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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 28, 1999
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 [ ]
The number of shares outstanding of each of the issuer's classes of common
stock, as of the close of business on May 5, 1999:
Class Number of Shares
Common Stock; $0.0001 per share par value 75,322,920
1
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUALCOMM Incorporated
/s/ ANTHONY S. THORNLEY
-----------------------------------------
Anthony S. Thornley
Executive Vice President
& Chief Financial Officer
Dated: May 10, 1999
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.. 7-14
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.................... 15-29
PART II. OTHER INFORMATION........................................ 30-31
Item 4. Submission of Matters to a Vote of Security Holders
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
MARCH 28, SEPTEMBER 27,
1999 1998
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 121,253 $ 175,846
Investments ............................................ 83,395 127,478
Accounts receivable, net ............................... 814,213 612,209
Finance receivables .................................... 59,457 56,201
Inventories, net ....................................... 254,477 386,536
Other current assets ................................... 215,514 178,950
----------- -----------
Total current assets ........................... 1,548,309 1,537,220
PROPERTY, PLANT AND EQUIPMENT, NET ....................... 557,899 609,682
FINANCE RECEIVABLES, NET ................................. 352,525 287,751
OTHER ASSETS ............................................. 162,663 132,060
----------- -----------
TOTAL ASSETS ............................................. $ 2,621,396 $ 2,566,713
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ............... $ 662,781 $ 660,428
Unearned revenue ....................................... 62,858 67,123
Bank lines of credit ................................... 64,000 151,000
Current portion of long-term debt ...................... 3,062 3,058
----------- -----------
Total current liabilities ...................... 792,701 881,609
LONG-TERM DEBT ........................................... 2,360 3,863
OTHER LIABILITIES ........................................ 44,411 25,115
----------- -----------
Total liabilities .............................. 839,472 910,587
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTES 3 AND 9)
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES ........... 45,073 38,530
----------- -----------
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 ........................................ 1,102,313 959,267
Retained earnings ...................................... 5,910 --
Accumulated other comprehensive loss ................... (31,379) (1,678)
----------- -----------
Total stockholders' equity ..................... 1,076,851 957,596
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............... $ 2,621,396 $ 2,566,713
=========== ===========
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 28, MARCH 29, MARCH 28, MARCH 29,
1999 1998 1999 1998
----------- ----------- ----------- -----------
REVENUES:
Communications systems ................ $ 774,308 $ 625,572 $ 1,591,362 $ 1,302,457
Contract services ..................... 81,452 64,927 161,266 128,958
License, royalty and development fees . 76,635 70,054 120,990 114,992
----------- ----------- ----------- -----------
Total revenues ................ 932,395 760,553 1,873,618 1,546,407
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Communications systems ................ 568,441 485,279 1,153,365 992,618
Contract services ..................... 55,334 49,053 112,800 95,329
Research and development .............. 102,713 76,946 203,075 151,747
Selling and marketing ................. 53,628 59,728 123,364 115,826
General and administrative ............ 51,266 38,246 102,053 74,715
Other (Notes 6 and 7) ................. 95,824 -- 95,824 11,976
----------- ----------- ----------- -----------
Total operating expenses ...... 927,206 709,252 1,790,481 1,442,211
----------- ----------- ----------- -----------
OPERATING INCOME ........................ 5,189 51,301 83,137 104,196
INTEREST INCOME ......................... 8,229 9,573 14,035 21,763
INTEREST EXPENSE ........................ (5,459) (1,685) (8,774) (4,374)
NET GAIN ON SALE OF INVESTMENTS ......... -- -- 5,663 2,950
LOSS ON CANCELLATION OF WARRANTS (NOTE 2) (3,273) -- (3,273) --
OTHER (NOTES 2 AND 7) ................... (52,531) -- (52,531) --
DISTRIBUTIONS ON TRUST CONVERTIBLE
PREFERRED SECURITIES OF SUBSIDIARY
TRUST ................................ (9,904) (9,972) (19,703) (19,725)
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARIES ............ (2,845) (21,642) (6,543) (17,861)
EQUITY IN LOSSES OF INVESTEES ........... (4,974) (1,398) (5,995) (4,170)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ....... (65,568) 26,222 6,016 82,779
INCOME TAX BENEFIT (EXPENSE) ............ 22,948 (211) (106) (20,006)
----------- ----------- ----------- -----------
NET INCOME (LOSS) ....................... $ (42,620) $ 26,011 $ 5,910 $ 62,773
=========== =========== =========== ===========
NET EARNINGS (LOSS) PER COMMON SHARE:
Basic ................................. $ (0.59) $ 0.38 $ 0.08 $ 0.91
=========== =========== =========== ===========
Diluted ............................... $ (0.59) $ 0.36 $ 0.08 $ 0.85
=========== =========== =========== ===========
SHARES USED IN PER SHARE CALCULATION:
Basic ................................. 72,307 68,934 71,515 68,705
=========== =========== =========== ===========
Diluted ............................... 72,307 73,143 73,263 73,643
=========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements.
5
QUALCOMM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
---------------------------
MARCH 28, MARCH 29,
1999 1998
--------- ---------
OPERATING ACTIVITIES:
Net income ......................................................... $ 5,910 $ 62,773
Depreciation and amortization ...................................... 86,719 65,119
Other non-cash operating expenses .................................. 102,151 11,976
Other non-cash non-operating expenses .............................. 42,204 --
Gain on sale of available-for-sale securities ...................... (5,663) --
Minority interest in income of consolidated subsidiaries ........... 6,543 17,861
Equity in losses of investees ...................................... 5,995 4,170
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net ........................................ (207,641) (153,967)
Finance receivables, net ........................................ (68,030) (39,990)
Inventories, net ................................................ 126,024 (134,539)
Other assets .................................................... (24,944) (29,243)
Accounts payable and accrued liabilities ........................ (50,046) 121,733
Unearned revenue ................................................ (4,265) 7,628
Other liabilities ............................................... 8,329 5,654
--------- ---------
Net cash provided (used) by operating activities ..................... 23,286 (60,825)
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures ............................................... (95,048) (154,221)
Purchases of investments ........................................... (15,894) (254,954)
Maturities of investments .......................................... 59,977 454,208
Issuance of notes receivable ....................................... (55,374) --
Collection of notes receivable ..................................... 22,475 --
Purchases of intangible assets ..................................... -- (11,548)
Proceeds from sale of available-for-sale securities and cancellation
of warrants ....................................................... 10,163 --
Investments in other entities ...................................... (9,939) (4,052)
--------- ---------
Net cash (used) provided by investing activities ..................... (83,640) 29,433
--------- ---------
FINANCING ACTIVITIES:
Net repayments under bank lines of credit .......................... (87,000) (54,000)
Principal payments on long-term debt ............................... (1,499) (2,520)
Net proceeds from issuance of common stock ......................... 106,339 25,447
Other items, net ................................................... (703) 602
--------- ---------
Net cash provided (used) by financing activities ..................... 17,137 (30,471)
--------- ---------
Effect of exchange rate changes on cash .............................. (11,376) --
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............................ (54,593) (61,863)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..................... 175,846 248,837
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................... $ 121,253 $ 186,974
========= =========
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 27, 1998 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 27, 1998. Operating results for interim periods are not necessarily
indicative of operating results for an entire fiscal year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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. Other criteria considered for the purpose of revenue recognition
include the customer's financial condition, the amount and quality of financial
support provided by the customer's investors, and the political and economic
environment in which the customer operates. 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. Billings on uncompleted
contracts in excess of incurred cost and accrued profits are classified as
unearned revenue. 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.
Beginning with the second quarter of fiscal 1998, the Company began to accrue
its estimate of certain royalty revenues earned that previously could not be
reasonably estimated prior to being reported by its licensees.
Basic earnings (loss) per common share are calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the
reporting period. Diluted earnings (loss) 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 28, MARCH 29, MARCH 28, MARCH 29,
1999 1998 1999 1998
--------- --------- --------- ---------
Options ........ -- 3,514 1,748 4,234
Warrants ....... -- 695 -- 704
----- ----- ----- -----
-- 4,209 1,748 4,938
===== ===== ===== =====
7
The computation of the diluted loss per share for the three months ended
March 28, 1999 excludes approximately 5,515,000 additional common shares that
are issuable upon exercise of outstanding stock options, calculated using the
treasury stock method, because the effect would be anti-dilutive. Options
outstanding during the three months ended March 28, 1999 and March 29, 1998 to
purchase approximately 77,000 and 4,181,000 shares of common stock,
respectively, and options outstanding during the six months ended March 28, 1999
and March 29, 1998 to purchase approximately 3,358,000 and 2,662,000 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.
The Company adopted Statement of Financial Accounting Standards No. 130
("FAS 130"), "Reporting Comprehensive Income," in the first quarter of fiscal
1999. As required by the statement, the Company displays the accumulated balance
of other comprehensive income or loss separately in the equity section of the
consolidated balance sheets. Prior year financial statements have been
reclassified to conform to the current period presentation. Total comprehensive
income (loss), which was comprised of net income (loss) and foreign currency
adjustments, amounted to approximately ($71.9) million and $25.8 million for the
three months ended March 28, 1999 and March 29, 1998, respectively, and ($23.8)
million and $62.4 million for the six months ended March 28, 1999 and March 29,
1998, respectively.
In June 1997, the Financial Accounting Standards Board ("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 completed its determination of 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.
