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 JUNE 28, 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 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, 69,691,619 shares outstanding as
of July 17, 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: July 27, 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............ 7-13
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.............................. 14-23
PART II. OTHER INFORMATION 24
Item 6. Exhibits and Reports on Form 8-K
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
JUNE 28, SEPTEMBER 28,
1998 1997
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents ........................................................ $ 179,905 $ 248,837
Investments ...................................................................... 118,454 448,235
Accounts receivable, net ......................................................... 787,865 445,382
Finance receivables .............................................................. 45,242 111,501
Inventories ...................................................................... 393,805 225,156
Other current assets ............................................................. 112,834 70,484
---------- ----------
Total current assets ..................................................... 1,638,105 1,549,595
PROPERTY, PLANT AND EQUIPMENT, NET ................................................. 565,671 425,090
INVESTMENTS ........................................................................ 111,626 111,786
FINANCE RECEIVABLES, NET ........................................................... 132,663 --
OTHER ASSETS ....................................................................... 187,299 188,209
---------- ----------
TOTAL ASSETS ....................................................................... $2,635,364 $2,274,680
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ......................................... $ 551,777 $ 409,156
Unearned revenue ................................................................. 92,494 45,084
Bank lines of credit ............................................................. 138,000 110,000
Current portion of long-term debt ................................................ 2,959 3,238
---------- ----------
Total current liabilities ................................................ 785,230 567,478
LONG-TERM DEBT ..................................................................... 4,734 7,729
OTHER LIABILITIES .................................................................. 23,591 15,295
---------- ----------
Total liabilities ........................................................ 813,555 590,502
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES ..................................... 27,195 --
---------- ----------
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 .................................................................. 948,193 906,373
Retained earnings ................................................................ 186,414 117,798
---------- ----------
Total stockholders' equity ............................................... 1,134,614 1,024,178
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................................... $2,635,364 $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 NINE MONTHS ENDED
--------------------------------- ---------------------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1998 1997 1998 1997
----------- ----------- ----------- -----------
REVENUES:
Communications systems .................. $ 758,627 $ 418,636 $ 2,061,084 $ 1,250,996
Contract services ....................... 69,947 54,119 198,905 142,163
License, royalty and development fees ... 46,923 47,505 161,915 101,787
----------- ----------- ----------- -----------
Total revenues ................... 875,497 520,260 2,421,904 1,494,946
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Communications systems .................. 574,053 315,173 1,566,671 993,382
Contract services ....................... 50,627 40,250 145,956 104,445
Research and development ................ 92,810 64,843 244,557 164,127
Selling and marketing ................... 64,693 40,467 180,519 98,508
General and administrative .............. 39,961 26,465 114,676 64,069
Other (Note 5) .......................... -- -- 11,976 8,792
----------- ----------- ----------- -----------
Total operating expenses ......... 822,144 487,198 2,264,355 1,433,323
----------- ----------- ----------- -----------
OPERATING INCOME ........................... 53,353 33,062 157,549 61,623
INTEREST INCOME ............................ 10,672 12,115 32,435 23,116
INTEREST EXPENSE ........................... (1,792) (3,002) (6,166) (8,198)
NET GAIN ON SALE OF INVESTMENTS ............ -- 3,946 2,950 13,400
WRITE-OFF OF INVESTMENT IN
OTHER ENTITY (NOTE 6) .................... (20,000) -- (20,000) --
DISTRIBUTIONS ON TRUST CONVERTIBLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST........... (9,771) (9,690) (29,496) (13,585)
MINORITY INTEREST IN INCOME OF CONSOLIDATED
SUBSIDIARIES ............................ (18,696) (600) (36,557) (6,030)
EQUITY IN LOSSES OF INVESTEES .............. (5,537) -- (9,707) --
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES ................. 8,229 35,831 91,008 70,326
INCOME TAX (EXPENSE) BENEFIT ............... (2,386) 114 (22,392) (8,510)
----------- ----------- ----------- -----------
NET INCOME ................................. $ 5,843 $ 35,945 $ 68,616 $ 61,816
=========== =========== =========== ===========
NET EARNINGS PER COMMON SHARE:
Basic ................................... $ 0.08 $ 0.53 $ 1.00 $ 0.92
=========== =========== =========== ===========
Diluted ................................. $ 0.08 $ 0.50 $ 0.93 $ 0.86
=========== =========== =========== ===========
SHARES USED IN PER SHARE CALCULATION:
Basic ................................... 69,287 67,567 68,899 67,124
=========== =========== =========== ===========
Diluted ................................. 73,978 72,146 73,754 71,748
=========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements.
