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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 MARCH 29, 1998
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 (ZIP CODE)
OFFICES)
(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, 69,214,356 shares
as of April 20, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUALCOMM Incorporated
/s/ ANTHONY S. THORNLEY
-----------------------------------------
Anthony S. Thornley
Executive Vice President, Finance
& Chief Financial Officer
Dated: April 24, 1998
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... 7-11
Item 2. Management's Discussion and Analysis of Results of
Operations ........................................... 12-21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
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 29, SEPTEMBER 28,
1998 1997
---------- -------------
CURRENT ASSETS:
Cash and cash equivalents................................... $ 186,974 $ 248,837
Investments................................................. 249,087 448,235
Accounts receivable, net.................................... 599,349 445,382
Finance receivables......................................... 47,720 111,501
Inventories................................................. 359,695 225,156
Other current assets........................................ 99,382 70,484
---------- ----------
Total current assets................................ 1,542,207 1,549,595
PROPERTY, PLANT AND EQUIPMENT, NET............................ 518,686 425,090
INVESTMENTS................................................... 111,680 111,786
FINANCE RECEIVABLES, NET...................................... 103,771 --
OTHER ASSETS.................................................. 179,387 188,209
---------- ----------
TOTAL ASSETS.................................................. $2,455,731 $2,274,680
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.................... $ 529,211 $ 409,156
Unearned revenue............................................ 52,712 45,084
Bank lines of credit........................................ 56,000 110,000
Current portion of long-term debt........................... 2,917 3,238
---------- ----------
Total current liabilities........................... 640,840 567,478
LONG-TERM DEBT................................................ 5,530 7,729
OTHER LIABILITIES............................................. 20,949 15,295
---------- ----------
Total liabilities................................... 667,319 590,502
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 8)........................
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES................ 8,504 --
---------- ----------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST CONVERTIBLE
PREFERRED SECURITIES OF A SUBSIDIARY TRUST HOLDING SOLELY DEBT
SECURITIES OF THE COMPANY.................................... 660,000 660,000
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.0001 par value.......................... -- --
Common stock, $0.0001 par value............................. 7 7
Paid-in capital............................................. 939,330 906,373
Retained earnings........................................... 180,571 117,798
---------- ----------
Total stockholders' equity.......................... 1,119,908 1,024,178
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................... $2,455,731 $2,274,680
========== ==========
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 29, MARCH 30, MARCH 29, MARCH 30,
1998 1997 1998 1997
--------- --------- --------- ---------
REVENUES:
Communications systems........... $ 625,572 $ 507,780 $1,302,457 $ 832,360
Contract services................ 64,927 49,365 128,958 88,044
License, royalty and development
fees........................... 70,054 28,601 114,992 54,282
--------- --------- ---------- ---------
Total revenues............. 760,553 585,746 1,546,407 974,686
--------- --------- ---------- ---------
OPERATING EXPENSES:
Communications systems........... 485,279 418,724 992,618 678,209
Contract services................ 49,053 36,470 95,329 64,195
Research and development......... 76,946 53,106 151,747 99,284
Selling and marketing............ 59,728 31,100 115,826 58,041
General and administrative....... 38,246 22,012 74,715 37,604
Other (Note 5)................... -- 8,792 11,976 8,792
--------- --------- ---------- ---------
Total operating expenses... 709,252 570,204 1,442,211 946,125
--------- --------- ---------- ---------
OPERATING INCOME................... 51,301 15,542 104,196 28,561
INTEREST INCOME.................... 9,573 6,548 21,763 11,001
INTEREST EXPENSE................... (1,685) (3,212) (4,374) (5,196)
UNREALIZED GAIN ON TRADING
SECURITIES....................... -- 9,454 -- 9,454
NET GAIN ON SALE OF INVESTMENTS.... -- -- 2,950 --
DISTRIBUTIONS ON TRUST CONVERTIBLE
PREFERRED SECURITIES OF
SUBSIDIARY TRUST................. (9,927) (3,895) (19,725) (3,895)
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARIES........ (21,642) (2,110) (17,861) (5,430)
EQUITY IN EARNINGS OF INVESTEES.... (1,398) -- (4,170) --
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES......... 26,222 22,327 82,779 34,495
INCOME TAX EXPENSE................. (211) (5,582) (20,006) (8,624)
--------- --------- ---------- ---------
NET INCOME......................... $ 26,011 $ 16,745 $ 62,773 $ 25,871
========= ========= ========== =========
NET EARNINGS PER COMMON SHARE:
Basic............................ $ 0.38 $ 0.25 $ 0.91 $ 0.39
========= ========= ========== =========
Diluted.......................... $ 0.36 $ 0.23 $ 0.85 $ 0.36
========= ========= ========== =========
SHARES USED IN PER SHARE
CALCULATION:
Basic............................ 68,934 67,225 68,705 66,903
========= ========= ========== =========
Diluted.......................... 73,143 72,821 73,643 71,740
========= ========= ========== =========
See Notes to Condensed Consolidated Financial Statements.
5
QUALCOMM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
-------------------------
MARCH 29, MARCH 30,
1998 1997
---------- ----------
OPERATING ACTIVITIES:
Net income................................................... $ 62,773 $ 25,871
Depreciation and amortization................................ 65,119 41,675
Acquired in-process research and development................. 6,976 --
Non-cash charge for impaired assets ......................... 5,000 8,792
Unrealized gain on trading securities........................ -- (9,454)
Minority interest in income of consolidated subsidiaries..... 17,861 5,430
Equity in earnings of investees.............................. 4,170 --
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net.................................. (153,967) (140,234)
Finance receivables, net.................................. (39,990) (87,063)
Inventories............................................... (134,539) (35,763)
Other assets.............................................. (29,243) (6,152)
Accounts payable and accrued liabilities.................. 121,733 85,006
Unearned revenue.......................................... 7,628 4,244
Other liabilities......................................... 5,654 3,314
Purchase of trading securities............................... -- (9,729)
---------- ----------
Net cash used by operating activities.......................... (60,825) (114,063)
---------- ----------
INVESTING ACTIVITIES:
Capital expenditures......................................... (154,221) (49,930)
Purchases of investments..................................... (254,954) (517,461)
Maturities of investments.................................... 454,208 309,044
Purchases of intangible assets............................... (11,548) --
Investments in other entities................................ (4,052) (49,135)
---------- ----------
Net cash provided (used) by investing activities............... 29,433 (307,482)
---------- ----------
FINANCING ACTIVITIES:
Net (repayments) borrowings under bank lines of credit....... (54,000) 59,300
Principal payments on long-term debt......................... (2,520) (777)
Minority interest investment in consolidated subsidiaries.... 602 98
Proceeds from issuance of trust convertible preferred
securities of subsidiary trust............................. -- 660,000
Deferred issuance costs...................................... (832) (18,624)
Net proceeds from issuance of common stock................... 26,279 17,705
---------- ----------
Net cash (used) provided by financing activities............... (30,471) 717,702
----------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........... (61,863) 296,157
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............... 248,837 110,143
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................... $ 186,974 $ 406,300
========== ==========
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" or "QUALCOMM"), without
audit, in accordance with the instructions to Form 10-Q and, therefore, do not
necessarily include all information and footnotes necessary for a fair
presentation of its financial position, results of operations and cash flows in
accordance with generally accepted accounting principles. The condensed
consolidated balance sheet at September 28, 1997 was derived from the audited
consolidated balance sheet at that date which is not presented herein. The
Company operates and reports using a period ending on the last Sunday of each
month.
