================================================================================
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 MARCH 30, 1997
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, 67,551,858 shares as of May 5,
1997.
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: May 7, 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
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 13
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
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
MARCH 30, SEPTEMBER 29,
1997 1996
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 406,300 $ 110,143
Investments (Note 4) 468,732 236,129
Accounts receivable, net 357,667 217,433
Finance receivables (Note 3) 87,063 -
Inventories 207,274 171,511
Other current assets 16,009 15,974
---------- ----------
Total current assets 1,543,045 751,190
PROPERTY, PLANT AND EQUIPMENT, NET 362,072 352,699
INVESTMENTS 3,006 8,009
OTHER ASSETS (NOTE 5) 131,870 73,432
---------- ----------
TOTAL ASSETS $2,039,993 $1,185,330
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 314,805 $ 229,799
Unearned revenue 17,470 13,226
Bank lines of credit 140,000 80,700
Current portion of long-term debt 3,082 2,234
---------- ----------
Total current liabilities 475,357 325,959
LONG-TERM DEBT 9,283 10,908
OTHER LIABILITIES 6,864 3,550
---------- ----------
Total liabilities 491,504 340,417
---------- ----------
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF SUBSIDIARY (NOTE 7) 660,000 -
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.0001 par value - -
Common stock, $0.0001 par value 7 7
Paid-in capital 836,747 819,042
Retained earnings 51,735 25,864
---------- ----------
Total stockholders' equity 888,489 844,913
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,039,993 $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 SIX MONTHS ENDED
--------------------------- --------------------------
MARCH 30, MARCH 31, MARCH 30, MARCH 31,
1997 1996 1997 1996
--------- --------- --------- ---------
REVENUES:
Communications systems $ 507,780 $ 104,120 $ 832,360 $ 192,824
Contract services 49,365 28,036 88,044 60,199
License, royalty and development fees 28,601 17,107 54,282 42,843
--------- --------- --------- ---------
Total revenues 585,746 149,263 974,686 295,866
--------- --------- --------- ---------
OPERATING EXPENSES:
Communications systems 418,724 78,866 678,209 141,618
Contract services 36,470 18,650 64,195 40,953
Research and development 53,106 35,324 99,284 67,579
Selling and marketing 31,100 16,539 58,041 32,029
General and administrative 22,012 8,464 37,604 19,720
Other 8,792 - 8,792 -
--------- --------- --------- ---------
Total operating expenses 570,204 157,843 946,125 301,899
--------- --------- --------- ---------
OPERATING INCOME 15,542 (8,580) 28,561 (6,033)
INTEREST INCOME 6,548 6,651 11,001 14,527
INTEREST EXPENSE (3,212) (666) (5,196) (1,357)
UNREALIZED GAIN ON TRADING SECURITIES 9,454 - 9,454 -
DISTRIBUTIONS ON CONVERTIBLE PREFERRED
SECURITIES OF SUBSIDIARY (3,895) - (3,895) -
MINORITY INTEREST IN (INCOME) LOSS OF
CONSOLIDATED SUBSIDIARY (2,110) 2,669 (5,430) 6,984
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 22,327 74 34,495 14,121
INCOME TAX (EXPENSE) BENEFIT (5,582) 1,391 (8,624) (2,542)
--------- --------- --------- ---------
NET INCOME $ 16,745 $ 1,465 $ 25,871 $ 11,579
========= ========= ========= =========
NET EARNINGS PER COMMON SHARE
Primary $ 0.23 $ 0.02 $ 0.36 $ 0.17
======== ========= ======== =========
Fully diluted $ 0.23 $ 0.02 $ 0.36 $ 0.17
======== ========= ======== =========
SHARES USED IN PER SHARE CALCULATION
Primary 72,821 70,158 71,740 69,673
========= ========= ========= =========
Fully diluted 73,758 70,158 72,208 69,702
========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements.
5
QUALCOMM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
--------------------------
MARCH 30, MARCH 31,
1997 1996
---------- ---------
OPERATING ACTIVITIES:
Net income $ 25,871 $ 11,579
Depreciation and amortization 41,675 24,419
Minority interest in income (loss) of consolidated subsidiary 5,430 (6,984)
Unrealized gain on trading securities (9,454) -
Purchase of trading securities (9,729) -
Non cash charge for impaired assets 8,792 -
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net (140,234) (50,175)
Finance receivables (87,063) -
Inventories (35,763) (64,525)
Other assets (24,776) (7,932)
Accounts payable and accrued liabilities 85,006 13,007
Unearned revenue 4,244 4,612
Other liabilities 3,314 (448)
--------- ---------
Net cash used in operating activities (132,687) (76,447)
---------- ---------
INVESTING ACTIVITIES:
Issuance of note receivable - (25,000)
Capital expenditures (49,930) (95,844)
Purchases of intangible assets - (3,788)
Purchases of investments (517,461) (264,852)
Maturities of investments 309,044 183,666
Investments in other entities (49,135) (6,722)
---------- ---------
Net cash used in investing activities (307,482) (212,540)
---------- ---------
FINANCING ACTIVITIES:
Sale/leaseback transaction - 10,248
Proceeds from bank lines of credit 59,300 -
Proceeds from issuance of convertible preferred securities 660,000 -
Principal payments under long-term debt (777) (20,498)
Proceeds from issuance of notes payable - 3,733
Minority interest investment in consolidated subsidiary 98 6,088
Net proceeds from issuance of common stock 17,705 9,008
--------- ---------
Net cash provided by financing activities 736,326 8,579
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 296,157 (280,408)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 110,143 500,629
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 406,300 $ 220,221
========= =========
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 is 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.
