NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
InterDigital designs and develops advanced technologies that enable and enhance wireless communications and capabilities. Since our founding in 1972, we have designed and developed a wide range of innovations that are used in digital cellular and wireless products and networks, including 2G, 3G, 4G and IEEE 802-related products and networks. We are a leading contributor of intellectual property to the wireless communications industry.
Repositioning
On October 23, 2012, we announced that, as part of our ongoing expense management, we had initiated a voluntary early retirement program ("VERP"). In connection with the VERP, we incurred related repositioning charges of
$1.5 million
and
$12.5 million
in
2013
and
2012
, respectively. These charges are included in the repositioning line of our Consolidated Statements of Income. The majority of the charges represent cash obligations associated with severance. During
2013
and
2012
, cash payments of
$12.6 million
and
$1.4 million
, respectively, were made for severance and related costs associated with the VERP. As of
December 31, 2013
and
December 31, 2012
, our accrued repositioning charge was
zero
and
$11.1 million
, respectively. We do not expect to incur any additional charges related to the VERP.
|
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles of Consolidation
The accompanying consolidated financial statements include all of our accounts and all entities which we have a controlling interest, which are required to be consolidated in accordance with the Generally Accepted Accounting Principles in the United States (“GAAP”). All significant intercompany accounts and transactions have been eliminated in consolidation.
In determining whether we are the primary beneficiary of an entity and therefore required to consolidate, we apply a qualitative approach that determines whether we have both the power to direct the economically significant activities of the entity and the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. These considerations impact the way we account for our existing collaborative relationships and other arrangements. We continuously assess whether we are the primary beneficiary of a variable interest entity as changes to existing relationships or future transactions may result in us consolidating or deconsolidating our partner(s) to collaborations and other arrangements.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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. If different assumptions were made or different conditions had existed, our financial results could have been materially different.
Cash and Cash Equivalents
We classify all highly liquid investment securities with original maturities of three months or less at date of purchase as cash equivalents. Our investments are comprised of mutual and exchange traded funds, commercial paper, United States and municipal government obligations and corporate securities. Management determines the appropriate classification of our investments at the time of acquisition and re-evaluates such determination at each balance sheet date.
Cash and cash equivalents at
December 31, 2013
and
2012
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2013
|
|
2012
|
Money market and demand accounts
|
$
|
465,722
|
|
|
$
|
261,899
|
|
Commercial paper
|
31,992
|
|
|
87,944
|
|
|
$
|
497,714
|
|
|
$
|
349,843
|
|
Short-Term Investments
At
December 31, 2013
and
2012
, all marketable securities have been classified as available-for-sale and are carried at fair value, with unrealized gains and losses reported net-of-tax as a separate component of shareholders’ equity. None of our marketable securities are deemed impaired as of
December 31, 2013
, as substantially all of our investments are investment grade government and corporate debt securities that have maturities of less than 3 years, and we have both the ability and intent to hold the investments until maturity. Net unrealized loss on short-term investments was less than
$0.1 million
at
December 31, 2013
. Realized gains and losses for
2013
,
2012
and
2011
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Gains
|
|
Losses
|
|
Net
|
2013
|
|
$
|
166
|
|
|
$
|
(678
|
)
|
|
$
|
(512
|
)
|
2012
|
|
$
|
14
|
|
|
$
|
(249
|
)
|
|
$
|
(235
|
)
|
2011
|
|
$
|
37
|
|
|
$
|
(274
|
)
|
|
$
|
(237
|
)
|
Short-term investments as of
December 31, 2013
and
2012
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2013
|
|
2012
|
Commercial paper
|
$
|
160,486
|
|
|
$
|
62,924
|
|
U.S. government agency instruments
|
31,688
|
|
|
50,560
|
|
Corporate bonds and asset backed securities
|
8,563
|
|
|
13,270
|
|
Mutual and exchange traded funds
|
—
|
|
|
100,682
|
|
|
$
|
200,737
|
|
|
$
|
227,436
|
|
At
December 31, 2013
and
2012
,
$189.5 million
and
$207.4 million
, respectively, of our short-term investments had contractual maturities within one year. The remaining portions of our short-term investments had contractual maturities primarily within two to five years.
Concentration of Credit Risk and Fair Value of Financial Instruments
Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash equivalents, short-term investments and accounts receivable. We place our cash equivalents and short-term investments only in highly rated financial instruments and in United States government instruments.
Our accounts receivable are derived principally from patent license and technology solutions agreements. At
December 31, 2013
,
five
licensees comprised
96%
of our net accounts receivable balance. At
December 31, 2012
,
four
licensees represented
96%
of our net accounts receivable balance. We perform ongoing credit evaluations of our licensees, who generally include large, multinational, wireless telecommunications equipment manufacturers. We believe that the book values of our financial instruments approximate their fair values.
Fair Value Measurements
We use various valuation techniques and assumptions when measuring fair value of our assets and liabilities. We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. This guidance established a hierarchy that prioritizes fair value measurements based on the types of input used for the various valuation techniques (market approach, income approach and cost approach). The levels of the hierarchy are described below:
Level 1 Inputs — Level 1 includes financial instruments for which quoted market prices for identical instruments are available in active markets.
Level 2 Inputs — Level 2 includes financial instruments for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets with insufficient volume or infrequent transactions (less active markets) or model-driven valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data, including market interest rate curves, referenced credit spreads and pre-payment rates.
Level 3 Inputs — Level 3 includes financial instruments for which fair value is derived from valuation techniques including pricing models and discounted cash flow models in which one or more significant inputs are unobservable, including the company’s own assumptions. The pricing models incorporate transaction details such as contractual terms, maturity and, in certain instances, timing and amount of future cash flows, as well as assumptions related to liquidity and credit valuation adjustments of marketplace participants.
Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy. We use quoted market prices for similar assets to estimate the fair value of our Level 2 investments. Our financial assets are included within short-term investments on our consolidated balance sheets, unless otherwise indicated. Our financial assets that are accounted for at fair value on a recurring basis are presented in the tables below as of
December 31, 2013
and
December 31, 2012
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of December 31, 2013
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Money market and demand accounts (a)
|
$
|
465,722
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
465,722
|
|
Commercial paper (b)
|
—
|
|
|
192,478
|
|
|
—
|
|
|
192,478
|
|
U.S. government securities
|
—
|
|
|
31,688
|
|
|
—
|
|
|
31,688
|
|
Corporate bonds, asset backed and other securities
|
1,398
|
|
|
7,165
|
|
|
—
|
|
|
8,563
|
|
|
$
|
467,120
|
|
|
$
|
231,331
|
|
|
$
|
—
|
|
|
$
|
698,451
|
|
______________________________
|
|
(a)
|
Included within cash and cash equivalents.
|
|
|
(b)
|
Includes
$32.0 million
of commercial paper that is included within cash and cash equivalents.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of December 31, 2012
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Money market and demand accounts (a)
|
$
|
261,899
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
261,899
|
|
Mutual and exchange traded funds
|
100,682
|
|
|
—
|
|
|
—
|
|
|
100,682
|
|
Commercial paper (b)
|
—
|
|
|
150,868
|
|
|
—
|
|
|
150,868
|
|
U.S. government securities
|
—
|
|
|
50,560
|
|
|
—
|
|
|
50,560
|
|
Corporate bonds and asset backed securities
|
—
|
|
|
13,270
|
|
|
—
|
|
|
13,270
|
|
|
$
|
362,581
|
|
|
$
|
214,698
|
|
|
$
|
—
|
|
|
$
|
577,279
|
|
______________________________
|
|
(a)
|
Included within cash and cash equivalents.
|
|
|
(b)
|
Includes
$87.9 million
of commercial paper that is included within cash and cash equivalents.
|
The carrying amount of long-term debt reported in the consolidated balance sheet as of
December 31, 2013
and
December 31, 2012
was
$208.8 million
and
$200.4 million
, respectively. Using inputs such as actual trade data, benchmark yields, broker/dealer quotes and other similar data, which were obtained from independent pricing vendors, quoted market prices or other sources, we determined the fair value of the Notes (as defined in Note 6,
Obligations
) to be
$234.0 million
and
$245.2 million
as of
December 31, 2013
and
December 31, 2012
, respectively.
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, engineering and test equipment and furniture and fixtures are generally
three
to
five
years. Leasehold improvements are 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. Leases meeting certain capital lease criteria are capitalized and the net present value of the related lease payments is recorded as a liability. Amortization of capital leased assets is recorded using the straight-line method over the lesser of the estimated useful lives or the lease terms.
Upon the retirement or disposition of property, plant and equipment, the related cost and accumulated depreciation or amortization are removed, and a gain or loss is recorded.
Internal-Use Software Costs
We capitalize costs associated with software developed for internal use that are incurred during the software development stage. Such costs are limited to expenses incurred after management authorizes and commits to a computer software project, believes that it is more likely than not that the project will be completed, the software will be used to perform the intended function with an estimated service life of
two
years or more, and the completion of conceptual formulation, design and testing of possible software project alternatives (the preliminary design stage). Costs incurred after final acceptance testing has been successfully completed are expensed. Capitalized computer software costs are amortized over their estimated useful life of three years.
All computer software costs capitalized to date relate to the purchase, development and implementation of engineering, accounting and other enterprise software.
Other-than-Temporary Impairments
We review our investment portfolio during each reporting period to determine whether there are identified events or circumstances that would indicate there is a decline in the fair value that is considered to be other-than-temporary. For non-public investments, if there are no identified events or circumstances that would have a significant adverse effect on the fair value of the investment, then the fair value is not estimated. If an investment is deemed to have experienced an other-than-temporary decline below its cost basis, we reduce the carrying amount of the investment to its quoted or estimated fair value, as applicable, and establish a new cost basis for the investment. For cost method investments we charge the impairment to
Other (Expense) Income
line of our Consolidated Statements of Income.
Investments in Other Entities
We may make strategic investments in companies that have developed or are developing technologies that are complementary to our business. We account for our investments using either the cost or equity method of accounting. Under the cost method, we do not adjust our investment balance when the investee reports profit or loss but monitor the investment for an other-than-temporary decline in value. On a quarterly basis, we monitor our investment’s financial position and performance to assess whether there are any triggering events or indicators present that would be indicative of an other-than-temporary impairment of our investment. When assessing whether an other-than-temporary decline in value has occurred, we consider such factors as the valuation placed on the investee in subsequent rounds of financing, the performance of the investee relative to its own performance targets and business plan, and the investee’s revenue and cost trends, liquidity and cash position, including its cash burn rate, and updated forecasts. Under the equity method of accounting, we initially record our investment in the stock of an investee at cost, and adjust the carrying amount of the investment to recognize our share of the earnings or losses of the investee after the date of acquisition. The amount of the adjustment is included in the determination of net income, and such amount reflects adjustments similar to those made in preparing consolidated statements including adjustments to eliminate intercompany gains and losses, and to amortize, if appropriate, any difference between our cost and underlying equity in net assets of the investee at the date of investment. The investment is also adjusted to reflect our share of changes in the investee’s capital. Dividends received from an investee reduce the carrying amount of the investment. When there are a series of operating losses by the investee or when other factors indicate that a decrease in value of the investment has occurred which is other than temporary, we recognize an impairment equal to the difference between the fair value and the carrying amount of our investment. The carrying costs of our investments are included within
Other Non-Current Assets
on our Consolidated Balance Sheets.
In September 2009, we entered into a worldwide patent licensing agreement with Pantech Co., Ltd. (“Pantech”) (formally known separately as Pantech Co., Ltd. and Pantech & Curitel Communications, Inc.). In exchange for granting Pantech the license, we received cash consideration and a minority equity interest in both Pantech Co., Ltd. and Pantech & Curitel Communications, Inc. Simultaneous with the execution of the patent license agreement, we executed a stock agreement to acquire a minority stake in Pantech using the Korean Won provided by Pantech with no participation at the board level or in management. Given that there are no observable inputs relevant to our investment in Pantech, we assessed pertinent risk factors, and reviewed a third-party valuation that used the discounted cash flow method, and incorporated illiquidity discounts in order to assign a fair market value to our investment. After consideration of the aforementioned factors, we valued our non-controlling equity interest in Pantech at
$21.7 million
. Due to the fact that we do not have significant influence over Pantech, we are accounting for this investment using the cost method of accounting. During 2013, we reassessed the carrying value of our investment in Pantech and concluded that given the entity's current financial position it was necessary to fully impair our investment, which wrote down the carrying amount of our investment to
zero
at December 31, 2013. When evaluating our investment, we assessed subsequent rounds of financing, the entity's current financial performance, pertinent risk factors, performance ratios and industry analyst forecasts. The
$21.7 million
impairment charge is included in
Other Expense
on our Consolidated Statements of Income.
During 2007, we made a
$5.0 million
investment for a non-controlling interest in Kineto Wireless (“Kineto”). Due to the fact that we do not have significant influence over Kineto, we are accounting for this investment using the cost method of accounting. In first quarter 2008, we wrote down this investment by
$0.7 million
based on a lower valuation of Kineto. Early in second quarter 2008, we participated in a new round of financing that included several other investors, investing an additional
$0.7 million
in Kineto. This second investment both maintained our ownership position and preserved certain liquidation preferences. During 2009, we reassessed our investment in Kineto and concluded that, given their financial position at the time, it was necessary to record an impairment of
$3.9 million
, which reduced our carrying amount of our investment in Kineto to approximately
$1.0 million
at December 31, 2009. During 2010, we reassessed our investment in Kineto and concluded that there was no evidence of an other-than-temporary impairment. As of December 31, 2010, the carrying amount of our investment in Kineto was
$1.0 million
. During 2011, we reassessed our investment in Kineto and concluded that given their financial position at the time, it was necessary to record an impairment of
$1.0 million
which reduced the carrying amount of our investment to
zero
as of December 31, 2011.
On December 17, 2009, we announced a multi-faceted collaboration agreement with Attila Technologies LLC (“Attila”). We will collaborate on the development and marketing of bandwidth aggregation technologies and related multi-network innovations. In addition, we paid approximately
$0.7 million
to acquire a
7%
minority stake. No other amounts were paid or are payable to Attila for the period ended December 31, 2009. Certain terms of the agreement afford us the ability to exercise significant influence over Attila; therefore we are accounting for this investment using the equity method of accounting. During 2010, we reassessed our investment in Attila and concluded that there was no evidence of an other-than-temporary impairment. As of December 31, 2010, the carrying amount of our investment in Attila was
$0.7 million
. During 2011, we reassessed our investment in Attila and concluded that given their financial position at the time, it was necessary to record an impairment of
$0.7 million
which reduced our carrying amount of the investment to
zero
as of December 31, 2011.
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 in the period incurred. We amortize capitalized patent costs for internally generated patents on a straight-line basis over
10
years, which represents the estimated useful lives of the patents. The ten year estimated useful life for 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 separate analysis related to each acquisition and may differ from the estimated useful lives of internally generated patents. The average estimated useful life of acquired patents thus far has been
10
years. 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.
Patents consisted of the following (in thousands, except for useful life data):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2013
|
|
2012
|
Weighted average estimated useful life (years)
|
10.2
|
|
|
10.3
|
|
Gross patents
|
$
|
358,793
|
|
|
$
|
300,174
|
|
Accumulated amortization
|
(152,422
|
)
|
|
(122,617
|
)
|
Patents, net
|
$
|
206,371
|
|
|
$
|
177,557
|
|
Amortization expense related to capitalized patent costs was
$29.8 million
,
$22.7 million
and
$19.6 million
in
2013
,
2012
and
2011
, respectively. These amounts are recorded within
Patent administration and licensing
line of our Consolidated Statements of Income.
The estimated aggregate amortization expense for the next five years related to our patents balance as of
December 31, 2013
is as follows (in thousands):
|
|
|
|
|
2014
|
$
|
32,350
|
|
2015
|
31,519
|
|
2016
|
30,094
|
|
2017
|
27,460
|
|
2018
|
22,766
|
|
Intangible Assets
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.
