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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 26, 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)
5775 MOREHOUSE DR., SAN DIEGO, CALIFORNIA 92121-1714
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(858) 587-1121
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
FORMER ADDRESS: 6455 LUSK BLVD., SAN DIEGO, CALIFORNIA 92121-2779
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 January 24, 2000:
Class Number of Shares
----- ----------------
Common Stock; $0.0001 per share par value 708,241,290
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUALCOMM Incorporated
/s/ ANTHONY S. THORNLEY
-------------------------------------------
Anthony S. Thornley
Executive Vice President
& Chief Financial Officer
Dated: January 28, 2000
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QUALCOMM INCORPORATED
INDEX
PAGE
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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.... 7-15
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition ..................... 16-21
PART II. OTHER INFORMATION............................................ 22
Item 1. Legal Proceedings ...................................... 22
Item 2. Changes in Securities .................................. 22
Item 3. Defaults Upon Senior Securities ........................ 22
Item 4. Submission of Matters to a Vote of Security Holders .... 22
Item 5. Other Information ...................................... 22
Item 6. Exhibits and Reports on Form 8-K ....................... 22-23
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUALCOMM INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
ASSETS
DECEMBER 26, SEPTEMBER 26,
1999 1999
------------ -------------
Current Assets:
Cash and cash equivalents $ 303,978 $ 660,016
Investments 1,087,164 954,415
Accounts receivable, net 998,200 883,640
Finance receivables 24,167 26,377
Inventories, net 259,968 257,941
Other current assets 201,825 195,849
---------- ----------
Total current assets 2,875,302 2,978,238
Property, plant and equipment, net 537,482 555,991
Investments 165,338 70,495
Finance receivables, net 680,090 548,482
Other assets 727,223 381,744
---------- ----------
Total assets $4,985,435 $4,534,950
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 715,546 $ 705,208
Unearned revenue 64,625 56,070
Bank lines of credit 124,000 112,000
Current portion of long-term debt 3,109 3,099
---------- ----------
Total current liabilities 907,280 876,377
Long-term debt - 795
Other liabilities 64,587 74,872
---------- ----------
Total liabilities 971,867 952,044
---------- ----------
Commitments and contingencies (Note 9)
Minority interest in consolidated subsidiaries 54,910 51,596
---------- ----------
Company-obligated mandatorily redeemable Trust
Convertible Preferred Securities of a subsidiary trust
holding solely debt securities of the Company 269,895 659,555
---------- ----------
Stockholders' Equity:
Preferred stock, $0.0001 par value - -
Common stock, $0.0001 par value 70 65
Paid-in capital 3,196,953 2,587,899
Retained earnings 377,998 200,879
Accumulated other comprehensive income 113,742 82,912
---------- ----------
Total stockholders' equity 3,688,763 2,871,755
---------- ----------
Total liabilities and stockholders' equity $4,985,435 $4,534,950
========== ==========
See Notes to Condensed Consolidated Financial Statements.
