan
Issuance of common stock
under profit sharing plan
Issuance of restricted
common stock, net
Acceration of options
Partial Reversal of valuatoin allowance —
Recognition of deferred tax benefit
—
Amortization of unearned compensation —
Repurchase of common stock
Balance, December 31, 2005
Net income
Net change in unrealized gain on
short-term investments
Total comprehensive income
Exercise of common stock options
Exercise of common stock warrants
Adjustment to vested options
Sale of common stock under
employee stock perchase plan
Issuance of common stock under
profit sharing plan
Issuance of restricted
common stock, net
Tax benefit from exercise
of stock options
Amortization of unearned
compensation
Repurchase of common stock
Balance, December 31, 2006
Net income
Net change in unrealized gain
on short-term investments
Total comprehensive income
Sale of common stock under
employee stock purchase plan
Issuance of common stock
under profit sharing plan
Issuance of restricted
common stock, net
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Cumulative effect of adoption of FIN48 —
Exercise of common stock options
—
—
—
1
33
322
—
—
—
—
—
—
—
3
—
—
—
—
—
25
568
300
190
20,268
3,227
8,771
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
60,537
605
377,648
(109,839)
(192)
—
—
3,379
80
—
1
24
—
—
34
1
—
—
—
—
—
39,919
609
1,096
15
442
410
225,222
—
—
—
—
—
146
—
—
—
—
—
—
—
—
—
—
—
—
737
—
14
—
—
—
7
—
—
—
—
20,004
—
—
252
—
6,456
(2,079)
—
—
—
8
469
395
—
—
—
—
—
—
—
—
148
2
Withheld for taxes on issuance of
restricted common stock
—
—
Tax benefit from exercise
of stock options
Amortization of unearned
compensation
Repurchase of common stock
—
—
—
—
—
—
—
—
—
—
—
(1,865)
—
—
—
5,123
—
—
—
—
9,083
—
—
—
—
—
4,506
—
—
—
—
—
—
—
—
—
—
2,000
6,506
—
—
—
—
—
—
—
—
—
$
(59,823)
$ 115,659
54,685
$
54,685
(126)
(126)
$
54,559
4,829
25
568
303
190
20,268
3,227
8,771
—
—
—
—
—
—
—
—
—
(34,085)
(34,085)
(93,908)
174,314
—
—
—
—
—
—
—
—
—
—
225,222
$
225,222
146
146
$
225,368
39,953
610
1,096
15
442
414
20,717
5,074
(192,527)
(192,527)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
20,004
$
20,004
252
252
$
20,256
(2,079)
6,463
8
469
397
(1,865)
5,123
9,083
5,749
(176,264)
(176,264)
—
—
372
4
—
—
—
—
20,717
—
—
—
—
5,074
—
—
—
—
—
—
6,540
64,393
644
445,930
115,383
(46)
13,046
(286,435)
275,476
Balance, December 31, 2007
—
$ —
65,292
$ 653
$ 465,599
$
133,308
$
206
18,795
$
(462,699)
$ 137,067
The accompanying notes are an integral part of these statements.
72
conSolID aTeD STaTeMenTS oF ca SH FloWS
InterDigital, Inc. and Subsidiaries
(in thousands)
For the Year Ended December 31,
2007
2006
2005
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization
Deferred revenue recognized
Increase in deferred revenue
Deferred income taxes
Share-based compensation
Tax benefit from stock options
Non-cash repositioning charges
Other
Decrease (Increase) in assets:
Receivables
Deferred charges
Other current assets
Increase (decrease) in liabilities:
Accounts payable
Accrued compensation
Accrued taxes payable
Other accrued expenses
$
20,004
$ 225,222
$
54,685
21,990
(119,596)
191,436
(8,630)
9,820
—
—
179
972
3,299
(5,354)
26,127
3,018
8,632
830
14,621
(196,294)
336,650
40,846
7,014
—
—
132
(112,318)
(10,328)
(3,326)
3,958
(3,817)
11,291
1,160
11,421
(65,553)
57,605
(37,298)
9,766
2,343
222
(75)
(7,922)
1,509
(409)
846
6,672
(219)
81
Net cash provided by operating activities
152,727
314,811
33,674
Cash flows from investing activities:
Purchases of short-term investments
Sales of short-term investments
Purchases of property and equipment
Capitalized patent costs
Capitalized technology license costs
Acquisition of patents
Proceeds from sale of fixed assets
Long-term investments
(133,787)
146,581
(13,826)
(23,852)
(24,440)
—
—
(5,000)
(172,210)
152,550
(11,152)
(18,865)
(2,700)
—
—
—
(151,453)
189,685
(5,372)
(16,954)
—
(8,050)
169
—
Net cash (used) provided by investing activities
(54,324)
(52,377)
8,025
Cash flows from financing activities:
Net proceeds from exercise of stock options and warrants
and employee stock purchase plan
Payments on long-term debt, including capital lease obligations
Repurchase of common stock
Tax benefit from share-based compensation
Net cash used by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
6,472
(1,247)
(183,118)
5,123
40,578
(351)
(184,870)
20,717
(172,770)
(123,926)
(74,367)
138,508
166,385
27,877
4,853
(327)
(34,085)
—
(29,559)
12,140
15,737
Cash and cash equivalents, end of period
$
92,018
$ 166,385
$
27,877
Supplemental cash flow information:
Interest paid
Income taxes paid, including foreign withholding taxes
Non-cash investing and financing activities
Issuance of restricted common stock
Issuance of common stock for profit sharing
Accrued purchase of treasury stock
Leased asset additions and related obligation
The accompanying notes are an integral part of these statements.
$
$
$
$
$
$
357
16,099
407
469
803
3,392
$
$
$
$
$
$
383
51,488
414
442
7,657
—
$
$
$
$
$
$
183
755
494
568
—
365
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
InterDigital, Inc. and Subsidiaries
DECEMBER 31, 2007
1. bacKgR oUnD
InterDigital, Inc. (collectively with its subsidiaries referred to as “InterDigital,” the “Company,”
“we,” “us” and “our”) designs and develops advanced digital wireless technology solutions.
We are developing technologies that may be utilized to extend the life of the current generation
of products, may be applicable to multiple generational standards such as 2G, 2.5G and 3G
cellular standards, as well as IEEE 802 wireless standards, and may have applicability across
multiple air interfaces. In conjunction with our technology development, we have assembled
an extensive body of technical know-how, related intangible products and a broad patent
portfolio. We offer our products and solutions for license or sale to semiconductor companies
and producers of wireless equipment and components.
Legal Entity Reorganization
On July 2, 2007, for the purpose of reorganizing into a holding Company structure, InterDigital
Communications Corporation executed a Plan of Reorganization and an Agreement and Plan of
Merger (“Merger”) with InterDigital, Inc., a newly formed Pennsylvania corporation and
another newly formed Pennsylvania corporation owned 100% by InterDigital, Inc. As a result of
the Merger, InterDigital Communications Corporation became a wholly-owned subsidiary of
InterDigital, Inc. These transactions are herein referred to collectively as the “Reorganization.”
As a result of the Reorganization, neither the business conducted by InterDigital, Inc.
and InterDigital Communications Corporation in the aggregate, nor the consolidated assets
and liabilities of InterDigital, Inc. and InterDigital Communications Corporation, in the
aggregate, changed.
By virtue of the Merger, each share of InterDigital Communications Corporation’s outstanding
common stock has been converted, on a share-for-share basis, into a share of common stock of
InterDigital, Inc. As a result, each shareholder of InterDigital Communications Corporation has
become the owner of an identical number of shares of common stock of InterDigital, Inc.
Further, each outstanding stock option and restricted stock unit (“RSU”) with respect to the
acquisition of shares of InterDigital Communications Corporation’s common stock now
represents a stock option or RSU, as the case may be, with respect to the acquisition of an
identical number of shares of InterDigital, Inc.’s common stock, upon the same terms and
conditions as the original stock option or RSU.
Immediately following the Merger, the provisions of the articles of incorporation and bylaws of
InterDigital, Inc. were the same as those of InterDigital Communications Corporation prior to
the Merger. Immediately following the Merger, the authorized capital stock of InterDigital, Inc.,
the designations, rights, powers and preferences of such capital stock and the qualifications,
limitations and restrictions thereof were also the same as the capital stock of InterDigital
Communications Corporation immediately prior to the Merger. Immediately following the
Merger, the directors and executive officers of InterDigital, Inc., were the same individuals who
were directors and executive officers, respectively, of InterDigital Communications Corporation
immediately prior to the Merger.
74
2. SUMMaRY oF SIgnIFIca nT acc oUnTIng PolIcIeS
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-
owned subsidiaries. All significant intercompany 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 these estimates. We believe the accounting
policies that are of particular importance to the portrayal of our financial condition and results,
and that may involve a higher degree of complexity and judgment in their application
compared to others, are those relating to patents, contingencies, revenue recognition,
compensation, and income taxes. If different assumptions were made or different conditions
had existed, our financial results could have been materially different.
Cash, Cash Equivalents and Short-Term Investments
We consider all highly liquid investments purchased with initial maturities of three months or
less to be cash equivalents. Management determines the appropriate classification of our
investments at the time of acquisition and re-evaluates such determination at each balance
sheet date. At December 31, 2007 and 2006, all of our short-term investments were classified
as available-for-sale and carried at amortized cost, which approximates market value.
We determine the cost of securities by specific identification and report unrealized gains and
losses on our available-for-sale securities as a separate component of equity. Net unrealized
losses on short-term investments were $0.2 million at December 31, 2007 and $0.4 million at
December 31, 2006. Realized gains and losses for 2007, 2006 and 2005 were as follows (in thousands):
Year
2007
2006
2005
Gains
Losses
$ 112
$ —
$ —
$
$
$
(366)
—
(82)
$
$
$
Net
(254)
—
(82)
Cash and cash equivalents at December 31, 2007 and 2006 consisted of the following (in thousands):
December 31,
Money market funds and demand accounts
Repurchase agreements
2007
2006
$ 91,818
200
$ 166,043
342
$ 92,018
$ 166,385
Our repurchase agreements are fully collateralized by United States Government securities and
are stated at cost, which approximates fair market value.
75
Short-term investments as of December 31, 2007 and 2006 consisted of the following
(in thousands):
December 31,
US Government agency instruments
Corporate bonds
2007
2006
$ 52,310
33,139
$ 52,392
45,189
$ 85,449
$ 97,581
At December 31, 2007 and 2006, $67.6 million and $71.5 million, respectively, of our short-term
investments had contractual maturities within one year. The remaining portions of our short-
term investments had contractual maturities within two to five years except for one that
matures in 2035.
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, computer software, machinery and equipment, and furniture and fixtures are
generally three to five years. Leasehold improvements are being amortized over the lesser of
their estimated useful lives or their respective lease terms, which are generally five to ten
years. Buildings are being depreciated over twenty-five years. Expenditures for major
improvements and betterments are capitalized while minor repairs and maintenance are
charged to expense as incurred.
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 costs associated with software for internal-use. All
computer software costs capitalized to date relate to the purchase, development and
implementation of engineering, accounting and other enterprise software. Capitalization begins
when the preliminary project stage is complete and ceases when the project is substantially
complete and ready for its intended purpose. Capitalized computer software costs are amortized
over their estimated useful life of three years.
Investments in Other Entities
In first quarter 2007, we made a $5.0 million investment for a non-controlling interest in Kineto
Wireless (“Kineto”). We do not have significant influence over Kineto and are accounting for
this investment using the cost method of accounting. Under the cost method, we will not
adjust our investment balance when the entity reports profit or loss but will monitor the
investment for an other-than-temporary decline in value. When assessing whether an other-
than-temporary decline in value has occurred, we will consider such factors as the valuation
placed on the investee in subsequent rounds of financing, the performance of Kineto relative to
its own performance targets and business plan, and Kineto’s revenue and cost trends, liquidity
and cash position, including its cash burn rate, and updated forecasts.
Patents
We capitalize external costs, such as filing fees and associated attorney fees, incurred to obtain
issued patents and patent license rights. We expense costs associated with maintaining and
defending patents subsequent to their issuance. We amortize capitalized patent costs on a
straight-line basis over the estimated useful lives of the patents. Ten years represents our best
estimate of the average useful life of our patents relating to technology developed directly by
76
us. The ten year estimated useful life of internally generated patents is based on our assessment
of such factors as the integrated nature of the portfolios being licensed, the overall makeup of
the portfolio over time and the length of license agreements for such patents. The estimated
useful lives of acquired patents and patent rights, however, have and will continue to be based
on a separate analysis related to each acquisition and may differ from the estimated useful
lives of internally generated patents. We assess the potential impairment to all capitalized net
patent costs when events or changes in circumstances indicate that the carrying amount of our
patent portfolio may not be recoverable. Amortization expense related to capitalized patent
costs was $9.3 million, $7.8 million and $6.3 million in 2007, 2006 and 2005, respectively. As of
December 31, 2007 and 2006, we had capitalized gross patent costs of $132.1 million and
$106.2 million, respectively, which were offset by accumulated amortization of $45.0 million
and $35.7 million, respectively. Our capitalized gross patent costs in 2005 increased $8.1 million
as a result of patents acquired from third parties. The weighted average estimated useful life
of our capitalized patent costs at December 31, 2007 and 2006 was 11.0 years and
11.2 years, respectively.
The estimated aggregate amortization expense related to our patents balance as of December
31, 2007 is as follows (in thousands):
2008
2009
2010
2011
2012
$ 10,366
10,223
10,064
9,803
9,470
Intangible Assets
Our other non-current asset balance at December 31, 2007 and 2006 includes $22.8 million and
$4.2 million, respectively, representing the net value of licensed technology used in our current
and future product offerings. These licenses are being amortized over a period of five years and
are presented net of accumulated amortization of $4.6 million and $0.9 million, respectively.
Contingencies
We recognize contingent assets and liabilities in accordance with Statement of Financial
Accounting Standards (SFAS) No. 5 Accounting for Contingencies.
Revenue Recognition
We derive the majority of our revenue from patent licensing. The timing and amount of revenue
recognized from each licensee depends upon a variety of factors, including the specific terms
of each agreement and the nature of the deliverables and obligations. 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 and non-refundable
license fees for the use of patents and/or know-how, patent and/or know-how licensing
royalties on covered products sold by licensees, cross licensing terms between us and other
parties, the compensation structure and ownership of intellectual property rights associated
with contractual technology development arrangements, and advanced payments and fees for
service arrangements. Due to the combined nature of some agreements and the inherent
difficulty in establishing reliable, verifiable and objectively determinable evidence of the fair
value of the separate elements of these agreements, the total revenue resulting from such
agreements may sometimes be recognized over the combined performance period. In other
circumstances, such as those agreements involving consideration for past and expected future
patent royalty obligations, the determining factors necessary to allocate revenue across past,
77
current, and future years may be difficult to establish. In such instances, after consideration of
the particular facts and circumstances, the appropriate recording of revenue between periods
may require the use of judgment. Generally, we will not recognize revenue or establish a
receivable related to payments that are due greater than twelve months from the balance sheet
date. In all cases, revenue is only recognized after all of the following criteria are met: (1)
written agreements have been executed; (2) delivery of technology or intellectual property
rights has occurred or services have been rendered; (3) fees are fixed or determinable; and (4)
collectibility of fees is reasonably assured
Patent License Agreements
Upon signing a patent license agreement, we provide the licensee permission to use our
patented inventions in specific applications. We have no material future obligations associated
with such licenses, other than, in some instances, to provide such licensees with notification of
future license agreements pursuant to most favored licensee rights. Under our patent license
agreements, we typically receive one or a combination of the following forms of payment as
consideration for permitting our licensees to use our patented inventions in their applications
and products:
Consideration for Prior Sales: Consideration related to a licensee’s product sales from prior
periods may result from a negotiated agreement with a licensee that utilized our patented
inventions prior to signing a patent license agreement with us or from the resolution of a
disagreement or arbitration with a licensee over the specific terms of an existing license
agreement. In each of these cases, we record the consideration as revenue. We may also
receive consideration from the settlement of patent infringement litigation where there was no
prior patent license agreement. We record the consideration related to such litigation as
other income.