7
NOTE 2 -- COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
MARCH 30, SEPTEMBER 29,
1997 1996
----------- -----------
Accounts Receivable (in thousands):
Trade, net of allowance for doubtful
accounts of $11,121 and $8,223 respectively $ 306,729 $ 181,732
Long-term contracts:
Billed 21,189 12,363
Unbilled 23,830 20,052
Other 5,919 3,286
----------- -----------
$ 357,667 $ 217,433
=========== ===========
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.
MARCH 30, SEPTEMBER 29,
1997 1996
----------- -----------
Inventories (in thousands):
Raw materials $ 98,447 $ 97,779
Work-in-progress 27,907 35,686
Finished goods 80,920 38,046
----------- -----------
$ 207,274 $ 171,511
=========== ===========
NOTE 3 -- FINANCE RECEIVABLES
Finance receivables represent amounts due resulting from sales arrangements
in which the Company has agreed to provide long-term financing. The components
of finance receivables were as follows (in thousands):
MARCH 30,
1997
-----------
Billed $ 2,478
Unbilled 84,585
-----------
$ 87,063
===========
At March 30, 1997, the finance receivables resulted from sales to one
customer and such amounts are expected to be converted into long-term loans.
Subject to finalizing definitive terms and conditions, the Company has reached
an agreement in principle to sell long-term loans from the customer to a
financial institution at par value on a non-recourse basis. The Company expects
to realize the finance receivables at March 30, 1997 within one year of the
balance sheet date.
Commitments to extend long-term financing under sales arrangements at March
30, 1997 and September 29, 1996, including amounts in finance receivables at
March 30, 1997, aggregated approximately $390 million and $200 million,
respectively. Such commitments are subject to the customer meeting certain
conditions established in the financing arrangements. Commitments represent the
estimated amounts to be financed under these arrangements, however, actual
financing may be in lesser or greater amounts.
8
NOTE 4 -- SHORT TERM INVESTMENTS
On February 12, 1997, the Company and Globalstar Telecommunications Limited
("GTL") entered into an arrangement under which GTL agreed to accelerate the
vesting and exercisability of the Company's warrants to purchase 367,131 shares
of GTL common stock at $26.50 per share. Also, GTL agreed to register for resale
the GTL common stock issued. The Company exercised such warrants in March 1997.
As it is the Company's intent to sell the GTL common stock, such securities
have been classified as trading securities under Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The Company has included the GTL common stock in short-term
investments with the carrying value of such securities adjusted to market value
as of March 30, 1997, resulting in an unrealized gain of $9.5 million, net of
estimated selling expenses. The Company will record in future periods any net
unrealized gain or loss resulting from market fluctuations until the sale of the
securities.
In addition, as of March 30, 1997, the Company continues to maintain an
approximate 7% indirect limited partnership interest in Globalstar L.P.
accounted for under the equity method of accounting.
NOTE 5 -- INVESTMENT IN OTHER ENTITIES
In March 1997, the Company agreed to purchase $42 million of voting
preferred shares representing a 50% ownership interest in a corporate joint
venture, Chilesat Telefonia Personal S.A. ("Chilesat PCS"). The preferred shares
are entitled to a liquidation preference in an amount equal to the original
purchase price per share during a five year period beginning with commencement
of commercial operations of the joint venture.
As of March 30, 1997, the $42 million purchase price has been placed in an
escrow account pending the grant of a license to operate wireless services in
Chile by the Subsecretaria de Telecommunicaciones de Chile to Chilesat PCS. The
Company has included the escrowed amount in other assets in the accompanying
balance sheet and as an investment in other entities in the accompanying
statement of cash flows.
The Company has agreed to provide a $58 million letter of credit on behalf
of Chilesat PCS. The letter of credit is required under a systems equipment
sales arrangement with Chilesat PCS in which the Company may be required to
reimburse Chilesat PCS a portion of Chilean government fines if certain network
build out milestones are not met. The amount that Chilesat PCS may draw on the
letter of credit will decline as interim milestones are met and will expire no
later than December 31, 1999.
NOTE 6 -- DEBT AND CREDIT FACILITIES
As of March 30, 1997 and September 29, 1996, QUALCOMM Personal Electronics,
("QPE") had total outstanding bank borrowings of $140 million and $80.7 million,
respectively, under two revolving credit facilities totaling $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 six months of fiscal 1997 and 5.9% on
borrowings outstanding at March 30, 1997.