NOTE 2 - SPIN-OFF OF LEAP WIRELESS INTERNATIONAL, INC.
On September 23, 1998, the Company completed the spin-off and distribution (the
"Distribution" or "Leap Wireless Spin-off") to its stockholders of shares of
Leap Wireless International, Inc., a Delaware corporation ("Leap Wireless") and
recorded a $17.1 million liability in connection with its agreement to transfer
its ownership interest in Telesystems of Ukraine ("TOU") and its working capital
loan receivable from TOU ("TOU assets") to Leap Wireless if certain events
occurred within 18 months of the Leap Wireless Spin-off. During the first six
months of fiscal 1999, the Company provided an additional $1.7 million working
capital loan to TOU and recorded 100% of the losses of TOU, net of eliminations,
because the other investors' equity interests are depleted. During March 1999,
the Company reassessed the recoverability of TOU assets in light of recent
developments affecting the TOU business and the disposition of other assets
related to the terrestrial CDMA wireless infrastructure business (Note 7). As a
result, the Company recorded a $15.1 million non-operating charge to write off
the TOU assets, as well as a $12.0 million charge to operations to write off
other assets related to the TOU contract (Note 7), and the adjusted liability to
transfer TOU to Leap Wireless of $15.1 million was reversed against equity as an
adjustment to the Distribution.
8
In connection with the Distribution, Leap Wireless issued to QUALCOMM a
warrant to purchase 5,500,000 shares of Leap Wireless common stock at $6.10625
per share. The Company recorded the warrant at its predecessor basis of $24.2
million net of the related deferred tax liability. In March 1999, the Company
agreed to reduce the number of shares under warrant to 4,500,000 in exchange for
$3.0 million in consideration from Leap Wireless, resulting in a pre-tax loss of
$3.3 million. The cancellation was done to give further assurance that Leap
Wireless will meet the FCC criteria for designated entity status.
NOTE 3 - COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
ACCOUNTS RECEIVABLE (IN THOUSANDS):
MARCH 28, SEPTEMBER 27,
1999 1998
-------- --------
Accounts receivable, net:
Trade, net of allowance for doubtful
accounts of $22,231 and $21,933,
respectively ................... $543,580 $459,324
Long-term contracts:
Billed .......................... 177,901 101,868
Unbilled ........................ 92,328 49,784
Other .............................. 404 1,233
-------- --------
$814,213 $612,209
======== ========
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 (IN THOUSANDS):
MARCH 28, SEPTEMBER 27,
1999 1998
--------- ---------
Finance receivables ................ $ 420,430 $ 348,907
Allowance for doubtful receivables . (8,448) (4,955)
--------- ---------
411,982 343,952
Current maturities ................. 59,457 56,201
--------- ---------
Non-current finance receivables, net $ 352,525 $ 287,751
========= =========
Finance receivables result from sales under arrangements in which the
Company has agreed to provide customers with long-term interest bearing debt
financing for the purchase of equipment and/or services. Such financing is
generally collateralized by the related equipment.
At March 28, 1999, commitments to extend long-term financing for possible
future sales to customers totaled approximately $276 million through fiscal
2003. Such commitments are subject to the customers meeting certain conditions
established in the financing arrangements. Commitments represent the estimated
amounts to be financed under these arrangements; actual financing may be in
lesser amounts. These commitments will be included in the total finance
commitments provided in connection with the disposition of assets (Note 7).
INVENTORIES (IN THOUSANDS):
MARCH 28, SEPTEMBER 27,
1999 1998
-------- --------
Inventories, net:
Raw materials ................. $152,067 $180,957
Work-in-progress .............. 74,246 81,479
Finished goods ................ 28,164 124,100
-------- --------
$254,477 $386,536
======== ========
9
NOTE 4 - INVESTMENTS IN OTHER ENTITIES
In November 1998, the Company and Microsoft Corporation entered into a joint
venture agreement pursuant to which each company obtained a 50% ownership
interest in a newly formed development stage entity, Wireless Knowledge LLC, a
Delaware limited liability company. Wireless Knowledge intends to form strategic
partnerships with computing, software and telecommunications companies, as well
as with wireless carriers, for the purpose of enabling secure and
airlink-independent internet access to mobile users. Pursuant to the joint
venture agreement, QUALCOMM made a capital contribution of $7.5 million during
the first quarter of fiscal 1999 and will be required to provide $17.5 million
in additional equity contributions through June 2000.
In January 1999, Canbra Holdings S.A. ("Canbra"), a Brazilian company formed
by a consortium, comprised of Bell Canada International Ltd., WLL International,
SLI Wireless S.A., Taquari Participacoes S.A., and the Company, won a bid for an
operating license to provide wireless and wireline telephone services in the
northern region of Brazil. The Company invested $2.4 million during the second
quarter of fiscal 1999 in connection with its 16.2% ownership interest in
Canbra. The Company expects to make additional equity contributions of
approximately $46 million over the next three years.
During the first six months of fiscal 1999, the Company recognized a gain of
$5.7 million from the sale of available-for-sale securities.
NOTE 5 - BANK LINES OF CREDIT
On March 11, 1998, the Company and a group of banks entered into a $400
million unsecured revolving credit agreement ("Credit Facility I") under which
the banks are committed to make loans to the Company and to extend letters of
credit on behalf of the Company. Credit Facility I 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
0.2% per annum on the unused amount of the $400 million credit commitment.
Credit Facility I includes certain restrictive financial and operating
covenants. As of March 28, 1999, there were $7.7 million letters of credit
issued, and no amounts outstanding, under Credit Facility I.
On March 4, 1999, the Company and a group of banks entered into a $200
million unsecured revolving credit agreement ("Credit Facility II") under which
the banks are committed to make loans to the Company. Credit Facility II expires
in March 2000. At the Company's option, amounts outstanding in March 2000 may be
converted to a one-year term loan with a final maturity of March 2001. Interest
is payable at the greater of the administrative agent's reference rate or 0.5%
plus the Federal Funds effective rate, each plus an applicable margin. The
Company is currently obligated to pay commitment fees equal to 0.2% per annum on
the unused amount of the $200 million credit commitment. Credit Facility II
includes certain restrictive financial and operating covenants. As of March 28,
1999, there were no amounts outstanding under Credit Facility II.
NOTE 6 - RESTRUCTURING
During January 1999, the Company completed a review of its operating
structure to identify opportunities to improve operating effectiveness. As a
result of this review, management approved a formal restructuring plan, and the
Company recorded a pretax restructuring charge to operations of $14.6 million.
The restructuring charge was comprised of employee termination benefits and
facility exit costs resulting primarily from the Company's plan to exit certain
activities in its infrastructure business. Facility exit costs include $3.5
million of asset impairments and $0.9 million of estimated net losses on
subleases or lease cancellation penalties.
The employee termination benefits included in the restructuring charge
reflect the immediate elimination of approximately 650 positions identified in
the restructuring plan. Severance payments will continue beyond the end of the
second quarter of fiscal 1999 due to the provisions of the severance program.
10
The restructuring plan specifically identified seven facilities to be
closed, including one administrative office and six international sales offices.
The Company expects to complete implementation of the plan by the end of the
second quarter of fiscal 2000.
The following table sets forth the restructuring provision and related
activity as of March 28, 1999 (in thousands):
ACTIVITY TO DATE
- ----------------------------------------------------------------------------------
PROVISION COSTS ACCRUAL AS OF
RECORDED INCURRED MARCH 28, 1999
- ----------------------------------------------------------------------------------
Employee
termination
benefits $ 10,162 $ (7,982) $ 2,180
Facility exit
costs 4,397 (3,526) 871
- ----------------------------------------------------------------------------------
Total $ 14,559 $(11,508) $ 3,051
- ----------------------------------------------------------------------------------
NOTE 7 - DISPOSITION OF ASSETS AND OTHER CHARGES
On March 24, 1999 the Company and Telefonaktiebolaget LM Ericsson
("Ericsson") entered into an Asset Purchase Agreement (the "Agreement") for the
sale by the Company to Ericsson of certain assets related to the Company's
terrestrial CDMA wireless infrastructure business. The Company and Ericsson also
entered into various license and settlement agreements in connection therewith,
all of which are effective upon the closing of the sale (the "Closing"). The
Closing is subject to certain customary closing conditions. The Company recorded
a charge of $60.4 million in other operating expenses to reflect the difference
between the carrying value of the net assets and the consideration to be
received from Ericsson, less costs to sell. The estimated loss before income
taxes for the business to be disposed of included in the results of operations
for the six months ended March 28, 1999 was approximately $110 million.
In addition, the Company and Ericsson agreed to jointly support a single
worldwide CDMA standard with three optional modes for the next generation of
wireless communications and have agreed to settle all of the existing litigation
between the companies and enter into cross-licenses for portions of their
respective CDMA patent portfolios. As part of the agreements, the Company and
Ericsson will each commit to the International Telecommunication Union ("ITU")
and to other standard bodies to license their essential patents for the single
CDMA standard or any of its modes to the rest of the industry on a fair and
reasonable basis free from unfair discrimination.
Pursuant to the Agreement, the Company will extend up to $400 million in
financing for possible future sales by Ericsson of cdmaOne or cdma2000
infrastructure equipment and related services to specific customers in certain
geographic areas, including Brazil, Chile, Russia, and Mexico or in other areas
selected by Ericsson. Such commitments are subject to the customers meeting
certain conditions established in the financing arrangements and, in most cases,
to Ericsson also financing a portion of such cdmaOne or cdma2000 sales.