Fixed Fee Royalty Payments: Up-front, non-refundable royalty payments that fulfill the
licensee’s obligations to us under a patent license agreement, for a specified time period or for
the term of the agreement.
Prepayments: Up-front, non-refundable royalty payments towards a licensee’s future obligations
to us related to its expected sales of covered products in future periods. Our licensees’ obligations
to pay royalties extend beyond the exhaustion of their Prepayment balance. Once a licensee
exhausts its Prepayment balance, we may provide them with the opportunity to make another
Prepayment toward future sales or it will be required to make Current Royalty Payments.
Current Royalty Payments: Royalty payments covering a licensee’s obligations to us related to
its sales of covered products in the current contractual reporting period.
We recognize revenues related to Consideration for Prior Sales when we have obtained a
signed agreement, identified a fixed or determinable price and determined that collectibility is
reasonably assured. We recognize revenues related to Fixed Fee Royalty Payments on a
straight-line basis over the effective term of the license. We utilize the straight-line method
because we have no future obligations under these licenses and we can not reliably predict in
which periods, within the term of a license, the licensee will benefit from the use of our
patented inventions.
78
Licensees that either owe us Current Royalty Payments or have Prepayment balances provide
us with quarterly or semi-annual royalty reports that summarize their sales of covered products
and their related royalty obligations to us. We typically receive these royalty reports subsequent
to the period in which our licensees’ underlying sales occurred. Consideration for Prior Sales,
the exhaustion of Prepayments and Current Royalty Payments are often calculated based on
related per-unit sales of covered products.
During 2007, we recognized revenue of $5.2 million related to unpaid patent licensee royalties.
We based our recognition of this revenue on royalty reports received, despite the fact that the
licensee has expressed its belief that it does not have a current payment obligation. We believe
that we are entitled to these royalty payments and the eventual collection of these amounts is
reasonably assured.
Technology Solutions Revenue
Technology solutions revenue consists primarily of revenue from software licenses and
engineering services. Software license revenues are recognized in accordance with the
American Institute of Certified Public Accountants Statement of Position (SOP) 97-2 Software
Revenue Recognition and SOP 98-9 Modification of SOP 97-2, Software Revenue Recognition.
When the arrangement with the customer includes significant production, modification or
customization of the software, we recognize the related revenue using the percentage-of-
completion method in accordance with SOP 81-1 Accounting for Performance of Construction-
Type and Certain Production-Type Contracts. Under this method, revenue and profit are
recognized throughout the term of the contract, based on actual labor costs incurred to date as
a percentage of the total estimated labor costs related to contract. Changes in estimates for
revenues, costs and profits are recognized in the period in which they are determinable. When
such estimates indicate that costs will exceed future revenues and a loss on the contract exists,
a provision for the entire loss is recognized at that time.
We recognize revenues associated with engineering service arrangements that are outside the
scope of SOP 81-1 on a straight-line basis under Staff Accounting Bulletin No. 104 Revenue
Recognition, unless evidence suggests that the revenue is earned or obligations are fulfilled in
a different pattern, over the contractual term of the arrangement or the expected period during
which those specified services will be performed, whichever is longer. In such cases, we often
recognize revenue using proportional performance and measure the progress of our
performance based on the relationship between incurred contract costs and total estimated
contract costs. Our most significant cost has been labor and we believe both labor hours and
labor cost provide a measure of the progress of our services. 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 probable and reasonably estimable.
When technology solutions agreements include royalty payments, we recognize revenue from
the royalty payments using the same methods described above under our policy for
recognizing revenue from patent license agreements.
79
Deferred Charges
From time-to-time, we use sales agents to assist us in our licensing activities. We often pay a
commission related to successfully negotiated license agreements. The commission rate varies
from agreement to agreement. Commissions are normally paid shortly after our receipt of cash
payments associated with the patent license agreements.
We defer recognition of commission expense related to both Prepayments and Fixed Fee
Royalty Payments and amortize these expenses in proportion to our recognition of the related
revenue. In 2007, 2006 and 2005, we paid cash commissions of approximately $1.7 million,
$18.8 million and $3.1 million and recognized commission expense of $4.7 million, $8.4 million,
and $4.5 million, respectively, as part of patent administration and licensing expense. At
December 31, 2007, 2006 and 2005 we had deferred commission expense of approximately
$4.0 million, $4.1 million and $1.4 million, respectively, included within prepaid and other
current assets and $8.9 million, $12.0 million and $4.4 million, respectively, included within
other non-current assets.
Research and Development
Research and development expenditures are expensed in the period incurred, except certain
software development costs which are capitalized between the point in time that technological
feasibility of the software is established and the product is available for general release to
customers. We did not have any such capitalized software costs in any period presented.
Acquired Technology
We capitalize the cost of technology solutions and platforms we acquire or license from third
parties when they have a future benefit and the development of these solutions and platforms
is substantially complete at the time they are acquired or licensed.
At December 31, 2007 and 2006, our other non-current assets, net included $22.9 million and
$4.2 million, respectively, of capitalized technology solutions net of accumulated amortization.
Compensation Programs
Through December 31, 2005, we accounted for stock-based employee compensation using
the intrinsic value method and provided pro forma disclosures related to our
stock-based compensation under the provisions of SFAS No. 148 Accounting for Stock-Based
Compensation—Transition and Disclosure an amendment of Financial Accounting Standards
Board (FASB) Statement No. 123. On January 1, 2006, we adopted the provisions of SFAS No.
123 (revised 2004), Share-Based Payment, using the modified-prospective method. SFAS No.
123(R) requires that compensation cost relating to share-based payment transactions be
recognized in financial statements based on the fair value of the instruments issued. SFAS No.
123(R) covers a wide range of share-based compensation arrangements including share
options, restricted share plans, performance-based awards, share appreciation rights and
employee share purchase plans. SFAS No. 123(R) also amends No. 95 Statement of Cash
Flows, to require that excess tax benefits, as defined, realized from the exercise of stock
options be reported as a financing cash inflow rather than as a reduction of taxes paid in flow
from operations.
In fourth quarter 2005, we accelerated the vesting of all remaining unvested options. We
recorded a charge of approximately $0.2 million related to the acceleration. This charge was
based, in part, on our estimate that approximately 12% of the accelerated options would have
been forfeited had the acceleration not occurred. The acceleration eliminates a non-cash charge
of approximately $7.1 million that would have been recognized under SFAS No. 123(R) between
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2006 and 2011. Prior to our January 1, 2006 adoption of SFAS No. 123(R), no other option-based
employee compensation cost was reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and earnings per share if
we had applied the fair value recognition provisions of SFAS No. 123 Accounting for
Stock-Based Compensation, to stock-based employee compensation (in thousands, except per
share data) in 2005:
For the Year Ended December 31,
Net income applicable to common shareholders—as reported
Add: Stock-based employee compensation expense included
in reported net income
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards(a)
Tax effect
Net income (loss) applicable to Common Shareholders—pro forma
Net income per share—as reported—basic
Net income per share—as reported—diluted
Net income (loss) per share—pro forma—basic
Net income (loss) per share—pro forma—diluted
2005
$ 54,685
9,766
(20,784)
3,746
$
47,413
1.01
0.96
0.88
0.83
(a) In 2005, we recorded a pro-forma charge of $7.1 million associated with the acceleration of 0.8 million unvested options.
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:
For the Year Ended December 31,
Expected option life (in years)
Risk-free interest rate
Volatility
Dividend yield
Weighted-average fair value
2005
5.7
4.1%
80.0%
—
$ 12.78
SFAS No. 123(R) requires that we reserve for estimated forfeitures of stock-based compensation
awards. In 2006, we recorded a reduction in operating expenses for the cumulative effect of a
change in accounting principle of less than $0.2 million upon adopting SFAS No. 123(R). This
cumulative effect adjustment was recorded to apply an estimated forfeiture rate of 3% to
unvested restricted stock units (RSUs) which had been issued under the 2005-2007 cycle of our
Long Term Compensation Program (LTCP) and which remained unvested and outstanding at
December 31, 2005. At December 31, 2007 and 2006, we have estimated the forfeiture rates for
outstanding RSUs to be between 0% and 16% over their lives of one to three years, depending
upon the group receiving the grant and the specific terms of the award issued.
In 2006, we adopted the short-cut method to establish the historical additional paid-in-capital
pool (APIC Pool) related to the tax effects of employee share-based compensation. Any positive
balance would be available to absorb tax shortfalls (which occur when the tax deductions
resulting from share-based compensation are less than the related book expense) recognized
subsequent to the adoption of SFAS No. 123(R). We did not incur any net tax shortfalls in 2007
or 2006.
81
In all periods, our policy has been to set the value of RSU and restricted stock awards equal to
the value of our underlying common stock on the date of grant. We amortize expense for all
such awards using an accelerated method.
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. We believe that the book value of our financial instruments
approximate their fair values.
Our accounts receivable are derived principally from patent license agreements and technology
solutions. At December 31, 2007, two customers represented 73% and 15%, respectively, of our
accounts receivable balance. At December 31, 2006, two customers represented 72% and 18%,
respectively, of our accounts receivable balance. We perform ongoing credit evaluations of
our customers who generally include large, multi-national, wireless telecommunications
equipment manufacturers.
Impairment of Long-Lived Assets
Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we
evaluate long-lived assets and intangible assets for impairment when factors indicate that the
carrying value 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 2005, we recorded an impairment to our fixed assets of approximately $0.2
million in connection with our 2005 Repositioning (Note 4). No such adjustments were recorded
in 2007 or 2006.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under this method,
deferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in
which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in the Consolidated
Statement of Operations in the period that includes the enactment date. A valuation allowance
is recorded to reduce the carrying amounts of deferred tax assets if management has
determined that it is more likely than not that such assets will not be realized.
In addition, the calculation of tax liabilities involves significant judgment in estimating the
impact of uncertainties in the application of complex tax laws. We are subject to examinations
by the Internal Revenue Service (IRS) and other taxing jurisdictions on various tax matters,
including challenges to various positions we assert in our filings. In the event that the IRS or
another taxing jurisdiction levies an assessment in the future, it is possible the assessment
could have a material adverse effect on our consolidated financial condition or results
of operations.
Effective January 1, 2007 the Company adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48). This interpretation clarifies the criteria for recognizing
income tax benefits under FASB Statement No. 109, Accounting for income taxes, and requires
additional disclosures about uncertain tax positions. Under FIN 48 the financial statement
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recognition of the benefit for a tax position is dependent upon the benefit being more likely
than not to be sustainable upon audit by the applicable tax authority. If this threshold is met,
the tax benefit is then measured and recognized at the largest amount that is greater than 50
percent likely of being realized upon ultimate settlement.
We adopted FIN 48, on January 1, 2007. As a result of the implementation, we recognized a
$2.1 million increase to reserves for uncertain tax positions. This increase, related to federal tax
credits, was accounted for as a reduction to retained earnings on the balance sheet. Including
this cumulative effect adjustment, on January 1, 2007 we had $6.2 million of net federal
tax benefits that, if recognized, would reduce our effective income tax rate in the
period recognized.
Prior to the adoption of FIN 48, we accrued for tax contingencies that have met both the
probable and reasonably estimable criteria. As of December 31, 2006 and 2005, there were
certain tax contingencies that either were not considered probable or were not reasonably
estimable by us at that time. In the event that the IRS or another taxing jurisdiction levies an
assessment in the future, it is possible the assessment could have a material adverse effect on
our consolidated financial condition or results of operations.
In 2007 and 2006 we credited foreign source withholding tax payments against our U.S.
Federal Income Tax Liability. Prior to 2006, we recognized deferred tax assets related to deferred
revenue for both U.S. Federal Income Tax purposes and non-U.S. jurisdictions that assess a
source withholding tax on related royalty payments. We expense these deferred tax assets as
we recognize the revenue and the related temporary differences reverse.
Net Income Per Common Share
Basic earnings per share (EPS) are 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 per share computation (in thousands, except for per share data):
For the Year Ended December 31, 2007
Income per Share—Basic:
Income
(Numerator)
Shares
(Denominator)
Per-Share
Amount
Income available to common shareholders
Dilutive effect of options, warrants and RSUs
$ 20,004
—
47,766
1,723
$ 0.42
(0.02)
Income per Share—Diluted:
Income available to common shareholders plus
dilutive effects of options, warrants and RSUs
For the Year Ended December 31, 2006
Income per Share—Basic:
$ 20,004
49,489
$ 0.40
Income
(Numerator)
Shares
(Denominator)
Per-Share
Amount
Income available to common shareholders
$ 225,222
Dilutive effect of options, warrants and RSUs
—
53,426
2,352
$ 4.22
(0.18)
Income per Share—Diluted:
Income available to common shareholders
plus dilutive effects of options, warrants,
RSUs and convertible preferred stock
$ 225,222
55,778
$ 4.04
83
For the Year Ended December 31, 2005
Income per Share—Basic:
Income
(Numerator)
Shares
(Denominator)
Per-Share
Amount
Income available to common shareholders
$ 54,685
Dilutive effect of options, warrants, and RSUs
—
54,058
3,103
$ 1.01
(0.05)
Income per Share—Diluted:
Income available to common shareholders
plus dilutive effects of options,
warrants and RSUs
$ 54,685
57,161
$ 0.96
For the years ended December 31, 2007, 2006 and 2005, options and warrants to purchase
approximately 0.5 million, 0.7 million and 1.8 million shares, respectively, of common stock
were excluded from the computation of diluted EPS because the exercise prices of the options
were greater than the weighted average market price of our common stock during the
respective periods and, therefore, their effect would have been anti-dilutive.
Recent Accounting Pronouncements
SFAS No. 157
In September 2006, the Financial Accounting Standard Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 157, Fair Value Measurements, which defines fair
value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. This statement does not
require any new fair value measurements, but provides guidance on how to measure fair value
by providing a fair value hierarchy used to classify the source of the information. For financial
assets and liabilities, SFAS No. 157 is effective for us beginning January 1, 2008. In February
2008, the FASB deferred the effective date of SFAS No. 157 for all non-financial assets
and non-financial liabilities, except those that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually) until January 1, 2009.
We believe the adoption of SFAS 157 will not have a material impact on our consolidated
financial statements.
SFAS No. 159
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, which provides companies with an option to report selected financial
assets and liabilities at fair value in an attempt to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by measuring related assets and
liabilities differently. This Statement is effective for us beginning January 1, 2008. We do not
anticipate electing the SFAS 159 option for our existing financial assets and liabilities and
therefore do not expect the adoption of SFAS 159 to have any impact on our consolidated
financial statements.