Revenue Recognition
We derive the vast 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 include multiple elements. 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, advanced payments and fees for service arrangements and settlement of intellectual property enforcement. For agreements entered into or materially modified prior to 2011, due to 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 has often been recognized over the performance period. Beginning in January 2011, all new or materially modified agreements are being accounted for under the Financial Accounting Standards Board ("FASB") revenue recognition guidance, "Revenue Arrangements with Multiple Deliverables." This guidance requires consideration to be allocated to each element of an agreement that has stand alone value using the relative fair value method. In other circumstances, such as those agreements involving consideration for past and expected future patent royalty obligations, after consideration of the particular facts and circumstances, the appropriate recording of revenue between periods may require the use of judgment. 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.
We establish a receivable for payments expected to be received within twelve months from the balance sheet date based on the terms in the license. Our reporting of such payments often results in an increase to both accounts receivable and deferred revenue. Deferred revenue associated with fixed-fee royalty payments is classified on the balance sheet as short-term when it is scheduled to be amortized within twelve months from the balance sheet date. All other deferred revenue is classified as long term, as amounts to be recognized over the next twelve months are not known.
Patent License Agreements
Upon signing a patent license agreement, we provide the licensee permission to use our patented inventions in specific applications. We account for patent license agreements in accordance with the guidance for revenue arrangements with
multiple deliverables. We have elected to utilize the leased-based model for revenue recognition, with revenue being recognized over the expected period of benefit to the licensee. 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 Past Patent Royalties:
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. We may also receive consideration for past patent royalties in connection with the settlement of patent litigation where there was no prior patent license agreement. In each of these cases, we record the consideration as revenue when we have obtained a signed agreement, identified a fixed or determinable price and determined that collectibility is reasonably assured. In prior periods, we have referred to "past patent royalties" as "past sales."
Fixed-Fee Royalty Payments:
These are 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 for specified products, under certain patents or patent claims, for sales in certain countries, or a combination thereof — in each case for a specified time period (including for the life of the patents licensed under the agreement). 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 cannot reliably predict in which periods, within the term of a license, the licensee will benefit from the use of our patented inventions.
Prepayments:
These are 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 typically 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:
These are royalty payments covering a licensee’s obligations to us related to its sales of covered products in the current contractual reporting period.
Licensees that either owe us Current Royalty Payments or have Prepayment balances are obligated to 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. As a result, it is impractical for us to recognize revenue in the period in which the underlying sales occur, and, in most cases, we recognize revenue in the period in which the royalty report is received and other revenue recognition criteria are met due to the fact that without royalty reports from our licensees, our visibility into our licensees’ sales is very limited.
When a licensee is required to gross-up their royalty payment to cover applicable foreign withholding tax requirements, the additional consideration is recorded in revenue.
The exhaustion of Prepayments and Current Royalty Payments are often calculated based on related per-unit sales of covered products. From time to time, licensees will not report revenues in the proper period, most often due to legal disputes. When this occurs, the timing and comparability of royalty revenue could be affected.
In cases where we receive objective, verifiable evidence that a licensee has discontinued sales of products covered under a patent license agreement with us, we recognize any related deferred revenue balance in the period that we receive such evidence.
Patent Sales
During 2012, we expanded our business strategy of monetizing our intellectual property to include the sale of select patent assets. As patent sales executed under this expanded strategy represent a component of our ongoing major or central operations and activities, we will record the related proceeds as revenue. We will recognize the revenue when there is persuasive evidence of a sales arrangement, fees are fixed or determinable, delivery has occurred and collectibility is reasonably assured. These requirements are generally fulfilled upon closing of the patent sale transaction.
Technology Solutions and Engineering Services
Technology solutions revenue consists primarily of revenue from software licenses and engineering services. Software license revenues are recognized in accordance with the original and revised guidance for software revenue recognition. When the arrangement with a customer includes significant production, modification, or customization of the software, we recognize the related revenue using the percentage-of-completion method in accordance with the accounting guidance for 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 the 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 the accounting guidance for construction-type and certain production-type contracts on a straight-line basis, unless evidence suggests that the revenue is earned 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 labor hours and total estimated labor hours or other measures of progress, if available. 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.
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. In such cases, we may pay a commission. 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
2013
,
2012
and
2011
, we paid cash commissions of less than
$0.1 million
,
$4.7 million
and
$0.1 million
, respectively.
Incremental direct costs incurred related to acquisition or origination of a customer contract in a transaction that results in the deferral of revenue may be either expensed as incurred or capitalized. The only eligible costs for deferral are those costs directly related to a particular revenue arrangement. We capitalize those direct costs incurred for the acquisition of a contract through the date of signing, and amortize them on a straight-line basis over the life of the patent license agreement. We paid approximately
$0.6 million
of direct contract origination costs in 2009 in relation to our patent licensing agreement with Pantech. There were no direct contract origination costs incurred during
2013
,
2012
, or 2011.
Incremental direct costs incurred related to a debt financing transaction may be capitalized. In connection with our Notes offering, discussed in detail within Note 6,
Obligations
, the company incurred
$8.0 million
of directly related costs in 2011. The initial purchaser's transaction fees and related offering expenses were allocated to the liability and equity components of the debt in proportion to the allocation of proceeds and accounted for as debt issuance costs. We allocated
$6.5 million
of debt issuance costs to the liability component of the debt, which were capitalized as deferred financing costs. These costs are being amortized to interest expense over the term of the debt using the effective interest method. The remaining
$1.5 million
of costs allocated to the equity component of the debt were recorded as a reduction of the equity component of the debt. There were no debt issuance costs incurred in 2013 or 2012.
Deferred charges are recorded in our Consolidated Balance Sheets within the following captions (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2013
|
|
2012
|
Prepaid and other current assets
|
|
|
|
|
|
Deferred commission expense
|
$
|
290
|
|
|
$
|
289
|
|
Deferred contract origination costs
|
79
|
|
|
79
|
|
Deferred financing costs
|
1,303
|
|
|
1,303
|
|
Other non-current assets
|
|
|
|
|
|
Deferred commission expense
|
750
|
|
|
1,061
|
|
Deferred contract origination costs
|
158
|
|
|
237
|
|
Deferred financing costs
|
1,629
|
|
|
2,932
|
|
Commission expense was approximately
$0.3 million
,
$5.0 million
and
$0.4 million
in
2013
,
2012
and
2011
, respectively. Commission expense is included within the
Patent administration and licensing
line of our Consolidated Statements of Income. Deferred contract origination expense recognized in
2013
,
2012
and
2011
was less than
$0.1 million
in each period and is included within the
Patent administration and licensing
line of our Consolidated Statements of Income.
Deferred financing expense was
$1.3 million
in
2013
,
$1.3 million
in 2012, and
$1.0 million
in 2011. Deferred financing expense is included within the
Other (Expense) Income
line of our Consolidated Statements of Income.
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 when the product is available for general release to customers. We did not have any such capitalized software costs in any period presented. Research, development and other related costs were approximately
$63.3 million
,
$67.9 million
and
$63.8 million
in
2013
,
2012
and
2011
, respectively.
Compensation Programs
We account for compensation costs associated with share-based transactions based on the fair value of the instruments issued, net of any estimated award forfeitures. At
December 31, 2013
,
2012
and
2011
, we have estimated the forfeiture rates for outstanding RSUs to be between
0%
and
25%
over their lives of one to three years, depending upon the type of 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 the stock-based compensation guidance. We did not incur any net tax shortfalls in
2013
,
2012
, or
2011
.
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 measurement. For grants with graded vesting, we amortize the associated unrecognized compensation cost using an accelerated method. For grants made that cliff vest, we expect to amortize the associated unrecognized compensation cost at
December 31, 2013
on a straight-line basis over a three-year period.
Impairment of Long-Lived Assets
We evaluate long-lived 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 whether we will be able to realize our long-lived assets by analyzing the projected undiscounted cash flows in measuring whether the asset is recoverable. We did not have any long-lived asset impairments in
2013
, 2012 or 2011.
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 carry forwards. 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 Income 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.
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. 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.
During fourth quarter 2009, we completed a study to assess the company’s ability to utilize foreign tax credit carryovers into the tax year 2006. As a result of the study, we amended our United States federal income tax returns for the
periods 1999 — 2005 to reclassify
$29.3 million
of foreign tax payments we made during those periods from deductions to foreign tax credits. We also amended our federal tax returns for the periods 2006 - 2008 to utilize the resulting tax credits. When we completed the study, we established a basis to support amending the returns and estimated that the maximum incremental benefit would be
$19.1 million
.
We recognized a net benefit of
$16.4 million
after establishing a
$2.7 million
reserve for related tax contingencies. In 2011, we recorded an additional tax benefit of
$8.3 million
to eliminate this and other tax contingencies and recognize interest income on the associated refund.
Between 2006 and 2013, we paid approximately
$169.1 million
in foreign taxes for which we have claimed foreign tax credits against our U.S. tax obligations. It is possible that as a result of tax treaty procedures, the U.S. government may reach an agreement with the related foreign governments that will result in a partial refund of foreign taxes paid with a related reduction in our foreign tax credits. Due to both foreign currency fluctuations and differences in the interest rate charged by the U.S. government compared to the interest rates, if any, used by the foreign governments, any such agreement could result in interest expense and/or foreign currency gain or loss.
Net Income Per Common Share
Basic Earnings Per Share ("EPS") is calculated by dividing net 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 or other securities with features that could result in the issuance of common stock were exercised or converted to common stock. The following table reconciles 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,
|
|
2013
|
|
2012
|
|
2011
|
|
Basic
|
|
Diluted
|
|
Basic
|
|
Diluted
|
|
Basic
|
|
Diluted
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shareholders
|
$
|
38,165
|
|
|
$
|
38,165
|
|
|
$
|
271,804
|
|
|
$
|
271,804
|
|
|
$
|
89,468
|
|
|
$
|
89,468
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding: Basic
|
41,115
|
|
|
41,115
|
|
|
43,070
|
|
|
43,070
|
|
|
45,411
|
|
|
45,411
|
|
Dilutive effect of stock options, RSUs and convertible securities
|
|
|
309
|
|
|
|
|
326
|
|
|
|
|
603
|
|
Weighted-average shares outstanding: Diluted
|
|
|
41,424
|
|
|
|
|
43,396
|
|
|
|
|
46,014
|
|
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
Net income: Basic
|
$
|
0.93
|
|
|
0.93
|
|
|
$
|
6.31
|
|
|
6.31
|
|
|
$
|
1.97
|
|
|
1.97
|
|
Dilutive effect of stock options, RSUs and convertible securities
|
|
|
(0.01
|
)
|
|
|
|
(0.05
|
)
|
|
|
|
(0.03
|
)
|
Net income: Diluted
|
|
|
$
|
0.92
|
|
|
|
|
$
|
6.26
|
|
|
|
|
$
|
1.94
|
|
For the years ended
December 31, 2013
,
2012
and
2011
, options to purchase
0.1 million
,
zero
and
zero
shares of common stock, respectively, were excluded from the computation of diluted EPS because their effect would have been anti-dilutive.
For the years ended
December 31, 2013
,
2012
and
2011
,
4.0 million
,
4.0 million
and
3.9 million
shares of common stock issuable under convertible securities were excluded from the computation of diluted EPS because their effect would have been anti-dilutive. For each of the years ended
December 31, 2013
, 2012 and 2011,
4.0 million
shares of common stock issuable under warrants were excluded from the computation of diluted EPS because their effect would have been anti-dilutive.
New Accounting Guidance
Accounting Standards Updates: Presentation of Unrecognized Tax Benefits
In July 2013, the FASB issued amendments to guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. The amendments require entities to present an unrecognized tax benefit netted against certain deferred tax assets when specific requirements are met.
The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013;
however, early adoption is permitted. We do not expect this guidance to have a material impact on our results of operations or financial position.
3. SIGNIFICANT EVENTS
Huawei Settlement Agreement
On December 23, 2013, InterDigital and Huawei reached a settlement agreement to enter into binding arbitration to resolve their global patent licensing dispute. The agreement is based on an expedited process leading to a license on terms set by the arbitration panel, with the arbitration process expected to be complete in 2014 or early 2015.
Pursuant to the settlement agreement, InterDigital and Huawei moved to dismiss all litigation matters pending between the parties, including the two USITC investigations and related U.S. district court proceedings as they relate to Huawei, and including withdrawal by Huawei of its various antitrust complaints, but excluding the action filed by Huawei in China to set a FRAND rate for the licensing of InterDigital’s Chinese standards-essential patents. The terms of the settlement agreement permit InterDigital to further appeal, through a petition for retrial in the Chinese Supreme People’s Court, this Chinese court decision relating to InterDigital’s Chinese standards-essential patents.
Pegatron and Apple Arbitration Awards
In 2007, we entered into a worldwide, non-transferable, non-exclusive, fixed-fee royalty-bearing patent license agreement with Apple (the “2007 Apple PLA”). In 2008, we entered into a patent license agreement with Pegatron (the “2008 Pegatron PLA”) that covers Pegatron and its affiliates. Under the terms of the 2008 Pegatron PLA, we granted Pegatron a non-exclusive, non-transferable, worldwide royalty-bearing license covering the sale of certain products designed to operate in accordance with 2G and 3G wireless standards.
In second quarter and fourth quarter 2013, we received arbitration awards in separate proceedings we initiated against Pegatron and Apple, respectively. Taken together, these arbitration awards clarified that Pegatron owes us royalties on certain products it produces for Apple. The Pegatron arbitration award confirmed that, to the extent that Pegatron manufactures products for Apple that are not licensed under the 2007 Apple PLA, those products are covered by the 2008 Pegatron PLA and are royalty bearing under that agreement. The Apple arbitration award declared that Apple iPads, and any Apple products designed to operate on CDMA2000 or LTE networks, are not licensed under the Apple PLA. As a result of these two arbitration awards, we recognized
$96.1 million
of revenue associated with sales of Apple products under the 2008 Pegatron PLA in 2013,
$71.4 million
of which was recognized as past patent royalties revenue and
$24.7 million
of which was recognized as per-unit royalties.
Technology Solutions Agreement Arbitration Award
We were engaged in an arbitration relating to a contractual dispute concerning the scope of royalty obligations and the scope of the licenses granted under our technology solutions agreement with Intel Mobile Communications GmbH. The arbitration hearing took place in late June 2012, and
the arbitration award was issued on August 13, 2013. As a result of the award, in third quarter 2013, we recognized related revenue of
$51.6 million
that had been deferred pending the resolution of the arbitration.
4. GEOGRAPHIC / CUSTOMER CONCENTRATION
We have one reportable segment. During 2013, the majority of our revenue was derived from a limited number of licensees based outside of the United States, primarily in Asia. These revenues were paid in U.S. dollars and were not subject to any substantial foreign exchange transaction risk. The table below lists the countries of the headquarters of our licensees and customers and the total revenue derived from each country or region for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2013
|
|
2012
|
|
2011
|
Taiwan
|
128,551
|
|
|
40,394
|
|
|
43,993
|
|
United States
|
108,728
|
|
|
406,950
|
|
|
13,719
|
|
Canada
|
36,148
|
|
|
40,667
|
|
|
54,728
|
|
Japan
|
27,494
|
|
|
39,558
|
|
|
61,594
|
|
Korea
|
15,334
|
|
|
118,078
|
|
|
118,078
|
|
Germany
|
4,539
|
|
|
3,470
|
|
|
5,439
|
|
Other Europe
|
3,004
|
|
|
4,700
|
|
|
3,461
|
|
China
|
1,563
|
|
|
9,246
|
|
|
688
|
|
Other Asia
|
—
|
|
|
—
|
|
|
42
|
|
Total
|
$
|
325,361
|
|
|
$
|
663,063
|
|
|
$
|
301,742
|
|
During
2013
,
2012
and
2011
, the following licensees or customers accounted for
10%
or more of total revenues:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Pegatron Corporation (a)
|
30
|
%
|
|
< 10%
|
|
|
< 10%
|
|
Intel Mobile Communications GmbH (b)
|
18
|
%
|
|
< 10%
|
|
|
< 10%
|
|
Sony Corporation of America
|
12
|
%
|
|
< 10%
|
|
|
—
|
%
|
BlackBerry Limited
|
< 10%
|
|
|
< 10%
|
|
|
14
|
%
|
HTC Corporation
|
< 10%
|
|
|
< 10%
|
|
|
11
|
%
|
Samsung Electronics Company, Ltd.
|
—
|
%
|
|
15
|
%
|
|
34
|
%
|
Intel Corporation
|
—
|
%
|
|
57
|
%
|
|
—
|
%
|
(a) 2013 revenues include
$71.4 million
of past patent royalties.