In the opinion of management, the unaudited financial information for the
interim periods presented reflects all adjustments (which 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 Annual Report on Form 10-K for the fiscal year ended
September 28, 1997. Operating results for interim periods are not necessarily
indicative of operating results for an entire fiscal year. Certain prior period
amounts have been reclassified to conform with the current period presentation.
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 disclosure 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 when reasonable estimates of such amounts can be made.
Since the commencement of royalty-bearing product sales by the Company's
licensees, the Company has accumulated and analyzed information relating to
royalties from its licensees. During this time, the availability of information
about royalty-bearing product sales by licensees has increased. The Company has
also gained experience in understanding the relationship between the timing of
its sales of CDMA subscriber unit components to its licensees and the timing of
its licensees' sales of related subscriber units. The Company believes it can
now reasonably estimate certain royalty revenues that previously could not be
reliably estimated prior to being reported by its licensees. The Company's
royalty revenue for the second quarter of fiscal 1998 includes an additional $18
million as a result of this improvement in its ability to estimate such
royalties.
The Company adopted Statement of Financial Accounting Standards No. 128 ("FAS
128"), "Earnings per Share" in the first quarter of fiscal 1998. FAS 128
superseded APB Opinion No. 15 ("APB 15"), "Earnings per Share" and replaced the
primary and fully diluted earnings per share ("EPS") computations pursuant to
APB 15 with basic and diluted EPS. Earnings per share data presented for the
three and six month periods ended March 30, 1997 have been restated for
comparative purposes.
7
Under FAS 128, basic earnings per common share are calculated by dividing net
income by the weighted average number of common shares outstanding during the
reporting period. Diluted earnings per common share reflect the potential
dilutive effect, determined by the treasury stock method, of additional common
shares that are issuable upon exercise of outstanding stock options and
warrants, as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- ---------------------
MARCH 29, MARCH 30, MARCH 29, MARCH 30,
1998 1997 1998 1997
--------- --------- --------- ---------
Options........ 3,514 4,895 4,234 4,149
Warrants....... 695 701 704 688
----- ----- ----- -----
4,209 5,596 4,938 4,837
===== ===== ===== =====
Options outstanding during the three months ended March 29, 1998 and March
30, 1997, to purchase approximately 4,181,000 and 240,000 shares of common
stock, respectively, and options outstanding during the six months ended March
29, 1998 and March 30, 1997, to purchase approximately 2,662,000 and 2,093,000
shares of common stock, respectively, were anti-dilutive and have been excluded
from the computations of diluted EPS. The conversion of the Trust Convertible
Preferred Securities is not assumed for all periods presented since its effect
would be anti-dilutive.
NOTE 2 -- COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
Accounts Receivable:
MARCH 29, SEPTEMBER 28,
1998 1997
-------- --------
Accounts Receivable, net (in thousands):
Trade, net of allowance for doubtful
accounts of $20,886 and $18,892
respectively............................. $526,295 $343,619
Long-term contracts:
Billed................................... 30,144 53,159
Unbilled................................. 28,245 32,230
Other...................................... 14,665 16,374
-------- --------
$599,349 $445,382
======== ========
Unbilled receivables represent costs and profits recorded in excess of
amounts billable pursuant to contract provisions and are expected to be realized
within one year.
Finance Receivables:
Finance receivables result from sales under arrangements in which the Company
has agreed to provide customers with the option to issue long-term interest
bearing notes to the Company for the purchase of equipment and/or services.
In March 1998, the Company agreed to defer up to $100 million of contract
payments, with interest accruing at 5 3/4% capitalized quarterly, as customer
financing under its development contract with Globalstar L.P. ("Globalstar").
Financed amounts outstanding as of January 1, 2000 will be repaid in eight equal
quarterly installments commencing as of that date, with final payment due
October 1, 2001 accompanied by all then unpaid accrued interest. At March 29,
1998, contract payments of approximately $58 million were outstanding from
Globalstar as interest bearing financed amounts. Subject to terms and
conditions, Globalstar is entitled to defer $4.2 million from each future
monthly development contract payment until the $100 million limit is reached.
8
Inventories:
MARCH 29, SEPTEMBER 28,
1998 1997
--------- -------------
Inventories (in thousands):
Raw materials.............................. $191,223 $118,516
Work-in-progress........................... 67,485 55,088
Finished goods............................. 100,987 51,552
-------- --------
$359,695 $225,156
======== ========
NOTE 3 -- DEBT AND CREDIT FACILITIES
On March 11, 1998, the Company and a group of banks entered into a $400
million unsecured revolving credit agreement (the "Credit Agreement") under
which the banks are committed to make loans to the Company and to extend letters
of credit on behalf of the Company. The Credit Agreement expires in March 2001
and may be extended on an annual basis thereafter, subject to approval of a
requisite percentage of the lenders. At the Company's option, interest is at the
applicable LIBOR rate or the greater of the administrative agent's reference
rate or 0.5% plus the Federal Funds effective rate, each plus an applicable
margin. The amount available for borrowing is reduced by letters of credit
outstanding. The Company is currently obligated to pay commitment fees equal to
0.3% per annum on the unused amount of the $400 million credit commitment. The
Credit Agreement includes certain restrictive financial and operating covenants.