NOTE 7 -- CONVERTIBLE PREFERRED SECURITIES OF SUBSIDIARY
In February 1997, QUALCOMM Financial Trust I (the "Trust"), a statutory
business trust created under the laws of the State of Delaware in which the
Company is the sole common stock holder, completed a private placement of $660
million of 5 3/4% Trust Convertible Preferred Securities ("Convertible Preferred
Securities"). The sole assets of the Trust are QUALCOMM Incorporated 5 3/4%
Convertible Subordinated Debentures ("Convertible Subordinated Debentures"). The
Convertible Preferred Securities are guaranteed by the Company and convertible
into Company common stock at the rate of 0.6882 shares of Company common stock
for each Convertible Preferred Security (equivalent to a conversion price of
$72.6563 per share of common stock). Distributions on the Convertible
9
preferred securities are payable quarterly by the Trust. The Convertible
Preferred Securities are subject to mandatory redemption on February 24, 2012,
at a redemption price of $50 per preferred security.
The Company may cause the Trust to defer the payment of distributions for
successive periods of up to twenty consecutive quarters. During such periods,
accrued distributions on the Convertible Preferred Securities will compound
quarterly and the Company may not declare or pay distributions on its common
stock or debt securities that rank equal or junior to the Convertible
Subordinated Debentures. Also during such period, if holders of Convertible
Preferred Securities convert such securities into Company common stock, the
holder will not receive any cash related to the deferred distribution.
Issuance costs of approximately $18 million related to the Convertible
Preferred Securities are deferred and are being amortized over the period until
mandatory redemption of the securities in February 2012.
NOTE 8 -- OTHER OPERATING EXPENSES
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", the Company recorded an $8.8 million non cash pretax charge in
the second quarter of fiscal 1997 relating to the impairment of certain
long-lived assets.
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
GUARANTEES
The Company has guaranteed approximately $17 million of certain vendor
financing obligations of Globalstar L.P. ("Globalstar") (the "Vendor Financing
Guarantee"). The Vendor Financing Guarantee will expire no later than September
1997. The Company has also agreed to guarantee up to $22.5 million of Globalstar
borrowings under an existing bank financing agreement which will expire in
December 2000. 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. As of March 30, 1997,
Globalstar had no outstanding borrowings under the existing bank financing
agreement.
OPERATING LEASES
During the first six months 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 options have not been exercised by the end of
the lease term, QPE may be required to pay certain contingent payments if
proceeds from the sale of the equipment fall below specified amounts. The
maximum amount of contingent payments for all equipment leased as of March 30,
1997, is approximately $50.4 million. Rental expense under this lease during the
first six months of fiscal 1997, including an accrual for such contingent
payments, amounted to $4.7 million. As of March 30, 1997, the Company has
accrued $5.0 million in other liabilities for such payments.
As of March 30, 1997, future rental payments under the lease, excluding the
contingent payments, from fiscal 1997 through 2002 are $2.1 million, $4.1
million, $4.1 million, $4.1 million, $3.1 million and $0.7 million,
respectively.
LITIGATION
On September 23, 1996, Ericsson Inc. and Telefonaktiebolaget LM Ericsson
("Ericsson") filed suit against QUALCOMM in the U.S. District Court for the
Eastern District of Texas, Civil Action No. 2-96CV183. 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. Both complaints allege
that various elements of the Company's CDMA equipment system and components
infringe one or more patents owned by Ericsson. In December 1996,
10
QUALCOMM 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 QUALCOMM'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 QUALCOMM and
are invalid. On April 9, 1997, the suit against Ericsson in the U.S. District
Court for the Southern District of California was dismissed so that all of
QUALCOMM's claims in that case can be litigated in the action filed by Ericsson
in the U.S. District Court for the Eastern District of Texas. 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 named Ericsson patents are not required to produce
IS-95 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 U.S. 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.
On March 5, 1997, the Company filed a complaint against Motorola, Inc.
("Motorola") in the U.S. District Court for the Southern District of California,
Civil Action No. CV00372. The complaint was filed in response to allegations by
Motorola that the Company's recently announced "Q" Phone infringes design and
utility patents held by Motorola as well as trade dress and common law rights
relating to the appearance of certain Motorola wireless telephone products. The
complaint denies such allegations and seeks a judicial declaration that the
Company's products do not infringe any patents held by Motorola. The complaint
also states that, pursuant to certain patent and technology license agreements
entered into in 1990 between the companies, Motorola is precluded from asserting
infringement of the utility patents. On March 10, 1997, Motorola filed a
complaint against the Company in the U.S. District Court for the Eastern
Division of Illinois, Civil Action No. 97 C 1616 (the "Motorola Complaint"),
alleging claims based primarily on the above alleged infringement. The Company's
motion to transfer the Motorola Complaint to the U.S. District Court for the
Southern District of California was granted on April 3, 1997. On April 24, 1997,
the court denied Motorola's motion for a preliminary injunction thereby
permitting QUALCOMM to continue to manufacture, market and sell the Q phone. On
April 25, 1997, Motorola appealed the denial of its motion for a preliminary
injunction. Although there can be no assurance that an unfavorable outcome of
the dispute would not have a material adverse effect on the Company's liquidity,
financial position or results of operations, the Company believes Motorola's
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 and QPE have entered into contracts that provide for performance
guarantees to protect customers against late delivery or failure to perform.