(b) 2013 revenues include
$53.3 million
of past technology solutions revenue.
At December 31, 2013, 2012 and 2011, we held
$215.9 million
,
$185.4 million
and
$146.0 million
, respectively, or nearly 100% in each year, of our property and equipment and patents in the United States net of accumulated depreciation and amortization. At each of December 31, 2013, 2012 and 2011, we also held less than
$0.1 million
of property and equipment, net of accumulated depreciation, in Canada. During 2013, we opened a small office in the United Kingdom and held less than
$0.1 million
of property and equipment, net of accumulated depreciation, in the United Kingdom at December 31, 2013.
5. PROPERTY AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2013
|
|
2012
|
Computer equipment and software
|
$
|
25,368
|
|
|
$
|
28,143
|
|
Engineering and test equipment
|
11,631
|
|
|
11,604
|
|
Building and improvements
|
7,902
|
|
|
7,800
|
|
Leasehold improvements
|
6,477
|
|
|
4,655
|
|
Furniture and fixtures
|
1,166
|
|
|
1,578
|
|
Land
|
695
|
|
|
695
|
|
Property and equipment, gross
|
53,239
|
|
|
54,475
|
|
Less: accumulated depreciation
|
(43,704
|
)
|
|
(46,651
|
)
|
Property and equipment, net
|
$
|
9,535
|
|
|
$
|
7,824
|
|
Depreciation expense was
$3.6 million
,
$3.6 million
and
$4.2 million
in
2013
,
2012
and
2011
, respectively. Depreciation expense included depreciation of computer software costs of
$1.0 million
,
$1.0 million
and
$1.2 million
in
2013
,
2012
and
2011
, respectively. Accumulated depreciation related to computer software costs was
$12.7 million
and
$15.7 million
at
December 31, 2013
and
2012
, respectively. The net book value of our computer software was
$2.5 million
and
$1.7 million
at
December 31, 2013
and
2012
, respectively.
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2013
|
|
2012
|
2.50% Senior Convertible Notes due 2016
|
$
|
230,000
|
|
|
$
|
230,000
|
|
Unamortized interest discount
|
(21,187
|
)
|
|
(29,609
|
)
|
Total debt obligations
|
208,813
|
|
|
200,391
|
|
Less: Current portion
|
—
|
|
|
—
|
|
Long-term debt obligations
|
$
|
208,813
|
|
|
$
|
200,391
|
|
There were no capital leases remaining at December 31, 2013 and December 31, 2012.
Maturities of principal of the long-term debt obligations of the company as of
December 31, 2013
are as follows (in thousands):
|
|
|
|
|
2014
|
$
|
—
|
|
2015
|
—
|
|
2016
|
230,000
|
|
2017
|
—
|
|
2018
|
—
|
|
Thereafter
|
—
|
|
|
$
|
230,000
|
|
Senior Convertible Note, Note Hedge and Warrant Transactions
On April 4, 2011, InterDigital issued
$230.0 million
in aggregate principal amount of its
2.50%
Senior Convertible Notes due 2016 (the “Notes”) pursuant to an indenture (the “Indenture”), dated as of April 4, 2011, by and between the company and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”). The Notes bear interest at a rate of
2.50%
per year, payable in cash on March 15 and September 15 of each year, commencing September 15, 2011. The Notes will mature on March 15, 2016, unless earlier converted or repurchased. The Notes are the company's senior unsecured obligations and rank equally in right of payment with any of the company's future senior unsecured indebtedness, and the Notes are structurally subordinated to the company's future secured indebtedness to the extent of the value of the related collateral and to the indebtedness and other liabilities, including trade payables, of the company's subsidiaries, except with respect to any subsidiaries that become guarantors pursuant to the terms of the Indenture.
The Notes will be convertible into cash and, if applicable, shares of the company's common stock at a conversion rate of
17.958
shares of common stock per
$1,000
principal amount of Notes (which is equivalent to an initial conversion price of approximately
$55.69
per share), as adjusted for the special dividend paid December 28, 2012. The conversion rate, and thus the conversion price, may be adjusted under certain circumstances, including in connection with conversions made following certain fundamental changes and under other circumstances as set forth in the Indenture.
Prior to 5:00 p.m., New York City time, on the business day immediately preceding December 15, 2015, the Notes will be convertible only under certain circumstances as set forth in the Indenture. Commencing on December 15, 2015, the Notes will be convertible in multiples of
$1,000
principal amount, at any time prior to 5:00 p.m., New York City time, on the business day immediately preceding the maturity date of the Notes. Upon any conversion, the conversion obligation will be settled in cash up to, and including, the principal amount and, to the extent of any excess over the principal amount, in shares of common stock.
If a fundamental change (as defined in the Indenture) occurs, holders may require the company to purchase all or a portion of their Notes for cash at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The company may not redeem the Notes prior to their maturity date.
On March 29 and March 30, 2011, in connection with the offering of the Notes, InterDigital entered into convertible note hedge transactions with respect to its common stock with Barclays Bank PLC, through its agent, Barclays Capital Inc. The two convertible note hedge transactions cover, subject to customary anti-dilution adjustments, approximately
3.5 million
and approximately
0.5 million
shares of common stock, respectively, at a strike price that corresponds to the initial conversion price of the Notes, also subject to adjustment, and are exercisable upon conversion of the Notes.
On April 4, 2011, the company paid
$37.1 million
and
$5.6 million
for the convertible note hedge transactions entered into on March 29 and March 30, 2011, respectively. The aggregate cost of the convertible note hedge transactions was
$42.7 million
. As described in more detail below, this cost was partially offset by the proceeds from the sale of the warrants in separate transactions.
The convertible note hedge transactions are intended generally to reduce the potential dilution to the common stock upon conversion of the Notes in the event that the market price per share of the common stock is greater than the strike price.
The convertible note hedge transactions are separate transactions and are not part of the terms of the Notes. Holders of the Notes have no rights with respect to the convertible note hedge transactions.
On March 29 and March 30, 2011, InterDigital also entered into privately-negotiated warrant transactions with Barclays Bank PLC, through its agent, Barclays Capital Inc., whereby InterDigital sold warrants to acquire, subject to customary anti-dilution adjustments, approximately
3.5 million
shares and approximately
0.5 million
shares, respectively, of common stock at a strike price of
$64.09
per share, as adjusted for the special dividend paid December 28, 2012. The warrants become exercisable in tranches starting in June 2016. As consideration for the warrants issued on March 29 and March 30, 2011, the company received, on April 4, 2011,
$27.6 million
and
$4.1 million
, respectively.
If the market value per share of the common stock, as measured under the warrants, exceeds the strike price of the warrants at the time the warrants are exercisable, the warrants will have a dilutive effect on the company's earnings per share.
Accounting Treatment of the Senior Convertible Note, Convertible Note Hedge and Warrant Transactions
The offering of the Notes on March 29, 2011 was for
$200.0 million
and included an overallotment option that allowed the initial purchaser to purchase up to an additional
$30.0 million
aggregate principal amount of Notes. The initial purchaser exercised its overallotment option on March 30, 2011, bringing the total amount of Notes issued on April 4, 2011 to
$230.0 million
.
In connection with the offering of the Notes, as discussed above, InterDigital entered into convertible note hedge transactions with respect to its common stock. The
$42.7 million
cost of the convertible note hedge transactions was partially offset by the proceeds from the sale of the warrants described above, resulting in a net cost of
$10.9 million
.
Existing accounting guidance provides that the March 29, 2011 convertible note hedge and warrant contracts be treated as derivative instruments for the period during which the initial purchaser's overallotment option was outstanding. Once the overallotment provision was exercised on March 30, 2011, the March 29 convertible note hedge and warrant contracts were reclassified to equity, as the settlement terms of the company's note hedge and warrant contracts both provide for net share settlement. There was no material net change in the value of these convertible note hedges and warrants during the one day they were classified as derivatives and the equity components of these instruments will not be adjusted for subsequent changes in fair value.
Under current accounting guidance, the company bifurcated the proceeds from the offering of the Notes between the liability and equity components of the debt. On the date of issuance, the liability and equity components were calculated to be approximately
$187.0 million
and
$43.0 million
, respectively. The initial
$187.0 million
liability component was determined based on the fair value of similar debt instruments excluding the conversion feature. The initial
$43.0 million
(
$28.0 million
net of tax) equity component represents the difference between the fair value of the initial
$187.0 million
in debt and the
$230.0 million
of gross proceeds. The related initial debt discount of
$43.0 million
is being amortized using the effective interest method over the life of the Notes. An effective interest rate of
7%
was used to calculate the debt discount on the Notes.
In connection with the above-noted transactions, the company incurred
$8.0 million
of directly related costs. The initial purchaser's transaction fees and related offering expenses were allocated to the liability and equity components of the debt in proportion to the allocation of proceeds and accounted for as debt issuance costs. We allocated
$6.5 million
of debt issuance costs to the liability component of the debt, which were capitalized as deferred financing costs. These costs are being amortized to interest expense over the term of the debt using the effective interest method. The remaining
$1.5 million
of costs allocated to the equity component of the debt were recorded as a reduction of the equity component of the debt.
The following table presents the amount of interest cost recognized
for the years ended
December 31, 2013
,
December 31, 2012
and December 31, 2011 related to the contractual interest coupon, accretion of the debt discount and the amortization of financing costs (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
Contractual coupon interest
|
|
$
|
5,750
|
|
|
$
|
5,750
|
|
|
$
|
4,313
|
|
Accretion of debt discount
|
|
8,423
|
|
|
7,862
|
|
|
5,567
|
|
Amortization of financing costs
|
|
1,303
|
|
|
1,303
|
|
|
977
|
|
Total
|
|
$
|
15,476
|
|
|
$
|
14,915
|
|
|
$
|
10,857
|
|
Leases
We have entered into various operating lease agreements. Total rent expense, primarily for office space, was
$3.3 million
,
$3.4 million
and
$3.4 million
in
2013
,
2012
and
2011
, respectively. Minimum future rental payments for operating leases as of
December 31, 2013
are as follows (in thousands):
|
|
|
|
|
2014
|
$
|
2,700
|
|
2015
|
2,437
|
|
2016
|
2,301
|
|
2017
|
2,193
|
|
2018
|
2,047
|
|
Thereafter
|
4,719
|
|
|
|
8.
|
LITIGATION AND LEGAL PROCEEDINGS
|
Samsung, Nokia, Huawei and ZTE 2013 USITC Proceeding (337-TA-868) and Related Delaware District Court Proceedings
USITC Proceeding (337-TA-868)
On January 2, 2013, the Company's wholly owned subsidiaries InterDigital Communications, Inc., InterDigital Technology Corporation, IPR Licensing, Inc. and InterDigital Holdings, Inc. filed a complaint with the United States International Trade Commission (the “USITC” or “Commission”) against Samsung Electronics Co., Ltd., Samsung Electronics America, Inc. and Samsung Telecommunications America, LLC, Nokia Corporation and Nokia Inc., Huawei Technologies Co., Ltd., Huawei Device USA, Inc. and FutureWei Technologies, Inc. d/b/a Huawei Technologies (USA) and ZTE Corporation and ZTE (USA) Inc. (collectively, the “337-TA-868 Respondents”), alleging violations of Section 337 of the Tariff Act of 1930 in that they engaged in unfair trade practices by selling for importation into the United States, importing into the United States and/or selling after importation into the United States certain 3G and 4G wireless devices (including WCDMA-, cdma2000- and LTE-capable mobile phones, USB sticks, mobile hotspots, laptop computers and tablets and components of such devices) that infringe one or more of up to seven of InterDigital's U.S. patents. The complaint also extends to certain WCDMA and cdma2000 devices incorporating Wi-Fi functionality. InterDigital's complaint with the USITC seeks an exclusion order that would bar from entry into the United States infringing 3G or 4G wireless devices (and components), including LTE devices, that are imported by or on behalf of the 337-TA-868 Respondents, and also seeks a cease-and-desist order to bar further sales of infringing products that have already been imported into the United States. Certain of the asserted patents have been asserted against Nokia, Huawei and ZTE in earlier pending USITC proceedings (including the Nokia, Huawei and ZTE 2011 USITC Proceeding (337-TA-800) and the Nokia 2007 USITC Proceeding (337-TA-613), as set forth below) and therefore are not being asserted against those 337-TA-868 Respondents in this investigation. On February 21, 2013, each 337-TA-868 Respondent filed their respective responses to the complaint.
On February 6, 2013, the Administrative Law Judge (“ALJ”) overseeing the proceeding issued an order setting a target date of June 4, 2014 for the Commission's final determination in the investigation, with the ALJ's Initial Determination on alleged violation due on February 4, 2014. On September 26, 2013, the ALJ issued an order modifying the procedural schedule and extending the target date for completion of the investigation. The ALJ set new dates for the evidentiary hearing of February 10 to February 21, 2014, moved the due date for the ALJ’s Final Initial Determination (“ID”) to April 25, 2014 and extended the target date for the Commission’s completion of the investigation to August 25, 2014. On October 18, 2013, the
ALJ issued an order, in light of the 16-day federal government shutdown, modifying the date for the ALJ’s Final ID and extending the target date for completion of the investigation. The date for the ALJ's Final ID and the target date for the Commission’s final determination are now May 12, 2014 and September 10, 2014, respectively. The trial dates were unchanged, and the trial commenced on February 10, 2014 and ended on February 20, 2014.
On February 21, 2013, Samsung moved for partial termination of the investigation as to six of the seven patents asserted against Samsung, alleging that Samsung was authorized to import the specific 3G or 4G devices that InterDigital relied on to form the basis of its complaint. InterDigital opposed this motion on March 4, 2013. On May 10, 2013, the ALJ denied Samsung’s motion for partial termination.
On February 22, 2013, Huawei and ZTE moved to stay the investigation pending their respective requests to the United States District Court for the District of Delaware (described below) to set a fair, reasonable and non-discriminatory (“FRAND”) royalty rate for a license that covers the asserted patents, or in the alternative, until a Final Determination issues in the 337-TA-800 investigation. Nokia joined this motion on February 28, 2013, and InterDigital opposed it on March 6, 2013. Also, on March 6, 2013, Samsung responded to Huawei’s and ZTE’s motion, noting that it does not join their motion, but does not oppose the requested stay. On March 12, 2013, the ALJ denied Huawei’s and ZTE’s motion to stay the investigation.
On March 13, 2013, InterDigital moved to amend the USITC complaint and notice of investigation to assert allegations of infringement of recently-issued U.S. Patent No. 8,380,244 by all 337-TA-868 Respondents. On March 25, 2013, the 337-TA-868 Respondents opposed InterDigital’s motion. On May 10, 2013, the ALJ denied InterDigital’s motion to amend the complaint. On July 18, 2013, Samsung moved to stay the 337-TA-868 investigation pending disposition by the Commission of the 337-TA-800 investigation, which was scheduled to be completed by December 19, 2013. InterDigital opposed that motion on July 29, 2013. On August 8, 2013, the ALJ denied the motion. On June 19, 2013, in an effort to streamline the evidentiary hearing and narrow the remaining issues, InterDigital filed an unopposed motion to partially terminate the investigation due to InterDigital’s withdrawal of over 30 collective claims from five of the seven asserted patents. The ALJ granted the motion on June 24, 2013. On August 22, 2013, InterDigital also filed an unopposed motion to partially terminate the investigation due to InterDigital’s withdrawal of eight collective claims from the other two asserted patents. The ALJ granted the motion on August 26, 2013.
On December 6, 2013, Samsung moved for partial summary determination that Samsung does not infringe U.S. Patent No. 7,502,406 (“the ’406 Patent”). On January 15, 2014, InterDigital and Samsung submitted a joint stipulation in which the parties agreed to the termination of the ’406 Patent from the Investigation in view of the USITC’s claim construction and determination in the 337-TA-800 investigation that the asserted claims of the ’406 patent were not infringed. On January 24, 2014, the ALJ issued an initial determination granting Samsung’s motion. On January 31, 2014, InterDigital petitioned the USITC for review of the initial determination terminating the 337-TA-868 investigation as to the ‘406 Patent, which, if denied, would ensure that InterDigital would be permitted to appeal the order to the Federal Circuit. That petition for review remains pending before the USITC.