Commitments represent the estimated amounts to be financed under these
arrangements, however, actual financing may be in lesser amounts.
As a result of the Ericsson transaction, the Company reassessed the
recoverability of the carrying value of remaining assets relating to its
terrestrial CDMA wireless infrastructure business. The Company recorded a charge
of $20.8 million in other operating expenses to reduce the carrying value of
certain other assets to their approximate net realizable value, including $12.0
million in other assets related to the TOU contract (Note 2). The Company also
recorded $52.5 million in non-operating charges, including $37.4 million in
reserves provided for financial guarantees on projects which the Company will no
longer pursue as a result of the Ericsson transaction and $15.1 million related
to the write-off of TOU assets (Note 2). The Company estimates that additional
charges in the third quarter of fiscal 1999 relating to the disposition of the
terrestrial CDMA wireless infrastructure business will total approximately $100
million (Note 10).
11
NOTE 8 - INCOME TAXES
The Company's income tax provision for the six months ended March 28, 1999
reflects an adjustment for the retroactive reinstatement of the R&D tax credit
in the first quarter of fiscal 1999. Excluding this adjustment, the Company
currently estimates its annual effective income tax rate to be approximately 35%
for fiscal 1999.
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 the Company's subsidiary QUALCOMM
Personal Electronics ("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. The suits were later amended to include a total of eleven Ericsson
patents. 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, breach of a nondisclosure agreement by Ericsson and 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. On October
14, 1998, Ericsson filed a dismissal with prejudice of all of its claims under
three of the patents at issue in the Marshall, Texas case. On March 24, 1999,
the Company and Ericsson entered into an Asset Purchase Agreement (Note 7) for
the sale by the Company to Ericsson of certain assets related to the Company's
terrestrial CDMA wireless infrastructure business and also entered into various
license and settlement agreements in connection therewith, all of which are
effective upon the Closing. The Closing is subject to certain customary closing
conditions, including receipt of required regulatory approvals. Upon the
Closing, the Company, QPE and Ericsson will dismiss with prejudice all of their
respective claims and counterclaims against each other. Pending the Closing, the
Company and Ericsson have agreed to a stay of all litigation effective March 25,
1999. In the event the Closing does not occur by July 25, 1999, the stay will be
lifted.
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 then, 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 4 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 7 additional patents. All of the
Motorola cases have been consolidated for pretrial proceedings. The cases have
been set for a final pretrial conference on August 1, 1999. 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 claims are without merit and
will continue to vigorously defend the action.
On October 27, 1998, the Electronics and Telecommunications Research
Institute of Korea ("ETRI") submitted to the International Chamber of Commerce a
Request for Arbitration (the "Request") of a dispute with the Company
12
arising out of a Joint Development Agreement dated April 30, 1992 ("JDA")
between ETRI and the Company. In the Request, ETRI alleges that the Company has
breached certain provisions of the JDA and seeks monetary damages and an
accounting. The Company filed an answer and counterclaims denying the
allegations, seeking a declaration establishing the termination of the JDA, and
for monetary damages and injunctive relief against ETRI. In accordance with the
JDA, the arbitration will take place in San Diego. No schedule for the
arbitration proceedings has been established. Although the ultimate resolution
of this dispute is subject to the uncertainties inherent in litigation or
arbitration, the Company does not believe that the resolution of these claims
will have a material adverse effect on the Company's results of operations,
liquidity or financial position. The Company believes that ETRI's claims are
without merit and will vigorously defend the action.
On February 26, 1999, the Lemelson Medical, Education & Research Foundation,
Limited Partnership ("Lemelson"), filed an industry-wide action in the United
States District Court for the District of Arizona. The complaint names a total
of 88 parties, including the Company, as defendants and purports to assert
claims for infringement of 15 patents. The complaint alleges that application
specific integrated circuit ("ASIC") devices sold by the Company, or the
processes by which such devices are manufactured, infringe the asserted patents.
Because all of the ASICs sold by the Company are manufactured for the Company by
others, the Company will likely be entitled to be defended and indemnified by
its vendors with respect to many, and perhaps all, of its ASIC products. The
Company believes that the Lemelson claims will not have a material adverse
effect on the Company's results of operations, liquidity or financial position.
The Company believes the Lemelson claims are without merit and will vigorously
defend the action.
On May 6, 1999, Thomas Sprague, an employee of the Company, filed a putative
class action against the Company, ostensibly on behalf of himself and those of
the Company's employees who have been offered employment with Ericsson in
conjunction with the sale to Ericsson of certain of the Company's infrastructure
division assets and liabilities (Note 7) and who have elected not to participate
in a Retention Bonus Plan being offered to such employees. The complaint was
filed in California Superior Court in and for the County of San Diego and
purports to state eight causes of action arising primarily out of alleged
breaches of the terms of the Company's 1991 Stock Option Plan, as amended from
time to time. The putative class seeks to include employees of the Company who
(among other things) "have not or will not execute the Bonus Retention Plan and
accompanying full and complete release of QUALCOMM." The complaint seeks an
order accelerating all unvested stock options for the members of the class. As
of May 7, 1999, 94 percent or more of the 1,053 transitioning employees who have
unvested stock options had chosen not to join the lawsuit and to participate
instead in the Retention Bonus Plan offered by QUALCOMM and Ericsson, which
provides several benefits including cash compensation based upon a portion of
the value of their unvested options. Although the Company believes the complaint
has no merit and intends to defend the action vigorously, there can be no
assurance that an unfavorable outcome of the action would not have a material
adverse impact on the Company's results of operations, liquidity or financial
position.
The Company is engaged in other legal actions arising in the ordinary course
of its business and believes that the ultimate outcome of these actions will not
have a material adverse effect on its results of operations, liquidity or
financial position.
LETTERS OF CREDIT AND FINANCIAL GUARANTEES
The Company has issued a letter of credit on behalf of its equity investee
Globalstar, L.P. ("Globalstar") to support a guarantee of up to $22.5 million of
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 28, 1999,
Globalstar had no borrowings outstanding under the existing bank financing
agreement.
In addition to the letter of credit on behalf of Globalstar, the Company has
$33.0 million of letters of credit and $4.7 million of other financial
guarantees outstanding, excluding those against which a reserve has been taken
as of March 28, 1999, none of which are collateralized.
PERFORMANCE GUARANTEES
The Company and its subsidiary, 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.
LEAP WIRELESS CREDIT FACILITY
The Company has a funding commitment to Leap Wireless in the form of a $265
million secured credit facility. The credit facility consists of two
sub-facilities. The first sub-facility enables Leap Wireless to borrow up to
$35.2
13
million from QUALCOMM, solely to meet the normal working capital and operating
expenses of Leap Wireless, including salaries, overhead and credit facility
fees, but excluding, among other things, strategic capital investments in
wireless operators, substantial acquisitions of capital products, and/or the
acquisition of telecommunications licenses. The other sub-facility enables Leap
Wireless to borrow up to $229.8 million from QUALCOMM, solely to use as
investment capital to make certain identified portfolio investments. Amounts
borrowed under the credit facility will be due September 23, 2006. QUALCOMM will
have a first priority security interest in, subject to minor exceptions,
substantially all of the assets of Leap Wireless for so long as any amounts are
outstanding under the credit facility. Amounts borrowed under the credit
facility will bear interest at a variable rate equal to LIBOR plus 5.25% per
annum. Interest will be payable quarterly beginning September 30, 2001; and
prior to such time, accrued interest shall be added to the principal amount
outstanding. At March 28, 1999, $45.2 million is outstanding under this
facility.
NOTE 10 - SUBSEQUENT EVENTS
In April 1999, the Company announced that it will provide certain
compensation benefits to employees being transferred to Ericsson in connection
with the proposed sale of assets related to the Company's terrestrial CDMA
wireless infrastructure business (Note 7). The Company estimates that additional
charges in the third quarter of fiscal 1999 relating to the disposition of the
terrestrial CDMA wireless infrastructure business will total approximately $100
million, primarily related to employee compensation benefits. This estimate is
largely based on the fair market value of the Company's common stock, and
therefore is subject to market fluctuations.
On April 14, 1999, the Company's Board of Directors declared a two-for-one
stock split of the Company's common stock. The stock dividend will be
distributed on May 10, 1999 to stockholders of record on April 21, 1999. Pro
forma earnings (loss) per common share, giving retroactive effect to the stock
split, are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ ------------------------------
MARCH 28, MARCH 29, MARCH 28, MARCH 29,
1999 1998 1999 1998
----------- ----------- ----------- -----------
NET EARNINGS (LOSS) PER COMMON SHARE:
Basic ............................. $ (0.29) $ 0.19 $ 0.04 $ 0.46
=========== =========== =========== ===========
Diluted ........................... $ (0.29) $ 0.18 $ 0.04 $ 0.43
=========== =========== =========== ===========
SHARES USED IN PER SHARE CALCULATION:
Basic ............................. 144,614 137,868 143,030 137,410
=========== =========== =========== ===========
Diluted ........................... 144,614 146,286 146,526 147,285
=========== =========== =========== ===========
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This information should be read in conjunction with the condensed
consolidated financial statements and the notes thereto included in Item 1 of
Part I of this Quarterly Report and the audited consolidated financial
statements and notes thereto and Management's Discussion and Analysis of Results
of Operations and Financial Condition for the year ended September 27, 1998
contained in the Company's 1998 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: risks relating to the closing of the proposed Ericsson transaction,
including the occurrence of required closing conditions; the ability to develop
and introduce cost effective new products in a timely manner, avoiding delays in
the commercial implementation of the Code Division Multiple Access ("CDMA")
technology; continued growth in the CDMA subscriber population and the scale-up
and operations of CDMA systems; risks relating to the success of the Globalstar
system; 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, in the
sections entitled Results of Operations and Liquidity and Capital Resources, and
in the Company's 1998 Annual Report on Form 10-K.
