- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
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 DECEMBER 31, 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
------------------------
QUALCOMM INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 95-3685934
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5775 MOREHOUSE DR., SAN DIEGO, 92121-1714
CALIFORNIA (Zip Code)
(Address of principal executive
offices)
(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 January 23, 2001:
CLASS NUMBER OF SHARES
----- ----------------
Common Stock $0.0001 per share par value 753,437,528
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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........ 6-16
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.......................... 17-23
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 24
Item 2. Changes in Securities....................................... 24
Item 3. Defaults Upon Senior Securities............................. 24
Item 4. Submission of Matters to a Vote of Security Holders......... 24
Item 5. Other Information........................................... 24
Item 6. Exhibits and Reports on Form 8-K............................ 24
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUALCOMM INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
DECEMBER 31, SEPTEMBER 24,
2000 2000
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 826,338 $ 716,871
Marketable securities..................................... 1,146,854 1,055,522
Accounts receivable, net.................................. 537,667 606,979
Finance receivables....................................... 131,055 128,515
Inventories, net.......................................... 77,801 85,366
Other current assets...................................... 129,112 136,727
----------- -----------
Total current assets.................................... 2,848,827 2,729,980
Property, plant and equipment, net........................ 423,429 431,705
Marketable securities..................................... 436,586 748,521
Finance receivables, net.................................. 402,145 799,404
Goodwill, net............................................. 764,467 821,834
Other assets.............................................. 704,971 531,538
----------- -----------
Total assets............................................ $ 5,580,425 $ 6,062,982
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 129,052 $ 112,856
Payroll and other benefits related liabilities............ 89,009 128,836
Unearned revenue.......................................... 61,850 68,419
Other current liabilities................................. 218,305 162,182
----------- -----------
Total current liabilities............................... 498,216 472,293
Other liabilities........................................... 24,196 27,718
----------- -----------
Total liabilities....................................... 522,412 500,011
----------- -----------
Commitments and contingencies (Notes 3, 5 and 8)
Minority interest in consolidated subsidiaries.............. 47,871 46,643
----------- -----------
Stockholders' equity:
Preferred stock, $0.0001 par value........................ -- --
Common stock, $0.0001 par value........................... 75 75
Paid-in capital........................................... 4,424,010 4,653,818
Retained earnings......................................... 642,347 871,090
Accumulated other comprehensive loss...................... (56,290) (8,655)
----------- -----------
Total stockholders' equity.............................. 5,010,142 5,516,328
----------- -----------
Total liabilities and stockholders' equity.............. $ 5,580,425 $ 6,062,982
=========== ===========
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
---------------------------
DECEMBER 31, DECEMBER 26,
2000 1999
------------ ------------
Revenues.................................................... $ 684,021 $ 1,120,073
----------- -----------
Operating expenses:
Cost of revenues.......................................... 295,921 648,748
Research and development.................................. 86,123 83,404
Selling, general and administrative....................... 79,964 101,777
Amortization of goodwill and other acquisition-related
intangible assets....................................... 62,995 71
Asset impairment and related charges...................... 480,778 26,152
Other..................................................... 69,188 --
----------- -----------
Total operating expenses.................................... 1,074,969 860,152
----------- -----------
Operating (loss) income..................................... (390,948) 259,921
Interest expense............................................ (8,568) (2,673)
Investment (expense) income, net............................ (231,529) 36,247
Distributions on Trust Convertible
Preferred Securities of subsidiary trust.................. -- (11,045)
Other....................................................... (56,566) --
----------- -----------
(Loss) income before income taxes and accounting change..... (687,611) 282,450
Income tax benefit (provision).............................. 330,053 (105,331)
----------- -----------
(Loss) income before accounting change...................... (357,558) 177,119
Accounting change, net of tax (Note 1)...................... 128,815 --
----------- -----------
Net (loss) income........................................... $ (228,743) $ 177,119
=========== ===========
Basic net (loss) earnings per common share:
(Loss) income before accounting change.................... $ (0.48) $ 0.27
Accounting change, net of tax............................. 0.17 --
----------- -----------
Net (loss) income......................................... $ (0.31) $ 0.27
=========== ===========
Diluted net (loss) earnings per common share:
(Loss) income before accounting change.................... $ (0.48) $ 0.23
Accounting change, net of tax............................. 0.17 --
----------- -----------
Net (loss) income......................................... $ (0.31) $ 0.23
=========== ===========
Shares used in per share calculations:
Basic..................................................... 749,482 664,586
=========== ===========
Diluted................................................... 749,482 790,827
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
4
QUALCOMM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
---------------------------
DECEMBER 31, DECEMBER 26,
2000 1999
------------ ------------
OPERATING ACTIVITIES:
Net (loss) income......................................... $ (228,743) $ 177,119
Depreciation and amortization............................. 82,701 35,082
Asset impairment and other non-cash charges and credits... 674,500 24,784
Net loss (gain) on derivative instruments and
securities.............................................. 283,300 (2,574)
Minority interest in income of consolidated
subsidiaries............................................ 1,228 3,314
Equity in losses of investees............................. 5,490 4,571
Non-cash income tax (benefit) provision................... (341,334) 105,331
Accounting change, net of tax............................. (128,815) --
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net................................ 51,800 (114,571)
Finance receivables, net................................ (71,444) (126,398)
Inventories, net........................................ (26,475) (2,895)
Other current assets.................................... 744 (27,479)
Trade accounts payable.................................. 5,174 (30,064)
Payroll, benefits, and other current liabilities........ (59,483) 23,776
Unearned revenue........................................ 5,508 8,555
Other liabilities......................................... -- 2,852
----------- -----------
Net cash provided by operating activities................... 254,151 81,403
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures...................................... (27,116) (38,079)
Purchases of available-for-sale securities................ (114,074) --
Proceeds from sale of available-for-sale securities....... 98,797 2,607
Purchases of held-to-maturity securities.................. (301,311) (293,435)
Maturities of held-to-maturity securities................. 338,804 118,814
Issuance of notes receivable.............................. (48,319) (145,555)
Investments in other entities............................. (137,542) (120,511)
Other items, net.......................................... (2,605) (3,023)
----------- -----------
Net cash used by investing activities....................... (193,366) (479,182)
----------- -----------
FINANCING ACTIVITIES:
Net borrowings under bank lines of credit................. -- 12,000
Net proceeds from issuance of common stock................ 50,272 31,484
Other items, net.......................................... 558 (1,231)
----------- -----------
Net cash provided by financing activities................... 50,830 42,253
----------- -----------
Effect of exchange rate changes on cash..................... (2,148) (512)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 109,467 (356,038)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 716,871 660,016
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 826,338 $ 303,978
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
5
QUALCOMM INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
FINANCIAL STATEMENT PREPARATION
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 consolidated financial position, results of operations and
cash flows in accordance with accounting principles generally accepted in the
United States. The condensed consolidated balance sheet at September 24, 2000
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 24, 2000. 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 accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts and the disclosure of
contingent 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.
