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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 25, 2000
OR
/ / 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 0-19528
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QUALCOMM INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 95-3685934
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5775 MOREHOUSE DR., SAN DIEGO, CALIFORNIA 92121-1714
(Address of principal executive offices) (Zip Code)
(858) 587-1121
(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 twelve 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 ninety days. Yes /X/ No / /
The number of shares outstanding of each of the issuer's classes of common
stock, as of the close of business on July 20, 2000:
CLASS NUMBER OF SHARES
- ----- ----------------
Common Stock $0.0001 per share par value.................... 745,059,404
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INDEX
PAGE
--------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets..................... 3
Condensed Consolidated Statements of Income............... 4
Condensed Consolidated Statements of Cash Flows........... 5
Notes to Condensed Consolidated Financial Statements...... 6-20
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition........................ 21-29
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 29
PART II. OTHER INFORMATION.................................................... 30
Item 1. Legal Proceedings........................................... 30
Item 2. Changes in Securities and Use of Proceeds................... 30
Item 3. Defaults Upon Senior Securities............................. 30
Item 4. Submission of Matters to a Vote of Security Holders......... 30
Item 5. Other Information........................................... 30
Item 6. Exhibits and Reports on Form 8-K............................ 30
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUALCOMM INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATE)
(UNAUDITED)
JUNE 25, SEPTEMBER 26,
2000 1999
---------- -------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 712,709 $ 660,016
Marketable securities..................................... 849,882 954,415
Accounts receivable, net.................................. 672,649 883,640
Finance receivables....................................... 54,167 26,377
Inventories, net.......................................... 73,949 257,941
Other current assets...................................... 253,087 195,849
---------- ----------
Total current assets.................................... 2,616,443 2,978,238
Property, plant and equipment, net.......................... 437,631 555,991
Marketable securities....................................... 705,771 70,495
Finance receivables, net.................................... 784,066 548,482
Goodwill, net............................................... 883,197 1,833
Deferred income taxes....................................... 515,855 123,788
Other assets................................................ 428,632 256,123
---------- ----------
Total assets................................................ $6,371,595 $4,534,950
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 432,697 $ 708,307
Unearned revenue.......................................... 83,919 56,070
Bank lines of credit...................................... -- 112,000
---------- ----------
Total current liabilities............................... 516,616 876,377
Other liabilities......................................... 35,082 75,667
---------- ----------
Total liabilities....................................... 551,698 952,044
---------- ----------
Commitments and contingencies (Notes 3, 6 and 10)
Minority interest in consolidated subsidiaries.............. 46,354 51,596
---------- ----------
Company-obligated mandatorily redeemable Trust Convertible
Preferred Securities of a subsidiary trust holding solely
debt securities of the Company............................ -- 659,555
Stockholders' equity:
Preferred stock, $0.0001 par value........................ -- --
Common stock, $0.0001 par value........................... 74 65
Paid-in capital........................................... 5,080,375 2,587,899
Retained earnings......................................... 732,415 200,879
Accumulated other comprehensive (loss) income............. (39,321) 82,912
---------- ----------
Total stockholders' equity.............................. 5,773,543 2,871,755
---------- ----------
Total liabilities and stockholders' equity.............. $6,371,595 $4,534,950
========== ==========
See Notes to Condensed Consolidated Financial Statements.
3
QUALCOMM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- -----------------------
JUNE 25, JUNE 27, JUNE 25, JUNE 27,
2000 1999 2000 1999
--------- ---------- ---------- ----------
Revenues....................................... $ 713,521 $1,004,066 $2,561,335 $2,877,684
--------- ---------- ---------- ----------
Operating expenses:
Cost of revenues............................. 274,952 597,667 1,274,096 1,863,832
Research and development..................... 80,933 93,719 254,490 296,653
Selling, general and administrative.......... 76,696 104,808 275,870 329,762
Amortization of goodwill and other
acquisition-related intangible assets...... 63,506 148 84,114 752
Purchased in-process technology.............. -- -- 60,030 --
Other........................................ -- 109,345 63,589 205,169
--------- ---------- ---------- ----------
Total operating expenses....................... 496,087 905,687 2,012,189 2,696,168
--------- ---------- ---------- ----------
Operating income............................... 217,434 98,379 549,146 181,516
Interest expense............................... (608) (2,704) (4,494) (11,478)
Investment income, net......................... 64,448 4,708 434,444 8,595
Distributions on Trust Convertible
Preferred Securities of subsidiary trust..... -- (9,694) (13,039) (29,397)
Other.......................................... -- -- (3,265) (52,531)
--------- ---------- ---------- ----------
Income before income taxes..................... 281,274 90,689 962,792 96,705
Income tax expense............................. (126,573) (31,741) (431,256) (31,847)
--------- ---------- ---------- ----------
Net income..................................... $ 154,701 $ 58,948 $ 531,536 $ 64,858
========= ========== ========== ==========
Net earnings per common share:
Basic........................................ $ 0.21 $ 0.10 $ 0.75 $ 0.11
========= ========== ========== ==========
Diluted...................................... $ 0.19 $ 0.09 $ 0.67 $ 0.11
========= ========== ========== ==========
Shares used in per share calculations:
Basic........................................ 741,735 601,159 707,713 581,798
========= ========== ========== ==========
Diluted...................................... 805,507 751,532 799,241 617,023
========= ========== ========== ==========
See Notes to Condensed Consolidated Financial Statements.
4
QUALCOMM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
-----------------------
JUNE 25, JUNE 27,
2000 1999
----------- ---------
OPERATING ACTIVITIES:
Net income................................................ $ 531,536 $ 64,858
Depreciation and amortization............................. 164,072 126,784
Purchased in-process technology........................... 60,030 --
Restructuring, impairments and other non-cash charges and
credits................................................. 74,646 244,052
Realized gains on sale of available-for-sale securities... (269,962) (5,663)
Minority interest in income of consolidated
subsidiaries............................................ 4,273 9,995
Equity in losses of investees............................. 8,965 9,445
Deferred income tax provision (benefit)................... 413,705 (45,178)
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net................................ 167,538 (140,680)
Finance receivables, net................................ (284,697) (212,116)
Inventories, net........................................ (57,434) 95,963
Other current assets.................................... (20,800) (17,826)
Accounts payable and accrued liabilities................ (241,892) 44,041
Unearned revenue........................................ 25,512 (5,868)
----------- ---------
Net cash provided by operating activities................... 575,492 167,807
----------- ---------
INVESTING ACTIVITIES:
Capital expenditures...................................... (143,717) (136,884)
Purchases of available-for-sale securities................ (859,379) --
Proceeds from sale of available-for-sale securities....... 538,888 7,163
Purchases of held-to-maturity securities.................. (1,014,933) (26,025)
Maturities of held-to-maturity securities................. 927,051 141,429
Issuance of notes receivable.............................. (202,248) (131,826)
Collection of notes receivable............................ 229,567 42,474
Proceeds from sale of businesses.......................... 246,990 98,097
Business acquisitions and investments in other entities... (247,956) (19,152)
Other items, net.......................................... 5,179 3,000
----------- ---------
Net cash used by investing activities....................... (520,558) (21,724)
----------- ---------
FINANCING ACTIVITIES:
Net reduction in borrowings under bank lines of credit.... (112,000) (53,000)
Net proceeds from issuance of common stock................ 108,514 182,103
Other items, net.......................................... (2,958) (1,745)
----------- ---------
Net cash (used) provided by financing activities............ (6,444) 127,358
----------- ---------
Effect of exchange rate changes on cash..................... 4,203 (13,187)
----------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 52,693 260,254
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 660,016 175,846
----------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 712,709 $ 436,100
=========== =========
See Notes to Condensed Consolidated Financial Statements.
5
QUALCOMM INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements have
been prepared by QUALCOMM Incorporated (the "Company" or "QUALCOMM"), without
audit, in accordance with the instructions to Form 10-Q and, therefore, do not
necessarily include all information and footnotes necessary for a fair
presentation of its financial position, results of operations and cash flows in
accordance with generally accepted accounting principles. The condensed
consolidated balance sheet at September 26, 1999 was derived from the audited
consolidated balance sheet at that date which is not presented herein. The
Company operates and reports using a period ending on the last Sunday of each
month.
In the opinion of management, the unaudited financial information for the
interim periods presented reflects all adjustments, which are only normal and
recurring, necessary for a fair presentation. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the fiscal year ended September 26, 1999. Operating results for interim periods
are not necessarily indicative of operating results for an entire fiscal year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the Company's financial
statements and the accompanying notes. Actual results could differ from those
estimates. Certain prior year amounts have been reclassified to conform to the
current year presentation.
The Company effected a two-for-one stock split in May 1999 and a
four-for-one stock split in December 1999. Stockholders' equity has been
restated to give retroactive recognition to the stock splits for all periods
presented by reclassifying the par value of the additional shares arising from
the splits from paid-in capital to common stock. All references in the financial
statements and notes to number of shares and per share amounts have been
restated to reflect these stock splits.