5
QUALCOMM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
-----------------------------
JUNE 28, JUNE 29,
1998 1997
--------- ---------
OPERATING ACTIVITIES:
Net income ........................................................ $ 68,616 $ 61,816
Depreciation and amortization ..................................... 100,871 65,888
Acquired in-process research and development ...................... 6,976 --
Non-cash charge for impaired assets ............................... 5,000 8,792
Gain on sale of trading securities ................................ -- (13,400)
Write-off of investment in other entity ........................... 20,000 --
Minority interest in income of consolidated subsidiaries .......... 36,557 6,030
Equity in losses of investees ..................................... 9,707 --
Tax benefit from recognition of deferred tax assets ............... -- (21,887)
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net ....................................... (342,483) (103,181)
Finance receivables, net ....................................... (66,404) (114,820)
Inventories .................................................... (168,649) (57,213)
Other assets ................................................... (54,189) (28,906)
Accounts payable and accrued liabilities ....................... 146,254 71,620
Unearned revenue ............................................... 47,410 12,593
Other liabilities .............................................. 8,296 11,793
Proceeds from sale of trading securities .......................... -- 23,129
Purchase of trading securities .................................... -- (9,729)
--------- ---------
Net cash used by operating activities ............................... (182,038) (87,475)
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures .............................................. (235,288) (91,309)
Purchases of investments .......................................... (255,427) (741,865)
Maturities of investments ......................................... 585,368 434,674
Purchases of intangible assets .................................... (12,959) --
Issuance of notes receivable ...................................... (15,000) (8,585)
Investments in other entities ..................................... (11,189) (49,213)
--------- ---------
Net cash provided (used) by investing activities .................... 55,505 (456,298)
--------- ---------
FINANCING ACTIVITIES:
Net borrowings (repayments) under bank lines of credit ............ 28,000 (9,500)
Principal payments on long-term debt .............................. (3,274) (1,486)
Minority interest investment in consolidated subsidiaries ......... 602 98
Proceeds from issuance of trust convertible preferred securities of
subsidiary trust .................................................. -- 660,000
Deferred issuance costs ........................................... (914) (18,624)
Net proceeds from issuance of common stock ........................ 33,187 20,319
--------- ---------
Net cash provided by financing activities ........................... 57,601 650,807
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ................ (68,932) 107,034
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................... 248,837 110,143
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................... $ 179,905 $ 217,177
========= =========
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. As a result, beginning with
the second quarter of fiscal 1998, the Company began to accrue its estimate of
certain royalty revenues earned in the current quarter that previously could not
be reasonably estimated prior to being reported in the subsequent quarter by its
licensees. The Company's royalty revenue for the second quarter of fiscal 1998
included 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
7
with basic and diluted EPS. Earnings per share data presented for the three and
nine month periods ended June 29, 1997, have been restated for comparative
purposes.
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 NINE MONTHS ENDED
----------------------- -----------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1998 1997 1998 1997
-------- -------- -------- --------
Options ............................. 3,989 3,882 4,152 3,933
Warrants ............................ 702 697 703 691
----- ----- ----- -----
4,691 4,579 4,855 4,624
===== ===== ===== =====
Options outstanding during the three months ended June 28, 1998 and June 29,
1997, to purchase approximately 3,700,000 and 1,151,000 shares of common stock,
respectively, and options outstanding during the nine months ended June 28, 1998
and June 29, 1997, to purchase approximately 3,008,000 and 1,779,000 shares of
common stock, respectively, were not included in the computation of diluted EPS
because the options' exercise price was greater than the average market price of
the common stock during the period and, therefore, the effect would be
anti-dilutive. 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:
JUNE 28, SEPTEMBER 28,
1998 1997
-------- --------
Accounts receivable, net (in thousands):
Trade, net of allowance for doubtful accounts of
$21,044 and $18,892, respectively .......................... $640,369 $343,619
Long-term contracts:
Billed ..................................................... 108,752 53,159
Unbilled ................................................... 28,327 32,230
Other ......................................................... 10,417 16,374
-------- --------
$787,865 $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 June 28,
1998, contract payments of approximately $71 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
At June 28, 1998, commitments to extend long-term financing for possible
future sales to customers other than Globalstar totaled approximately $370
million through fiscal 1999.
Inventories:
JUNE 28, SEPTEMBER 28,
1998 1997
-------- --------
Inventories (in thousands):
Raw materials ................................................................ $191,600 $118,516
Work-in-progress ............................................................. 84,454 55,088
Finished goods ............................................................... 117,751 51,552
-------- --------
$393,805 $225,156
======== ========
NOTE 3 -- INVESTMENTS IN OTHER ENTITIES
PEGASO
In April 1998, QUALCOMM, through its wholly-owned subsidiary QUALCOMM PCS
Mexico, Inc., entered into a joint venture agreement pursuant to which it
obtained a 49% ownership interest in a newly formed development stage entity,
Pegaso Telecomunicaciones, S.A. de C.V. ("PEGASO"), a Mexico corporation. In May
1998, PEGASO obtained the right to acquire Personal Communications Services
("PCS") licenses providing nationwide coverage in Mexico. Pursuant to the joint
venture agreement, QUALCOMM will be required to provide equity contributions
necessary for its proportionate share of license payments and other financial
requirements as a result of the business plan. As of June 28, 1998, QUALCOMM has
made equity contributions of approximately $7 million, and expects that it will
make additional investments of approximately $90 million in the joint venture
before October 1, 1998. The Company accounts for its investment under the equity
method of accounting.
