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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 29, 1996
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 (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO)
6455 LUSK BLVD., SAN DIEGO, CALIFORNIA 92121-2779
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(619) 587-1121
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORTED)
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 ___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Common Stock, $0.0001 per share par value, 67,205,379 shares as of February 6,
1997.
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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
Senior Vice President, Finance
& Chief Financial Officer
Dated: February 10, 1997
2
QUALCOMM INCORPORATED
INDEX
PAGE
-----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets............................ 4
Condensed Consolidated Statements of Income...................... 5
Condensed Consolidated Statements of Cash Flows.................. 6
Notes to Condensed Consolidated Financial Statements............. 7-9
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition..................................................... 10-16
PART II. OTHER INFORMATION 16
Item 6. Exhibits and Reports on Form 8-K
Exhibit 11.1 -- Computation of Earnings Per Share
3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUALCOMM INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
ASSETS
DECEMBER 29, SEPTEMBER 29,
1996 1996
------------ -------------
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 126,735 $ 110,143
Investments...................................................... 162,573 236,129
Accounts receivable, net......................................... 327,166 217,433
Inventories...................................................... 244,848 171,511
Other current assets............................................. 17,186 15,974
----------- -----------
Total current assets..................................... 878,508 751,190
PROPERTY, PLANT AND EQUIPMENT, NET................................. 350,628 352,699
INVESTMENTS........................................................ 6,008 8,009
OTHER ASSETS....................................................... 76,765 73,432
----------- -----------
TOTAL ASSETS....................................................... $1,311,909 $ 1,185,330
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities......................... $ 286,533 $ 229,799
Unearned revenue................................................. 15,902 13,226
Bank lines of credit............................................. 137,000 80,700
Current portion of long-term debt................................ 3,001 2,234
----------- -----------
Total current liabilities................................ 442,436 325,959
LONG-TERM DEBT..................................................... 10,105 10,908
OTHER LIABILITIES.................................................. 4,092 3,550
----------- -----------
Total liabilities........................................ 456,633 340,417
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY....................... -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $0.0001 par value............................... -- --
Common stock, $0.0001 par value.................................. 7 7
Paid-in capital.................................................. 820,279 819,042
Retained earnings................................................ 34,990 25,864
----------- -----------
Total stockholders' equity............................... 855,276 844,913
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................... $1,311,909 $ 1,185,330
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
4
QUALCOMM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
------------------------------
DECEMBER 29, DECEMBER 31,
1996 1995
------------ -------------
REVENUES:
Communications systems........................................... $324,580 $ 88,704
Contract services................................................ 38,679 32,163
License, royalty and development fees............................ 25,681 25,736
--------- ---------
Total revenues........................................... 388,940 146,603
--------- ---------
OPERATING EXPENSES:
Communications systems........................................... 259,485 62,752
Contract services................................................ 27,725 22,303
Research and development......................................... 46,178 32,255
Selling and marketing............................................ 26,941 15,490
General and administrative....................................... 15,592 11,256
--------- ---------
Total operating expenses................................. 375,921 144,056
--------- ---------
OPERATING INCOME................................................... 13,019 2,547
INTEREST INCOME.................................................... 4,453 7,877
INTEREST EXPENSE................................................... (1,984) (692)
MINORITY INTEREST IN (INCOME) LOSS OF CONSOLIDATED SUBSIDIARY...... (3,320) 4,315
--------- ---------
INCOME BEFORE INCOME TAXES......................................... 12,168 14,047
INCOME TAX EXPENSE................................................. (3,042) (3,933)
--------- ---------
NET INCOME......................................................... $ 9,126 $ 10,114
========= =========
NET EARNINGS PER COMMON SHARE
Primary.......................................................... $ 0.13 $ 0.15
========= =========
Fully diluted.................................................... $ 0.13 $ 0.15
========= =========
SHARES USED IN PER SHARE CALCULATION
Primary.......................................................... 70,659 69,188
========= =========
Fully diluted.................................................... 70,659 69,246
========= =========
See Notes to Condensed Consolidated Financial Statements.