NET EARNINGS PER COMMON SHARE
Basic net earnings per common share are calculated by dividing net income or
loss by the weighted average number of common shares outstanding during the
reporting period. Diluted net earnings per common share (diluted EPS) for the
three months ended December 26, 1999 reflect the potential dilutive effect,
calculated using the treasury stock method, of 68,626,000 additional common
shares issuable upon exercise of outstanding stock options and the potential
dilutive effect, for the period prior to conversion, of 57,615,000 shares of
common stock issuable upon conversion of Trust Convertible Preferred Securities,
determined on an if-converted basis. Net income in the computation of diluted
EPS for the three months ended December 26, 1999 is increased by $7 million,
representing the assumed savings of distributions, net of taxes, on the Trust
Convertible Preferred Securities. The diluted share base for the three months
ended December 31, 2000 excludes the potential dilutive effect of 56,567,000
incremental shares related to outstanding stock options, calculated using the
treasury stock method, due to their anti-dilutive effect as a result of the
Company's loss before accounting change.
Options outstanding during the three months ended December 31, 2000 and
December 26, 1999 to purchase approximately 8,097,000 shares and 1,821,000
shares of common stock, respectively, were not included in the treasury stock
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common stock during the period and, therefore,
the effect would be anti-dilutive.
During the first three months of fiscal 2000 approximately 7,793,000 Trust
Convertible Preferred Securities were converted into approximately 42,906,000
shares of common stock. The remaining Trust
6
Convertible Preferred Securities were converted into common stock during the
second quarter of fiscal 2000.
COMPREHENSIVE INCOME
Components of accumulated other comprehensive loss consist of the following:
DECEMBER 31, SEPTEMBER 24,
2000 2000
------------ -------------
(IN THOUSANDS)
Foreign currency translation..................... $ (32,547) $ (25,022)
Unrealized (loss) gain on marketable securities,
net of income taxes............................ (23,743) 16,367
------------ ------------
$ (56,290) $ (8,655)
============ ============
Total comprehensive (loss) income consists of the following:
THREE MONTHS ENDED
---------------------------
DECEMBER 31, DECEMBER 26,
2000 1999
------------ ------------
(IN THOUSANDS)
Net (loss) income................................ $ (228,743) $ 177,119
Other comprehensive (loss) income:
Foreign currency translation................... (7,525) (866)
Unrealized (loss) gain on marketable
securities, net of income taxes.............. (101,611) 33,292
Reclassification adjustment for other than
temporary losses on marketable securities
included in net income, net of income
taxes........................................ 69,887 --
Reclassification adjustment for net realized
gains included in net income, net of income
taxes........................................ (12,311) (1,596)
Reclassification adjustment for losses included
in accounting change, net of income taxes.... 3,925 --
------------ ------------
Total other comprehensive (loss) income.......... (47,635) 30,830
------------ ------------
Total comprehensive (loss) income................ $ (276,378) $ 207,949
============ ============
The reclassification adjustment for other than temporary losses on
marketable securities results from the recognition of unrealized losses in the
income statement resulting from declines in the market prices of those
securities deemed to be other than temporary. The reclassification adjustment
for net realized gains results from the recognition of the net realized gains in
the income statement when the marketable securities are sold. The
reclassification adjustment for losses included in the accounting change results
from the recognition of unrealized losses attributable to derivative instruments
as of the beginning of fiscal 2001 in the income statement as a result of the
implementation of Statement of Financial Accounting Standards No. 133
(FAS 133). Unrealized losses on certain derivative instruments subject to
FAS 133 were previously recorded as a component of other comprehensive income.
ACCOUNTING CHANGE
The Company was required to adopt FAS 133, "Accounting for Derivative
Instruments and Hedging Activities" as of the beginning of fiscal 2001. FAS 133
requires certain derivative instruments to be recorded at fair value. Derivative
instruments held by the Company are comprised of warrants
7
and other rights to purchase equity interests in certain other companies related
to strategic investment and financing activities. Such instruments are held for
investment, but not trading, purposes.
The Company recorded a $129 million gain, net of taxes of $87 million, as
the cumulative effect of a change in accounting principle as of the beginning of
fiscal 2001. The cumulative effect of the accounting change related primarily to
the recognition of the unrealized gain on a warrant to purchase 4,500,000 shares
of Leap Wireless International, Inc. (Leap Wireless) common stock issued to the
Company in connection with its spin-off of Leap Wireless in September 1998.
Additionally, the Company recorded $160 million in pre-tax unrealized losses on
derivative instruments during the first quarter of fiscal 2001, primarily
resulting from a decline in the market price of Leap Wireless stock which
reduced the fair value of the Leap Wireless warrant. After adoption of FAS 133,
unrealized gains and losses on these derivative instruments are recorded in the
income statement as a component of investment income (Note 4). The Company
exercised a portion of the Leap Wireless warrant during the first quarter of
fiscal 2001. At December 31, 2001, the Company has the right to purchase
3,375,000 shares of Leap Wireless common stock under the warrant.
FUTURE ACCOUNTING REQUIREMENTS
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." The SEC staff subsequently amended SAB 101 to provide registrants
with additional time to implement SAB 101. The Company is required to adopt SAB
101 by the fourth quarter of fiscal 2001, applied retroactively to the first
quarter of fiscal 2001. The Company does not expect the adoption of SAB 101 to
have a material effect on its consolidated financial position, results of
operations or cash flows.
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 transaction
costs. 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 acquisition of SnapTrack had been made at
the beginning of the period presented, are as follows (in thousands, except per
share data):
THREE
MONTHS ENDED
DECEMBER 26,
1999
--------------
Revenues.................................................... $ 1,120,392
--------------
Net income.................................................. $ 114,104
==============
Basic earnings per common share............................. $ 0.17
==============
Diluted earnings per common share........................... $ 0.15
==============
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 periods
presented or of future results of operations of the consolidated entities.