Through March 29, 1998, there were no amounts outstanding, or letters of credit
issued, under the Credit Agreement.
NOTE 4 -- QUALCOMM PERSONAL ELECTRONICS
During March 1998, the Company and Sony signed an agreement whereby QUALCOMM
Personal Electronics ("QPE") became solely a manufacturing venture. Previously,
QPE had been a design and sales venture in addition to a manufacturing venture.
In connection with that agreement, certain expenses previously included in QPE
were absorbed by its parent companies in the second quarter of fiscal 1998.
NOTE 5 -- OTHER OPERATING EXPENSES
During November 1997, the Company acquired, for approximately $10 million,
substantially all the assets of Now Software, Inc., a developer of advanced
scheduling and calendaring software products. In connection with this asset
purchase, acquired in-process research and development of $7 million,
representing the fair value of software products still in the development stage
that had not yet reached technological feasibility, was expensed at the
acquisition date.
Also during the first quarter of fiscal 1998, the Company recorded a $5
million non-cash charge to operations relating to the impairment of leased
manufacturing equipment no longer used in the manufacturing process. The $5
million charge represents the estimated total cost of related lease obligations,
net of estimated recoveries.
During the second quarter of fiscal 1997, the Company recorded an $8.8
million non-cash charge to operations relating to the impairment of certain
long-lived assets. The $8.8 million charge represents the total carrying value
of these assets and related net disposition costs.
NOTE 6 -- SALE OF INVESTMENTS
During the first quarter of fiscal 1998, the Company recognized a net gain of
$3 million from the sale of, and from other investing activities related to,
investments in other entities.
9
In February 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 GTL common
stock. The Company exercised such warrants in March 1997, and classified the GTL
shares as trading securities consistent with the Company's intent to sell the
GTL shares on a near-term basis. Accordingly, the Company adjusted the carrying
value of the GTL common stock to market value as of March 30, 1997, resulting in
an unrealized gain of $9.5 million, net of estimated selling expenses. The
Company sold the GTL common stock during the third quarter of fiscal 1997
resulting in an aggregate realized gain of $13.4 million.
NOTE 7 -- INCOME TAXES
The Company's income tax provision for the second quarter of fiscal 1998
reflects a revision in the estimated annual effective tax rate due primarily to
lower estimated pretax earnings and an increase in certain estimated tax
credits. Excluding the increase in certain estimated tax credits, the Company
currently estimates an annual effective income tax rate of approximately 29% for
fiscal 1998.
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
GUARANTEES
The Company has issued a letter of credit to support a guarantee of up to
$22.5 million of Globalstar borrowings under an existing bank financing
agreement. The guarantee will expire in December 2000. The letter of credit is
collateralized by a commensurate amount of the Company's investments in debt
securities. As of March 29, 1998, Globalstar had no borrowings outstanding under
the existing bank financing agreement.
Under an agreement entered into during fiscal 1997 with Chilesat Telefonia
Personal S.A. ("Chilesat PCS"), the Company agreed to provide a $58 million
letter of credit on behalf of Chilesat PCS in which the Company may be required
to reimburse Chilesat PCS for 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. The letter
of credit will expire no later than December 31, 1999, and is collateralized by
a commensurate amount of the Company's investments in debt securities. As of
March 29, 1998, no amounts have been drawn on the letter of credit.
LITIGATION
On September 23, 1996, Ericsson Inc. and Telefonaktiebolaget LM Ericsson
("Ericsson") filed suit against the Company in Marshall, Texas and on December
17, 1996, Ericsson also filed suit against QPE in Dallas, Texas with both
complaints alleging that the Company's or QPE's CDMA products infringe one or
more patents owned by Ericsson. In December 1996, QUALCOMM filed a countersuit
alleging, among other things, unfair competition by Ericsson based on a pattern
of conduct intended to impede the acceptance and commercial deployment of
QUALCOMM's CDMA technology and is seeking a judicial declaration that certain of
Ericsson's patents are not infringed by QUALCOMM and are invalid. That
countersuit has now been consolidated with the Marshall, Texas action. On
September 10, 1996, OKI America, Inc. ("OKI") filed a complaint against Ericsson
seeking a judicial declaration that certain of OKI's CDMA subscriber products do
not infringe nine patents of Ericsson and that such patents are invalid. The
nine patents are among the eleven patents at issue in the litigation between the
Company and Ericsson. The OKI case has not yet been set for trial. The Marshall
case is set for trial in December 1998 and the Dallas case is set for trial in
June 1999. Although there can be no assurances that an unfavorable outcome of
the Marshall or Dallas cases would not have a material adverse effect on the
Company's results of operations, liquidity or financial position, the Company
believes the named Ericsson patents are not required to produce IS-95 compliant
systems and that Ericsson's claims are without merit.
10
On March 5, 1997, the Company filed a complaint against Motorola, Inc.
("Motorola"). 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. On March 10, 1997,
Motorola filed a complaint against the Company (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 the Company 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. On January 16, 1998 the U.S. Court of Appeals for the Federal
Circuit denied Motorola's appeal and affirmed the decision of the U.S. District
Court for the Southern District of California refusing Motorola's request to
enjoin QUALCOMM from manufacturing and selling the Q phone. On June 4, 1997,
Motorola filed another lawsuit alleging infringement by QUALCOMM of four
patents. Three of the patents had already been alleged in previous litigation
between the parties. On August 18, 1997, Motorola filed another complaint
against the Company alleging infringement by the Company of seven additional
patents. All of the Motorola cases have been consolidated for pretrial
proceedings. The cases have been set for a final pretrial conference in November
1998. Although there can be no assurance that an unfavorable outcome of the
dispute would not have a material adverse effect on the Company's results of
operations, liquidity or financial position, the Company believes Motorola's
complaint has no merit and will vigorously defend the action.