5
QUALCOMM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
------------------------------
DECEMBER 29, DECEMBER 31,
1996 1995
------------ -------------
OPERATING ACTIVITIES:
Net income....................................................... $ 9,126 $ 10,114
Depreciation and amortization.................................... 19,004 11,726
Minority interest in income (loss) of consolidated subsidiary.... 3,320 (4,315)
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net...................................... (109,733) (24,958)
Inventories................................................... (73,337) (27,328)
Other assets.................................................. (1,956) (7,462)
Accounts payable and accrued liabilities...................... 56,735 13,467
Unearned revenue.............................................. 2,676 2,984
Other liabilities............................................. 542 (577)
---------- ----------
Net cash used in operating activities.............................. (93,623) (26,349)
---------- ----------
INVESTING ACTIVITIES:
Issuance of note receivable...................................... -- (25,000)
Capital expenditures............................................. (15,573) (65,936)
Purchases of intangible assets................................... -- (3,788)
Purchases of investments......................................... (103,848) (122,420)
Maturities of investments........................................ 179,405 56,472
Investments in other entities.................................... (7,269) (6,722)
---------- ----------
Net cash provided by (used in) investing activities................ 52,715 (167,394)
---------- ----------
FINANCING ACTIVITIES:
Sale/leaseback transaction....................................... -- 10,248
Proceeds from bank lines of credit............................... 56,300 --
Principal payments under long-term debt.......................... (37) (20,426)
Proceeds from issuance of notes payable.......................... -- 3,733
Minority interest investment in consolidated subsidiary.......... -- 6,088
Net proceeds from issuance of common stock....................... 1,237 1,157
---------- ----------
Net cash provided by financing activities.......................... 57,500 800
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............... 16,592 (192,943)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................... 110,143 500,629
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................... $ 126,735 $ 307,686
========== ==========
See Notes to Condensed Consolidated Financial Statements.
6
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"), 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 29, 1996 was derived from the audited consolidated balance
sheet at that date which is not presented herein.
In the opinion of management, the unaudited financial information for the
interim periods shown reflects all adjustments (which include only normal,
recurring adjustments) necessary for a fair presentation. These condensed
consolidated financial statements and notes thereto should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 1996 Annual Report on Form 10-K for the year ended
September 29, 1996. 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 of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue from communications systems and products is generally recognized at
the time the units are shipped and over the period during which message and
warranty services are provided, except for shipments under arrangements
involving significant acceptance requirements. Under such arrangements, revenue
is recognized when the Company has substantially met its performance
obligations. Revenue from long-term contracts and revenue earned under license
and development agreements with continuing performance obligations is recognized
using the percentage-of-completion method, based either on costs incurred to
date compared with total estimated costs at completion or using a units of
delivery methodology. Estimated contract losses are recognized when determined.
Non-refundable license fees are recognized when there is no material continuing
performance obligation under the agreement and collection probable. Royalty
revenue is recorded as earned in accordance with the specific terms of each
license agreement.
The Company operates and reports using a period ending on the last Sunday
of each month. As a result of this practice, fiscal 1996 included 53 weeks. The
first quarter of fiscal 1997 had 13 weeks of activity compared to 14 weeks of
activity during the first quarter of fiscal 1996.
Certain prior period amounts have been reclassified to conform with the
current period presentation.
NOTE 2 -- COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
DECEMBER 29, SEPTEMBER 29,
1996 1996
------------ -------------
Accounts Receivable (in thousands):
Trade, net of allowance for doubtful accounts of
$10,468 and $8,223 respectively............... $276,362 $ 181,732
Long-term contracts:
Billed........................................ 26,448 12,363
Unbilled, net of progress payments of $781 and
$1,572 respectively......................... 21,878 20,052
Other............................................ 2,478 3,286
--------- ---------
$327,166 $ 217,433
========= =========
7
QUALCOMM INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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. Progress payments decreased $0.8 million and increased $0.4
million during the first quarter of fiscal 1997 and 1996, respectively.
DECEMBER 29, SEPTEMBER 29,
1996 1996
------------ -------------
Inventories (in thousands):
Raw materials.................................... $ 98,238 $ 97,779
Work-in-progress................................. 47,508 35,686
Finished goods................................... 99,102 38,046
--------- ---------
$244,848 $ 171,511
========= =========
NOTE 3 -- DEBT AND CREDIT FACILITIES
As of December 29, 1996 and September 29, 1996, QUALCOMM Personal
Electronics, ("QPE") had total outstanding bank borrowings of $137 million and
$80.7 million, respectively, under two revolving credit facilities totalling
$200 million. These credit facilities have identical terms and expire in July
1997. The interest rates under both facilities are at prime rate, or, at the
Company's option, at a mutually acceptable market rate. The weighted average
interest rate was 6.0% on borrowings outstanding during the first quarter of
fiscal 1997 and 6.3% on borrowings outstanding at December 29, 1996.
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
FINANCING COMMITMENTS
As of December 29, 1996, the Company had an outstanding guarantee of
approximately $8.6 million on certain vendor financing obligations of Globalstar
L.P. ("Globalstar") (the "Vendor Financing Guarantee"). The Vendor Financing
Guarantee will expire no later than March 1997. The Company also agreed to
guarantee up to $22.5 million of Globalstar borrowings under an existing bank
financing agreement, which will expire in December 2000. As of December 29,
1996, Globalstar bank borrowings guaranteed by the Company amounted to $8.4
million. The amount of the Vendor Financing Guarantee will decrease, dollar for
dollar, as Globalstar increases borrowings subject to guarantee by the Company
under the existing bank financing agreement.