8
NOTE 3--COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
ACCOUNTS RECEIVABLE
DECEMBER 31, SEPTEMBER 24,
2000 2000
------------ -------------
(IN THOUSANDS)
Trade, net of allowance for doubtful accounts of
$21,107 and $9,610, respectively............... $ 507,434 $ 542,288
Long-term contracts:
Billed......................................... 9,910 38,059
Unbilled....................................... 10,798 21,185
Other............................................ 9,525 5,447
------------ ------------
$ 537,667 $ 606,979
============ ============
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
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) 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:
DECEMBER 31, SEPTEMBER 24,
2000 2000
------------ -------------
(IN THOUSANDS)
Finance receivables.............................. $ 1,025,613 $ 939,063
Allowance for doubtful receivables............... (492,413) (11,144)
------------ ------------
533,200 927,919
Current maturities............................... 131,055 128,515
------------ ------------
Noncurrent finance receivables, net.............. $ 402,145 $ 799,404
============ ============
At December 31, 2000, commitments to extend long-term financing by QUALCOMM
to certain CDMA customers of Ericsson totaled approximately $643 million,
including the $400 million commitment related to the November 2000 settlement
with Ericsson (Note 8). The financing commitments expire over a three year
period and are subject to the CDMA customers meeting conditions prescribed in
the financing agreements and, in certain cases, to Ericsson also financing a
portion of such sales and services. Commitments represent the estimated amounts
to be financed under these arrangements; actual financing may be in lesser
amounts.
9
INVENTORIES
DECEMBER 31, SEPTEMBER 24,
2000 2000
------------ -------------
(IN THOUSANDS)
Raw materials..................................... $ 20,699 $ 47,952
Work-in-process................................... 4,638 8,370
Finished goods.................................... 52,464 29,044
----------- -----------
$ 77,801 $ 85,366
=========== ===========
GOODWILL
At December 31, 2000 and September 24, 2000, goodwill is presented net of
$204 million and $144 million in accumulated amortization, respectively.
NOTE 4--INVESTMENT (EXPENSE) INCOME, NET
Investment (expense) income is comprised as follows:
THREE MONTHS ENDED
---------------------------
DECEMBER 31, DECEMBER 26,
2000 1999
------------ ------------
(IN THOUSANDS)
Interest income................................... $ 68,422 $ 41,558
Net realized gains on marketable securities....... 20,588 2,574
Unrealized other than temporary losses on
marketable securities........................... (143,628) --
Unrealized other than temporary loss on equity
method investment............................... (9,933) --
Change in unrealized gain on derivative
instruments..................................... (160,260) --
Minority interest in income of consolidated
subsidiaries.................................... (1,228) (3,314)
Equity in losses of investees..................... (5,490) (4,571)
----------- -----------
$ (231,529) $ 36,247
=========== ===========
NOTE 5--INVESTMENTS IN OTHER ENTITIES
GLOBALSTAR LP
Through partnership interests held in certain intermediate limited
partnerships, the Company owns a 6.3% partnership interest in Globalstar LP
(Globalstar), a limited partnership formed to develop, own and operate the
Globalstar low-Earth-orbit (LEO) satellite system utilizing CDMA technology (the
Globalstar System).
The Company has contracts with Globalstar to design, develop and manufacture
subscriber products and ground communications equipment. On January 16, 2001,
Globalstar announced that, in order to have sufficient funds available for the
continued progress of its marketing and service activities, it has suspended
indefinitely principal and interest payments on all of its debt, including its
vendor financing obligations. As a result, Globalstar did not make an
approximate $22 million payment for principal and interest due to QUALCOMM on
January 15, 2001. Globalstar also announced the retention of a financial adviser
to assist in developing future initiatives, including restructuring Globalstar's
debt, identifying funding opportunities and pursuing other strategic
alternatives. As a result of these recent developments, QUALCOMM has assessed
the recoverability of all assets and considered probable exposures related to
the Globalstar business. The Company has recorded charges
10
of $48 million in cost of revenues, $481 million in asset impairment and related
charges, $10 million in investment expense and $57 million in other
non-operating charges related primarily to the impairment of certain assets. At
December 31, 2000, the Company has approximately $56 million in net assets
remaining, primarily consisting of accounts receivable, finance receivables,
inventory and fixed assets related to the Globalstar business. The Company also
decided to not recognize revenue on business with Globalstar before cash is
received starting in the first quarter of fiscal 2001 until the collectibility
of receivables can be reasonably assured.
WINGCAST, LLC
In July 2000, Ford Motor Company and QUALCOMM announced the creation of a
new company, Wingcast, LLC (Wingcast), that will develop and deliver wireless
mobility services, including safety and security, information and
communications, and entertainment and mobile commerce, into cars and trucks.
QUALCOMM committed to contribute $125 million to the initial capital of
Wingcast, of which $75 million is payable in cash and $50 million is payable in
non-cash consideration. QUALCOMM may be further committed to fund an additional
$75 million in cash upon vehicle manufacturers committing to enable certain
volumes of vehicles to use Wingcast's services. At December 31, 2000,
$63 million of the $75 million cash commitment is outstanding, and Wingcast had
not met the performance milestones related to the additional $75 million cash
commitment. The Company expects to fund the remaining commitment over three
years.
INQUAM LIMITED
In October 2000, the Company agreed to invest $200 million in the
convertible preferred shares of Inquam Limited (Inquam). Inquam was formed to
acquire, own, develop and manage wireless telecommunication systems, either
directly or indirectly, with the primary intent of deploying CDMA-based
technology. During the first quarter of fiscal 2001, the Company funded
$40 million of its investment and advanced an additional $10 million under a
promissory note that matures on October 31, 2001 and bears interest at 10%. The
Company expects to fund its remaining equity commitment over three years.
QUALCOMM/HANSOL iV CDMA FUND
In December 2000, the Company announced the formation of a Korean
partnership fund, QUALCOMM/Hansol iV CDMA Fund, with Hansol i Ventures
Co., Ltd. to invest in Korean start-up companies engaged in the development and
commercialization of CDMA products to support the adoption of CDMA and the use
of the wireless Internet. The Company made a capital contribution of
$14 million during the first quarter of fiscal 2001 and will provide an
additional capital contribution of $13 million during calendar 2001.