SFAS No. 141-R
In December 2007, the FASB issued SFAS No. 141-R, Business Combinations which revised
SFAS No. 141, Business Combinations. This pronouncement is effective for us beginning
January 1, 2009. Under SFAS No. 141, organizations utilized the announcement date as the
measurement date for the purchase price of the acquired entity. SFAS No. 141-R requires
measurement at the date the acquirer obtains control of the acquiree, generally referred to as
the acquisition date. SFAS No. 141-R will have a significant impact on the accounting for
transaction costs, restructuring costs as well as the initial recognition of contingent assets and
liabilities assumed during a business combination. Under SFAS No. 141-R, adjustments to the
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acquired entity’s deferred tax assets and uncertain tax position balances occurring outside the
measurement period are recorded as a component of the income tax expense, rather than
goodwill. As the provisions of SFAS No. 141-R are applied prospectively, the impact to the
Registrants cannot be determined until the transactions occur.
3. geogRaPHIc/cUST oMeR conc enTRa TIo n
We have one operating segment. As of December 31, 2007, substantially all of our revenue was
derived from a limited number of customers based outside of the United States (primarily Asia
and Europe). These revenues were paid in U.S. dollars and not subject to any substantial
foreign exchange transaction risk. During 2007, 2006, and 2005, revenue from our Asian-based
licensees comprised 79%, 39%, and 71% of total revenues, respectively. For the same
years, revenue from our European-based licensees comprised 10%, 58%, and 14% of total
revenues, respectively.
During 2007, 2006, and 2005, the following customers accounted for 10% or more of
total revenues:
Nokia Corporation
LG Electronics Inc.
NEC Corporation of Japan
Sharp Corporation of Japan
(a) Less than 10%
2007
2006
2005
(a)
25%
14%
19%
53%
11%
(a)
(a)
(a)
(a)
30%
22%
4. SIgnIFIcanT agReeMenTS anD eVenTS
Technology Solution Agreements
We account for portions of our technology solution agreements using proportional performance.
During 2007 and 2006, we recognized related revenue of approximately $1.2 million and
$4.5 million, respectively, using proportional performance. Our accounts receivable at
December 31, 2007 and 2006 included unbilled amounts of $0.3 million and $1.7 million,
respectively. We expect to bill and collect such amounts within twelve months of each
respective balance sheet date.
Acquisition of Patents
In 2005, we acquired, for a purchase price of approximately $8.1 million, selected patents,
intellectual property blocks and related assets from an unrelated third party. These assets are
designed to improve the range, throughput and reliability of wireless LAN and other wireless
technology systems. The purchase price was allocated almost entirely to patent assets with a
nominal amount being allocated to other assets. Based on our assessment in connection with
the asset acquisition, we are amortizing these patents over their expected useful lives of
approximately 15 years.
2005 Repositioning
In August 2005, we announced plans to close our Melbourne, Florida design facility. We ceased
our development activity at this facility in third quarter 2005 and relocated certain development
efforts and personnel to other Company locations. We closed the facility in fourth quarter 2005.
On the date of the announced closing, there were thirty-three full or part-time employees at
this facility, of which, five full-time employees accepted offers of continued employment
elsewhere within our organization. We estimate the repositioning resulted in annual pre-tax
cost savings of approximately $6.0 million.
85
In connection with the closure, we recognized repositioning charges totaling approximately
$1.5 million, comprised of severance and relocation costs of $1.0 million and facility closing
costs of $0.5 million. The facility closing costs include lease termination costs, fixed asset
writeoffs and costs to wind down the facility. We recorded these charges in 2005. We believe
that our financial obligations associated with this repositioning are complete.
5. P RoPeRTY anD eQU IPMenT
(In thousands)
December 31,
Land
Building and improvements
Engineering and test equipment
Computer equipment
Computer software
Furniture and fixtures
Leasehold improvements
Less: Accumulated depreciation
2007
2006
$
695
6,775
26,982
19,524
23,888
4,516
3,969
$
695
6,545
19,389
17,117
18,761
4,355
2,673
86,349
(61,755)
69,535
(52,853)
$ 24,594
$ 16,682
Depreciation expense was $8.9 million, $5.9 million, and $5.1 million in 2007, 2006 and 2005,
respectively. Depreciation expense included depreciation of computer software costs of $2.5
million, $1.9 million and $1.5 million in 2007, 2006 and 2005, respectively. Accumulated
depreciation related to computer software costs was $17.5 million and $15.0 million at
December 31, 2007 and 2006, respectively.
6. oblIga TIonS
(In thousands)
December 31,
Credit facility
Mortgage debt
Capital leases
Total long-term debt obligations
Less: Current portion
$
2007
—
1,203
2,514
3,717
(1,311)
2006
$
—
1,410
162
1,572
(369)
$ 2,406
$ 1,203
In December 2005, we entered into a two-year $60 million unsecured revolving credit facility
(the Credit Agreement). The Credit Agreement was entered into by the Company, Bank of
America, N.A., as Administrative Agent, and Citizens Bank of Pennsylvania. On July 2, 2007, as
a result of the Company’s internal corporate reorganization, InterDigital Communications
Corporation, the Company, the Subsidiary Guarantors party thereto, the Lenders and Bank of
America, N.A., as Administrative Agent and L/C Issuer, entered into a First Amendment,
Consent and Joinder to Credit Agreement. We did not borrow against the Credit Agreement
during the initial two year term.
86
In December 2007, we entered into a Second Amendment to Credit Agreement resulting in the
continuation of our two-year $60 million unsecured revolving credit facility (the Credit
Agreement) through December 2009. Under the Second Amendment, borrowings under the
Credit Agreement will, at the Company’s option, bear interest at either (i) LIBOR plus 65 basis
points or (ii) the higher of the prime rate or 50 basis points above the federal funds rate. The
customary restrictive financial and operating covenants under the Credit Agreement continue
in full force and effect and include, among other things, that the Company is required to (i)
maintain certain minimum cash and short-term investment levels, (ii) maintain minimum
financial performance requirements as measured by the Company’s income or loss before
taxes with certain adjustments, and (iii) limit or prohibit the incurrence of certain indebtedness
and liens, judgments above a threshold amount for which a reserve is not maintained, and
certain other activities outside of the ordinary course of business. Borrowings under the Credit
Agreement can be used for general corporate purposes including capital expenditures, working
capital, letters of credit, certain permitted acquisitions and investments, cash dividends and
stock repurchases. As of December 31, 2007, the Company did not have any amounts
outstanding under the Credit Agreement.
During 1996, we purchased our 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.
Two capital software lease obligations are payable annually. All other capital lease obligations
are payable in monthly installments at an average rate of 5.96%, through 2010. The net book
value of equipment under capitalized lease obligations was $3.0 million at December 31, 2007
and $0.1 million at December 31, 2006.
Maturities of principal of the long-term debt obligations as of December 31, 2007 are as follows
(in thousands):
2008
2009
2010
2011
2012
Thereafter
$ 1,359
1,303
588
288
179
0
$ 3,717
7. coMMITMenTS
Leases
We have entered into various operating lease agreements. Total rent expense, primarily for
office space, was $4.0 million, $3.1 million, and $3.1 million in 2007, 2006 and 2005, respectively.
Minimum future rental payments for operating leases as of December 31, 2007 are as follows
(in thousands):
2008
2009
2010
2011
2012
Thereafter
$ 2,122
2,078
2,078
1,810
1,413
0
87
8. lITIga TIon anD lega l PR oce eDIngS
Samsung and Nokia U.S. International Trade Commission Proceedings and Related Delaware
District Court Proceedings
In March 2007, InterDigital, Inc.’s wholly-owned subsidiaries InterDigital Communications, LLC
and InterDigital Technology Corporation (collectively, the “Company,” “InterDigital,” “we,” or
“our”) filed a Complaint against Samsung Electronics Co. Ltd. and certain of its affiliates
(collectively, “Samsung”) in the United States International Trade Commission (“USITC”)
alleging that Samsung engages in unfair trade practices by selling for importation, importing
into the United States, and selling after importation certain 3G handsets and components that
infringe three of InterDigital’s patents. In May 2007 and December 2007, a fourth patent and
fifth patent, respectively, were added to our Complaint against Samsung. The Complaint
against Samsung seeks an exclusion order barring from entry into the U.S. infringing 3G
WCDMA handsets and components that are imported by or on behalf of Samsung. Our
Complaint also seeks a cease-and-desist order to bar sales of infringing Nokia products that
have already been imported into the United States.
In addition, on the same date as our filing of the Samsung USITC action referenced above, we
also filed a Complaint in the United States District Court for the District of Delaware (“Delaware
District Court”) alleging that Samsung’s 3G WCDMA handsets infringe the same three
InterDigital patents identified in the original Samsung USITC Complaint. The U.S. trade laws
provide for a mandatory stay of parallel district court proceedings at the request of a
respondent. In June 2007, the Delaware District Court entered a Stipulated Order staying this
Delaware District Court proceeding against Samsung. The Stipulated Order was agreed to by
the parties. The Stipulated Order stays the proceeding until the USITC’s determination in this
matter becomes final. The Delaware District Court has permitted InterDigital to add the fourth
and fifth asserted patents asserted against Samsung in the USITC action to this stayed
Delaware action.
In August 2007, we filed a USITC Complaint against Nokia Corporation and Nokia, Inc.
(collectively, “Nokia”) alleging that Nokia engaged in an unfair trade practice by making for
importation into the United States, importing, and selling after importation certain 3G mobile
handsets and components that infringe two of InterDigital’s patents. In November 2007 and
December 2007, a third patent and fourth patent, respectively, were added to our Complaint
against Nokia. The Complaint against Nokia seeks an exclusion order barring from entry into
the U.S. infringing 3G mobile handsets and components that are imported by or on behalf of
Nokia. Our Complaint also seeks a cease-and-desist order to bar further sales of infringing
Nokia products that have already been imported into the United States.
In addition, on the same date as our filing of the Nokia USITC action referenced above, we also
filed a Complaint in the Delaware District Court alleging that Nokia’s 3G mobile handsets and
components infringe the same two InterDigital patents identified in the original Nokia USITC
Complaint. This Delaware action was also stayed on January 10, 2008, pursuant to the
mandatory, statutory stay of parallel district court proceedings at the request of a respondent
in an ITC Investigation. Thus, this Delaware action is stayed until the USITC’s determination
in this matter becomes final. The Delaware District Court has permitted InterDigital to add
the third and fourth patents asserted against Nokia in the USITC action to this stayed
Delaware action.
Nokia, joined by Samsung, moved to consolidate the Samsung and Nokia ITC proceedings. On
October 24, 2007, the Honorable Paul J. Luckern, the Administrative Law Judge overseeing the
two USITC proceedings against Samsung and Nokia, respectively, issued an Order to
consolidate the two pending investigations. Pursuant to the Order, the schedules for both
investigations have been revised to consolidate proceedings and set a unified evidentiary
88
hearing on April 21-28, 2008, the filing of a single initial determination by Judge Luckern by
July 11, 2008, and a Target Date for the consolidated investigations of November 12, 2008, by
which date the USITC should issue its final determination.
On December 4, 2007, Nokia moved for an order terminating, or alternatively, staying the
USITC investigation as to Nokia, on the ground that Nokia and InterDigital must first arbitrate a
dispute as to whether Nokia is licensed under the patents asserted by InterDigital against Nokia
in the USITC investigation. On January 8, 2008, Judge Luckern issued an order denying Nokia’s
motion and holding that Nokia has waived its arbitration defense by instituting and participating
in the Investigation and other legal proceedings. On February 13, 2008, Nokia filed an action in
the U.S. District Court for the Southern District of New York, seeking to preliminarily enjoin
InterDigital from proceeding with the USITC action with respect to Nokia, in spite of Judge
Luckern’s ruling denying Nokia’s motion to terminate the Investigation. Nokia raises in this
preliminary injunction action the same arguments it raised in its motion to terminate the ITC
Investigation, namely that InterDigital allegedly must first arbitrate its dispute with Nokia and
that Nokia has not waived this defense. The Court has scheduled a preliminary injunction
hearing for March 20, 2008.
On February 8, 2008, Nokia filed a motion for summary determination that InterDigital cannot
show that a domestic industry exists in the United States as required to obtain relief. Samsung
joined this motion. InterDigital has opposed this motion. On February 14 and 26, 2008,
InterDigital filed its own motions for summary determination regarding the domestic industry
requirement. No schedule has been set by Judge Luckern as to when these motions will
be decided.
On February 27, 2008, Nokia filed a motion to extend the Target Date in the ITC proceeding.
InterDigital intends to vigorously oppose this motion.
Nokia UKII Action
In July 2005, Nokia filed a claim in the English High Court of Justice, Chancery Division, Patents
Court (“English High Court”) against ITC seeking a Declaration that thirty-one of ITC’s UMTS
European Patents registered in the UK are not essential IPR for the 3GPP Standard (“UKII”).
On December 21, 2007, the English High Court issued a judgment finding that European Patent
(UK) 0,515,610 (the ’610 patent), owned by InterDigital Technology Corporation, is essential to
the 3G UMTS WCDMA European standard promulgated by the European Telecommunications
Standards Institute (ETSI) and that this patented invention is infringed by carrying out the
method described in the standard. The ’610 patent relates to open loop power control, a
fundamental aspect of 3G technology. Foreign counterparts having identical or similar claim
language to the ’610 patent have been issued in many parts of the world, including the United
States, Canada, Germany, France, Spain, Italy, and Sweden. The judicial determination of
essentiality is in addition to Nokia’s withdrawal of its challenge to the essentiality of another
patent, European Patent (UK) 0,515,675 relating to pilot codes, effectively conceding that that
patent is essential as well.
In the judgment, the English High Court ruled that one claim of the ’610 patent was essential.
The English High Court ruled that a second claim of the ’610 patent, as well as three additional
patents, were not essential. A declaration of non-essentiality is not a finding that a particular
third party product does not infringe an InterDigital patent, and no products were in issue
in these proceedings. The judgment is subject to appeal by either party if permission to appeal
is granted.
There will be a further hearing in April 2008 to determine the form of order to be made as well
as any orders relating to attorneys’ fees. Pursuant to UK law, it is customary for a party winning
a motion or the overall outcome of a case to receive reimbursement of attorneys fees from the
89
other party. Depending on the outcome of this hearing, this could result in a substantial
amount for the Company, Nokia or neither party. At December 31, 2007, we accrued $7.8 million
for the potential reimbursement of legal fees associated with this matter.
Nokia UKIII Action
In December 2006, ITC filed a claim in the English High Court against Nokia seeking a
Declaration that thirty-four UMTS European Patents and one UMTS GB national patent all
registered in the UK and declared by Nokia to be essential IPR for the 3GPP Standard are not
essential. Nokia has since admitted in the proceedings that five of those patents are not
essential to the Standard. Since the proceedings began, an additional five of the patents have
been transferred to Nokia Siemens Networks Oy, which has been joined to the action as a
second defendant and which has admitted that one of the five patents is non-essential. The
Court has scheduled a preliminary hearing for no earlier than June 2008 with respect to
whether the Judge should exercise his discretion to issue the declaration being sought by
InterDigital. Trial in this action is scheduled to begin in the fourth quarter of 2008.
Nokia Delaware Proceeding
In January 2005, Nokia and Nokia, Inc. (collectively, “Nokia”) filed a Complaint in the United
States District Court for the District of Delaware (“Delaware District Court”) against InterDigital
Communications, LLC (“IDC”) and our wholly-owned subsidiary, InterDigital Technology
Corporation (“ITC”) (IDC and ITC collectively referred to as “InterDigital,” “we,” or “our”),
alleging that we have used false or misleading descriptions or representations regarding our
patents’ scope, validity, and applicability to products built to comply with 3G wireless phone
Standards (“Nokia Delaware Proceeding”). We subsequently filed counterclaims based on
Nokia’s licensing activities as well as Nokia’s false or misleading descriptions or representations
regarding Nokia’s 3G patents and Nokia’s undisclosed funding and direction of an allegedly
independent study of the essentiality of 3G patents.