During the first quarter of fiscal 1997, the Company entered into a binding
letter of intent with Chase Telecommunications, Inc. ("Chase") to provide
long-term financing of approximately $108 million for its purchase of equipment
and services from the Company for its Personal Communication Services ("PCS")
network. Definitive terms and conditions of the long-term financing and purchase
agreements remain to be finalized. It is expected that most of the financing
will be utilized by December 31, 1999. The letter of intent provides for certain
restrictive covenants applicable to the borrower and a pledge of the equity
ownership of the borrower's affiliate who will hold the PCS licenses. In
addition, the borrowings will be collateralized by substantially all the assets
of the borrower. Any sale or transfer of control of a PCS license is subject to
Federal Communications Commission approval.
OPERATING LEASES
During the first quarter of fiscal 1997, QPE leased additional equipment
pursuant to an existing operating lease agreement for manufacturing equipment
that may be leased under separate schedules, each with approximately five year
terms. The lease agreement is non-recourse to the Company and the minority
interest holder in QPE. Equipment under lease has both early and end of term
purchase options. If the purchase
8
QUALCOMM INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
options have not been exercised by the end of the lease term, QPE will be
required to pay certain deficiency payments if proceeds from the sale of the
equipment fall below specified amounts. The maximum amount of deficiency
payments for all equipment leased as of December 29, 1996 is approximately $43.1
million. Rental expense under this lease during the first quarter of fiscal
1997, including an accrual for such deficiency payments, amounted to $1.2
million. As of December 29, 1996, the Company has accrued $2.3 million for
deficiency payments in other liabilities.
As of December 29, 1996, future rental payments under the lease, excluding
the deficiency payments, from fiscal 1997 through 2002 are $2.6 million, $3.5
million, $3.5 million, $3.5 million, $2.4 million and $0.5 million,
respectively.
LITIGATION
In September 1996, Ericsson, Inc. and Telefonaktiebolaget L.M. Ericsson
("Ericsson") filed suit against QUALCOMM in the U.S. District Court alleging
that various elements of the Company's Code Division Multiple Access ("CDMA")
equipment system and components infringe one or more patents owned by Ericsson.
On December 17, 1996, Ericsson also filed suit against QPE in the U.S. District
Court for the Northern District of Texas, Civil Action No. 3-96CV3373P. In
December 1996, the Company filed a countersuit in the U.S. District Court for
the Southern District of California. The complaint alleges unfair competition by
Ericsson based on a pattern of conduct intended to impede the acceptance and
commercial deployment of the Company's CDMA technology. The complaint also
charges that Ericsson's patent infringement claims against the Company violate a
1989 agreement between the companies. Finally, the lawsuit seeks a judicial
declaration that certain of Ericsson's patents are not infringed by the Company
and are invalid. Although there can be no assurances that an unfavorable outcome
would not have a material adverse effect on the Company's liquidity, financial
position or results of operations, the Company believes that the named Ericsson
patents are not required to produce IS95 compliant systems and that Ericsson's
claims are without merit. The Company will vigorously defend itself against such
claims.
On November 8, 1996 the Company was served with a complaint in connection
with a lawsuit filed in the United States District Court for the Eastern
District of Pennsylvania by BTG USA Inc. The complaint alleges that the
Company's Global Positioning System, CDMA telecommunications products and the
OmniTRACS system components thereof infringe United States Patent No. Re.
34,004. The patent expired in November 1996. Although there can be no assurances
that an unfavorable outcome would not have a material adverse effect on the
Company's liquidity, financial position or results of operations, the Company
believes the complaint has no 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 financial position or results of
operations.
PERFORMANCE GUARANTEES
The Company has agreements to supply CDMA equipment and equipment designs,
certain of which provide for substantial performance guarantees. If the Company
is unable to meet its performance obligations, the financial impact of
nonperformance could amount to a significant portion of the respective
agreements' contract value and could materially adversely affect margins and the
Company's results of operations.
9
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
this Quarterly Report and the audited consolidated financial statements and
notes thereto and Management's Discussion and Analysis of Results of Operations
and Financial Condition for the year ended September 29, 1996 contained in the
Company's 1996 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. The Company'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, timely product development and
commercial implementation of the Company's CDMA technology, continued growth in
the CDMA subscriber population and the scale up and operations of CDMA systems,
timing and receipt of license fees and royalties, the Company's ability to
successfully manufacture significant quantities of CDMA or other equipment on a
timely basis, failure to satisfy performance obligations, change in economic
conditions of the various markets the Company serves, as well as the other risks
detailed in this section, and in the sections entitled Results of Operations and
Liquidity and Capital Resources.