These performance guarantees, and any future commitments for performance
guarantees, are obligations entered into separately, and in some cases jointly,
with partners to supply CDMA subscriber and infrastructure equipment. Certain of
these obligations provide for substantial performance guarantees that accrue at
a daily rate based on percentages of the contract value to the extent the
equipment is not delivered by scheduled delivery dates or the systems fail to
meet certain performance criteria by such dates. The Company is dependent in
part on the performance of its suppliers and strategic partners in order to
provide equipment which is the subject of the guarantees. Thus, the ability to
timely deliver such equipment may be outside of the Company's control. If the
Company and QPE are unable to meet their performance obligations, the payment of
the performance guarantees could amount to a significant portion of the contract
value and would have a material adverse effect on product margins and the
Company's results of operations.
11
NOTE 10 -- RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128")
applicable to entities with publicly held common stock or potential common
stock. This statement supersedes APB Opinion No. 15, "Earnings per Share"
("Opinion 15") and requires dual presentation of basic and diluted EPS for
entities with complex capital structures. Basic EPS excludes dilution and
replaces primary EPS. Diluted EPS is computed similarly to fully diluted EPS
pursuant to Opinion 15. FAS 128 is effective for financial statements issued for
periods ending after December 15, 1997. Pro forma EPS amounts calculated under
FAS 128 are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ -----------------------------
MARCH 30, MARCH 31, MARCH 30, MARCH 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
NET EARNINGS PER COMMON SHARE
Basic $ 0.25 $ 0.02 $ 0.39 $ 0.18
============ ============ ============ ============
Diluted $ 0.23 $ 0.02 $ 0.36 $ 0.17
============ ============ ============ ============
SHARES USED IN PER SHARE CALCULATION
(IN THOUSANDS)
Basic 67,225 65,262 66,903 65,009
============ ============ ============ ============
Diluted 72,821 70,158 71,740 69,673
============ ============ ============ ============
12
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: the failure to develop products in
a timely manner and delays in the commercial implementation of the Company's
Code Division Multiple Access ("CDMA") technology; continued growth in the CDMA
subscriber population and the scale-up and operations of CDMA systems; adverse
developments in current or future litigation; the Company's ability to
effectively manage growth and the intense competition in the wireless
communications industry; risks associated with vendor financing; 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; as well as the other risks detailed
in this section, in the sections entitled Results of Operations and Liquidity
and Capital Resources and in the Form 10-K.
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 is
also involved in the development and commercialization of its proprietary CDMA
technology for digital wireless communication applications, including digital
cellular, Personal Communications Services ("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 and infrastructure 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.
During the first half of fiscal 1997, the Company successfully completed the
private placement of $660 million of 5 3/4% Trust Convertible Preferred
Securities ("Convertible Preferred Securities"). The proceeds will be used by
the Company for working and fixed capital requirements (including facilities)
related to the expansion of it operations, financing of customers of its CDMA
infrastructure equipment and investments in joint ventures or other companies
and other assets to support growth of its business.
A significant 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 QUALCOMM
Personal Electronics ("QPE"). Other service providers worldwide have also
launched, expanded or announced intentions to launch their PCS, cellular and WLL
networks utilizing CDMA proprietary technology.
13
The Company began manufacturing and shipping significant volumes of CDMA
subscriber and infrastructure equipment during fiscal 1996. Production
capabilities at QPE were significantly expanded and during the second quarter of
fiscal 1997, the Company achieved the significant milestone of shipping over one
million CDMA portable phones. Infrastructure production began during fiscal 1996
and in the first half of fiscal 1997 significant quantities of base stations
were manufactured and shipped to customer sites. In the second quarter of fiscal
1997, commensurate with the commercial launch of PCS networks, revenues were
recognized on base stations installed for a major contract. 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 in connection with the commercial rollout of CDMA technology by the
Company's major customers, or any delays in obtaining orders for the Company's
infrastructure equipment from both national and international customers could
result in under utilization of the manufacturing facility and have a material
adverse effect on the Company's results of operations. If the Company is unable
to manufacture CDMA 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.
Since the end of fiscal 1996, the Company, either directly or through QPE,
entered into a number of significant agreements to provide CDMA equipment and
services. In December 1996, the Company entered into an agreement with Chase
Telecommunications Inc. ("Chase"), a C-Block PCS licensee, to supply
approximately $140 million of PCS infrastructure equipment and services.
QUALCOMM has agreed to provide up to $119 million of financing for equipment
purchased under the Chase agreement subject to Chase satisfying certain
conditions. International CDMA equipment contracts signed during February 1997
include an agreement with Chilesat Telefonia Personal S.A., a subsidiary of
Telex-Chile S.A., to supply approximately $94 million of PCS infrastructure and
subscriber equipment and services, and a multi-year contract with JSC Personal
Communications of Moscow, Russian Federation to supply its CDMA digital wireless
infrastructure equipment, network planning and installation services.
Additionally in February 1997, US WEST Communications signed an agreement with
QPE to purchase approximately $80 million of CDMA handsets in support of its
plans to deploy CDMA digital services within its markets. In March 1997, the
Company entered into an agreement with Hitachi Ltd. ("Hitachi"), under which
QUALCOMM will share its CDMA infrastructure product designs allowing Hitachi to
accelerate its time to market with cost-competitive feature-rich CDMA
infrastructure products. As part of this agreement, Hitachi will purchase a
percentage of its CDMA infrastructure requirements from QUALCOMM.
