XNAS:IDCC InterDigital Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q

þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended June 30, 2012
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from                      to                     
Commission File Number 1-33579
INTERDIGITAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
PENNSYLVANIA
(State or Other Jurisdiction of
Incorporation or Organization)
 
23-1882087
(I.R.S. Employer
Identification No.)
781 Third Avenue, King of Prussia, PA 19406-1409
(Address of Principal Executive Offices and Zip Code)
(610) 878-7800
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer R
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, par value $0.01 per share
42,634,466
Title of Class
Outstanding at July 23, 2012
 



INDEX

 
 
 
PAGES
 
 
EX-10.2
 
EX-10.3
 
EX-31.1
 
EX-31.2
 
EX-32.1
 
EX-32.2
 
EX-101 INSTANCE DOCUMENT
 
EX-101 SCHEMA DOCUMENT
 
EX-101 CALCULATION LINKBASE DOCUMENT
 
EX-101 LABELS LINKBASE DOCUMENT
 
EX-101 PRESENTATION LINKBASE DOCUMENT
 
InterDigital® is a registered trademark and SlimChip is a trademark of InterDigital, Inc. All other trademarks, service marks and/or trade names appearing in this Quarterly Report on Form 10-Q are the property of their respective holders.




PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

INTERDIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
 
JUNE 30,
2012
 
DECEMBER 31,
2011
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
168,985

 
$
342,211

Short-term investments
355,134

 
335,783

Accounts receivable, less allowances of $1,750
38,833

 
28,079

Deferred tax assets
50,950

 
53,990

Prepaid and other current assets
8,624

 
8,824

Total current assets
622,526

 
768,887

PROPERTY AND EQUIPMENT, NET
6,952

 
7,997

PATENTS, NET
153,980

 
137,963

DEFERRED TAX ASSETS
49,837

 
54,110

OTHER NON-CURRENT ASSETS
26,970

 
28,011

 
237,739

 
228,081

TOTAL ASSETS
$
860,265

 
$
996,968

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Current portion of long-term debt
$

 
$
180

Accounts payable
7,367

 
7,110

Accrued compensation and related expenses
17,420

 
14,129

Deferred revenue
117,877

 
134,087

Taxes payable
4,566

 
3,265

Dividends payable
4,348

 
4,570

Other accrued expenses
13,849

 
9,812

Total current liabilities
165,427

 
173,153

LONG-TERM DEBT
196,392

 
192,529

LONG-TERM DEFERRED REVENUE
87,417

 
153,953

OTHER LONG-TERM LIABILITIES
2,922

 
5,651

 
 
 
 
TOTAL LIABILITIES
452,158

 
525,286

 
 
 
 
COMMITMENTS AND CONTINGENCIES

 

 
 
 
 
SHAREHOLDERS’ EQUITY:
 
 
 
Preferred Stock, $0.10 par value, 14,399 shares authorized, 0 shares issued and outstanding

 

Common Stock, $0.01 par value, 100,000 shares authorized, 69,341 and 69,118 shares issued and 43,384 and 45,548 shares outstanding
693

 
691

Additional paid-in capital
575,681

 
573,950

Retained earnings
478,427

 
466,727

Accumulated other comprehensive income (loss)
298

 
(439
)
 
1,055,099

 
1,040,929

Treasury stock, 25,957 and 23,570 shares of common held at cost
646,992

 
569,247

Total shareholders’ equity
408,107

 
471,682

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
860,265

 
$
996,968


The accompanying notes are an integral part of these statements.

3


INTERDIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)

 
FOR THE THREE MONTHS
ENDED JUNE 30,
 
FOR THE SIX MONTHS
ENDED JUNE 30,
 
2012
 
2011
 
2012
 
2011
REVENUES:
 
 
 
 
 
 
 
Patent licensing royalties
$
62,344

 
$
68,551

 
$
130,926

 
$
145,513

Patent sales
9,000

 

 
9,000

 

Technology solutions
527

 
1,322

 
1,250

 
2,818

 
$
71,871

 
$
69,873

 
$
141,176

 
$
148,331

 
 
 
 
 
 
 
 
OPERATING EXPENSES:
 
 
 
 
 
 
 
Patent administration and licensing
26,200

 
16,756

 
49,428

 
32,704

Development
17,177

 
15,763

 
34,666

 
33,187

Selling, general and administrative
10,920

 
7,547

 
20,103

 
15,327

 
54,297

 
40,066

 
104,197

 
81,218

 
 
 
 
 
 
 
 
Income from operations
17,574

 
29,807

 
36,979

 
67,113

 
 
 
 
 
 
 
 
OTHER EXPENSE
(2,484
)
 
(3,381
)
 
(5,218
)
 
(4,323
)
Income before income taxes
15,090

 
26,426

 
31,761

 
62,790

INCOME TAX PROVISION
(5,417
)
 
(9,270
)
 
(11,158
)
 
(22,295
)
NET INCOME
$
9,673

 
$
17,156

 
$
20,603

 
$
40,495

NET INCOME PER COMMON SHARE — BASIC
$
0.22

 
$
0.38

 
$
0.46

 
$
0.89

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING — BASIC
43,876

 
45,369

 
44,639

 
45,338

NET INCOME PER COMMON SHARE — DILUTED
$
0.22

 
$
0.37

 
$
0.46

 
$
0.88

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING — DILUTED
44,139

 
45,843

 
44,946

 
45,858

CASH DIVIDENDS DECLARED PER COMMON SHARE
$
0.10

 
$
0.10

 
$
0.20

 
$
0.20


The accompanying notes are an integral part of these statements.

4


INTERDIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)

 
FOR THE THREE MONTHS
ENDED JUNE 30,
 
FOR THE SIX MONTHS
ENDED JUNE 30,
 
2012
 
2011
 
2012
 
2011
Net income
$
9,673

 
$
17,156

 
$
20,603

 
$
40,495

Unrealized gain (loss) investments, net of tax

 
(79
)
 
737

 
(67
)
Total comprehensive income
$
9,673

 
$
17,077

 
$
21,340

 
$
40,428


The accompanying notes are an integral part of these statements.


5



INTERDIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
FOR THE SIX MONTHS
ENDED JUNE 30,
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
20,603

 
$
40,495

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation and amortization
12,586

 
11,751

Accretion of debt discount
3,863

 
1,834

Amortization of financing costs
652

 
326

Deferred revenue recognized
(107,316
)
 
(118,934
)
Increase in deferred revenue
24,570

 
35,469

Deferred income taxes
7,313

 
(1,823
)
Share-based compensation
3,135

 
3,367

Impairment of long-term investment

 
1,616

Other
849

 
(254
)
(Increase) decrease in assets:
 
 
 
Receivables
(10,754
)
 
3,898

Deferred charges
247

 
173

Other current assets
(215
)
 
(661
)
Increase (decrease) in liabilities:
 
 
 
Accounts payable
906

 
(2,104
)
Accrued compensation
(3,107
)
 
(10,231
)
Accrued taxes payable and other tax contingencies
1,301

 
(51
)
Other accrued expenses
4,037

 
3,872

Net cash used in operating activities
(41,330
)
 
(31,257
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of short-term investments
(211,271
)
 
(362,285
)
Sales of short-term investments
193,055

 
367,142

Purchases of property and equipment
(1,030
)
 
(1,826
)
Capitalized patent costs
(14,865
)
 
(13,126
)
Acquisition of patents
(13,000
)
 

Net cash used in investing activities
(47,111
)
 
(10,095
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net proceeds from exercise of stock options
590

 
2,952

Payments on long-term debt, including capital lease obligations
(180
)
 
(141
)
Proceeds from issuance of convertible senior notes

 
230,000

Purchase of convertible bond hedge

 
(42,665
)
Proceeds from issuance of warrants

 
31,740

Payments of debt issuance costs

 
(8,015
)
Dividends paid
(9,040
)
 
(9,062
)
Tax benefit from share-based compensation
1,590

 
681

Repurchase of common stock
(77,745
)
 

Net cash (used in) provided by financing activities
(84,785
)
 
205,490

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(173,226
)
 
164,138

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
342,211

 
215,451

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
168,985

 
$
379,589

The accompanying notes are an integral part of these statements.

6


INTERDIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(unaudited)

1. BASIS OF PRESENTATION:
In the opinion of management, the accompanying unaudited, condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial position of InterDigital, Inc. (individually and/or collectively with its subsidiaries referred to as “InterDigital,” the “Company,” “we,” “us” or “our,” unless otherwise indicated) as of June 30, 2012, and the results of our operations for the three and six months ended June 30, 2012 and 2011 and our cash flows for the six months ended June 30, 2012 and 2011. The accompanying unaudited, condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, accordingly, do not include all of the detailed schedules, information and notes necessary to state fairly the financial condition, results of operations and cash flows in conformity with generally accepted accounting principles (“GAAP”). The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP for year-end financial statements. Therefore, these financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (our “2011 Form 10-K”) as filed with the Securities and Exchange Commission (“SEC”) on February 27, 2012. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year. We have one reportable segment.
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 and disclosures of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Change in Presentation
Due to our recent patent sales, we have expanded the presentation of revenue on our income statement to separately state revenue generated from patent licensing royalties, patent sales, and technology solutions.
Change in Accounting Policies
Except as outlined below, there have been no material changes or updates in our existing accounting policies from the disclosures included in our 2011 Form 10-K.
Revenue Recognition
During the current year, 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 collectability is reasonably assured. These requirements are generally fulfilled upon closing of the patent sale transaction.
New Accounting Guidance
Accounting Standards Updates: Fair Value Measurements: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS
In May 2011, the FASB issued authoritative guidance that is more closely aligned with the fair value measurement and disclosure guidance issued by the International Accounting Standards Board ("IASB"). The issuance of this standard results in global fair value measurement and disclosure guidance that minimizes the differences between U.S. GAAP and International Financial Reporting Standards. Many of the changes in the final standard represent clarifications to existing guidance, while some changes related to the valuation premise and the application of premiums and discounts and new required disclosures are more significant. This guidance is effective for interim and annual periods beginning after December 15, 2011. We adopted this guidance effective January 1, 2012; however, the adoption of this guidance does not have a significant impact on the Company’s financial statements or related disclosures.
Accounting Standards Updates: Presentation of Comprehensive Income
In June 2011, the FASB issued authoritative guidance requiring most entities to present items of net income and other comprehensive income either in one continuous statement, referred to as the statement of comprehensive income, or in two

7


separate, but consecutive, statements of net income and other comprehensive income. The option to present items of other comprehensive income in the statement of changes in equity was eliminated. This guidance is effective for interim and annual periods beginning after December 15, 2011. We adopted this guidance effective January 1, 2012. We have chosen to present items of net income and other comprehensive income in two separate but consecutive statements.
On December 23, 2011, the FASB issued an amendment to the new standard on comprehensive income to defer the requirement to measure and present reclassification adjustments from accumulated other comprehensive income to net income by income statement line item in net income and also in other comprehensive income. The deferred requirement would have called for the measurement and presentation in net income of items previously recognized in other comprehensive income.     
2. SIGNIFICANT AGREEMENTS:

Sale of Patents to Intel Corporation

On June 18, 2012, we announced that certain of our subsidiaries have signed a definitive agreement to sell approximately 1,700 patents and patent applications, including approximately 160 issued U.S. patents and approximately 40 U.S. patent applications, to Intel Corporation for $375.0 million The agreement involves patents primarily related to 3G, LTE and 802.11 technologies.  We expect that the transaction will be completed in third quarter 2012, subject to customary closing conditions and any required regulatory approvals.  The accounting for the transaction is still being finalized.  However, we expect that a significant portion of the gross proceeds from the transaction will be recognized as revenue in the period in which the transaction closes.
3. INCOME TAXES:
In first half 2012, our effective tax rate was approximately 35.1% based on the statutory federal tax rate net of discrete federal and foreign taxes. During first half 2011, our effective tax rate was approximately 35.5% based on the statutory federal tax rate net of discrete foreign taxes.
During first half 2012 and 2011, we paid approximately $1.3 million and $4.8 million, respectively, of foreign source withholding tax. We previously accrued approximately $0.8 million of the first half 2012 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.
4. NET INCOME PER 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 tables reconcile the numerator and the denominator of the basic and diluted net income per share computation (in thousands, except for per share data):
 
For the Three Months Ended June 30,
 
2012
 
2011
 
Basic
 
Diluted
 
Basic
 
Diluted
Numerator:
 
 
 
 
 
 
 
Net income applicable to common shareholders
$
9,673

 
$
9,673

 
$
17,156

 
$
17,156

Denominator:

 

 
 
 
 
Weighted-average shares outstanding: Basic
43,876

 
43,876

 
45,369

 
45,369

Dilutive effect of stock options, RSUs, convertible securities, and warrants

 
263

 
 
 
474

Weighted-average shares outstanding: Diluted

 
44,139

 
 
 
45,843

Earnings Per Share:

 

 

 

Net income: Basic
$
0.22

 
$
0.22

 
$
0.38

 
$
0.38

Dilutive effect of stock options, RSUs, convertible securities, and warrants
 
 

 
 
 
(0.01
)
Net income: Diluted
 
 
$
0.22

 
 
 
$
0.37



8


 
For the Six Months Ended June 30,
 
2012
 
2011
 
Basic
 
Diluted
 
Basic
 
Diluted
Numerator:
 
 
 
 
 
 
 
Net income applicable to common shareholders
$
20,603

 
$
20,603

 
$
40,495

 
$
40,495

Denominator:
 
 
 
 
 
 
 
Weighted-average shares outstanding: Basic
44,639

 
44,639

 
45,338

 
45,338

Dilutive effect of stock options, RSUs, convertible securities, and warrants
 
 
307

 
 
 
520

Weighted-average shares outstanding: Diluted
 
 
44,946

 
 
 
45,858

Earnings Per Share:
 
 
 
 
 
 
 
Net income: Basic
$
0.46

 
$
0.46

 
$
0.89

 
$
0.89

Dilutive effect of stock options, RSUs, convertible securities, and warrants
 
 

 
 
 
(0.01
)
Net income: Diluted
 
 
$
0.46

 
 
 
$
0.88

For both three months and six months ended June 30, 2012 and June 30, 2011, options to purchase zero shares of common stock were excluded from the computation of diluted earnings per share because the exercise prices of these options were greater than the weighted-average market price of our common stock during these periods and, therefore, their effect would have been anti-dilutive.
For both three months and six months ended June 30, 2012 and June 30, 2011, 4.0 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 both three months and six months ended June 30, 2012 and June 30, 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. 
5. LITIGATION AND LEGAL PROCEEDINGS
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 Community (the "TFEU").  Huawei is claiming that InterDigital has a dominant position with respect to the alleged market for the licensing of its 3G standard essential patents. Huawei further claims that InterDigital is 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 the terms of Article 102 of the TFEU. The European Commission has not yet indicated whether or not it will initiate proceedings against InterDigital as a result of the complaint.
LG Arbitration
On March 19, 2012, LG Electronics, Inc. (“LG” for the purposes of the discussion of this matter) filed a demand for arbitration against InterDigital's wholly owned subsidiaries InterDigital Technology Corporation, IPR Licensing, Inc., and InterDigital Communications, LLC (collectively, “InterDigital”) with the American Arbitration Association's International Centre for Dispute Resolution, 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 the U.S. International Trade Commission (“USITC” or the “Commission”) proceeding initiated by InterDigital in the second half of 2011 (Investigation No. 337-TA-800, discussed below).

Huawei China Proceedings
On February 21, 2012, InterDigital was served with two complaints filed by Huawei Technologies Co., Ltd. (“Huawei Technologies”) 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 (collectively, “InterDigital” for purposes of the discussion of this matter).  This first complaint alleges that InterDigital had 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 Technologies seeks relief in the amount of 20.0 million RMB

9


(approximately $3.2 million based on the current exchange rate), 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 InterDigital's wholly owned subsidiaries InterDigital Technology Corporation, InterDigital Communications, LLC, InterDigital Patent Holdings, Inc., and IPR Licensing, Inc. (collectively, “InterDigital” for purposes of the discussion of this matter).  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 fair, reasonable, and non-discriminatory (“FRAND”) terms; and that InterDigital has failed to negotiate on FRAND terms with Huawei Technologies.  Huawei Technologies is asking the court to determine the FRAND rate for licensing essential Chinese patents to Huawei Technologies and also seeks compensation for its costs associated with this matter. 
On March 22, 2012, InterDigital filed jurisdictional challenges to both of these complaints. On April 28, 2012, the Shenzhen Intermediate People's Court denied the jurisdictional challenges in both actions. On May 28, 2012, InterDigital appealed the rulings to The Higher People's Court of Guangdong Province.
Huawei Delaware State Court Proceeding
On October 25, 2011, Huawei Technologies Co., Ltd. and FutureWei Technologies, Inc. d/b/a Huawei Technologies (USA) (collectively, “Huawei”) filed a complaint (“Complaint”) with the Court of Chancery of the State of Delaware (“Court of Chancery”) against InterDigital's wholly owned subsidiaries InterDigital Technology Corporation, IPR Licensing, Inc., and InterDigital Communications, LLC (collectively, “InterDigital”). The Complaint asserts causes of action for breach of contract, equitable estoppel, waiver, and declaratory judgment. The Complaint seeks to enforce alleged contractual commitments made by InterDigital to license on FRAND terms patents Huawei claims InterDigital has declared essential to various 3G wireless standards. The Complaint further requests a declaratory judgment that InterDigital has not offered licenses on FRAND terms to such patents, a declaratory judgment that InterDigital is equitably estopped and has waived its right to seek injunctive or exclusionary relief for Huawei's alleged infringement of such patents, including but not limited to such relief as sought in InterDigital's USITC proceeding against Huawei, and a declaratory judgment determining an appropriate FRAND royalty for InterDigital's United States patents that Huawei claims have been declared essential to a standard used by Huawei's accused products. On the same date that the Complaint was filed, Huawei filed a motion seeking expedited proceedings.
On November 14, 2011, InterDigital filed an opposition to Huawei's motion to expedite proceedings and filed a motion to stay or dismiss the proceedings. On November 16, 2011, the Court of Chancery denied Huawei's motion to expedite and requested a status update within 30 days. On December 16, 2011, InterDigital and Huawei submitted separate status reports to the Court of Chancery on the parallel proceedings in the USITC and the District of Delaware (discussed below).
On March 22, 2012, following the March 2, 2012 denial of Huawei's motion to partially lift the stay in the Delaware District Court proceeding (discussed below), Huawei filed a renewed motion for expedited proceedings. On April 5, 2012, InterDigital filed its opposition to Huawei's renewed motion for expedited proceedings and filed a renewed motion to stay or dismiss. On April 12, 2012, Huawei filed a reply in support of its renewed motion for expedited proceedings. On June 11, 2012, the Delaware Chancery Court held a hearing on Huawei's renewed motion for expedited proceedings and InterDigital's renewed motion to stay or dismiss. At the hearing, the Delaware Chancery Court dismissed the case without prejudice.
Nokia, Huawei and ZTE USITC Proceeding (337-TA-800) and Related Delaware District Court Proceeding
On July 26, 2011, InterDigital's wholly owned subsidiaries InterDigital Communications, LLC, InterDigital Technology Corporation and IPR Licensing, Inc. (collectively, the “Company,” “InterDigital,” “we,” or “our” for the purposes of the discussion of this matter) filed a complaint with the USITC against Nokia Corporation and Nokia Inc. (collectively, “Nokia”), Huawei Technologies Co., Ltd. and FutureWei Technologies, Inc. d/b/a Huawei Technologies (USA) (collectively, “Huawei”) and ZTE Corporation and ZTE (USA) Inc. (collectively, “ZTE” and together with Nokia and Huawei, “Respondents”), alleging 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 “Asserted 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 U.S. any infringing 3G wireless devices (and components) that are imported by or on behalf of 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 August 31, 2011, the USITC formally instituted an investigation against Respondents (337-TA-800). 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. (collectively, “LG”) as Respondents to the Company's USITC complaint and the USITC's investigation, and that the USITC add an additional patent to the USITC complaint and investigation as well. On December 5, 2011, the Administrative Law Judge ("ALJ") granted this motion, and on December 21, 2011, the Commission