OVERVIEW
QUALCOMM commenced operations in July 1985, initially providing contract
research and development services and limited product manufacturing. In December
1988, the Company began shipping its two-way OmniTRACS mobile terminals and
providing messaging services to its OmniTRACS system customers. The Company has
also been involved in the development and commercialization of its proprietary
CDMA technology for digital wireless communication applications, including
digital cellular, PCS and Wireless Local Loop ("WLL") applications and now is
involved in production of its own products for those markets. The Company also
provides contract development services, including the design and development of
subscriber and ground communications equipment for the Globalstar
satellite-based communications system. In addition, the Company develops,
markets and manufactures a variety of other communications products, including
Eudora, a leading Internet-based electronic mail software application, for
personal, commercial and government applications.
The Company's revenues generated from its proprietary CDMA technology are
currently derived primarily from subscriber equipment and Application Specific
Integrated Circuits ("ASICs") component sales to domestic and international
wireless communications equipment suppliers and service providers. In addition,
the Company has derived significant revenues and margins from license, royalty
and development fees. Although the Company expects to continue to receive CDMA
license, royalty and development fees from its existing agreements and may
receive similar fees and royalties from new licensees, the amount and timing of
these CDMA fees and royalties will depend on the extent to which and when the
Company's CDMA technology is commercially implemented. Delays in roll-out or
commencement of commercial operation of cellular, PCS or WLL systems could have
a material adverse effect on quarterly and annual revenues.
A number of CDMA commercial system deployments were implemented or
announced since the end of fiscal 1996. During fiscal 1997, both Sprint Spectrum
L.P. ("Sprint PCS") and PrimeCo Personal Communications L.P. ("PrimeCo")
announced commercial roll-outs of their PCS networks in selected markets.
Subscriber equipment for both roll-outs was provided by QPE. Other service
providers worldwide have also launched, expanded or announced intentions to
launch their PCS, cellular and WLL networks utilizing CDMA proprietary
technology.
The Company began manufacturing and shipping significant volumes of CDMA
subscriber and infrastructure equipment during fiscal 1996. Production
capabilities at QPE were significantly expanded resulting in the shipment of
over 200,000 handsets in the month of December 1996, including both PCS and dual
mode cellular phones. Infrastructure production expanded in the first quarter of
fiscal 1997 as significant quantities of base stations were manufactured and
shipped to customer sites. Revenues have not been
10
recognized on shipments relating to a major contract which represents the
majority of all base stations shipped to date. The Company intends to recognize
revenue under this contract after successful commercial deployment. In January
1997, the Company commenced operation of a 177,000 square foot facility in San
Diego, California to expand its capacity to manufacture CDMA infrastructure
equipment. Any delays or difficulties in connection with the planned increase in
manufacturing capacity could have a material adverse effect on the Company's
business and results of operations. If the Company is unable to manufacture CDMA
subscriber and infrastructure equipment at commercially acceptable costs and on
a timely basis, the Company's competitive position and the ability of the
Company to achieve a profitable return on its CDMA research and development
expenditures could be materially impaired.
In fiscal 1996, the Company either directly, or through QPE, has entered
into a number of significant agreements including agreements with Sprint PCS,
PrimeCo and Northern Telecom ("Nortel") pursuant to which the Company (or QPE)
agreed to provide approximately $500 million, $350 million and $200 million,
respectively, in CDMA equipment and services. Also, in September 1996, the
Company and Hughes Network Systems ("Hughes") entered into an agreement whereby
Hughes agreed to purchase a minimum percentage of CDMA infrastructure equipment
from QUALCOMM for resale to Hughes' customers. In December 1996, the Company
entered into an agreement with Chase, a C-Block PCS licensee, to supply
approximately $140 million of PCS infrastructure equipment and services.
QUALCOMM has agreed to provide up to $108 million of financing for equipment
purchased under the Chase agreement.
Cellular, PCS and WLL systems operators are requiring their suppliers to
arrange or provide long-term financing for them as a condition to obtaining
infrastructure projects. These projects may require the Company to arrange or
provide significant amounts of financing either directly, and/or through a
guaranty of such financing through third party lenders. The inability to arrange
or provide such financing or to successfully compete for infrastructure projects
could have a material adverse effect on the Company. Also, in order for the
Company to arrange or provide financing for the cellular, PCS and WLL projects,
the Company will be required to expose itself to significant project, market,
political and credit risks.