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, infrastructure and Application Specific Integrated
Circuits ("ASICs") products 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 L.P. ("Globalstar"), a
low-Earth-orbit satellite 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 by such
licensees of CDMA subscriber and infrastructure equipment. License fees are
generally nonrefundable and may be paid in one or more installments. Revenues
generated from license fees and royalties are subject to quarterly and annual
fluctuations. This is due to variations in the amount and timing of recognition
of CDMA license fees, 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, and risks associated with royalties generated from international
licensees.
The Company has manufactured CDMA infrastructure products for sale to
wireless network operators worldwide. On March 24, 1999, QUALCOMM and
Telefonaktiebolaget LM Ericsson ("Ericsson") entered into an Asset Purchase
Agreement for the sale by the Company to Ericsson of certain assets related to
the Company's terrestrial CDMA wireless infrastructure business, subject to
certain customary closing conditions, including receipt of required regulatory
approvals.
The Company manufactures its CDMA subscriber products primarily through
QUALCOMM Personal Electronics ("QPE"), a joint venture between the Company and a
subsidiary of Sony Electronics, Inc. The Company, through QPE, is one of the
largest manufacturers of CDMA handsets. The Company also generates substantial
revenue from the design and sale of CDMA ASICs to its licensees for
incorporation into their subscriber and infrastructure products.
15
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 products and terminals, and
service fees. 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. The Company's development agreement
provides for the design and development of the ground communications stations
("gateways") and user terminals of the Globalstar System. Under the agreement,
the Company is reimbursed for its development services on a cost-plus basis. In
addition, in April 1997 the Company was awarded a contract to manufacture and
supply commercial gateways for deployment in the Globalstar System. In March
1998, the Company entered into an agreement with Globalstar to manufacture and
supply portable and fixed CDMA handsets that will operate on the Globalstar
System. The Globalstar system is still being deployed, and cannot begin
commercial operations until at least 32 satellites are working in orbit, the
necessary ground equipment and user terminals are in place and service providers
are licensed in the countries to be served. Satellite launches are risky, with
about 15% of attempts ending in failure. Globalstar has already had one launch
failure, and more failures may occur within the course of its launch campaign.
If another launch fails, the resulting increased costs, including those
associated with delay, could have a material adverse effect on the financial
condition and results of operations of Globalstar. The cost of installing the
Globalstar system has been revised upward from the original estimates, and
further increases are possible. Until the system is fully deployed and tested,
it is not certain that it will perform as designed. Even if the system operates
as it should, there is no certainty that the anticipated market will develop.
Barring unexpected adverse developments, Globalstar will need approximately
$600 million more capital before it can begin commercial service in September
1999 as planned. Any delay in raising the necessary funds will delay the start
of commercial service. If the start of service is significantly delayed, a
larger proportion of Globalstar's debt services requirements will become due
before Globalstar has positive cash flow, which will increase the amount of
money Globalstar needs.
The value of the Company's investment in and future business with
Globalstar, as well as its ability to collect outstanding receivables from
Globalstar, depends on the success of Globalstar and the Globalstar System.
Globalstar is a development stage company and has no operating history. From its
inception, Globalstar has incurred net losses and losses are expected to
continue at least until commercial operations of the Globalstar System commence,
which is expected to be in calendar 1999. A substantial shortfall in meeting
Globalstar's capital needs could prevent completion of the Globalstar System and
could materially and adversely affect the Company's results of operations,
liquidity and financial position. In addition, Globalstar can terminate its
development agreement with the Company if Globalstar abandons its efforts to
develop the Globalstar System.
The manufacture of wireless communications products is a complex and precise
process involving specialized material, manufacturing and testing equipment and
processes. The majority of the Company's products are manufactured based upon a
forecast of market demand. The Company cannot assure the accuracy of its market
forecast or that it will be able to effectively meet customer demand in a timely
manner. Factors that could materially and adversely affect the Company's ability
to meet customer demand include defects or impurities in the components or
materials used, delays in the delivery of such components or materials,
equipment failures or other difficulties. The Company may experience component
failures or defects which could require significant product recalls, reworks
and/or repairs which are not covered by warranty reserves and which could
consume a substantial portion of the Company's manufacturing capacity.
Revenues from customers outside of the U.S. accounted for approximately 32%
and 34% of total revenues for the six months ended March 28, 1999 and in fiscal
1998, respectively. Sales of subscriber, infrastructure and ASICs products,
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.
16
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 providing such financing, the Company is exposed to risk from
fluctuations in foreign currency and interest rates, which could impact the
Company's results of operations and financial condition. QUALCOMM's financing on
products and services is denominated in dollars and any significant change in
the value of the dollar against the national currency where QUALCOMM is lending
could result in the increase of costs to the debtors and could restrict the
debtors from fulfilling their contractual obligations. Any devaluation in the
local currency relative to the currencies in which such liabilities are payable
could have a material adverse effect on the Company. In some developing
countries, including Chile, Mexico, Brazil, and Russia, significant currency
devaluations relative to the U.S. dollar have occurred and may occur again in
the future. In such circumstances, the Company may experience economic loss with
respect to the collectability of its receivables and the value of inventories as
a result of exchange rate fluctuations.
During the commercial start-up of its system in Chile with Chilesat
Telefonia Personal, S.A. ("Chilesat PCS"), the Company's equipment experienced
certain problems relating to the performance of the system. As a result,
Chilesat PCS has claimed that the Company is in breach of warranty. The Company
has tested and delivered a processor upgrade, which the Company believes
resolves the claim. Although there can be no assurance that the Company's
processor upgrade will resolve the claim until the system is at specified
capacity, the Company does not believe that the resolution of this claim will
have a material adverse effect on the Company. Subsequent to quarter end,
Chilesat PCS became a wholly-owned subsidiary of Leap Wireless.
The Russian economic environment has experienced severe volatility, which
could negatively impact the Company's prospects and have a material adverse
effect on the Company's business, results of operations, liquidity and financial
position. The Company currently has approximately $17 million in Russian
receivables and an additional $26 million in products and deployment services
placed with carriers for which the Company has not yet recognized revenues. The
Company cannot guarantee that these carriers will have sufficient resources to
complete their planned projects. The failure of any of these emerging service
carriers to obtain sufficient financing to meet their regulatory obligations
could adversely affect the value of the Company's receivables and inventories
relating to these customers.
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.
RECENT DEVELOPMENTS
The Company's terrestrial CDMA wireless infrastructure business has
continued to incur losses, and the recent financial crisis in developing markets
has materially impacted infrastructure products sales in fiscal 1999. In January
1999, management approved a formal restructuring plan. As a result, the Company
recorded a pretax restructuring charge to operations of $15 million. The charge
was comprised of employee termination benefits and facility exit costs resulting
primarily from the Company's plan to exit certain activities in its
infrastructure business.
On March 24, 1999, QUALCOMM and Ericsson entered into an Asset Purchase
Agreement (the "Agreement") for the sale by the Company to Ericsson of certain
assets related to the Company's terrestrial CDMA wireless infrastructure
business. The Company and Ericsson also entered into various license and
settlement agreements in connection therewith, all of which are effective upon
the closing of the sale (the "Closing"). The Closing is subject to certain
customary closing conditions. The Closing is expected to occur during the
Company's third fiscal quarter of 1999. Under the Agreement, (a) QUALCOMM agreed
to sell certain assets relating to its terrestrial CDMA wireless infrastructure
business to Ericsson in exchange for cash and the assumption of certain
liabilities, (b) QUALCOMM and Ericsson agreed to jointly support a single
worldwide CDMA standard with three optional modes for the next generation of
wireless communications and (c) all of the existing litigation between the
companies will be settled and the companies will enter into royalty-bearing
cross-licenses for their respective CDMA patent portfolios.
17
Pursuant to the Agreement, Ericsson will purchase certain assets of
QUALCOMM's terrestrial CDMA wireless infrastructure business, including its R&D
resources, located in San Diego, Calif. and Boulder, Colo., and will assume
selected customer commitments, including a portion of future vendor financing
obligations, related assets and personnel. The Company recorded a charge of $60
million to reflect the difference between the carrying value of the net assets
and the consideration to be received from Ericsson, less costs to sell. As part
of the Agreement, the Company agreed to jointly finance with Ericsson certain
sales by Ericsson of cdmaOne and cdma2000 infrastructure equipment and services
(the "cdmaOne/2000 Sales").
Pursuant to the Agreement, the Company will extend up to $400 million in
financing for possible future sales by Ericsson of cdmaOne or cdma2000
infrastructure equipment and related services to specific customers in certain
geographic areas, including Brazil, Chile, Russia, and Mexico, or in other areas
selected by Ericsson. Such commitments are subject to the customers meeting
certain conditions established in the financing arrangements and, in most cases
to Ericsson also financing a portion of such cdmaOne or cdma2000 sales.
Commitments represent the estimated amounts to be financed under these
arrangements, however, actual financing may be in lesser amounts.