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 likely be subjected 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 half 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. International 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. During the second quarter
of fiscal 1997 Globalstar's funding was strengthened as Globalstar, L.P.
announced a plan to raise approximately $140 million of equity from the exercise
of warrants and raised approximately $500 million
14
from a high yield securities offering. This brings the total capital raised by
Globalstar to approximately $2 billion. 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. The Company's interest in Globalstar, which is
approximately 7%, is owned indirectly through certain limited partnerships. 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 has experienced, and expects to continue to experience,
increased operating expenses as a result of the Company's overall expansion. In
the first half of fiscal 1997, 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 in major areas throughout the world.
On September 23, 1996, Ericsson Inc. and Telefonaktiebolaget LM Ericsson
("Ericsson") filed suit against QUALCOMMin the U.S. District Court for the
Eastern District of Texas, Civil Action No. 2-96CV183. 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. Both complaints allege
that various elements of the Company's CDMA equipment system and components
infringe one or more patents owned by Ericsson. In December 1996, QUALCOMM 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 QUALCOMM'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 QUALCOMM and are invalid. On April 9,
1997, the suit against Ericsson in the U.S. District Court for the Southern
District of California was dismissed so that all of QUALCOMM's claims in that
case can be litigated in the action filed by Ericsson in the U.S. District Court
for the Eastern District of Texas. 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
named Ericsson patents are not required to produce IS-95 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 U.S. 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.
On March 5, 1997, the Company filed a complaint against Motorola, Inc.
("Motorola") in the U.S. District Court for the Southern District of California,
Civil Action No. CV00372. The complaint was filed in response to allegations by
Motorola that the Company's recently announced "Q" Phone infringes design and
utility patents held by Motorola as well as trade dress and common law rights
relating to the appearance of certain Motorola wireless telephone products. The
complaint denies such allegations and seeks a judicial declaration that the
Company's products do not infringe any patents held by Motorola. The complaint
also states that, pursuant to certain patent and technology license agreements
entered into in 1990 between the companies, Motorola is precluded from asserting
infringement of the utility patents. On March 10, 1997, Motorola filed a
complaint against the Company in the U.S. District Court for the Eastern
Division of Illinois, Civil Action No. 97 C 1616 (the "Motorola Complaint"),
alleging claims based primarily on the above alleged infringement. The Company's
motion to transfer the Motorola Complaint to the U.S. District Court for the
Southern District of California was granted on April 3, 1997. On April 24, 1997,
the court denied Motorola's motion for a preliminary injunction thereby
permitting QUALCOMM to
15
continue to manufacture, market and sell the Q phone. On April 25, 1997,
Motorola appealed the denial of its motion for a preliminary injunction.
Although there can be no assurance that an unfavorable outcome of the dispute
would not have a material adverse effect on the Company's liquidity, financial
position or results of operations, the Company believes Motorola's 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 Six Months Ended
-------------------------------- --------------------------------
March 30, 1997 March 31, 1996 March 30, 1997 March 31, 1996
-------------- -------------- -------------- --------------
Revenues:
Communications systems 87% 70% 85% 65%
Contract services 8 19 9 20
License, royalty and development fees 5 11 6 15
---- ----- ----- ----
Total revenues 100% 100% 100% 100%
---- ----- ----- ----
Operating expenses:
Communications systems 71% 53% 69% 48%
Contract services 6 12 7 14
Research and development 9 24 10 23
Selling and marketing 5 11 6 11
General and administrative 4 6 4 6
Other 2 - 1 -
---- ----- ----- ----
Total operating expenses 97% 106% 97% 102%
---- ----- ----- ----
Operating income (loss) 3 (6) 3 (2)
Interest income, net * 4 1 5
Unrealized gain on trading
securities 2 - 1 -
Distributions on convertible preferred
securities of subsidiary (1) - * -
Minority interest * 2 (1) 2
---- ----- ----- ----
Income before income taxes 4 * 4 5
Income tax (expense) benefit (1) 1 (1) (1)
---- ----- ----- ----
Net income 3% 1% 3% 4%
==== ===== ===== ====
Communications systems costs as a
percentage of communications
systems revenues 82% 76% 81% 73%
Contract services costs as a percentage
of contract services revenues 74% 67% 73% 68%
* Less than 1%
Total revenues for the second quarter of fiscal 1997 were $586 million, an
increase of $437 million or 292% compared to total revenues of $149 million for
the second quarter of fiscal 1996. Total revenues for the first six months of
fiscal 1997 were $975 million, an increase of $679 million over total revenues
of $296 million for the first six months of fiscal 1996. Revenue growth for the
second quarter and first six months of fiscal 1997 was due to significant growth
in communications systems which was primarily driven by increased revenues from
CDMA subscriber and infrastructure equipment and ASICs products, as well as
increased contract services revenues from the Company's development agreement
with Globalstar.