On May 19, 1997, the Company filed a complaint against U.S. Philips
Corporation ("Philips") seeking a judicial declaration that certain of the
Company's products do not infringe three patents held by Philips and that such
patents are invalid. The court stayed all proceedings in the action until
December 15, 1997 to allow the parties to hold settlement discussions. On
December 16, 1997, the Company dismissed the case without prejudice pursuant to
a stipulation whereby the parties agreed that the Company could refile the case
if a negotiated resolution is not reached. In February 1998, the Company and
Philips, Philips Consumer Communications LP ("PCC") and Philips Electronics NV
entered into cross-license agreement which resolved all disputes which had been
the subject of the litigation. Under terms of the agreement, QUALCOMM granted
PCC a royalty-bearing license under certain of its patents to develop,
manufacture and sell CDMA subscriber units including those for cdmaOne
applications, and for the proposed European Telecommunications Standards
Institute ("ETSI") Universal Mobile Telephone System ("UMTS") standard being
referred to as "W-CDMA." Philips, PCC and Philips Electronics NV granted
QUALCOMM a license under certain of their patents for use and sale of CDMA
products.
The Company is engaged in other legal actions arising in the ordinary course
of its business and believes that the ultimate outcome of these actions will not
have a material adverse effect on its results of operations, liquidity or
financial position.
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, liquidity or financial position.
11
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 28, 1997 contained in the
Company's 1997 Annual Report on Form 10-K.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. QUALCOMM Incorporated's ("QUALCOMM" or the "Company") 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 Company's ability to successfully manufacture and sell
significant quantities of Code Division Multiple Access ("CDMA") infrastructure
and subscriber equipment on a timely basis; the ability to achieve revenue
growth in future quarters and develop and introduce cost effective new products
in a timely manner, avoiding delays in the commercial implementation of the
Company's CDMA technology; change in economic conditions of various markets
served by the Company or major customers of the Company, including the Asian
markets; continued currency fluctuations and risk; continued growth in the CDMA
subscriber population and the scale-up and operations of CDMA systems;
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; failure to satisfy performance
obligations 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, a Delaware corporation, is a leading provider of digital wireless
communications products, technologies and services. The Company designs,
develops, manufactures, markets and sells wireless communications,
infrastructure and subscriber equipment and Application Specific Integrated
Circuits ("ASICs") based on its CDMA technology and has licensed its CDMA
technology to major telecommunications equipment suppliers for incorporation
into their wireless communications products. The Company designed and is
manufacturing, distributing and operating the OmniTRACS system, a
satellite-based, two-way mobile communications and tracking system that provides
messaging, position reporting and other services for transportation companies
and other mobile and fixed-site customers. The Company also provides contract
development services, including the design and development of subscriber and
ground communications equipment for the Globalstar L.P. ("Globalstar")
satellite-based communications system. In addition, the Company develops,
manufactures, markets and sells a variety of other communications products,
including products for the U.S. government, and Eudora, a leading Internet-based
electronic mail software application, for personal, commercial and government
applications.
The Company experienced a reduction in second quarter fiscal 1998
communications systems revenues and gross margin from the first quarter of
fiscal 1998. The decline was primarily due to economic conditions in South
Korea. In addition, the Company experienced lower demand for its 1900 MHz
Personal Communications Services ("PCS") Q phone in the U.S. and South Korea and
a delay in the introduction of the Company's 800 MHz cellular dual-mode Q phone.
During the second quarter of fiscal 1998, the Company implemented a proactive
program to address certain quality issues related to its QCP phone models. The
Company devoted a portion of its manufacturing capacity to re-work QCP phones in
finished goods inventory, which resulted in fewer handset shipments as compared
to the previous quarter. There can be no assurance that the Company will not
encounter similar manufacturing issues in the future, which could have a
material adverse effect on the Company's margins, results of operations,
liquidity or financial position. Communications systems revenues and gross
margin may fluctuate in future quarters depending on mix of products sold,
competitive pricing, new product introduction costs and other factors.
The Company's revenues generated from its proprietary CDMA technology are
currently derived primarily from subscriber and infrastructure products and
ASICs component sales to domestic and international wireless
12
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 of
future cellular, PCS or Wireless Local Loop ("WLL") systems could have a
material adverse effect on quarterly and annual revenues. Additionally, revenues
generated from license, royalty and development fees will fluctuate quarterly
and yearly due to variations in the amount and timing of recognition of CDMA
license fees, the timing, pricing and amount of sales by the Company's licensees
and the Company's ability to accurately estimate such sales, and the impact of
currency fluctuations and risk on royalties generated from international
licensees.
Sales of infrastructure equipment internationally are subject to a number of
risks, including substantial competition with other providers of CDMA, Global
System for Mobile Communications ("GSM"), and other competing wireless systems
(most of whom have substantially greater resources than the Company and are
well-established equipment manufacturers with long manufacturing histories) and
risks related to unexpected changes in regulatory requirements, export controls,
national standards, currency exchange rates, expropriation, tariffs and other
barriers, political risks and difficulties in staffing and managing foreign
operations and risks associated with providing long-term customer financing
agreements. WLL systems in the U.S. and foreign countries are just beginning to
be implemented, and their market acceptance is uncertain. The wireless
telecommunications industry is experiencing significant technological changes.
As a result, the future prospects of the industry, the success of PCS, WLL and
other competing services and the Company's ability to generate substantial
revenues and profits from sales of CDMA infrastructure and subscriber equipment
are uncertain.
In order to commence operation, PCS and WLL operators will need, among other
things, to invest substantial capital and complete their system designs and
build-outs. 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 Company's manufacturing
facility and have a material adverse effect on the Company's results of
operations, liquidity or financial position.
The manufacture of wireless communications equipment is a complex and precise
process involving specialized manufacturing and testing equipment and processes.
Defects or impurities in the components or materials used, equipment failure,
product design issues, or other difficulties could adversely affect the
Company's ability to meet planned production yields. There can be no assurance
that the Company will not encounter difficulties in achieving planned yields on
its products, which would adversely affect its margins, results of operations,
liquidity or financial position.
The Company manufactures its CDMA based digital cellular and PCS subscriber
equipment through QUALCOMM Personal Electronics ("QPE"), a joint venture between
the Company and a subsidiary of Sony. The risks associated with the commercial
manufacture of the Company's infrastructure and subscriber equipment products,
which are described in this document, also apply to the manufacture of
subscriber equipment by QPE. To the extent that QPE experiences any of the
complications, delays or interruptions described herein, the Company's results
of operations, liquidity or financial position would be adversely affected.
A significant portion of the Company's CDMA subscriber and infrastructure
equipment and ASICs components sales are, and are expected to continue to be,
concentrated with a limited number of customers. As a result, the Company's
performance will depend significantly on relatively large orders from a limited
number of customers, as well as gaining additional customers, both within
existing cellular, PCS and WLL markets and in new markets. The loss of any
existing customer for CDMA equipment and ASICs components or the failure of the
Company to gain additional customers could have a material adverse effect on the
Company's business, results of operations, liquidity or financial position.