Basic earnings per common share are calculated by dividing net income by the
weighted average number of common shares outstanding during the reporting
period. Diluted earnings per common share ("diluted EPS") reflect the potential
dilutive effect, calculated using the treasury stock method, of additional
common shares that are issuable upon exercise of outstanding stock options and
the potential dilutive effect for the period prior to conversion of shares
issuable upon conversion of Trust Convertible Preferred Securities, determined
on an if-converted basis, as follows (in thousands):
THREE MONTHS NINE MONTHS
ENDED ENDED
------------------- -------------------
JUNE 25, JUNE 27, JUNE 25, JUNE 27,
2000 1999 2000 1999
-------- -------- -------- --------
Options................................... 63,772 77,704 67,375 35,225
Trust Convertible Preferred Securities.... -- 72,669 24,153 --
------ ------- ------ ------
63,772 150,373 91,528 35,225
====== ======= ====== ======
Options outstanding during the three months ended June 25, 2000 and
June 27, 1999 to purchase approximately 2,051,000 shares and 141,000 shares of
common stock, respectively, and options outstanding during the nine months ended
June 25, 2000 and June 27, 1999 to purchase approximately
6
QUALCOMM INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION (CONTINUED)
1,314,000 and 17,957,000 shares of common stock, respectively, were not included
in the computation of diluted EPS because the options' exercise prices were
greater than the average market price of the common stock during the period and,
therefore, the effect would be anti-dilutive. Net income in the computation of
diluted EPS for the three months ended June 27, 1999 and the nine months ended
June 25, 2000 is increased by $6 million and $7 million, respectively,
representing the assumed savings of distributions, net of taxes, on the Trust
Convertible Preferred Securities. The additional common shares assuming the
conversion of the Trust Convertible Preferred Securities have not been included
for the nine month period ended June 27, 1999 because the effect would have been
anti-dilutive.
During the first nine months of fiscal 2000 approximately 13,191,000 Trust
Convertible Preferred Securities were converted into approximately 72,622,000
shares of common stock. All Trust Convertible Preferred Securities have been
converted into common stock.
The Company displays the accumulated balance of other comprehensive income
or loss separately in the equity section of the consolidated balance sheets.
Total comprehensive income consists of the following (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- --------------------
JUNE 25, JUNE 27, JUNE 25, JUNE 27,
2000 1999 2000 1999
-------- -------- --------- --------
Net income.......................................... $154,701 $ 58,948 $ 531,536 $ 64,858
-------- -------- --------- --------
Other comprehensive (loss) income:
Foreign currency translation...................... (1,824) 8,273 4,312 (21,428)
Change in unrealized gain on securities, net of
income taxes.................................... (21,067) 67,752 35,180 67,752
Reclassification adjustment for gains included in
net income, net of income taxes................. 65 (27,236) (161,725) (27,236)
-------- -------- --------- --------
Total other comprehensive (loss) income............. (22,826) 48,789 (122,233) 19,088
-------- -------- --------- --------
Total comprehensive income.......................... $131,875 $107,737 $ 409,303 $ 83,946
======== ======== ========= ========
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." In May 1999, the FASB delayed
the effective date of FAS 133 by one year. The Company will be required to adopt
FAS 133 for fiscal year 2001. This statement establishes a new model for
accounting for derivatives and hedging activities. Under FAS 133, all
derivatives must be recognized as assets and liabilities and measured at fair
value. The Company has not completed its determination of the impact of the
adoption of this new accounting standard on its consolidated financial position
or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." In June 2000, the SEC staff amended SAB 101 to provide registrants
with additional time to implement SAB 101. The Company will be required to adopt
SAB 101 by the fourth quarter of fiscal 2001. The Company has not
7
QUALCOMM INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION (CONTINUED)
completed its determination of the impact of the adoption of SAB 101 on its
consolidated financial position or results of operation.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation." The Company
will be required to adopt FIN 44 effective July 1, 2000 with respect to certain
provisions applicable to new awards, exchanges of awards in a business
combination, modifications to outstanding awards, and changes in grantee status
that occur on or after that date. FIN 44 addresses practice issues related to
the application of Accounting Practice Bulletin Opinion No. 25, "Accounting for
Stock Issued to Employees." The Company does not expect the application of FIN
44 to have a material impact on its consolidated financial position or results
of operations.
NOTE 2--ACQUISITIONS
SNAPTRACK, INC.
In March 2000, the Company completed the acquisition of all of the
outstanding capital stock of SnapTrack, Inc. ("SnapTrack"), a developer of
wireless position location technology, in a transaction accounted for as a
purchase. The purchase price was approximately $1 billion, representing the
value of QUALCOMM shares issued to effect the purchase, the value of vested and
unvested options and warrants exchanged at the closing date and estimated
transaction costs of $2 million. The preliminary allocation of purchase price,
based on the estimated fair values of the acquired assets and assumed
liabilities and an independent appraisal of intangible assets, reflects acquired
goodwill of $948 million, purchased in-process technology of $60 million and
other intangible assets of $34 million. Tangible assets acquired and liabilities
assumed were not material to the Company's financial statements. The Company
expects to finalize the purchase price allocation within one year and does not
anticipate material adjustments to the preliminary purchase price allocation.
Amounts allocated to goodwill and other intangible assets are amortized on a
straight-line basis over their estimated useful lives of four years. The
acquisition has been treated as a non-cash transaction in the statement of cash
flows.
Purchased in-process technology was expensed upon acquisition because
technological feasibility had not been established and no future alternative
uses existed. The value of purchased in-process technology was calculated by
identifying research projects in areas for which technological feasibility has
not been established, estimating the costs to develop the purchased in-process
technology into commercially viable products, estimating the resulting net cash
flows from such products, discounting the net cash flows to present value, and
applying the percentage completion of the projects thereto. The discount rate
includes a factor that takes into account the uncertainty surrounding the
successful development of the purchased in-process technology.
The condensed consolidated financial statements include the operating
results of SnapTrack from the date of acquisition. Unaudited pro forma operating
results for the Company, assuming the
8
QUALCOMM INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2--ACQUISITIONS (CONTINUED)
acquisition of SnapTrack had been made at the beginning of the periods
presented, are as follows (in thousands, except per share data):
THREE NINE MONTHS ENDED
MONTHS ENDED -----------------------
JUNE 27, JUNE 25, JUNE 27,
1999 2000 1999
------------ ---------- ----------
Revenues................................ $1,004,066 $2,561,674 $2,877,700
---------- ---------- ----------
Net (loss) income....................... $ (2,885) $ 483,681 $ (121,073)
========== ========== ==========
Basic (loss) earnings per common
share................................. $ -- $ 0.68 $ (0.21)
========== ========== ==========
Diluted (loss) earnings per common
share................................. $ -- $ 0.61 $ (0.21)
========== ========== ==========
These pro forma results have been prepared for comparative purposes only and
may not be indicative of the results of operations which actually would have
occurred had the combination been in effect at the beginning of the respective
periods or of future results of operations of the consolidated entities.
TECHNOLOGY DEVELOPMENT GROUP OF TELLIT COMMUNICATIONS LTD.
In February 2000, the Company purchased the Technology Development Group of
Tellit Communications Limited ("Tellit"), a U.K.-based company. QUALCOMM paid
the initial purchase price of $12 million in cash. An additional $9 million in
consideration is payable in cash through March 31, 2001 if certain performance
and other milestones are reached. The preliminary allocation of purchase price,
based on the estimated fair values of acquired assets and liabilities assumed,
reflects acquired goodwill of $11 million and other intangible assets of
$1 million. The Company expects to finalize the purchase price allocation within
one year and does not anticipate material adjustments to the preliminary
purchase price allocation. Any adjustments to the purchase price related to
contingent consideration are expected to increase goodwill. Amounts allocated to
goodwill and assembled workforce are amortized on a straight-line basis over
their estimated useful lives of three years. The condensed consolidated
financial statements include the operating results of the Technology Development
Group of Tellit from the date of acquisition. Pro forma results of operations
have not been presented because the effect of this acquisition is not material.
9
QUALCOMM INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3--COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
Accounts receivable, net are comprised as follows (in thousands):
JUNE 25, SEPTEMBER 26,
2000 1999
-------- -------------
Trade, net of allowance for doubtful accounts of
$12,374 and $22,276, respectively.................. $535,503 $674,211
Long-term contracts:
Billed............................................. 86,716 128,208
Unbilled........................................... 42,886 69,409
Other................................................ 7,544 11,812
-------- --------
$672,649 $883,640
======== ========
Unbilled receivables represent costs and profits recorded in excess of
amounts billable pursuant to contract provisions and are expected to be realized
within one year.
Finance receivables result from arrangements in which the Company has agreed
to provide its customers or certain Code Division Multiple Access ("CDMA")
customers of Telefonaktiebolaget LM Ericsson ("Ericsson") (Note 8) with
long-term interest bearing debt financing for the purchase of equipment and/or
services. Such financing is generally collateralized by the related equipment.
Finance receivables are comprised as follows (in thousands):
JUNE 25, SEPTEMBER 26,
2000 1999
-------- -------------
Finance receivables.................................. $848,852 $585,482
Allowance for doubtful receivables................... (10,619) (10,623)
-------- --------
838,233 574,859
Current maturities................................... 54,167 26,377
-------- --------
Noncurrent finance receivables, net.................. $784,066 $548,482
======== ========
At June 25, 2000, commitments to extend long-term financing to CDMA
customers of Ericsson (Note 8) totaled approximately $301 million, which the
Company expects to fund over the next five years. Such commitments are subject
to the customers meeting certain conditions established in the financing
arrangements and, in most cases, to Ericsson also financing a portion of such
sales. Commitments represent the estimated amounts to be financed under these
arrangements; actual financing may be in lesser amounts.