The Company generates revenues from its domestic OmniTRACS business by
manufacturing and selling OmniTRACS terminals and related application software
packages and by providing ongoing messaging and maintenance services to domestic
OmniTRACS users. Competition has resulted in a reduction of the margins on unit
sales and services in fiscal 1996 and through the first quarter of fiscal 1997.
The Company generates revenues from its international OmniTRACS business through
license fees, sales of network equipment and terminals and fees from engineering
support services. Messaging services are provided by service providers that
operate network management centers for a region under licenses granted by the
Company.
In March 1994, the Company entered into a four-year development agreement
with Globalstar, to design and develop subscriber equipment and ground
communications segments of the Globalstar system through 1998. The revenues from
this contract are expected to be in excess of $500 million, Globalstar will
require substantial additional capital which will be used, in part, to fund
payment for the equipment to be developed by QUALCOMM. There can be no assurance
that Globalstar will be successful in raising additional capital or that delays
or technical or regulatory developments will not arise which could adversely
affect Globalstar's ability to fund payment for development of such equipment
from QUALCOMM which could have a material adverse effect on QUALCOMM's business
and results of operations. In December 1996, the Company entered into a license
with Telital S.r.1. ("Telital"), to design and manufacture dual mode Globalstar
CDMA/Global System for Mobile ("GSM") telephones. The Company's interest in
Globalstar, which is approximately 7%, is owned indirectly through certain
limited partnerships.
The Company has experienced, and expects to continue to experience,
increased operating expenses as a result of the Company's overall expansion. In
fiscal 1996, operating expenses were significantly higher, although operating
expenses as a percentage of revenue declined. The growth was primarily due to
increased research and development expenditures, expanded sales and marketing
efforts and overall expansion of the business base. Through fiscal 1997, the
Company expects to continue its rapid growth and will continue to add to its
engineering resources and increase its investments in research and development
projects, and expand its sales and marketing efforts as the Company's products
are marketed throughout the world.
11
In September 1996, Ericsson, Inc. and Telefonaktiebolaget L.M. Ericsson
("Ericsson") filed suit against QUALCOMM in the U.S. District Court alleging
that various elements of the Company's CDMA equipment system and components
infringe one or more patents owned by Ericsson. On December 17, 1996, Ericsson
also filed suit against QPE in the U.S. District Court for the Northern District
of Texas, Civil Action No. 3-96CV3373P. In December 1996, the Company filed a
countersuit in the U.S. District Court for the Southern District of California.
The complaint alleges unfair competition by Ericsson based on a pattern of
conduct intended to impede the acceptance and commercial deployment of the
Company's CDMA technology. The complaint also charges that Ericsson's patent
infringement claims against the Company violate a 1989 agreement between the
companies. Finally, the lawsuit seeks a judicial declaration that certain of
Ericsson's patents are not infringed by the Company and are invalid. Although
there can be no assurances that an unfavorable outcome would not have a material
adverse effect on the Company's liquidity, financial position or results of
operations, the Company believes that the named Ericsson patents are not
required to produce IS95 compliant systems and that Ericsson's claims are
without merit. The Company will vigorously defend itself against such claims.
On November 8, 1996 the Company was served with a complaint in connection
with a lawsuit filed in the United States District Court for the Eastern
District of Pennsylvania by BTG USA Inc. The complaint alleges that the
Company's Global Positioning System, CDMA telecommunications products and the
OmniTRACS system components thereof infringe United States Patent No. Re.
34,004. The patent expired in November 1996. Although there can be no assurances
that an unfavorable outcome would not have a material adverse effect on the
Company's liquidity, financial position or results of operations, the Company
believes the complaint has no merit and will vigorously defend the action.
RESULTS OF OPERATIONS
The following table sets forth certain revenue and expense items as
percentages of revenues:
THREE MONTHS ENDED
------------------------------
DECEMBER 29, DECEMBER 31,
1996 1995
------------ -------------
Revenues:
Communications systems........................... 83% 60%
Contract services................................ 10 22
License, royalty and development fees............ 7 18
--- ---
Total revenues........................... 100% 100%
--- ---
Operating expenses:
Communications systems........................... 67% 43%
Contract services................................ 7 15
Research and development......................... 12 22
Selling and marketing............................ 7 11
General and administrative....................... 4 7
--- ---
Total operating expenses................. 97% 98%
--- ---
Operating income................................... 3 2
Interest income, net............................... 1 5
Minority interest in (income) loss of consolidated
subsidiary....................................... (1) 3
--- ---
Income before income taxes......................... 3 10
Income tax expense................................. 1 3
--- ---
Net income......................................... 2% 7%
=== ===
Communications systems costs as a percentage of
communications systems revenues.................. 80% 71%
Contract services costs as a percentage of contract
services revenues................................ 72% 69%
12
FIRST QUARTER FISCAL 1997 COMPARED TO FIRST QUARTER FISCAL 1996
Total revenues for the first quarter of fiscal 1997 were $389 million, an
increase of $242 million or 165% compared to total revenues of $147 million for
the first quarter of fiscal 1996. The increase in revenue was due to significant
growth in communications systems which was primarily driven by increased
revenues related to subscriber and ASICs products, as well as increased contract
services revenues from the Company's development agreement with Globalstar.