13
Revenues from international customers accounted for approximately 30% of
total revenues in fiscal 1997. Since the Company is a relatively new entrant
into some of these markets and its competitors may have long-standing,
entrenched positions, it may be difficult for the Company to succeed in certain
markets, thereby limiting international sales. Other risks faced by the Company
in its international business include unexpected changes in economic conditions,
regulatory requirements, export controls, national standards, currency exchange
rates, expropriation, tariffs or other barriers, political risks, difficulties
in staffing and managing foreign operations and potentially negative tax
consequences. These factors could have an adverse impact on the Company's
operating results. In addition, because certain joint ventures between the
Company and foreign firms provide for a minority ownership position by the
Company in the joint venture, the Company may be limited in taking actions it
might otherwise wish to pursue. The Company is subject to U.S. export control
laws and regulations with respect to all of the Company's products and
technology that are exported from the United States. The Company is subject to
the risk that more stringent export control requirements could be imposed in the
future on product classes that include products exported by the Company, which
would result in additional compliance burdens on the Company or ensure the
enforceability of its contract rights. In addition, the laws of certain foreign
countries, including developing nations in Asia, South America, Africa and
Eastern Europe, may not protect the Company's intellectual property rights or
ensure the enforceability of its contract rights to the same extent as do the
laws of the United States.
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. 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.
The Company has entered into a development agreement with Globalstar to
design and develop subscriber equipment and the ground communication stations of
the Globalstar system. The revenues from this contract are expected to be in
excess of $700 million and the Company is reimbursed for its development
services on a cost-plus basis. During March 1998, the Company agreed to defer up
to $100 million of contract payments as interest bearing customer financing
under its development contract with Globalstar. During April 1997, the Company
was awarded a $275 million contract to manufacture and supply commercial
gateways for deployment of Globalstar's worldwide Low-Earth-Orbiting
satellite-based digital telecommunications system. This multi-year agreement has
subsequently grown to $330 million and could grow to approximately $600 million
as the Globalstar network is built out. The Company began shipment of their
production gateways during April 1998. Globalstar may require additional capital
to fund payment for the equipment to be developed by the Company. To date,
Globalstar has received funds and financing commitments totaling approximately
$2.6 billion. There can be no assurance that Globalstar will be successful in
raising additional capital, if needed, or that delays or technical or regulatory
developments will not arise which could adversely affect Globalstar's ability to
continue funding the development agreement, which could have a material adverse
effect on the Company's business and results of operations. The Company's
interest in Globalstar is owned indirectly through certain limited partnerships.
The Company's current ownership interest in Globalstar is approximately 6.5%.
The Company has experienced, and expects to continue to experience, increased
operating expenses in absolute dollars. Although the Company expects to continue
its efforts in the overall expansion of its business base, it will continue to
emphasize control of operating expenses and reduction of these expenses as a
percentage of revenue. The Company expects to continue to add to its engineering
resources, increase its investments in research and development projects, expand
its sales and marketing efforts and continue the overall expansion of the
business base as the Company's products are marketed in major areas throughout
the world.
A review of the Company's current litigation is disclosed in the Notes to
Condensed Consolidated Financial Statements (see Notes to Condensed Consolidated
Financial Statements -- Note 8 Commitments and Contingencies). The Company is
also engaged in other legal actions arising in the ordinary course of its
business and believes that the ultimate outcome of these actions will not have a
material adverse effect on its results of operations, liquidity or financial
position.
14
RESULTS OF OPERATIONS
The following table sets forth certain revenue and expense items as percentages
of revenues:
Three Months Ended Six Months Ended
---------------------- ---------------------
March 29, March 30, March 29, March 30,
1998 1997 1998 1997
--------- --------- --------- ---------
Revenues:
Communications systems............... 82% 87% 84% 85%
Contract services.................... 9 8 8 9
License, royalty and development fees 9 5 8 6
--- --- --- ---
Total revenues.......................... 100% 100% 100% 100%
--- --- --- ---
Operating expenses:
Communications systems............... 64% 71% 64% 69%
Contract services.................... 6 6 6 7
Research and development............. 10 9 10 10
Selling and marketing................ 8 5 7 6
General and administrative........... 5 4 5 4
Other................................ -- 2 1 1
--- --- --- ---
Total operating expenses................ 93% 97% 93% 97%
--- --- --- ---
Operating income ....................... 7 3 7 3
Interest income, net.................... -- -- -- 1
Unrealized gain on trading securities .. -- 2 -- 1
Distributions on trust convertible
preferred securities of subsidiary
trust................................ (1) (1) (1) --
Minority interest in income of
consolidated subsidiaries............ (3) -- (1) (1)
--- --- --- ---
Income before income taxes.............. 3 4 5 4
Income tax expense...................... -- (1) (1) (1)
--- --- --- ---
Net income.............................. 3% 3% 4% 3%
=== === === ===
Communications systems costs as a
percentage of communications
systems revenues..................... 78% 82% 76% 81%
Contract services costs as a percentage
of contract services revenues........ 76% 74% 74% 73%
SECOND QUARTER AND FIRST SIX MONTHS OF FISCAL 1998 COMPARED TO SECOND QUARTER
AND FIRST SIX MONTHS OF FISCAL 1997
Total revenues for the second quarter of fiscal 1998 were $761 million, an
increase of $175 million or 30% compared to total revenues of $586 million for
the second quarter of fiscal 1997. Total revenues for the first six months of
fiscal 1998 were $1,546 million, an increase of $572 million over total revenues
of $975 million for the first six months of fiscal 1997. Revenue growth for the
second quarter and first six months of fiscal 1998 was due to significant growth
in communications systems which was primarily driven by increased revenues from
CDMA subscriber equipment and ASICs products, as well as increased contract
services revenues from the Company's development agreement with Globalstar and
increased license, royalty and development fees.