10


determined not to review the ALJ's determination, thus adding the LG entities as Respondents and including allegations of infringement of the additional patent.
On September 29, 2011, Nokia filed a motion to terminate the USITC investigation, arguing that InterDigital's alleged commitment to the European Telecommunications Standards Institute (“ETSI”) regarding the licensing of essential patents on FRAND terms allegedly resulted in InterDigital's waiver of the right to seek exclusionary relief at the USITC. On October 19, 2011, InterDigital filed its opposition to the motion to terminate. On May 31, 2012, the ALJ denied Nokia's motion to terminate. On June 11, 2012, Nokia requested that the order denying its motion to terminate be certified for interlocutory review. On June 21, 2012, InterDigital opposed this request. On June 28, 2012, Nokia sought leave to file a supplement to its request for interlocutory review; InterDigital opposed this request on July 6, 2012.
On October 6, 2011, Nokia filed a motion to stay the USITC investigation based on its allegations that InterDigital had violated the protective order in the prior USITC investigation between InterDigital and Nokia (described below). On October 21, 2011, InterDigital filed its opposition to Nokia's motion to stay. On December 22, 2011, the ALJ denied Nokia's motion to stay.
On January 6, 2012, the ALJ granted the parties' motion to extend the target date for completion of the investigation by four months from February 28, 2013 to June 28, 2013. On March 23, 2012, the ALJ issued a new procedural schedule for the USITC investigation, setting a trial date of October 22 to November 2, 2012. On January 20, 2012, LG filed a motion to terminate the USITC investigation as it relates to the LG entities alleging there is an arbitrable dispute. InterDigital filed its response opposing LG's motion on February 6, 2012. The ALJ granted LG's motion on June 4, 2012. On June 11, 2012, InterDigital petitioned for review of this order. On July 6, 2012, the Commission determined not to review the ALJ's order and the investigation was terminated as to LG. InterDigital has 60 days from issuance of the Commissions's July 6, 2012 notice to appeal if it chooses to do so. 
On the same date that InterDigital filed the present USITC action (referenced above), we filed a parallel action in the United States District Court for the District of Delaware (the “Delaware District Court”) against the Respondents alleging infringement of the same Asserted Patents identified in the USITC complaint. 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 the investigation referenced above, 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 the USITC complaint referenced above. On October 10, 2011, the Company filed a statement of non-opposition to the motion to stay. On October 11, 2011, the Delaware District Court granted defendants' motion to stay.
On November 30, 2011, following the November 16, 2011 denial of Huawei's motion for expedited proceedings in the Delaware State Court proceeding (discussed above), Huawei filed in the Delaware District Court action a motion to partially lift the stay to adjudicate certain proposed counterclaims premised on InterDigital's purported breach of certain FRAND obligations, while the rest of the case remains stayed. On December 16, 2011, ZTE (USA) Inc. (“ZTE USA”) filed a pleading joining in Huawei's motion, and seeking to partially lift the stay so that ZTE USA's similar FRAND-based counterclaims can be adjudicated. On December 19, 2011, InterDigital filed a brief responding to Huawei's motion and seeking a discretionary stay with respect to Huawei's and ZTE USA's proposed counterclaims. On December 30, 2011, Huawei filed its reply brief in support of its motion to partially lift the stay. On January 9, 2012, InterDigital filed its reply brief in support of its request for a discretionary stay of Huawei's and ZTE USA's proposed counterclaims.
On March 2, 2012, the Court denied Huawei's and ZTE USA's request to partially lift the stay and granted InterDigital's request for a discretionary stay with respect to Huawei's proposed FRAND-based counterclaims.
On March 21, 2012, InterDigital filed an unopposed motion requesting that the USITC add newly-formed entity Huawei Device USA, Inc. of Plano, Texas as a Respondent to InterDigital's USITC complaint and the USITC's investigation. 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 Respondent.
InterDigital has filed three motions for summary determination and Nokia has filed two motions for summary determination.  These matters have been briefed and remain pending before the ALJ.  On May 17, 2012, InterDigital filed a motion for summary determination that the asserted claims of InterDigital's patents are not invalid in view of the Respondents' failure to adequately disclose their invalidity contentions.  Respondents jointly opposed this motion on May 29, 2012. 

11


InterDigital submitted a reply in further support of its motion on June 26, 2012.  InterDigital filed a motion for summary determination on May 23, 2012 that certain Nokia devices infringe claims 1 and 3 of InterDigital's U.S. Patent No. 7,970,127 (“the '127 patent”), and a motion for summary determination that certain Nokia devices infringe claims 1 and 2 of InterDigital's U.S. Patent No. 8,009,636.  Nokia opposed both of these motions on June 11, 2012, and InterDigital submitted replies in further support of these motions on June 28, 2012, and July 11, 2012, respectively.  On July 9, 2012, Nokia also submitted a sur-reply in further opposition to InterDigital's motion for summary determination of infringement of the '127 patent.
On June 20, 2012, Nokia filed a conditional motion for summary determination that the asserted claims of InterDigital's U.S. Patent No. 7,536,013 and the '127 patent are not infringed by certain Nokia devices.  InterDigital opposed this motion on July 2, 2012.  On July 13, 2012, Nokia submitted a reply in further support of this motion.  Finally, on June 22, 2012, Nokia filed a conditional motion for summary determination that the asserted claims of InterDigital's U.S. Patent No. 7,616,970 are invalid.  InterDigital opposed this motion on July 12, 2012.  Nokia may seek to submit a reply in further support of this motion.
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.  The USITC has 30 days from July 24, 2012 to determine whether to review the ALJ's Initial Determination granting the motion.
Prior Nokia USITC Proceeding (337-TA-613), Related Delaware District Court and Southern District of New York Proceedings and Federal Circuit Appeal
In August 2007, InterDigital filed a USITC complaint against Nokia Corporation and Nokia, Inc. (collectively, “Nokia”) alleging 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 fourth patent, respectively, were added to our 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. Our complaint also seeks a cease-and-desist order to bar further sales of infringing Nokia products that have already been imported into the United States.
In addition, on the same date as our filing of the USITC action referenced above, we also filed a complaint in the Delaware District Court alleging that Nokia's 3G mobile handsets and components infringe the same two InterDigital patents identified in the original 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. Nokia, joined by Samsung Electronics Co., Ltd. (“Samsung”), moved to consolidate the Nokia USITC proceeding with an investigation we had earlier initiated against Samsung in the USITC. On October 24, 2007, the Honorable Paul J. Luckern, the Administrative Law Judge overseeing the two USITC proceedings against Samsung and Nokia, respectively, issued an order to consolidate the two pending investigations. Pursuant to the order, the schedules for both investigations were revised to consolidate proceedings and set a unified evidentiary hearing on April 21-28, 2008, the filing of a single initial determination by Judge Luckern by July 11, 2008, and a target date for the consolidated investigations of November 12, 2008, by which date the USITC would issue its final determination (the “Target Date”).
On December 4, 2007, Nokia moved for an order terminating or, alternatively, staying the USITC investigation as to Nokia, on the ground that Nokia and InterDigital must first arbitrate a dispute as to whether Nokia is licensed under the patents asserted by InterDigital against Nokia in the USITC investigation. On January 8, 2008, Judge Luckern issued an order denying Nokia's motion and holding that Nokia has waived its arbitration defense by instituting and participating in the investigation and other legal proceedings. On February 13, 2008, Nokia filed an action in the U.S. District Court for the Southern District of New York (the “Southern District Action”), seeking to preliminarily enjoin InterDigital from proceeding with the USITC investigation with respect to Nokia, in spite of Judge Luckern's ruling denying Nokia's motion to terminate the USITC investigation. Nokia raised in this preliminary injunction action the same arguments it raised in its motion to terminate the USITC investigation, namely that InterDigital allegedly must first arbitrate its alleged license dispute with Nokia and that Nokia has not waived arbitration of this defense. In the Southern District Action, Nokia also sought to compel InterDigital to arbitrate its alleged license dispute with Nokia and, in the alternative, sought a determination by the District Court that Nokia is licensed under the patents asserted by InterDigital against Nokia in the USITC investigation. On March 7, 2008, InterDigital filed a motion to dismiss Nokia's claim in the alternative that Nokia is licensed under the patents asserted by InterDigital against Nokia in the USITC investigation.

12


On February 8, 2008, Nokia filed a motion for summary determination in the USITC that InterDigital cannot show that a domestic industry exists in the United States as required to obtain relief. Samsung joined this motion. InterDigital opposed this motion. On February 14, 2008, InterDigital filed a motion for summary determination that InterDigital satisfies the domestic industry requirement based on its licensing activities. On February 26, 2008, InterDigital filed a motion for summary determination that it has separately satisfied the so-called “economic prong” for establishing that a domestic industry exists based on InterDigital's chipset product that practices the asserted patents. Samsung and Nokia opposed these motions. On March 17, 2008, Samsung and Nokia filed a motion to strike any evidence concerning InterDigital's product and to preclude InterDigital from introducing any such evidence in relation to domestic industry at the evidentiary hearing. On March 26, 2008, the Administrative Law Judge granted InterDigital's motion for summary determination that it has satisfied the so-called “economic prong” for establishing that a domestic industry exists based on InterDigital's chipset product that practices the asserted patents and denied Samsung's motion to strike and preclude introduction of evidence concerning InterDigital's domestic industry product.
On March 17, 2008, Nokia and Samsung jointly moved for summary determination that U.S. Patent No. 6,693,579, which was asserted against both Samsung and Nokia, is invalid. InterDigital opposed this motion. On April 14, 2008, the Administrative Law Judge denied Nokia's and Samsung's joint motion for summary determination that the '579 patent is invalid.
On March 20, 2008, the U.S. District Court for the Southern District of New York decided that Nokia is likely to prevail on the issue of whether Nokia's alleged entitlement to a license is arbitrable. The Court did not consider or rule on whether Nokia is entitled to such a license. As a result, the Court entered a preliminary injunction requiring InterDigital to participate in arbitration of the license issue and requiring InterDigital to cease participation in the USITC proceeding by April 11, 2008, but only with respect to Nokia. The Court ordered Nokia to post a $500,000 bond by March 28, 2008, which Nokia did. InterDigital promptly filed a request for a stay of the preliminary injunction and for an expedited appeal with the U.S. Court of Appeals for the Federal Circuit, which transferred the appeal to the U.S. Court of Appeals for the Second Circuit. The preliminary injunction became effective on April 11, 2008, and, in accordance with the Court's order, InterDigital filed a motion with the Administrative Law Judge to stay the USITC proceeding against Nokia pending InterDigital's appeal of the District Court's decision or, if that appeal were unsuccessful, pending the Nokia TDD Arbitration (described below). On April 14, 2008, the Administrative Law Judge ordered that the date for the commencement of the evidentiary hearing, originally scheduled for April 21, 2008, be suspended until further notice from the Administrative Law Judge. The Administrative Law Judge did not at that point change the scheduled date of July 11, 2008 for his initial determination in the investigation or the scheduled Target Date of November 12, 2008 for a decision by the USITC. InterDigital's motion for a stay of the preliminary injunction and for an expedited appeal was considered by a panel of the Second Circuit on April 15, 2008. On April 16, 2008, the Second Circuit denied the motion for stay but set an expedited briefing schedule for resolving InterDigital's appeal on the merits of whether the District Court's order granting the preliminary injunction should be reversed.
On April 17, 2008, InterDigital filed a motion with the USITC to separate the consolidated investigations against Nokia and Samsung in order for the investigation to continue against Samsung pending the expedited appeal or, if the appeal is unsuccessful, pending the Nokia TDD Arbitration. Samsung and Nokia opposed InterDigital's motion. On May 16, 2008, the Administrative Law Judge deconsolidated the investigations against Samsung and Nokia and set an evidentiary hearing date in the investigation against Samsung (337-TA-601) to begin on July 8, 2008.
On May 20, 2008, the Administrative Law Judge denied without prejudice all pending motions in the consolidated investigation (337-TA-613).
On June 17, 2008, a panel of the U.S. Court of Appeals for the Second Circuit heard argument on InterDigital's appeal from the order of the U.S. District Court for the Southern District of New York preliminarily enjoining InterDigital from proceeding against Nokia in the consolidated investigation. On July 31, 2008, the Second Circuit reversed the preliminary injunction, finding that Nokia's litigation conduct resulted in a waiver of any right to arbitrate its license dispute. InterDigital promptly notified the Administrative Law Judge in the Nokia investigation (337-TA-613) of the Second Circuit's decision. On August 14, 2008, Nokia filed a petition for rehearing and petition for rehearing en banc of the Second Circuit's decision, and on September 15, 2008, the Second Circuit denied Nokia's petitions. The mandate from the Second Circuit issued to the Southern District of New York on September 22, 2008. Notwithstanding the Second Circuit's decision, on October 17, 2008 Nokia filed a request for a status conference with the District Court to establish a procedural schedule for Nokia to pursue a permanent injunction requiring InterDigital to arbitrate Nokia's alleged license defense, and arguing that the Second Circuit's decision does not bar such an action. On October 23, 2008, InterDigital filed a response with the District Court asserting that the Second Circuit's waiver finding was dispositive, and seeking the dismissal of Nokia's complaint in its entirety. On March 5, 2009, the Court in the Southern District Action granted InterDigital's request and dismissed all of Nokia's claims in the Southern District Action, but delayed issuing a final judgment pending a request by InterDigital seeking to collect against the $500,000 preliminary injunction bond posted by Nokia. On April 3, 2009, InterDigital filed a motion to collect against the preliminary