On December 6, 2013, Samsung moved for partial summary determination that certain of the asserted claims of U.S. Patent Nos. 7,190,966 (“the ’966 patent”), 7,286,847 (“the ’847 patent”), and 7,706, 830 (“the ’830 patent”) are invalid for lack of sufficient written description. ZTE and Huawei joined Samsung’s motion on December 12, 2013. InterDigital opposed Samsung’s motion on December 18, 2014. On January 30, 2014, the ALJ denied the motion.
On December 12, 2013, Samsung moved for partial summary determination that, in view of the Commission’s claim construction and determination in the 337-TA-800 investigation, it does not infringe the asserted claims of U.S. Patent No. 8,009,636 (“the ’636 patent”), and the ’830, ’966, and ’847 patents. Huawei and ZTE joined Samsung’s motion on December 12, 2013 and December 13, 2014, respectively. InterDigital opposed Samsung’s motion on January 2, 2014. On February 5, 2014, the ALJ granted in part and denied in part the motion. Specifically, the ALJ granted the motion with respect to the ’830 and ’636 patents, and denied the motion with respect to the ’966 and ’847 patents. On February 14, 2014, InterDigital petitioned the USITC for review of the initial determination terminating the 337-TA-868 investigation as to the ’830 and ’636 Patents, which, if denied, would ensure that InterDigital would be permitted to appeal the order to the Federal Circuit. That petition for review remains pending before the USITC.
On December 12, 2013, Respondents moved for summary determination that InterDigital has failed to satisfy the technical prong of the domestic industry requirement with respect to U.S. Patent No. 7,941,151 (“the ’151 patent”). InterDigital opposed the motion on January 2, 2014. On January 30, 2014, the ALJ denied the motion.
On December 12, 2013, InterDigital moved for summary determination that Respondents infringe limitations of the asserted claims of the ’966 and ’847 patents. Respondents opposed the motion on January 2, 2014. InterDigital moved for
leave to file a reply on January 16, 2014, and Respondents opposed InterDigital’s motion for leave on January 23, 2014. On January 30, 2014, the ALJ denied the motion.
On December 12, 2013, InterDigital moved for summary determination that the ’151 patent is not unenforceable for inequitable conduct. Respondents opposed InterDigital’s motion on January 2, 2014. InterDigital moved for leave to file a reply on January 13, 2014, and Respondents opposed InterDigital’s motion for leave on January 16, 2014. On February 4, 2014, the ALJ denied the motion.
On December 12, 2013, Samsung moved to terminate the investigation as to U.S. Patent No. 7,616,970 (the “’970 Patent”) in view of the USITC’s determination in the 337-TA-800 investigation that the asserted claims of the ’970 patent are not valid. On January 6, 2014, InterDigital responded to this motion and stated that, subject to its objection to the Commission’s final determination in the 337-TA-800 investigation and reserving its right to appeal that determination, InterDigital acquiesced to the termination of the 337-TA-868 investigation as to the ’970 Patent. On January 6, 2014, the Commission’s Office of Unfair Import Investigations responded in support of the underlying legal analysis but stated that it would not support the motion in the form of a motion to terminate. Samsung withdrew the motion to terminate and, on January 9, 2014, Samsung moved for partial summary determination of no violation of Section 337 as to the ’970 Patent in view of the USITC’s determination in the 337-TA-800 investigation that the asserted claims of the ’970 patent are not valid. On January 10, 2014, InterDigital responded to this motion and stated that, subject to its objection to the Commission’s final determination in the 337-TA-800 investigation and reserving its right to appeal that determination, InterDigital acquiesced to the termination of the 337-TA-868 investigation as to the ’970 Patent. On January 15, 2014, the ALJ issued an initial determination finding that the ALJ is bound by the Commission’s determination in the 337-TA-800 investigation and granting Samsung’s motion. On January 27, 2014, InterDigital petitioned the USITC for review of the initial determination terminating the 337-TA-868 investigation as to the ’970 Patent, and on February 11, 2014, the USITC denied this petition. InterDigital is now permitted to appeal the order terminating the 337-TA-868 investigation to the Federal Circuit.
On December 23, 2013, InterDigital and Huawei reached a settlement agreement to enter into binding arbitration to resolve their global patent licensing dispute. The agreement is based on an expedited process leading to a license on terms set by the arbitration panel, with the arbitration process expected to be complete in 2014 or early 2015. Pursuant to the settlement agreement, InterDigital and Huawei moved to dismiss all litigation matters pending between the parties except the action filed by Huawei in China to set a FRAND rate for the licensing of InterDigital’s Chinese standards-essential patents (discussed below under “Huawei China Proceedings”), the decision in which InterDigital is permitted to further appeal. On January 2, 2014, InterDigital and Huawei filed a joint motion to terminate the 337-TA-868 investigation as to the Huawei Respondents on the basis of this confidential settlement agreement between the parties. On the same day, InterDigital and Huawei also moved to stay the procedural schedule with respect to the Huawei Respondents pending the parties’ motion to terminate. On January 6, 2014, the ALJ granted the motion to stay, and on January 16, 2014, the ALJ granted the joint motion to terminate the 337-TA-868 investigation as to the Huawei Respondents. On February 12, 2014, the USITC determined not to review the initial determination terminating the Huawei Respondents from the 337-TA-868 investigation.
Related Delaware District Court Proceedings
On January 2, 2013, the Company's wholly owned subsidiaries InterDigital Communications, Inc., InterDigital Technology Corporation, IPR Licensing, Inc. and InterDigital Holdings, Inc. filed four related district court actions in the United States District Court for the District of Delaware (the “Delaware District Court”) against the 337-TA-868 Respondents. These complaints allege that each of the defendants infringes the same patents with respect to the same products alleged in the complaint filed by InterDigital in USITC Proceeding (337-TA-868). The complaints seek permanent injunctions and compensatory damages in an amount to be determined, as well as enhanced damages based on willful infringement, and recovery of reasonable attorneys' fees and costs.
On January 24, 2013, Huawei filed its answer and counterclaims to InterDigital's Delaware District Court complaint. Huawei asserted counterclaims for breach of contract, equitable estoppel, waiver of right to enjoin and declarations that InterDigital has not offered or granted Huawei licenses on FRAND terms, declarations seeking the determination of FRAND terms and declarations of noninfringement, invalidity and unenforceability of the asserted patents. In addition to the declaratory relief specified in its counterclaims, Huawei seeks specific performance of InterDigital's purported contracts with Huawei and standards-setting organizations, appropriate damages in an amount to be determined at trial, reasonable attorneys' fees and such other relief as the court may deem appropriate. On January 31, 2013, ZTE filed its answer and counterclaims to InterDigital's Delaware District Court complaint; ZTE asserted counterclaims for breach of contract, equitable estoppel, waiver of right to enjoin and declarations that InterDigital has not offered ZTE licenses on FRAND terms, declarations seeking the determination of FRAND terms and declarations of noninfringement, invalidity and unenforceability. In addition to the declaratory relief specified in its counterclaims, ZTE seeks specific performance of InterDigital's purported contracts with ZTE and standards-
setting organizations, appropriate damages in an amount to be determined at trial, reasonable attorneys' fees and such other relief as the court may deem appropriate.
On February 11, 2013, Huawei and ZTE filed motions to expedite discovery and trial on their FRAND-related counterclaims. Huawei sought a schedule for discovery and trial on its FRAND-related counterclaims that would afford Huawei the opportunity to accept a FRAND license rate at the earliest opportunity, and in any case before December 28, 2013. ZTE sought a trial on its FRAND-related counterclaims no later than November 2013. On March 14, 2013, those motions were denied.
On February 28, 2013, Nokia filed its answer and counterclaims to InterDigital's Delaware District Court complaint, and then amended its answer and counterclaims on March 5, 2013. Nokia asserted counterclaims for breach of contract, breach of implied contract, unfair competition under Cal. Bus. & Prof. Code § 17200, equitable estoppel, a declaration setting FRAND terms and conditions, a declaration that InterDigital is estopped from seeking an exclusion order based on its U.S. declared-essential patents, a declaration of patent misuse, a declaration that InterDigital has failed to offer FRAND terms, a declaration that Nokia has an implied license to the asserted patents, and declarations of non-infringement, invalidity and unenforceability. In addition to the declaratory relief specified in its counterclaims, Nokia seeks an order that InterDigital specifically perform its purported contracts by not seeking a USITC exclusion order for its essential patents and by granting Nokia a license on FRAND terms and conditions, an injunction preventing InterDigital from participating in a USITC investigation based on essential patents, appropriate damages in an amount to be determined, including all attorney’s fees and costs spent in participating in all three USITC Investigations (337-TA-868, 337-TA-800 and 337-TA-613), and any other relief as the court may deem just and proper.
On March 13, 2013, InterDigital filed an amended Delaware District Court complaint against Nokia and Samsung, respectively, to assert allegations of infringement of recently-issued U.S. Patent No. 8,380,244. On April 1, 2013, Nokia filed its answer and counterclaims to InterDigital’s amended Delaware District Court complaint. On April 24, 2013, Samsung filed its answer and a counterclaim to InterDigital's amended Delaware District Court complaint. Samsung asserted a counterclaim for breach of contract. Samsung seeks a judgment that InterDigital has breached its purported contractual commitments, a judgment that the asserted patents are not infringed, are invalid, and unenforceable, an order that InterDigital specifically perform its purported contractual commitments, damages in an amount to be determined, attorneys' fees, costs and expenses, and any other relief as the court may deem just and proper.
On March 21, 2013, pursuant to stipulation, the Delaware District Court granted InterDigital leave to file an amended complaint against Huawei and ZTE, respectively, to assert allegations of infringement of recently-issued U.S. Patent No. 8,380,244. On March 22, 2013, Huawei and ZTE filed their respective answers and counterclaims to InterDigital’s amended Delaware District Court complaint. On April 9, 2013, InterDigital filed a motion to dismiss Huawei’s and ZTE’s counterclaims relating to their FRAND allegations. On April 22, 2013, InterDigital filed a motion to dismiss Nokia’s counterclaims relating to its FRAND allegations. On July 12, 2013, the Delaware District Court held a hearing on InterDigital’s motions to dismiss. By order issued the same day, the Delaware District Court granted InterDigital’s motions, dismissing counterclaims for equitable estoppel, implied license, waiver of the right to injunction or exclusionary relief, and violation of California Bus. & Prof. Code § 17200 with prejudice. It further dismissed the counterclaims for breach of contract and declaratory relief related to InterDigital’s FRAND commitments with leave to amend.
In June 2013, the Delaware District Court set separate schedules for InterDigital’s cases against Nokia, Huawei and ZTE, on the one hand, and Samsung, on the other. On June 10, 2013, the court set a schedule in InterDigital’s case against Samsung that includes a trial beginning on June 15, 2015. On June 26, 2013, the court set a common pretrial schedule in InterDigital’s cases against Nokia, Huawei, and ZTE, along with separate trials beginning on the following days: September 8, 2014 for Nokia, October 6, 2014 for Huawei, and October 20, 2014 for ZTE.
On August 6, 2013, Huawei, Nokia, and ZTE filed answers and amended counterclaims for breach of contract and for declaratory judgments seeking determination of FRAND terms. The counterclaims also continue to seek declarations of noninfringement, invalidity, and unenforceability. Nokia also continued to assert a counterclaim for a declaration of patent misuse. On August 30, 2013, InterDigital filed a motion to dismiss the declaratory judgment counterclaims relating to the request for determination of FRAND terms. On September 30, 2013, Huawei, Nokia, and ZTE filed their oppositions to this motion to dismiss. On October 17, 2013, InterDigital filed its reply. The motion was heard on November 26, 2013. The court has not yet ruled on InterDigital’s motion.
On December 30, 2013, InterDigital and Huawei filed a stipulation of dismissal on account of the confidential settlement agreement and agreement to arbitrate their disputes in this action. On the same day, the Delaware District Court granted the stipulation of dismissal.
On February 11, 2014, the Delaware District Court judge granted an InterDigital, Nokia, and ZTE stipulated Amended Scheduling Order that bifurcated issues relating to damages, FRAND-related affirmative defenses, and FRAND-related counterclaims.
Huawei Complaint to European Commission
On May 23, 2012, Huawei lodged a complaint with the European Commission alleging that InterDigital was acting in breach of Article 102 of the Treaty on the Functioning of the European Union (the "TFEU"). Huawei alleged that InterDigital has a dominant position with respect to the alleged market for the licensing of its 3G standards-essential patents. Huawei further alleged that InterDigital was acting in abuse of its alleged dominant position by allegedly seeking to force Huawei to agree to unfair purchase or selling prices and in applying dissimilar conditions to equivalent transactions contrary to Article 102 of the TFEU. The European Commission had not yet indicated whether or not it would initiate proceedings against InterDigital as a result of the complaint and, in January 2014, as a result of the confidential settlement agreement mentioned above, Huawei contacted the European Commission and requested the withdrawal of the complaint.
Huawei China Proceedings
On February 21, 2012, InterDigital was served with two complaints filed by Huawei Technologies Co., Ltd. in the Shenzhen Intermediate People's Court in China on December 5, 2011. The first complaint names as defendants InterDigital, Inc. and its wholly owned subsidiaries InterDigital Technology Corporation and InterDigital Communications, LLC (now InterDigital Communications, Inc.). This first complaint alleges that InterDigital had a dominant market position in China and the United States in the market for the licensing of essential patents owned by InterDigital, and abused its market power by engaging in allegedly unlawful practices, including differentiated pricing, tying and refusal to deal. Huawei sought relief in the amount of 20.0 million RMB (approximately 3.2 million USD based on the exchange rate as of September 30, 2013), an order requiring InterDigital to cease the allegedly unlawful conduct and compensation for its costs associated with this matter. The second complaint names as defendants the Company's wholly owned subsidiaries InterDigital Technology Corporation, InterDigital Communications, LLC (now InterDigital Communications, Inc.), InterDigital Patent Holdings, Inc. and IPR Licensing, Inc. This second complaint alleges that InterDigital is a member of certain standards-setting organization(s); that it is the practice of certain standards-setting organization(s) that owners of essential patents included in relevant standards license those patents on FRAND terms; and that InterDigital has failed to negotiate on FRAND terms with Huawei. Huawei is asking the court to determine the FRAND rate for licensing essential Chinese patents to Huawei and also seeks compensation for its costs associated with this matter.
On February 4, 2013, the Shenzhen Intermediate People's Court issued rulings in the two proceedings. With respect to the first complaint, the court decided that InterDigital had violated the Chinese Anti-Monopoly Law by (i) making proposals for royalties from Huawei that the court believed were excessive, (ii) tying the licensing of essential patents to the licensing of non-essential patents, (iii) requesting as part of its licensing proposals that Huawei provide a grant-back of certain patent rights to InterDigital and (iv) commencing a USITC action against Huawei while still in discussions with Huawei for a license. Based on these findings, the court ordered InterDigital to cease the alleged excessive pricing and alleged improper bundling of InterDigital's Chinese essential and non-essential patents, and to pay Huawei 20.0 million RMB (approximately 3.2 million USD) in damages related to attorneys’ fees and other charges, without disclosing a factual basis for its determination of damages. The court dismissed Huawei's remaining allegations, including Huawei's claim that InterDigital improperly sought a worldwide license and improperly sought to bundle the licensing of essential patents on multiple generations of technologies. With respect to the second complaint, the court determined that, despite the fact that the FRAND requirement originates from ETSI's Intellectual Property Rights policy, which refers to French law, InterDigital's license offers to Huawei should be evaluated under Chinese law. Under Chinese law, the court concluded that the offers did not comply with FRAND. The court further ruled that the royalties to be paid by Huawei for InterDigital's 2G, 3G and 4G essential Chinese patents under Chinese law should not exceed 0.019% of the actual sales price of each Huawei product, without explanation as to how it arrived at this calculation.