Communications systems revenues, which consisted primarily of revenues from
CDMA subscriber equipment, ASICs chip sales to CDMA licensees, and the sales of
the Company's OmniTRACS systems, were $325 million, an increase of $236 million
or 266% over the first quarter of fiscal 1996. The growth in communications
systems revenues was primarily attributable to increases in sales of subscriber
equipment and ASICs components.
Contract services revenues totaled $39 million in the first quarter of
fiscal 1997 or 10% of total revenues, compared to $32 million or 22% of total
revenues for the first quarter of fiscal 1996. The dollar increase resulted
primarily from the development agreement with Globalstar which has continued to
ramp up since its inception in fiscal 1994.
License, royalty and development fees for the first quarter of fiscal 1997
were $26 million or 7% of total revenues, compared to $26 million or 18% of
total revenues in the first quarter of fiscal 1996. In the first quarter of
fiscal 1997, revenues were generated from a world-wide CDMA license agreement
with Hitachi to manufacture CDMA infrastructure equipment, a Globalstar
subscriber license agreement with Telital, royalties from the sale of CDMA
equipment by licensees and fees from other new and existing licensees.
Costs of communications systems, which consisted primarily of costs of
sales of CDMA subscriber equipment, ASICs components and OmniTRACS products and
services, were $259 million or 80% of communications systems revenues for the
first quarter of fiscal 1997, compared to $63 million or 71% of communications
systems revenues for the same period in the prior fiscal year. The dollar
increase in costs primarily reflects increased shipments of CDMA subscriber
equipment and ASICs components. The increase in communications systems costs as
a percentage of communications systems revenues was due to increasing volumes of
CDMA subscriber equipment and ASICs components which generate lower margins than
the Company's OmniTRACS business which was the major element of communication
systems revenues in the first quarter of fiscal 1996, and start-up costs
associated with the manufacturing of CDMA subscriber, infrastructure, and ASICs
products.
Contract services costs were $28 million or 72% of contract services
revenues for the first quarter of fiscal 1997 compared to $22 million or 69% of
contract services revenues for the first quarter of fiscal 1996. The dollar
increase was primarily related to the continued ramp-up on the Globalstar
development contract.
Research and development expenses were $46 million or 12% of revenues for
the first quarter of fiscal 1997, compared to $32 million or 22% of revenues for
the first quarter of fiscal 1996. The dollar increase was primarily attributed
to increased efforts towards the deployment of commercial CDMA infrastructure
and subscriber equipment. The decline in research and development expenses as a
percentage of revenues is primarily due to the significant expansion in the
revenue base in the first quarter of fiscal 1997. Overall research and
development expenditures are expected to increase in future quarters as the
Company plans to continue to add to its engineering resources.
Selling and marketing expenses were $27 million or 7% of total revenues for
the first three months of fiscal 1997, compared to $16 million or 11% of total
revenues for the first three months of fiscal 1996. The dollar increase in
selling and marketing was due primarily to the growth in personnel and other
marketing expenses related to the introduction of CDMA products in the domestic
and international marketplace, and to support the significant sales growth in
the Eudora division, which launched Eudora 3.0 in the first quarter of fiscal
1997.
General and administrative expenses were $16 million or 4% of total
revenues for the first quarter of fiscal 1997, compared to $11 million or 7% of
total revenues for the first quarter of fiscal 1996. The dollar increase
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was attributable to additional personnel and associated overhead costs, relating
in part to the strengthening of information systems necessary to support the
overall growth in the Company's operations.
Interest income was $4 million during the first quarter of fiscal 1997,
compared to $8 million during the first quarter of fiscal 1996. The lower
interest income reflects the use of cash to support the Company's substantial
growth over the past year which resulted in increased investments in working
capital, fixed assets and other investments.
Interest expense was $2 million in the first quarter of fiscal 1997,
compared to $1 million in the first quarter of fiscal 1996. The increase was
primarily due to the increased outstanding debt and capital leases related to
QPE.