13


injunction bond, contending that InterDigital was damaged by at least $500,000 as a result of the wrongfully obtained preliminary injunction. On March 10, 2010, the District Court denied InterDigital's motion to collect against the preliminary injunction bond. On April 9, 2010, InterDigital filed a notice of appeal with the District Court, indicating that InterDigital is appealing the denial of its motion to collect against the preliminary injunction bond to the U.S. Court of Appeals for the Second Circuit. Following briefing, the Second Circuit heard oral argument on March 7, 2011. On May 23, 2011, the Second Circuit vacated the District Court's order of March 10, 2010 and remanded for the District Court to reconsider its denial of InterDigital's motion to recover against the preliminary injunction bond. On July 14, 2011, the District Court granted InterDigital's motion in part and denied the motion in part as moot, finding that InterDigital established damages in excess of $500,000 and therefore is entitled to recover the full amount of the $500,000 preliminary injunction bond, and requiring Nokia to direct its surety promptly to make payment to InterDigital. On July 26, 2011, Nokia filed a notice of appeal with the District Court indicating that it is appealing the District Court's July 14, 2011 order to the Second Circuit; Nokia filed its opening brief in the Second Circuit on October 18, 2011. On August 17, 2011, InterDigital moved in the District Court for an order requiring Hartford Fire Insurance Company (“Hartford”), Nokia's surety on the preliminary injunction bond, to pay InterDigital the full amount of the bond. Both Nokia and Hartford opposed this motion, and Nokia cross-moved for an order staying enforcement of the District Court's July 14, 2011 order until Nokia's appeal has been decided by the Second Circuit. InterDigital opposed Nokia's cross-motion. On December 22, 2011, the District Court granted InterDigital's motion to enforce liability against Nokia's surety, and denied Nokia's cross-motion. On December 30, 2011, Nokia filed with the Second Circuit a “motion to confirm automatic stay or, in the alternative, to stay payment of bond pending appeal,” in which Nokia sought to stay payment on its preliminary injunction bond pending appeal. On January 9, 2012, InterDigital filed its opposition with the Second Circuit, and on January 17, 2012, Nokia filed its reply. On March 5, 2012, the Second Circuit granted Nokia's motion to stay any efforts by InterDigital to collect on the injunction bond pending a decision on the underlying appeal. On April 17, 2012, the Second Circuit heard oral argument on the merits of Nokia's appeal of the July 14, 2011 order. On April 30, 2012, the Second Circuit issued a summary order affirming the District Court's order granting InterDigital's motion to recover the full amount of its $500,000 preliminary injunction bond.  InterDigital received the $500,000 on June 14, 2012, and such amount was recorded as a reduction of patent administration and licensing expense in second quarter 2012.
On September 24, 2008, InterDigital filed a motion to lift the stay of the Nokia investigation (337-TA-613) based on the issuance of the Second Circuit's mandate reversing the preliminary injunction granted to Nokia. The Administrative Law Judge granted InterDigital's motion on September 25, 2008 and lifted the stay. On October 7, 2008, the Administrative Law Judge issued an order in the Nokia investigation setting the evidentiary hearing for May 26-29, 2009. On October 10, 2008, the Administrative Law Judge issued an order resetting the Target Date for the USITC's Final Determination in the Nokia investigation to December 14, 2009, and requiring a final Initial Determination by the Administrative Law Judge to be entered no later than August 14, 2009.
On January 21, 2009, Nokia filed a motion to schedule a claim construction hearing in the USITC proceeding in early February 2009, and on January 29, 2009, InterDigital filed an opposition to the motion for a claim construction hearing. On February 9, 2009, the Administrative Law Judge denied Nokia's motion for a claim construction hearing.
On February 13, 2009, InterDigital filed a renewed motion for summary determination that InterDigital has satisfied the domestic industry requirement based on its licensing activities, and on February 27, 2009, Nokia filed an opposition to the motion. On March 10, 2009, the Administrative Law Judge granted InterDigital's motion, finding that InterDigital has established, through its licensing activities that a domestic industry exists in the United States as required to obtain relief before the USITC. On April 9, 2009, the Commission issued a notice that it would not review the Administrative Law Judge's Order granting summary determination of a licensing-based domestic industry, thereby adopting the Administrative Law Judge's decision.
The evidentiary hearing for the USITC investigation with respect to Nokia was held from May 26, 2009 through June 2, 2009.
On August 14, 2009, the Administrative Law Judge 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 Administrative Law Judge 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 August 31, 2009, InterDigital filed a petition for review of certain issues raised in the August 14, 2009 Initial Determination. On that same date, Nokia also filed a contingent petition for review of certain issues in the Initial Determination. Responses to both petitions were filed on September 8, 2009.
On October 16, 2009, the Commission issued a notice that it had determined to review in part the Initial

14


Determination, and that it affirmed the Administrative Law Judge'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 Administrative Law Judge's validity determinations. On review, the Commission modified the Administrative Law Judge'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 United States Court of Appeals for the Federal Circuit a petition for review of certain rulings by the Commission. 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 determination. On December 17, 2009, Nokia filed a motion to intervene in the appeal, which was granted by the Court on January 4, 2010. InterDigital's opening brief was filed on April 12, 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. Nokia and the Commission filed their briefs on July 13, 2010. In their briefs, Nokia and the Commission argue that the Commission correctly construed the claim terms asserted by InterDigital in its appeal and that the Commission properly determined that Nokia did not infringe the patents on appeal. Nokia also argues that the Commission's finding of noninfringement should be affirmed based on an additional claim term. Nokia further argues that the Commission erred in finding that InterDigital could satisfy the domestic industry requirement based solely on its patent licensing activities and without proving that an article in the United States practices the claimed inventions, and that the Commission's finding of no Section 337 violation should be affirmed on that additional basis. InterDigital filed its reply brief on August 30, 2010. The Court heard oral argument in the appeal on January 13, 2011. The Court has not yet issued a decision in this appeal.
InterDigital has no obligation as a result of the above matter and we have not recorded a related liability in our financial statements.
Nokia Delaware Proceeding
In January 2005, Nokia filed a complaint in the Delaware District Court against InterDigital Communications Corporation (now IDC) and ITC (for purposes of the Nokia Delaware Proceeding described herein, IDC and ITC are collectively referred to as “InterDigital,” “we,” or “our”), alleging that we have used false or misleading descriptions or representations regarding our patents' scope, validity, and applicability to products built to comply with 3G wireless phone Standards (“Nokia Delaware Proceeding”). Nokia's amended complaint seeks declaratory relief, injunctive relief and damages, including punitive damages, in an amount to be determined. We subsequently filed counterclaims based on Nokia's licensing activities as well as Nokia's false or misleading descriptions or representations regarding Nokia's 3G patents and Nokia's undisclosed funding and direction of an allegedly independent study of the essentiality of 3G patents. Our 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 InterDigital's USITC investigation against Nokia (337-TA-613). Specifically, the full and final resolution of the USITC investigation includes any initial or final determinations of the Administrative Law Judge overseeing the proceeding, the USITC, and any appeals therefrom. Pursuant to the order, the parties and their affiliates are generally prohibited from initiating against the other parties, in any forum, any claims or counterclaims that are the same as the claims and counterclaims pending in the Nokia Delaware Proceeding, and should any of the same or similar claims or counterclaims be initiated by a party, the other parties may seek dissolution of the stay.
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, including the Prior Nokia USITC Proceeding and Related Delaware District Court and Southern District of New York Proceedings (described above).
Nokia Arbitration Concerning Presentations
In November 2006, InterDigital Communications Corporation (now IDC) and ITC filed a request for arbitration with the International Chamber of Commerce against Nokia (“Nokia Arbitration Concerning Presentations”), claiming that certain presentations Nokia has attempted to use in support of its claims in the Nokia Delaware Proceeding are confidential and, as a result, may not be used in the Nokia Delaware Proceeding pursuant to the parties' agreement.
The December 10, 2007 order entered by the Delaware District Court to stay the Nokia Delaware Proceeding (described above) also stayed the Nokia Arbitration Concerning Presentations pending the full and final resolution of the USITC investigation against Nokia (337-TA-613) as described above.

15


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.
Contingency related to Technology Solutions Agreement Arbitration
Our wholly owned subsidiaries InterDigital Communications LLC and InterDigital Technology Corporation are 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 a decision is expected in late 2012. As of June 30, 2012, we have deferred related revenue of $36.5 million pending the resolution of this arbitration and recorded such amount within short-term deferred revenue since we expect a decision within the next twelve months.

6. EQUITY TRANSACTIONS:

Changes in shareholders’ equity for the six months ended June 30, 2012 were as follows (in thousands):
 
Total Shareholders' Equity
Balance as of December 31, 2011
$
471,682

Net income
20,603

Unrealized gain on investments, net
737

Cash dividends declared
(8,817
)
Repurchase of Common Stock
(77,745
)
Net proceeds for exercise of stock options
590

Taxes withheld upon restricted stock unit vestings
(3,668
)
Tax benefit from share-based compensation
1,590

Share-based compensation
3,135

Balance as of June 30, 2012
$
408,107

Repurchase of Common Stock
During first half 2012, we repurchased a cumulative total of 2.4 million shares of our common stock for $77.7 million under the 2009 Repurchase Program and the 2012 Repurchase Program, each as defined below. We made no share repurchases during second half 2011.
In March 2009, our Board of Directors authorized a $100.0 million share repurchase program (the “2009 Repurchase Program”). The Company was able to repurchase shares under the 2009 Repurchase Program through open market purchases, pre-arranged trading plans, or privately negotiated purchases. During first half 2012, we repurchased 2.3 million shares under the 2009 Repurchase Program for $75.0 million, completing the 2009 Repurchase Program and bringing the cumulative repurchase total under the program to 3.3 million shares at a cost of $100.0 million.
In May 2012, our Board of Directors authorized a new share repurchase program, which was 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. During first half 2012, we repurchased 0.1 million shares under the 2012 Repurchase Program for $2.7 million.
From July 1, 2012 through July 23, 2012, we repurchased an additional 0.8 million shares for $21.1 million, bringing the cumulative repurchase total under the 2012 Repurchase Program to 0.9 million shares at a cost of $23.8 million.
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. Cash dividends on outstanding common stock declared in 2012 and 2011 were as follows (in thousands, except per share data):