On February 17, 2013, Huawei filed a notice of appeal with respect to the first proceeding, seeking a finding that InterDigital’s conduct constitutes refusal to deal and an order that InterDigital cease purportedly tying 3G and 4G essential patents. On March 11, 2013, InterDigital filed notices of appeal with respect to the judgments in both proceedings, seeking reversal of the court’s February 4, 2013 rulings. On July 2, 2013, the Guangdong Province High Court heard argument on InterDigital’s appeal with respect to the second proceeding. On July 9, 2013, the Guangdong Province High Court heard argument on InterDigital’s and Huawei’s appeal with respect to the first proceeding. On October 16, 2013, the Guangdong Province High Court issued a ruling affirming the ruling of the Shenzhen Intermediate People's Court in the second proceeding, and on October 21, 2013, the Guangdong Province High Court issued a ruling affirming the ruling of the Shenzhen Intermediate People's Court in the first proceeding.
InterDigital believes that the decisions in the first and second proceedings are seriously flawed both legally and factually. For instance, in determining a purported FRAND rate, the Chinese courts applied an incorrect economic analysis by evaluating InterDigital’s lump-sum patent license agreement with Apple in hindsight to posit a running royalty rate. Indeed, the ALJ in USITC Inv. No. 337-TA-800 rejected that type of improper analysis. Moreover, the Chinese courts had an incomplete record and applied incorrect facts, particularly in view of the arbitration decision, discussed below, which found that InterDigital’s license agreement with Apple is limited in scope. InterDigital intends to appeal the Guangdong Province High Court’s decision regarding the setting of FRAND royalties with respect to InterDigital’s Chinese essential patents to the Supreme People’s Court in Beijing.
InterDigital learned that Huawei filed earlier in 2013 a new Chinese Anti-Monopoly Law complaint against InterDigital in the Shenzhen Intermediate People’s Court. At Huawei’s request, in connection with InterDigital and Huawei’s confidential settlement agreement, this complaint was dismissed on January 9, 2014.
Investigation by National Development and Reform Commission of China
On September 23, 2013, counsel for InterDigital was informed by China’s National Development and Reform Commission (“NDRC”) that the NDRC had initiated a formal investigation into whether InterDigital has violated China’s Anti-Monopoly Law with respect to practices related to the licensing of InterDigital’s standards-essential patents to Chinese companies. Companies found to violate the Anti-Monopoly Law may be subject to a cease and desist order, fines, and disgorgement of any illegal gains. The Company continues to cooperate with the NDRC’s investigation and, on February 10, 2014, submitted a proposed commitments request to NDRC that could form the predicate for suspension of NDRC's investigation under a procedure provided for under the Anti-Monopoly Law.
Nokia, Huawei and ZTE 2011 USITC Proceeding (337-TA-800) and Related Delaware District Court Proceeding
USITC Proceeding (337-TA-800)
On July 26, 2011, InterDigital's wholly owned subsidiaries InterDigital Communications, LLC (now InterDigital Communications, Inc.), InterDigital Technology Corporation and IPR Licensing, Inc. filed a complaint with the USITC against Nokia Corporation and Nokia Inc., Huawei Technologies Co., Ltd. and FutureWei Technologies, Inc. d/b/a Huawei Technologies (USA) and ZTE Corporation and ZTE (USA) Inc. (collectively, the “337-TA-800 Respondents”), alleging violations of Section 337 of the Tariff Act of 1930 in that they engaged in unfair trade practices by selling for importation into the United States, importing into the United States and/or selling after importation into the United States certain 3G wireless devices (including WCDMA- and cdma2000-capable mobile phones, USB sticks, mobile hotspots and tablets and components of such devices) that infringe seven of InterDigital's U.S. patents. The action also extends to certain WCDMA and cdma2000 devices incorporating WiFi functionality. InterDigital's complaint with the USITC seeks an exclusion order that would bar from entry into the United States any infringing 3G wireless devices (and components) that are imported by or on behalf of the 337-TA-800 Respondents, and also seeks a cease-and-desist order to bar further sales of infringing products that have already been imported into the United States. On October 5, 2011, InterDigital filed a motion requesting that the USITC add LG Electronics, Inc., LG Electronics U.S.A., Inc. and LG Electronics Mobilecomm U.S.A., Inc. as 337-TA-800 Respondents to the complaint and investigation, and that the Commission add an additional patent to the complaint and investigation as well. On December 5, 2011, the ALJ overseeing the proceeding granted this motion and, on December 21, 2011, the Commission determined not to review the ALJ's determination, thus adding the LG entities as 337-TA-800 Respondents and including allegations of infringement of the additional patent.
On January 6, 2012, the ALJ granted the parties' motion to extend the target date for completion of the investigation from February 28, 2013 to June 28, 2013. On March 23, 2012, the ALJ issued a new procedural schedule for the investigation, setting a trial date of October 22, 2012 to November 2, 2012.
On January 20, 2012, LG filed a motion to terminate the investigation as it relates to the LG entities, alleging that there is an arbitrable dispute. The ALJ granted LG's motion on June 4, 2012. On July 6, 2012, the Commission determined not to review the ALJ's order, and the investigation was terminated as to LG. On August 27, 2012, InterDigital filed a petition for review of the ALJ's order in the United States Court of Appeals for the Federal Circuit (the “Federal Circuit”). On September 14, 2012, the Federal Circuit granted LG's motion to intervene. On October 23, 2012, InterDigital filed its opening brief. Responsive briefs were filed on January 22, 2013, and InterDigital's reply brief was filed on February 8, 2013. The Federal Circuit heard oral argument on April 4, 2013. On June 7, 2013, the Federal Circuit reversed the termination of the investigation as to LG, finding that LG’s request for termination and arbitration was wholly groundless, and remanded to the Commission for further proceedings. On July 19, 2013, LG filed a petition for rehearing and rehearing
en banc
. On October 3, 2013, the Federal Circuit denied LG’s petition for rehearing and rehearing
en banc
and issued its mandate on October 10, 2013. LG filed a petition for a writ of certiorari with the U.S. Supreme Court seeking reversal of the Federal Circuit’s judgment on December
31, 2013. Responses to LG’s petition are due on March 19, 2014. On January 13, 2014, InterDigital filed a motion to terminate the 337-TA-800 investigation as to the LG Respondents. No opposition to InterDigital’s motion was filed. On February 12, 2014, the Commission granted InterDigital’s motion to terminate the investigation as to LG. In terminating the 337-TA-800 investigation, the Commission adopted the ALJ’s determination that the ‘830, ‘636, ‘406, and ‘332 patents are not invalid. The Commission declined to take a position regarding InterDigital’s domestic industry or FRAND issues.
On March 21, 2012, InterDigital filed an unopposed motion requesting that the Commission add newly formed entity Huawei Device USA, Inc. as a 337-TA-800 Respondent. On April 11, 2012, the ALJ granted this motion and, on May 1, 2012, the Commission determined not to review the ALJ's determination, thus adding Huawei Device USA, Inc. as a 337-TA-800 Respondent.
On July 20, 2012, in an effort to streamline the evidentiary hearing and narrow the remaining issues, InterDigital voluntarily moved to withdraw certain claims from the investigation, including all of the asserted claims from U.S. Patent No. 7,349,540. By doing so, InterDigital expressly reserved all arguments regarding the infringement, validity and enforceability of those claims. On July 24, 2012, the ALJ granted the motion. On August 8, 2012, the Commission determined not to review the ALJ's Initial Determination granting the motion to terminate the investigation as to the asserted claims of the '540 patent.
On August 23, 2012, the parties jointly moved to extend the target date in view of certain outstanding discovery to be provided by the 337-TA-800 Respondents and third parties. On September 10, 2012, the ALJ granted the motion and issued an Initial Determination setting the evidentiary hearing for February 12, 2013 to February 22, 2013. The ALJ also set June 28, 2013 as the deadline for his Initial Determination as to violation and October 28, 2013 as the target date for the Commission's Final Determination in the investigation. On October 1, 2012, the Commission determined not to review the Initial Determination setting those deadlines, thereby adopting them.
On January 2, 2013, in an effort to streamline the evidentiary hearing and narrow the remaining issues, InterDigital voluntarily moved to withdraw certain additional patent claims from the investigation. By doing so, InterDigital expressly reserved all arguments regarding the infringement, validity and enforceability of those claims. On January 3, 2013, the ALJ granted the motion. On January 23, 2013, the Commission determined not to review the ALJ's Initial Determination granting the motion to terminate the investigation as to those withdrawn patent claims. InterDigital continues to assert seven U.S. patents in this investigation.
The ALJ held an evidentiary hearing from February 12-21, 2013. The parties submitted initial post-hearing briefs on March 8, 2013 and reply post-hearing briefs on March 22, 2013. The ALJ’s Initial Determination (“ID”) issued on June 28, 2013, finding no violation because the asserted patents were not infringed and/or invalid. Specifically, the ALJ found infringement with respect to claims 1-9 of the ‘970 patent, but not as to the other asserted claims of the ‘970 patent, or any of the other asserted patents. In addition, the ALJ found that the asserted claims of the ‘970 patent, U.S. Patent No. 7,536,013, and U.S. Patent No. 7,970,127 were invalid in light of the prior art. The ALJ further found that InterDigital had established a licensing-based domestic industry. With respect to the 337-TA-800 Respondents’ FRAND and other equitable defenses, the ALJ found that Respondents had failed to prove either that InterDigital violated any FRAND obligations, that InterDigital failed to negotiate in good faith, or that InterDigital’s licensing offers were discriminatory. The ALJ also found that InterDigital is not precluded from seeking injunctive relief based on any alleged FRAND commitments. Further, the ALJ found that the 337-TA-800 Respondents had not shown that they are licensed under the asserted patents. On July 10, 2013, the ALJ issued a Recommended Determination on Remedy, concluding that if a violation is found by the Commission, the ALJ recommends the issuance of a Limited Exclusion Order as to all 337-TA-800 Respondents, and cease and desist orders as to 337-TA-800 Respondents Nokia and Huawei.
Petitions for review of the ID to the Commission were filed by InterDigital and the 337-TA-800 Respondents on July 15, 2013. InterDigital requested review of certain limited erroneous claim constructions and the ALJ’s resulting erroneous determinations that InterDigital’s U.S. Patent No. 7,706,830, U.S. Patent No. 8,009,636, U.S. Patent No.7,502,406 and U.S. Patent No.7,706,332 were not infringed and that the claims of the ’970 patent are invalid. The 337-TA-800 Respondents requested review of the ALJ’s determination that a domestic industry exists as to each of the asserted patents. In addition, the 337-TA-800 Respondents requested review of a number of alleged claims construction errors and the impact of such alleged errors on the infringement and validity of the patents listed above, as well as review of the ALJ’s determination that Respondents are not licensed under certain of the asserted patents through a third party. Responses to the various petitions were filed on July 23, 2013. On September 4, 2013, the Commission determined to review the ID in its entirety and requested limited briefing on the issue of whether licensing-based domestic industry requires proof of “Articles protected by the patent.” Opening briefs were submitted on September 27, 2013 and replies were submitted on October 21, 2013 after the end of the government shutdown. The target date for the Commission to issue its Final Determination, which was October 28, 2013 prior to the federal government shutdown, was extended to November 13, 2013 by operation of the notice issued by the Commission on September 30, 2013 tolling all schedules and deadlines during the pendency of the federal government shutdown. On
October 23, 2013, the Commission issued a Notice further extending the target date for the Commission to issue its Final Determination, in view of the federal government shutdown, from November 13, 2013 to December 19, 2013.
On December 19, 2013, the Commission issued its final determination. The Commission adopted, with some modification, the ALJ’s finding of no violation of section 337 as to Nokia, Huawei, and ZTE. The Commission did not rule on any other issue, including FRAND and domestic industry, and stated that all other issues remain under review.
On December 20, 2013, InterDigital filed in the Federal Circuit a petition for review seeking reversal of the Commission’s final determination. InterDigital’s appeal was docketed on December 23, 2014. On January 17, 2014, the Nokia and ZTE Respondents moved for leave to intervene in the appeal. On January 30, 2014, the ALJ granted these motions. On January 22, 2014, third party Samsung moved for leave to intervene in the appeal. Nokia and ZTE responded to this motion on February 2, 2014. Samsung's motion remains pending.
Related Delaware District Court Proceeding
On July 26, 2011, the same date that InterDigital filed USITC Proceeding (337-TA-800), it filed a parallel action in the United States District Court for the District of Delaware against the 337-TA-800 Respondents alleging infringement of the same asserted patents identified in USITC Proceeding (337-TA-800). The Delaware District Court complaint seeks a permanent injunction and compensatory damages in an amount to be determined, as well as enhanced damages based on willful infringement, and recovery of reasonable attorneys' fees and costs. On September 23, 2011, the defendants in the Delaware District Court complaint filed a motion to stay the Delaware District Court action pending the parallel proceedings in the USITC. Because the USITC has instituted USITC Proceeding (337-TA-800), the defendants have a statutory right to a mandatory stay of the Delaware District Court proceeding pending a final determination in the USITC. On October 3, 2011, InterDigital amended the Delaware District Court complaint, adding LG as a defendant and adding the same additional patent that InterDigital requested be added to USITC Proceeding (337-TA-800). On October 11, 2011, the Delaware District Court granted the defendants' motion to stay. On January 14, 2014, InterDigital and Huawei filed a stipulation of dismissal of their disputes in this action on account of the confidential settlement agreement mentioned above. On the same day, the Delaware District Court granted the stipulation of dismissal.
LG Arbitration
On March 19, 2012, LG Electronics, Inc. filed a demand for arbitration against the Company’s wholly owned subsidiaries InterDigital Technology Corporation, IPR Licensing, Inc. and InterDigital Communications, LLC (now InterDigital Communications, Inc.) with the American Arbitration Association’s International Centre for Dispute Resolution (“ICDR”), initiating an arbitration in Washington, D.C. LG seeks a declaration that it is licensed to certain patents owned by InterDigital, including the patents asserted against LG in USITC Proceeding (337-TA-800). On April 18, 2012, InterDigital filed an Answering Statement objecting to the jurisdiction of the ICDR on the ground that LG’s claims are not arbitrable, and denying all claims made by LG in its demand for arbitration.
The issue of whether LG’s claim to arbitrability is wholly groundless was appealed to the Federal Circuit. On June 7, 2013, the Federal Circuit issued an opinion holding that the USITC erred in terminating USITC Proceeding (337-TA-800) as to LG because “there is no plausible argument that the parties’ dispute in this case arose under their patent license agreement” and finding that “LG’s assertion of arbitrability was ‘wholly groundless.’” The Federal Circuit reversed the USITC’s order terminating the USITC proceeding as to LG and remanded to the USITC for further proceedings.
On June 25, 2013, the arbitration tribunal granted the parties’ joint request to stay the arbitration pending the exhaustion of all appellate rights from the Federal Circuit’s decision. As noted above, LG filed a petition for a writ of certiorari with the U.S. Supreme Court challenging the Federal Circuit’s ruling on December 31, 2013.
Nokia 2007 USITC Proceeding (337-TA-613), Related Delaware District Court Proceeding and Federal Circuit Appeal
In August 2007, InterDigital filed a USITC complaint against Nokia Corporation and Nokia, Inc., alleging a violation of Section 337 of the Tariff Act of 1930 in that Nokia engaged in an unfair trade practice by selling for importation into the United States, importing into the United States and/or selling after importation into the United States certain 3G mobile handsets and components that infringe two of InterDigital's patents. In November and December 2007, a third patent and a fourth patent were added to the Company’s complaint against Nokia. The complaint seeks an exclusion order barring from entry into the United States infringing 3G mobile handsets and components that are imported by or on behalf of Nokia. InterDigital’s 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 the filing of USITC Proceeding (337-TA-613), InterDigital 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 USITC complaint. The complaint seeks a permanent injunction and damages in an amount to be determined. This Delaware action was stayed on January 10, 2008, pursuant to the mandatory, statutory stay of parallel district court proceedings at the request of a respondent in a USITC investigation. Thus, this Delaware action is stayed with respect to the patents in this case until the USITC's determination on these patents becomes final, including any appeals. The Delaware District Court permitted InterDigital to add to the stayed Delaware action the third and fourth patents InterDigital asserted against Nokia in the USITC action.
On August 14, 2009, the ALJ overseeing USITC Proceeding (337-TA-613) issued an Initial Determination finding no violation of Section 337 of the Tariff Act of 1930. The Initial Determination found that InterDigital's patents were valid and enforceable, but that Nokia did not infringe these patents. In the event that a Section 337 violation were to be found by the Commission, the ALJ recommended the issuance of a limited exclusion order barring entry into the United States of infringing Nokia 3G WCDMA handsets and components, as well as the issuance of appropriate cease-and-desist orders.