The minority interest represents the 49% ownership interest of a subsidiary
of SONY in the income or loss of QPE, which is consolidated in the Company's
financial statements. In the first quarter of fiscal 1997, QPE recognized a
profit for the first time.
Income tax expense was $3 million during the first quarter of fiscal 1997,
a decrease of $1 million, compared to the first quarter of fiscal 1996. The
decrease was primarily due to lower pretax earnings in the first quarter of
fiscal 1997. In future periods, the Company will recognize its remaining
deferred tax assets if they meet the "more likely than not" criteria of
realization established by Statement of Financial Accounting Standard No. 109
(FAS 109).
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that the cash and cash equivalents and investment
balances of $295 million at December 29, 1996, including interest earned
thereon, will be used to fund working capital requirements related to the
expansion of its operations, equipment vendor financing, the acquisition of
capital equipment, investment in joint ventures, and continued expansion of
facilities. In addition, the Company may also invest in companies whose products
or services complement or support the Company's manufacturing and supply
capabilities or whose products or services complement or enhance the Company's
current or future product or service offerings.
In the first quarter of fiscal 1997, $94 million in cash was used by
operations, compared to $26 million used in the first quarter of fiscal 1996.
The increase in cash used by operations was primarily due to significant
increases in working capital requirements including inventories and accounts
receivable. Receivables and inventories were higher reflecting the significant
CDMA equipment revenue increase in the first quarter of fiscal 1997.
Infrastructure products shipped to customer sites prior to successful commercial
deployment also contributed to the higher levels of inventory.
Investments in capital expenditures, intangible assets and other entities
totaled $23 million in the first quarter of fiscal 1997 compared to $76 million
in the same period in fiscal 1996. Significant components in the first quarter
of fiscal 1997 consisted of the purchase of $16 million of capital assets and
the investment of $7 million in entities in which the Company holds less than a
50% interest. In the first quarter of fiscal 1996, the $76 million investment
related primarily to the purchase of $66 million of capital assets including a
manufacturing and research facility for approximately $32 million, construction
of a new engineering facility and increased building improvements relating
primarily to the new manufacturing and research facility. The Company expects to
continue making significant investments in capital assets, including new
facilities and building improvements, throughout fiscal 1997.
In the first quarter of fiscal 1997, the Company's financing activities
provided net cash of $58 million compared to $1 million in the same period in
fiscal 1996. In July 1996, QPE completed negotiations on two bank credit
facilities totaling, in the aggregate, $200 million. With this credit facility,
QPE repaid all of its loan balances outstanding to QUALCOMM and SONY and at the
end of the first quarter of fiscal 1997 maintained a loan balance of
approximately $137 million. The balance at the end of fiscal 1996 was
approximately $81 million which reflects an increase of $56 million relating
entirely to working capital requirements at QPE necessary to support the
significant expansion in production of subscriber equipment. The secured
revolving credit facilities are non-recourse to QUALCOMM and the minority
interest holder in
14
QPE. The first quarter of fiscal 1996 included proceeds from the sale and
leaseback of manufacturing equipment to QPE, and additional contributions
received from SONY related to the QPE joint venture, which were partially offset
by the retirement of the $20 million note on the Company's corporate
headquarters.
The design, development, manufacture and marketing of digital wireless
communication products and services are highly capital intensive. In addition,
cellular, PCS and WLL systems operators increasingly have required their
suppliers to arrange or provide long-term financing for them as a condition to
obtaining or bidding on infrastructure products. To the extent that such cash
resources are insufficient to fund the Company's activities, the Company may be
required to raise additional funds, potentially in the near term, which funds
may be derived through additional debt, equity financing, or other sources.
There can be no assurance that additional financing will be available on
reasonable terms or at all. If additional capital is raised through the sale of
additional equity or convertible debt securities, dilution to the Company's
stockholders could occur. The Company is evaluating the financing alternatives,
and is considering multiple sources of funding including unsecured bank
facilities, extension of the current QPE secured revolving credit facilities,
preferred securities and/or convertible debt. There can be no assurances such
capital will be available or, if available, that it will be on acceptable terms.
The actual amount and timing of working capital and capital equipment
expenditures that the Company may incur in future periods may vary
significantly. This will depend upon numerous factors, including the extent and
timing of the commercial deployment of the Company's CDMA technology in the U.S.
and worldwide, investments in joint ventures or other forms of strategic
alliances, the requirement to provide CDMA vendor financing and the growth in
personnel and related facility expansion and the increase in manufacturing
capacity. In addition, expenses related to any patent infringement, or other
litigation, may require additional cash resources and may have an adverse impact
on the Company's results of operations.