In July 1998, PEGASO announced an increase in total equity commitments
through the addition of four new consortium members. As there was no change in
QUALCOMM's total equity commitment, the Company's ownership interest will be
reduced to approximately 33%.
QUALCOMMTel
During October 1997, QUALCOMM formed QUALCOMM Telecommunications Limited,
("QUALCOMMTel"), a Cayman Islands corporation. QUALCOMM holds a 70% ownership
interest in QUALCOMMTel. The minority 30% interest is held by Tiller
International Limited ("Tiller"), a private investment company. QUALCOMMTel is
intended to be an intermediate holding company to facilitate the Company's
business prospects in the Russian Federation.
In February 1998, QUALCOMMTel entered into an agreement with a Russian
company, providing for their participation, subject to terms and conditions, in
the development of wireless communications networks in the Russian Federation.
Pursuant to the agreement and subject to terms and conditions, QUALCOMMTel and
the Russian company will become 50/50 joint venture partners in Metrosvyaz
Limited ("Metrosvyaz"), a Cyprus corporation, which intends to invest in joint
ventures with local Russian telecommunications operators for the formation,
development, financing and operation of CDMA based wireless networks.
Additionally, QUALCOMM and QUALCOMMTel will commit, subject to terms and
conditions, up to a total of $500 million in joint funding which may be in the
form of debt or equity, to Metrosvyaz to support its business plan. QUALCOMM
shall, at Tiller's option, fund Tiller's share of capital calls by QUALCOMMTel
and such funding shall give rise to a limited recourse interest bearing loan.
However, no decisions relating to the relative funding by QUALCOMM and
QUALCOMMTel have been finalized.
9
Chilesat PCS
In March 1997, the Company purchased $42 million of voting preferred shares
representing a 50% ownership interest in a corporate joint venture, Chilesat
Telefonia Personal S.A. ("Chilesat PCS"), a development stage enterprise. The
Company holds its shares in Chilesat PCS via a wholly-owned subsidiary of
QUALCOMM, Inversiones QUALCOMM Chile S.A. ("Inversiones QUALCOMM"). The
remaining 50% ownership interest represented by voting common shares is owned by
Telex-Chile S.A. and its subsidiary Chilesat S.A. (together "Telex-Chile").
During June 1998, QUALCOMM and Inversiones QUALCOMM finalized negotiations
with Chilesat PCS to provide or guarantee approximately $35 million in
short-term loans, convertible into common equity if not repaid on or before
January 31, 1999. If converted, QUALCOMM and Inversiones QUALCOMM would hold
voting shares of approximately 65% of Chilesat PCS. This conversion is available
to QUALCOMM and Inversiones QUALCOMM only if the loans are not repaid on or
before January 31, 1999. Chilesat PCS currently contemplates that it will issue
a $35 million capital call in approximately December of 1998, which may be used
to repay the convertible loan or to provide for additional operating expenses.
If Telex-Chile makes at least a $17.5 million cash contribution before January
31, 1999 pursuant to such capital call, QUALCOMM and Inversiones QUALCOMM have
committed to convert $17.5 million of the short-term loans to equity.
Telex-Chile has been unable to make principal repayments on its outstanding
loans and is under standstill agreements with many of its significant lenders.
Thus, the Company may not be able to count on Telex-Chile to provide additional
capital to Chilesat PCS when and if needed.
Other
In connection with the Company's efforts to partner and develop wireless
communications networks in the Russian Federation, QUALCOMM has entered into a
letter of intent to purchase controlling interests in certain related
telecommunications companies for approximately $52 million, subject to
adjustment and pending due diligence procedures expected to be completed in July
1998. In connection with the potential acquisition, during May 1998, QUALCOMM
provided $15 million in interest bearing loans that will become part of the
purchase price consideration in the event the acquisition is completed.
Otherwise, the $15 million loan and accrued interest, collateralized by all of
the assets of the potential acquiree, will be repayable within one year of the
date of its issuance.
Certain of these and other investments and commitments may be spun-off to
stockholders of the Company as part of a proposed transaction described in Note
10.
NOTE 4 -- DEBT AND CREDIT FACILITIES
On March 11, 1998, the Company and a group of banks entered into a $400
million unsecured revolving credit facility (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 facility. The
Credit Agreement includes certain restrictive financial and operating covenants.