On December 10, 2007, pursuant to a joint request by the parties, the Delaware District Court
entered an Order staying the proceedings pending the full and final resolution of the Company’s
ITC investigation against Nokia and Samsung. Specifically, the full and final resolution of the
ITC investigation includes any initial or final determinations of the Administrative Law Judge
overseeing the proceeding, the ITC, and any appeals therefrom. Pursuant to the Order, the
parties and their affiliates are generally prohibited from initiating against the other parties, in
any forum, any claims or counterclaims that are the same as the claims and counterclaims
pending in the Nokia Delaware Proceeding, and should any of the same or similar claims or
counterclaims be initiated by a party, the other parties may seek dissolution of the stay.
The Order does not affect any of the other legal proceedings between the parties including
the current ITC Investigation involving InterDigital, Nokia and Samsung, or the parallel
Delaware District Court proceedings also brought by InterDigital against Nokia and
Samsung individually.
Nokia ICC Arbitration
In November 2006, we filed a Request for Arbitration with the ICC against Nokia (“Nokia ICC
Proceeding”), claiming that certain presentations Nokia has attempted to use in support of its
claims in the Nokia Delaware Proceeding are confidential and, as a result, may not be used in
the Nokia Delaware Proceeding pursuant to the parties’ agreement.
The December 10, 2007, Order entered by the Delaware District Court to stay the Nokia
Delaware Proceeding described above, also stayed the Nokia ICC Proceeding pending the full
and final resolution of the ITC Investigation against Nokia and Samsung as described above.
90
Samsung Delaware Proceeding
In March 2007, Samsung Telecommunications America LLP (“Samsung Telecom”) and Samsung
Electronics Co., Ltd. (“Samsung Electronics”) filed an action against InterDigital Communications
Corporation (now “InterDigital Communications, LLC”), ITC and another affiliate, Tantivy
Communications, Inc. (collectively, “InterDigital,” “we,” or “our”), in the Delaware District Court,
alleging that InterDigital has refused to comply with its alleged contractual obligations to be
prepared to license our patents on fair, reasonable, and non-discriminatory (“FRAND”) terms,
and that InterDigital has allegedly engaged in unfair business practices. By their original
Complaint in the action, the Samsung entities sought damages and declaratory relief, including
declarations that: (i) InterDigital’s patents and patent applications allegedly promoted to
standards bodies are unenforceable; (ii) the Samsung entities have a right to practice
InterDigital’s intellectual property as a result of an alleged license from QUALCOMM
Incorporated; (iii) nine specified InterDigital patents are invalid and/or not infringed by
the Samsung entities; and (iv) InterDigital must offer the Samsung entities a license on
FRAND terms.
In September 2007, Samsung Electronics filed a First Amended Complaint (“Amended
Complaint”) in its proceeding in the Delaware District Court against InterDigital. The Amended
Complaint includes Samsung’s originally-pled claims concerning InterDigital’s alleged behavior
with respect to standards bodies and licensing practices, but omits all of Samsung’s previously
asserted claims for declaratory judgment that nine specified InterDigital patents are invalid
and/or not infringed. The Amended Complaint was filed only on behalf of Samsung Electronics
and, unlike the original Complaint, does not identify Samsung Telecom as a co-plaintiff.
InterDigital intends to vigorously defend itself against Samsung’s allegations in this matter. In
November 2007, InterDigital filed its Answer to the Amended Complaint, disputing Samsung’s
allegations and asserting counterclaims of infringement of two InterDigital patents. InterDigital
simultaneously filed a partial motion to dismiss Samsung’s claim alleging violation of
California’s Unfair Competition Law. No ruling has been made on InterDigital’s motion to
dismiss, and no scheduling order has been issued in the case. The Court has not yet set this
matter for an initial Case Management Conference, and discovery has not yet begun.
Samsung 2nd Arbitration and Related Confirmation Proceeding
In August 2006, an arbitral tribunal (“Tribunal”) operating under the auspices of the
International Court of Arbitration of the International Chamber of Commerce issued a final
award (“Award”) in an arbitration proceeding between InterDigital Communications, LLC and
InterDigital Technology Corporation (collectively, “InterDigital”), and Samsung Electronics. In its
Award, the Tribunal ordered Samsung Electronics to pay to InterDigital, pursuant to the parties’
1996 patent license agreement (“Samsung Agreement”), approximately $134 million in past
royalties plus interest on Samsung’s sale of single mode 2G GSM/TDMA and 2.5G GSM/GPRS/
EDGE terminal units through 2005 (“Award”). The Tribunal also established the royalty rates to
be applied to Samsung’s sales of covered products in 2006.
In September 2006, InterDigital filed an action seeking to enforce the arbitral Award in the U.S.
District Court for the Southern District of New York (the “Enforcement Action”). Subsequent to
that filing, in September 2006 Samsung Electronics filed an opposition to the enforcement
action, including filing a cross-petition to vacate or modify the Award and to stay the Award.
Oral arguments were held in November 2007.
On December 10, 2007, the Honorable Richard J. Sullivan, the Judge who is currently
overseeing the Enforcement Action, confirmed the Award in its entirety and directed that
Samsung pay InterDigital $150.25 million comprised of $134 million in royalties plus interest
less an approximate $6 million prepayment credit for sales of 2G terminal units through 2005,
91
plus pre-judgment interest calculated at a rate of 5% per annum. The Order of Judgment
denied all of Samsung’s petitions and motions and does not include a specified amount for
royalties owed for 2006 under the arbitration award.
On December 18, 2007, Samsung filed an appeal with the United States Court of Appeals for
the Second Circuit and posted an appeal bond, in the amount of approximately $166.7 million,
with the New York District Court. By posting the appeal bond, Samsung has stayed execution of
the Order of Judgment pending the appeal. Under the current schedule, oral argument before
the Second Circuit Court of Appeals will take place no earlier than the week of May 26, 2008.
On February 25, 2008, Samsung filed a motion to stay their appeal, and vacate the current
briefing schedule, pending the outcome of the Samsung 3rd Arbitration (described below). The
Company intends to oppose Samsung’s motion.
Samsung 3rd Arbitration
In October 2006, Samsung Electronics filed a request for a new ICC arbitration proceeding (the
“Samsung 3rd Arbitration”) relating to the ongoing patent royalty dispute between Samsung
and InterDigital. In the Samsung 3rd Arbitration, Samsung Electronics seeks to have a new
arbitration panel determine new royalty rates for Samsung’s 2G/2.5G GSM/GPRS/EDGE product
sales based on the April 2006 Nokia Settlement, which implemented a June 2005 Nokia
arbitration Award. Samsung has purported to have elected the Nokia Settlement under the
most favored licensee (“MFL”) clause in the Samsung Agreement. Samsung contends that it
has the right to have a new rate, based on the Nokia Settlement, applied to its sales in the
period from January 1, 2002 through December 31, 2006 in lieu of the royalty rates that have
been determined by the Tribunal in the Samsung 2nd Arbitration for that period. In addition to
seeking relief based on the Nokia Settlement, Samsung has expressly reserved a purported
right to make an MFL election of another specified license agreement between InterDigital and
a third party, and to add claims relating to that agreement. In the Samsung 3rd Arbitration
proceeding, we have denied that Samsung is entitled to receive any new royalty rate
adjustment based on the Nokia Settlement or the specified third party license agreement.
We have also counterclaimed, seeking an Award of the royalties Samsung owes for its
2G/2.5G sales in 2006 at the royalty rate specified in the August 2006 Award in the Samsung
2nd Arbitration.
In February 2008, the Tribunal heard oral argument on the issue of whether Samsung is entitled
to elect the Nokia Settlement. The Tribunal has not indicated when it will render a decision on
this issue. The parties will need to present evidence and/or argument in a further phase of this
arbitration on the amount of royalties Samsung owes for its 2G/2.5G sales in 2006, and,
depending on the Tribunal’s decision as to whether Samsung is entitled to elect the Nokia
Settlement, possibly for earlier periods of time.
Other
We have filed patent applications in the United States and in numerous foreign countries. In
the ordinary course of business, we currently are, and expect from time-to-time to be, subject
to challenges with respect to the validity of our patents and with respect to our patent
applications. We intend to continue to vigorously defend the validity of our patents and defend
against any such challenges. However, if certain key patents are revoked or patent applications
are denied, our patent licensing opportunities could be materially and adversely affected.
92
We and our licensees, in the normal course of business, may have disagreements as to the
rights and obligations of the parties under the applicable patent license agreement. For
example, we could have a disagreement with a licensee as to the amount of reported sales of
covered products and royalties owed. Our patent license agreements typically provide for
arbitration as the mechanism for resolving disputes. Arbitration proceedings can be resolved
through an award rendered by an arbitration panel or through private settlement between
the parties.
In addition to disputes associated with enforcement and licensing activities regarding our
intellectual property, including the litigation and other proceedings described above, we are a
party to other disputes and legal actions not related to our intellectual property, but also arising
in the ordinary course of our business, including claims by us for insurance coverage involving
the Nokia Delaware Proceeding. Based upon information presently available to us, we believe
that the ultimate outcome of these other disputes and legal actions will not have a material
adverse affect on us.
Among the types of legal proceedings we encounter in the normal course of business, we are
engaged in the following action:
Federal
In May 2007, the Arbitrator in the arbitration proceeding between InterDigital Communications
Corporation (now “InterDigital Communications, LLC”) and InterDigital Technology Corporation
(collectively, “InterDigital,” “we,” or “our”) and Federal Insurance Company (“Federal”), and
relating to a Litigation Expense and Reimbursement Agreement signed in February 2000 by the
parties (“Reimbursement Agreement”), refused to award the full amount of Federal’s claim
which was in excess of $33 million. The Arbitrator did award Federal approximately $13 million,
pursuant to a formula set forth in the Reimbursement Agreement, for reimbursement of
attorneys’ fees and expenses previously paid to or on behalf of InterDigital by Federal, plus
approximately $2 million in interest. As additional reimbursement of attorneys’ fees and
expenses, the Arbitrator awarded $5 million, without interest, as Federal’s share under the
Reimbursement Agreement of “additional value” of the 2003 settlement between InterDigital
and Ericsson Inc. Further, the Arbitrator ruled that InterDigital must pay Federal 10% of any
additional payments InterDigital may receive as a result of an audit of Sony Ericsson’s sales. In
June 2007, we notified Federal that we had received $2 million from Sony Ericsson to resolve
Sony Ericsson’s payment obligations following an audit. The approximately $13 million portion
of the Award represents a percentage of the amounts InterDigital has received since March
2003 from Telefonaktiebolaget LM Ericsson and Ericsson Inc., and Sony Ericsson Mobile
Communications AB under their respective patent license agreements.
In June 2007, Federal moved to confirm the Award in the United States District Court for the
Eastern District of Pennsylvania. Also in June 2007, we filed an opposition to Federal’s motion
to confirm the arbitration Award and a cross motion to vacate a portion of the Award, totaling
approximately $14.5 million, on the ground that the Arbitrator exceeded the scope of her
authority. We also moved the Court to stay confirmation of the Award pending adjudication of
our recoupment defense whereby we are seeking to recoup the full amount of the Award
based on Federal’s bad faith breach of its contractual and fiduciary duties to us. In July 2007,
the Court heard oral arguments on Federal’s motion to confirm the Award, our opposition
thereto, our cross motion to vacate the Award, and to stay confirmation pending adjudication
of our recoupment defense. The Court has not yet ruled on these pending motions.
93
At the time of judgment we recorded an expense of approximately $16.6 million which
represents the total amount of the Award through third quarter 2007, less the amount of a
previously accrued liability of $3.4 million. We have also accrued post judgment interest of $0.7
million and reported such interest expense within the “Interest and other income, net” line
item of our Statement of Income.
9. Re la TeD P aRT Y TRanS acTIonS
One of our outside directors is Chairman of the Advisory Board to a firm that provides us with
consulting services. We paid $0.3 million to this firm for their services in 2007 and we paid
them less than $0.1 million, in each of 2006 and 2005. Our board member did not receive any
direct compensation or commissions related to these engagements.
10. coMPenS aTIon Pla nS anD PR ogRaMS
Common Stock Compensation Plans
We have stock-based compensation plans under which, depending on the plan, directors,
employees, consultants and advisors can receive share-based awards such as, stock options,
stock appreciation rights, restricted stock awards and other stock unit awards. We
issue the share-based awards authorized under these plans through a variety of
compensation programs.
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 other specified groups, depending on the plan. No further grants are allowed under the
Pre-existing Plans. In 2000, our 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
other securities. The 2000 Plan authorizes the offer and sale of up to approximately 6.9 million
shares of common stock. The Board of Directors or the Compensation 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 the fair market value of the common stock at the date
of grant.
In 2002, the Board of Directors approved the 2002 Stock Award and Incentive Plan (2002 Plan)
that allows for the granting of incentive and non-qualified options, as well as other securities,
to Company employees who are not subject to the reporting requirements of Section 16 of the
Securities Act of 1934 or an “affiliate” for purposes of Rule 144 of the Securities Act of 1933. The
2002 Plan authorizes the offer and sale of up to 1.5 million shares of common stock. The Board
of Directors or the Compensation Committee of the Board determine the number of options to
be granted. 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 plans that provide for both incentive and non-qualified stock options,
grants most commonly vest in six semi-annual installments.
94
Information with respect to current year stock options activity under the above plans is
summarized as follows (in thousands, except per share amounts):
Outstanding Options
Number
Price Range
Weighted
Average
Exercise
Price
Available
For Grant
Balance at December 31, 2006
934
4,526
$ 0.01–39.00
Canceled
Exercised
Balance at December 31, 2007
32
—
966
(32)
39.00–39.00
(737)
5.19–25.73
$ 15.41
39.00
8.77
3,757
$ 0.01–39.00
$ 16.51
The following table summarizes information regarding the stock options outstanding at
December 31, 2007 (in thousands, except for per share amounts):
Range of
Exercise Prices
$
$
$
$
$
0.01 – 5.81
6.00 – 9.00
9.03 – 9.60
9.77 – 11.63
11.64 – 13.19
$ 13.25 – 17.13
$ 17.26 – 23.97
$ 24.00 – 31.81
$ 34.13 – 34.13
$ 39.00 – 39.00
$
0.01 – 39.00
Number
Outstanding and
Exercisable
Weighted
Average
Remaining
Contractual
Life (Years)*
Weighted
Average
Exercise
Price
418
301
446
455
510
418
390
312
13
494
3,757
3.10
11.42
3.81
12.66
3.43
3.76
5.18
3.77
2.18
2.02
5.26
$ 4.84
7.67
9.59
10.84
12.48
15.79
19.88
25.85
34.13
39.00
$ 16.51
* We currently have approximately 227,000 options outstanding that have an indefinite contractual life. These options were granted between
1983 and 1986 under a pre-existing plan. For purposes of this table these options were assigned an original life in excess of 50 years. The
majority of these options have an exercise price of between $9.77 and $11.63.
The total intrinsic value of stock options exercised during the year ended December 31, 2007,
2006 and 2005 was $14.2 million, $59.4 million and $4.6 million, respectively. The total intrinsic
value of our options outstanding at December 31, 2007 was $34.3 million. In 2007, we recorded
cash received from the exercise of options of $6.5 million and tax benefits of $5.0 million.