10
QUALCOMM INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3--COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS (CONTINUED)
Inventories are comprised as follows (in thousands):
JUNE 25, SEPTEMBER 26,
2000 1999
-------- -------------
Raw materials......................................... $34,120 $161,481
Work-in-process....................................... 7,780 51,003
Finished goods........................................ 32,049 45,457
------- --------
$73,949 $257,941
======= ========
At June 25, 2000, goodwill is presented net of $83 million in accumulated
amortization.
NOTE 4--MARKETABLE SECURITIES
In April 2000, the Company purchased 11,499,627 shares of the common stock
of NetZero, Inc. ("NetZero"), representing a 9.9% interest, for $144 million in
cash. NetZero is a publicly traded company that provides Internet access and
services to consumers and on-line direct marketing services to advertisers. The
recorded value of the NetZero investment is $66 million at June 25, 2000.
In February 2000, the Company purchased 308,000 units of Leap Wireless
International Inc.'s ("Leap Wireless") senior discount notes with warrants for
$150 million. The notes mature in April 2010 and bear interest at 14.5%. The
warrants are detachable after six months and entitle each holder to purchase
2.503 common shares per each senior discount note unit held. The exercise price
is $96.80 per common share. Leap Wireless used $227 million of the proceeds from
the issuance of senior discount notes and senior notes to pay down its credit
facility with QUALCOMM. The credit facility was cancelled in the second quarter
of fiscal 2000. The recorded value of the senior discount notes with warrants is
$134 million at June 25, 2000.
In November 1999, the Company purchased 2,565,000 common shares of Korea
Telecom Freetel ("KT Freetel"), representing a 1.9% interest, for $110 million
and an $86 million zero coupon bond with warrants to purchase approximately
1,851,000 additional shares in KT Freetel. If KT Freetel meets certain
obligations related to the commercial deployment of high data rate, or 1xEV
technology, the Company will be required to exercise the warrants. The exercise
price of the warrants is expected to be paid by tendering the bond as payment in
full. If KT Freetel does not meet such obligations, the Company will have the
right to redemption of the bond at face value plus a premium equal to 10% per
annum. The Company uses the cost method to account for 1,924,000 of the common
shares and warrants to purchase 1,389,000 additional shares as those securities
and the securities underlying the warrants are restricted through June 1, 2002.
The remaining shares and warrants are recorded at fair value. The recorded value
of the KT Freetel investments is $204 million at June 25, 2000, including
$147 million related to restricted securities classified as other noncurrent
assets.
11
QUALCOMM INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5--INVESTMENT INCOME (EXPENSE), NET
Investment income (expense) is comprised as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- -------------------
JUNE 25, JUNE 27, JUNE 25, JUNE 27,
2000 1999 2000 1999
-------- -------- -------- --------
Interest income........................................ $68,557 $11,610 $177,720 $25,645
Realized gains on marketable securities................ (99) -- 269,962 5,663
Loss on cancellation of warrants....................... -- -- -- (3,273)
Minority interest in income of consolidated
subsidiaries......................................... (659) (3,452) (4,273) (9,995)
Equity in losses of investees.......................... (3,351) (3,450) (8,965) (9,445)
------- ------- -------- -------
$64,448 $ 4,708 $434,444 $ 8,595
======= ======= ======== =======
NOTE 6--INVESTMENTS IN OTHER ENTITIES
GLOBALSTAR L.P.
Through partnership interests held in certain intermediate limited
partnerships, the Company owns a 6.0% partnership interest in Globalstar L.P.
("Globalstar"), a limited partnership formed to develop, own and operate the
Globalstar low-Earth-orbit ("LEO") satellite system utilizing CDMA technology
(the "Globalstar System").
At June 25, 2000 and September 26, 1999, $509 million and $349 million in
interest bearing financed amounts and $105 million and $171 million in accounts
receivable, including $30 million and $59 million in unbilled receivables,
respectively, were outstanding from Globalstar. In May 2000, the Company and
Globalstar signed definitive agreements to finance current and future contract
payments. The financing bears interest at 6% and is payable in quarterly
installments beginning January 15, 2001 through August 15, 2003. The Company
received warrants to purchase 3,450,000 ordinary partnership interests in
Globalstar as part of the financing arrangement for $42.25 per unit, which
approximates the market value of the common shares of Globalstar
Telecommunications Ltd. on the transaction date assuming a just over one-to-four
relationship. Fifty percent of the warrants are vested and the remaining
warrants vest in 25% increments on September 1, 2000 and 2001. The vested
warrants were recorded at an estimated fair value of $24 million, resulting in a
corresponding discount to the finance receivables. The Company changed its
estimate of amounts collectible under Globalstar contracts and recorded
previously unrecognized revenue of $8 million and interest income of
$10 million during the first nine months of fiscal 2000. At June 25, 2000,
$31 million in future contract billings, including unbilled receivables at
June 25, 2000, are expected to be eligible for financing under the financing
agreement with Globalstar (Note 12).
IGNITION, LLC
In March 2000, the Company purchased 42 million Series B Preferred units,
representing an approximate 13% undiluted interest, in Ignition, LLC
("Ignition"), a venture firm formed to fund, mentor and build wireless Internet
start-up companies. The Company also received a warrant to purchase four million
common units at $0.46 per unit. The Company made capital contributions of
$17 million during the first nine months of fiscal 2000 and will be required to
provide $25 million in
12
QUALCOMM INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6--INVESTMENTS IN OTHER ENTITIES (CONTINUED)
additional equity contributions over five years. The Company accounts for its
investment in Ignition under the equity method.
OTHER INVESTMENTS
The Company makes strategic investments in companies that have developed or
are developing innovative wireless data applications and wireless carriers that
promote the worldwide deployment of CDMA and high date rate, or 1xEV ("1xEV"),
systems. Funding commitments related to these investments total $74 million at
June 25, 2000, which the Company expects to fund over three years. Such
commitments may be subject to the investees meeting certain conditions; actual
equity funding may be in lesser amounts.
NOTE 7--BANK LINE OF CREDIT
The Company has an unsecured credit facility under which banks are committed
to make up to $400 million in revolving loans to the Company. The credit
facility expires in March 2001. The facility may be extended on an annual basis
upon maturity. The Company is currently obligated to pay commitment fees equal
to 0.175% per annum on the unused amount of the credit facility. The credit
facility includes certain restrictive financial and operating covenants. At
June 25, 2000, there were no amounts or letters of credit issued or outstanding
under the credit facility.
NOTE 8--DISPOSITION OF ASSETS AND OTHER CHARGES
In February 2000, the Company sold its terrestrial-based CDMA wireless
consumer phone business, including its phone inventory, manufacturing equipment
and customer commitments, to Kyocera Corporation ("Kyocera"). Under the
agreement with Kyocera, Kyocera agreed to purchase a majority of its CDMA
integrated circuits and system software requirements from QUALCOMM for a period
of five years. Kyocera will continue its existing royalty-bearing CDMA license
agreement with QUALCOMM. QUALCOMM received $216 million on February 22, 2000 and
an additional $26 million during the third quarter of fiscal 2000 based on
finalization of the recorded values of net assets actually sold. At June 25,
2000, approximately $10 million in net assets are held in connection with the
pending transfer of certain foreign assets to Kyocera, and a corresponding
liability has been recorded as a result of Kyocera's payment for these assets
during the third quarter of fiscal 2000.
As part of the agreement with Kyocera, QUALCOMM formed a new subsidiary that
has a substantial number of employees from QUALCOMM Consumer Products business,
to provide services to Kyocera on a cost-plus basis to support Kyocera's phone
business for up to three years. Selected employees of QUALCOMM Personal
Electronics ("QPE"), a 51% owned consolidated subsidiary of the Company and
manufacturer of phones for QUALCOMM, were transferred to Kyocera. As a condition
of the purchase, QPE paid down and cancelled its two revolving credit
agreements. The Company anticipates that remaining QPE manufacturing assets will
be liquidated. QUALCOMM recorded $83 million in charges during the nine months
ended June 25, 2000 to reflect the estimated difference between the carrying
value of the net assets and the consideration to be received from Kyocera, less
costs to sell, and employee termination costs.
13
QUALCOMM INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 8--DISPOSITION OF ASSETS AND OTHER CHARGES (CONTINUED)
In May 1999, the Company sold certain of its assets related to its
terrestrial CDMA wireless infrastructure business to Ericsson and entered into
various license and settlement agreements with Ericsson. Pursuant to the
Company's agreement with Ericsson, the Company has and will extend financing for
possible future sales by Ericsson of infrastructure equipment and related
services to specific customers in certain geographic areas, including Brazil,
Chile, Mexico, and Russia or in other areas selected by Ericsson (Note 3). The
Company recorded charges of $108 million and $251 million during the three month
and the nine month periods ended June 27, 1999, respectively, related to the
sale of its terrestrial CDMA wireless infrastructure business. Ericsson has
notified the Company that it is disputing the purchase price (Note 10).
NOTE 9--INCOME TAXES
The Company currently estimates its annual effective income tax rate to be
approximately 45% for fiscal 2000, compared to 35% for fiscal 1999. The higher
tax rate for fiscal 2000 is primarily a result of higher pretax earnings,
non-deductible charges for purchased in-process technology and amortization of
goodwill.