Through June 28, 1998, there were no amounts outstanding, or letters of credit
issued, under the Credit Agreement.
10
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.
NOTE 6 -- SALE AND WRITE-OFF OF INVESTMENTS
In June 1998, the Company recorded a $20 million non-cash charge to
write-off its investment in NextWave Telecom Inc. ("NextWave"). Subsidiaries of
NextWave filed for bankruptcy protection in June 1998 under Chapter 11 of the
U.S. Bankruptcy Code. There is significant uncertainty as to the outcome of the
bankruptcy proceedings.
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.
NOTE 7 -- INCOME TAXES
The Company's income tax provision for the nine months ended June 28, 1998,
reflects 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 -- 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.
Also, during the third quarter of fiscal 1998, certain warranty provisions were
assumed by its parent companies in proportion to their ownership interests in
the QPE joint venture.
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
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. By order dated July 24, 1998, the Dallas action
was transferred to Marshall, Texas. 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 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. Although there
can be no assurances that an unfavorable outcome of the Marshall case would not
have a material
11
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.
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.
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.
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 June 28, 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. Chilesat PCS has received notification
from the Chilean Undersecretariat of Telecommunications ("SUBTEL") that phase
one of the network has passed certain acceptance tests performed by SUBTEL, and
has been cleared to commence commercial operations. Chilesat PCS is required to
successfully complete certain remaining tests on phase two of the network no
later than December 1998. The amount that Chilesat PCS may draw on the letter of
credit has been reduced to $52 million and will decline further as additional
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 June 28, 1998, no amounts have been drawn
on the letter of credit.
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
12
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.
NOTE 10 -- PROPOSED TRANSACTION
The Company is considering a transaction whereby it would transfer certain
of its joint venture and equity interests in emerging wireless
telecommunications operating companies to a wholly-owned subsidiary of the
Company, QUALCOMM SpinCo, Inc. ("SpinCo"), followed by a spin-off of SpinCo to
its stockholders. A Registration Statement on Form 10 related to the proposed
spin-off was filed with the Securities and Exchange Commission on July 1, 1998.
The transaction is intended to include the transfer of approximately $250
million in net assets to SpinCo and a substantial funding commitment on the part
of the Company in the form of a $250 million line of credit. The transaction
will be treated as a taxable dividend to the Company's stockholders in an amount
equal to the fair market value of the shares received. Following the
transaction, the Company expects that a public market will exist for SpinCo's
stock. If approved by the Company's Board of Directors, and other requisite
approvals are obtained, the transaction is expected to be completed by the end
of fiscal 1998.
13
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 is a leading provider of digital wireless communications products,
technologies and services. The Company generates revenues primarily from license
fees and royalties paid by licensees of the Company's CDMA technology, sales of
CDMA subscriber and infrastructure equipment, ASICs component sales to domestic
and international wireless communications equipment suppliers and service
providers, sales of OmniTRACS terminals and related software and services to
OmniTRACS users and contract development services, including the design and
development of subscriber and ground communications equipment for Globalstar, a
worldwide, satellite-based digital telecommunications system utilizing CDMA
technology (the "Globalstar System"). In addition, the Company generates
revenues from the design, development, manufacture and sale of a variety of
other communications products and services.
The Company generates revenue from its CDMA licensees in the form of
up-front licenses as well as ongoing royalties based on worldwide sales of CDMA
subscriber and infrastructure equipment by such licensees. License fees are
generally nonrefundable and may be paid in one or more installments. Revenues
generated from license fees and royalties 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 estimate such sales, and the impact of currency
fluctuations, in particular the South Korean won, and risks associated with
royalties generated from international licensees.
The Company is a major manufacturer of CDMA infrastructure and subscriber
equipment. The Company manufactures CDMA infrastructure equipment for sale to
wireless network operators worldwide. The Company has entered into agreements
regarding the manufacture and supply of CDMA infrastructure equipment with
Hitachi, Hughes and Nortel. The Company manufactures its CDMA subscriber
equipment through QPE, a joint venture between the Company and a subsidiary of
Sony. The Company, through QPE, is one of the largest manufacturers of CDMA
handsets. The Company has also generated substantial revenue from the design and
sale of CDMA ASICs to its licensees for incorporation into their subscriber and
infrastructure equipment.
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
14
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 number of development and manufacturing
contracts involving the Globalstar System which, in aggregate, are expected to
generate revenues to the Company in excess of $1 billion over the life of such
contracts. The Company's development agreement to design and develop the ground
communications stations ("gateways") of the Globalstar System is expected to
generate in excess of $868 million over the life of the agreement. Under the
development agreement, the Company is reimbursed for its development services on
a cost-plus basis. In addition, in April 1997 the Company was awarded a $275
million contract to manufacture and supply commercial gateways for deployment in
the Globalstar System. In April 1998, the Company entered into a $117 million
agreement with Globalstar to manufacture and supply portable and fixed CDMA
handsets that will operate on the Globalstar System.