On October 16, 2009, the Commission issued a notice that it had determined to review in part the Initial Determination, and that it affirmed the ALJ's determination of no violation and terminated the investigation. The Commission determined to review the claim construction of the patent claim terms “synchronize” and “access signal” and also determined to review the ALJ's validity determinations. On review, the Commission modified the ALJ's claim construction of “access signal” and took no position with regard to the claim term “synchronize” or the validity determinations. The Commission determined not to review the remaining issues decided in the Initial Determination.
On November 30, 2009, InterDigital filed with the Federal Circuit a petition for review of certain rulings by the USITC. In the appeal, neither the construction of the term “synchronize” nor the issue of validity can be raised because the Commission took no position on these issues in its Final Determination. On December 17, 2009, Nokia filed a motion to intervene in the appeal, which was granted by the Federal Circuit on January 4, 2010. In its appeal, InterDigital seeks reversal of the Commission's claim constructions and non-infringement findings with respect to certain claim terms in U.S. Patent Nos. 7,190,966 and 7,286,847, vacatur of the Commission's determination of no Section 337 violation and a remand for further proceedings before the Commission. InterDigital is not appealing the Commission's determination of non-infringement with respect to U.S. Patent Nos. 6,973,579 and 7,117,004. On August 1, 2012, the Federal Circuit issued its decision in the appeal, holding that the Commission had erred in interpreting the claim terms at issue and reversing the Commission's finding of non-infringement. The Federal Circuit adopted InterDigital's interpretation of such claim terms and remanded the case back to the Commission for further proceedings. In addition, the Federal Circuit rejected Nokia's argument that InterDigital did not satisfy the domestic industry requirement. On September 17, 2012, Nokia filed a combined petition for rehearing by the panel or en banc with the Federal Circuit. On January 10, 2013, the Federal Circuit denied Nokia's petition.
On January 17, 2013, the Federal Circuit issued its mandate remanding USITC Proceeding (337-TA-613) to the Commission for further proceedings. On February 4, 2013, on remand from the Federal Circuit, the Commission issued an order requiring the parties to submit comments regarding what further proceedings must be conducted to comply with the Federal Circuit's August 1, 2012 judgment, including whether any issues should be remanded to an ALJ to be assigned to this investigation. All parties filed initial responses to the Commission’s order by February 14, 2013 and reply responses by February 22, 2013. On March 27, 2013, Nokia filed a motion asking the Federal Circuit to recall its mandate, which the Federal Circuit denied on March 28, 2013.
On May 10, 2013, Nokia filed a petition for a writ of certiorari to the United States Supreme Court (No. 12 -1352). Briefs in opposition to Nokia’s petition were filed on September 9, 2013, and Nokia filed its reply brief on September 23, 2013. On October 15, 2013, the Supreme Court denied Nokia’s petition for a writ of certiorari.
On February 12, 2014, the Commission issued a notice, order and opinion remanding the investigation to an ALJ. In doing so, the Commission determined certain issues and identified others that would be subject to further proceedings by the ALJ. For example, with respect to domestic industry, the Commission acknowledged the Federal Circuit’s affirmance of InterDigital’s domestic industry and declined Nokia’s invitation to revisit the issue on remand. With respect to validity, the Commission affirmed the ALJ’s determination that the Lucas reference does not anticipate or render obvious the asserted claims of the ‘966 and ‘847 patents. The Commission further affirmed the ALJ’s determination that the asserted claims of the ‘966 and ’847 patents are not rendered obvious by the IS-95 references combined with the CODIT reference. The Commission construed the claim limitation “synchronize” in the asserted claims of the ‘847 patent to mean “establishing a timing reference with the pilot signal transmitted by a base station,” as InterDigital had originally proposed to the ALJ.
With respect to infringement, the Commission determined that the PRACH preamble used in the accused Nokia handsets satisfies the “code”/“signal” limitation of the asserted claims of the ‘966 and ‘847 patents under the Federal Circuit’s
revised claim construction. The Commission also determined that the transmission of the PRACH preambles meet the claim limitation “increased power level” in the asserted claims of the ‘966 and ‘847 patents based on the Federal Circuit’s revised claim construction. The Commission further determined that Nokia waived any argument that the PRACH preamble and message signals in the accused Nokia handsets are never transmitted. The Commission separately found that the accused handsets do not satisfy the “synchronized to a pilot signal” limitation under the doctrine of equivalents.
The Commission assigned the investigation to an ALJ for limited remand proceedings consistent with its February 12, 2014 opinion. The Commission defined the scope of the remand proceedings by enumerating the particular issues before the ALJ. Specifically, the Commission ordered the ALJ to:
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•
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take additional briefing and make findings on whether the accused Nokia handsets meet the “generated using a same code” limitation or “the message being transmitted only subsequent to the subscriber unit receiving the indication” limitation in the asserted claims of the ‘966 patent, and whether the accused Nokia handsets meet the “generated using a same code” limitation or the “function of a same code” limitation in the asserted claims of the ‘847 patent;
|
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•
|
take additional briefing and make findings on whether the 3GPP standard supports a finding that the pilot signal (P-CPICH) satisfies the claim limitation “synchronized to a pilot signal” as recited in the asserted claims of the ‘847 patent by synchronizing to either the P-SCH or S-SCH signals under the Commission's construction of that claim limitation, as well as, regarding the asserted claims of the ‘847 patent, whether the PRACH Message is transmitted during the power ramp up process; and
|
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•
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take evidence and/or briefing and make findings regarding (i) whether Nokia’s currently imported products infringe the asserted patents; (ii) whether the chips in the currently imported products are licensed; (iii) whether the issue of the standard-essential nature of the ‘847 and ‘966 patents is contested; (iv) whether there is “patent hold-up” or “reverse patent hold-up”; and (v) the statutory public interest factors.
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The ALJ requested the parties submit by February 24, 2014 briefing regarding their respective positions, including proposed procedural schedules, for the limited proceedings they respectively contend are necessary in view of the Commission’s order regarding the scope of the remand. The Commission did not authorize the taking of discovery, the taking of evidence, or the briefing of issues relating to validity of the asserted claims.
The Commission’s action is important for several reasons. Foremost, it confirms the validity of the asserted claims of the ‘966 and ‘847 patents in light of the evidence and arguments presented by Nokia in the 337-TA-613 investigation. Additionally, the Commission’s determination that 3GPP WCDMA PRACH preambles satisfy the “code”/“signal” limitation of the asserted claims of the ‘966 and ‘847 patents, and that the transmission of the PRACH preambles meet the claim limitation “increased power level” in the asserted claims of the ‘966 and ‘847 patents, both based on the Federal Circuit’s revised claim constructions, demonstrates the scope and vitality of the ‘966 and ‘847 patents, particularly as these patents apply to 3G WCDMA capable devices.
Nokia Delaware Proceeding
In January 2005, Nokia filed a complaint in the Delaware District Court against InterDigital Communications Corporation (now InterDigital, Inc.) and its wholly owned subsidiary InterDigital Technology Corporation, alleging that InterDigital has used false or misleading descriptions or representations regarding the Company’s patents' scope, validity and applicability to products built to comply with 3G standards (the “Nokia Delaware Proceeding”). Nokia's amended complaint seeks declaratory relief, injunctive relief and damages, including punitive damages, in an amount to be determined. InterDigital 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. InterDigital’s counterclaims seek injunctive relief as well as damages, including punitive damages, in an amount to be determined.
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 USITC Proceeding (337-TA-613). Specifically, the full and final resolution of USITC Proceeding (337-TA-613) includes any initial or final determinations of the ALJ overseeing the proceeding, the USITC and any appeals therefrom and any remand proceedings thereafter. 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.
Except for the Nokia Delaware Proceeding and the Nokia Arbitration Concerning Presentations (described below), the order does not affect any of the other legal proceedings between the parties.
Nokia Arbitration Concerning Presentations
In November 2006, InterDigital Communications Corporation (now InterDigital, Inc.) and its wholly owned subsidiary InterDigital Technology Corporation filed a request for arbitration with the International Chamber of Commerce against Nokia (the “Nokia Arbitration Concerning Presentations”), claiming that certain presentations Nokia has attempted to use in support of its claims in the Nokia Delaware Proceeding (described above) 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 also stayed the Nokia Arbitration Concerning Presentations pending the full and final resolution of USITC Proceeding (337-TA-613).
Other
We are party to certain other disputes and legal actions in the ordinary course of business. We do not believe that these matters, even if adversely adjudicated or settled, would have a material adverse effect on our financial condition, results of operations or cash flows.
Technology Solutions Agreement Arbitration Award
Our wholly owned subsidiaries InterDigital Communications, LLC (now InterDigital Communications, Inc.) and InterDigital Technology Corporation were engaged in an arbitration relating to a contractual dispute concerning the scope of royalty obligations and the scope of the licenses granted under one of our technology solutions agreements. The arbitration hearing took place in late June 2012, and
the arbitration award was issued on August 13, 2013. As a result of the award, in third quarter 2013 InterDigital recognized related revenue of
$51.6 million
that had been deferred pending the resolution of the arbitration.
Pegatron Arbitration Award
On April 18, 2013, our wholly owned subsidiaries InterDigital Technology Corporation and IPR Licensing, Inc. filed an action in the U.S. District Court for the Northern District of California to confirm an arbitration award against Pegatron Corporation (“Pegatron”). The arbitration award issued on April 17, 2013 from a three-member panel constituted by the American Arbitration Association’s International Centre for Dispute Resolution in a proceeding we initiated to resolve a dispute surrounding our 2008 patent license agreement with Pegatron. Under the award, Pegatron was required to pay us approximately
$29.9 million
, including
$23.5 million
for past patent royalties through June 30, 2012,
$6.2 million
of interest, and additional amounts for certain arbitration costs and expenses. On May 15, 2013, InterDigital received
$29.9 million
.
On May 24, 2013, Pegatron responded to InterDigital’s petition to confirm the award, and, on June 24, 2013, the U.S. District Court for the Northern District of California entered an Order confirming the award and entered judgment in the matter.
Arbitration with Apple Inc. Regarding Scope of 2007 Patent License Agreement
On October 10, 2013, a three-member tribunal constituted by the American Arbitration Association’s International Centre for Dispute Resolution issued an arbitration award in a proceeding initiated by our wholly owned subsidiaries InterDigital Technology Corporation and IPR Licensing, Inc. to resolve a dispute surrounding our 2007 patent license agreement with Apple Inc. (the "Apple PLA”). The arbitration award declared that Apple iPads, and any Apple products designed to operate on CDMA2000 or LTE networks, are not licensed under the Apple PLA. On October 30, 2013, InterDigital Technology Corporation and IPR Licensing, Inc. filed a petition to confirm the arbitration award in the United States District Court for the Northern District of California. On December 11, 2013, Apple responded to InterDigital’s petition to confirm the award, stating that it did not oppose confirmation of the award, and on December 17, 2013, InterDigital filed a reply in support of its petition to confirm the arbitration award. A hearing is scheduled on InterDigital’s petition for April 4, 2014
.
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9.
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RELATED PARTY TRANSACTIONS
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On December 17, 2009, we announced a multi-faceted collaboration agreement with Attila, a company in which we have a direct investment. Under the agreement, we collaborate on the development and marketing of bandwidth aggregation technologies and related multi-network innovations. In addition, we paid approximately
$0.7 million
in 2009 to acquire a
7%
minority stake in Attila. In 2013, 2012 and 2011, we paid
zero
,
zero
and
$0.4 million
, respectively, to Attila in relation to the collaboration agreement previously discussed.
In February 2013, we entered into an R&D collaboration agreement with BIO-key International, Inc. ("BIO-key"), and made a direct investment in the company. The R&D collaboration will target advanced Cloud security and identity and access management solutions for the mobile market. As part of the agreement, we acquired approximately
4.0 million
shares of BIO-key which were initially valued at
$0.5 million
. In 2013, we paid less than
$0.1 million
to BIO-key in relation to the collaboration agreement previously discussed.
On September 17, 2013, InterDigital announced that it had entered into a development agreement with a wholly owned subsidiary of DDD Group plc ("DDD") regarding its next generation HD and UHD video processing technologies. Under the terms of the development agreement, DDD and InterDigital will collaborate to combine DDD's new image processing techniques with InterDigital's user adaptive video streaming technology to explore the feasibility of the combined solution for applications in streaming video to mobile devices and Smart TVs. As part of the agreement, we acquired approximately
7.0 million
shares of DDD which were initially valued at
$0.9 million
. In 2013, we paid
zero
to DDD in relation to the development agreement previously discussed.
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10.
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COMPENSATION PLANS AND PROGRAMS
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Stock Plans
On June 4, 2009, the company’s shareholders adopted and approved the 2009 Stock Incentive Plan (the “2009 Plan”), under which current or prospective officers and employees and non-employee directors, consultants and advisors can receive share-based awards such as RSUs, restricted stock, stock options and other stock awards. As of this date, no further grants were permitted under any previously existing stock plans (the “Pre-existing Plans”). We issue the share-based awards authorized under the 2009 Plan through a variety of compensation programs.
The following table summarizes changes in the number of equity instruments available for grant (in thousands) under the 2009 Plan for the current year:
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|
|
|
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Available for Grant
|
Balance at December 31, 2012
|
3,427
|
|
RSUs granted (a)
|
(1,458
|
)
|
Options granted
|
(86
|
)
|
Options expired and RSUs canceled
|
122
|
|
Balance at December 31, 2013
|
2,005
|
|
_______________________________________
|
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(a)
|
RSUs granted include time-based RSUs, performance-based RSUs and dividend equivalents.
|
Stock Options
We have outstanding non-qualified stock options that were granted under the 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 2009, our shareholders approved the 2009 Plan, which allows for the granting of incentive and non-qualified stock options, as well as other securities. The 2009 Plan authorizes the issuance of up to approximately
3.0 million
shares of common stock. The administrator of the 2009 Plan, initially the Compensation Committee of the Board of Directors, determines the number of options to be granted. In 2013, both incentive and non-qualified stock options were granted pursuant to the Long-Term Compensation Program ("LTCP") under the 2009 Plan. Under the terms of the 2009 Plan, the exercise price per share of each option, other than in the event of options granted in connection with a merger or other acquisition, cannot be less than
100%
of the fair market value of a share of common stock on the date of grant. Under all of the plans, options are generally exercisable for a period of between 7 to 10 years from the date of grant and may vest on the grant date, another specified date or over a period of time.
Information with respect to current year stock option activity under the above plans is summarized as follows (in thousands, except per share amounts):
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|
|
|
|
|
|
|
|
Outstanding Options
|
|
Weighted
Average Exercise Price
|
Balance at December 31, 2012
|
210
|
|
|
$
|
13.39
|
|
Granted
|
86
|
|
|
44.24
|
|
Canceled
|
(2
|
)
|
|
19.61
|
|
Exercised
|
(49
|
)
|
|
21.11
|
|
Balance at December 31, 2013
|
245
|
|
|
$
|
22.61
|
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The weighted average remaining contractual life of our outstanding options was
19.3
years as of
December 31, 2013
. We currently have approximately
0.1 million
options outstanding that have an indefinite contractual life. These options were granted between 1983 and 1986 under a Pre-existing Plan. For purposes of calculating the weighted average remaining contractual life, these options were assigned an original life in excess of 50 years. The majority of these options have an exercise price between
$8.25
and
$11.63
. The total intrinsic value of stock options exercised during the years ended
December 31, 2013
,
2012
and
2011
was
$1.0 million
,
$2.8 million
and
$12.1 million
, respectively. The total intrinsic value of our options outstanding at
December 31, 2013
was
$3.0 million
. In
2013
, we recorded cash received from the exercise of options of
$1.0 million
and tax benefits from option exercises and RSU vestings of
$0.8 million
. Upon option exercise, we issued new shares of stock.
At both
December 31, 2013
and
2012
, we had approximately
0.2 million
options outstanding that had exercise prices less than the fair market value of our stock at each balance sheet date. These options would have generated cash proceeds to the company of
$1.7 million
and
$2.8 million
, respectively, if they had been fully exercised on those dates.