Effective upon the closing, the Agreement will settle the litigation between
Ericsson and QUALCOMM and provide for cross-licensing of patents for all CDMA
technologies, including cdmaOne, WCDMA and cdma2000. The cross-licenses are
royalty bearing for CDMA subscriber units sold by Ericsson and QUALCOMM.
QUALCOMM also will receive rights to sublicense certain Ericsson patents,
including the patents asserted in the litigation, to QUALCOMM's Application
Specific Integrated Circuits ("ASIC") customers.
The Company expects to incur additional charges in the third quarter of
fiscal 1999 relating to the disposition of the terrestrial CDMA wireless
infrastructure business. The Company currently estimates these charges to be
approximately $100 million, primarily related to compensation for employees
being transferred to Ericsson in connection with the proposed sale of the
Company's terrestrial CDMA wireless infrastructure business. This estimate is
largely based on the fair market value of the Company's common stock, and
therefore is subject to market fluctuations.
As part of the Agreement, QUALCOMM and Ericsson have also agreed to jointly
support approval by the International Telecommunications Union ("ITU") and the
other standards bodies, including the U.S. Telecommunications Industry
Association ("TIA") and the European Telecommunications Standards Institute
("ETSI"), of a single CDMA third generation ("3G") standard that encompasses
three optional modes of operation: 1) direct sequence Frequency Division Duplex
("FDD"), 2) multi-carrier FDD, and 3) Time Division Duplex ("TDD"). Each mode
supports operation with both GSM MAP and ANSI-41 networks. The Company believes
that rapid adoption of the single CDMA standard is in the best interests of the
industry and will allow each operator to select which mode of operation to
deploy based on marketplace needs. As part of the Agreements, QUALCOMM and
Ericsson will each commit to the ITU and to other standards bodies to license
their essential patents for the single CDMA standard or any of its modes to the
rest of the industry on a fair and reasonable basis free from unfair
discrimination. Upon the Closing, each of the companies have agreed to notify
the ITU and other relevant standards bodies that any intellectual property
rights blocking currently in force will be immediately withdrawn.
There can be no assurance that the Closing will occur or that the
transactions contemplated under the Agreement will be consummated. There can be
no assurance that the industry or any country will adopt such a single CDMA
standard or that such a standard, if adopted, will be commercially deployed. The
extent to which it is commercially deployed may have a material affect on the
Company. The Company believes that its CDMA patent portfolio provides broad
coverage and is applicable to any commercially viable CDMA wireless system,
including modes of CDMA recommended for the proposed single CDMA 3G standard.
The Company has informed standards bodies, including the ITU, TIA, ETSI and the
Association of Radio Industries and Business ("ARIB"), that it holds essential
patents for third generation CDMA systems that have been submitted to such
standards bodies. Further, the Company intends to vigorously enforce and protect
its intellectual property position against any infringement. However, despite
the Company's position and the license agreements entered into by the Company
with Ericsson and others which provide for royalties payable to the Company for
certain products employing such CDMA standards, there can be no assurance that
the Company's CDMA patents will be determined to be applicable to any proposed
standard. The adoption of next generation CDMA standards, if any, which are
determined not to rely on the
18
Company's intellectual property could have a material adverse effect on the
Company's business, results of operations, liquidity and financial position.
Upon consummation of the transaction with Ericsson, the Company will retain
certain terrestrial CDMA wireless infrastructure business contracts. Equipment
sales and deployment services under these contracts may be subcontracted to
Ericsson. The Company will no longer develop terrestrial infrastructure
products. Accordingly, the Company reassessed the recoverability of the carrying
value of remaining assets relating to its terrestrial CDMA wireless
infrastructure business.
The Company had intended to transfer its equity ownership interest in
Telesystems of Ukraine ("TOU") to Leap Wireless International ("Leap Wireless").
During March 1999, the Company reassessed the recoverability of its ownership
interest in TOU and its working capital receivable from TOU ("TOU assets") in
light of recent developments affecting the TOU business and the disposition of
other assets related to the terrestrial CDMA wireless infrastructure business.
As a result, the Company recorded a $15 million non-operating charge to write
off the TOU assets, as well as a $12 million charge to operations to write off
other assets related to the TOU contract.
The Company recorded a charge of $21 million during the second quarter to
reduce the carrying value of certain other assets to their approximate net
realizable value, including the $12 million in other assets related to the TOU
contract. The Company also recorded $52 million in non-operating charges,
including $37 million in reserves provided for financial guarantees on projects
which the Company will no longer pursue as a result of the Ericsson transaction
and $15 million related to the write-off of TOU assets.
19
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 SIX MONTHS ENDED
---------------------- ----------------------
MARCH 28, MARCH 29, MARCH 28, MARCH 29,
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Communications systems ................ 83% 82% 85% 84%
Contract services ..................... 9 9 9 8
License, royalty and development fees . 8 9 6 8
---- ---- ---- ----
Total revenues ............................ 100% 100% 100% 100%
---- ---- ---- ----
Operating expenses:
Communications systems ................ 61% 64% 62% 64%
Contract services ..................... 6 6 6 6
Research and development .............. 11 10 11 10
Selling and marketing ................. 6 8 7 7
General and administrative ............ 5 5 5 5
Other ................................. 10 -- 5 1
---- ---- ---- ----
Total operating expenses .................. 99% 93% 96% 93%
---- ---- ---- ----
Operating income .......................... 1 7 4 7
Interest income, net ...................... -- -- -- --
Net gain on sale of investments ............ -- -- -- --
Loss on cancellation of warrants ........... -- -- -- --
Other ...................................... (6) -- (3) --
Distributions on trust convertible preferred
securities of subsidiary trust ............ (1) (1) (1) (1)
Minority interest in income of consolidated
subsidiaries .............................. -- (3) -- (1)
Equity in losses of investees .............. (1) -- -- --
---- ---- ---- ----
Income (loss) before income taxes .......... (7) 3 -- 5
Income tax benefit (expense) ............... 2 -- -- (1)
---- ---- ---- ----
Net income (loss) .......................... (5)% 3% --% 4%
==== ==== ==== ====
Communications systems costs as a percentage
of communications systems revenues ....... 73% 78% 72% 76%
Contract services costs as a percentage
of contract services revenues .......... 68% 76% 70% 74%
SECOND QUARTER OF FISCAL 1999 COMPARED TO SECOND QUARTER OF FISCAL 1998
Total revenues for the second quarter of fiscal 1999 were $932 million, an
increase of $171 million or 22% compared to total revenues of $761 million for
the second quarter of fiscal 1998. Revenue growth was primarily due to the
significant growth in the revenue related to communications systems.
Communications systems revenues were $774 million in the second quarter of
fiscal 1999, an increase of $148 million or 24% compared to $626 million for the
same period in fiscal 1998. The increase represents the higher volume of sales
of CDMA subscriber and ASICs products.
Contract services revenues for the second quarter of fiscal 1999 were $81
million, a 25% increase compared to $65 million for the same period in fiscal
1998. The dollar increase resulted primarily from revenues from the development
agreement with Globalstar.
20
License, royalty and development fees for the second quarter of fiscal 1999
were $77 million, compared with revenues of $70 million for the same period in
fiscal 1998. In the second quarter of 1999, shipments of CDMA equipment by
licensees increased, resulting in increased royalty payments due to the Company.
The increase in royalties was partially offset by a decline in up-front license
payments. License, royalty and development fees may continue to fluctuate
quarterly due to the timing and amount of up-front fees on new licenses,
royalties from sales by the Company's licensees and changes in foreign currency
exchange rates. Beginning with the second quarter of fiscal 1998, the Company
began to accrue its estimate of certain royalty revenues earned that previously
could not be reasonably estimated prior to being reported by its licensees.
Costs of communications systems were $568 million or 73% of communications
systems revenues for the second quarter of fiscal 1999 compared to $485 million
or 78% of communications systems revenues for the second quarter of fiscal 1998.
Costs of communications systems for the second quarter of fiscal 1999 include
$10 million in non-recurring charges primarily related to additional
infrastructure equipment contract costs to be incurred as a result of the
Company's decision to sell its terrestrial CDMA wireless infrastructure
business. Costs of communications systems as a percentage of communications
systems revenues for the second quarter of fiscal 1999 decreased primarily as a
result of cost improvements related to ASICs products. 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 for the second quarter of fiscal 1999 were $55
million or 68% of contract services revenues, compared to $49 million or 76% of
contract services revenues for the second quarter of fiscal 1998. The dollar
increase in contract services costs was primarily related to increased sales
under the Globalstar development contract. Contract service costs as a
percentage of contract services revenue decreased due to a change in the mix of
labor and materials incurred on the Globalstar development contract.
Research and development expenses were $103 million or 11% of revenues for
the second quarter of fiscal 1999, compared to $77 million or 10% of revenues
for the same period in fiscal 1998.
Selling and marketing expenses were $54 million or 6% of revenues for the
second quarter of fiscal 1999, compared to $60 million or 8% of revenues for the
same period in fiscal 1998. The dollar decline in selling and marketing expense
was due primarily to a decrease in marketing expense for infrastructure
products, including reduced headcount and proposal activity.
General and administrative expenses for the second quarter of fiscal 1999
were $51 million or 5% of revenues, compared to $38 million or 5% of revenues
for the second quarter of fiscal 1998. The dollar increase was attributable to
growth in personnel and associated overhead expenses necessary to support the
overall growth in the Company's operations and increased legal, patent, and
information technology expenses.