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 data rate, cdma2000 1xEV,
systems. Funding commitments related to other strategic investments total
$48 million at December 31, 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 6--BANK LINE OF CREDIT
The Company had an unsecured credit facility under which banks were
committed to make up to $400 million in revolving loans to the Company, maturing
in March 2001. At December 31, 2000, there were no amounts or letters of credit
issued or outstanding under the credit facility. Effective January 26, 2001,
QUALCOMM terminated this facility.
11
NOTE 7--INCOME TAXES
The Company currently estimates its annual effective income tax rate to be
approximately 48% for fiscal 2001, compared to 44% for fiscal 2000. The higher
tax rate for fiscal 2001 is primarily a result of lower pre-tax earnings
relative to nondeductible charges.
NOTE 8--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, and seeking monetary damages. The Company
thereafter submitted a Reply and Counterclaim, alleging that Elisra breached the
DSA, and 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 arguments. 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.
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. On December 4, 2000, the International Chamber of Commerce's
International Court of Arbitration issued its decision, ordering QUALCOMM to pay
ETRI for damages, interest and costs, and making certain declarations as to
future obligations of QUALCOMM to share with ETRI certain royalties received for
products sold in Korea. The Company is evaluating its options with respect to
the decision and award. During the first quarter of fiscal 2001, the Company
recorded $69 million in other operating expense and $8 million in interest
expense related to this decision. The liability is included in other current
liabilities.
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. The complaint and subsequent
amendments, filed in the California Superior Court in San Diego state several
causes of action against the Company arising primarily out of breaches of the
Company's 1991 Stock Option plan and upon various allegedly fraudulent behavior
by the Company. On September 15, 2000, the Court certified the case as a class
action, and subsequently approximately 206 individuals in the potential class
opted out of the class. On December 8, 2000, the Court granted summary judgment
as to all class members who had not opted out and who had participated in the
Retention Bonus Plan, dismissing all claims filed on their behalf, leaving
approximately 35 plaintiffs remaining in the case. On January 19, 2001, the
Court decertified the class action as to all claims except for plaintiffs'
claims based upon alleged breach of the plaintiffs' stock option agreements. The
contract claims are currently scheduled to proceed to trial on February 16,
2001. 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 December 14, 2000, 77 former QUALCOMM employees who had opted out of the
above-referenced Sprague v. QUALCOMM lawsuit filed a lawsuit against the Company
in the District Court for Boulder County, Colorado, alleging claims for
intentional misrepresentation, nondisclosure and
12
concealment, violation of C.R.S. Section 8-2-104 (obtaining workers by
misrepresentation), breach of contract, breach of the implied covenant of good
faith and fair dealing, promissory estoppel, negligent misrepresentation, unjust
enrichment, violation of California Labor Code Section 970, violation of
California Civil Code Sections 1709-1710, rescission, violation of California
Business & Professions Code Section 17200 and violation of California Civil Code
Section 1575. 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. Trial
is scheduled to commence in this case on February 27, 2001. 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.
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 a release of claims, other than federal age discrimination
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, and discovery has commenced. 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. On
November 17, 2000, the Court granted QPE's motion to dismiss the complaint based
solely on the allegations in the complaint as to all causes of action,
permitting plaintiffs the opportunity to file an amended complaint. On
December 1, 2000, plaintiffs served the First Amended Complaint, raising
identical causes of action. Subsequently, the parties stipulated to allow the
plaintiffs to file a Second Amended Complaint in lieu of having QPE file a
demurrer to the First Amended Complaint. The plaintiffs have done so and the
Company is in the process of responding to the complaint. 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.
13
Effective November 6, 2000, QUALCOMM and Ericsson entered into a Settlement
Agreement and Mutual Release pursuant to which, among other things, QUALCOMM and
Ericsson settled (i) an arbitration proceeding in which Ericsson was disputing
the determination of the purchase price under the asset purchase agreement
pursuant to which Ericsson acquired certain assets related to QUALCOMM's
terrestrial wireless infrastructure business in May 1999, and (ii) claims for
indemnification asserted by Ericsson under the asset purchase agreement. As part
of the settlement, Ericsson agreed to pay QUALCOMM the remaining balance of the
purchase price due under the asset purchase agreement, together with interest.
In connection with the settlement, QUALCOMM agreed to provide financing of up to
$400 million to specified CDMA customers of Ericsson for such customers'
purchase of CDMA infrastructure equipment and related services from Ericsson
(Note 3).
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
On December 22, 1999 and April 25, 2000, the Company and Pegaso
Telecomunicaciones, S.A. de C.V. (Pegaso) executed 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 provided a $300 million bridge facility, including a
$175 million guarantee and $125 million in funding from QUALCOMM. The bridge
facility will be prepaid and cancelled upon funding of the $250 million senior
secured facility and the $250 million unsecured facility. At December 31, 2000,
$230 million is outstanding under the bridge facility, with the remaining
$70 million to be funded by QUALCOMM.
In December 2000, the Company and an investor in CDMA telecommunications
operators in Latin America executed a Term Loan Agreement in which the Company
agreed to provide $230 million of convertible debt financing, including
$30 million for capitalized interest. The debt facility has a three year term
and bears interest at 18%. At December 31, 2000, $19 million is outstanding
under this debt facility.
In addition to these debt financing commitments, the Company has $3 million
of letters of credit and $7 million of other financial guarantees outstanding as
of December 31, 2000, none of which are collateralized.
NOTE 9--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 and applications 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 Wireless Corp. in February 2000.
The Company evaluates the performance of its segments based on earnings
before income taxes and accounting change (EBT). EBT includes the allocation of
certain corporate expenses to the
14
segments, including depreciation and amortization expense related to unallocated
corporate assets. Segment data includes intersegment revenues.
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:
DECEMBER 31, 2000
Revenues........... $ 330,054 $ 223,482 $ 92,841 $ 37,644 $ 684,021
EBT................ 83,771 141,609 (587,582) (325,409) (687,611)
DECEMBER 26, 1999
Revenues........... $ 352,395 $ 177,545 $ 214,964 $ 375,169 $ 1,120,073
EBT................ 127,690 162,590 66,147 (73,977) 282,450
Reconciling items in the previous table are comprised as follows (in
thousands):
THREE MONTHS ENDED
---------------------------
DECEMBER 31, DECEMBER 26,
2000 1999
------------ ------------
REVENUES
Revenues from external customers of
QCP segment sold................................. $ -- $ 441,364
Elimination of intersegment revenue................ (16,833) (100,104)
Other products..................................... 54,477 33,909
----------- ----------
Reconciling items................................ $ 37,644 $ 375,169
=========== ==========
EARNINGS BEFORE INCOME TAXES
Unallocated corporate expenses..................... $ (72,105) $ (27,570)
EBT of QCP segment sold............................ -- (17,546)
Unallocated investment (expense) income, net....... (238,867) 26,031
Distributions on Trust Convertible
Preferred Securities of subsidiary trust......... -- (11,045)
Intracompany profit................................ (2,768) (31,905)
Other.............................................. (11,669) (11,942)
----------- ----------
Reconciling items................................ $ (325,409) $ (73,977)
=========== ==========
Unallocated corporate expenses for the three months ended December 31, 2000
include $63 million for amortization of goodwill and other acquisition-related
intangible assets. Unallocated corporate expenses for the three months ended
December 26, 1999 include $27 million in charges related to the sale of the
terrestrial-based CDMA wireless consumer phone business.