Wireless and satellite 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. In order to provide for such financing, the Company may be subject to
significant project, market, political, credit and foreign exchange risks.
Revenues from international customers, which consisted of export sales,
including license and royalty fees, to customers outside of the U.S., accounted
for approximately 30% of total revenues in fiscal 1997. Sales of subscriber and
infrastructure equipment and ASICs internationally are subject to a number of
risks, including delays in opening of foreign markets to new competitors,
exchange controls, currency fluctuations, investment policies, repatriation of
cash, nationalization, social and political risks, taxation and other factors,
depending on the country in which such opportunity arises.
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 9 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.
15
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages of
total revenues represented by certain consolidated statements of operations
data:
Three Months Ended Nine Months Ended
------------------------ ------------------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
-------- ------- ------- -------
Revenues:
Communications systems .............................. 87% 81% 85% 84%
Contract services ................................... 8 10 8 9
License, royalty and development fees ............... 5 9 7 7
---- ---- ---- ----
Total revenues .......................................... 100% 100% 100% 100%
---- ---- ---- ----
Operating expenses:
Communications systems .............................. 65% 61% 65% 66%
Contract services ................................... 6 8 6 7
Research and development ............................ 11 12 10 11
Selling and marketing ............................... 7 8 7 7
General and administrative .......................... 5 5 5 4
Other ............................................... -- -- -- 1
---- ---- ---- ----
Total operating expenses ................................ 94% 94% 93% 96%
---- ---- ---- ----
Operating income ........................................ 6 6 7 4
Interest income, net .................................... 1 2 1 1
Net gain on sale of investments ......................... -- 1 -- 1
Write-off of investment in other entity ................. (2) -- (1) --
Distributions on trust convertible preferred
securities of subsidiary trust ...................... (1) (2) (1) (1)
Minority interest in income of consolidated
subsidiaries......................................... (2) -- (2) --
Equity in losses of investees ........................... (1) -- -- --
---- ---- ---- ----
Income before income taxes .............................. 1 7 4 5
Income tax (expense) benefit ............................ -- -- (1) (1)
---- ---- ---- ----
Net income .............................................. 1% 7% 3% 4%
==== ==== ==== ====
Communications systems costs as a
percentage of communications
systems revenues .................................... 76% 75% 76% 79%
Contract services costs as a percentage
of contract services revenues ....................... 72% 74% 73% 73%
THIRD QUARTER OF FISCAL 1998 COMPARED TO THIRD QUARTER OF FISCAL 1997
Total revenues for the third quarter of fiscal 1998 were $875 million, an
increase of $355 million or 68% compared to total revenues of $520 million for
the third quarter of fiscal 1997. Revenue growth was primarily due to the
significant growth in communications systems which was primarily attributable to
increased revenues from CDMA subscriber, ASICs and infrastructure products, and
initial sales of commercial gateways for deployment in the Globalstar System.
Also contributing were increased contract services revenues from the Company's
development agreement with Globalstar.
Communications systems revenues, which consisted primarily of sales of CDMA
subscriber, infrastructure and ASICs products and product and service revenues
from the sale of the Company's OmniTRACS system, were $759 million in the third
quarter of fiscal 1998, an increase of $340 million or 81% compared to $419
million for the period in fiscal 1997. The growth in communications systems
revenues was primarily attributable
16
to the following: increased sales of CDMA subscriber and infrastructure
equipment, increased ASICs sales and initial revenues from the sales of
Globalstar gateway equipment. OmniTRACS revenues increased primarily from
increased messaging revenues due to the expansion of the installed OmniTRACS
base in the U.S. and from increased international shipments.
Contract services revenues for the third quarter of fiscal 1998 were $70
million, a 29% increase compared to $54 million for the same period in fiscal
1997. The increase resulted primarily from the development agreement with
Globalstar.
License, royalty and development fees for the third quarter of fiscal 1998
were $47 million, compared to revenues of $48 million for fiscal 1997. License,
royalty and development fees may continue to fluctuate quarterly due to the
timing and amount of up-front fees on new licenses as well as royalties from
sales by the Company's licensees, changes in foreign currency exchange rates and
changes to previous estimates.
Costs of communications systems were $574 million or 76% of communications
systems revenues for the third quarter of fiscal 1998 compared to $315 million
or 75% of communications systems revenues for the third quarter of fiscal 1997.
The increase in communications systems costs primarily reflects the increased
sales volume of CDMA handsets, infrastructure equipment and ASICs, and initial
sales of Globalstar gateways. Communications systems costs as a percentage of
communications systems revenues may fluctuate in future quarters depending on
the mix of products sold, competitive pricing, new product introduction costs
and other factors.