RSUs and Restricted Stock
Under the 2009 Plan, we may issue up to approximately
3.0 million
RSUs and/or shares of restricted stock to current or prospective officers and employees and non-employee directors, consultants and advisors. No further grants are allowed under the Pre-existing Plans. Any cancellations of outstanding RSUs that were granted under the 2009 Plan or Pre-existing Plans will increase the number of RSUs and/or shares of restricted stock available for grant under the 2009 Plan. The RSUs vest over periods generally ranging from
0
to
3
years from the date of the grant. During
2013
and
2012
, we granted approximately
0.9 million
and
0.2 million
RSUs, respectively, under the 2009 Plan. We have issued less than
0.1 million
shares of restricted stock under the 2009 Plan.
At
December 31, 2013
and
2012
, we had unrecognized compensation cost related to share-based awards of
$11.2 million
and
$6.1 million
, respectively. For grants made prior to 2010 with graded vesting, we amortize the unrecognized compensation cost at
December 31, 2013
over a weighted average period of less than one year using an accelerated method. For grants made in 2013, 2012 and 2011 that cliff vest, we expect to amortize the associated unrecognized compensation cost at
December 31, 2013
on a straight-line basis over a three-year period.
We grant RSUs as an element of compensation to all of our employees under the LTCP.
Under all LTCP cycles that began after 2009, all time-based RSU awards vest at the end of the respective three-year LTCP cycle. Under the LTCP cycles that began between 2010 and 2012, for employees below manager level,
100%
of their LTCP award is in the form of time-based RSUs, and for all employees at or above the manager level,
25%
of their total LTCP award is in the form of time-based RSUs and the remaining
75%
in the form of a performance-based award that is paid out at the end of the respective three-year cycle in cash, equity or any combination thereof pursuant to the Long-Term Incentive Plan (“LTIP”) component of the LTCP. Where the LTIP allocation has not been determined at the beginning of the cycle, as in the case of Cycles 5, 6, and 7 (as defined below), the allocation was assumed to be
100%
cash for accounting purposes. In January 2013, subsequent to the start of Cycles 6 and 7, it was determined that the LTIP component of such cycles would be paid out in equity and, therefore, performance-based RSUs were granted on January 18, 2013. The terms of the current LTCP are discussed further below.
For LTCP cycles that began prior to 2010, RSU awards vested over three years according to the following schedules:
|
|
|
|
|
|
|
|
|
|
|
Year 1
|
|
Year 2
|
|
Year 3
|
Time-Based Awards
|
|
|
|
|
|
|
|
|
- Employees below manager level (represents 100% of the total award)
|
33
|
%
|
|
33
|
%
|
|
34
|
%
|
- Managers and technical equivalents (represents 75% of the total award)
|
33
|
%
|
|
33
|
%
|
|
34
|
%
|
- Senior Officers (represents 50% of the total award)
|
—
|
%
|
|
—
|
%
|
|
100
|
%
|
Performance-Based Awards
|
|
|
|
|
|
|
|
|
- Managers and technical equivalents (remaining 25% of the total award)
|
—
|
%
|
|
—
|
%
|
|
100
|
%
|
- Senior officers (remaining 50% of the total award)
|
—
|
%
|
|
—
|
%
|
|
100
|
%
|
Vesting of performance-based RSU awards is subject to attainment of specific goals established by the Compensation Committee of the Board of Directors. Depending upon performance against these goals, the payout range for performance-based RSU awards under LTCP cycles that began prior to 2010 could have been anywhere from
0
to
3
times the value of the award. For cycles that began after 2009, the payout range for performance-based RSU awards can be anywhere from
0
to
2
times the value of the award.
Information with respect to current RSU activity is summarized as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
Number of
Unvested
RSUs
|
|
Weighted
Average Per Share
Grant Date
Fair Value
|
Balance at December 31, 2012
|
253
|
|
|
$
|
38.09
|
|
Granted*
|
604
|
|
|
44.10
|
|
Forfeited*
|
(39
|
)
|
|
43.12
|
|
Vested*
|
(163
|
)
|
|
42.33
|
|
Balance at December 31, 2013
|
655
|
|
|
$
|
42.04
|
|
_______________________________________
|
|
*
|
These numbers include less than
0.1 million
RSUs credited on unvested RSUs as dividend equivalents. Dividend equivalents accrue with respect to unvested RSUs when and as cash dividends are paid on the company's common stock, and vest if and when the underlying RSUs vest.
|
The total vest date fair value of the RSUs that vested in
2013
,
2012
and
2011
was
$6.5 million
,
$12.9 million
and
$8.0 million
, respectively. The weighted average per share grant date fair value in
2013
,
2012
and
2011
was
$42.34
,
$39.35
and
$42.17
, respectively.
Other RSU Grants
We also grant RSUs to all non-management Board members and, in special circumstances, management personnel outside of the LTCP. Grants of this type are supplemental to any awards granted to management personnel through the LTCP.
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 both cash and share-based components, as discussed further below. We issue new shares of our common stock to satisfy our obligations under the share-based components of these programs from the 2009 Plan 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
$7.3 million
,
$8.2 million
and
$3.1 million
of compensation expense in
2013
,
2012
and
2011
, respectively, related to the performance-based incentive component of our LTCP, discussed in greater detail below. The majority of the share-based compensation expense, for all years, relates to RSU awards granted under our LTCP. The 2013 amount includes charges of
$1.7 million
and
$4.8 million
, respectively, to adjust the accrual rates for Cycles 6 and 7 (as defined below) to
71%
and
65%
, respectively. The 2012 amount includes a charge of
$4.4 million
to adjust the accrual rate for Cycle 5 (as defined below) to
100%
. The 2011 amount includes a credit of
$5.7 million
to reduce the accrual rates for the performance-based incentive under Cycles 5 and 6 (each as defined below) from
100%
to
50%
, based on revised expectations for a lower payout. The
$5.7 million
adjustment represents a reduction to the accrual established for LTCP Cycles 5 and 6 in 2010 and 2011, respectively. The 2011 amount includes a charge of
$1.3 million
to increase the accrual rate for LTCP Cash Cycle 3 (as defined below) from the previously estimated payout of
50%
to the actual payout of
86%
. We also recognized share-based compensation expense of
$15.9 million
,
$6.5 million
and
$8.1 million
in
2013
,
2012
and
2011
, respectively.
Long-Term Compensation Program
Prior to 2010, the LTCP, which consists of overlapping cycles that are generally three years in length, was designed to alternate annually between equity and cash cycles, with equity cycles including both time-based and performance-based components and cash cycles consisting entirely of a performance-based cash incentive. Under the equity cycles, executives received
50%
of their awards in the form of performance-based RSUs, and
50%
in the form of time-based RSUs that vested in full at the end of the respective three-year cycle. Employees at or above the manager level received
25%
of their equity awards in the form of performance-based RSUs, and
75%
in the form of time-based RSUs that vested in full at the end of the three-year cycle. All performance-based RSUs vested, if at all, based on the company's achievement of certain goals established by the Compensation Committee of our Board of Directors for the three-year cycle. For cycles that began prior to 2010, payouts under the performance-based RSU cycles were capped at
300%
and payouts under performance-based cash incentive cycles were capped at
225%
. Prior to 2010, employees below the manager level did not participate in the LTCP, but did receive RSU grants under a separate program. The following cycles are relevant to our financial statements for the years ended 2011 and 2012:
|
|
•
|
Cash Cycle 3:
A long-term performance-based cash incentive covering the performance period January 1, 2008 through December 31, 2010; and
|
|
|
•
|
RSU Cycle 4:
Time-based RSUs granted on January 1, 2009, which vested on January 1, 2012; and performance-based RSUs covering the performance period from January 1, 2009 through December 31, 2011 granted on January 1, 2009, which vested at a payout level of
31%
on January 1, 2012.
|
In fourth quarter 2010, the LTCP was amended to, among other things, increase the relative proportion of performance-based compensation for both executives and managers, extend participation to all employees, and eliminate alternating annual RSU and cash cycles.
Under the terms of the LTCP as amended in 2010, effective beginning with the cycle that began on January 1, 2010, all employees below manager level received
100%
of their LTCP participation in the form of time-based RSUs that vest in full at the end of the respective three-year cycle. Executives and employees at or above the manager level received
25%
of their LTCP award in the form of time-based RSUs that vest in full at the end of the respective three-year cycle and the remaining
75%
in the form of performance-based awards granted under the LTIP component of the LTCP. The LTIP performance-based awards that are applicable to both executives and managers may be paid out in the form of cash or equity, or any combination thereof at the end of the respective three-year cycle. The form of the LTIP award will be determined by the Compensation Committee of our Board of Directors, in its sole discretion, for each three-year cycle. The following cycles were initiated under the LTCP between 2010 and 2012:
|
|
•
|
Cycle 5:
Time-based RSUs granted on November 1, 2010, which vested on January 1, 2013; and a long-term performance-based incentive covering the performance period from January 1, 2010 through December 31, 2012, which was paid out in cash at the
100%
level in first quarter 2013;
|
|
|
•
|
Cycle 6:
Time-based RSUs granted on January 1, 2011, which vested on January 1, 2014; and performance-based RSUs covering the performance period from January 1, 2011 through December 31, 2013, granted on January 18, 2013, which vested at a payout level of
71%
on January 1, 2014; and
|
|
|
•
|
Cycle 7
: Time-based RSUs granted on January 1, 2012, which vest on January 1, 2015; and performance-based RSUs covering the performance period from January 1, 2012 through December 31, 2014, granted on January 18, 2013, which vest, if at all, on January 1, 2015.
|
In January 2013, the LTCP was further amended to adjust the program participation levels to reflect current market conditions, to add a stock option program component and to provide management with more flexibility in setting the participation levels and allocation among compensation components. Beginning with the 2013 cycle, the company's Chief Executive Officer (or, in certain circumstances the Compensation Committee) determines annually what percentage of LTCP participation each level of participant (e.g., manager, director, senior director, etc.) receives and the components of each participant's award, which can include time-based RSUs, stock options and performance-based awards granted under the LTIP. The Compensation Committee determines the form of the LTIP award. For the cycle that covers the performance period from January 1, 2013 through December 31, 2015 (Cycle 8), executive officers received
25%
of their LTCP award in the form of time-based RSUs that vest at the end of the cycle,
25%
in the form of stock options that vest ratably over three-years and have a seven-year term, and
50%
under the LTIP in the form of performance-based RSUs that vest contingent upon the company's achievement of goals during the 2013-2015 cycle as established by the Compensation Committee. Employees at the director, senior director and vice president levels received
50%
of their LTCP award in the form of time-based RSUs and
50%
in the
form of performance-based RSUs. Employees at or below the senior manager level received
100%
of their participation in the form of time-based RSUs. All time-based and performance-based RSU awards under Cycle 8 were granted on January 18, 2013 and have a vest date of January 18, 2016.
Payouts of performance-based awards granted under the LTCP as amended and restated in January 2013 are determined by the Compensation Committee in its sole discretion, based on the company’s achievement of one of more performance goals, previously established and approved by the Compensation Committee, during the respective cycle period. Payouts may exceed or be less than target, depending on the level of the company’s achievement of the performance goal(s). No payout may be made under the LTIP if the company fails to achieve the minimum level of performance for the applicable cycle, and the payout for any particular cycle is capped at
200%
of target.
401(k) and Profit-Sharing
We have a 401(k) plan (“Savings Plan”) wherein employees can elect to defer compensation within federal limits. The company matches a portion of employee contributions. The company’s contribution expense was approximately
$1.0 million
for each of
2013
,
2012
and
2011
. At its discretion, the company may also make a profit-sharing contribution to our employees’ 401(k) accounts. In fourth quarter 2009, the Compensation Committee of the Board of Directors determined that it would not elect to make a profit-sharing contribution to each employee in 2010 or the foreseeable future.
Our income tax provision consists of the following components for
2013
,
2012
and
2011
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
$
|
(6,093
|
)
|
|
$
|
93,441
|
|
|
$
|
30,990
|
|
State
|
225
|
|
|
44
|
|
|
131
|
|
Foreign source withholding tax
|
23,269
|
|
|
4,173
|
|
|
5,453
|
|
|
17,401
|
|
|
97,658
|
|
|
36,574
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
(18,727
|
)
|
|
22,209
|
|
|
(21,621
|
)
|
State
|
2,614
|
|
|
(4,494
|
)
|
|
(416
|
)
|
Foreign source withholding tax
|
24,548
|
|
|
21,457
|
|
|
20,603
|
|
|
8,435
|
|
|
39,172
|
|
|
(1,434
|
)
|
Total
|
$
|
25,836
|
|
|
$
|
136,830
|
|
|
$
|
35,140
|
|
The deferred tax assets and liabilities are comprised of the following components at
December 31, 2013
and
2012
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
Federal
|
|
State
|
|
Foreign
|
|
Total
|
Net operating losses
|
$
|
—
|
|
|
$
|
70,602
|
|
|
$
|
—
|
|
|
$
|
70,602
|
|
Deferred revenue, net
|
8,564
|
|
|
56
|
|
|
4,189
|
|
|
12,809
|
|
Foreign tax credits
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock compensation
|
7,606
|
|
|
1,088
|
|
|
—
|
|
|
8,694
|
|
Patent amortization
|
16,424
|
|
|
—
|
|
|
—
|
|
|
16,424
|
|
Depreciation
|
1,295
|
|
|
169
|
|
|
—
|
|
|
1,464
|
|
Other-than-temporary impairment
|
9,815
|
|
|
301
|
|
|
—
|
|
|
10,116
|
|
Other accrued liabilities
|
1,044
|
|
|
44
|
|
|
—
|
|
|
1,088
|
|
Other employee benefits
|
4,497
|
|
|
517
|
|
|
—
|
|
|
5,014
|
|
|
49,245
|
|
|
72,777
|
|
|
4,189
|
|
|
126,211
|
|
Less: valuation allowance
|
—
|
|
|
(70,492
|
)
|
|
—
|
|
|
(70,492
|
)
|
Net deferred tax asset
|
$
|
49,245
|
|
|
$
|
2,285
|
|
|
$
|
4,189
|
|
|
$
|
55,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
Federal
|
|
State
|
|
Foreign
|
|
Total
|
Net operating losses
|
$
|
—
|
|
|
$
|
68,640
|
|
|
$
|
—
|
|
|
$
|
68,640
|
|
Deferred revenue, net
|
24,691
|
|
|
2,030
|
|
|
5,467
|
|
|
32,188
|
|
Foreign tax credits
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock compensation
|
6,709
|
|
|
951
|
|
|
—
|
|
|
7,660
|
|
Patent amortization
|
13,215
|
|
|
7
|
|
|
—
|
|
|
13,222
|
|
Depreciation
|
1,202
|
|
|
199
|
|
|
—
|
|
|
1,401
|
|
Other accrued liabilities
|
1,662
|
|
|
302
|
|
|
—
|
|
|
1,964
|
|
Other-than-temporary impairment
|
2,212
|
|
|
414
|
|
|
—
|
|
|
2,626
|
|
Other employee benefits
|
4,096
|
|
|
735
|
|
|
—
|
|
|
4,831
|
|
|
53,787
|
|
|
73,278
|
|
|
5,467
|
|
|
132,532
|
|
Less: valuation allowance
|
—
|
|
|
(68,378
|
)
|
|
—
|
|
|
(68,378
|
)
|
Net deferred tax asset
|
$
|
53,787
|
|
|
$
|
4,900
|
|
|
$
|
5,467
|
|
|
$
|
64,154
|
|
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, 2013
,
2012
and
2011
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Tax at U.S. statutory rate
|
$
|
21,538
|
|
|
$
|
143,022
|
|
|
$
|
43,612
|
|
Foreign withholding tax, with no U.S. foreign tax credit
|
—
|
|
|
—
|
|
|
—
|
|
State tax provision
|
2,536
|
|
|
(4,466
|
)
|
|
(330
|
)
|
Change in federal and state valuation allowance
|
261
|
|
|
(2,225
|
)
|
|
(313
|
)
|
Adjustment to tax credits
|
—
|
|
|
—
|
|
|
—
|
|
Adjustments to uncertain tax positions
|
—
|
|
|
—
|
|
|
(6,775
|
)
|
Permanent differences
|
2,153
|
|
|
211
|
|
|
119
|
|
Other
|
(652
|
)
|
|
288
|
|
|
(1,173
|
)
|
Total tax provision
|
$
|
25,836
|
|
|
$
|
136,830
|
|
|
$
|
35,140
|
|
Valuation Allowances and Net Operating Losses
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 assets to offset future taxes. We believe it is more likely than not that the majority of our state deferred tax assets will not be utilized; therefore and we have maintained a near full valuation allowance against our state deferred tax assets as of
December 31, 2013
.