NOTE 10--COMMITMENTS AND CONTINGENCIES
LITIGATION
On or about June 5, 1997, Elisra Electronic Systems Ltd. ("Elisra")
submitted to the International Chamber of Commerce a Request for Arbitration of
a dispute with the Company based upon a Development and Supply Agreement ("DSA")
entered into between the parties effective November 15, 1995, alleging that the
Company wrongfully terminated the DSA, seeking monetary damages. The Company
thereafter submitted a Reply and Counterclaim, alleging that Elisra breached the
DSA, seeking monetary damages. Subsequently, the parties stipulated that the
dispute be heard before an arbitrator under the jurisdiction of the American
Arbitration Association, and to bifurcate the resolution of liability issues
from damage issues. To date, the arbitrator has heard testimony regarding the
liability or non-liability of the parties, post-hearing briefs have been filed,
and the parties have submitted oral argument. Although there can be no assurance
that the resolution of these claims will not have a material adverse effect on
the Company's results of operations, liquidity or financial position, the
Company believes that the claims made by Elisra are without merit and will
vigorously defend against the claims.
On October 27, 1998, the Electronics and Telecommunications Research
Institute of Korea ("ETRI") submitted to the International Chamber of Commerce a
Request for Arbitration (the "Request") of a dispute with the Company arising
out of a Joint Development Agreement ("JDA") dated April 30, 1992, between ETRI
and the Company. In the Request, ETRI alleged that the Company breached certain
provisions of the JDA and sought monetary damages and an accounting. The Company
filed an answer and counterclaims denying the allegations, seeking a declaration
establishing the termination of the JDA and monetary damages and injunctive
relief against ETRI. The arbitration hearing commenced on July 5, 2000 in San
Diego. Although there can be no assurance that the resolution of these claims
will not have a material adverse effect on the Company's results of operations,
liquidity or financial position, the Company believes that the claims are
without merit and will vigorously defend the action.
14
QUALCOMM INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
On May 6, 1999, Thomas Sprague, a former employee of the Company, filed a
putative class action against the Company, ostensibly on behalf of himself and
those of the Company's former employees who were offered employment with
Ericsson in conjunction with the sale to Ericsson of certain of the Company's
infrastructure division assets and liabilities and who elected not to
participate in a Retention Bonus Plan being offered to such former employees.
The complaint was filed in California Superior Court in and for the County of
San Diego and purports to state eight causes of action arising primarily out of
alleged breaches of the terms of the Company's 1991 Stock Option Plan, as
amended from time to time. The putative class sought to include former employees
of the Company whom, among other things, "have not or will not execute the Bonus
Retention Plan and accompanying full and complete release of QUALCOMM." The
complaint seeks an order accelerating all unvested stock options for the members
of the class. Of the 1,053 transitioning former employees who had unvested stock
options, 1,016 elected to participate in the Retention Bonus Plan offered by
QUALCOMM and Ericsson, which provides several benefits including cash
compensation based upon a portion of the value of their unvested options, and
includes a written release of claims against the Company. On July 30, 1999,
plaintiffs filed a First Amended Complaint incorporating the allegations set
forth in the original complaint, adding two new causes of action and expanding
the putative class to also include those former employees who chose to
participate in the Bonus Retention Plan. In October 1999, the court sustained
the Company's demurrer to the plaintiffs' cause of action for breach of
fiduciary duty. Counsel for the putative class filed a Second Amended Complaint,
including substantially the same allegations as the First Amended Complaint, on
November 1, 1999. On March 10, 2000, counsel for plaintiffs and QUALCOMM filed a
Stipulation of Settlement with the court that would allocate a settlement
payment of $9 million, which will be funded by third parties, to all plaintiffs
who do not elect to opt out of the settlement on or before April 17, 2000. The
number of employees electing to opt out exceeded the limit, and the Company has
elected to void the settlement. Although there can be no assurance that an
unfavorable outcome of the dispute would not have a material adverse effect on
the Company's results of operations, liquidity or financial position, the
Company believes the claims are without merit and will vigorously defend the
action.
On June 29, 1999, GTE Wireless, Incorporated ("GTE") filed an action in the
U.S. District Court for the Eastern District of Virginia asserting that wireless
telephones sold by the Company infringe a single patent allegedly owned by GTE.
On September 15, 1999, the court granted the company's motion to transfer the
action to the U.S. District Court for the Southern District of California.
Although there can be no assurance that an unfavorable outcome of the dispute
would not have a material adverse effect on the Company's results of operations,
liquidity or financial position, the Company believes the action is without
merit and will vigorously defend the action.
QUALCOMM and Ericsson are currently participating in an arbitration in which
Ericsson is disputing the determination of the purchase price under the asset
purchase agreement pursuant to which Ericsson acquired certain assets related to
the Company's terrestrial wireless infrastructure business in May 1999. QUALCOMM
has also received notice from Ericsson that Ericsson intends to assert claims
for indemnification under the subject asset purchase agreement. QUALCOMM and
Ericsson are having on-going discussions aimed at potentially resolving these
claims. In the event the parties are unable to otherwise resolve these claims,
the pending arbitration with respect to the purchase price determination shall
continue to proceed forward and Ericsson's claims for indemnification will be
subject to resolution pursuant to the dispute resolution procedures set forth in
15
QUALCOMM INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
the asset purchase agreement. Although there can be no assurance that the
resolution of these claims will not have a material adverse effect on the
Company's results of operations, liquidity or financial position, the Company
believes the claims are without merit and will vigorously defend them.
On February 2, 2000, Thomas Durante, James Curley, Curtis Parker and Joseph
Edwards, filed a putative class action against the Company, ostensibly on behalf
of themselves and those former employees of the Company whose employment was
terminated in April 1999. Virtually all of the purported class of plaintiffs
received severance packages at the time of the termination of their employment,
in exchange for their general release of claims against the Company. The
complaint was filed in California Superior Court in and for the County of Los
Angeles and purports to state ten causes of action including breach of contract,
age discrimination, violation of Labor Code Section 200, violation of Labor Code
Section 970, unfair business practices, intentional infliction of emotional
distress, unjust enrichment, breach of the covenant of good faith and fair
dealing, declaratory relief and undue influence. The complaint seeks an order
accelerating all unvested stock options for the members of the class. On
June 27, 2000, the case was ordered transferred from Los Angeles County Superior
Court to San Diego County Superior Court. On July 3, 2000, the Company removed
the case to the United States District Court for the Southern District of
California. Although there can be no assurance that an unfavorable outcome of
the dispute would not have a material adverse effect on the Company's results of
operations, liquidity or financial position, the Company believes the claims are
without merit and will vigorously defend the action.
On June 13, 2000, Van May, Ruth Ann Feldman, Jeffrey Alan MacGuire and
Maurice Clark filed a putative class action lawsuit in San Diego County Superior
Court against the Company and against QUALCOMM Personal Electronics ("QPE"),
ostensibly on behalf of themselves and other former employees of QPE who were
offered benefits in QPE's Performance Unit Plan. The complaint purports to state
seven causes of action, including breach of contract, violation of California
Labor Code Section 970, fraud, unfair business practices, unjust enrichment,
breach of the covenant of good faith and fair dealing and declaratory relief.
Although there can be no assurance that an unfavorable outcome of the dispute
would not have a material adverse effect on the Company's results of operations,
liquidity or financial position, the Company believes the claims are without
merit and will vigorously defend the action.
The Company is engaged in other legal actions arising in the ordinary course
of its business and believes that the ultimate outcome of these actions will not
have a material adverse effect on its results of operations, liquidity or
financial position.
LETTERS OF CREDIT, FINANCIAL GUARANTEES AND OTHER FINANCIAL COMMITMENTS
The Company has issued a letter of credit to support a guarantee of up to
$22.5 million of Globalstar (Note 6) borrowings under an existing bank financing
agreement. The guarantee will expire in December 2000. The letter of credit is
collateralized by a commensurate amount of the Company's investments in debt
securities. As of June 25, 2000, $250 million was outstanding under the existing
bank financing agreement (Note 12).
On December 22, 1999 and April 25, 2000, the Company and Pegaso
Telecomunicaciones, S.A. de C.V. ("Pegaso"), a wireless telecommunications
operating company investee of Leap Wireless, executed
16
QUALCOMM INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
commitment letters, in which the Company agreed to underwrite up to
$500 million of debt financing to Pegaso and its wholly-owned subsidiary, Pegaso
Comunicaciones y Sistemas, a CDMA wireless operating company in Mexico. The debt
financing would consist of a $250 million senior secured facility and a
$250 million unsecured facility. The debt facilities are expected to have final
maturities of seven to eight years. The Company currently has guaranteed a
$175 million facility that will be prepaid and cancelled upon funding of the
$250 million senior secured facility.
In addition to the letter of credit on behalf of Globalstar, the Company has
$3 million of letters of credit and $189 million of other financial guarantees
outstanding as of June 25, 2000, none of which are collateralized.
METROSVYAZ LTD.