Upon option exercise, we issued new shares of stock.
At December 31, 2007 and 2006, we had approximately 2.9 million and 4.0 million options
outstanding, respectively, that had exercise prices less than the fair market value of our stock
at each balance sheet date. These options would generate $33.1 million and $48.8 million of
cash proceeds to the Company if they were fully exercised.
95
Restricted Stock
Under our 1999 Restricted Stock Plan, as amended (1999 Plan), we may issue up to 3.5 million
shares of restricted common stock and restricted stock units (RSUs) 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, 2007 and 2006, we
had issued approximately 2.9 million and 2.3 million shares, respectively, of restricted stock
and RSUs under the 1999 Plan. The related compensation expense is amortized over vesting
periods that are generally from 1 to 5 years. At December 31, 2007 and 2006, we had
unrecognized compensation cost related to share-based awards of $5.6 million and
$4.2 million, respectively. We expect to amortize the unrecognized compensation cost at
December 31, 2007 over a weighted average period of less than one year using an
accelerated method.
We grant RSUs as an element of compensation to all of our employees. These awards vest
over three years according to the following schedules:
Employees below manager level
Managers and technical equivalents
Senior officers
Year 1
Year 2
Year 3
33%
25%
0%
33%
25%
0%
34%
50%
100%
Information with respect to current and prior year RSU activity under the above plan is
summarized as follows (in thousands, except per share amounts):
Balance at December 31, 2005
Granted*
Forfeited
Vested
Balance at December 31, 2006
Granted**
Forfeited
Vested
Balance at December 31, 2007
Number of
Unvested
Weighted
Average
Grant Date
RSUs
Fair Value
814
209
(32)
(365)
626
684
(49)
(192)
1,069
$ 20.00
20.41
20.07
19.10
20.66
33.06
30.11
20.52
$ 28.19
* The numbers of RSUs presented as issued and cancelled in this table do not reflect the impact of a third quarter exchange of 56,000
time-based RSUs for an equal number of performance-based RSUs.
** The number of RSUs presented as issued includes 0.4 million performance RSUs which may be satisfied with between 0 and 0.4 million
shares of common stock on January 1, 2010, depending upon the company’s performance against operating measures between the grant
and end date for RSU Cycle 3.
The total vest date fair value of our RSUs that vested during each of 2007, 2006 and 2005 was
$6.4 million, $7.0 million and $6.0 million, respectively.
Compensation Programs
We use a variety of compensation programs to attract and retain employees, as well as more
closely align employee compensation with Company performance. These programs include
both cash components and share-based components. We issue new shares of our common
stock to satisfy our obligations under the share-based components of these programs from the
96
Common Stock and Restricted Stock Plans discussed above. However, our board of directors
has the right to authorize the issuance of treasury shares to satisfy such obligations in
the future.
We recognized $3.9 million, $3.5 million and $6.5 million of compensation expense in 2007,
2006 and 2005, respectively, related to a performance-based cash incentive under our LTCP,
discussed below. We also recognized share-based compensation expense of $9.8 million, $7.0
million and $9.8 million in 2007, 2006 and 2005, respectively. The majority of the share-based
compensation expense, for all years, related to RSU awards granted to managers under our
LTCP. In 2006, share-based compensation expense also included a non-recurring charge of $1.0
million to correct our accounting related to share-based grants awarded to two non-employee,
non-director consultants in 1998. We previously accounted for these non-employee grants
similarly to share-based employee grants, using the intrinsic value method. The charge reflects
the incremental cost that would have been recognized by correctly treating these grants as
non-employee grants using the fair value method. The balance of the share-based compensation
expense relates to the programs described below.
LTCP
The LTCP applies to all management personnel and includes a time-based RSU component, a
performance-based RSU component and a performance-based cash incentive component. The
LTCP was originally designed as three year cycles that overlap by one year. However, the first
cycle under the program covered the period from April 1, 2004 through January 1, 2006 (Cycle
1). The second cycle originally covered the period from January 1, 2005 through January 1,
2008 (Cycle 2). In second quarter 2005, the Compensation Committee of our Board of Directors
amended the LTCP to revise the performance-based cash award portion of Cycle 2 to cover a
3-1/2 year period from July 1, 2005 through January 1, 2009 (Cycle 2a), and authorized a
pro-rated interim payment, of approximately $0.9 million, related to first half 2005. The third
RSU cycle (RSU Cycle 3) began on January 1, 2007 and runs through January 1, 2010. The third
performance-based cash award cycle (Cash Cycle 3) began on January 1, 2008 and runs
through January 1, 2011.
During 2006, fourteen members of our senior management voluntarily exchanged approximately
56,000 Cycle 2 time-based RSUs for an equal number of Cycle 2 performance-based RSUs. The
Company ultimately satisfied these performance-based RSUs in early 2008 through the
issuance of approximately 11,000 shares, based upon senior management’s performance
against specified goals. During 2006, the LTCP was amended such that, beginning with the
January 1, 2007 grant, executives now receive 50% of their RSU grant as performance-based
RSUs and 50% as time-based. Under the amendment the Company’s managers now receive
25% of their RSU grant as performance-based RSUs and 75% as time-based.
Other RSU Grants
We also grant RSUs to all non-management employees, all non-employee board members
and, in special circumstances, management personnel outside of the LTCP. Grants of this type
awarded to management personnel are in addition to any grants awarded through the LTCP.
401(k) and Profit Sharing
We have a 401(k) plan wherein employees can elect to defer compensation based on federal
limits. The Company matches a portion of employee contributions. At its discretion, the
Company may also make a profit sharing contribution to its employees’ 401(k) plans. In 2007,
2006 and 2005, we issued 13,963, 24,084 and 32,632 shares of common stock to satisfy our
accrued obligations from the prior years of $0.5 million, $0.5 million and $0.6 million related to
our profit sharing contribution to eligible employees under our Savings and Protection Plan
(Savings Plan).
97
Annual Bonus
We have a performance-based annual bonus plan that is applicable to all employees. Executive
officers and other key management personnel may be paid up to 30% of their bonus in shares
of restricted stock. These shares are restricted as to their transferability for a two year period
but are not forfeitable. The shares have full voting power and have a right to receive dividends.
We issued 11,765, 17,000 and 29,000 shares of restricted stock in 2007, 2006 and 2005,
respectively, to satisfy our accrued obligations from the prior years of $0.4 million, $0.4 million
and $0.5 million under the restricted stock portion of the annual bonus.
11. S HaReH olDeR RIgHTS Plan
In December 1996, our Board of Directors (Board) declared a distribution under our Shareholder
Rights Plan (Rights Plan) of one Right (as defined in the Rights Plan) for each outstanding
common share of the Company to shareholders of record as of the close of business on
January 3, 1997. In addition, all new common shares issued after January 3, 1997 are
accompanied by one Right for each common share issued. On December 15, 2006, the
Company entered into the Amended and Restated Rights Agreement (the “Amended
Agreement”) dated as of December 15, 2006, between the Company and American Stock
Transfer and Trust Company as Rights Agent (“Rights Agent”), amending and restating the
Rights Plan.
In addition to continuing the provisions of the Rights Plan as previously in effect, the Amended
Agreement (i) implemented a regular evaluation thereof by a committee composed of non-
management members of the Board who have been determined by the Board to be
“independent directors”, (ii) extended the term of the Rights Plan to December 15, 2016, (iii)
simplified the determination of the Stock Acquisition Date under the Amended Plan, (iv)
changed the “Purchase Price” (as defined in the Amended Agreement) from $250 to $200, (v)
changed the redemption price of a Right from $.01 to $.001, and (vi) made certain other minor
or conforming changes and other changes to reflect current requirements under the federal
securities laws.
Pursuant to the Rights Plan, as amended and restated by the Amended Agreement, each Right
entitles shareholders to buy one-thousandth of a share of Series B Junior Participating
Preferred Stock (Preferred Stock) at the Purchase Price of $200 per 1/1000th of a share, subject
to adjustment. Ordinarily, the Rights will not be exercisable until (i) 10 business days after the
earliest of any of the following events (A) a person, entity or group other than certain categories
of shareholders exempted under the Rights Plan (collectively, a Person), acquires beneficial
ownership of 10% or more of the Company’s outstanding common shares, or (B) a Person
publicly commences a tender or exchange offer for 10% or more of the Company’s outstanding
common shares, or (C) a Person publicly announces an intention to acquire control over the
Company and proposes to elect through a proxy or consent solicitation such a number of
directors, who if elected, would outnumber the Independent Directors (as defined in the Rights
Plan) on the Board, or (ii) such later date as may be determined by action of a majority of the
Independent Directors prior to the occurrence of any event specified in (i) above (Distribution
Date). In general, following the Distribution Date and in the event that the Company enters into
a merger or other business combination with an Acquiring Person (as such term is defined in
the Rights Plan) and the Company is the surviving entity, each holder of a Right will have the
right to receive, upon exercise, units of Preferred Stock (or, in certain circumstances, Company
common shares, cash, property, or other securities of the Company) having a value equal to
twice the exercise price of the Right, or if the Company is acquired in such a merger or other
business combination, each holder of a Right will have the right to receive stock of the
98
acquiring entity having a value equal to twice the exercise price of the Right. The Company
reserves the right to redeem the Rights by majority action of its Independent Directors at any
time prior to the date such Rights become exercisable.
12. TaXeS
Our income tax (benefit) provision consists of the following components for 2007, 2006 and
2005 (in thousands):
Year Ended December 31,
2007
2006
2005
Current
Federal
Alternative Minimum Tax (AMT)
Foreign income tax
Foreign source withholding tax
Deferred
Federal
Foreign source withholding tax
Reversal of valuation allowance
Total
$ 4,797
—
—
15,832
20,629
$ 39,354
$ 2,343
—
—
28,488
350
170
—
67,842
2,863
(2,448)
(6,182)
—
61,131
(4,584)
6,938
2,136
—
(46,371)
(8,630)
56,547
(37,297)
$ 11,999
$ 124,389
$ (34,434)
The deferred tax assets and liabilities are comprised of the following components at
December 31, 2007 and 2006 (in thousands):
2007
Net operating losses
Deferred revenue, net
Foreign tax credits
Stock compensation
Patent amortization
Depreciation
Other accrued liabilities
Other employee benefits
Less: valuation allowance
Net deferred tax asset
2006
Net operating losses
Deferred revenue, net
Foreign tax credits
Stock compensation
Patent amortization
Depreciation
Other accrued liabilities
Other employee benefits
Less: valuation allowance
Net deferred tax asset
Federal
State
Foreign
Total
$
—
$ 38,274
$
—
$ 38,274
13,825
—
8,973
4,912
2,111
13,808
827
44,456
—
—
—
1,343
735
316
1,665
123
14,112
—
—
—
—
—
—
27,937
—
10,316
5,647
2,427
15,473
950
42,456
14,112
101,024
(42,456)
—
(42,456)
$ 44,456
$
—
$ 14,112
$ 58,568
Federal
State
Foreign
Total
$ 1,139
$ 28,408
—
$ 29,547
10,803
15,700
5,172
4,016
1,680
2,668
830
—
—
922
716
300
475
148
7,930
18,733
—
—
—
—
—
—
15,700
6,094
4,732
1,980
3,143
978
42,008
30,969
7,930
80,907
—
(30,969)
—
(30,969)
$ 42,008
$
—
$
7,930
$ 49,938
99
The following is a reconciliation of income taxes at the federal statutory rate with income taxes
recorded by the Company for the years ended December 31, 2007, 2006 and 2005
(in thousands):
Year Ended December 31,
Tax at U.S. statutory rate
Foreign withholding tax, with no U.S. foreign tax credit
State tax provision
Change in federal and state valuation allowance
Adjustment to tax credits
Other
Tax provision before adjustments related to
federal deferred tax asset valuation
Reversal of federal valuation allowance
Change in effective rate applied to federal
deferred tax assets
Other adjustments to deferred tax assets
Total adjustments related to federal deferred
tax asset valuation
2007
2006
2005
$ 11,201
—
—
—
728
70
$ 122,358
$
7,088
2,228
1,388
—
—
(910)
713
—
—
626
173
11,999
124,389
9,275
—
—
—
—
—
(46,371)
—
—
(1,438)
4,100
—
(43,709)
Total tax provision (benefit)
$ 11,999
$ 124,389
$ (34,434)
In 2006 we utilized our federal NOL carryforwards and began to pay U.S. Federal Income Tax.
We continue to pay foreign source withholding taxes on patent license royalties and state taxes
when applicable. However, we now apply foreign source withholding tax payments against our
U.S. Federal Income Tax obligations to the extent we have foreign source income to support
these credits. In 2007 and 2006, we paid $15.8 million and $28.5 million in foreign source
withholding taxes, respectively, and applied these payments as credits against our U.S. Federal
Tax Obligation. At both December 31, 2007 and 2006, we accrued $15.7 million of foreign
source withholding taxes payable associated with expected royalty payments from a licensee
and recorded corresponding deferred tax assets related to the expected foreign tax credits that
will result from these payments. In the course of future tax planning, should we identify tax
saving opportunities that entail amending prior year returns in order to fully avail ourselves of
foreign tax credits that we previously considered unavailable to us, we will recognize the
benefit of the credits in the period in which they are both identified and quantified.
Generally accepted accounting principles require that we establish a valuation allowance for
any portion of our deferred tax assets for which management believes it is more likely than not
that we will be unable to utilize the asset to offset future taxes. At December 31, 2003, we
provided a full valuation allowance on all deferred tax assets other than those associated with
revenue that was recognized in the computation of our foreign source withholding tax liability,
but deferred for financial statement purposes. In 2004, we determined that our operating
performance, coupled with our expectations to generate future taxable income, indicated that it
was more likely than not that we would utilize a portion of our deferred tax assets. Accordingly,
in third quarter 2004, we recognized an increase in the value of our deferred tax assets of
approximately $27 million through a partial reversal of the valuation allowance. Of the $27
million benefit, approximately $17 million was recognized as income in our Statement of
Operations and approximately $10 million was credited directly to additional paid-in capital. In
2005, we determined that our expectations to generate future taxable income indicated that it
was more likely than not that we would utilize our remaining Federal deferred tax assets.
10 0
Accordingly, in fourth quarter 2005, we reversed our remaining Federal deferred tax asset
valuation allowance of approximately $66.7 million. Of the $66.7 million benefit, approximately
$46.4 million was recognized as income in our Statement of Operations and approximately
$20.3 million was credited directly to additional paid-in capital. In addition, at the same time,
we increased the value of our deferred tax assets by $2.4 million as a result of a 1% change in
the estimated tax rate we expect will apply when these deferred tax assets reverse in future
years. Of the $2.4 million benefit, approximately $1.4 million was recognized as income in our
Statement of Operations and approximately $1.0 million was credited directly to additional
paid-in capital. These tax benefits are partly offset by a $4.1 million adjustment to reduce the
recorded value of credits associated with federal NOL carryforwards and research and
development activities based on our assessment of the likelihood of realizing such credits.
In 2005, we completed a study of our state net operating losses. As a result of that study, we
adjusted our gross deferred tax asset associated with state net operating losses by
approximately $13.5 million. However, we believe it is more likely than not that our state
deferred tax assets will not be utilized and we have therefore maintained a full valuation
allowance against our state deferred tax assets.