15
Revenues from external customers and intersegment revenues are as follows
(in thousands):
QCT QTL QWS
---------- ---------- ----------
FOR THE THREE MONTHS ENDED:
DECEMBER 31, 2000
Revenues from external customers........ $ 328,503 $ 208,929 $ 92,112
Intersegment revenues................... 1,551 14,553 729
DECEMBER 26, 1999
Revenues from external customers........ $ 285,975 $ 143,861 $ 214,964
Intersegment revenues................... 66,420 33,684 --
Segment assets were presented in the Company's 2000 Annual Report on
Form 10-K. QWS segment assets decreased to $630 million at December 31, 2000
from $1,119 million at September 24, 2000, principally as a result of the
write-down of certain QWS assets related to the Globalstar business (Note 5),
offset by financing activities under the agreements with Ericsson (Note 3).
NOTE 10--SUBSEQUENT EVENTS
On January 22, 2001, the Company entered into a senior secured credit
facility with Leap Wireless in the amount of $125 million. Under the agreement,
the Company expects to transfer a $125 million Auction Discount Voucher to Leap
Wireless to support its spectrum acquisition activities in the FCC's current
auction of PCS spectrum. The facility is expected to be repaid in a lump sum
payment, including principal and accrued interest, no later than five years
after the date of the initial draw. The facility bears interest at a variable
rate, to be determined based on the collateral provided to the Company.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
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 24,
2000 contained in the Company's 2000 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: potential declines in the rate of
growth in the CDMA subscriber base; risks associated with the scale-up,
acceptance and operations of CDMA systems, including high data rate, now known
as cdma2000 1xEV (previously HDR), and 3G technology; potential component
shortages including shortage of supplier manufacturing capacity; risks
associated with strategic opportunities or acquisitions, divestitures and
investments the Company may pursue, including investments in new ventures and
operators, and the proposed spin-off of its integrated circuit and system
software business; risks relating to the success of the Globalstar business;
developments in current or future litigation; the ability to develop and
introduce cost effective new products in a timely manner; the Company's ability
to effectively manage growth; the intense competition in the wireless
communications industry; risks associated with the timing and collection of
license fees and royalties; risks associated with international business
activities; risks associated with macroeconomic trends worldwide; and risks
related to accounts receivable and finance receivables, as well as the other
risks detailed in the Company's Form 10-K for fiscal year ended September 24,
2000. The Company's consolidated financial data includes SnapTrack, Inc. and
other consolidated subsidiaries of the Company.
OVERVIEW
QUALCOMM designs, develops, manufactures and markets digital wireless
communications products and services based on its CDMA and other technologies.
The Company licenses and receives royalty payments on its CDMA technology from
major domestic and international telecommunications equipment suppliers.
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. In addition, the Company designs,
manufactures and distributes products and provides services for its OmniTRACS
system. On July 25, 2000, QUALCOMM announced the proposed spin-off and initial
public offering (IPO) of its integrated circuits and system software solutions
business. In connection with this announcement, QUALCOMM filed a Current Report
on Form 8-K dated July 25, 2000. Given current uncertainties in the financial
markets, the Company is evaluating the need for and timing of an IPO. Regardless
of the IPO decision, the Company continues to plan for the spin-off and full
distribution of the shares of QUALCOMM Spinco, Inc. (QUALCOMM Spinco), a
wholly-owned subsidiary of QUALCOMM formed as part of the proposed spin-off,
expected to occur by the fall of 2001, subject to approval by QUALCOMM's Board
of Directors and other factors.
The Company has contracts with Globalstar LP (Globalstar) to design, develop
and manufacture subscriber products and ground communications equipment. On
January 16, 2001, Globalstar announced that, in order to have sufficient funds
available for the continued progress of its marketing and service activities, it
has suspended indefinitely principal and interest payments on all of its debt,
including its vendor financing obligations. As a result, Globalstar did not make
an approximate $22 million payment for principal and interest due to QUALCOMM on
January 15, 2001. Globalstar also announced the retention of a financial adviser
to assist in developing future initiatives, including
17
restructuring Globalstar's debt, identifying funding opportunities and pursuing
other strategic alternatives. As a result of these recent developments, QUALCOMM
has assessed the recoverability of all assets and considered probable exposures
related to the Globalstar business. The Company has recorded charges of
$48 million in cost of revenues, $481 million in asset impairment and related
charges, $10 million in investment expense and $57 million in other
non-operating charges related primarily to the impairment of certain assets. At
December 31, 2000, the Company has approximately $56 million in net assets
remaining, primarily consisting of certain finance receivables, accounts
receivable, inventory and fixed assets related to the Globalstar business. The
Company also decided to not recognize revenue on business with Globalstar before
cash is received starting in the first quarter of fiscal 2001 until the
collectibility of receivables can be reasonably assured. The Company expects its
Globalstar-related revenues to be significantly lower for the balance of fiscal
2001 than the comparable periods of the prior year despite on-going sales of
equipment and services to support both continued operations and the addition of
high-speed data capability.
The Company intends to continue 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. In
general, the Company enters into strategic relationships with CDMA carriers and
companies that have developed or are developing innovative technologies or
products for the wireless industry. QUALCOMM enters into joint ventures with
strategic partners that are designed to increase wireless usage and dependence
on wireless devices. As part of these investment activities, QUALCOMM may
provide financing to facilitate the marketing and sale of CDMA equipment by
authorized suppliers. QUALCOMM also, from time-to-time, makes investments in
entities such as venture funds or incubators focused on the wireless market. In
November 2000, QUALCOMM announced the formation of QUALCOMM Ventures, an
organization that will make strategic investments in early stage companies
globally to support the adoption of CDMA and use of the wireless Internet.