Communications systems revenues which consisted primarily of revenues from
CDMA subscriber equipment, ASICs sales to CDMA licensees, the sale of the
Company's OmniTRACS, products and services, and CDMA infrastructure equipment,
were $626 million, an increase of $118 million or 23% over the second quarter in
fiscal 1997. The growth in communications systems revenues for the second
quarter of fiscal 1998 compared to the second quarter of fiscal 1997 was
primarily attributed to the following: increased sales of
15
CDMA subscriber equipment and software sales, increased ASIC sales; and
increased revenues from OmniTRACS system sales and messaging. These increases
were partially offset by a decrease in infrastructure revenues as compared to
the year ago quarter, when a substantial portion of a major infrastructure
contract was recognized. For the first six months of fiscal 1998, communications
systems revenues were $1,302 million, a 56% increase compared to revenues of
$832 million for the same period in fiscal 1997. The increase for the first six
months of fiscal 1998 represents the higher volumes of CDMA subscriber equipment
and ASICs shipments as well as increased revenues from OmniTRACS system sales
and CDMA software revenue.
Contract services revenues totaled $65 million in the second quarter of
fiscal 1998 or 9% of total revenues, compared to $49 million or 8% of total
revenues for the second quarter of fiscal 1997. Contract services revenues for
the first six months of fiscal 1998 increased to $129 million from $88 million
for the same period in fiscal 1997, an increase of 46%. The increase of $16
million for the quarter and $41 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 1998
increased to $70 million from $29 million for the second quarter of the prior
fiscal year. Revenues for the second quarter of fiscal 1998 included revenues
for existing and unannounced licensees. License, royalty and development fees
for the first six months of fiscal 1998 were $115 million, compared to
$54 million for the same period in fiscal 1997.
During the second quarter of fiscal 1998, the Company determined that royalty
estimates have become more reliable due to sufficient historical data and
availability of information on licensee subscriber activity. The Company
believes it can now reasonably estimate certain royalty revenues that previously
could not be reliably estimated prior to being reported by its licensees.
Therefore, in the second quarter of fiscal 1998, the Company recognized actual
reported royalties from such licensees for the prior quarter and accrued
estimated royalties for the current quarter. The effect of this one-time
adjustment increased royalty revenue by $18 million in the second quarter of
fiscal 1998. Royalty income will fluctuate quarterly due to the timing and
amount of sales by the Company's licensees and the Company's ability to
accurately estimate such sales as well as currency fluctuations, in particular
the Korean won. The Company expects to continue to experience considerable
fluctuation in quarterly and yearly operating results in the future due to
variations in the amount and timing of recognition 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 $485 million or 78% of communications systems
revenues for the second quarter of fiscal 1998, compared to $419 million or 82%
of communications systems revenues for the same period in the prior fiscal year.
For the first six months of fiscal 1998, communications systems costs were $993
million or 76% of communications systems revenues, compared to $678 million or
81% of communications systems revenues for the same period in fiscal 1997. The
dollar increase in costs primarily reflects increased shipments of CDMA
subscriber equipment and ASICs components. The decrease in communications
systems costs as a percentage of communications systems revenues reflects lower
costs achieved with high volume sales and manufacturing of CDMA equipment and
higher software sales. Communications systems costs as a percentage of
communications systems revenues may fluctuate in future quarters depending on
mix of products sold, competitive pricing, new product introduction costs and
other factors.
Contract services costs were $49 million or 76% of contract services revenues
for the second quarter of fiscal 1998, compared to $36 million or 74% of
contract services revenues for the second quarter of fiscal 1997. Contract
services costs for the first six months of fiscal 1998 were $95 million or 74%
of contract services revenues, compared to $64 million or 73% of contract
services revenues for fiscal 1997. The dollar increase in contract services
costs was primarily related to the Globalstar development contract.
Research and development expenses were $77 million or 10% of revenues for the
second quarter of fiscal 1998, compared to $53 million or 9% of revenues for the
second quarter of fiscal 1997. For the first six months of fiscal 1998 research
and development costs were $152 million or 10% of revenues, compared to $99
million or 10% of revenues for the first six months of fiscal 1997. Overall
research and development efforts are expected
16
to continue into future quarters and research and development expenditures in
absolute dollars are expected to increase throughout fiscal 1998.
Selling and marketing expenses were $60 million or 8% of total revenues for
the second quarter of fiscal 1998, compared to $31 million or 5% of total
revenues for the same quarter last year. For the first six months of fiscal
1998, selling and marketing expenses were $116 million or 7% of revenues,
compared to $58 million or 6% of revenues for the same period in fiscal 1997.
The dollar increase in selling and marketing expenses for the quarter and the
first six months was primarily due to higher volume of sales of CDMA subscriber
equipment along with increased national and international marketing activities.
General and administrative expenses were $38 million or 5% of total revenues
for the second quarter of fiscal 1998, compared to $22 million or 4% of total
revenues for the second quarter of fiscal 1997. General and administrative
expenses for the first six months of fiscal 1998 were $75 million or 5% of
revenues, compared to $38 million or 4% of revenues for the same period in
fiscal 1997. The dollar increase for the quarter and the first half of the
fiscal year was attributable to continued growth in personnel and associated
overhead costs necessary to support the overall growth in the Company's
operations as well as increased litigation expenses.
A review of the components of other operating expenses is disclosed in the
Notes to Condensed Consolidated Financial Statements (see Notes to Condensed
Consolidated Financial Statements -- Note 5 Other Operating Expenses).
Interest income was $10 million during the second quarter of fiscal 1998
compared to $7 million for the second quarter fiscal 1997. For the first six
months of fiscal 1998, interest income was $22 million compared to $11 million
for the same period in fiscal 1997. The increase for the second quarter of
fiscal 1998 and the first six months of fiscal 1998 reflects the interest earned
on the proceeds from the private placement of Trust Convertible Preferred
Securities which occurred during March 1997.
Interest expense decreased to $2 million in the second quarter of fiscal
1998, compared to $3 million in the second quarter of fiscal 1997. For the first
six months of fiscal 1998, interest expense was $4 million compared to $5
million for the same period in fiscal 1997. This decrease in the second quarter
and first six months of fiscal 1998 is the result of decreased bank borrowings
to support the working capital needs of QPE.
The unrealized gain on trading securities of approximately $9 million for the
second quarter and first six months of fiscal 1997 relates to a market value
adjustment in the value of equity trading securities. The securities were sold
during the third quarter of fiscal 1997.
During the first quarter of fiscal 1998, the Company recognized a net gain of
$3 million from the sale of, and from other investing activities related to,
investments in other entities.