16
Communications systems revenues which consisted primarily of revenues from
the sale of the Company's OmniTRACS system, both products and services, sales of
CDMA subscriber and infrastructure equipment and ASICs sales to CDMA licensees
and service providers were $508 million, an increase of $404 million or 388%
over the second quarter in fiscal 1996. For the first six months of fiscal 1997,
communications systems revenues were $832 million, a 332% increase compared to
revenues of $193 million for the same period in fiscal 1996. Significant growth
in revenues for the quarter and the first six months was primarily attributable
to increased shipments of CDMA subscriber equipment and ASIC's products In
addition, in the second quarter of fiscal 1997, commensurate with the commercial
launch of PCS networks, revenues were recognized on a major contract for
infrastructure equipment installed as of March 30, 1997. CDMA product revenues
are expected to represent an increasing share of communications systems revenues
as higher volumes of commercial products are shipped. For the first half of
fiscal 1997, OmniTRACS revenue growth was attributable to increased domestic
unit sales and higher domestic messaging revenues but was partially offset by a
decline in international unit sales.
Contract services revenues totaled $49 million in the second quarter of
fiscal 1997 or 8% of total revenues, compared to $28 million or 19% of total
revenues for the second quarter of fiscal 1996. Contract services revenues for
the first six months of fiscal 1997 increased to $88 million from $60 million
for the same period in fiscal 1996, an increase of 46%. The increase of $21
million for the quarter and $28 million for the first six months 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 second quarter of fiscal 1997
increased to $29 million from $17 million for the second quarter of the prior
fiscal year. License, royalty and development fees for the first six months of
fiscal 1997 were $54 million, compared to $43 million for the same period in
fiscal 1996. In the second quarter of fiscal 1997, new CDMA license fees were
generated from a handset license agreement with Kokusai Electric Co., Ltd. and a
design license agreement with Hitachi, which is in addition to the CDMA license
agreement to manufacture CDMA infrastructure equipment that was signed by
Hitachi in the first quarter of fiscal 1997. The Company also recorded revenues
from royalties associated with the sale of CDMA equipment by licensees. Revenues
generated from CDMA royalties increased approximately 90% during the second
fiscal quarter of 1997 compared to the second quarter of the prior fiscal year,
and more than doubled for the first six months of fiscal 1997 compared to the
same period in fiscal 1996. The Company expects to continue to experience
fluctuations in quarterly and yearly operating results in fiscal 1997 and beyond
due to the variability in the amount and timing of receipt of CDMA license,
royalty and development fees.
Costs of communications systems, which consisted primarily of costs of sales
of CDMA subscriber and infrastructure equipment, ASICs components and OmniTRACS
products and services were $419 million or 82% of communications systems
revenues for the second quarter of fiscal 1997, compared to $79 million or 76%
of communications systems revenues for the same period in the prior fiscal year.
For the first six months of fiscal 1997, communications systems costs were $678
million or 81% of communications systems revenues, compared to $142 million or
73% of communications systems revenues for the same period in fiscal 1996. The
increase in communications systems costs as a percentage of communications
systems revenues reflects the significant increase in sales volumes of CDMA
products, which realized a lower gross margin than OmniTRACS revenues, and the
related costs associated with the rapid expansion of production capacity for
CDMA equipment.
Contract services costs were $36 million or 74% of contract services
revenues for the second quarter of fiscal 1997, compared to $19 million or 67%
of contract services revenues for the second quarter of fiscal 1996. Contract
services costs for the first six months of fiscal 1997 were $64 million or 73%
of contract services revenues, compared to $41 million or 68% of contract
services revenues for fiscal 1996. The dollar increase in contract services
costs was primarily related to the Globalstar development contract.
Research and development expenses were $53 million or 9% of revenues for the
second quarter of fiscal 1997, compared to $35 million or 24% of revenues for
the second quarter of fiscal 1996. For the first six months of fiscal 1997,
research and development costs were $99 million or 10% of revenues, compared to
$68 million or 23% of revenues for the first six months of fiscal 1996. The
Company continues to add to its engineering resources and the dollar increase
was primarily attributed to increased efforts towards the development of
commercial CDMA
17
infrastructure and subscriber equipment in 1997. Purchases of material and
equipment for research and development will vary from quarter to quarter but
overall research and development expenditures are expected to increase in future
quarters.
Selling and marketing expenses were $31 million or 5% of total revenues for
the second quarter fiscal 1997, compared to $17 million or 11% of total revenues
for the same quarter last year. For the first six months of fiscal 1997, selling
and marketing expenses were $58 million or 6% of revenues, compared to $32
million or 11% of revenues for the same period in fiscal 1996. The dollar
increase in selling and marketing expenses for the quarter and the first six
months was due primarily to significant growth in personnel and marketing
expenses related to CDMA marketing activity both domestically and
internationally. Other factors contributing to marketing expense growth included
trade shows, commissions, advertising and the establishment of foreign sales
offices.