Under Internal Revenue Code Section 382, the utilization of a corporation’s NOL carryforwards
is limited following a change in ownership (as defined by the Internal Revenue Code) of greater
than 50% within a three-year period. If it is determined that prior equity transactions limit our
NOL carryforwards, the annual limitation will be determined by multiplying the market value of
the Company on the date of the ownership change by the federal long-term tax-exempt rate.
Any amount exceeding the annual limitation may be carried forward to future years for the
balance of the NOL carryforward period.
A more-than-50% cumulative change in ownership occurred in 1992. As a result of such change,
approximately $14 million of our NOL carryforwards were limited as of December 31, 2007
and 2006.
Uncertain Income Tax Positions
We adopted FIN 48, on January 1, 2007. As a result of the implementation, we recognized a
$2.1 million increase to reserves for uncertain tax positions. This increase, related to federal tax
credits, was accounted for as a reduction to retained earnings on the balance sheet. Including
this cumulative effect adjustment, the gross amount of the Company’s unrecognized tax
benefits as of January 1, 2007 and December 31, 2007 were $6.2 million and $4.4 million,
respectively, that if recognized, would impact the Company’s effective income tax rate in the
period of recognition. The total amount of unrecognized tax benefits could increase or decrease
within the next twelve months for a number of reasons including the expiration of statutes of
limitations, audit settlements, tax examination activities and the recognition and measurement
considerations under FIN 48.
During 2007, we completed a tax study related to our research and development tax credits. As
a result of this study, we reduced the gross amount of the related research and development
tax credits by $3.0 million in third quarter 2007 when we filed our 2006 tax return. This
reduction resulted in additional income tax expense of approximately $1.5 million and reduced
our related FIN 48 reserve by $1.5 million. During 2007, we also filed our 2006 tax return
which resulted in a reduction in certain other gross tax benefits of $0.3 million with an equal
reduction to our FIN 48 reserve. As of December 31, 2007, our FIN 48 reserve is $4.4 million.
We do not expect a material change in this estimate in the next twelve months, although a
change is possible.
101
The following is a roll forward of our total gross unrecognized tax benefits liabilities for the
fiscal year 2007 (in thousands):
Balance as of January 1, 2007
Tax positions related to current year
Additions
Reductions
Tax positions related to prior years
Additions
Reductions
Settlements
Lapses in statues of limitations
Balance as of December 31, 2007
$ 6,220
—
—
—
(1,816)
—
$ 4,404
The Company and its subsidiaries are subject to US federal income tax, foreign income and
withholding taxes, and income taxes from multiple state jurisdictions. The majority of our
federal and state tax returns from 1990 through 2006 is currently open and will not close until
the respective statues of limitations have expired. The statues of limitations generally expire
three years following the filing of the return or in some cases three years following the
utilization or expiration of net operating loss carry forwards. The statute of limitations applicable
to our open federal returns will expire between the current year and 2010.
Our policy is to recognize interest and or penalties related to income tax matters in income
tax expense. We did not have any interest or penalties accrued at January 1, 2007 or
December 31, 2007.
Between 1999 and 2005 we paid approximately $30.7 million of foreign taxes. During this
period we were in a net operating loss position for U.S. federal income tax purposes and
elected to deduct these foreign tax payments as expenses on our U.S. federal income tax
returns rather than take them as foreign tax credits. We elected this strategy because a) we had
no U.S. cash tax obligations at the time and b) net operating losses can be carried forward
significantly longer than foreign tax credits. We utilized most of our net operating losses in
2006 and began to generate U.S. cash tax obligations. At that time, we began to treat our
foreign tax payments as foreign tax credits on our U.S. federal income tax return.
We are currently evaluating the possibility of amending our U.S. federal income tax returns for
the periods 1999–2005 to determine if we are able to take the foreign tax payments we made
during that period as foreign tax credits instead of deductions. The process to amend these
returns is complicated including aggregating information that was not previously required and
may not be available and involves tax treaty competent authority procedures including both
U.S. and foreign tax authorities. It is possible that we may be unable to establish a basis to
support amending the returns, but it is estimated that a maximum benefit could be a refund
claim of approximately $20 million. We can not yet predict the amount if any, of potential
refund and we do not anticipate being in a position to file any amended returns until 2009,
although it is possible that we could file amended returns sooner. No benefit has been
recorded for this contingent gain.
102
13. eQUITY TRa nS acTIonS
Repurchase of Common Stock
In 2006 our Board of Directors authorized the repurchase of up to $350.0 million of our
outstanding common stock. In October 2007, our Board of Directors authorized a new
$100.0 million share repurchase program. The Company may repurchase shares under the
program through open market purchases, pre-arranged trading plans or privately negotiated
purchases. During 2006 we repurchased approximately 6.5 million shares of common stock for
$192.5 million. At December 31, 2006, we accrued accounts payable of approximately
$7.6 million associated with our obligation to settle late December repurchases. We completed
the 2006 repurchase program in April 2007 through the repurchase of 4.8 million shares of
common stock for $157.7 million. Under the October 2007 authorization, we repurchased
approximately 1.0 million shares of common stock for $18.5 million. At December 31, 2007, we
accrued accounts payable of approximately $0.8 million associated with our obligation to settle
late December repurchases. From January 1, 2008 through February 22, 2008, we repurchased
an additional 0.3 million shares for $7.9 million bringing the cumulative repurchase totals to
1.3 million shares at a cost of $26.4 million under the current program. Under a previous
repurchase program in 2005, we repurchased 2.0 million shares of common stock for
$34.1 million.
Common Stock Warrants
As of December 31, 2007 and December 31, 2006 we had no warrants outstanding.
14. SelecTeD QU aRTeRl Y ReS Ul TS (UnaUDITeD)
The table below presents quarterly data for the years ended December 31, 2007 and 2006:
(in thousands, except per share amounts, unaudited)
First
Second
Third
Fourth
2007:
Revenues(a)
Net income (loss) applicable to
common shareholders(b)
Net income (loss) per common share—basic
Net income (loss) per common share—diluted
$ 67,818
$ 55,006
$ 56,548
$ 54,860
$ 17,669
$
$
0.35
0.34
$
$
$
(4,406)
$ 8,717
$ (1,976)
(0.09)
(0.09)
$
$
0.18
0.18
$
$
(0.04)
(0.04)
2006:
Revenues(c)
$ 51,606
$ 296,617
$ 67,175
$ 65,068
Net income applicable to common shareholders(c) $ 12,939
$ 170,363
$ 21,657
$ 20,263
Net income per common share—basic
Net income per common share—diluted
$
$
0.24
0.23
$
$
3.13
2.98
$
$
0.41
0.40
$
$
0.39
0.37
(a) During first quarter 2007, the Company recognized $9.3 million associated with prior period sales of Sony Ericsson’s covered 2G products
identified in a routine audit.
(b) During second quarter 2007, the Company recorded a $16.6 million charge to record a contingent liability associated with our dispute with
Federal. During fourth quarter 2007, the Company recorded a $7.8 million charge to record a contingent liability for the reimbursement of
legal fees that may become due to Nokia in connection with our UK II litigation.
(c) During second quarter 2006, the Company entered into agreements with Nokia Corporation to resolve certain legal proceedings with
them. Specifically, in an Arbitration Settlement Agreement, the parties resolved their disputes arising out of the June 2005 International
Court of Arbitration of the International Chamber of Commerce Arbitration Tribunal Award. Pursuant to the Arbitration Settlement
Agreement, on April 28, 2006, Nokia paid InterDigital $253 million. We recognized $228 million of revenue related to the Arbitration
Settlement Agreement in second quarter 2006, and $12.5 million in each of the third and fourth quarters of 2006.
103
ITeM 9. cHangeS In an D DISagReeMenTS WITH accoUnTanTS
on accoUnTIng anD FIna ncIa l DIScloSURe
None.
ITeM 9a. conTR olS anD PR oceDUReS
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and its Chief Financial Officer, with the assistance of
other members of management, have evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934) as of the end of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure controls and
procedures were effective in their design to ensure that the information required to be
disclosed by us in the reports that we file under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified in the SEC’s
rules and forms and to ensure that the information required to be disclosed by us in the reports
that we file under the Securities and Exchange Act of 1934 is accumulated and communicated
to our management, including our principal executive and financial officers, as appropriate to
allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange
Act of 1934. The Company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with accounting principles generally
accepted in the United States of America. Internal control over financial reporting includes
those policies and procedures that:
• Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the Company;
• Provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles generally
accepted in the United States of America, and that receipts and expenditures of the Company
are being made only in accordance with authorization of management and directors of the
Company; and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a material effect on
the consolidated financial statements.
Management, including the Chief Executive Officer and Chief Financial Officer, assessed the
effectiveness of internal control over financial reporting as of December 31, 2007. Management
based this assessment on criteria for effective internal control over financial reporting described
in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
determined that, as of December 31, 2007, the Company maintained effective internal control
over financial reporting at a reasonable assurance level.
104
The effectiveness of the Company’s internal control over financial reporting as of December 31,
2007 has been audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears under Item 8 in this Annual Report on
Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fourth quarter
of 2007 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
ITeM 9b . oTHeR InFoRMa TIon
None.
PaRT III
ITeM 10. DIRecToRS, eXecUTIVe
oFFIceRS anD coR PoRa Te goVeRnance
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 2011 Annual Meeting of Shareholders” to, but not
including, “Committees and Meetings of the Board of Directors” in our Definitive Proxy
Statement to be filed with the Securities and Exchange Commission pursuant to Regulation
14A, not later than 120 days after the end of our fiscal year ended December 31, 2007, and
which shall be forwarded to shareholders prior to the 2008 Annual Meeting of Shareholders
(Proxy Statement).
Our Code of Business Conduct and Ethics is applicable to all employees and consultants of the
Company including the Chief Executive Officer, Chief Financial Officer, and the Board of
Directors (Code). In addition, each of our consultants agrees to abide by its terms. A copy of
the Code is available free of charge on our Internet website at www.interdigital.com. We intend
to disclose any amendment to the Code or waiver from a provision of the Code made to our
Chief Executive Officer, Chief Financial Officer—Chief Accounting Officer or Controller on our
website. Information concerning the Company’s Audit Committee and the Company’s Audit
Committee financial expert is incorporated herein by reference to the Proxy Statement
following the caption “Audit Committee Report” to, but not including, “RATIFICATION OF
APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.” In addition,
information set forth in the two paragraphs immediately following the caption “Section 16(a)
Beneficial Ownership Reporting Compliance” in the Proxy Statement is incorporated by
reference herein. Information concerning executive officers appears under the caption “Item 1.
Business, Executive Officers” in Part 1 of this Annual Report on Form 10-K.
ITeM 11. eXecUTIVe coMPenS aTIon
The information required by this item is incorporated by reference to the Proxy Statement
following the caption “2007 Director Compensation Narrative” to, but not including, “Security
Ownership of Management.”
ITeM 12. SecUR ITY oWneRS HIP oF ceRTaIn beneFIcIal oWneRS
anD ManageMenT anD Rela TeD ST ocKH olDeR Ma TTeRS
The information required by this item is incorporated by reference to the Proxy Statement
following the caption “Security Ownership of Certain Beneficial Owners” to and including all
information in the section “Equity Compensation Plan Information.”
105
ITeM 13. ceRTaIn RelaTIonSH IPS anD RelaTeD TRanSacTIonS,
anD DIRecT oR InDePenDenc e
The information required by this item is incorporated by reference to the Proxy Statement
following the caption “Our Policies Regarding the Review and Approval of Related Person
Transactions” to and including all information in the section “Director Independence.”
ITeM 14. PRIncIP al acc oUnT anT FeeS anD SeRVIceS
The information required by this item is incorporated by reference to the Proxy Statement
following the caption “Fees Paid to Independent Registered Public Accounting Firm”
PaRT IV
ITeM 15. eXHIbITS anD FInancIal ST aTeMenT ScHeDUleS
(a) The following documents are filed as a part of this Annual Report on Form 10-K:
(1) Financial Statements
The information required by this Item begins on Page 67.
(2) Financial Statement Schedules
InterDigital, Inc. and Subsidiaries Schedule II – Valuation and Qualifying Accounts
(in thousands)
Description
2007 Valuation Allowance
for Deferred Tax Assets
2006 Valuation Allowance
for Deferred Tax Assets
2005 Valuation Allowance
for Deferred Tax Assets
Balance
Beginning
of Period
Reversal of
Valuation
(Decrease) Allowance
Increase
Balance,
End of
Period
$ 34,110
$ 8,346 (a)
$
—
$ 42,456
22,692
11,418 (a)
—
34,110
86,168
3,181
(66,657) (b)
22,692
(a) The increase was necessary to maintain a full valuation allowance against our state deferred tax assets and did not result in additional
tax expense.
(b) Of the $66.7 million benefit, approximately $46.4 million was recognized as income in our Statement of Operations and approximately
$20.3 million was credited directly to additional paid-in capital.
106
(3) Exhibits.
See Item 15(b) below.
(b) Exhibit
Exhibit Number Exhibit Description
*2.1
*2.2
*2.3
*3.1
*3.2
*4.1
*10.1
*10.2
10.3
*10.4
*10.5
*10.6
*10.7
*10.8
Asset Purchase Agreement dated as of July 30, 2003 by and between
InterDigital Acquisition Corp. and Tantivy Communications, Inc. (Exhibit 2.1 to
InterDigital’s Current Report on Form 8-K dated August 4, 2003).
Plan of Reorganization by and among InterDigital Communications Corporation,
InterDigital, Inc. and ID Merger Company dated July 2, 2007 (Exhibit 2.1 to
InterDigital’s Quarterly Report on Form 10-Q dated August 9, 2007).
Agreement and Plan of Merger by and among InterDigital Communications
Corporation, InterDigital, Inc. and ID Merger Company dated July 2, 2007
(Exhibit 2.2 to InterDigital’s Quarterly Report on Form 10-Q dated
August 9, 2007).
Articles of Incorporation of InterDigital, Inc. (Exhibit 3.1 to InterDigital’s
Quarterly Report on Form 10-Q dated August 9, 2007).
Bylaws of InterDigital, Inc. (Exhibit 3.2 to InterDigital’s Quarterly Report on Form
10-Q dated August 9, 2007).
Rights Agreement between InterDigital, Inc. and American Stock Transfer &
Trust Co., dated July 2, 2007. (Exhibit 4.1 to InterDigital’s Quarterly Report on
Form 10-Q dated August 9, 2007).
Contracts
Credit Agreement dated as of December 28, 2005 among InterDigital, Bank of
America, N.A. as Administrative Agent and L/C Issuer and the other Lenders
party thereto (Exhibit 10.86 to InterDigital’s Annual Report on Form 10-K dated
March 14, 2006).
First Amendment, Consent and Joinder to Credit Agreement by and between
InterDigital, the Subsidiary Guarantors Party Hereto, the Lenders Party Hereto
and Bank of America, N.A., as Administrative Agent and L/C Issuer dated
July 2, 2007 (Exhibit 10.88 to InterDigital’s Quarterly Report on Form 10-Q dated
August 9, 2007).
Second Amendment to Credit Agreement by and between InterDigital,
the Subsidiary Guarantors Party Hereto, the Lenders Party Hereto and
Bank of America, N.A., as Administrative Agent and L/C Issuer dated
December 28, 2007 (Filed herewith).
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).
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).
E-TDMA License Agreement dated February 29, 1992 between InterDigital and
Hughes Network Systems, Inc. (Exhibit 10.4 to InterDigital’s Current Report on
Form 8-K dated February 29, 1992).