QUALCOMM made a $500 million commitment to this strategic initiative that is
expected to be invested over a period of four years. Most of the Company's
strategic investments are illiquid securities that have a high degree of risk.
Such securities generally will not become liquid until more than one year from
the date of investment, if at all. To the extent that such investments do become
liquid, QUALCOMM will attempt to make regular periodic sales that will be
recognized in net investment income. It is likely that some portion of these
investments will never become liquid and that QUALCOMM may be required to
recognize losses from time to time in the future as it determines that
impairment in the value of particular investments have become other than
temporary.
In October 2000, the Company agreed to invest $200 million in the
convertible preferred shares of Inquam Limited (Inquam). Inquam was formed to
acquire, own, develop and manage wireless telecommunication systems, either
directly or indirectly, with the primary intent of deploying CDMA-based
technology. See "Notes to Condensed Consolidated Financial Statements--Note 5--
Investments in Other Entities."
In December 2000, QUALCOMM announced a new CDMA license program designed to
allow selected early stage companies to issue equity to QUALCOMM as a means of
paying part of the up-front fees payable under QUALCOMM's CDMA license
agreements. The Company records license fee revenues based on the fair value of
the equity instruments received. The measurement date for determination of fair
value is the earlier of the date on which the parties sign a written agreement
documenting a commitment to perform or the date at which the performance is
complete. The evaluation procedures used to determine fair value include, but
are not limited to, examining the current market price for the shares if the
licensee is publicly traded, examining recent rounds of financing and the
licensee's business plan if not publicly traded, and performing other due
diligence procedures. The new program will not affect the ongoing royalties
payable under QUALCOMM's CDMA license agreements.
18
In December 2000, the Company announced the formation of a Korean
partnership fund, QUALCOMM/Hansol iV CDMA Fund, with Hansol i Ventures
Co., Ltd. to invest in Korean start-up companies engaged in the development and
commercialization of CDMA products to support the adoption of CDMA and the use
of the wireless Internet. See "Notes to Condensed Consolidated Financial
Statements--Note 5--Investments in Other Entities."
In December 2000, the Company and an investor in CDMA telecommunications
operators in Latin America executed a Term Loan Agreement in which the Company
agreed to provide $230 million of convertible debt financing, including
$30 million for capitalized interest. See "Notes to Condensed Consolidated
Financial Statements--Note 8--Commitments and Contingencies."
On January 22, 2001, the Company entered into a senior secured credit
facility with Leap Wireless International, Inc. (Leap Wireless) in the amount of
$125 million. Under the agreement, the Company expects to transfer a
$125 million Auction Discount Voucher to Leap Wireless to support its spectrum
acquisition activities in the FCC's current auction of PCS spectrum. The
facility is expected to be repaid in a lump sum payment, including principal and
accrued interest, no later than five years after the date of the initial draw.
The facility bears interest at a variable rate, to be determined based on the
collateral provided to the Company.
The Company was required to adopt Statement of Financial Accounting
Standards No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging
Activities" as of the beginning of fiscal 2001. FAS 133 requires certain
derivative instruments to be recorded at fair value. After adoption of FAS 133,
unrealized gains and losses on these derivative instruments are recorded in the
income statement. The Company recorded a $129 million gain, net of taxes, as the
cumulative effect of the change in accounting principle as of the beginning of
fiscal 2001. The cumulative effect of the accounting change related primarily to
the recognition of the unrealized gain on a warrant to purchase 4,500,000 shares
of Leap Wireless common stock issued to the Company in connection with its
spin-off of Leap Wireless in September 1998. Additionally, the Company recorded
$160 million in pre-tax unrealized losses on derivative instruments during the
first quarter of fiscal 2001, primarily resulting from a decline in the market
price of Leap Wireless stock which reduced the fair value of the Leap Wireless
warrant. The new requirement to record unrealized gains and losses on these
instruments in the income statement may cause substantial quarterly and annual
fluctuations in operating results due to stock market volatility. See "Notes to
Condensed Consolidated Financial Statements--Note 1--Basis of Presentation" and
"Item 3. Quantitative and Qualitative Disclosure About Market Risk."
FIRST QUARTER OF FISCAL 2001 COMPARED TO FIRST QUARTER OF FISCAL 2000
Total revenues for the first quarter of fiscal 2001 were $684 million
compared to $1,120 million for the first quarter of fiscal 2000. Total revenues
for the first quarter of fiscal 2000 included $356 million in revenue related to
the terrestrial-based CDMA wireless consumer phone business which was sold in
February 2000. Excluding the revenue of the business sold from the first quarter
of fiscal 2000, total revenues decreased by $80 million in the first quarter of
fiscal 2001. The decrease is primarily attributable to the decision to not
recognize revenue on business with Globalstar before cash is received, lower
shipments of Globalstar portable and fixed phones to service providers, a
decrease in OmniTRACS domestic unit shipments, and decreases in average selling
prices of integrated circuits, offset by increased royalties and license fees
and higher OmniTRACS messaging revenue. Revenue from two customers of the QCT
and QTL segments, Kyocera Wireless Corp. (Kyocera) and Samsung Electronics
Company (Samsung), comprised an aggregate of 16% and 14% of total revenues in
the first quarter of 2001, respectively, compared to an aggregate of 11% of
total revenues from Samsung in the first quarter of fiscal 2000.
Cost of revenues for the first quarter of fiscal 2001 was $296 million
compared to $649 million for the first quarter of fiscal 2000. Total cost of
revenues for the first quarter of fiscal 2000 included
19
$318 million in cost of revenues related to the terrestrial-based CDMA wireless
consumer phone business which was sold in February 2000. Excluding the cost of
revenues of the business sold from the first quarter of fiscal 2000, total cost
of revenues decreased by $35 million in the first quarter of fiscal 2001, and
cost of revenues as a percentage of revenues was 43% for the first quarter of
fiscal 2001 and 43% for the first quarter of fiscal 2000. Although the
percentage of revenues remained consistent, the decision to not recognize
revenue on business with Globalstar before cash is received negatively affected
margin, but the effect was offset by a higher percentage of revenues from
royalties and license fees and OmniTRACS messaging services. Cost of revenues as
a percentage of revenues may fluctuate in future quarters depending on the mix
of products sold and services provided, royalties and license fees earned,
competitive pricing, new product introduction costs and other factors.