We recognize excess tax benefits associated with share-based compensation to shareholders’ equity only when realized. When assessing whether excess tax benefits relating to share-based compensation have been realized, we follow the with and without approach excluding any indirect effects of the excess tax deductions. Under the approach, excess tax benefits related to share-based compensation are not deemed to be realized until after the utilization of all other tax benefits available to the company. During 2013, 2012 and 2011, we realized
$0.8 million
,
$0.9 million
and
$5.1 million
, respectively, of such excess tax benefits for federal purposes, and accordingly recorded a corresponding credit to additional paid-in capital. As of December 31, 2013 and 2012, we had
$12.2 million
and
$12.1 million
, respectively, of state unrealized tax benefits associated with share-based compensation. These state tax benefits will be accounted for as a credit to additional paid-in capital, if and when realized, rather than a reduction of the provision for income taxes.
Uncertain Income Tax Positions
As of each of
December 31, 2013
,
2012
and
2011
, the company had
zero
unrecognized tax benefits. The total amount of unrecognized tax benefits could increase within the next twelve months for a number of reasons including audit settlements, tax examination activities and the recognition and measurement considerations under this guidance.
As of January 1, 2009, we had unrecognized tax benefits of
$4.4 million
, primarily related to NOL carryforwards. During 2009, we received a settlement offer from the Internal Revenue Service related to our 2006 Internal Revenue Service
audit and we reclassified
$0.6 million
from the reserve to offset our current receivable. In 2011, we settled the 2006 Internal Revenue Service audit and recognized the remaining tax benefit of
$3.8 million
.
During 2009, we established a reserve of
$2.7 million
related to the recognition of a
$19.1 million
gross benefit for amending tax returns for the periods 1999 — 2005 to switch foreign tax payments made during that period from a deduction to a foreign tax credits. In 2011, we recorded an additional tax benefit of
$8.3 million
to eliminate this tax contingency and recognize interest income on the associated refund. As of
December 31, 2013
, our reserve was
zero
. We do not expect a material change in this estimate in the next twelve months, although a change is possible.
The following is a roll forward of our total gross unrecognized tax benefits, which if reversed would impact the effective tax rate, for the fiscal years
2011
through
2013
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Balance as of January 1
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,459
|
|
Tax positions related to current year:
|
|
|
|
|
|
|
|
|
Additions
|
—
|
|
|
—
|
|
|
—
|
|
Reductions
|
—
|
|
|
—
|
|
|
—
|
|
Tax positions related to prior years:
|
|
|
|
|
|
Additions
|
—
|
|
|
—
|
|
|
—
|
|
Reductions
|
—
|
|
|
—
|
|
|
(6,459
|
)
|
Settlements
|
—
|
|
|
—
|
|
|
—
|
|
Lapses in statues of limitations
|
—
|
|
|
—
|
|
|
—
|
|
Balance as of December 31
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Our policy is to recognize interest and or penalties related to income tax matters in income tax expense. Because we had
zero
unrecognized tax benefits as of each of
December 31, 2013
,
2012
and
2011
, we also had
zero
accrued interest as of the same dates.
The company and its subsidiaries are subject to United States federal income tax, foreign income and withholding taxes and income taxes from multiple state jurisdictions. Our federal income tax returns for 2007 to the present are currently open and will not close until the respective statutes of limitations have expired. The statutes 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 at the end of 2014. Specific tax treaty procedures remain open for certain jurisdictions for 2006 and 2007. Many of our subsidiaries have filed state income tax returns on a separate company basis. To the extent these subsidiaries have unexpired net operating losses, their related state income tax returns remain open. These returns have been open for varying periods, some exceeding ten years.
Currently the company is under audit by the U.S. Internal Revenue Service for the tax year ended December 31, 2011. To date, there have not been any identified issues. The company is also under audit by the State of New York for tax years 2002 through 2008. The State is claiming that prior to 2007 the company should have reported its returns as a combined report instead of as a separate entity as the company had filed. The company has reviewed the findings of the State and believes that it is more likely than not that the company will successfully sustain its separate company reporting and thus has not accrued any tax, interest or penalty exposure under the accounting for uncertain income tax position guidance.
Foreign Taxes
We pay foreign source withholding taxes on patent license royalties and state taxes when applicable. We apply foreign source withholding tax payments against our United States federal income tax obligations to the extent we have foreign source income to support these credits. In
2013
,
2012
and
2011
, we paid
$23.3 million
,
$3.6 million
and
$5.5 million
in foreign source withholding taxes, respectively, and applied these payments as credits against our United States federal tax obligation. We previously accrued approximately
$4.0 million
of the
2013
foreign source withholding payments and established a corresponding deferred tax asset representing the associated foreign tax credit that we expect to utilize to offset future U.S. federal income taxes. At
December 31, 2013
, we accrued
$7.1 million
of foreign source withholding taxes payable associated with expected royalty payments from licensees and recorded corresponding deferred tax assets related to the expected foreign tax credits that will result from these payments.
Between 1999 and 2005 we paid approximately
$29.3 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 United States federal income tax returns rather than take them as foreign tax credits. We elected this strategy because: a) we had no United States 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 United States cash tax obligations. At that time, we began to treat our foreign tax payments as foreign tax credits on our United States federal income tax return.
During fourth quarter 2009, we completed a study to assess the company’s ability to utilize foreign tax credit carryovers into the tax year 2006. As a result of the study, we amended our United States federal income tax returns for the periods 1999 — 2005 to reclassify
$29.3 million
of foreign tax payments we made during those periods from deductions to foreign tax credits. We also amended our federal tax returns for the periods 2006 - 2008 to utilize the resulting tax credits. When we completed the study, we established a basis to support amending the returns and estimated that the maximum incremental benefit would be
$19.1 million
.
We recognized a net benefit of
$16.4 million
after establishing a
$2.7 million
reserve for related tax contingencies. In 2011, we recorded an additional tax benefit of
$8.3 million
to eliminate this and other tax contingencies and recognize interest income on the associated refund.
Between 2006 and 2013, we paid approximately
$169.1 million
in foreign taxes for which we have claimed foreign tax credits against our U.S. tax obligations. It is possible that as a result of tax treaty procedures, the U.S. government may reach an agreement with the related foreign governments that will result in a partial refund of foreign taxes paid with a related reduction in our foreign tax credits. Due to both foreign currency fluctuations and differences in the interest rate charged by the U.S. government compared to the interest rates, if any, used by the foreign governments, any such agreement could result in interest expense and/or foreign currency gain or loss.
Repurchase of Common Stock
In March 2009, our Board of Directors authorized a
100.0 million
share repurchase program (the “2009 Repurchase Program”). The company repurchased shares under the 2009 Repurchase Program through pre-arranged trading plans and completed the program in second quarter 2012.
In May 2012, our Board of Directors authorized a new share repurchase program, which was then expanded in June 2012 to increase the amount of the program from $100.0 million to
$200.0 million
(the "2012 Repurchase Program"). The company may repurchase shares under the 2012 Repurchase Program through open market purchases, pre-arranged trading plans or privately negotiated purchases.
The table below summarizes share repurchases made under the 2009 and 2012 Repurchase Programs in 2013, 2012, and 2011, in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
2009 Repurchase Program
|
|
2012 Repurchase Program
|
|
Total Both Programs
|
# of Shares
|
Value
|
|
# of Shares
|
Value
|
|
# of Shares
|
Value
|
2013
|
—
|
|
$
|
—
|
|
|
0.9
|
|
$
|
29.1
|
|
|
0.9
|
|
$
|
29.1
|
|
2012
|
2.3
|
|
75.0
|
|
|
2.6
|
|
77.7
|
|
|
4.9
|
|
152.7
|
|
2011
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Prior to 2011
|
1.0
|
|
25.0
|
|
|
—
|
|
—
|
|
|
1.0
|
|
25.0
|
|
Total
|
3.3
|
|
$
|
100.0
|
|
|
3.5
|
|
$
|
106.8
|
|
|
6.8
|
|
$
|
206.8
|
|
From January 1, 2014 through February 23, 2014, we did not make any share repurchases under the 2012 Repurchase Program.
Dividends
Prior to 2011, we had not paid any cash dividends on our shares of common stock. In fourth quarter 2010, our Board of Directors approved the company’s initial dividend policy and declared the first quarterly cash dividend of
$0.10
per share. On December 5, 2012, we announced that our Board of Directors had declared a special cash dividend of
$1.50
per share on InterDigital common stock. The dividend was payable on December 28, 2012 to stockholders of record as of the close of business on December 17, 2012. Cash dividends on outstanding common stock declared in
2013
and
2012
were as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
Per Share
|
|
Total
|
|
Cumulative by Fiscal Year
|
First quarter
|
$
|
0.10
|
|
|
$
|
4,115
|
|
|
$
|
4,115
|
|
Second quarter
|
0.10
|
|
|
4,118
|
|
|
8,233
|
|
Third quarter
|
0.10
|
|
|
4,119
|
|
|
12,352
|
|
Fourth quarter
|
0.10
|
|
|
4,031
|
|
|
16,383
|
|
|
$
|
0.40
|
|
|
$
|
16,383
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
First quarter
|
$
|
0.10
|
|
|
$
|
4,469
|
|
|
$
|
4,469
|
|
Second quarter
|
0.10
|
|
|
4,348
|
|
|
8,817
|
|
Third quarter
|
0.10
|
|
|
4,095
|
|
|
12,912
|
|
Fourth quarter
|
1.60
|
|
|
65,643
|
|
|
78,555
|
|
|
$
|
1.90
|
|
|
$
|
78,555
|
|
|
|
We currently expect to continue to pay dividends comparable to our regular quarterly $0.10 cash dividends in the future; however, continued payment of cash dividends and changes in the company’s dividend policy will depend on the company’s earnings, financial condition, capital resources and capital requirements, alternative uses of capital, restrictions imposed by any existing debt, economic conditions and other factors considered relevant by our Board of Directors.
Common Stock Warrants
On March 29, 2011 and March 30, 2011, we entered into privately negotiated warrant transactions with Barclays Bank PLC through its agent, Barclays Capital Inc., whereby we sold to Barclays Bank PLC warrants to acquire, subject to customary anti-dilution adjustments, approximately
3.5 million
and approximately
0.5 million
shares of our common stock, respectively, at a strike price of
$64.0909
per share, also subject to adjustment, as updated. The warrants become exercisable in tranches starting in June 2016. In consideration for the warrants issued on March 29, 2011 and March 30, 2011, the company received
$27.6 million
and
$4.1 million
, respectively, on April 4, 2011.
|
|
13.
|
SELECTED QUARTERLY RESULTS (UNAUDITED)
|
The table below presents quarterly data for the years ended
December 31, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
(In thousands, except per share amounts, unaudited)
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (a)
|
$
|
47,363
|
|
|
$
|
67,692
|
|
|
$
|
110,623
|
|
|
$
|
99,683
|
|
Net income applicable to InterDigital, Inc.'s common shareholders (b)
|
$
|
(12,269
|
)
|
|
$
|
9,238
|
|
|
$
|
26,660
|
|
|
$
|
14,536
|
|
Net income per common share — basic
|
$
|
(0.30
|
)
|
|
$
|
0.22
|
|
|
$
|
0.65
|
|
|
$
|
0.35
|
|
Net income per common share — diluted
|
$
|
(0.30
|
)
|
|
$
|
0.22
|
|
|
$
|
0.64
|
|
|
$
|
0.35
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (c)
|
$
|
69,305
|
|
|
$
|
71,871
|
|
|
$
|
434,010
|
|
|
$
|
87,877
|
|
Net income applicable to InterDigital, Inc.'s common shareholders (d)
|
$
|
10,930
|
|
|
$
|
9,673
|
|
|
$
|
235,669
|
|
|
$
|
15,532
|
|
Net income per common share — basic
|
$
|
0.24
|
|
|
$
|
0.22
|
|
|
$
|
5.61
|
|
|
$
|
0.38
|
|
Net income per common share — diluted
|
$
|
0.24
|
|
|
$
|
0.22
|
|
|
$
|
5.56
|
|
|
$
|
0.38
|
|
(a) In second quarter 2013, we recognized
$23.5 million
of past patent royalties as a result of an arbitration award. In third quarter 2013, we recognized
$51.6 million
of revenue that had been deferred pending the resolution of an arbitration
relating to one of our technology solutions agreements. In fourth quarter 2013, we recognized
$36.4 million
of past patent royalties primarily as a result of an arbitration award.
(b) In first quarter 2013, we incurred a repositioning charge of
$1.5 million
related to our remaining VERP participants. In first quarter 2013 and fourth quarter 2013, we recorded charges of
$6.7 million
and
$15.0 million
, respectively, related to impairments on our investment in other entities.
(c) In third quarter 2012, our revenues included
$375.0 million
related to a patent sale to Intel Corporation.
(d) In third quarter 2012, we recognized
$16.5 million
of expense associated with the Intel patent sale. In fourth quarter 2012, we incurred
$12.5 million
of repositioning charges. In fourth quarter 2012, our income tax provision included a benefit of
$4.5 million
related to the release of valuation allowances on deferred tax assets, which we expect to utilize in future periods.
14. VARIABLE INTEREST ENTITIES
Convida Wireless
On December 21, 2012, we formed a joint venture with Sony Corporation of America to combine Sony's consumer electronics expertise with our wireless machine-to-machine ("M2M") and bandwidth management research. The joint venture, called Convida Wireless, will focus on driving new research in M2M wireless communications and other connectivity areas. Based on the terms of the agreement, the parties will contribute funding and resources for additional M2M research and platform development, which we will perform. Stephens Capital Partners LLC ("Stephens"), the principal investing affiliate of Stephens Inc., is a minority investor in Convida Wireless.
Our agreement with Sony is a multiple-element arrangement that also includes a three-year license to our patents for Sony's sale of 3G and 4G products, effective January 1, 2013, and an amount for past patent royalties.
Convida Wireless is a variable interest entity. Based on our provision of M2M research and platform development services to Convida Wireless, we have determined that we are the primary beneficiary for accounting purposes and must consolidate Convida Wireless. For the
twelve months ended
December 31,
2013, we have allocated approximately
$2.5 million
of Convida Wireless's net loss for the same period to noncontrolling interests held by other parties.
The assets and liabilities of Convida Wireless that are contained within our Consolidated Balance Sheet as of December 31, 2013 are as follows (in thousands):
|
|
|
|
|
|
ASSETS
|
|
DECEMBER 31, 2013
|
Cash
|
|
$
|
8,905
|
|
Patents, Net
|
|
151
|
|
|
|
|
LIABILITIES
|
|
Other Accrued Expenses
|
|
$
|
95
|
|
Signal Trust for Wireless Innovation
On October 17, 2013, we announced the establishment of the Signal Trust for Wireless Innovation, which will monetize a large InterDigital patent portfolio related to cellular infrastructure.
The more than 500 patents and patent applications being transferred to the Signal Trust focus primarily on 3G and LTE technologies, and were developed by InterDigital's engineers and researchers over more than a decade, with a number of the innovations contributed to the worldwide standards process.
InterDigital has committed funding to the Signal Trust to help ensure its successful launch. The company will also be the primary beneficiary of the Signal Trust. The distributions from the Signal Trust will support continued research related to cellular wireless technologies. A small portion of the proceeds from the Signal Trust will be used to fund, through the newly formed Signal Foundation for Wireless Innovation, scholarly analysis of intellectual property rights and the technological, commercial and creative innovations they facilitate.
The Signal Trust is a variable interest entity. Based on the terms of the Trust Agreement, we have determined that we are the primary beneficiary for accounting purposes and must consolidate the Signal Trust. The impact of the consolidation of Signal Trust on our financial statements was immaterial as of December 31, 2013.