16


2012
Per Share
 
Total
 
Cumulative by Fiscal Year
First quarter
$
0.10

 
$
4,469

 
$
4,469

Second quarter
0.10

 
4,348

 
8,817

 
$
0.20

 
$
8,817

 
 
 
 
 
 
 
 
 
 
 
 
 
 
2011
Per Share
 
Total
 
Cumulative by Fiscal Year
First quarter
$
0.10

 
$
4,535

 
$
4,535

Second quarter
0.10

 
4,540

 
9,075

Third quarter
0.10

 
4,549

 
13,624

Fourth quarter
0.10

 
4,570

 
18,194

 
$
0.40

 
$
18,194

 
 
 
 
 
 
 
 
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 $66.3528 per share, also subject to adjustment. 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.
7. CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES:
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 June 30, 2012, four licensees comprised 98% of our net accounts receivable balance. At December 31, 2011, three licensees represented 97% 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
Effective January 1, 2008, we adopted the provisions of the FASB fair value measurement guidance that relate to our financial assets and financial liabilities. We adopted the guidance related to non-financial assets and liabilities as of January 1, 2009. 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

17


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 condensed 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 June 30, 2012 and December 31, 2011 (in thousands):

 
Fair Value as of June 30, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Money market and demand accounts (a)
$
160,990

 


 
$

 
$
160,990

Mutual and exchange traded funds
98,391

 


 

 
98,391

Commercial paper (b)

 
174,653

 

 
174,653

U.S. government securities

 
75,749

 

 
75,749

Corporate bonds and asset backed securities

 
14,336

 

 
14,336

 
$
259,381

 
$
264,738

 
$

 
$
524,119

______________________________
(a)
Included within cash and cash equivalents.
(b)
Includes $8.0 million of commercial paper that is included within cash and cash equivalents.

 
Fair Value as of December 31, 2011
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Money market and demand accounts (a)
$
338,211

 
$

 
$

 
$
338,211

Mutual and exchange traded funds
96,130

 

 

 
96,130

Commercial paper (b)

 
160,574

 

 
160,574

U.S. government securities

 
66,647

 

 
66,647

Corporate bonds and asset backed securities

 
16,432

 

 
16,432

 
$
434,341

 
$
243,653

 
$

 
$
677,994

______________________________
(a)
Included within cash and cash equivalents.
(b)
Includes $4.0 million of commercial paper that is included within cash and cash equivalents.

The carrying amount of long-term debt reported in the condensed consolidated balance sheets as of June 30, 2012 and December 31, 2011 was $196.4 million and $192.5 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 these level 2 Notes (as defined in Note 8 "Long-Term Debt") to be $224.0 million as of June 30, 2012 and $240.9 million as of December 31, 2011.

8. LONG-TERM DEBT:
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

18


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 an initial conversion rate of 17.3458 shares of common stock per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $57.65 per share). 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 $66.3528 per share, also subject to adjustment. 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

19


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 reflects the carrying value of the Company's convertible debt as of June 30, 2012 and December 31, 2011 (in thousands):
 
 
 
 
 
June 30, 2012
 
December 31, 2011
2.50% Senior Convertible Notes due 2016
$
230,000

 
$
230,000

Less: Unamortized interest discount
(33,608
)
 
(37,471
)
Net carrying amount of 2.50% Senior Convertible Notes due 2016
$
196,392

 
$
192,529

The following table presents the amount of interest cost recognized for the three and six months ended June 30, 2012 and June 30, 2011 relating to the contractual interest coupon, accretion of the debt discount, and the amortization of financing costs (in thousands):
 
 
 
 
 
 
 
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Contractual coupon interest
$
1,438

 
$
1,438

 
$
2,875

 
$
1,438

Accretion of debt discount
1,964

 
1,834

 
3,863

 
1,834

Amortization of financing costs
326

 
326

 
652

 
326

Total
$
3,728

 
$
3,598

 
$
7,390

 
$
3,598



20


Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
The following discussion should be read in conjunction with the unaudited, condensed consolidated financial statements and notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, in addition to our 2011 Form 10-K, other reports filed with the SEC and the Statement Pursuant to the Private Securities Litigation Reform Act of 1995 — Forward-Looking Statements below. Please refer to the Glossary of Terms in our 2011 Form 10-K for a list and detailed descriptions of the various technical, industry and other defined terms that are used in this Quarterly Report on Form 10-Q.
Patent Sales
On June 18, 2012, we announced that certain of our subsidiaries have signed a definitive agreement to sell approximately 1,700 patents and patent applications, including approximately 160 issued U.S. patents and approximately 40 U.S. patent applications, to Intel Corporation for $375.0 million.  The agreement involves patents primarily related to 3G, LTE and 802.11 technologies.  We expect that the transaction will be completed in third quarter 2012, subject to customary closing conditions and any required regulatory approvals.  The accounting for the transaction is still being finalized.  However, we expect that a significant portion of the gross proceeds from the transaction will be recognized as revenue in the period in which the transaction closes.
During second quarter 2012, one of our subsidiaries entered into a definitive agreement to sell certain patents and patent applications to Nufront Mobile Communications Technology Co. Ltd. ("Nufront") for $9.0 million. This amount was recorded as revenue upon closing of the transaction in second quarter 2012. Additionally, the company recognized approximately $0.7 million of expenses associated with this patent sale in second quarter 2012.

We intend to pursue additional patent sale opportunities as part of our expanded strategy. However, we are unable to predict the timing and magnitude of any such sales due to the nature of the sales cycle for such transactions.
Patent Licensing
Patent licensing royalties of $62.4 million in second quarter 2012 decreased $6.2 million or 9% over first quarter 2012. This sequential decrease was primarily driven by a $6.3 million decrease in royalties from two of our per-unit licensees resulting from lower shipments.
Technology Solutions
We are engaged in arbitration to determine whether royalties are owed on specific product classes pursuant to one of our technology solutions agreements. The arbitration hearing took place in late June 2012, and a decision is expected in late 2012. As of June 30, 2012, we have deferred related revenue of $36.5 million pending the resolution of this arbitration and recorded such amount within short-term deferred revenue since we expect a decision within the next twelve months. This amount has either been collected or recorded in accounts receivable as of the current balance sheet date.
During second quarter 2012, we signed an expanded technology solutions agreement to develop a Release 7 baseband modem design on a time and materials basis. We expect to record the majority of revenue and costs related to this agreement over a twelve-month period beginning third quarter 2012.
Intellectual Property Enforcement
Please see Note 5, “Litigation and Legal Proceedings,” in the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a full discussion of the following and other matters:

Nokia, Huawei and ZTE U.S. International Trade Commission (“USITC” ) Proceeding and Related Delaware District Court Proceeding

On July 26, 2011, InterDigital's wholly-owned subsidiaries InterDigital Communications, LLC, InterDigital Technology Corporation and IPR Licensing, Inc. (collectively, the “Company,” “InterDigital,” “we,” or “our” for the purposes of the discussion of this matter) filed a complaint with the USITC against Nokia Corporation and Nokia Inc. (collectively, “Nokia”), Huawei Technologies Co., Ltd. and FutureWei Technologies, Inc. d/b/a Huawei Technologies (USA) (collectively, “Huawei”) and ZTE Corporation and ZTE (USA) Inc. (collectively, "ZTE" and together with Nokia and Huawei, “Respondents”), alleging 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 that infringe seven of InterDigital's U.S.

21


patents (the “Asserted Patents”). The action also extends to certain WCDMA and cdma2000® devices incorporating WiFi functionality. On August 31, 2011, the USITC formally instituted an investigation against Respondents. 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. (collectively, “LG”) as Respondents to the Company's USITC complaint and the USITC investigation, and that the USITC add an additional patent to the USITC complaint and investigation as well. On December 5, 2011, the Administrative Law Judge (“ALJ”) granted this motion, and on December 21, 2011 the USITC determined not to review the ALJ’s determination, thus adding the LG entities as Respondents and including allegations of infringement of the additional patent. On January 20, 2012, LG filed a motion to terminate the USITC investigation as it relates to the LG entities alleging there is an arbitrable dispute. The ALJ granted LG's motion on June 4, 2012, and on July 6, 2012, the Commission determined not to review the ALJ's order and partially terminated the investigation as to LG. InterDigital has 60 days from issuance of the Commission's July 6, 2012 notice to appeal if it chooses to do so.
On March 21, 2012, InterDigital filed an unopposed motion requesting that the USITC add newly-formed entity Huawei Device USA, Inc. of Plano, Texas as a Respondent to InterDigital's USITC complaint and the USITC's investigation. 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 Respondent.
The ALJ has set a trial date of October 22 to November 2, 2012 and has set a target date of June 28, 2013 for completion of the USITC investigation.
On the same date that InterDigital filed the present USITC action (referenced above), we also filed a parallel action in the United States District Court for the District of Delaware (the “Delaware District Court”) against the Respondents alleging infringement of the same Asserted Patents identified in the USITC complaint. 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 the USITC complaint referenced above. The Delaware District Court action has been stayed pending the parallel proceedings in the USITC.

Prior Nokia USITC Proceeding/Federal Circuit Appeal
The United States Court of Appeals for the Federal Circuit has not yet issued a decision in our appeal of certain rulings by the USITC in connection with the USITC investigation initiated by us against Nokia in 2007.
Comparability of Financial Results
When comparing second quarter 2012 financial results against other periods, the following items should be taken into consideration:
Our second quarter 2012 revenue includes:
$9.0 million of revenue associated with the sale of four patent families; and
$1.2 million of past sales primarily related to an amended patent license agreement signed during the quarter and revenue associated with an audit of an existing licensee;
Our second quarter 2012 operating expenses include:
a $3.0 million charge to increase our accrual rate under our Long-Term Compensation Program ("LTCP") on the program cycle ending December 31, 2012;
lower accrual rates, as compared to second quarter 2011, for the remaining two active cycles under our LTCP; and
$0.7 million of expense to remove the remaining net book value of patents sold during the quarter.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in our 2011 Form 10-K. A discussion of our critical accounting policies, and the estimates related to them, are included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2011 Form 10-K. Except as outlined below, there have been no material changes in our existing critical accounting policies from the disclosures included in our 2011 Form 10-K. Refer to Note 1, “Basis of Presentation,” in the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for updates related to new accounting pronouncements.
Revenue Recognition
During the current year, we expanded our business strategy of monetizing our intellectual property to include the sale of