In September 1999, the Company recorded $51 million in charges to reflect
the impairment of assets related to Metrosvyaz Ltd. ("Metrosvyaz"), a company
formed to develop and manage investments in wireless operating companies in
Russia, as a result of Leap Wireless' announcement of its intention to withdraw
its support for Metrosvyaz. In February 2000, as a result of ongoing discussions
and QUALCOMM's continued interest in promoting CDMA in Russia, the Company
signed a Memorandum of Understanding ("MOU") with Metrosvyaz, pursuant to which,
the Company advanced $6 million under a previously existing loan facility. The
amount advanced was deemed to be nonrecoverable, and the $6 million charge was
recorded as other non-operating expense. In March 2000, the parties agreed to
modify certain provisions of the MOU, and as a result, QUALCOMM would receive a
30% interest in Metrosvyaz, in exchange for a contribution by QUALCOMM of all
its outstanding Metrosvyaz indebtedness before Metrosvyaz meets additional
funding milestones. The MOU provides specific milestones that Metrosvyaz must
meet to obtain an additional $10 million in funding. If the additional funding
occurs, QUALCOMM would receive an additional 5% interest in Metrosvyaz. The
Company also has a commitment to Ericsson to provide up to approximately
$30 million in vendor financing to Metrosvyaz related to potential future sales
made by Ericsson to Metrosvyaz (Note 3).
NOTE 11--SEGMENT INFORMATION
The Company is organized on the basis of products and services. Reportable
segments are as follows: QUALCOMM CDMA Technologies ("QCT") is a leading
developer and supplier worldwide of CDMA-based wireless communication integrated
circuits and system software solutions for voice and data communications
products and services; QUALCOMM Technology Licensing ("QTL") licenses third
parties to design, manufacture, and sell products incorporating the Company's
technologies; and QUALCOMM Wireless Systems ("QWS") designs, manufactures,
markets, and deploys infrastructure and handset products for use in terrestrial
and non-terrestrial CDMA wireless and satellite networks and provides
satellite-based two-way data messaging, position reporting equipment and
services to transportation companies. The Company sold its terrestrial-based
CDMA wireless consumer phone business, the former operating segment, QUALCOMM
Consumer Products ("QCP"), to Kyocera in February 2000 (Note 8).
17
QUALCOMM INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 11--SEGMENT INFORMATION (CONTINUED)
The table below presents revenues and earnings before taxes ("EBT") for
reported segments (in thousands):
RECONCILING
QCT QTL QWS ITEMS TOTAL
-------- -------- -------- ----------- ----------
FOR THE THREE MONTHS ENDED:
JUNE 25, 2000
Revenues............................... $338,132 $174,245 $167,184 $ 33,960 $ 713,521
EBT.................................... 109,573 152,384 65,129 (45,812) 281,274
JUNE 27, 1999
Revenues............................... $318,324 $126,019 $228,283 $ 331,440 $1,004,066
EBT.................................... 129,496 112,820 7,624 (159,251) 90,689
FOR THE NINE MONTHS ENDED:
JUNE 25, 2000
Revenues............................... $969,713 $519,442 $570,450 $ 501,730 $2,561,335
EBT.................................... 327,240 465,397 214,310 (44,155) 962,792
JUNE 27, 1999
Revenues............................... $775,050 $306,561 $731,145 $1,064,928 $2,877,684
EBT.................................... 302,426 268,887 (31,451) (443,157) 96,705
Reconciling items in the above table are comprised as follows (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------- ----------------------
JUNE 25, JUNE 27, JUNE 25, JUNE 27,
2000 1999 2000 1999
-------- --------- --------- ----------
REVENUES:
Revenues from external customers of QCP segment
sold........................................... $ -- $ 354,174 $ 541,856 $1,048,933
Elimination of intersegment revenue.............. (22,785) (99,603) (164,840) (265,689)
Other products................................... 56,745 76,869 124,714 281,684
-------- --------- --------- ----------
Reconciling items.............................. $ 33,960 $ 331,440 $ 501,730 $1,064,928
======== ========= ========= ==========
EARNINGS BEFORE INCOME TAXES
Unallocated corporate expenses................... $(67,194) $(123,251) $(250,514) $ (281,065)
EBT of QCP segment sold.......................... -- 5,481 (80,222) (25,294)
Unallocated investment income (expense), net..... 32,221 5,456 357,829 12,631
Distributions on Trust Convertible Preferred
Securities of subsidiary trust................. -- (9,694) (13,039) (29,397)
Intracompany profit.............................. (17,076) (26,392) (59,529) (92,214)
Other............................................ 6,237 (10,851) 1,320 (27,818)
-------- --------- --------- ----------
Reconciling items.............................. $(45,812) $(159,251) $ (44,155) $ (443,157)
======== ========= ========= ==========
18
QUALCOMM INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 11--SEGMENT INFORMATION (CONTINUED)
Unallocated corporate expenses for the three months ended June 25, 2000
include $64 million for amortization of goodwill and other acquisition-related
intangible assets. Unallocated corporate expenses for the nine months ended
June 25, 2000 include $83 million in charges related to the sale of the
terrestrial-based CDMA wireless consumer products business, $60 million for
in-process technology related to the SnapTrack acquisition, and $84 million for
amortization of goodwill and other acquisition-related intangible assets.
Unallocated corporate expenses for the three months and nine months ended
June 27, 1999 include $163 million and $280 million, respectively, related to
the sale of certain assets of the Company's terrestrial CDMA wireless
infrastructure business and restructuring charges.
Revenues from external customers and intersegment revenues are as follows
(in thousands):
QCT QTL QWS
-------- -------- --------
FOR THE THREE MONTHS ENDED:
JUNE 25, 2000
Revenues from external customers.............. $330,793 $159,443 $166,540
Intersegment revenues......................... 7,339 14,802 644
JUNE 27, 1999
Revenues from external customers.............. $247,721 $ 97,104 $228,198
Intersegment revenues......................... 70,603 28,915 85
FOR THE NINE MONTHS ENDED:
JUNE 25, 2000
Revenues from external customers.............. $874,562 $453,879 $566,324
Intersegment revenues......................... 95,151 65,563 4,126
JUNE 27, 1999
Revenues from external customers.............. $598,490 $228,064 $720,513
Intersegment revenues......................... 176,560 78,497 10,632
Segment assets were presented in the Company's 1999 Annual Report on
Form 10-K. QWS segment assets increased to $1.078 billion at June 25, 2000 from
$868 million at September 26, 1999, principally as a result of the financing of
Globalstar contract payments (Note 6) and financing under the agreement with
Ericsson (Note 8).
NOTE 12--SUBSEQUENT EVENTS
On June 30, 2000, Globalstar defaulted on a $250 million bank facility that
QUALCOMM partially guaranteed in 1996 (Note 10). As a result of this default,
QUALCOMM's guaranty was called, and QUALCOMM paid $22 million to the subject
banks. Pursuant to an agreement entered into in April 1996, with respect to the
original provision of this guaranty, Globalstar has the right, under certain
conditions, to cause QUALCOMM to accept, in satisfaction of QUALCOMM's
subrogation rights, a subordinated promissory note issued by Globalstar with a
principal amount equal to the
19
QUALCOMM INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 12--SUBSEQUENT EVENTS (CONTINUED)
amount QUALCOMM paid under its guaranty (the "Globalstar Promissory Note").
Globalstar has elected to exercise this right. The Globalstar Promissory Note
bears interest at LIBOR plus 3%, and principal and interest are due and payable
in full on June 30, 2003.
On July 25, 2000, QUALCOMM announced that it will spin-off a business
consisting primarily of its integrated circuit and system software solutions
business. In connection with this announcement, QUALCOMM has filed a Current
Report on Form 8-K.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This information should be read in conjunction with the condensed
consolidated financial statements and the notes thereto included in Item 1 of
Part I of this Quarterly Report and the audited consolidated financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended September 26,
1999 contained in the Company's 1999 Annual Report on Form 10-K.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. QUALCOMM's future results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not specifically limited to: the ability to develop and
introduce cost effective new products in a timely manner; risk that the rate of
growth in the Code Division Multiple Access ("CDMA") subscriber base will
decrease; risks associated with the scale-up, acceptance and operations of CDMA
systems, including high data rate, or 1xEV ("1xEV"), technology; risks
associated with component shortages; risks associated with strategic
opportunities or acquisitions, divestitures and investments the Company may
pursue; risks related to the ability to sustain or improve operational
efficiency and profitability; risks relating to the success of the Globalstar
business; developments in current or future litigation; the Company's ability to
effectively manage growth and the intense competition in the wireless
communications industry; risks associated with the timing and receipt of license
fees and royalties; risk associated with international business activities; and
risks related to accounts receivable and finance receivables, as well as the
other risks detailed in this section, "Liquidity and Capital Resources," and in
the Company's 1999 Annual Report on Form 10-K. The Company's consolidated
financial data includes QPE and certain other consolidated subsidiaries of the
Company.
OVERVIEW
QUALCOMM is a leading developer and supplier worldwide of CDMA-based
wireless communication integrated circuits and system software solutions for
voice and data communications products and services. QUALCOMM's CDMA-based
products include system software and baseband, radio frequency, intermediate
frequency, and power amplification integrated circuit products for wireless
handset manufacturers. For wireless infrastructure manufacturers, QUALCOMM
offers base-band integrated circuit products and system software solutions which
provide wireless-standards compliant processing of voice and data signals to and
from wireless handsets.