Other operating expenses for the second quarter of fiscal 1999 were $96
million. During the second quarter of fiscal 1999, the Company recorded a pretax
restructuring charge to operations of $15 million. The restructuring charge was
comprised of employee termination benefits and facility exit costs resulting
primarily from the Company's plan to exit certain activities in its
infrastructure business. In March 1999, the Company entered into the Agreement
with Ericsson to sell certain assets related to its terrestrial CDMA wireless
infrastructure business and various license and settlement agreements in
connection therewith. As a result, the Company recorded charges of $60 million
to reflect the difference between the carrying value of the net assets to be
sold and the consideration to be received, less costs to sell, and $21 million
to reduce the carrying value of certain other assets relating to its terrestrial
CDMA wireless infrastructure business.
Interest income was $8 million for the second quarter of fiscal 1999,
compared to $10 million for the same period in fiscal 1998 due to lower cash and
investment balances.
Interest expense was $5 million for the second quarter of fiscal 1999,
compared to $2 million for the same period in fiscal 1998. The higher interest
expense is due to higher average balances on the bank lines of credit.
21
During the second quarter of fiscal 1999, the Company recorded a loss of $3
million in connection with the cancellation of warrants to purchase 1,000,000
common shares of Leap Wireless. The cancellation was done to give further
assurance that Leap Wireless will meet the FCC criteria for designated entity
status.
During the second quarter of fiscal 1999, the Company recorded $52 million
in non-operating charges, including $37 million in reserves provided for
financial guarantees on projects which the Company will no longer pursue as a
result of the Ericsson transaction and $15 million related to the write-off of
TOU assets.
Distributions on Trust Convertible Preferred Securities of $10 million for
the second quarter of fiscal 1999 and 1998 relate to the private placement of
$660 million of 5 3/4% Trust Convertible Preferred Securities by QUALCOMM in
February 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. The minority interest for the second quarter
of 1998 includes the impact of restructuring QPE.
The second quarter loss resulted in an income tax benefit of $23 million for
the second quarter of fiscal 1999 compared to an income tax expense of $0.2
million for the same period in fiscal 1998. The annual effective tax rate for
fiscal 1999 is currently estimated to be 35%, excluding the effect of the
reinstatement of the R&D tax credit, compared to 30% for fiscal 1998, excluding
an increase in certain estimated tax credits.
FIRST SIX MONTHS OF FISCAL 1999 COMPARED TO FIRST SIX MONTHS OF FISCAL 1998
Total revenues for the first six months of fiscal 1999 were $1,874 million,
an increase of $328 million or 21% over total revenues of $1,546 million for the
first six months of fiscal 1999.
Communications systems revenues for the first six months of fiscal 1999 were
$1,591 million, a 22% increase compared to revenues of $1,302 million for the
same period in fiscal 1998. The increase for the first six months of fiscal 1999
represents the higher volumes of sales of CDMA subscriber and ASICs products,
increased revenues from the expansion of the installed OmniTRACS base in the
U.S., and sales of commercial gateways for deployment in the Globalstar system.
Contract services revenues for the first six months of fiscal 1999 increased
to $161 million from $129 million for the same period in fiscal 1998, an
increase of 25%. The increase of $32 million resulted primarily from the
development agreement with Globalstar.
License, royalty and development fees for the first six months of fiscal
1999 were $121 million, compared to $115 million for the same period in fiscal
1998, an increase of 5%. The increase was driven by increased royalties
recognized in conjunction with the worldwide sales of subscriber units utilizing
the Company's CDMA technology by the Company's licensees, partially offset by
lower up front license fees. Beginning with the second quarter of fiscal 1998,
the Company began to accrue its estimate of certain royalty revenues earned that
previously could not be reasonably estimated prior to being reported by its
licensees.
Costs of communications systems for the first six months of fiscal 1999 were
$1,153 million or 72% of communications systems revenues, compared to $993
million or 76% of communications systems revenues for the same period in fiscal
1998. The dollar increase in costs primarily reflects increased shipments of
CDMA subscriber and ASICs products, and sales of commercial gateways.
Communications systems costs as a percentage of communications systems revenues
decreased primarily as a result of cost improvements related to ASICs products.
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 six months of fiscal 1999 were $113
million or 70% of contract services revenues, compared to $95 million or 74% of
contract services revenues for the same period in fiscal 1998. The dollar
increase in contract services costs was primarily related to the Globalstar
development contract. Contract
22
service costs as a percentage of contract services revenue decreased due to a
change in the mix of labor and materials incurred on the Globalstar development
contract.
For the first six months of fiscal 1999, research and development expenses
were $203 million or 11 % of revenues, compared to $152 million or 10% of
revenues for the first six months of fiscal 1998.
For the first six months of fiscal 1999, selling and marketing expenses were
$123 million or 7% of revenues, compared to $116 million or 7% of revenues for
the same period in fiscal 1998.
General and administrative expenses for the first six months of fiscal 1999
were $102 million or 5% of revenues, compared to $75 million or 5% of revenues
for the same period in fiscal 1998. The dollar increase for the first six months
of fiscal year 1999 was attributable to continued growth in personnel and
associated overhead expenses necessary to support the overall growth in the
Company's operations, increased litigation, patent and information technology
expenses.
During the first six months of fiscal 1999, other operating expenses were
$96 million, compared to $12 million for the same period in fiscal 1998. During
the first six months of fiscal 1999, the Company recorded a pretax restructuring
charge to operations of $15 million. The restructuring charge was comprised of
employee termination benefits and facility exit costs resulting primarily from
the Company's plan to exit certain activities in its infrastructure business. In
March 1999, the Company entered into the Agreement with Ericsson to sell certain
assets related to its terrestrial CDMA wireless infrastructure business, and
various license and settlement agreements in connection therewith. As a result,
the Company recorded charges of $60 million to reflect the difference between
the carrying value of the net assets to be sold and the consideration to be
received, less costs to sell, and $21 million to reduce the carrying value of
certain other assets relating to its terrestrial CDMA wireless infrastructure
business and various license and settlement agreements in connection therewith.
During the first six months of fiscal 1998, the Company acquired, for $10
million, substantially all of the assets of Now Software, Inc. 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. This expense was included in other operating
expenses. Also during the same period, the Company recorded a $5 million
non-cash charge to operations relating to the impairment of leased manufacturing
equipment that is no longer used in the manufacturing process. The $5 million
charge represented the estimated total cost of related lease obligations, net of
estimated recoveries.
For the first six months of fiscal 1999, interest income was $14 million
compared to $22 million for the same period in fiscal 1998. The higher interest
income for the first six months of fiscal 1998 was related to the interest
earned on the proceeds from the private placement of Trust Convertible Preferred
Securities which occurred during February 1997.
For the first six months of fiscal 1999, interest expense was $9 million
compared to $4 million for the same period in fiscal 1998, as a result of the
interest charged on the higher average balances on the bank lines of credit.
During the first six months of fiscal 1999, the Company recognized a gain of
$6 million on the sale of available-for-sale securities, as compared to a net
gain of $3 million during the same period in fiscal 1998, from the sale of, and
other investing activities related to, investments in other entities.
During the first six months of fiscal 1999, the Company recorded a loss of
$3 million in connection with the cancellation of warrants to purchase 1,000,000
common shares of Leap Wireless. The cancellation was done to give further
assurance that Leap Wireless will meet the FCC criteria for designated entity
status.
During the first six months of fiscal 1999, the Company recorded $52 million
in non-operating charges, including $37 million in reserves provided for
financial guarantees on projects which the Company will no longer pursue as a
result of the Ericsson transaction and $15 million related to the write off of
TOU assets.
23
Distributions on Trust Convertible Preferred Securities of $20 million for
the first six months of fiscal 1999 and 1998 relate to the private placement of
$660 million of 5 3/4% Trust Convertible Preferred Securities by QUALCOMM in
February 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.
Income tax expense was $0.1 million for the first six months of fiscal 1999
compared to $20 million for the same period in fiscal 1998, resulting primarily
from the non-recurring charges for the first six months of fiscal 1999. The
income tax expense for the first six months of fiscal 1999 reflects the benefit
for the reinstatement of the R&D tax credit retroactive to July 1, 1998. The
annual effective tax rate for fiscal 1999 is currently estimated to be 35%,
excluding the effect of the reinstatement of the R&D tax credit, compared to 30%
for fiscal 1998, excluding an increase in certain estimated tax credits.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that the cash and cash equivalents and investments
balances of $205 million at March 28, 1999, including interest earned thereon,
will be used to fund working and fixed capital requirements, financing for
customers of its CDMA infrastructure products and investment in joint ventures
or other companies and other assets to support the growth of its business. The
Company contemplates raising additional funds from a combination of sources
including potential debt and equity issuances. There can be no assurance that
additional financing will be available on acceptable terms or at all. In
addition, the Company's Credit Facilities as well as notes and indentures, place
restrictions on the Company's ability to incur additional indebtedness which
could adversely affect its ability to raise additional capital through debt
financing.
The Company has two unsecured credit facilities ("Credit Facilities") under
which banks are committed to make up to $400 million and $200 million in
revolving loans to the Company. The Credit Facilities expire in March 2001 and
2000, respectively. The $400 million facility may be extended on an annual basis
upon maturity. At the Company's option, amounts outstanding under the $200
million facility may be converted to a one year term loan with a final maturity
of March 2001. The Company is currently obligated to pay commitment fees equal
to 0.2% per annum on the unused amount of the Credit Facilities. The Credit
Facilities include certain restrictive financial and operating covenants. At
March 28, 1999, there were $8 million letters of credit issued, and no amounts
outstanding, under the Credit Facilities.