22


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 collectability is reasonably assured. These requirements are generally fulfilled upon closing of the patent sale transaction.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL REQUIREMENTS
Our primary sources of liquidity are cash, cash equivalents and short-term investments, as well as cash generated from operations. We have the ability to obtain additional liquidity through debt and equity financings. Based on our past performance and current expectations, we believe our available sources of funds, including cash, cash equivalents and short-term investments and cash generated from our operations, will be sufficient to finance our operations, capital requirements, debt obligations, existing stock repurchase program and dividend program in the next twelve months.
On April 4, 2011, we completed an offering of $230.0 million in aggregate principal amount of 2.50% Senior Convertible Notes due 2016 (the "Notes"). The net proceeds from the offering were approximately $222.0 million, after deducting the initial purchaser's discount and offering expenses. A portion of the net proceeds of the offering were used to fund the cost of the convertible note hedge transactions entered into in connection with the offering of the Notes. We expect to use the remaining net proceeds from the offering for general corporate purposes, which may include, among other things: acquisitions of intellectual property-related assets or businesses or securities in such businesses; capital expenditures; and working capital. Refer to Note 8, "Long-Term Debt," in the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a more detailed discussion of the Notes.
As discussed above in the "Overview" section, on June 18, 2012, we announced that we have entered into a definitive agreement to sell approximately 1,700 patents to Intel Corporation for $375.0 million in cash. Upon the closing of the transaction, which is expected to occur in third quarter 2012, we expect to record a significant portion of the $375.0 million of gross proceeds as revenue and to receive nearly $250.0 million of cash, net of taxes. We intend to use the net proceeds from the sale to fund our existing stock repurchase program and for other general corporate purposes.
Cash, cash equivalents and short-term investments
At June 30, 2012 and December 31, 2011, we had the following amounts of cash, cash equivalents and short-term investments (in thousands):
 
June 30, 2012
 
December 31, 2011
 
Increase /
(Decrease)
Cash and cash equivalents
$
168,985

 
$
342,211

 
$
(173,226
)
Short-term investments
355,134

 
335,783

 
19,351

Total Cash and cash equivalents and short-term investments
$
524,119

 
$
677,994

 
$
(153,875
)
The decrease in cash, cash equivalents and short-term investments was primarily attributable to repurchases of common stock of $77.7 million, $41.3 million used in operating activities, $28.9 million in capital investments and patent acquisitions, and $9.0 million of dividend payments.
Cash flows used in operations
We used the following cash flows from our operating activities in first half 2012 and 2011 (in thousands):
 
For the Six Months Ended June 30,
 
2012
 
2011
 
Increase /
(Decrease)
Net cash used in operating activities
$
(41,330
)
 
$
(31,257
)
 
$
(10,073
)

Cash used in operating activities during first half 2012 included cash operating expenses (operating expenses less depreciation of fixed assets, amortization of patents, non-cash compensation, accretion of debt discount, and amortization of financing costs) of $84.0 million, cash payments for short-term and long-term incentive compensation of $10.3 million, estimated federal tax payments of $1.5 million and cash payments for foreign source withholding taxes of $1.3 million. These cash uses were partially offset by $47.7 million of cash receipts from patent license, patent sale, and technology solutions agreements along with other changes in working capital. We received $8.0 million of fixed fee payments, $3.0 million of patent sales payments and $27.8 million of per-unit royalty payments, including past sales, current royalties and prepayments, from existing customers and a new licensee. Cash receipts from our technology solutions agreements totaled $8.9 million, primarily related to royalties and other license fees associated with our SlimChip modem core.

23



 Cash used in operating activities during first half 2011 was primarily due to cash operating expenses (operating expenses less depreciation of fixed assets, amortization of patents, non-cash compensation, accretion of debt discount, impairment of long-term investments, and amortization of financing costs) of $62.3 million, cash payments for short-term and long-term incentive compensation of $20.1 million, estimated federal tax payments of $19.0 million, and cash payments for foreign source withholding taxes of $4.8 million. These cash uses were partially offset by receipts of approximately $68.5 million related to patent license and technology solutions agreements. We received $16.0 million of fixed fee payments and $38.8 million of per-unit royalty payments, including past sales and prepayments, from existing customers and a new customer. Cash receipts from our technology solutions agreements totaled $13.7 million, primarily related to royalties and other license fees associated with our SlimChip modem core. Additionally, $6.5 million of activity in other working capital partially offset cash used in operating activities during first half 2011.

Working capital
We believe that working capital, adjusted to exclude cash, cash equivalents, short-term investments, and current deferred revenue provides additional information about non-cash assets and liabilities that might affect our near-term liquidity. While we believe cash and short-term investments are important measures of our liquidity, the remaining components of our current assets and current liabilities, with the exception of deferred revenue, could affect our near-term liquidity and or cash flow. We have no material obligations associated with our deferred revenue, and the amortization of deferred revenue has no impact on our future liquidity and or cash flow. Our adjusted working capital, a non-GAAP financial measure, reconciles to working capital, the most directly comparable GAAP financial measure, at June 30, 2012 and December 31, 2011 (in thousands) as follows:
 
June 30, 2012
 
December 31, 2011
 
Increase / (Decrease)
Current assets
$
622,526

 
$
768,887

 
$
(146,361
)
Less: current liabilities
165,427

 
173,153

 
(7,726
)
Working capital
457,099

 
595,734

 
(138,635
)
Subtract:
 
 
 
 
 
Cash and cash equivalents
168,985

 
342,211

 
(173,226
)
Short-term investments
355,134

 
335,783

 
19,351

Add:
 
 
 
 
 
Current deferred revenue
117,877

 
134,087

 
(16,210
)
Adjusted working capital
$
50,857

 
$
51,827

 
$
(970
)

Adjusted working capital decreased less than 2%, or $1.0 million, since December 31, 2011. This net decrease is attributable to increases in our current liabilities, primarily associated with higher accrued other expense, accrued compensation and taxes payable, and was partially offset by increases in accounts receivable.
Cash used in or provided by investing and financing activities
We used net cash in investing activities of $47.1 million in first half 2012 and $10.1 million in first half 2011. We purchased $18.2 million of short-term marketable securities, net of sales in first half 2012, and sold $4.9 million of short-term marketable securities, net of purchases, in first half 2011. This increase in net purchases in first half 2012 was driven by additional reinvestment of cash on hand as of December 31, 2011. Purchases of property and equipment decreased to $1.0 million in first half 2012 from $1.8 million in first half 2011 due to lower levels of investments in our new and existing facilities. Investment costs associated with capitalized patent costs and acquisition of patents increased to $27.9 million in first half 2012 from $13.1 million in first half 2011, primarily due to investments in patent acquisitions during first half 2012.
Net cash (used in) provided by financing activities decreased by $290.3 million primarily due to our issuance of the Notes and related transactions in second quarter 2011 as discussed above, as well as our repurchases of common stock of $77.7 million in first half 2012.
Other
Our combined short-term and long-term deferred revenue balance at June 30, 2012 was approximately $205.3 million, a decrease of $82.7 million from December 31, 2011. We have no material obligations associated with such deferred revenue. In

24


first half 2012, deferred revenue decreased $82.7 million due to $107.3 million of deferred revenue recognized, partially offset by gross increases in deferred revenue of $24.6 million. The deferred revenue recognized was comprised of $67.4 million of amortized fixed fee royalty payments and $39.9 million in per-unit exhaustion of prepaid royalties (based upon royalty reports provided by our licensees). The gross increases in deferred revenue of $24.6 million primarily related to cash received or due from patent licensees and technology solutions customers. Of the $24.6 million, $6.8 million relates to the technology solutions agreement arbitration discussed above in the "Overview" section.
Based on current license agreements, we expect the amortization of fixed fee royalty payments and the resolution of the technology solutions agreement arbitration to reduce the June 30, 2012 deferred revenue balance of $205.3 million by $117.9 million over the next twelve months. Additional reductions to deferred revenue will be dependent upon the level of per-unit royalties our licensees report against prepaid balances.
For both the period ended June 30, 2012 and the period ended December 31, 2011, we had 0.3 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 $4.3 million and $4.9 million, respectively, of cash proceeds to the Company if they had been fully exercised as of such dates.
RESULTS OF OPERATIONS
Second Quarter 2012 Compared to Second Quarter 2011
Revenues
The following table compares second quarter 2012 revenues to second quarter 2011 revenues (in millions):
 
For the Three Months Ended June 30,
 
 
 
2012
 
2011
 
(Decrease)/ Increase
Per-unit royalty revenue
$
27.4

 
$
35.0

 
$
(7.6
)
 
(22
)%
Fixed fee amortized royalty revenue
33.8

 
33.2

 
0.6

 
2
 %
Current patent royalties
61.2

 
68.2

 
(7.0
)
 
(10
)%
Past sales
1.2

 
0.4

 
0.8

 
200
 %
Total patent licensing royalties
62.4

 
68.6

 
(6.2
)
 
(9
)%
Patent sales revenue
9.0

 

 
9.0

 
100
 %
Technology solutions revenue
0.5

 
1.3

 
(0.8
)
 
(62
)%
Total revenue
$
71.9

 
$
69.9

 
$
2.0

 
3
 %

The $2.0 million increase in total revenue was primarily attributable to a $9.0 million increase in patent sales revenue as a result of the sale of patents and patent applications to Nufront. Not including the revenue from the patent sale, total revenue decreased $7.0 million. This decrease is primarily attributable to a $7.6 million decrease in per-unit royalty revenue, the majority of which is due to lower shipments from our per-unit licensees with concentrations in the smartphone market. Past sales of $1.2 million in second quarter 2012 primarily related to an amended patent license agreement signed during the quarter and revenue associated with an audit of an existing licensee. The decrease in technology solutions revenue was due to lower royalties recognized in connection with our SlimChip modem IP business.
In second quarter 2012 and second quarter 2011, 61% and 64% of our total revenues, respectively, were attributable to companies that individually accounted for 10% or more of our total revenues. In second quarter 2012 and second quarter 2011, the following companies accounted for 10% or more of our total revenues:

 
For the Three Months Ended June 30,
 
2012
 
 
2011
Samsung Electronics Company, Ltd. (a)
36
%
 
 
37
%
Nufront Mobile Communications Technology Co. Ltd.
13
%
(b)
 
< 10%

Research in Motion Limited (c)
12
%
 
 
16
%
HTC Corporation
< 10%

 
 
11
%
______________________________

25


(a) The 3G portion of our patent license agreement with Samsung Electronics Company, Ltd. expires at the end of 2012.
(b) Revenues related primarily to sale of patents.
(c) Our 2G/3G patent license agreement with Research in Motion Limited expires at the end of 2012.
Operating Expenses
The following table summarizes the change in operating expenses by category (in millions):
 
For the Three Months Ended June 30,
 
 
 
2012
 
2011
 
Increase/ (Decrease)
Patent administration and licensing
$
26.2

 
$
16.8

 
$
9.4

 
56
%
Development
17.2

 
15.8

 
1.4

 
9
%
Selling, general and administrative
10.9

 
7.5

 
3.4

 
45
%
Total operating expenses
$
54.3

 
$
40.1

 
$
14.2

 
35
%

The $14.2 million increase in operating expenses was primarily due to net changes in the following items (in millions):
 
Increase/
(Decrease)
Intellectual property enforcement and non-patent litigation
$
8.9

Long-term compensation
2.0

Personnel-related costs
1.7

Cost of patent sale
0.7

Patent amortization
0.6

Patent maintenance and patent evaluation
0.3

Total increase in operating expenses
$
14.2

Intellectual property enforcement and non-patent litigation increased $8.9 million primarily due to costs associated with the USITC action initiated in second half 2011 and the previously discussed arbitration proceeding related to one of our technology solutions agreements. Long-term compensation had a net increase of $2.0 million, which was primarily related to a $3.0 million charge to increase our accrual rate on the LTCP cycle ending December 31, 2012 and was partially offset by a $1.0 million decrease associated with lower accrual rates on the remaining program cycles. Personnel-related costs increased $1.7 million due to higher personnel levels, merit increases and the second quarter 2011 recognition of an increased government subsidy. We recognized $0.7 million of expense during second quarter to remove the remaining net book value of patents sold during the quarter. Patent amortization increased $0.6 million due to increases in the number of patent applications filed in recent years. The increase in patent maintenance and patent evaluation was primarily related to due diligence associated with both patent acquisition and patent sale opportunities.
Patent Administration and Licensing Expense: The increase in patent administration and licensing expense primarily resulted from the above-noted increases in intellectual property enforcement, cost of patent sale, patent amortization, patent maintenance and patent evaluation, personnel-related costs and long-term compensation.
Development Expense: The increase in development expense was primarily attributable to the above-noted increases in personnel-related costs and long-term compensation.
Selling, General and Administrative Expense: The increase in selling, general and administrative expense was primarily attributable to the above-noted increases in non-patent litigation, personnel-related costs and long-term compensation.