The Company licenses and receives royalty payments on its CDMA technology
from major domestic and international telecommunications equipment suppliers. In
addition, the Company designs, manufactures and distributes products and
provides services for its OmniTRACS system. The Company also has contracts with
Globalstar to design, develop and manufacture subscriber products and ground
communications systems utilizing CDMA technology and to provide contract
development services. The Company also recently announced a new business model
for the Company's Eudora e-mail software product. The Company provides the
Eudora e-mail software to users for free and generate revenues from sponsor
advertising within the program.
The Company is increasing its strategic investment activities to promote the
worldwide adoption of CDMA products and the growth of CDMA-based wireless data
and CDMA-based wireless Internet products and solutions. The Company generally
enters into strategic transactions with start-up companies that have developed
or are developing innovative technologies for the wireless industry, other
companies that enter into similar transactions with start-up companies and CDMA
carrier companies.
The Company's CDMA technology has been adopted as an industry standard for
digital cellular, Personal Communications Services and other wireless services.
Wireless networks based on the
21
Company's current implementation of CDMA technology, referred to as cdmaOne,
have been commercially deployed or are under development in more than 35
countries around the world, with 27 countries already in commercial deployments.
In May 2000, the CDMA Development Group reported that CDMA carriers now have
over 57 million commercial subscribers worldwide as of March 2000, a growth of
101% in one year.
QUALCOMM continues to invest in research and development projects focused on
improving current CDMA applications and products, developing and commercializing
next generation CDMA technology and products, compatible with multiple wireless
technologies (multi-mode products) to enable world-wide roaming and are in the
process of developing and commercializing third generation wireless
communication technology to handle the increase in mobile Internet usage and
wireless multimedia applications. The Company believes 1xEV will provide a high
speed, cost-effective, fixed and mobile alternative for Internet access,
competing with digital subscriber loop, cable, and satellite networks. 1xEV is
designed to enable existing wireless operators and future CDMA third-generation
service providers to obtain higher capacities and superior performance by
optimizing voice and data spectrum separately, while serving both applications
from the same base station.
In June 2000, QUALCOMM announced an agreement with Technicolor Digital
Cinema, Inc. ("Technicolor") to form a joint venture, Technicolor Digital
Cinema, LLC, which will work with the motion picture industry as a technology
enabler and service provider while supporting open standards for the digital
delivery of movies and the existing studio-to-theater business model. Both
Technicolor and QUALCOMM will take an active role in the initial management of
the entity's day-to-day operations. Technicolor will maintain a majority
ownership of the entity.
QUALCOMM continues to provide services and sell products under a number of
development and manufacturing contracts involving the Globalstar System.
QUALCOMM's development agreement provides for the design and development of the
ground communications stations, known as gateways, and user terminals of the
Globalstar System. Since telephone systems using low-Earth-orbit satellites are
a new commercial technology, demand for Globalstar's service is uncertain. If
Globalstar fails to generate sufficient cash flow from operations through the
marketing efforts of its service providers, it might be unable to fund its
operating costs or service its debt. On June 30, 2000, Globalstar defaulted on a
$250 million bank facility that QUALCOMM partially guaranteed in 1996. See
"Notes to Condensed Consolidated Financial Statements--Note 12--Subsequent
Events."
At June 25, 2000, the Company had approximately $608 million in net asset
exposure related to its business with Globalstar, including receivables,
inventory, unearned revenues, investment-related assets and the $22 million
guarantee. The value of QUALCOMM's investment in and future business with
Globalstar, as well as QUALCOMM's ability to collect outstanding receivables
from Globalstar, depends on the success of Globalstar and the Globalstar System.
See "Notes to Condensed Consolidated Financial Statements--Note 6--Investments
in Other Entities."
In June 2000, the Federal Communications Commission ("FCC") awarded a
$125 million "Auction Discount Voucher" ("ADV") to QUALCOMM to use in any FCC
spectrum auction, for one or more licenses over a period of up to three years.
Fully transferable, the ADV may be used in whole or in part by any entity in any
auction, including those in which QUALCOMM is not a participant. The FCC award
is in response to a July 1999 U.S. Court of Appeals decision in which the FCC
was ordered to designate QUALCOMM a "pioneer" under the Commission's Pioneer's
Preference program, and grant QUALCOMM spectrum forthwith. The FCC awarded the
ADV to QUALCOMM in lieu of granting spectrum. Two preliminary auctions, one in
the 700 MHz band and one for licenses reclaimed from former C-block license
holders, have been scheduled by the FCC over the next several months. The
Company is currently exploring opportunities to participate in these auctions on
its own or through a partnership or consortium with other parties or to sell the
ADV to a third party. The Company will not recognize the value of the ADV until
it is utilized or sold.
22
THIRD QUARTER OF FISCAL 2000 COMPARED TO THIRD QUARTER OF FISCAL 1999
Total revenues for the third quarter of fiscal 2000 were $714 million
compared to $1.004 billion for the third quarter of fiscal 1999. The decrease in
revenue for the third quarter of fiscal 2000 was primarily due to a decrease in
the terrestrial CDMA wireless consumer product revenue as a result of the sale
of the business in February 2000, a decrease in the wireless infrastructure
product revenue related to the sale of this business in May 1999, and a decrease
in average selling prices of integrated circuits, offset by increases in royalty
revenues and CDMA integrated circuits shipments. Based on recent feedback from
South Korean customers and operators, the Company may experience lower
integrated circuits shipments and royalty revenue in the fourth quarter of
fiscal 2000 due to an anticipated decrease in domestic South Korean phone sales
related to the elimination of phone subsidies.
Cost of revenues for the third quarter of fiscal 2000 was $275 million
compared to $598 million for the third quarter of fiscal 1999. The dollar
decrease was primarily due to a decrease in the terrestrial CDMA wireless
consumer product costs as a result of the sale of the business in
February 2000, a decrease in the terrestrial CDMA wireless infrastructure
product costs related to the sale of this business in May 1999, and a reduction
in the unit cost of integrated circuits, offset by an increase in CDMA
integrated circuits unit volume. Cost of revenues decreased as a percentage of
revenues to 39% in the third quarter of fiscal 2000 from 60% in the third
quarter of fiscal 1999. This is primarily due to higher revenues from high
margin integrated circuits and software, royalties, OmniTRACS unit sales and
messaging services, offset by lower revenues from lower gross margin terrestrial
CDMA wireless phones and infrastructure.
For the third quarter of fiscal 2000, research and development expenses were
$81 million or 11% of revenues, compared to $94 million or 9% of revenues for
the third quarter of fiscal 1999. The dollar decrease was due to a decrease in
terrestrial CDMA consumer product research and development as a result of the
sale of this business in February 2000 and a decrease in terrestrial CDMA
wireless infrastructure product research and development related to the sale of
this business in May 1999, offset by increased integrated circuits product
initiatives and software development efforts and new 1xEV products.
For the third quarter of fiscal 2000, selling, general and administrative
expenses were $77 million or 11% of revenues, compared to $105 million or 10% of
revenues for the third quarter of fiscal 1999. The dollar decrease from the
third quarter of fiscal 1999 was due to a decrease in marketing costs in
terrestrial CDMA wireless consumer products as a result of the sale of the
business in February 2000, and a decrease in selling, general and administrative
expenses for terrestrial CDMA wireless infrastructure products as a result of
the sale of this business in May 1999, partially offset by continued growth in
personnel and associated overhead expenses necessary to support growth in other
business operations, and increased patent, litigation and employer payroll tax
on employee non-qualified stock option exercises expenses.
Amortization of goodwill and other acquisition-related intangible assets
increased to $64 million for the third quarter of fiscal 2000 compared to
$0.1 million for the third quarter of fiscal 1999, primarily due to the
acquisition of SnapTrack. See "Notes to Condensed Consolidated Financial
Statements--Note 2--Acquisitions."
For the third quarter of fiscal 2000, there were no other operating
expenses. During the third quarter of fiscal 1999, the Company recorded a
$6 million charge to reflect the difference between the carrying value of the
net assets sold to Ericsson and the net consideration received, a $22 million
charge to reduce the carrying value of certain other assets related to its
terrestrial CDMA wireless infrastructure business, and $74 million in
compensation benefits provided to employees transferred to Ericsson. See "Notes
to Condensed Consolidated Financial Statements--Note 8--Disposition of Assets
and Other Charges."
23
Net investment income was $64 million in the third quarter of fiscal 2000
compared to a $5 million expense, net for the third quarter of fiscal 1999. The
increase was primarily due to interest earned on higher cash balances, interest
earned on Globalstar and other finance receivables and changes in the estimate
of amounts collectible under certain finance receivables as a result of a letter
of credit provided to backstop those receivables. See "Notes to Condensed
Consolidated Financial Statements--Note 6--Investments in Other Entities."
For the third quarter of fiscal 2000, there were no distributions on Trust
Convertible Preferred Securities expenses, compared to $10 million for the third
quarter of fiscal 1999, as a result of conversions of the 5 3/4% Trust
Convertible Preferred Securities into common stock. During the second quarter of
fiscal 2000, all remaining Trust Convertible Preferred Securities were converted
into common stock. See "Liquidity and Capital Resources."
Income tax expense was $127 million for the third quarter of fiscal 2000
compared to $32 million for the third quarter of fiscal 1999. The annual
effective tax rate is currently estimated to be 45% for fiscal 2000, compared to
35% for fiscal 1999. The higher tax rate is primarily a result of higher pretax
earnings, non-deductible charges for purchased in-process technology and
amortization of goodwill.