Contract services costs for the third quarter of fiscal 1998 were $51
million or 72% of contract services revenues, compared to $40 million or 74% of
contract services revenues for the third quarter of fiscal 1997. The dollar
increase in contract services costs was primarily related to the Globalstar
development contract.
Research and development expenses were $93 million or 11% of revenues for
the third quarter of fiscal 1998, compared to $65 million or 12% of revenues for
the same period in fiscal 1997. The dollar increase resulted from increased
investments in the development of CDMA related infrastructure, ASICs and
subscriber products.
Selling and marketing expenses were $65 million or 7% of revenues for the
third quarter of fiscal 1998, compared to $40 million or 8% of revenues for the
same period in fiscal 1997. The dollar increase of selling and marketing expense
was due primarily to increased marketing efforts both domestically and
internationally as the Company expanded its sales and marketing forces.
General and administrative expenses for the third quarter of fiscal 1998
were $40 million or 5% of revenues, compared to $26 million or 5% of revenues
for the third quarter of fiscal 1997. The dollar increase was driven primarily
by additional personnel and associated overhead costs necessary to support the
overall growth in the Company's operations, as well as costs associated with
computer system implementations.
Interest income was $11 million for the third quarter of fiscal 1998,
consistent with $12 million for the same period in fiscal 1997.
Interest expense was $2 million for the third quarter of fiscal 1998,
consistent with $3 million for the same period in fiscal 1997.
The third quarter of fiscal 1997 net gain on sale of investments of $4
million relates to the sale of Globalstar Telecommunications Ltd. ("GTL") common
stock received in exchange for the Company's guarantee of a Globalstar bank
financing agreement.
During the third quarter of fiscal 1998, the Company recorded a $20 million
non-cash charge to write-off its investment in NextWave Telecom, Inc.
("NextWave"). Subsidiaries of NextWave filed for bankruptcy protection under
Chapter 11 of the U.S. Bankruptcy Code in June 1998.
17
Distributions on Trust Convertible Preferred Securities of $10 million for
the third quarter of fiscal 1998 and 1997 relate to the $660 million of 5-3/4%
Trust Convertible Preferred Securities issued by the Company in March 1997. The
securities are convertible into common stock of the Company at a conversion
price of $72.6563 per share of common stock.
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 third quarter of fiscal
1998 includes an adjustment for warranty provisions, which were assumed by Sony
and QUALCOMM in proportion to their ownership interests in the QPE joint
venture, as well as improved earnings in QPE.
Income tax expense was $2 million for the third quarter of fiscal 1998,
compared to a minimal benefit for the third quarter of fiscal 1997. The effect
of lower pretax earnings in the third quarter of fiscal 1998 was offset by the
tax benefit from recognition, during the third quarter of fiscal 1997, of
deferred tax assets that satisfied the "more likely than not" criteria for
recognition established by FAS 109.
FIRST NINE MONTHS OF FISCAL 1998 COMPARED TO FIRST NINE MONTHS OF FISCAL 1997
Total revenues for the first nine months of fiscal 1998 were $2,422 million,
an increase of $927 million or 62% over total revenues of $1,495 million for the
first nine months of fiscal 1997. Revenue growth for the first nine months of
fiscal 1998 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 and increased license,
royalty and development fees.
Communications systems revenues for the first nine months of fiscal 1998,
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 $2,061 million, a 65% increase
compared to revenues of $1,251 million for the same period in fiscal 1997. The
increase for the first nine months of fiscal 1998 represents the higher volumes
of CDMA subscriber and infrastructure equipment, increased ASICs shipments, as
well as initial revenues from sales of Globalstar gateway equipment. OmniTRACS
revenues increased primarily from increased messaging revenues due to the
expansion of the installed OmniTRACS base in the U.S. and from increased
international shipments.
The Company experienced a reduction in the second quarter of 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 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
significant portion of its manufacturing capacity in the second quarter of
fiscal 1998 to re-work QCP phones in finished goods inventory, which resulted in
fewer handset shipments as compared to the first quarter of fiscal 1998. 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.
Contract services revenues for the first nine months of fiscal 1998
increased to $199 million from $142 million for the same period in fiscal 1997,
an increase of 40%. The increase of $57 million resulted primarily from the
development agreement with Globalstar which has continued to ramp up since its
inception in fiscal 1994.
License, royalty and development fees for the first nine months of fiscal
1998 were $162 million, compared to $102 million for the same period in fiscal
1997, an increase of 59%. The increase was driven by increased royalties
recognized in conjunction with the worldwide sales of subscriber units and
infrastructure equipment utilizing the Company's CDMA technology by the
Company's licensees.
18
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. As a result,
beginning with the second quarter of fiscal 1998, the Company began to accrue
its estimate of certain royalty revenues earned in the current quarter that
previously could not be reasonably estimated prior to being reported in the
subsequent quarter by its licensees. The effect of this one-time adjustment
increased royalty revenue by $18 million in the second quarter of fiscal 1998.