Other (Expense) Income
The following table compares second quarter 2012 other (expense) income to second quarter 2011 other (expense) income (in millions):

26


 
For the Three Months Ended June 30,
 
 
 
 
 
2012
 
2011
 
(Decrease)/Increase
Interest expense
$
(3.7
)
 
$
(3.6
)
 
$
(0.1
)
 
3
 %
Other
(0.2
)
 
(0.3
)
 
0.1

 
(33
)%
Investment income
1.4

 
0.5

 
0.9

 
180
 %
 
$
(2.5
)
 
$
(3.4
)
 
$
0.9

 
(26
)%
In second quarter 2012, other expense was $2.5 million as compared to other expense of $3.4 million in second quarter 2011. The change between periods primarily resulted from higher returns on our investment balances during second quarter 2012 as compared to second quarter 2011.
First Six Months 2012 Compared to First Six Months 2011
Revenues
The following table compares first half 2012 revenues to first half 2011 revenues (in millions):
 
For the Six Months Ended June 30,
 
 
 
2012
 
2011
 
(Decrease)/Increase
Per-unit royalty revenue
$
61.9

 
$
74.4

 
$
(12.5
)
 
(17
)%
Fixed fee amortized royalty revenue
67.4

 
68.4

 
(1.0
)
 
(1
)%
Current patent royalties
129.3

 
142.8

 
(13.5
)
 
(9
)%
Past sales
1.6

 
2.7

 
(1.1
)
 
(41
)%
Total patent licensing royalties
130.9

 
145.5

 
(14.6
)
 
(10
)%
Patent sales
9.0

 

 
9.0

 
100
 %
Technology solutions revenue
1.3

 
2.8

 
(1.5
)
 
(54
)%
Total revenue
$
141.2

 
$
148.3

 
$
(7.1
)
 
(5
)%

Total revenue decreased $7.1 million in first half 2012. Not including revenue from patent sales, total revenue decreased $16.1 million. This decrease is primarily attributable to a $12.5 million decrease in per-unit royalty revenue driven by lower shipments from our Japanese per unit-unit licensees and our per-unit licensees with concentrations in smartphones. The decrease in technology solutions revenue was due to lower royalties recognized in connection with our SlimChip modem IP business. These decreases were partially offset by the sale of patents and patent applications to Nufront for $9.0 million during second quarter 2012.
In both first half 2012 and first half 2011, 51% of our total revenues were attributable to companies that individually accounted for 10% or more of these amounts. In first half 2012 and first half 2011, the following companies accounted for 10% or more of our total revenues:
 
For the Six Months Ended June 30,
 
2012
 
2011
Samsung Electronics Company, Ltd. (a)
36%
 
35%
Research in Motion Limited (b)
15%
 
16%
HTC Corporation
< 10%
 
10%
______________________________
(a) The 3G portion of our patent license agreement with Samsung Electronics Company, Ltd. expires at the end of 2012.
(b) Our 2G/3G patent license agreement with Research in Motion Limited expires at the end of 2012.


Operating Expenses

27


The following table summarizes the change in operating expenses by category (in millions):
 
For the Six Months Ended June 30,
 
 
 
2012
 
2011
 
Increase/ (Decrease)
Patent administration and licensing
$
49.4

 
$
32.7

 
$
16.7

 
51
%
Development
34.7

 
33.2

 
1.5

 
5
%
Selling, general and administrative
20.1

 
15.3

 
4.8

 
31
%
Total operating expenses
$
104.2

 
$
81.2

 
$
23.0

 
28
%

The $23.0 million increase in operating expenses was primarily due to net changes in the following items (in millions):

 
Increase/
(Decrease)
Intellectual property enforcement and non-patent litigation
$
17.0

Personnel-related costs
2.6

Patent amortization
1.2

Long-term compensation
1.0

Patent maintenance and evaluation
1.0

Cost of patent sale
0.7

Other
(0.5
)
Total increase in operating expenses
$
23.0

Intellectual property enforcement and non-patent litigation increased $17.0 million primarily due to costs associated with the USITC action initiated in second half 2011 and the previously discussed arbitration proceeding related to one of our technology solutions agreements. Personnel-related costs grew $2.6 million due to increased personnel levels, merit increases and the first half 2011 recognition of an increased government subsidy. Patent amortization increased $1.2 million due to increases in the number of patent applications filed in recent years. Long-term compensation had a net increase of $1.0 million, which was primarily related to a $2.6 million charge to increase our accrual rate on the LTCP cycle ending December 31, 2012 and was partially offset by a $1.6 million decrease associated with lower accrual rates on the remaining program cycles. The increase in patent maintenance and patent evaluation was primarily related to due diligence associated with both patent acquisition and patent sale opportunities. We recognized $0.7 million of expense during first half 2012 to remove the remaining net book value of patents sold during the period.
Patent Administration and Licensing Expense: The increase in patent administration and licensing expense primarily resulted from the above-noted increases in intellectual property enforcement, patent amortization, patent maintenance and patent evaluation, cost of patent sale, personnel-related costs and long-term compensation.
Development Expense: The increase in development expense was primarily attributable to the above-noted increases in personnel-related costs and long-term compensation.
Selling, General and Administrative Expense: The increase in selling, general and administrative expense was primarily attributable to the above-noted increases in non-patent litigation, personnel-related costs and long-term compensation.

Other (Expense) Income
The following table compares first half 2012 other (expense) income to first half 2011 other (expense) income (in millions):
    
 
For the Six Months Ended June 30,
 
 
 
 
 
2012
 
2011
 
(Decrease)/Increase
Interest expense
$
(7.4
)
 
$
(3.6
)
 
$
(3.8
)
 
106
 %
Other
(0.2
)
 
(1.8
)
 
1.6

 
(89
)%
Investment income
2.4

 
1.1

 
1.3

 
118
 %

$
(5.2
)
 
$
(4.3
)
 
$
(0.9
)
 
21
 %

28


The change between periods primarily resulted from the recognition of an additional $3.7 million of interest expense associated with the Notes issued on April 4, 2011 due to the Notes being outstanding all of first half 2012. This change was partially offset by higher returns on our investment balances in first half 2012 as compared to first half 2011 and a decrease in other expense due to $1.6 million of investment impairments recorded in first half 2011.
STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 — FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include certain information under the heading “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information regarding our current beliefs, plans and expectations, including without limitation the matters set forth below. Words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “forecast,” variations of any such words or similar expressions are intended to identify such forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q include, without limitation, statements regarding:

The potential effects of new accounting standards on our financial statements or results of operations;
Our expectation that the amortization of fixed fee royalty payments and the resolution of the technology solutions agreement arbitration will reduce our June 30, 2012 deferred revenue balance over the next twelve months;
Our expectation that we will use deferred tax assets to offset future U.S. federal income tax returns;
The timing, outcome and impact of our various litigation, arbitration and administrative matters;
Our ability to obtain additional liquidity through debt and equity financings;
Our belief that our available sources of funds will be sufficient to finance our operations, capital requirements, debt obligations, existing stock repurchase program and dividend program in the next twelve months;
Our expectation that the patent sale to Intel Corporation will be completed in third quarter 2012;
Our expectation that a significant portion of the gross proceeds from the Intel Corporation transaction will be recognized as revenue in the period in which the transaction closes;
Our expectation that we will receive nearly $250 million of cash, net of taxes, upon the closing of the Intel Corporation transaction;
Our intention to use the net proceeds from the Intel Corporation sale to fund our existing stock repurchase program and for other general corporate purposes; and
Our intention to pursue additional patent sale opportunities as part of our expanded strategy.
Forward-looking statements concerning our business, results of operations and financial condition are inherently subject to risks and uncertainties that could cause actual results, and actual events that occur, to differ materially from results contemplated by the forward-looking statements. These risks and uncertainties include, but are not limited to, the risks and uncertainties outlined in greater detail in Part I, Item 1A. Risk Factors of our 2011 Form 10-K. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, except as otherwise required by law.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in quantitative and qualitative market risk from the disclosures included in our 2011 Form 10-K.

Item 4. CONTROLS AND PROCEDURES.
The Company’s principal executive officer and principal financial officer, with the assistance of other members of management, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions

29


regarding required disclosure. There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2012 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

30


PART II — OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS.

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 Community (the "TFEU").  Huawei is claiming that InterDigital has a dominant position with respect to the alleged market for the licensing of its 3G standard essential patents. Huawei further claims that InterDigital is 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 the terms of Article 102 of the TFEU. The European Commission has not yet indicated whether or not it will initiate proceedings against InterDigital as a result of the complaint.
LG Arbitration
On March 19, 2012, LG Electronics, Inc. (“LG” for the purposes of the discussion of this matter) filed a demand for arbitration against InterDigital's wholly owned subsidiaries InterDigital Technology Corporation, IPR Licensing, Inc., and InterDigital Communications, LLC (collectively, “InterDigital” for the purposes of the discussion of this matter) with the American Arbitration Association's International Centre for Dispute Resolution, 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 the U.S. International Trade Commission (“USITC” or the “Commission”) proceeding initiated by InterDigital in the second half of 2011 (Investigation No. 337-TA-800).

Huawei China Proceedings

Reference is made to the Huawei China Proceedings in which InterDigital was served in February 2012 with two complaints filed by Huawei Technologies Co., Ltd. (“Huawei Technologies”) in the Shenzhen Intermediate People's Court in China previously disclosed in the 2011 Form 10-K and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (the "First Quarter 2012 Form 10-Q").  On March 22, 2012, InterDigital filed jurisdictional challenges to both of these complaints. On April 28, 2012, the Shenzhen Intermediate People's Court denied the jurisdictional challenges in both actions. On May 28, 2012, InterDigital appealed the rulings to The Higher People's Court of Guangdong Province.

