InterDigital Inc (IDCC)

[wireless_wazoo]

I used to work for PriceWaterhouseCoopers in the early '80s(actually was with Coopers & Lybrand before it was acquired by PriceWaterhouse)and have been on audits of small, medium and large companies. I think some background on how audits are conducted might be illustrative and shed some light on the level of ERICY's confidence after the Markman Order.

Auditing Standards require a company to provide status of any pending legal disputes to the auditors. Each year throughout the '90's, ERICY's management would have listed the dispute with Interdigital and provided the auditors "proof" of why a loss was not likely. I am sure that after the MOT decision ERICY provided PWC with this evidence as "proof" there was nothing to worry about concerning the lawsuit with Interdigital.

Ask Yourself: What changed in the 4th qtr. of 2000? After all those years of not recognizing any possible loss for patent infringement, suddenly an expense is booked and a "Provision" for loss is booked in the 4th qtr. of 2000 and shown in the 2000 Annual Report for the first time.

Considering that before PWC would ever request a loss Provision on a legal case which at the time was over 6 yrs. old, PWC would had discussions with ERICY's in-house counsel, ERICY's management, been allowed to review documents sent to ERICY from McKool to ERICY's in-house counsel etc... related to the Markman Order and it's impact, settlement discussions and any other pertinent information concerning the case.

A Loss Provision is only booked when the chance for loss is probable or likely and can be quantified. Before the audit was completed and PWC signs off ERICY's financial statements, PWC would have shown ERICY the loss provision they wanted to book.
Corporate managment's do not like to book loss provisions for hundreds of millions of dollars. PWC would have done their review and discussed with ERICY's management how much the loss provision would be and how they came to the number. ERICY's management would try to provide evidence to make the number as low as possible but in the end, PWC and ERICY agreed as to the number and that a Provison for loss due to "patent disputes" was needed.

Additionally, PWC would have had a choice to book the liability as a "Contingent Liability" or as a "Provision." Provisions are stronger obligations than a Contingent Liability in other words, Provisions contain a very probable chance for loss or expense. As an example, please note that pension obligations are booked as a "Provision" rather than as a "Contingent Liability."

Let's summarize what happened in the 4th qtr. of 2000 --
1) Markman Order
2) After 6 yrs. of booking not $1 of Loss Provision for patent disputes and after review of all pertinent information and discussions with ERICY's in-house counsel and management, PWC books an expense and sets up a liability "Provision".
3) After talking with ERICY management about the degree of potential loss and doing their own calculations of probable loss, PWC booked the liability as a "Provision" rather than a "Contingent Liability" to the tune of [My Opinion] between $550M - $750M.
4) Remember, Steps #2-3 do not happen without PWC and ERICY management BOTH discussing the amount of Provision to be booked. PWC cannot just walk into management and say we're going to book a $700M expense on your books and that's it. No, ERICY is able to provide additional documentation to try and mitigate how much loss to book or that some of it should be booked as a Contingent Liability instead. In the end, both PWC and ERICY management agreed.
5) I am sure PWC which has attorneys on-staff would have reviewed the patent arguments and the Markman Order before agreeing to book a loss Provision. Remember, 2000 was not the first year PWC would have reviewed this case to determine whether a liability should be set up on the books or not.

All this hand-wringing over the Markman Order and Sealed Documents which can only cause confusion because we don't have all the information -- yet, PWC would have had access to ALL pertinent information and after likely having it reviewed by their own attorneys and after discussions with ERICY's own in-house counsel on the merits of ERICY's case, they book a large loss Provision on ERICY's books in the 4th qtr. of 2000.

Now let's review what has happened since 2000:
1)ERICY was found guilty of willful infringement in the HRS case
2)FESTO Supreme Court decision is recognized by many attorneys as a decision making it easier for patent holders to defend their patents to infringement.
3)The most recent financial disclosure from ERICY (rights offering in 8/02 - just 5 mos. ago) showed the "Other Provisions" containing the provision for patent disputes grew by 3 Billion SEK or about $326M in 2001 than what was on the books in 2000.
Page 194 of 222 in this .pdf file showing ERICY's prospectus for their rights offering (Note 16 - "Other Provisions include amounts for risks regarding balance sheet customer financing, patent disputes and changes in technique and markets") --

http://www.ericsson.com/investors/docs/us_prospectus.pdf

You will note the "Other Provisions" total as of 12/31/01 was 9,312 billion SEK. Conversion rate used was $1US = 9.20 SEK (See page 25 of 222) for a total of $1,012,000,000 US Dollars.

4) Hellstrom and CFO Fornell of ERICY had to attest to the accuracy of their financial statements in accordance with the Sarbanes-Oxley Act -- See below:

http://www.ericsson.com/infocenter/news/finance/020823_financial_certification.shtml

5) The rights offering's prospectus (Page 18 of 222) gives some additional insight to ERICY's thinking. Remember, ERICY is trying to secure over $8B in additional funds so any wording in the prospectus would need to make accurate factual statements/disclosures but be presented in a way to minimize concerns by any investor, yet here is some of the language:

http://www.ericsson.com/investors/docs/us_prospectus.pdf

If we do not succeed in any such litigation, we could be required to expend significant resources to pay damages, develop non-infringing products/technology or to obtain licenses to the products/technology which is the subject of such litigation. However, we cannot be certain that any such licenses, if available at all, will be available to us on commercially reasonable terms."

"... we may have to expend significant resources to pay damages and we could be enjoined in the United States from selling any products found to infringe unless we either modify these products or obtain licenses to the patents found to be valid and infringed."

"In addition, third parties may attempt to appropriate our confidential information and proprietary technologies and processes used in our business, which we may be unable to prevent."

6)Potential "Smoking Gun" letter which was presented in the HRS case.

The rights offering was filed in 8/02 -- again it would have been prepared with PWC's oversight and any updates concerning legal matters would have been reviewed. This is why the statements on page 18 of the rights offering are interesting about ERICY being enjoined from selling products in the U.S.

Unless something has changed since 8/02, I would say ERICY's management does not have much confidence in not paying some damages to IDCC. Oh, I forgot something has happened since 8/02 --- ERICY was found guilty of willful patent infringement against HRS and the same judge is now the judge over the IDCC matter.

HMMMMMMMM -- somebody make a call to PWC and make sure they are aware of this new development as they are right now reviewing ERICY's 2002 financials. Of course, PWC is already aware and are probably reviewing legal correspondence as I type this post.