FIRST NINE MONTHS OF FISCAL 2000 COMPARED TO FIRST NINE MONTHS OF FISCAL 1999
Total revenues for the first nine months of fiscal 2000 were $2.561 billion
compared to $2.878 billion for the first nine months of fiscal 1999. The
decrease in revenue for the first nine months of fiscal 2000 was primarily due
to a decrease in the terrestrial CDMA consumer product revenue as a result of
the sale of the business in February 2000, a decrease in the terrestrial CDMA
wireless infrastructure product revenue related to the sale of this business in
May 1999 and a decrease in average selling prices of integrated circuits, offset
by significant increases in royalty revenues and in sales of CDMA integrated
circuits. Revenue from one South Korean customer, Samsung Electronics Company,
by the QCT and QTL segments comprised 11% of total revenues in the first nine
months of fiscal 2000.
Cost of revenues for the first nine months of fiscal 2000 was
$1.274 billion compared to $1.864 billion for the first nine months of fiscal
1999. The dollar decrease was primarily due to a decrease in the terrestrial
CDMA wireless consumer phone product costs as a result of the sale of the
business in February 2000, a decrease in the terrestrial CDMA wireless
infrastructure product costs related to the sale of this business in May 1999,
and a reduction in the unit cost of integrated circuits, offset by an increase
in CDMA integrated circuits unit volume. Cost of revenues decreased as a
percentage of revenues to 50% in the first nine months of fiscal 2000 from 65%
in the first nine months of fiscal 1999. This is primarily due to higher
revenues from high margin integrated circuits and software, royalties, offset by
lower revenues from lower gross margin terrestrial CDMA phones and
infrastructure.
For the first nine months of fiscal 2000, research and development expenses
were $254 million or 10% of revenues, compared to $297 million or 10% of
revenues for the first nine months of fiscal 1999. The dollar decrease was due
to a decrease in terrestrial CDMA wireless infrastructure product research and
development as a result of the sale of this business in May 1999, offset by
increased integrated circuits product initiatives and software development
efforts and new 1xEV products.
For the first nine months of fiscal 2000, selling, general and
administrative expenses were $276 million or 11% of revenues, compared to
$330 million or 11% of revenues for the first nine months of fiscal 1999. The
dollar decrease from the first nine months of fiscal 1999 was due to a decrease
in marketing costs in terrestrial CDMA wireless consumer phone products as a
result of the sale of the business in February 2000 and a decrease in selling,
general and administrative expenses for terrestrial CDMA wireless infrastructure
products as a result of the sale of this business in May 1999, partially offset
by continued growth in personnel and associated overhead expenses necessary to
24
support other growing business operations and increased patent, litigation,
employer payroll tax on employee non-qualified stock option exercises and
investor relations expenses.
Amortization of goodwill and other acquisition-related intangible assets
increased to $84 million for the first nine months of fiscal 2000 compared to
$1 million for the first nine months of fiscal 1999, primarily due to the
acquisition of SnapTrack. See "Notes to Condensed Consolidated Financial
Statements--Note 2--Acquisitions."
Purchased in-process technology of $60 million in the first nine months of
fiscal 2000 resulted from the acquisition of SnapTrack. See "Notes to Condensed
Consolidated Financial Statements--Note 2--Acquisitions."
For the first nine months of fiscal 2000, other operating expenses were
$64 million, compared to $205 million in the first nine months of fiscal 1999.
Other operating expenses during the first nine months of fiscal 2000 were
comprised primarily of charges to reflect the estimated difference between the
carrying value of the net assets and the consideration to be received from
Kyocera, less costs to sell, and employee termination costs. During the first
nine months of fiscal 1999, the Company recorded $66 million in charges to
reflect the difference between the carrying value of the net assets to be sold
to Ericsson and the net consideration received and various license and
settlement agreements in connection therewith, $43 million in charges to reduce
the carrying value of certain other assets related to its terrestrial CDMA
wireless infrastructure business, $15 million in restructuring charges and
$74 million in compensation benefits provided to employees transferred to
Ericsson. See "Notes to Condensed Consolidated Financial
Statements--Note 8--Disposition of Assets and Other Charges."
Interest expense was $4 million for the first nine months of fiscal 2000,
compared to $11 million for the first nine months of fiscal 1999. The decrease
was due to decreased bank borrowings by QPE and the subsequent payoff and
cancellation of the QPE bank lines of credit in February 2000.
Net investment income was $434 million in the first nine months of fiscal
2000 compared to $9 million for the first nine months of fiscal 1999. The
increase was primarily due to a $270 million realized gain on the sale of
marketable securities, interest earned on higher cash balances, interest earned
on Globalstar and other finance receivables, changes in the estimate of amounts
collectible under the Globalstar contracts and changes in the estimate of
amounts collectible under certain finance receivables as a result of a letter of
credit provided to backstop those receivables. See "Notes to Condensed
Consolidated Financial Statements--Note 6--Investment in Other Entities."
Distributions on Trust Convertible Preferred Securities decreased to
$13 million for the first nine months of fiscal 2000 compared to $29 million for
the first nine months of fiscal 1999 as a result of conversions of the 5 3/4%
Trust Convertible Preferred Securities outstanding into common stock. During the
second quarter of fiscal 2000, all remaining Trust Convertible Preferred
Securities were converted into common stock. See "Liquidity and Capital
Resources."
During the first nine months of fiscal 2000, the Company recorded
$3 million in net non-operating other charges, including $6 million in charges
relating to amounts advanced to Metrosvyaz (see "Notes to Condensed Consolidated
Financial Statements--Note 10--Commitments and Contingencies"), offset by a
$3 million release of non-operating reserves due to a settlement. During the
first nine months of fiscal 1999, the Company recorded $53 million in
non-operating charges, including $37 million related to the Ericsson transaction
and $15 million related to the write-off of non-operating assets.
Income tax expense was $431 million for the first nine months of 2000
compared to $32 million for the first nine months of 1999. The Company's income
tax provisions for the first nine months of fiscal 2000 and 1999 reflect
adjustments for the retroactive reinstatements of the R&D tax credit.
25
QUALCOMM SEGMENT RESULTS FOR THE THIRD QUARTER OF FISCAL 2000 COMPARED TO THIRD
QUARTER OF FISCAL 1999
The following should be read in conjunction with the third quarter financial
results of fiscal 2000 for each reporting segment. See "Notes to Condensed
Consolidated Financial Statements--Note 11--Segment Information."
CDMA TECHNOLOGIES SEGMENT ("QCT")
The QCT segment is a leading developer and supplier worldwide of CDMA-based
wireless communication integrated circuits and system and applications software
solutions for voice and data communications products and services. QCT's
CDMA-based products include system software and base-band, radio frequency,
intermediate frequency, and power amplification integrated circuit products for
wireless handset manufacturers. For wireless infrastructure manufacturers, QCT
offers base-band integrated circuit products and system software solutions which
provide wireless-standards compliant processing of voice and data signals to and
from wireless handsets. QCT provides reference designs and system design tools
that enable manufactures to customize their product features and user interface,
integrate CDMA-based solutions with other components incorporated into their
product and test inter-operability with existing and planned standardized CDMA
networks.
QCT segment revenues for the third quarter of fiscal 2000 were $338 million
compared to $318 million for the third quarter of fiscal 1999. Earnings before
taxes for the third quarter of fiscal 2000 were $110 million compared to
$129 million for the third quarter of fiscal 1999. Revenue growth was primarily
due to increased customer demand for CDMA chipsets in the United States, Korea,
and Japan, offset by a decrease in average selling prices of integrated
circuits. The decrease in earnings before taxes was due to increased research
and development related to integrated circuit product initiatives, including new
1xEV products, and software development efforts. Approximately 15 million MSM
integrated circuits were sold during the third quarter of fiscal 2000, compared
to 11 million in the third quarter of fiscal 1999. As previously announced,
based on recent feedback from South Korean customers and operators, the Company
may experience lower integrated circuit shipments in the fourth quarter of
fiscal 2000 due to an anticipated decrease in domestic South Korean phone sales
related to the elimination of phone subsidies. The Company expects cell site
modem ("CSM") infrastructure chip shipments to decline in the fourth quarter of
fiscal 2000 compared to the third quarter of fiscal 2000; CSM chip shipment
volumes are inconsistent, and third quarter shipments were high.
TECHNOLOGY LICENSING SEGMENT ("QTL")
QTL licenses third parties to design, manufacture and sell products
incorporating the Company's technologies.
QTL segment revenues for the third quarter of fiscal 2000 were $174 million
compared to $126 million for the third quarter of fiscal 1999. Earnings before
taxes for the third quarter of fiscal 2000 were $152 million compared to
$113 million for the third quarter of fiscal 1999. Growth in revenue and
earnings before taxes was primarily due to additional license fees and royalties
received from licensees resulting from an increase in worldwide demand for CDMA
products. Based on the anticipated decrease in domestic South Korean phone sales
related to the elimination of phone subsidies, the Company may experience lower
royalty revenue in the fourth quarter of fiscal 2000.
WIRELESS SYSTEMS SEGMENT ("QWS")
QWS designs, manufactures, markets and deploys infrastructure and handset
products for use in terrestrial and non-terrestrial CDMA wireless and satellite
networks and provides satellite-based two-way data messaging, position reporting
equipment, and services to transportation companies.