Huawei Delaware State Court Proceeding
 
Reference is made to the Huawei Delaware State Court Proceeding initiated in October 2011 by Huawei Technologies Co., Ltd. and FutureWei Technologies, Inc. d/b/a Huawei Technologies (USA) (collectively, “Huawei”) against InterDigital Technology Corporation, IPR Licensing, Inc., and InterDigital Communications, LLC (collectively, “InterDigital” for the purposes of the discussion of this matter) previously disclosed in the 2011 Form 10-K and the First Quarter 2012 Form 10-Q. On June 11, 2012, the Delaware Chancery Court held a hearing on Huawei's renewed motion for expedited proceedings and InterDigital's renewed motion to stay or dismiss. At the hearing, the Delaware Chancery Court dismissed the case without prejudice.

Nokia, Huawei and ZTE USITC Proceeding and Related Delaware District Court Proceeding
 
Reference is made to the USITC proceeding and related Delaware District Court proceeding initiated in July 2011 by InterDigital's wholly-owned subsidiaries InterDigital Communications, LLC, InterDigital Technology Corporation and IPR Licensing, Inc. (collectively, the “Company,” “InterDigital,” “we,” or “our” for the purposes of the discussion of this matter) against Nokia Corporation and Nokia Inc. (collectively, “Nokia”), Huawei Technologies Co., Ltd. and FutureWei Technologies, Inc. d/b/a Huawei Technologies (USA) (collectively, “Huawei”) and ZTE Corporation and ZTE (USA) Inc. (collectively, "ZTE" and together with Nokia and Huawei, “Respondents”) previously disclosed in the 2011 Form 10-K and the First Quarter 2012 Form 10-Q. On March 21, 2012, InterDigital filed an unopposed motion requesting that the USITC add newly-formed entity Huawei Device USA, Inc. of Plano, Texas as a Respondent to InterDigital's USITC complaint and the USITC's investigation. On April 11, 2012, the Administrative Law Judge ("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 Respondent.
On May 31, 2012, ALJ denied Nokia's motion to terminate the USITC investigation. On June 11, 2012, Nokia requested that the order denying its motion to terminate be certified for interlocutory review. On June 21, 2012, InterDigital opposed this request. On June 28, 2012, Nokia sought leave to file a supplement to its request for interlocutory review;

31


InterDigital opposed this request on July 6, 2012. In addition, on June 4, 2012, the ALJ granted LG's motion to terminate the investigation as to LG, and on June 11, 2012, InterDigital petitioned for review of this order. On July 6, 2012, the Commission determined not to review the ALJ's order and terminated the investigation as to LG. InterDigital has 60 days from issuance of the Commissions's July 6, 2012 notice to appeal if it chooses to do so. 

InterDigital has filed three motions for summary determination and Nokia has filed two motions for summary determination.  These matters have been briefed and remain pending before the ALJ.  On May 17, 2012, InterDigital filed a motion for summary determination that the asserted claims of InterDigital's patents are not invalid in view of the Respondents' failure to adequately disclose their invalidity contentions.  Respondents jointly opposed this motion on May 29, 2012.  InterDigital submitted a reply in further support of its motion on June 26, 2012.  InterDigital filed a motion for summary determination on May 23, 2012, that certain Nokia devices infringe claims 1 and 3 of InterDigital's U.S. Patent No. 7,970,127 (“the '127 patent”), and a motion for summary determination that certain Nokia devices infringe claims 1 and 2 of InterDigital's U.S. Patent No. 8,009,636.  Nokia opposed both of these motions on June 11, 2012, and InterDigital submitted replies in further support of these motions on June 28, 2012, and July 11, 2012, respectively.  On July 9, 2012, Nokia also submitted a sur-reply in further opposition to InterDigital's motion for summary determination of infringement of the '127 patent.

On June 20, 2012, Nokia filed a conditional motion for summary determination that the asserted claims of InterDigital's U.S. Patent No. 7,536,013 and the '127 patent are not infringed by certain Nokia devices.  InterDigital opposed this motion on July 2, 2012.  On July 13, 2012, Nokia submitted a reply in further support of this motion.  Finally, on June 22, 2012, Nokia filed a conditional motion for summary determination that the asserted claims of InterDigital's U.S. Patent No. 7,616,970 are invalid.  InterDigital opposed this motion on July 12, 2012.  Nokia may seek to submit a reply in further support of this motion.     

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.  The USITC has 30 days from July 24, 2012 to determine whether to review the ALJ's Initial Determination granting the motion. 

Nokia New York Southern District Proceeding
 
Reference is made to the notice of appeal filed by InterDigital with the United States District Court for the Southern District of New York (“New York District Court”) as previously disclosed in the 2011 Form 10-K and the First Quarter 2012 Form 10-Q, in which InterDigital indicated that it was appealing to the U.S. Court of Appeals for the Second Circuit (the "Second Circuit") the New York District Court's March 10, 2010 order denying InterDigital's motion to collect against the preliminary injunction bond posted by Nokia in March 2008 in connection with a preliminary injunction that was later ruled to have been wrongly obtained. On April 30, 2012, the Second Circuit issued a summary order affirming the District Court's order granting InterDigital's motion to recover the full amount of its $500,000 preliminary injunction bond.  InterDigital received the $500,000 on June 14, 2012, and such amount was recorded as a reduction of patent administration and licensing expense in second quarter 2012.

See Note 5, “Litigation and Legal Proceedings,” to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion regarding these proceedings.

Item 1A. RISK FACTORS.

In addition to factors set forth in the Statement Pursuant to the Private Securities Litigation Reform Act of 1995 - Forward Looking-Statements in Part I, Item 2 of this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors of the 2011 Form 10-K, which could materially affect our business, financial condition or future results. The risks described in this Quarterly Report on Form 10-Q and in our 2011 Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.





Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Issuer Purchases of Equity Securities

32


The following table provides information regarding company purchases of its common stock during second quarter 2012.

Period
Total Number of Shares (or Units) Purchased (1)
Average Price Paid per Share (Unit)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet be Purchased Under the Plans or Programs
 
April 1, 2012 - April 30, 2012
715,439

$
34.49

715,439

(2)
$
25,001,078

(4)
May 1, 2012 - May 31, 2012
910,066

$
27.47

910,066

(2)
$

(4)
June 1, 2012 - June 30, 2012
100,000

$
27.45

100,000

(3)
$
197,255,200

(5)
Total
1,725,505

$
30.38

1,725,505

 
$
197,255,200

(5)
__________
(1) Total number of shares purchased during each period reflects share purchase transactions that were completed (i.e., settled) during the period indicated.
(2) Shares were purchased pursuant to the company's $100.0 million share repurchase program (the “2009 Repurchase Program"), which was authorized by the company's board of directors and announced on March 11, 2009. The 2009 Repurchase Program, which had no expiration date, was completed in May 2012.
(3) Shares were purchased pursuant to the company's $200.0 million share repurchase program (the “2012 Repurchase Program"), which was initially authorized by the company's board of directors on May 3, 2012 and announced on May 4, 2012. On June 18, 2012, the company announced that the board had authorized an increase to the amount of 2012 Repurchase Program from $100.0 million to $200.0 million. The 2012 Repurchase Program has no expiration date. The company may repurchase shares under the 2012 Repurchase Program through open market purchases, pre-arranged trading plans, or privately negotiated purchases.
(4) Amount shown reflects the amount remaining under the 2009 Repurchase Program.
(5) Amount shown reflects the amount remaining under the 2012 Repurchase Program.
From July 1, 2012 through July 23, 2012, we repurchased an additional 0.8 million shares for $21.1 million, bringing the cumulative repurchase total under the 2012 Repurchase Program to 0.9 million shares at a cost of $23.8 million.

Item 6. EXHIBITS.
The following is a list of exhibits filed with this Quarterly Report on Form 10-Q:


33


Exhibit
Number
 
Exhibit Description
*†Exhibit 10.1
 
Employment Agreement dated as of May 9, 2012 by and between InterDigital, Inc. and Richard Brezski (Exhibit 10.1 to InterDigital's Current Report on Form 8-K dated May 11, 2012).
 
 
 
†Exhibit 10.2
 
Short-Term Incentive Plan, as amended May 2012.
 
 
 
†Exhibit 10.3
 
Long-Term Incentive Program, as amended May 2012.
 
 
 
Exhibit 31.1
 
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
 
 
 
Exhibit 31.2
 
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
 
 
 
Exhibit 32.1
 
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350. ††
 
 
 
Exhibit 32.2
 
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350. ††
 
 
 
Exhibit 101
 
The following financial information from InterDigital, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, filed with the Securities and Exchange Commission on July 26, 2012, formatted in eXtensible Business Reporting Language:
 
 
 
 
 
(i) Condensed Consolidated Balance Sheets at June 30, 2012 and December 31, 2011, (ii) Condensed Consolidated Statements of Income for the three and six months ended June 30, 2012 and 2011, (iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and 2011, (iv) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 and (v) Notes to Condensed Consolidated Financial Statements.**
 
 
 
______________________________
*
 
Incorporated by reference to the previous filing indicated.
 
 
 
**
 
As provided in Rule 406T of Regulation S-T, this information will not be deemed "filed" for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.
 
 
 
 
Management contract or compensatory plan or arrangement.
 
 
 
††
 
This exhibit will not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act or Securities Exchange Act, except to the extent that InterDigital, Inc. specifically incorporates it by reference.


34


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
INTERDIGITAL, INC.
 
 
 
 
Date: July 26, 2012
/s/ WILLIAM J. MERRITT  
 
 
William J. Merritt 
 
 
President and Chief Executive Officer 
 
 
 
 
 
 
 
Date: July 26, 2012
/s/ RICHARD J. BREZSKI  
 
 
Richard J. Brezski 
 
 
Chief Financial Officer
 


35


EXHIBIT INDEX
Exhibit
Number
 
Exhibit Description
*†Exhibit 10.1
 
Employment Agreement dated as of May 9, 2012 by and between InterDigital, Inc. and Richard Brezski (Exhibit 10.1 to InterDigital's Current Report on Form 8-K dated May 11, 2012).
 
 
 
†Exhibit 10.2
 
Short-Term Incentive Plan, as amended May 2012.
 
 
 
†Exhibit 10.3
 
Long-Term Incentive Program, as amended May 2012.
 
 
 
Exhibit 31.1
 
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
 
 
 
Exhibit 31.2
 
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
 
 
 
Exhibit 32.1
 
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350. ††
 
 
 
Exhibit 32.2
 
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350. ††
 
 
 
Exhibit 101
 
The following financial information from InterDigital, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, filed with the Securities and Exchange Commission on July 26, 2012, formatted in eXtensible Business Reporting Language:
 
 
 
 
 
(i) Condensed Consolidated Balance Sheets at June 30, 2012 and December 31, 2011, (ii) Condensed Consolidated Statements of Income for the three and six months ended June 30, 2012 and 2011, (iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and 2011, (iv) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 and (v) Notes to Condensed Consolidated Financial Statements.**
______________________________
*
 
Incorporated by reference to the previous filing indicated.
 
 
 
**
 
As provided in Rule 406T of Regulation S-T, this information will not be deemed "filed" for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.
 
 
 
 
Management contract or compensatory plan or arrangement.
 
 
 
††
 
This exhibit will not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act or Securities Exchange Act, except to the extent that InterDigital, Inc. specifically incorporates it by reference.


36

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