General and administrative expenses were $22 million or 4% of total revenues
for the second quarter of fiscal 1997, compared to $8 million or 6% of total
revenues for the second quarter of fiscal 1996. General and administrative
expenses for the first six months of fiscal 1997 were $38 million or 4% of
revenues, compared to $20 million or 6% of revenues for the same period in
fiscal 1996. The dollar increase for the quarter and the first half of the
fiscal year was driven primarily by additional personnel and associated overhead
costs necessary to support the overall growth in the Company's operations as
well as increased legal fees associated with patent infringement litigation.
Although the Company is experiencing rapid growth, it continues to emphasize
control of operating expenses and reduction of expenses as a percentage of
revenue.
Other operating expense of $9 million for the second quarter and the first
six months of fiscal 1997 represents a non cash pretax charge relating to the
impairment of certain long-lived assets.
The unrealized gain on trading securities of approximately $10 million for
the second fiscal quarter, and first six months of fiscal 1997, relates to the
market value adjustment in the value of equity trading securities. The Company
will record in future periods any net unrealized gain or loss resulting from
market fluctuations until the sale of the securities.
Interest income was $7 million during the second quarter of fiscal 1997 and
fiscal 1996. For the first six months of fiscal 1997, interest income was $11
million compared to $15 million for the same period in fiscal 1996. The decrease
for the first six months in fiscal 1997 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. During the
second quarter of fiscal 1997, the Company received $660 million in proceeds
from the private placement of Trust Convertible Preferred Securities.
Interest expense increased to $3 million in the second quarter of fiscal
1997, compared to $1 million in the second quarter of fiscal 1996. For the first
six months of fiscal 1997, interest expense was $5 million compared to $1
million for the same period in fiscal 1996. This increase in the second quarter
and first six months of fiscal 1997 is the result of increased bank borrowings
to support the working capital needs of QPE.
Distributions accrued on Convertible Preferred Securities of $4 million for
the second quarter of fiscal 1997, and first six months of fiscal 1997 relate to
the private placement of $660 million of 5 3/4% Trust Convertible Preferred
Securities by QUALCOMM in March 1997. The securities are convertible into common
stock of QUALCOMM at a conversion price of $72.6563 per share of common stock.
The minority interest reflects SONY's 49% share in the profit or loss of
QPE, a joint venture consolidated in the Company's financial statements.
Income tax expense of $6 million during the second quarter of fiscal 1997
represents an increase of $7 million compared to the second quarter of fiscal
1996. Income tax expense was $9 million for the first six months of fiscal 1997
compared to $3 million for fiscal 1996. The increase was primarily due to higher
pretax earnings for the first six months of fiscal 1997. In future periods, the
Company will recognize its remaining deferred tax assets or
18
portions thereof if they meet the "more likely than not" criteria of realization
established by Statement of Financial Accounting Standard No. 109, Accounting
for Income Taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that the cash and cash equivalents and investment
balances of $878 million at March 30, 1997, including interest earned thereon,
will be used to fund working and fixed capital requirements, including
facilities, related to the expansion of its operations, financing for customers
of its CDMA infrastructure equipment and investment in joint ventures or other
companies and other assets to support the growth of its business.
In the first half of fiscal 1997, $133 million in cash was used by
operations, compared to $76 million used by operations in the first half of
fiscal 1996. The increase in cash used by operations was primarily due to
significant increases in net working capital requirements including receivables
and inventories. The dollar growth in receivables and inventories was primarily
attributable to the significant increase in CDMA equipment revenues.
Investments in capital expenditures, intangible assets and other entities
totaled $99 million in the first half of fiscal 1997, compared to $106 million
in the same period of fiscal 1996. Significant components in the first half of
fiscal 1997 consisted of the purchase of $50 million of capital assets and the
investment of $7 million in entities in which the Company holds less than a 50%
interest. Also, during the second quarter of fiscal 1997, the Company agreed to
purchase $42 million of voting preferred shares representing a 50% ownership
interest in a corporate joint venture, Chilesat PCS. As of March 30, 1997 the
$42 million purchase price has been placed in an escrow account pending the
grant of a license to operate wireless services in Chile by the Subsecretaria de
Telecommunicaciones de Chile to Chilesat PCS. In the first half of fiscal 1996,
the Company purchased $96 million of capital assets including the purchase of 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 half of fiscal 1997, the Company's financing activities
provided net cash of $736 million compared to $9 million in the first half of
fiscal 1996. The first half of fiscal 1997 included $660 million in proceeds
from the issuance of the Convertible Preferred Securities and $18 million from
the issuance of common stock under the Company's stock option and employee stock
purchase plan. Additionally, QPE drew down $59 million of the credit facility to
fund working capital requirements necessary to support the significant expansion
in production of subscriber equipment. The first half 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,
and the issuance of common stock under the Company's stock option and employee
stock purchase plan, 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 which may be derived through additional debt,
equity financing, or other sources. 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 continues to evaluate financing
alternatives, including unsecured bank facilities, extension of the current QPE
secured revolving credit facilities, or other sources of debt or equity
financing. There can be no assurances such additional financing 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
19
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. In order to arrange or provide
for such financing, the Company will likely be subjected 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. Such amounts 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 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.
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.
The Company and QPE have entered into contracts that provide for performance
guarantees to protect customers against late delivery or failure to perform.