26
QWS segment revenues for the third quarter of fiscal 2000 were $167 million
compared to $228 million for the third quarter of fiscal 1999. Earnings before
taxes for the third quarter of fiscal 2000 were $65 million compared to
$8 million for the third quarter of fiscal 1999. Revenues decreased due to the
sale of certain assets of the Company's terrestrial CDMA wireless infrastructure
business in May 1999 to Ericsson and the completion of the production and sale
of Globalstar gateways, offset by increased OmniTRACS domestic and international
unit demand and messaging revenue due to an increase in the customer base and
increased Globalstar phone sales. The Company shipped approximately 14,000
OmniTRACS and other related communication systems during the third quarter of
fiscal 2000, compared to approximately 12,000 in the third quarter of fiscal
1999. The Company shipped approximately 31,000 Globalstar phones in the third
quarter of fiscal 2000, for a cumulative total of over 71,000 Globalstar phone
shipments since production began in September 1999.
Earnings before taxes increased due to the sale of certain assets related to
the Company's terrestrial CDMA wireless infrastructure business in May 1999 to
Ericsson and an increase in interest income and fees on finance receivables.
(See "Notes to Condensed Consolidated Financial Statements--Note 6--Investments
in Other Entities.") During the first nine months of fiscal 2000, the Company
recognized previously unamortized loan fees in connection with the pay off and
cancellation of certain credit facilities, including the Leap facility. See
"Notes to Condensed Consolidated Financial Statements--Note 4--Investments."
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that its cash and cash equivalents and marketable
securities balances of $2.268 billion at June 25, 2000, including interest
earned thereon, will be used to fund its working and other capital requirements,
including investments in other companies and other assets to support the growth
of its business, financing for customers of CDMA infrastructure products in
accordance with the agreement with Ericsson, and other commitments. In the event
additional needs for cash arise, the Company may raise additional funds from a
combination of sources including potential debt and equity issuance.
On July 25, 2000, QUALCOMM announced that it will spin-off a business
consisting primarily of its integrated circuit and system software solutions
business.
The Company has an unsecured credit facility under which banks are committed
to make up to $400 million in revolving loans to the Company. The facility
expires in March 2001 and may be extended on an annual basis upon maturity. The
Company is currently obligated to pay commitment fees equal to 0.175% per annum
on the unused amount of the facility. The facility includes certain restrictive
financial and operating covenants. At June 25, 2000, there were no amounts or
letters of credit issued or outstanding under the facility.
In the first nine months of fiscal 2000, $575 million in cash was provided
by operating activities, compared to $168 million in cash provided by operating
activities in the first nine months of fiscal 1999. Cash provided by operating
activities in the first nine months of fiscal 2000 includes $987 million of net
cash flow provided by operations offset by $412 million of net working capital
requirements. The improved cash flow from operations primarily reflects the
increase in net income resulting from improved gross margins and investment
income. Net working capital requirements of $412 million primarily reflect
increases in finance receivables and a decrease in accounts payable and accrued
liabilities, offset by a decrease in accounts receivable. The increase in
finance receivables in the first nine months of fiscal 2000 resulted from the
financing of contract payments under the development agreement with Globalstar
and customers of CDMA infrastructure products in accordance with the agreement
with Ericsson, and the decrease in accounts payable and accrued liabilities and
accounts receivable is primarily attributed to the sale of the terrestrial-based
CDMA wireless consumer products business.
27
In the first nine months of fiscal 2000, $521 million in cash was used by
the Company in investing activities, including $248 million for business
acquisitions and investments in entities in which the Company holds less than a
50% interest, the issuance of $202 million in notes receivable, $408 million in
net purchases of marketable securities and $144 million in capital expenditures,
offset by $247 million in proceeds from the sale of the terrestrial CDMA
wireless consumer products business. The Company is increasing its strategic
investment activities to promote the worldwide adoption of CDMA technology
products and the growth of CDMA-based wireless data and CDMA-based wireless
Internet products and solutions. The Company generally invests in start-up
companies that have developed or are developing innovative technologies for the
wireless industry, venture firms that invest in similar start-up companies and
CDMA carrier companies. The Company expects to continue making significant
investments in other entities.
In the first nine months of fiscal 2000, the Company's financing activities
used $6 million, including $112 million in net repayments under bank lines of
credit, offset by $109 million from the issuance of common stock under the
Company's stock option and employee stock purchase plans. In the first nine
months of fiscal 1999, the Company's financing activities provided net cash of
$127 million.
Information regarding the Company's financial commitments at March 26, 2000
is provided in the Notes to the Condensed Consolidated Financial Statements. See
"Notes to Condensed Consolidated Financial Statements--Note 3--Composition of
Certain Balance Sheet Captions, Note 6--Investments in Other Entities, and
Note 10--Commitments and Contingencies."
YEAR 2000
The Company has completed its Year 2000 ("Y2K") Project ("Project") as
scheduled, including addressing leap year calendar date calculation concerns.
The possibility of significant interruptions of normal operations has been
reduced. As of July 24, 2000, the Company's products, computing, and
communications infrastructure systems have operated without Y2K related problems
and appear to be Y2K ready. The Company is not aware that any of its major
customers or third-party suppliers have experienced significant Y2K related
problems.
The Company believes all its critical systems are Y2K ready. However, there
is no guarantee that the Company has discovered all possible failure points.
Specific factors contributing to this uncertainty include failure to identify
all systems, non-ready third parties whose systems and operations impact the
Company, and other similar uncertainties.
Contingency plans are complete and will be implemented if required. Should a
significant problem occur, the Company would revert to standard manual
contingency procedures to continue operation until the problem is corrected.
To date, the Company has spent an estimated $20 million on this Project. The
funding for this Project comes from operations and working capital. The Company
estimates the allocable time of employees using average hourly rates for each
class of employee. None of the Company's other mission-critical information
projects have been delayed due to the implementation of the Y2K Project.
As a result of the Y2K Project, the Company identified and corrected several
system issues. In addition, the Company received other benefits from the Y2K
Project, including acceleration of the development of alternative sourcing for
our supply base risk mitigation plans which are valid and beneficial to long
term supply assurance, refinement of the Company's Disaster Recovery Plan,
improvement of diagnostic procedures for core information technology services
and asset management, and establishment of a more consistent computer desktop
environment which should ultimately reduce support costs.
28
FUTURE ACCOUNTING REQUIREMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." In May 1999, the FASB delayed the effective date of FAS 133 by one
year. The Company will be required to adopt FAS 133 for fiscal year 2001. This
statement establishes a new model for accounting for derivatives and hedging
activities. Under FAS 133, all derivatives must be recognized as assets and
liabilities and measured at fair value. The Company has not completed its
determination of the impact of the adoption of this new accounting standard on
its consolidated financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." In June 2000, the SEC staff amended SAB 101 to provide registrants
with additional time to implement SAB 101. The Company will be required to adopt
SAB 101 by the fourth quarter of fiscal 2001. The Company has not completed its
determination of the impact of the adoption of SAB 101 on its consolidated
financial position or results of operation.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation." The Company
will be required to adopt FIN 44 effective July 1, 2000 with respect to certain
provisions applicable to new awards, exchanges of awards in a business
combination, modifications to outstanding awards, and changes in grantee status
that occur on or after that date. FIN 44 addresses practice issues related to
the application of Accounting Practice Bulletin Opinion No. 25, "Accounting for
Stock Issued to Employees." The Company does not expect the application of FIN
44 to have a material impact on its consolidated financial position or results
of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Financial market risks related to interest rates, foreign currency exchange
rates and equity price risks on investments held by the Company are described in
the Company's 1999 Annual Report on Form 10-K. The recorded value of
available-for-sale securities increased from $190 million at September 26, 1999
to $633 million at June 25, 2000. The available-for-sale securities subject the
Company to equity price risk. At June 25, 2000, there have been no other
material changes to the market risks described at September 26, 1999.
Additionally, the Company does not anticipate any near-term changes in the
nature of its market risk exposures or in management's objectives and strategies
with respect to managing such exposures.
29
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A review of the Company's current litigation is disclosed in the Notes to
Condensed Consolidated Financial Statements. See "Notes to Condensed
Consolidated Financial Statements--Note 10--Commitments and Contingencies." The
Company is also engaged in other legal actions arising in the ordinary course of
its business and believes that the ultimate outcome of these actions will not
have a material adverse effect on its results of operations, liquidity or
financial position.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.30 Credit Agreement dated as of May 5, 2000 between Globalstar,
L.P. and the Registrant. (1)
27.0 Financial Data Schedule.
(b) Reports on Form 8-K
Report on Form 8-K/A dated April 11, 2000, amending the Form 8-K dated
March 15, 2000, containing information relating to the acquisition of
SnapTrack, Inc. among QUALCOMM Incorporated, Falcon Acquisition Company,
wholly-owned subsidiary of QUALCOMM, and SnapTrack, Inc.
- ------------------------
(1) Incorporated by reference to Exhibit 10.1 to the Form 10-Q for the quarterly
period ended March 31, 2000 filed by Globalstar Telecommunications Limited.
30
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.
QUALCOMM INCORPORATED
/S/ ANTHONY S. THORNLEY
---------------------------------------------
Anthony S. Thornley
EXECUTIVE VICE PRESIDENT & CHIEF FINANCIAL
OFFICER
Dated: July 24, 2000
31