The TDD Development Agreement between and among InterDigital, ITC
and Nokia (Exhibit 10.55 to InterDigital’s Current Report on Form 8-K/A dated
July 2, 2003).
Amendment No. 1 to the TDD Development Agreement dated September 30,
2001 between and among InterDigital, ITC and Nokia (Exhibit 10.56 to
InterDigital’s Current Report on Form 8-K/A dated July 2, 2003).
107
*10.9
*10.10
*10.11
*10.12
*10.13
*10.14
*10.15
*10.16
*10.17
*10.18
*10.19
*10.20
*10.21
†*10.22
†*10.23
†*10.24
†*10.25
108
Amendment to the Patent License Agreement of May 8, 1995 between ITC
and NEC (Exhibit 10.52 to InterDigital’s Current Report on Form 8-K dated
February 21, 2003).
Patent License Agreement by and between InterDigital Communications
Corporation and Samsung Electronics Co., Ltd., effective January 22, 1996
(Exhibit 10.85 to InterDigital’s Quarterly Report on Form 10-Q dated
November 9, 2006).
PHS and PDC Subscriber Unit Patent License Agreement dated March 19, 1998
between ITC and Sharp Corporation of Japan (Sharp) (Exhibit 10.57 to
InterDigital’s Current Report on Form 8-K dated February 21, 2003).
Amendment No. 1 dated March 23, 2000 and Amendment No. 2 dated
May 30, 2003 to PHS and PDC Subscriber Unit Patent License Agreement dated
March 19, 1998 between ITC and Sharp (Exhibit 10.58 to InterDigital’s
Amendment No. 1 to Current Report on Form 8-K/A dated July 2, 2003).
Litigation Expense and Reimbursement Agreement by and between InterDigital,
ITC and Federal Insurance Company dated February 15, 2000 (Exhibit 99.1 to
InterDigital’s Quarterly Report on Form 10-Q dated November 9, 2005).
Narrowband CDMA and Third Generation Patent License Agreement dated
January 15, 2002 between ITC and NEC (Exhibit 10.53 to InterDigital’s Current
Report on Form 8-K dated February 21, 2003).
Settlement Agreement dated January 15, 2002 between ITC and NEC (Exhibit
10.54 to InterDigital’s Current Report on Form 8-K dated February 21, 2003).
License Agreement by and between InterDigital Group and LG Electronics, Inc.
dated January 1, 2006 (Exhibit 10.82 to InterDigital’s Quarterly Report on Form
10-Q dated May 10, 2006).
Amendment to Patent License Agreement effective January 1, 2007, by and
between InterDigital Technology Company and NEC Corporation (Exhibit 10.92
to InterDigital’s Quarterly Report on Form 10-Q dated August 9, 2007).
Arbitration Settlement Agreement by and between InterDigital Communications
Corporation, InterDigital Technology Corporation and Nokia Corporation dated
April 26, 2006 (Exhibit 10.83 to InterDigital’s Quarterly Report on Form 10-Q
dated August 7, 2006).
Agreement of Lease dated November 25, 1996 by and between InterDigital and
We’re Associates Company (Exhibit 10.42 to InterDigital’s Annual Report on
Form 10-K for the year ended December 31, 2000).
Modification of Lease Agreement dated December 28, 2000 by and between
InterDigital and We’re Associates Company (Exhibit 10.43 to InterDigital’s Annual
Report on Form 10-K for the year ended December 31, 2000).
Third Modification to Lease Agreement effective June 1, 2006 by and between
InterDigital and Huntington Quadrangle 2 (successor to We’re Associates
Company). (Exhibit 10.18 to InterDigital’s Annual Report on Form 10-K for the
year ended December 31, 2006).
Benefit Plans
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).
Amendment to Non-Qualified Stock Option Plan (Exhibit 10.31 to InterDigital’s
Quarterly Report on Form 10-Q dated August 14, 2000).
Amendment to Non-Qualified Stock Option Plan, effective October 24, 2001
(Exhibit 10.6 to InterDigital’s Annual Report on Form 10-K for the year ended
December 31, 2001).
1992 Non-Qualified Stock Option Plan (Exhibit 10.1 to InterDigital’s Current
Report on Form 8-K dated October 21, 1992).
†*10.26
†*10.27
†*10.28
†*10.29
†*10.30
†*10.31
†*10.32
†*10.33
†*10.34
†*10.35
†*10.36
†*10.37
†*10.38
†*10.39
†*10.40
†*10.41
†*10.42
†*10.43
†*10.44
Amendment to 1992 Non-Qualified Stock Option Plan (Exhibit 10.32 to
InterDigital’s Quarterly Report on Form 10-Q dated August 14, 2000).
1992 Employee Stock Option Plan (Exhibit 10.71 to InterDigital’s Annual Report
on Form 10-K for the year ended December 31, 1992).
Amendment to 1992 Employee Stock Option Plan (Exhibit 10.29 to InterDigital’s
Quarterly Report on Form 10-Q dated August 14, 2000).
Amendment to 1992 Employee Stock Option Plan, effective October 24, 2001
(Exhibit 10.11 to InterDigital’s Annual Report on Form 10-K for the year ended
December 31, 2001).
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).
Amendment to the 1995 Stock Option Plan for Employees and Outside Directors
(Exhibit 10.25 to InterDigital’s Annual Report on Form 10-K for the year ended
December 31, 1999).
Amendment to 1995 Stock Option Plan for Employees and Outside Directors
(Exhibit 10.33 to Quarterly Report on Form 10-Q dated August 14, 2000).
Amendment to 1995 Stock Option Plan for Employees and Outside Directors,
effective October 24, 2001 (Exhibit 10.15 to InterDigital’s Annual Report on Form
10-K for the year ended December 31, 2001).
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).
Amendment to 1997 Stock Option Plan for Non-Employee Directors (Exhibit
10.34 to InterDigital’s Quarterly Report on Form 10-Q dated August 14, 2000).
1997 Stock Option Plan for Non-Employee Director s, as amended
March 30, 2000 (Exhibit 10.42 to InterDigital’s Quarterly Report on Form 10-Q
dated August 14, 2000).
Amendment to 1997 Stock Option Plan for Non-Employee Directors, effective
October 24, 2001 (Exhibit 10.19 to InterDigital’s Annual Report on Form 10-K for
the year ended December 31, 2001).
1999 Restricted Stock Plan, as amended April 13, 2000 (Exhibit 10.43 to
InterDigital’s Quarterly Report on Form 10-Q dated August 14, 2000).
1999 Restricted Stock Plan, Form of Restricted Stock Unit Agreement [Awarded
to Independent Directors Upon Re-Election] (Exhibit 10.62 to InterDigital’s
Quarterly Report on Form 10-Q dated November 9, 2004).
1999 Restricted Stock Plan, Form of Restricted Stock Unit Agreement [Annual
Award to Independent Directors] (Exhibit 10.63 to InterDigital’s Quarterly Report
on Form 10-Q dated November 9, 2004).
1999 Restricted Stock Plan, Form of Restricted Stock Unit Agreement
[Periodically Awarded to Members of the Board of Directors] (Exhibit 10.64 to
InterDigital’s Quarterly Report on Form 10-Q dated November 9, 2004).
1999 Restricted Stock Plan, Form of Restricted Stock Agreement [Awarded to
Executives and Management as Part of Annual Bonus] (Exhibit 10.65 to
InterDigital’s Quarterly Report on Form 10-Q dated November 9, 2004).
1999 Restricted Stock Plan, Form of Restricted Stock Unit Agreement [Awarded
to Independent Directors Upon Re-Election] (Exhibit 10.62 to InterDigital’s
Quarterly Report on Form 10-Q dated August 9, 2005).
1999 Restricted Stock Plan, Form of Restricted Stock Unit Agreement [Annual
Award to Independent Directors] (Exhibit 10.63 to InterDigital’s Quarterly Report
on Form 10-Q dated August 9, 2005).
109
2000 Stock Award and Incentive Plan (Exhibit 10.28 to InterDigital’s Quarterly
Report on Form 10-Q dated August 14, 2000).
2000 Stock Award and Incentive Plan, as amended June 1, 2005 (Exhibit 10.74
to InterDigital’s Quarterly Report on Form 10-Q dated August 9, 2005).
2000 Stock Award and Incentive Plan, Form of Option Agreement [Director
Awards] (Exhibit 10.66 to InterDigital’s Quarterly Report on Form 10-Q dated
November 9, 2004).
2000 Stock Award and Incentive Plan, Form of Option Agreement [Executive
Awards] (Exhibit 10.67 to InterDigital’s Quarterly Report on Form 10-Q dated
November 9, 2004).
2000 Stock Award and Incentive Plan, Form of Option Agreement [Inventor
Awards] (Exhibit 10.68 to InterDigital’s Quarterly Report on Form 10-Q dated
November 9, 2004).
2002 Stock Award and Incentive Plan (Exhibit 10.50 to InterDigital’s Quarterly
Report on Form 10-Q dated May 15, 2002).
InterDigital Communications Corporation 2002 Stock Award and Incentive Plan,
as amended through June 4, 2003 (Exhibit 10.52 to InterDigital’s Annual Report
on Form 10-K for the year ended December 31, 2003).
InterDigital’s 2002 Stock Award and Incentive Plan, as amended June 1, 2005
(Exhibit 10.87 to InterDigital’s Quarterly Report on Form 10-Q dated November
9, 2006).
2002 Stock Award and Incentive Plan, Form of Option Agreement [Inventor
Awards] (Exhibit 10.69 to InterDigital’s Quarterly Report on Form 10-Q dated
November 9, 2004).
InterDigital Communications Corporation Long-Term Compensation Program,
as amended December 2004 (“LTCP”) (Exhibit 10.55 to InterDigital’s Annual
Report on Form 10-K for the year ended December 31, 2004).
InterDigital Communications Corporation Long-Term Compensation Program,
as amended April 2005 (Exhibit 10.70 to InterDigital’s Quarterly Report on Form
10-Q dated May 9, 2005).
InterDigital Communications Corporation Long-Term Compensation Program,
as amended June 2005 (Exhibit 10.70 to InterDigital’s Quarterly Report on Form
10-Q dated August 9, 2005).
InterDigital Communications Corporation Restricted Stock Unit Award
Agreement with Harry G. Campagna dated February 4, 2005 (Exhibit 10.73 to
InterDigital’s Quarterly Report on Form 10-Q dated May 9, 2005).
Form of InterDigital Communications Corporation Restricted Stock Unit Award
Agreement (Exhibit 10.86 to InterDigital’s Quarterly Report on Form 10-Q dated
November 9, 2006).
Compensation Program for Outside Directors, as amended January 2006
(Incorporated from Item 1.01 of InterDigital’s Current Report on Form 8-K dated
January 18, 2006).
InterDigital Communications Corporation Annual Employee Bonus Plan, as
amended December 15, 2006 (Exhibit 10.57 to Inter Digital’s Annual Report on
Form 10-K for the year ended December 31, 2006.)
Form of InterDigital Communications Corporation Restricted Stock Unit Award
Agreement, as amended December 14, 2006 (Exhibit 10.58 to Inter Digital’s
Annual Report on Form 10-K for the year ended December 31, 2006).
†*10.45
†*10.46
†*10.47
†*10.48
†*10.49
†*10.50
†*10.51
†*10.52
†*10.53
†*10.54
†*10.55
†*10.56
†*10.57
†*10.58
†*10.59
†*10.60
†*10.61
110
†*10.62
†*10.63
†*10.64
†*10.65
†*10.68
†*10.69
†*10.70
†*10.71
†*10.72
†*10.73
†*10.74
†*10.76
Employment-Related Agreements
Indemnity Agreement dated as of March 19, 2003 by and between the Company
and Howard E. Goldberg (pursuant to Instruction 2 to Item 601 of Regulation
S-K, the Indemnity Agreements, which are substantially identical in all material
respects, except as to the parties thereto and the dates, between the Company
and the following individuals, were not filed: Bruce G. Bernstein, D. Ridgely
Bolgiano, Richard J. Brezski, Harry G. Campagna, Steven T. Clontz, Joseph S.
Colson, Jr., Patrick J. Donahue, Richard J. Fagan, Guy M. Hicks, Gary D. Isaacs,
John D. Kaewell, Edward B. Kamins, Brian G. Kiernan, Mark A. Lemmo, Linda
S. Lutkefedder, Scott A. McQuilkin, William J. Merritt, William C. Miller, James
Nolan, Rebecca B. Opher, Janet M. Point, Robert S. Roath, Jane S. Schultz, and
Lawrence F. Shay) (Exhibit 10.47 to InterDigital’s Quarterly Report on Form 10-Q
dated May 15, 2003).
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).
Amendment dated as of April 6, 2000 by and between InterDigital and Mark A.
Lemmo (Exhibit 10.37 to InterDigital’s Quarterly Report on Form 10-Q dated
August 14, 2000).
Amended and Restated Employment Agreement dated as of April 2, 2007 by
and between InterDigital and Richard J. Fagan (Exhibit 10.1 to InterDigital’s
Quarterly Report on Form 10-Q dated May 10, 2007).
Employment Agreement dated November 19, 1996 by and between InterDigital
and Brian G. Kiernan (Exhibit 10.37 to InterDigital’s Annual Report on Form 10-K
for the year ended December 31, 2000).
Amendment dated as of April 6, 2000 by and between InterDigital and Brian G.
Kiernan (Exhibit 10.38 to InterDigital’s Annual Report on Form 10-K for the year
ended December 31, 2000).
Employment Agreement dated July 24, 2000 by and between InterDigital and
William C. Miller (Exhibit 10.39 to InterDigital’s Annual Report on Form 10-K for
the year ended December 31, 2000).
Employment Agreement dated as of November 12, 2001 by and between
InterDigital and Lawrence F. Shay (Exhibit 10.38 to InterDigital’s Annual Report
on Form 10-K for the year ended December 31, 2001).
Amended and Restated Employment Agreement dated May 16, 2005, by and
between William J. Merritt and InterDigital (Exhibit 10.1 to InterDigital’s Current
Report on Form 8-K dated May 16, 2005).
Employment Agreement dated as of June 20, 2005 by and between Bruce G.
Bernstein and InterDigital (Exhibit 10.1 to InterDigital’s Current Report on Form
8-K dated June 20, 2005).
Employment Agreement by and between InterDigital Communications
Corporation and James Nolan dated May 16, 2006 (Exhibit 10.84 to InterDigital’s
Quarterly Report on Form 10-Q dated August 7, 2006).
Amendment and Assignment of Employment Agreement dated as of July 2,
2007 by and between InterDigital Communications Corporation, InterDigital,
Inc. and Bruce G. Bernstein (pursuant to Instruction 2 to Item 601 of Regulation
S-K, the Amendment and Assignment of Employment Agreements dated as of
July 2, 2007 which are substantially identical in all material respects, except as
to the parties thereto, between InterDigital Communications Corporation,
InterDigital, Inc. and the following individuals, were not filed: James Nolan,
Brian G. Kiernan, William J. Merritt, William C. Miller, and Mark A. Lemmo,
respectively) (Exhibit 10.89 to InterDigital’s Quarterly Report on Form 10-Q
dated August 9, 2007).
111
†*10.77
†*10.78
21
23.1
31.1
31.2
32.1
32.2
Assignment and Assumption of Indemnity Agreement dated as of July 2, 2007,
by and between InterDigital Communications Corporation, InterDigital, Inc. and
Bruce G. Bernstein (pursuant to Instruction 2 to Item 601 of Regulation S-K, the
Indemnity Agreements, which are substantially identical in all material respects,
except as to the parties thereto, between InterDigital Communications
Corporation, InterDigital, Inc. and the following individuals, were not filed: D.