Distributions on Trust Convertible Preferred Securities of $10 million for
the second quarter of fiscal 1998, and $20 million for the first six months of
fiscal 1998 relate to the private placement of $660 million of 5 3/4% Trust
Convertible Preferred Securities by QUALCOMM in March 1997.
The minority interest represents other parties' or stockholders' share of the
income or losses of consolidated subsidiaries, including QPE, a joint venture
with a subsidiary of Sony. Minority interest for the second quarter of fiscal
1998 and the first six months of fiscal 1998 includes the impact of
restructuring QPE. During March 1998, the Company and Sony signed an agreement
whereby QPE became solely a manufacturing venture. Previously, QPE had been a
design and sales venture in addition to a manufacturing venture. In connection
with that agreement, certain expenses previously included in QPE were absorbed
by its parent companies in the second quarter of fiscal 1998.
Income tax expense for the second quarter of fiscal 1998 decreased $5 million
compared to the second quarter of fiscal 1997. The decrease was primarily due to
a revision in the estimated annual effective tax rate and an increase in certain
estimated tax credits. Excluding the increase in certain estimated tax credits,
the
17
annual effective tax rate for fiscal 1998 is currently estimated to be 29%.
Income tax expense was $20 million for the first six months of fiscal 1998
compared to $9 million for fiscal 1997, resulting primarily from higher pretax
earnings for the first six months of fiscal 1998 compared to the same period of
fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that the cash and cash equivalents and investments
balances of $548 million at March 29, 1998, 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 1998, $61 million in cash was used by operating
activities, compared to $114 million used by operating activities in the first
half of fiscal 1997. Cash used by operating activities in the first half of
fiscal 1998 includes $223 million of net working capital requirements offset by
$162 million of net cash flow provided by operations. The improved cash flow
from operations primarily reflects the increase in net income resulting from
increased revenues and gross margins. Net working capital requirements of $223
million reflect increases in accounts receivable, finance receivables, and
inventories which were offset by an increase in accounts payable and accrued
liabilities. The increase in accounts and finance receivables in the first half
of fiscal 1998 primarily reflects the continued growth in equipment and
component sales. The increases in inventories and accounts payable and accrued
liabilities are primarily attributable to the growth of the business.
Additionally, higher inventory balances reflect an increase in Q phones and QCP
phones in finished goods inventory. During the second quarter of fiscal 1998,
the Company experienced lower demand for its 1900 MHz PCS Q phone which resulted
in increased inventory balances. The increase in QCP inventory is associated
with the re-work of finished goods inventory performed during the second quarter
of fiscal 1998.
Investments in capital expenditures, intangible assets and other entities
totaled $170 million in the first half of fiscal 1998, compared to $99 million
in the same period of fiscal 1997. Significant components in the first half of
fiscal 1998 consisted of the purchase of $154 million of capital assets, the
purchase of $12 million of intangible assets, and the investment of $4 million
in entities in which the Company holds less than a 50% interest. 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. The Company expects to continue making significant
investments in capital assets, including new facilities and building
improvements throughout fiscal 1998.
An important element of the Company's strategy is to be a major supplier of
CDMA infrastructure and subscriber equipment worldwide for cellular, PCS and WLL
service providers. The Company's ability to generate substantial revenues and
profits from sales of infrastructure and subscriber equipment will require
continued substantial capital investments by the Company and is subject to risks
and uncertainties. The Company's ability to generate substantial sales of CDMA
infrastructure and subscriber equipment to PCS licensees is 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.
The Company has an ownership interest in certain U.S. and foreign PCS
licensees and service providers, including $20 million in NextWave Telecom Inc.,
("NextWave") and $4 million in Chase Telecommunications, Inc. ("Chase"). The
Company may continue to make similar investments in future periods in an effort
to expand its infrastructure business. There can be no assurance any of these
licensees or service providers, including NextWave and Chase, will be able to
obtain sufficient financing to build-out their systems or meet their payment
obligations to the FCC. The failure of these licensees and service providers to
obtain sufficient financing or to meet their obligations to the FCC could
adversely affect the value of the Company's investments in these entities. There
can be no assurances that these current or future investments, loans or advances
will provide an adequate
18
financial or market return. As a result, an impairment of such investments,
loans and advances may have a material adverse effect on the Company's results
of operations, liquidity or financial position.
The Company may provide further equity or debt, as necessary, to support the
future build-out and operational needs of entities in which the Company has
invested. Additionally, the Company is currently involved in proposals for
cellular licenses, which if successful, could result in significant funding
requirements to support the build-out and operational needs of such systems.
There can be no assurances that these current or future investments will provide
an adequate financial or market return.
In the first half of fiscal 1998, the Company's financing activities used $30
million. QPE made net repayments of $54 million on its outstanding credit
facility. This use of cash was offset by $26 million in proceeds from the
issuance of common stock under the Company's stock option and employee stock
purchase plans. In the first half of fiscal 1997, the Company's financing
activities provided net cash of $718 million. The first half of fiscal 1997
included $660 million in proceeds from the issuance of the Convertible Preferred
Securities, offset by $19 million of deferred costs, and $18 million from the
issuance of common stock under the Company's stock option and employee stock
purchase plans. Additionally, during the first half of fiscal 1997, 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 design, development, manufacture and marketing of digital wireless
communication products and services are highly capital intensive. 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 may be derived through additional debt, equity financing, or other
sources. There can be no assurance that additional financing will be available
or, if available that it will be on acceptable terms. 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 extension of the current QPE secured
revolving credit facilities or other sources.
On March 11, 1998, the Company and a group of banks entered into a $400
million unsecured revolving credit agreement under which the banks are committed
to make loans to the Company and to extend letters of credit on behalf of the
Company. The credit agreement expires in March 2001 and may be extended on an
annual basis thereafter, subject to approval of a requisite percentage of the
lenders. The amount available for borrowing is reduced by letters of credit
outstanding. The Company is currently obligated to pay commitment fees equal to
0.3% per annum on the unused amount of the $400 million credit commitment. The
credit agreement includes certain restrictive financial and operating covenants.
Through March 29, 1998, there were no amounts outstanding, or letters of credit
issued, under the credit agreement.
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; the growth in
personnel and related facility expansion; the increase in manufacturing
capacity; and the extension or change in terms of trade accounts receivable. 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, liquidity or financial position.