In the first six months of fiscal 1999, $23 million in cash was provided by
operating activities, compared to the use of $61 million for operating
activities the first six months of fiscal 1998. Cash used by operating
activities in the first six months of fiscal 1999 and 1998 includes $221 million
and $223 million, respectively, of net working capital requirements offset by
$244 million and $162 million, respectively, of net cash flow provided by
operations. Net working capital requirements of $221 million during the first
six months of fiscal 1999 primarily reflect increases in accounts receivable and
finance receivables and reductions in accounts payable and accrued liabilities,
offset by a decrease in inventories. The increase in accounts receivable and
finance receivables, and the decrease in accounts payable and accrued
liabilities, during the first six months of fiscal 1999 primarily reflects the
continued growth in products and component sales. The reduction in total
inventory is primarily the result of inventory management programs.
The Company has entered into strategic alliance agreements to support the
design and manufacture of CDMA infrastructure products. In one of these
agreements, in which QUALCOMM participates on a percentage basis with the prime
contractor, outstanding finance receivables of $20 million from the prime
contractor are being withheld subject to the end-customer's complete acceptance
of the total system. There is currently a dispute between the prime contractor
and the end-customer as to the contract language of the acceptance criteria. The
Company believes it has met its obligations and is entitled to payment under the
contract. The Company may be exposed to the extent the prime contractor is not
successful in obtaining the customer's acceptance or negotiates a reduced
payment.
24
Investments in capital expenditures, intangible assets and other entities
totaled $105 million in the first six months of fiscal 1999, compared to $170
million in the same period of fiscal 1998. Significant components in the first
six months of fiscal 1999 consisted of the purchase of $95 million of capital
assets, and the investment of $10 million in newly formed development stage
entities. The Company expects to continue making investments in capital assets
throughout fiscal 1999.
In the first six months of fiscal 1999, the Company's financing activities
provided $17 million. The Company and QPE repaid net amounts of $80 million and
$7 million, respectively, on their outstanding credit facilities, and the
Company realized $106 million in proceeds from the issuance of common stock
under the Company's stock option and employee stock purchase plans. In the first
six months of fiscal 1998, the Company's financing activities used net cash of
$30 million. The first six months of fiscal 1998 included $25 million from the
issuance of common stock under the Company's stock option and employee stock
purchase plans, offset by $54 million in net repayments on outstanding bank
lines of credit.
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 28,
1999, of approximately $105 million in interest bearing financed amounts and
approximately $246 million in accounts receivable, including $80 million not yet
billed, were outstanding from Globalstar.
At March 28, 1999, commitments to extend long-term financing for possible
future sales to customers totaled approximately $276 million through fiscal
2003. Such commitments are subject to the customers meeting certain conditions
established in the financing arrangements. Commitments represent the estimated
amounts to be financed under these arrangements; actual financing may be in
lesser amounts. Pursuant to the Ericsson Agreement, the Company will extend up
to $400 million in financing for possible future sales by Ericsson. Commitments
outstanding at March 28, 1999 will be included in the $400 million.
The Company has committed to provide a guarantee of a working capital bank
loan of $100 million to its customer, Pegaso Telecommunicaciones, S.A. de C.V.
("Pegaso"), to facilitate its network launch and purchase of equipment from the
Company. In April 1999, the Company provided a $10 million working capital loan
to Pegaso repayable within 30 days.
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 28, 1999, Globalstar had no borrowings outstanding under
the existing bank financing agreement.
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. At March
28, 1999, the Company has investments in Shinsegi Telecomm, Inc. (Korea) and
Canbra Holdings, S. A. (Brazil).
Canbra Holdings, S. A., a consortium comprised of Bell Canada International
Inc. (34.4%), QUALCOMM Incorporated (16.2%), SLI Wireless S.A. (12.5%), Taquari
Participaoes S.A. (2.5%) and WLL International (34.4%), announced on January 15,
1999 that it has won an operating license to provide wireless and wireline
telephone services in the northeast region of Brazil. QUALCOMM invested $2.4
million during the second quarter of fiscal 1999 and expects to make additional
equity contributions over the next three years in amounts approximating $46
million.
A second consortium comprised of Bell Canada International Inc. (35.3%),
QUALCOMM Incorporated (16.6%), SLI Wireless S.A. (12.8%), and WLL International
(34.3%) announced on April 23, 1999 that it has won an operating license to
provide wireless and wireline telephone services in the Sao Paulo State of
Brazil. QUALCOMM will invest approximately $8 million over the next two years
related to its interest in the consortium.
25
In November 1998, the Company and Microsoft Corporation entered into a joint
venture agreement pursuant to which each company obtained a 50% ownership
interest in a newly formed development stage entity, Wireless Knowledge LLC, a
Delaware limited liability company. Wireless Knowledge intends to form strategic
partnerships with computing, software and telecommunications companies, as well
as with wireless carriers, for the purpose of enabling secure and
airlink-independent internet access to mobile users. Pursuant to the joint
venture agreement, QUALCOMM made a capital contribution of $7.5 million during
the first quarter of fiscal 1999 and will be required to provide an additional
$17.5 million in equity contributions through June 2000.
QUALCOMM has a substantial funding commitment to Leap Wireless in the form
of a $265 million secured credit facility. The credit facility consists of two
sub-facilities. The first sub-facility enables Leap Wireless to borrow up to
$35.2 million from QUALCOMM, solely to meet the normal working capital and
operating expenses of Leap Wireless, including salaries, overhead and credit
facility fees, but excluding, among other things, strategic capital investments
in wireless operators, substantial acquisitions of capital products, and/or the
acquisition of telecommunications licenses. The other sub-facility enables Leap
Wireless to borrow up to $229.8 million from QUALCOMM, solely to use as
investment capital to make certain identified portfolio investments. Amounts
borrowed under the credit facility will be due on September 23, 2006. QUALCOMM
will have a first priority security interest in, subject to minor exceptions,
substantially all of the assets of Leap Wireless for so long as any amounts are
outstanding under the credit facility. Amounts borrowed under the credit
facility will bear interest at a variable rate equal to LIBOR plus 5.25% per
annum. Interest will be payable quarterly beginning September 30, 2001; and
prior to such time, accrued interest shall be added to the principal amount
outstanding. At March 28, 1999, $45.2 million was outstanding under this
facility.
YEAR 2000 READINESS
The Year 2000 ("Y2K") issue relates to the way computer systems and programs
define calendar dates. A system could fail or miscalculate a date including "00"
to mean 1900 rather than 2000. Also, other systems and products that are not
typically recognized as computer or information technology related may contain
embedded hardware or software that would be affected by this issue.
The Company has been working on correcting Y2K problems since 1997. As part
of this strategy, a Y2K Program Office was formed consisting of a Program
Director and key individuals. In February 1999, the Company reorganized the
Program Office and it is now led by the Company's Chief Information Officer
("CIO"). It is sponsored by each division President and is composed of Senior IT
Managers / Directors within each division. These leaders are responsible for
working within their divisions to ensure Y2K readiness with a primary focus on
products and customers. Functional areas which support all divisions are also
members of the Program Office. These include Supply Chain, Corporate Human
Resources and Accounting, Logistics, Facilities, and certain elements of
Information Technology. All Program Office members are focusing attention and
required resources on the Company's Y2K issues. The Company has also engaged
outside consulting firms to assist with the effort. All Y2K efforts are being
tracked through the Program Office though plans have been developed and are
being executed at the division and functional area levels. This strategy is
expected to reduce the Company's level of uncertainty about the Y2K problem, and
in particular, about the Y2K readiness of the Company's critical customers and
suppliers. The Company believes that with the completion of the Project as
scheduled, the possibility of significant interruptions of normal operations
will be reduced.
As of March 28, 1999, the Company's Y2K Project ("Project"), designed to
minimize the impact of Y2K problems on operations, is proceeding on the revised
schedule. However, the Company is unable to completely determine at this time
whether the consequences of Y2K failures will have a material impact on the
Company's results of operations, liquidity or financial condition. The failure
to correct a material Y2K problem could result in an interruption in, or a
failure of, certain normal business activities or operations. Such failures
could materially and adversely affect the Company's results of operations,
liquidity and financial condition. This is due to the general uncertainty
inherent in the Y2K problems, resulting in part from the uncertainty of the Y2K
readiness of third-party suppliers, customers and utility services.
The members of the Company's Y2K Program Office are addressing the issues
under four major sections: Internal Readiness, Supply Chain Assessment, Product
Readiness and Customer Readiness. Each section is evaluated
26
through four phases: Discovery, Assessment, Remediation and Post-Remediation.
Discovery is the process of identifying potential Y2K issues throughout the
Company's critical business process. Assessment is the process of categorizing
issues that were identified in the Discovery phase into "ready," "not ready" or
"needs more study." Remediation is the process of fixing and testing those items
that must be ready for the Y2K. Post-Remediation is the process of addressing
Y2K issues that were not previously or not adequately corrected.