These performance guarantees, and any future commitments for performance
guarantees, are obligations entered into separately, and in some cases jointly,
with partners to supply CDMA subscriber and infrastructure equipment. Certain of
these obligations provide for substantial performance guarantees that accrue at
a daily rate based on percentages of the contract value to the extent the
equipment is not delivered by scheduled delivery dates or the systems fail to
meet certain performance criteria by such dates. The Company is dependent in
part on the performance of its suppliers and strategic partners in order to
provide equipment which is the subject of the guarantees. Thus, the ability to
timely deliver such equipment may be outside of the Company's control. If the
Company and QPE are unable to meet their performance obligations, the payment of
the performance guarantees could amount to a significant portion of the contract
value and would have a material adverse effect on product margins and the
Company's results of operations.
To complete system build-outs and implement their business plans, PCS and
WLL service providers will require substantial amounts of capital. The failure
of the Company's customers to design, construct and launch their systems would
have a material adverse effect on the Company's financial results. The Company
expects that a number of its potential infrastructure and subscriber equipment
customers will be C, D, E and F-Block licensees. These licensees are subject to
a number of risks in addition to those facing other wireless service providers.
Many of these licensees have limited financial resources, are highly leveraged
and will require large amounts of capital to complete the build-out of their
systems. There can be no assurance that these licensees will be able to raise
such capital. During March 1997, the C-Block licensee holding the second largest
number of PCS licenses filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. There can be no assurance that other C, D, E and F-Block
licensees will not file for similar protection. In addition, the Company may be
under increased pressure to provide financing to existing C, D, E and F-Block
licensees. Many PCS and cellular service providers will have substantially
greater resources than these licensees, in particular the C and F-Block
licensees who were required to qualify as "small business" in order to bid in
the C and F-Block auctions. Further, there can be no assurance that future FCC
auctions of wireless spectrum will not reduce the competitiveness or
attractiveness of these licensees and
20
their systems, or that such licenses will not be sold at prices substantially
less than those recorded in the prior FCC auctions. In addition, the C, D, E and
F-Block auctions were concluded over one year following the conclusion of the
A-Block and B-Block auctions, which have provided the A-Block and B-Block
licensees with a significant time-to-market competitive advantage over such
licensees.
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 decide 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 $119 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 C-Block
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.
QUALCOMM has announced its intent to enter into an agreement with the City
of San Diego whereby a one time payment of approximately $18 million will be
made to the city in exchange for certain naming rights to San Diego Jack Murphy
Stadium. The payment is anticipated to occur during the third quarter of fiscal
1997, at which time the stadium will be renamed QUALCOMM Stadium with certain
rights obtained for signage in and around the facility for a twenty year period.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
See Note 9 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
The Company's Annual Meeting of Stockholders (the "Annual Meeting") was held on
February 11, 1997. At the Annual Meeting, the stockholders of the Company (i)
elected a director to hold office until the 1999 Annual Meeting of Stockholders
and four directors to hold office until the 2000 Annual Meeting of Stockholders
or until his successor is elected, as listed below; (ii) approved the Company's
1991 Stock Option Plan, as amended; and (iii) ratified the selection of Price
Waterhouse LLP as the Company's independent accountants for the fiscal year
ending September 28, 1997.
21
The Company had 66,613,744 shares of Common Stock outstanding as of December 20,
1996, the record date for the Annual Meeting. At the Annual Meeting, holders of
a total of 60,210,863 shares of Common Stock were present in person or
represented by proxy. The following sets forth information regarding the results
of the voting at the Annual Meeting:
Proposal 1: Election of Directors
Shares Voting Shares
Director In Favor Withheld
--------- -------------- --------
Robert E. Kahn 59,974,961 235,902
Harvey P. White 59,978,905 231,958
Richard C. Atkinson 59,977,179 233,684
Peter M. Sacerdote 59,977,190 233,673
Marc I. Stern 59,977,115 233,748
Directors whose term of office continued after the annual meeting are: Irwin
Mark Jacobs, Andrew J. Viterbi, Adelia A. Coffman, Neil Kadisha, Jerome S.
Katzin, Duane A. Nelles, Frank Savage and Brent Scowcroft.
Proposal 2: Approval of the 1991 Stock Option Plan as Amended
Votes in favor: 24,597,612
Votes against: 11,967,330
Abstentions: 786,688
Broker non-votes: 22,859,233
Proposal 3: Ratification of Selection of Independent Accountants
Votes in favor: 60,060,943
Votes against: 65,774
Abstentions: 84,146
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
11.1-Computation of Earnings Per Share
(b) Reports on Form 8K
During the three-month period ending March 30, 1997, the following
reports were filed on Form 8-K under Item 5, Other Events:
1. The report dated and filed March 7, 1997 announcing Registrant's
complaint filed against Motorola, Inc. In the U.S. District Court for
the Southern District of California, in response to allegations by
Motorola that the Registrant's recently announced "Q" Phone infringes
a design patent and certain utility patents held by Motorola as well
as trade dress and common law rights relating to the appearance of
certain Motorola wireless telephone products.
2. The report dated and filed February 25, 1997 announcing Registrant's
offering of Trust Convertible Preferred Securities of QUALCOMM
Financial Trust I.
22