Cellular, PCS and WLL network operators both domestic and international,
increasingly have required their suppliers to arrange or provide long-term
financing for them as a condition to obtaining or bidding on infrastructure
projects. As such, the Company may continue to enter into significant future
commitments to provide or guarantee long-term financing for its customers. 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 through a
guarantee 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. The amount of such
financing could become significant
19
and, if not repaid, could have a material adverse effect on the Company's
results of operations, liquidity or financial position. The Company may be
required to maintain any such extensions of credit, or remain obligated under
guarantees, until maturity, which could have a material adverse effect on the
Company's credit rating. Although the Company may seek to have third parties
assume some or all of any such credit arrangements, there can be no assurance
that the Company will be able to do so. 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), 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 and services.
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. Most 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.
During March 1998, the Company agreed to defer up to $100 million of contract
payments, with interest accruing at 5 3/4% capitalized quarterly, as customer
financing under its development contract with Globalstar. Financed amounts
outstanding as of January 1, 2000 will be repaid in eight equal quarterly
installments commencing as of that date, with final payment due October 1, 2001
accompanied by all then unpaid accrued interest. At March 29, 1998, contract
payments of approximately $58 million were outstanding from Globalstar as
interest bearing financed amounts. Subject to terms and conditions, Globalstar
is entitled to defer $4.2 million from each future monthly development contract
payment until the $100 million limit is reached.
The Company has issued a letter of credit to support a guarantee of up to
$22.5 million of Globalstar, L.P. borrowings under an existing bank financing
agreement. The guarantee will expire in December 2000. The letter of credit is
collateralized by a commensurate amount of the Company's investments in debt
securities. As of March 29, 1998, Globalstar had no borrowings outstanding under
the existing bank financing agreement.
Under an agreement entered into during fiscal 1997 with Chilesat Telefonia
Personal S.A. ("Chilesat PCS"), the Company agreed to provide a $58 million
letter of credit on behalf of Chilesat PCS in which the Company may be required
to reimburse Chilesat PCS for 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. The letter
of credit will expire no later than December 31, 1999, and is collateralized by
a commensurate amount of the Company's investments in debt securities.
The Company and QPE have entered into contracts that provide 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 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
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value and would have a material adverse effect on product margins and the
Company's results of operations, liquidity or financial position.
YEAR 2000 ISSUE
The Year 2000 issue arises from the fact that most computer software programs
have been written using two digits rather than four to represent a specific
year. Any computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculation causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activities. Based on a recent assessment,
the Company believes that it will not be required to modify or replace
significant portions of its software in order to address its Year 2000 issue.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issue. There can be no assurance that the systems of other companies will be
converted timely, or that a failure to convert by another company, or a
conversion that is incompatible with the Company's systems, would not have a
material adverse effect on the Company.
FUTURE ACCOUNTING REQUIREMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting
Comprehensive Income," which the Company will be required to adopt for fiscal
year 1999. This statement will require the Company to report in the financial
statements, in addition to net income, comprehensive income and its components
including, as applicable, foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. Upon adoption, the Company will also be required to
reclassify financial statements for earlier periods provided for comparative
purposes. The Company currently expects that the effect of adoption of FAS 130
may be primarily from foreign currency translation adjustments and has not yet
determined the manner in which comprehensive income will be displayed.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," which the Company will be required to adopt for fiscal year 1999.
This statement establishes standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Under FAS 131, operating segments are to
be determined consistent with the way that management organizes and evaluates
financial information internally for making operating decisions and assessing
performance. The Company has not determined the impact of the adoption of this
new accounting standard on its consolidated financial statement disclosures.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 8 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 10, 1998. At the Annual Meeting, the stockholders of the Company (i)
elected four directors to hold office until the 2001 Annual Meeting of
Stockholders or until his/her successor is elected, as listed below; (ii)
approved the Amendment to the Company's Restated Certificate of Incorporation;
(iii) approved the Company's 1991 Stock Option Plan, as amended; (iv) approved
the Company's 1991 Employee Stock Purchase Plan, as amended; (v) approved the
Company's 1998 Non-Employee Directors' Stock Option Plan as an amendment and
restatement of the Company's existing Non-Employee Directors' Stock Option Plan;
and (vi) ratified the selection of Price Waterhouse LLP as the Company's
independent accountants for the fiscal year ending September 27, 1998.
The Company had 68,608,552 shares of Common Stock outstanding as of December 18,
1997, the record date for the Annual Meeting. At the Annual Meeting, holders of
a total of 58,535,145 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
-------- -------- --------
Irwin Mark Jacobs 58,441,282 93,863
Andrew J. Viterbi 58,444,593 90,552
Adelia A. Coffman 58,150,601 384,544
Neil Kadisha 58,040,629 494,516
Directors whose term of office continued after the annual meeting are: Robert
E. Kahn, Jerome S. Katzin, Duane A. Nelles, Frank Savage, Brent Scowcroft,
Harvey P. White, Richard C. Atkinson, Peter M. Sacerdote and Marc I. Stern.
Proposal 2: Approval of the Amendment to the Company's Restated Certificate of
Incorporation
Votes in favor: 56,843,425
Votes against: 1,548,252
Abstentions: 143,468
Proposal 3: Approval of the 1991 Stock Option Plan, as Amended
Votes in favor: 27,155,655
Votes against: 7,827,701
Abstentions: 319,027
Broker non-votes: 23,232,762
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Proposal 4: Approval of the 1991 Employee Stock Purchase Plan, as Amended
Votes in favor: 34,471,385
Votes against: 1,330,634
Abstentions: 256,600
Broker non-votes: 22,476,526
Proposal 5: Approval of the 1998 Non-Employee Directors' Stock Option Plan
Votes in favor: 28,524,005
Votes against: 7,161,454
Abstentions: 373,140
Broker non-votes: 22,476,546
Proposal 6: Ratification of Selection of Independent Accountants
Votes in favor: 58,328,460
Votes against: 65,256
Abstentions: 141,429
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Credit Agreement dated as of March 11, 1998, among QUALCOMM Incorporated,
as Borrower, the Lender Parties, Bank of America N.T. & S.A., as
Administrative Agent, Syndication Agent and Initial Issuing Bank, and
Citibank, N.A., as Documentation Agent and Syndication Agent(1).
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which this
report is filed.
(1) Certain portions of this exhibit have been omitted pursuant to a
request for confidential treatment. Omitted portions will be filed
separately with the Securities and Exchange Commission.
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