Internal Readiness addresses the computing and communications
infrastructure, the tools and systems used to develop products and run the
business, and internal service organizations. The Company has identified the
majority of the critical systems and non-computer related items that are
required to be Y2K ready. Using supplier data and internal discovery methods,
remediation or replacement efforts have begun. Those items considered most
critical to continuing operations are given the highest priority, and testing on
these items is scheduled to be complete by October 1999. The Company has
established a dedicated Y2K readiness testing lab for testing the Company's
computing and communications infrastructure as well as the Company's critical
business tools. The majority of non-ready critical systems are scheduled to be
retired, replaced, or repaired by October 1999. At this time, no critical issues
have been identified that will not be made ready by calendar year-end 1999.
Supply Chain Assessment involves evaluating the Y2K readiness of QUALCOMM's
suppliers and their ability to continue delivering materials and services after
1999. The Company has initiated formal communications with critical suppliers to
determine the Company's vulnerability to suppliers' Y2K issues. The Company has
requested that critical suppliers represent their products and services to be
Y2K ready and that they have a program to test for that readiness. The Company
has received initial Y2K readiness information from the majority of critical
suppliers. On-site visits of key suppliers for the purpose of verifying Y2K
readiness status are being conducted during the first two calendar quarters of
1999. Based on knowledge gained through communication with critical suppliers
and in parallel with the supplier assessment process, the Company is developing
contingency plans to ensure minimal interruption of supply. The Company is
scheduled to assess the majority of its critical suppliers' state-of-readiness
for Y2K by June 30, 1999. If the Company determines a critical supplier is not
on track to be Y2K ready, the Company will solidify contingency plans relevant
to those suppliers, while in parallel initiating a search for alternate
solutions to avoid supply chain interruptions. At this time, no critical
suppliers have been identified as not being Y2K ready, however, the assessment
is not complete. In addition, the Company is participating in the High
Technology Consortium - Year 2000 and Beyond, and leveraging that organization
and resource pool to augment the Company's efforts.
Product Readiness includes the review of QUALCOMM's products for Y2K
readiness. The Company's program office has been working with individual
business unit managers to review all QUALCOMM products for Y2K readiness. The
Company believes the majority of its products are Y2K ready with further formal
verification being initiated where required. The majority of testing for Y2K
product readiness is scheduled for completion by September 1999. The Company
expects to verify Y2K readiness for the majority of products and to have an
upgrade or migration path available for legacy products by November 1999.
Customer Readiness is the review of QUALCOMM's major customers for Y2K
readiness. The Program Office has organized a review targeted to cover a
significant portion of the Company's customers. Customer lists are being
generated and survey work has begun. The Company does not currently have
sufficient information concerning the Y2K readiness status of major customers.
The Company is requesting information from customers to understand their state
of Y2K readiness and has scheduled this process for completion by September
1999.
While the Company expects these efforts will provide reasonable assurance
that material disruptions will not occur due to internal failure, the potential
for interruption still exists. The need for a contingency plan is recognized and
plans will be developed to deal with issues such as "at risk" suppliers and
interruption of utility and other services. The response of certain third
parties is beyond the control of the Company. If the Company does not receive
adequate Y2K readiness responses from its critical suppliers or customers prior
to June 1999, contingency plans will be developed by September 1999. Contingency
plans may include increasing inventory levels, securing alternate sources of
supply, adjusting alternate shutdown and start-up schedules and other
appropriate measures. At this time, the Company cannot estimate the additional
cost, if any, from the implementation of such contingency plans.
27
The Company believes its critical systems will be Y2K ready by October 1999.
However, there is no guarantee that these results will be achieved. Specific
factors contributing to this uncertainty include failure to identify all
susceptible systems, non-readiness by third parties whose systems and operations
impact the Company and other similar uncertainties. A worst case scenario might
include one or more of the Company's internal systems, suppliers, products or
customers not being Y2K ready. An event such as this could result in a material
disruption to the Company's operations. Specifically, the Company could
experience software application, computer network, manufacturing products and
telephone system failures. Supply chain and product non-readiness could result
in the failure of the Company to perform on contracts, delayed delivery of
products to customers and inadequate customer service. Customer non-readiness
could result in delayed payments for products and services and build up of
inventories. Should a worst case scenario occur, it could, depending on its
duration, have a material adverse effect on the Company's business, results of
operations, liquidity and financial position.
To date the Company has spent an estimated $10 million on this Project.
Total budgeted cost at this time is estimated at $28 million. The funding for
this Project comes from operations and working capital. The Company does not
have a project tracking system that tracks the cost and time that its employees
spend on the Y2K project. However, the Company estimates the allocable time of
employees using average hourly rates for each class of employee. None of the
Company's other mission critical information projects have been delayed due to
the implementation of the Y2K Project.
FUTURE ACCOUNTING REQUIREMENTS
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 completed its determination of 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 completed its
determination of the impact of the adoption of this new accounting standard on
its consolidated financial position or results of operations.
MARKET RISK
A complete discussion and analysis of the Company's market risks is
described in the Company's 1998 Annual Report on Form 10-K. Such risks include
unfavorable movements in interest rates, equity prices, and foreign currency
exchange rates. In regard to foreign exchange risk, foreign exchange financial
instruments that are subject to the effects of currency fluctuations which may
affect reported earnings include financial instruments which are not denominated
in the currency of the legal entity holding the instruments. Such risk exists in
connection with both equity investees and wholly-owned subsidiaries. Because of
the rapid ramp up in operations during the first six months of fiscal 1999 by
the Company's wholly-owned subsidiary, QUALCOMM do Brazil (QdB), accounts
payable and receivable not denominated in the currency of QdB have increased
dramatically since September 27, 1998. QdB uses the local currency, the
Brazilian real, as its functional currency. During the second quarter of fiscal
1999, a significant devaluation occurred in the Brazilian real. As a result, the
Company recorded a $29 million translation loss in equity. The Company also
recorded a $2 million transaction gain which affected earnings as a result of
local currency denominated price protection agreements. At March 28, 1999, the
Company has $1 million in net payables at QdB which are not denominated in the
local currency. The fair value of those net payables would increase by $0.1
million if the U.S. dollar were to depreciate against the Brazilian real by 10%.
This hypothetical amount is suggestive of the effect on fair value, but not on
future cash flows assuming that the Company does not
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sell QdB. At March 28, 1999, there have been no other material changes to the
market risks described at September 27, 1998. Additionally, the Company does not
anticipate any near-term changes in the nature of its market risk exposures or
in management's objectives and strategies with respect to managing such
exposures.
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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
The Company's Annual Meeting of Stockholders (the "Annual Meeting") was held on
February 23, 1999. At the Annual Meeting, the stockholders of the Company (i)
elected five directors to hold office until the 2002 Annual Meeting of
Stockholders or until his/her successor is elected, as listed below; (ii)
approved the Company's 1991 Stock Option Plan, as amended; and (iii) ratified
the selection of PricewaterhouseCoopers LLP as the Company's independent
accountants for the fiscal year ending September 26, 1999. The Company had
70,864,528 shares of Common Stock outstanding as of December 28, 1998, the
record date for the Annual Meeting. At the Annual Meeting, holders of a total of
63,012,349 shares of Common Stock were present in person or represented by
proxy. The following sets forth information regarding the results of the voting
at the Annual Meeting:
Proposal 1: Election of Directors
Shares Voting Shares
Director In Favor Withheld
-------- ------------- --------
Robert E. Kahn 62,864,307 148,921
Jerome S. Katzin 62,861,454 148,921
Duane A. Nelles 62,864,235 148,921
Frank Savage 62,863,974 148,921
Brent Scowcroft 62,863,170 148,921
Directors whose term of office continued after the annual meeting are: Richard
C. Atkinson, Peter M. Sacerdote, Diana Lady Dougan, Marc I. Stern, Irwin Mark
Jacobs, Andrew J. Viterbi, Adelia A. Coffman, and Neil Kadisha.
Proposal 2: Approval of the 1991 Stock Option Plan, as Amended
Votes in favor: 52,188,524
Votes against: 10,628,365
Abstentions: 195,460
Broker non-votes: 0
Proposal 3: Ratification of Selection of Independent Accountants
Votes in favor: 62,856,912
Votes against: 73,717
Abstentions: 81,720
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ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 - Asset Purchase Agreement between QUALCOMM Incorporated and
Telefonaktiebolaget LM Ericsson dated as of March 24, 1999. (1) (2)
10.1 - Credit Agreement dated as of March 4, 1999, among QUALCOMM
Incorporated, as Borrower, the Lender Parties, Bank of America
National Trust & Savings Association as Administrative Agent and
Syndication Agent, and Citibank N.A., as Documentation Agent and
Syndication Agent. (1)
10.2 - Multi-Product License Agreement between QUALCOMM Incorporated and
Telefonaktiebolaget LM Ericsson dated March 24, 1999. (1)
10.3 - Subscriber Unit License Agreement between QUALCOMM Incorporated and
Telefonaktiebolaget LM Ericsson dated March 24, 1999. (1)
10.4 - Settlement Agreement and Mutual Release between QUALCOMM Incorporated
and Telefonaktiebolaget LM Ericsson dated March 24, 1999.
10.5 - First Amendment to Revolving Credit Agreement between QUALCOMM
Incorporated, Bank of America National Trust & Savings Association,
et al, and Citibank N.A. dated March 24, 1999.
27.0 - 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.
(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.
(2) Schedules omitted pursuant to Rule 601(b)(2) of Regulation S-K of the
Securities and Exchange Commission. Registrant undertakes to furnish such
schedules and attachments thereto to the Securities and Exchange Commission
upon request.
31