For the first quarter of fiscal 2001, research and development expenses were
$86 million or 13% of revenues, compared to $83 million or 7% of revenues for
the first quarter of fiscal 2000. The dollar and percentage increases in
research and development expenses were primarily due to increased integrated
circuit product initiatives to support high-speed wireless Internet applications
and mobile data applications, including new cdma2000 1xEV products and position
location technologies, offset by a decrease in terrestrial-based CDMA wireless
consumer phone research and development as a result of exiting this business in
February 2000.
For the first quarter of fiscal 2001, selling, general and administrative
expenses were $80 million or 12% of revenues, compared to $102 million or 9% of
revenues for the first quarter of fiscal 2000. The dollar decrease in selling,
general and administrative expenses from the first quarter of fiscal 2000 was
due to a decrease in marketing costs for terrestrial-based CDMA wireless
consumer phone products as a result of the sale of the business in
February 2000. The percentage increase is primarily due to expanded
international business in China and other regions and higher advertising and
trade show expenses related to the expansion of the integrated circuit customer
base and product portfolio.
Amortization of goodwill and other acquisition-related intangible assets was
$63 million for the first quarter of fiscal 2001 primarily related to the
acquisition of SnapTrack in March 2000. See "Notes to Condensed Consolidated
Financial Statements--Note 2--Acquisitions."
For the first quarter of fiscal 2001, asset impairment and related charges
were $481 million, compared to $26 million for the first quarter of fiscal 2000.
Asset impairment and related charges during the first quarter of fiscal 2001
were comprised primarily of charges related to certain assets that management
has determined are impaired and other charges related to the Globalstar
business. Asset impairment and related charges during the first quarter of
fiscal 2000 were comprised primarily of charges to reflect the estimated
difference between the carrying value of the net assets and the consideration
received from Kyocera related to the sale of the terrestrial-based CDMA wireless
consumer phone business, less costs to sell.
For the first quarter of fiscal 2001, other operating expenses were
$69 million related to an arbitration decision against the Company.
Interest expense was $9 million for the first quarter of fiscal 2001,
compared to $3 million for the first quarter fiscal 2000. The increase was due
to $8 million in interest charges resulting from an arbitration decision against
the Company, offset by lower interest expense resulting from decreased bank
borrowings.
Net investment expense was $232 million for the first quarter of fiscal 2001
compared to net investment income of $36 million for the first quarter of fiscal
2000. The decrease was primarily due to $160 million in unrealized losses on
derivative instruments in accordance with FAS 133, $144 million in unrealized
losses related to other than temporary impairment of marketable securities, and
a $10 million charge related to the recognition of an other than temporary loss
on the Company's investment in Globalstar Telecommunications, Ltd., offset by a
$27 million increase in interest income,
20
primarily related to interest earned on finance receivables and higher cash
balances and interest rates, and an $18 million increase in realized gains on
the sale of marketable securities.
For the first quarter of fiscal 2001, there were no distributions on Trust
Convertible Preferred Securities due to the conversion of all remaining Trust
Convertible Preferred Securities into common stock during the second quarter of
fiscal 2000. This is compared to $11 million in distributions for the first
quarter of fiscal 2000. See "Liquidity and Capital Resources."
For the first quarter of fiscal 2001, the Company recorded $57 million in
other nonoperating charges to write down the recorded values of a note
receivable from and warrants to acquire partnership interests in Globalstar to
their estimated fair values.
The income tax benefit was $330 million for the first quarter of fiscal 2001
compared to an income tax expense of $105 million for the first quarter of
fiscal 2000. The annual effective tax rate is expected to be 48% for fiscal
2001, compared to 44% for fiscal 2000. The higher tax rate is primarily a result
of lower pre-tax earnings relative to nondeductible charges. The Company has
provided a valuation allowance on its net deferred tax assets because of
uncertainty regarding their realizability due to the expectation that deductions
from future employee stock option exercises and related deductions will exceed
future taxable income. The Company's valuation allowance against net deferred
tax assets has been increased by $420 million in the first quarter of fiscal
2001 and was reflected as a reduction of stockholders' equity.
The Company recorded a $129 million gain, net of taxes, in the first quarter
of fiscal 2001 as the cumulative effect of a change in accounting principle at
September 25, 2000. The cumulative effect of the accounting change related
primarily to the unrealized gain on a warrant to purchase 4,500,000 shares of
Leap Wireless International, Inc. (Leap Wireless) common stock issued to the
Company in connection with its spin-off of Leap Wireless in September 1998. See
"Notes to Condensed Consolidated Financial Statements--Note 1--Basis of
Presentation."
QUALCOMM SEGMENT RESULTS FOR THE FIRST QUARTER OF FISCAL 2001 COMPARED TO FIRST
QUARTER OF FISCAL 2000
The following should be read in conjunction with the first quarter financial
results of fiscal 2001 for each reporting segment. See "Notes to Condensed
Consolidated Financial Statements--Note 9--Segment Information."
CDMA TECHNOLOGIES SEGMENT (QCT)
QCT segment revenues for the first quarter of fiscal 2001 were $330 million
compared to $352 million for the first quarter of fiscal 2000. Earnings before
taxes for the first quarter of fiscal 2001 were $84 million compared to
$128 million for the first quarter of fiscal 2000. Revenues decreased primarily
due to a decrease in average selling prices of integrated circuits. The decrease
in earnings before taxes was due to increased research and development primarily
associated with new integrated circuit product and technology initiatives to
support high-speed wireless Internet access and mobile data applications,
including cdma2000 1xEV (HDR), position location, Bluetooth and multimedia
capabilities, and marketing and advertising expenses. Approximately 15 million
MSM integrated circuits were sold during the first quarter of fiscal 2001,
compared to approximately 15 million for the first quarter of fiscal 2000. The
Company anticipates shipments in the second quarter of fiscal 2001 to be
constrained by a capacity limitation at one of its suppliers. The Company
expects the supply constraint to be substantially resolved by the third quarter
of fiscal 2001.
21
TECHNOLOGY LICENSING SEGMENT (QTL)
QTL segment revenues for the first quarter of fiscal 2001 were $223 million
compared to $178 million for the first quarter of fiscal 2000. Earnings before
taxes for the first quarter of fiscal 2001 were $142 million compared to
$163 million for the first quarter of fiscal 2000. Growth in revenues was
primarily due to increased royalty revenues resulting from an increase in
worldwide demand for products based on CDMA technologies, and significant
license fees related to the expansion of existing licenses to include third
generation systems, such as WCDMA, cdma2000 and TD-SCDMA, and new license
agreements. The decrease in earnings before taxes was due to a $69 million
charge resulting from an arbitration decision against the Company. Excluding the
arbitration judgment, earnings before taxes for the first quarter of fiscal 2001
would have been $211 million compared to $163 million for the first quarter of
fiscal 2000.