Cellular, PCS and WLL network operators increasingly have required their
suppliers to arrange or provide long-term financing for them as a condition to
obtaining or bidding on infrastructure projects. These projects may require the
Company to arrange or provide financing of amounts ranging from modest sums to
over a billion dollars on any particular project. Such amount financed may
include "soft costs" (such as software, cell site leases and permits), and thus
the amount financed may exceed 100% of infrastructure equipment costs. The
Company has vendor financing obligations with Sprint PCS (through Nortel), Chase
and directly with other service providers. The Company has also entered into
contracts for the supply of CDMA equipment which contain performance guarantees
which protect against late delivery or failure to perform. If the Company is
unable to deliver equipment on the scheduled dates, the performance guarantees
could have a material adverse impact on the Company and its results of
operations.
The Company's ability to arrange or provide and be competitive with such
financing will depend on a number of factors, including the Company's capital
structure, level of available credit and ability to provide financing in
conjunction with third-party lenders. There can be no assurance that the Company
will be able to arrange or provide such financing on terms and conditions, and
in amounts, that will be satisfactory to such network operators. The Company may
be required to hold any loans, or remain obligated under guarantees, until
maturity, which could have a material adverse effect on the Company's credit
rating. A number of the Company's competitors have substantially greater
resources than the Company, which may enable them to offer more favorable
financing terms and successfully compete against the Company for infrastructure
projects. The inability to arrange or provide such financing or to successfully
compete for infrastructure projects could have a material adverse effect on the
Company and its business prospects.
In order to arrange or provide for financing for cellular, PCS and WLL
projects, the Company may be required to expose itself to significant project,
market, political and credit risks. The Company may be required to provide such
financing directly, and/or guaranty such financing through third party lenders.
The amount of such financing could become significant and, if not repaid by the
carrier, could have a material adverse effect on the Company's operating results
and liquidity. Many WLL and PCS network operators, including a number of C-Block
licensees, have limited or no operating histories, are faced with significant
capital requirements and are high credit risks. Pursuant to FCC regulations
applicable to C-Block licensees, the FCC will have a lien on these licenses
which initially will constitute the primary asset of many C-Block
15
licensees. C-Block licensees, in particular, are faced with strict regulatory
requirements under applicable FCC regulations. Compliance with those regulations
is outside of the control of the Company. The failure of a C-Block licensee to
comply with any of those regulations could result in the revocation of that
licensee's FCC licenses. The Company has limited experience evaluating the
credit worthiness or commercial viability of potential purchasers of CDMA
equipment, and there can be no assurances that such customers will not default
on any financing arranged or provided by the Company for the purchase of its
CDMA equipment. In addition, the Company may be required to provide vendor
financing for a portion of the Globalstar system prior to its full scale
implementation.
A recent ruling of the U.S. Court of Appeals for the District of Columbia
required the FCC to review a two year old decision by the FCC which denied
QUALCOMM a "Pioneer's Preference" PCS license for the provision of wireless
voice and data services. The Company is currently in discussions with the FCC
regarding the impact of this ruling, which may allow the Company to purchase one
or more PCS licenses at a favorable rate. In the event QUALCOMM is awarded one
or more licenses, the Company may be required to commit funds for the purchase
of such licenses and for the construction of related wireless networks.
In December 1996, the Company and Chase entered into an agreement pursuant
to which QUALCOMM will supply approximately $140 million of PCS infrastructure
equipment and services based on QUALCOMM's CDMA technology to Chase. QUALCOMM
has agreed to provide up to $108 million of financing for equipment purchased
under the Chase agreement. In connection with the Chase agreement, the Company
purchased $4 million of Chase Class B Common Stock. The Company may be obligated
to purchase up to an additional $25 million of Chase Class B Common Stock under
certain circumstances.
In fiscal 1996 the Company provided $30 million in financing to NextWave
Telecom, Inc. ("NextWave") in connection with its plans to bid on PCS licenses
in the recently completed C-block auctions conducted by the FCC. The financing
originally consisted of $5 million of equity and $25 million in a convertible
loan. In connection with this investment, subject to the satisfaction of certain
conditions, NextWave has committed to purchase approximately 50% of its PCS
infrastructure equipment requirements from the Company. In March 1996, the
Company increased its equity investment to $20 million by converting $15 million
of the convertible loan balance to equity. Of the remaining $10 million loan,
$9.6 million was repaid in the third quarter of fiscal 1996 and $0.4 million was
converted into a three-year note with an equity conversion option. The Company
currently holds less than 5% of NextWave's outstanding shares and is accounting
for its investment under the cost method. The Company expects its ownership
percentage to decrease in the future as NextWave raises additional equity.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 4 of Notes to Condensed Consolidated Financial Statements.
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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 -- Computation of Earnings Per Share
(b) Reports on Form 8K
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
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