RECENT SIGNIFICANT TRANSACTION
In March 2003, we entered into worldwide royalty-bearing license agreements with Telefonaktiebolaget LM Ericsson and Ericsson Inc. (Ericsson) and Sony Ericsson Mobile Communications AB (Sony Ericsson) for sales of terminal units and infrastructure products compliant with Second Generation (2G) GSM/TDMA and 2.5G GSM/GPRS/TDMA standards. These agreements resolved a patent infringement lawsuit with Ericsson that was scheduled for trial in May 2003. We also were granted an option for a Reference Design License and Support Agreement for Ericsson’s GSM/GPRS/UMTS Platform.
We expect to receive aggregate payments currently estimated to be approximately $34 million from Ericsson and Sony Ericsson related to sales of terminal and infrastructure products through December 31, 2002. These payments should be received over four quarters, commencing in the second quarter 2003. We expect to receive approximately $16 million of the $34 million in 2003. We will recognize the total expected payments as other income in the first quarter 2003.
For the period January 1, 2003 through December 31, 2006, Sony Ericsson will be obligated to pay us a royalty on each licensed product sold. In return for advance royalty payments covering projected sales of covered products for discreet twenty-four month periods, Sony Ericsson will receive certain prepayment discounts and credits. The initial advance royalty payments for the first twenty-four month period are mandatory and Sony Ericsson is obligated to make these payments in the second and third quarters of 2003. Based on currently available third party projections of Sony Ericsson’s sales of covered products and certain assumptions by the Company regarding such items as Sony Ericsson’s sales, sales mix, and selling prices, we estimate that the total prepayments for the first twenty-four month period could be in the range of $20 million to $25 million. Once the initial prepayments are exhausted, Sony Ericsson would have the option to make additional advance royalty payments (net of related prepayment discounts and any applicable credits) or, pay royalties on an ongoing basis at undiscounted base royalty rates. The advance royalty payments will be recorded as deferred revenue and recognized as revenue in the periods in which Sony Ericsson exhausts such prepayments through the sale of covered product.
Ericsson also is obligated to pay us an annual license fee of $6 million per year for sales of covered infrastructure products for each of the years 2003 through 2006. The annual license fee will be recognized as revenue on a straight-line basis each year.
We expect that a portion (less than 10%) of amounts to be paid by Ericsson and Sony Ericsson will be used by us to satisfy an insurance reimbursement obligation.
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The license agreements with Ericsson and Sony Ericsson establish the financial terms necessary to define the royalty obligations of Nokia Corporation (Nokia) and Samsung Electronics Co. Ltd. (Samsung) on sales of 2G GSM/TDMA and 2.5G GSM/GPRS/TDMA products under their existing agreements with us. Under the most favored licensee (MFL) provision applicable to their respective patent licenses, both companies are obligated to pay royalties to us on sales of covered products from January 1, 2002 by reference to the terms of the Ericsson and Sony Ericsson licenses. The MFL terms include provisions for a period of review, negotiation, and dispute resolution with regard to the determination of the royalty obligations of both Nokia and Samsung. Based on the Company’s application of the MFL provision, currently available third party estimates of Nokia’s and Samsung’s sales of covered products in 2002, and the Company’s assumptions regarding such items as Nokia’s and Samsung’s sales mix, selling prices, and market share, the Company projects that Nokia’s royalty obligation for 2002 could be in the range of $100 million to $120 million and Samsung’s royalty obligation for 2002 could be in the range of $22 million to $27 million. Further, based on the application of the MFL provision and assumptions noted above, recent market forecasts, and the advance payment of royalties (net of related discounts and any applicable credits) consistent with the terms of the Ericsson and Sony Ericsson agreements, the Company projects that 2003 royalty revenue from Nokia could be in the range of $80 million to $90 million, 2003 royalty revenue from Samsung could be in the range of $20 million to $24 million, and the aggregate advance royalty payments from Nokia and Samsung for 2003 and 2004 could be in the range of $180 million to $220 million. Once these initial prepayments are exhausted, Nokia and Samsung can either make additional advance royalty payments (net of related discounts and any applicable credits) for discreet twenty-four month periods, or pay royalties at undiscounted base royalty rates on sales through 2006. The Company will not record revenue associated with the Nokia and Samsung license agreements until all elements required for revenue recognition are met.
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