Ridgely Bolgiano, Richard J. Brezski, Harry G. Campagna, Steven T. Clontz,
Richard J. Fagan, Gary D. Isaacs, John D. Kaewell, Edward B. Kamins, Brian G.
Kiernan, Mark A. Lemmo, Linda S. Lutkefedder, William J. Merritt, William C.
Miller, James Nolan, Rebecca B. Opher, Robert S. Roath, Jane S. Schultz, and
Lawrence F. Shay) (Exhibit 10.90 to InterDigital’s Quarterly Report on Form 10-Q
dated August 9, 2007).
Employment Agreement dated July 9, 2007 by and between InterDigital, Inc.
and Scott A. McQuilkin (Exhibit 10.91 to InterDigital’s Quarterly Report on Form
10-Q dated August 9, 2007).
Subsidiaries of InterDigital.
Consent of PricewaterhouseCoopers LLP.
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 for William J. Merritt.
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 for Scott A. McQuilkin.
*Incorporated by reference to the previous filing indicated.
†Management contract or compensatory plan or arrangement.
(c) None.
112
SIgnaTUReS
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
InterDigital, Inc.
Date: February 29, 2008
Date: February 29, 2008
/s/ William J. Merritt
William J. Merritt
President and Chief Executive Officer
/s/ Scott A. McQuilkin
Scott A. McQuilkin
Chief Financial Officer
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of InterDigital and in the capacities and on the dates
indicated.
Date: February 29, 2008
Date: February 29, 2008
Date: February 29, 2008
Date: February 29, 2008
Date: February 29, 2008
Date: February 29, 2008
Date: February 29, 2008
Date: February 29, 2008
Date: February 29, 2008
/s/ D. Ridgely Bolgiano
D. Ridgely Bolgiano, Director
/s/ Harry G. Campagna
Harry G. Campagna,
Chairman of the Board of Directors
/s/ Steven T. Clontz
Steven T. Clontz, Director
/s/ Edward B. Kamins
Edward B. Kamins, Director
/s/ Robert S. Roath
Robert S. Roath, Director
/s/ Robert W. Shaner
Robert W. Shaner, Director
/s/ William J. Merritt
William J. Merritt, Director,
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Scott A. McQuilkin
Scott A. McQuilkin, Chief Financial Officer
(Principal Financial Officer)
/s/ Richard J. Brezski
Richard J. Brezski, Chief Accounting Officer
113
eXHIbIT InDeX
Exhibit
Exhibit Number Exhibit Description
10.3
21
23.1
31.1
31.2
32.1
32.2
Second Amendment to Credit Agreement by and between InterDigital, the
Subsidiary Guarantors Party Hereto, the Lenders Party Hereto and Bank of
America, N.A., as Administrative Agent and L/C Issuer dated December 28,
2007 (Filed herewith).
Subsidiaries of InterDigital.
Consent of PricewaterhouseCoopers LLP.
Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 for William J. Merritt.
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 for Scott A. McQuilkin.
eXHIbIT 10.3
Second Amendment To Credit Agreement
SECOND AMENDMENT TO CREDIT AGREEMENT dated as of December 28, 2007 (this
“Amendment”), among INTERDIGITAL, INC., a Pennsylvania corporation (the “Borrower”),
THE SUBSIDIARY GUARANTORS PARTY HERETO, THE LENDERS PARTY HERETO and BANK
OF AMERICA, N.A., as Administrative Agent and L/C Issuer.
WHEREAS, the Borrower, the Lenders party thereto, the Administrative Agent and the L/C
Issuer are party to the Credit Agreement, as defined below; and
WHEREAS, the Borrower has requested certain amendments to the Credit Agreement;
NOW, THEREFORE, in consideration of the foregoing and the agreements contained herein, the
parties hereby agree as follows:
1. REFERENCE TO CREDIT AGREEMENT. Reference is made to that certain Credit Agreement
dated as of December 28, 2005, as amended by the First Amendment, Consent and Joinder to
Credit Agreement dated July 2, 2007 (as so amended, and as in effect from time to time, the
“Credit Agreement”), among the Borrower, the Lenders party thereto, the Administrative Agent
and the L/C Issuer. Capitalized terms used and not defined herein are used with the meanings
assigned to such terms in the Credit Agreement.
2. AMENDMENTS. Effective as of the date hereof, in consideration of the agreements
contained herein, and subject to the terms and conditions hereof, the Credit Agreement is
amended as follows:
(a) Amendment to Section 1.01. The definition of “Applicable Rate” contained in Section 1.01 of
the Credit Agreement is restated in its entirety as follows:
“Applicable Rate” means the following percentages per annum:
Applicable Rate for Base Rate Loans:
Applicable Rate for LIBOR Loans:
0.00%
0.65%
114
(b) Amendment to Section 1.01. The definition of “Maturity Date” contained in Section 1.01 of
the Credit Agreement is amended by deleting the date “December 28, 2007” and replacing
the same with “December 28, 2009”.
(c) Amendment to Section 2.09(a). Section 2.09(a) of the Credit Agreement is amended by
deleting the words and figure “two-tenths of one percent (0.20%)” and replacing the same
with the words and figure “one-tenth of one percent (0.10%)”.
3. CONDITIONS PRECEDENT. The effectiveness of the amendments set forth in Section 2 hereof,
is subject to the satisfaction or waiver in accordance with the Credit Agreement of each of the
following conditions:
(a) Documents. The Administrative Agent’s receipt of the following, each of which shall be
originals or telecopies (followed promptly by originals) unless otherwise specified, each
properly executed by a Responsible Officer of the signing Loan Party, each dated the date of
this Amendment and each in form and substance satisfactory to the Administrative Agent:
(i) executed counterparts of this Amendment, sufficient in number for distribution to the
Administrative Agent, each Lender and the Borrower;
(ii) such certificates of resolutions or other action, incumbency certificates and/or other
certificates of Responsible Officers of the Borrower as the Administrative Agent may
require evidencing the identity, authority and capacity of each Responsible Officer thereof
authorized to act as a Responsible Officer in connection with this Amendment;
(iii) such documents and certifications as the Administrative Agent may reasonably require to
evidence that the Borrower is duly organized or formed;
(iv) a favorable opinion of Dilworth Paxson LLP, counsel to the Loan Parties, addressed to
the Administrative Agent and each Lender, as to such matters concerning the Loan Parties
and the Loan Documents as the Administrative Agent may reasonably request;
(v) a certificate signed by a Responsible Officer of the Borrower certifying that the conditions
specified in Sections 4(b) and 4(c) have been satisfied;
(vi) a Solvency Certificate, in form reasonably satisfactory to the Administrative Agent,
executed by the chief financial officer of the Borrower as to the solvency of each of the
Borrower and the other Loan Parties, in each case before and after giving effect to this
Amendment; and
(vii) such other assurances, certificates, documents, consents or opinions as the Administrative
Agent, the L/C Issuer or the Required Lenders reasonably may require.
(b) Consents. All governmental, shareholder and other consents and approvals necessary
in connection with this Amendment shall have been received and shall be in full force
and effect.
(c) Representations and Warranties. All representations and warranties of the Loan Parties shall
be true and correct in all material respects.
(d) Execution. This Amendment shall have been executed and delivered by each Lender, the L/C
Issuer (and the Administrative Agent shall have received a counterpart signature page from
each of them), and the Administrative Agent.
(e) Closing Fee. On the date hereof, the Borrower shall have paid to each Lender a closing fee
equal to its Applicable Percentage times ten thousand dollars ($10,000). Such fee shall be
fully earned when paid and shall not be refundable for any reason whatsoever.
115
4. NO DEFAULT; REPRESENTATIONS, WARRANTIES AND COVENANTS. The Loan Parties hereby
represent, warrant, covenant and confirm that:
(a) The representations and warranties of the Loan Parties contained in Article V of the Credit
Agreement and in the other Loan Documents are true on and as of the date hereof as if
made on such date (except to the extent that such representations and warranties expressly
relate to an earlier date).
(b) Before and after giving effect to this Amendment, the Loan Parties are in compliance with
all of the terms and provisions set forth in the Credit Agreement on their part to be observed
or performed thereunder.
(c) Before and after giving effect to this Amendment, no Default or Event of Default shall have
occurred and be continuing.
5. MISCELLANEOUS.
(a) Except to the extent specifically amended hereby, the Credit Agreement, the Loan
Documents and all related documents shall remain in full force and effect. Whenever the
terms or sections amended hereby shall be referred to in the Credit Agreement, Loan
Documents or such other documents (whether directly or by incorporation into other
defined terms), such terms or sections shall be deemed to refer to those terms or sections
as amended by this Amendment.
(b) This Amendment may be executed in any number of counterparts, each of which, when
executed and delivered, shall be an original, but all counterparts shall together constitute
one instrument.
(c) This Amendment shall be governed by the laws of the State of New York and shall be
binding upon and inure to the benefit of the parties hereto and their respective successors
and assigns.
(d) The Loan Parties agree to pay all reasonable expenses, including reasonable legal fees and
disbursements, incurred by the Administrative Agent in connection with this Amendment
and the transactions contemplated hereby.
(e) This Amendment shall be considered a Loan Document for all purposes.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment which shall be
deemed to be a sealed instrument as of the date first above written.
BORROWER
InterDigital, Inc.
By:
/s/ William J. Merritt
William J. Merritt
President & Chief Executive Officer
116
The undersigned hereby acknowledge the within Amendment and confirm that their obligations
under the Subsidiary Guarantee and the other Loan Documents shall remain in full force and
effect notwithstanding such Amendment.
SUBSIDIARY GUARANTORS
InterDigital Communications, LLC
/s/ William J. Merritt
By:
William J. Merritt
President & Chief Executive Officer
InterDigital Facility Company
/s/ Scott A. McQuilkin
By:
Scott A. McQuilkin
President
InterDigital Finance Corporation
By:
/s/ Scott A. McQuilkin
Scott A. McQuilkin
President
InterDigital Advanced Technologies, Inc.
By:
/s/ William J. Merritt
William J. Merritt
President
InterDigital Technology Corporation
/s/ William J. Merritt
By:
William J. Merritt
President
IPR Licensing, Inc.
By:
/s/ William J. Merritt
William J. Merritt
President
Tantivy Communications, Inc.
/s/ William J. Merritt
By:
William J. Merritt
President
InterDigital Canada LTEE
By:
/s/ William C. Miller
William C. Miller
President & Chief Executive Officer
InterDigital Patent Holdings, Inc.
By:
/s/ William J. Merritt
William J. Merritt
President
117
Bank of America, N.A.
as Administrative Agent
By:
/s/ John B. Desmond
John B. Desmond
Managing Director
Bank of America, N.A.
as Lender and L/C Issuer
By:
/s/ John B. Desmond
John B. Desmond
Managing Director
Citizens Bank Of Pennsylvania
as Lender
By:
/s/ Daniel J. Astolf
Daniel J. Astolf
SVP
Subsidiaries of InterDigital, Inc.
Company
InterDigital Canada Ltd.
InterDigital Communications, LLC
InterDigital Facility Company
InterDigital Finance Corporation
InterDigital Advanced Technologies, Inc.
InterDigital Patent Holdings, Inc.
InterDigital Technology Corporation
IPR Licensing, Inc.
Tantivy Communications, Inc.
eXHIbIT 23.1
Jurisdiction/State of
Incorporation or Organization
Delaware
Pennsylvania
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form
S-8 (Nos. 333-66626, 333-85560, 333-63276, 333-56412, 33-61021, 333-94553, 33-89920, 33-89922,
33-43256, 33-53660 and 33-53388) and Form S-3 (No. 333-85692) of InterDigital, Inc. of our
report dated February 29, 2008 relating to the financial statements, financial statement
schedule, and the effectiveness of internal control over financial reporting, which appears in
this annual report.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 29, 2008
118
eXHIbIT 31.1
Certification of President and Chief Executive Officer of InterDigital, Inc.
I, William J. Merritt, President and Chief Executive Officer, InterDigital, Inc., certify that:
1. I have reviewed this Annual Report on Form 10-K of InterDigital, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)),
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and to the
audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting.
Date: February 29, 2008
William J. Merritt, President and Chief Executive Officer
119
eXHIbIT 31.2
Certification of Chief Financial Officer of InterDigital, Inc.
I, Scott A. McQuilkin, Chief Financial Officer, InterDigital, Inc., certify that:
1. I have reviewed this Annual Report on Form 10-K of InterDigital, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)),
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and to the
audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting.
Date: February 29, 2008
Scott A. McQuilkin, Chief Financial Officer
120
eXHIbIT 32.1
Certification pursuant to 18 U.S.C. Section 1350
As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the accompanying Annual Report on Form 10-K of InterDigital, Inc. (the
“Company”) for the year ended December 31, 2007, as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), I, William J. Merritt, President and Chief
Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date: February 29, 2008
William J. Merritt, President and Chief Executive Officer
eXHIbIT 32.2
Certification pursuant to 18 U.S.C. Section 1350
As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the accompanying Annual Report on Form 10-K of InterDigital
Communications Corporation (the “Company”) for the year ended December 31, 2007, as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), I, Scott A.
McQuilkin, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date: February 29, 2008
Scott A. McQuilkin, Chief Financial Officer
121
BOARD OF DIRECTORS
EXECUTIVE MANAGEMENT
Harry G. Campagna
Chairman of the Board, InterDigital
President, Chief Executive Officer
and Chairman of the Board,
Qualitex Co.
D. Ridgely Bolgiano
Chief Scientist & Vice President,
InterDigital
Steven T. Clontz
Chief Executive Officer and Director,
StarHub, Ltd.
William J. Merritt
President, Chief Executive Officer
and Director,
InterDigital
Ed Kamins
Chief Operational Excellence Officer,
Avnet, Inc.
Robert S. Roath
Chief Financial Officer (retired),
RJR Nabisco, Inc.
Non-executive Chairman,
Advisory Board to L.E.K. Consulting
Robert W. Shaner
President (retired),
Cingular Wireless LLC Managing Partner,
Performance Management LLC
William J. Merritt
President, Chief Executive Officer and Director
Scott A. McQuilkin
Chief Financial Officer
Richard J. Brezski
Chief Accounting Officer
Gary D. Isaacs
Chief Administrative Officer
Brian G. Kiernan
Executive Vice President, Standards
Mark A. Lemmo
Executive Vice President,
Business Development & Product Management
William C. Miller
Executive Vice President, Programs
and Customer Support
James J. Nolan
Executive Vice President, Engineering
Janet Meenehan Point
Executive Vice President,
Communications & Investor Relations
Lawrence F. Shay
President, InterDigital’s Patent Holding
Subsidiaries, Executive Vice President of
Intellectual Property and Chief IP Counsel
for InterDigital, Inc.
Steven W. Sprecher
General Counsel and
Government Affairs Officer
122
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2 0 0 7 a nnu a l r e port
This is a
green
ANNUAL REPORT
www.GreenAnnualReport.com
™
InterDigital, Inc. saved the following resources
by producing this Green Annual Report™:
18.78 trees
preserved for
the future
54.23 lbs
water-borne
waste not
created
7,977 gals
wastewater
flow saved
883 lbs solid
waste not
generated
1,738 lbs net
greenhouse
gases
prevented
13,302,075
million BTUs
energy not
consumed
XX%