WIRELESS SYSTEMS SEGMENT (QWS)
QWS segment revenues for the first quarter of fiscal 2001 were $93 million
compared to $215 million for the first quarter of fiscal 2000. QWS recorded a
loss before taxes for the first quarter of fiscal 2001 of $588 million compared
to earnings before taxes of $66 million for the first quarter of fiscal 2000.
Revenues and earnings decreased primarily due to asset impairment and other
charges related to the Globalstar business totaling $595 million, the decision
to not recognize revenue on business with Globalstar before cash is received,
lower shipments of Globalstar portable and fixed phones to service providers, a
decrease in OmniTRACS domestic unit demand, offset by an increase in OmniTRACS
messaging services revenue. The Company shipped approximately 10,000 OmniTRACS
and other related communication systems during the first quarter of fiscal 2001,
compared to approximately 14,000 in the first quarter of fiscal 2000. The
decrease in unit shipments is due to higher fuel prices and domestic economic
conditions affecting the long-haul trucking industry. The Company shipped
approximately 2,000 Globalstar portable and fixed phones in the first quarter of
fiscal 2001 compared to 29,000 in the first quarter of fiscal 2000, for a
cumulative total of approximately 101,000 Globalstar portable and fixed phone
units shipped since production began in September 1999. The decrease in unit
shipments is due to the slow ramp-up of subscriber growth realized by the
Globalstar service providers.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that its cash and cash equivalents and marketable
securities balances of $2,410 million at December 31, 2000, including interest
to be 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,
financing under agreements with CDMA telecommunications operators, 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 Spinco filed a Registration
Statement on Form S-1 related to its proposed IPO. Given current uncertainties
in the financial markets, the Company is evaluating the need for and timing of
an IPO. If an IPO occurs, QUALCOMM Spinco would add the net proceeds of the
offering to funds available for working capital and general corporate purposes,
including product development and selling and marketing.
The Company had an unsecured credit facility under which banks were
committed to make up to $400 million in revolving loans to the Company, maturing
in March 2001. At December 31, 2000, there were no amounts or letters of credit
issued or outstanding under the facility. Effective January 26, 2001, QUALCOMM
terminated this facility.
22
In the first quarter of fiscal 2001, $254 million in cash was provided by
operating activities, compared to $81 million in cash provided by operating
activities in the first quarter of fiscal 2000. Cash provided by operating
activities in the first quarter of fiscal 2001 and fiscal 2000 includes
$348 million and $350 million, respectively, of net cash flow provided by
operations offset by $94 million and $269 million, respectively, of net working
capital requirements. Net working capital requirements for the first quarter of
fiscal 2001 primarily reflect an increase in finance receivables and inventories
and a reduction in payroll, benefits and other current liabilities, offset by a
decrease in accounts receivable.
In the first quarter of fiscal 2001, $193 million in cash was used by the
Company in investing activities, including $138 million for investments in
unconsolidated entities, $48 million for the issuance of notes receivable, and
$27 million in capital expenditures, offset by $22 million in net sales and
maturities of marketable securities. The Company intends to continue 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. As part of these investment activities,
QUALCOMM may provide financing to facilitate the marketing and sale of CDMA
equipment by authorized suppliers. In November 2000, QUALCOMM announced the
formation of QUALCOMM Ventures, an organization that will make strategic
investments in early stage companies globally to support the adoption of CDMA
and use of the wireless Internet. QUALCOMM made a $500 million commitment to
this strategic initiative that is expected to be invested over a period of four
years.
In the first quarter of fiscal 2001, the Company's financing activities
provided $51 million, including $50 million from the issuance of common stock
under the Company's stock option and employee stock purchase plans. In the first
quarter of fiscal 2000, the Company's financing activities provided
$42 million, including $31 million from the issuance of common stock under the
Company's stock option and employee stock purchase plans and $12 million in net
borrowings under bank lines of credit.
Information regarding the Company's financial commitments at December 31,
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 5--Investments in Other Entities, and Note 8--Commitments and
Contingencies."
FUTURE ACCOUNTING REQUIREMENTS
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." The SEC staff subsequently amended SAB 101 to provide registrants
with additional time to implement SAB 101. The Company is required to adopt SAB
101 by the fourth quarter of fiscal 2001, applied retroactively to the first
quarter of fiscal 2001. The Company does not expect the adoption of SAB 101 to
have a material effect on its consolidated financial position, results of
operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Financial market risks related to interest rates, foreign currency exchange
rates and equity prices are described in the Company's 2000 Annual Report on
Form 10-K. Available-for-sale equity securities and derivative instruments
recorded at fair value under FAS 115 and FAS 133, respectively, subject the
Company to equity price risk. The recorded value of available-for-sale equity
securities decreased to $207 million at December 31, 2000 from $426 million at
September 24, 2000. The recorded value of derivative instruments subject to
FAS 133 at December 31, 2000 is $99 million. The Company generally invests in
companies in the high-technology industry, and typically does not attempt to
reduce or eliminate its market exposure on these securities. As of December 31,
2000, four equity positions constituted approximately 89% of the fair value of
the available-for-sale equity securities portfolio. During the first quarter of
fiscal 2001, many high-technology stocks experienced a significant decrease in
value, negatively affecting the fair value of the Company's available-for-sale
equity securities. The portfolio's concentrations in specific companies and
industry segments may vary over time, and changes in concentrations may affect
the portfolio's price volatility.
At December 31, 2000, there have been no other material changes to the
market risks described at September 24, 2000. 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.
23
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 8--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
Exhibits
3.1 Restated Certificate of Incorporation.(1)
3.2 Certificate of Amendment of Restated Certificate of Incorporation.(2)(3)
3.3 Certificate of Designation of Preferences.(4)
3.4 Bylaws.(5)
3.5 Amendment of the Bylaws.(6)
- ------------------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-3
(No. 33-62724).
(2) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 27, 1994, as amended.
(3) Filed as an exhibit to the Registrant's Current Report on Form 8-K filed on
December 23, 1999.
(4) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 29, 1996.
(5) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 33-42782).
(6) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 28, 1997.
24
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: January 26, 2001
25