Accordingly, royalty revenue recognized in each quarter will consist of
royalties based on estimated sales by the Company's licensees in that quarter as
well as an adjustment for the difference between royalty estimates in the prior
quarter and actual royalties for the prior quarter shown on royalty reports
received in the current quarter. License, royalty and development fees may
continue to fluctuate quarterly and yearly due to the timing and amount of
up-front fees on new licenses as well as royalties from sales by the Company's
licensees, changes in foreign currency exchange rates and changes to previous
estimates.
Costs of communications systems for the first nine months of fiscal 1998,
which consisted primarily of costs of sales of CDMA subscriber and
infrastructure equipment, ASICs and OmniTRACS products and services, were $1,567
million or 76% of communications systems revenues, compared to $993 million or
79% of communications systems revenues for the same period in fiscal 1997. The
dollar increase in costs primarily reflects increased shipments of CDMA
subscriber and infrastructure equipment, ASICs, and initial sales of commercial
gateways. The decrease in communications systems costs as a percentage of
communications systems revenues primarily reflects margins associated with
higher sales of ASICs. Communications systems costs as a percentage of
communications systems revenues may fluctuate in future quarters depending on
the mix of products sold, competitive pricing, new product introduction costs
and other factors.
Contract services costs for the first nine months of fiscal 1998 were $146
million or 73% of contract services revenues, compared to $104 million or 73% of
contract services revenues for the same period in fiscal 1997. The dollar
increase in contract services costs was primarily related to the Globalstar
development contract.
For the first nine months of fiscal 1998, research and development expenses
were $245 million or 10% of revenues, compared to $164 million or 11% of
revenues for the first nine months of fiscal 1997. Research and development
expenditures in absolute dollars are expected to increase in future periods.
For the first nine months of fiscal 1998, selling and marketing expenses
were $181 million or 7% of revenues, compared to $99 million or 7% of revenues
for the same period in fiscal 1997. The dollar increase in selling and marketing
expenses for the first nine months of fiscal 1998 was primarily due to increased
national and international marketing activities related to sales of CDMA
subscriber equipment.
General and administrative expenses for the first nine months of fiscal 1998
were $115 million or 5% of revenues, compared to $64 million or 4% of revenues
for the same period in fiscal 1997. The dollar increase for the first nine
months of fiscal year 1998 was attributable to continued growth in personnel and
associated overhead expenses necessary to support the overall growth in the
Company's operations, increased litigation expenses, and costs associated with
computer system implementations.
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).
For the first nine months of fiscal 1998, interest income was $32 million
compared to $23 million for the same period in fiscal 1997. The increase for the
first nine 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.
For the first nine months of fiscal 1998, interest expense was $6 million
compared to $8 million for the same period in fiscal 1997. This decrease is the
result of lower average bank borrowings during the first nine months of fiscal
1998 to support the working capital needs of QPE.
19
The net gain on sale of investments was $3 million for the first nine months
of fiscal 1998 as compared to $13 million for the same period in 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. During the first nine months of fiscal 1997, the
Company realized a $13 million gain on the sale of trading securities associated
with the sale of GTL common stock, including a gain of $4 million recorded in
the third quarter of fiscal 1997.
During the third quarter of fiscal 1998, the Company recorded a $20 million
non-cash charge to write-off its investment in NextWave. Subsidiaries of
NextWave filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy
Code in June 1998.
Distributions on Trust Convertible Preferred Securities of $29 million for
the first nine 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 first nine 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. Additionally, during the third quarter of fiscal 1998
minority interest included an adjustment for warranty provisions, which were
assumed by Sony and QUALCOMM in proportion to their ownership interests in the
QPE joint venture.
Income tax expense was $22 million for the first nine months of fiscal 1998
compared to $9 million for the same period in fiscal 1997, resulting from higher
pretax earnings for the first nine months of fiscal 1998 and the tax benefit
from recognition, during the third quarter of fiscal 1997, of deferred tax
assets that satisfied the "more likely than not" criteria for recognition
established by FAS 109. Excluding an increase in certain estimated tax credits,
the annual effective tax rate for fiscal 1998 is currently estimated to be 29%,
compared to 20% for fiscal 1997 which includes the tax benefit from recognizing
the deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that the cash and cash equivalents and investments
balances of $410 million at June 28, 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 nine months of fiscal 1998, $182 million in cash was used by
operating activities, compared to $87 million used by operating activities in
the first nine months of fiscal 1997. Cash used by operating activities in the
first nine months of fiscal 1998 and 1997 includes $430 million and $195
million, respectively, of net working capital requirements offset by $248
million and $107 million, respectively, of net cash flow provided by operations.
The improved cash flow from operations primarily reflects higher earnings and
increased depreciation expense in 1998. Net working capital requirements of $430
million primarily 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 receivable and finance receivables in the
first nine months of fiscal 1998 primarily reflects the continued growth in
equipment and component sales and extended terms provided to certain Korean
customers. 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 the raw materials
and finished goods inventory of Q phones. This is primarily attributable to the
lower demand for the Company's 1900 MHz PCS Q phone experienced in the second
and third quarters of fiscal 1998.
20
Investments in capital expenditures, intangible assets and other entities
totaled $259 million in the first nine months of fiscal 1998, compared to $141
million in the same period of fiscal 1997. Significant components in the first
nine months of fiscal 1998 consisted of the purchase of $235 million of capital
assets, the purchase of $13 million of intangible assets, and the investment of
$11 million in entities in which the Company holds less than a 50% interest.
Significant components in the first nine months of fiscal 1997 include the
purchase of $91 million of capital assets as well as the purchase of $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.
In the first nine months of fiscal 1998, the Company's financing activities
provided $58 million. QPE borrowed a net of $28 million on its outstanding
credit facility, and the Company realized $33 million in proceeds from the
issuance of common stock under the Company's stock option and employee stock
purchase plans. These cash proceeds were offset by $3 million in principal
payments on long-term debt. In the first nine months of fiscal 1997, the
Company's financing activities provided net cash of $651 million. The first nine
months of fiscal 1997 included $660 million in proceeds from the issuance of the
Trust Convertible Preferred Securities and $20 million from the issuance of
common stock under the Company's stock option and employee stock purchase plans,
offset by $19 million of deferred issuance costs and $10 million in net
repayments on bank lines of credit.
The design, development, manufacture and marketing of digital wireless
communication products and services are highly capital intensive. 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.
On March 11, 1998, the Company and a group of banks entered into a $400
million unsecured revolving credit facility (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 Credit Agreement includes certain restrictive financial and
operating covenants. Through June 28, 1998, there were no amounts outstanding,
or letters of credit issued, under the Credit Agreement.
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 June 28,
1998, contract payments of approximately $71 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.
At June 28, 1998, commitments to extend long-term financing for possible
future sales to customers other than Globalstar totaled approximately $370
million through fiscal 1999.
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 June 28, 1998, Globalstar had no borrowings outstanding under
the existing bank financing agreement.
Under an agreement entered into during fiscal 1997 with 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.
Chilesat PCS
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has received notification from the Chilean Undersecretariat of
Telecommunications ("SUBTEL") that phase one of the network has passed certain
acceptance tests performed by SUBTEL, and has been cleared to commence
commercial operations. Chilesat PCS is required to successfully complete certain
remaining tests on phase two of the network no later than December 1998. The
amount that Chilesat PCS may draw on the letter of credit has been reduced to
$52 million and will decline further as additional 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 part of the Company's strategy of supporting the commercialization and
sale of its CDMA technology and products, the Company may from time to time
enter into strategic alliances with domestic and international emerging wireless
telecommunications operating companies. These alliances often involve the
investment by QUALCOMM of substantial equity in the operating company, as well
as a commitment by the operating company to purchase CDMA equipment from
QUALCOMM. To date, the Company has made or has committed to make investments
domestically in Chase Telecommunications, Inc. and internationally in Chilesat
PCS, Telesystems of Ukraine, QUALCOMMTel (Russia) and PEGASO (Mexico). At June
28, 1998, unfunded equity commitments total approximately $150 million.
The Company is considering a transaction whereby it would transfer certain
of its joint venture and equity interests in emerging wireless
telecommunications operating companies to a wholly-owned subsidiary of the
Company, QUALCOMM SpinCo, Inc. ("SpinCo"), followed by a spin-off of SpinCo to
its stockholders. A Registration Statement on Form 10 related to the proposed
spin-off was filed with the Securities and Exchange Commission on July 1, 1998.
The transaction is intended to include the transfer of approximately $250
million in net assets to SpinCo and a substantial funding commitment on the part
of the Company in the form of a $250 million line of credit. The transaction
will be treated as a taxable dividend to the Company's stockholders in an amount
equal to the fair market value of the shares received. Following the
transaction, the Company expects that a public market will exist for SpinCo's
stock. If approved by the Company's Board of Directors, and other requisite
approvals are obtained, the transaction is expected to be completed by the end
of fiscal 1998.
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
would be primarily from unrealized gains and losses on certain investments in
debt and equity securities and
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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.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," which the Company will be required to adopt for fiscal year 2000.
This statement establishes a new model for accounting for derivatives and
hedging activities. Under FAS 133, all derivatives must be recognized as assets
and liabilities and measured at fair value. The Company has not determined the
impact of the adoption of this new accounting standard on its consolidated
financial position or results of operations.
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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
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which this report
is filed.
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