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QUALCOMM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED
----------------------------------
DECEMBER 26, DECEMBER 27,
1999 1998
----------- -----------
Revenues $ 1,120,073 $ 941,223
----------- -----------
Operating expenses:
Cost of revenues 648,748 642,390
Research and development 83,404 100,362
Selling, general and administrative 101,848 120,523
Other 26,152 -
----------- -----------
Total operating expenses 860,152 863,275
----------- -----------
Operating income 259,921 77,948
Interest expense (2,673) (3,315)
Investment income (expense), net 36,247 6,750
Distributions on Trust Convertible
Preferred Securities of subsidiary trust (11,045) (9,799)
----------- -----------
Income before income taxes 282,450 71,584
Income tax expense (105,331) (23,054)
----------- -----------
Net income $ 177,119 $ 48,530
=========== ===========
Net earnings per common share:
Basic $ 0.27 $ 0.09
=========== ===========
Diluted $ 0.23 $ 0.08
=========== ===========
Shares used in per share calculations:
Basic 664,586 565,780
=========== ===========
Diluted 790,827 593,749
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
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QUALCOMM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
-------------------------------
DECEMBER 26, DECEMBER 27,
1999 1998
------------ ------------
OPERATING ACTIVITIES:
Net income $ 177,119 $ 48,530
Depreciation and amortization 35,082 44,448
Impairments and other non-cash charges and credits 24,784 -
Gain on sale of available-for-sale securities (2,574) (5,663)
Minority interest in income of consolidated subsidiaries 3,314 3,698
Equity in losses of investees 4,571 1,021
Deferred income tax provision 105,331 -
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net (114,571) (240,279)
Finance receivables, net (126,398) (29,866)
Inventories (2,895) 51,464
Other current assets (27,479) (4,812)
Accounts payable and accrued liabilities (6,288) (2,081)
Unearned revenue 8,555 (8,633)
Other liabilities 2,852 3,877
--------- ---------
Net cash provided (used) by operating activities 81,403 (138,296)
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures (38,079) (62,884)
Purchases of held-to-maturity investments (293,435) (10,363)
Maturities of held-to-maturity investments 118,814 32,358
Proceeds from sale of available-for-sale securities 2,607 7,163
Issuance of notes receivable (145,555) (25,021)
Collection of notes receivable - 16,835
Investments in other entities (120,511) (7,500)
Other items, net (3,023) -
--------- ---------
Net cash used by investing activities (479,182) (49,412)
--------- ---------
FINANCING ACTIVITIES:
Net borrowings under bank lines of credit 12,000 137,000
Net proceeds from issuance of common stock 31,484 7,953
Other items, net (1,231) (1,151)
--------- ---------
Net cash provided by financing activities 42,253 143,802
--------- ---------
Effect of exchange rate changes on cash (512) -
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (356,038) (43,906)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 660,016 175,846
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 303,978 $ 131,940
========= =========
See Notes to Condensed Consolidated Financial Statements.
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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 26, 1999 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 26, 1999. 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. Certain prior year amounts
have been reclassified to conform to the current year presentation.
The Company effected a two-for-one stock split in May 1999 and a four-for-one
stock split in December 1999. Stockholders' equity has been restated to give
retroactive recognition to the stock splits for all periods presented by
reclassifying the par value of the additional shares arising from the splits
from paid-in capital to common stock. All references in the financial statements
and notes to number of shares and per share amounts have been restated to
reflect these stock splits.
Basic earnings per common share are calculated by dividing net income by the
weighted average number of common shares outstanding during the reporting
period. Diluted earnings per common share ("diluted EPS") reflect the potential
dilutive effect, calculated using the treasury stock method, of 68,626,000 and
27,969,000 additional common shares that are issuable upon exercise of
outstanding stock options for the three months ended December 26, 1999 and
December 27, 1998, respectively, and the potential dilutive effect of Trust
Convertible Preferred Securities convertible into 57,615,000 shares of common
stock, determined on an if-converted basis, for the three months ended December
26, 1999.
Options outstanding during the three months ended December 26, 1999 and
December 27, 1998 to purchase approximately 1,821,000 shares and 53,111,000
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. Net income in the computation of diluted EPS for the
three months ended December 26, 1999 is increased by $7 million representing the
assumed savings of distributions, net of taxes, on the Trust Convertible
Preferred Securities. The inclusion of additional common shares assuming the
conversion of the Trust Convertible Preferred Securities for the three months
ended December 27, 1998 would have been anti-dilutive.
During the first quarter of fiscal 2000, 7,793,182 Trust Convertible
Preferred Securities were converted into 42,906,040 shares of common stock. The
conversions resulted in a $390 million reduction in the recorded obligation to
Trust Convertible Preferred Securities holders (Note 11).
The Company displays the accumulated balance of other comprehensive income or
loss separately in the equity section of the consolidated balance sheets. Total
comprehensive income, which is comprised of net income and other comprehensive
income (loss), amounted to approximately $208 million and $48 million for the
three months ended December 26, 1999 and December 27, 1998, respectively.
Components of other comprehensive income (loss) consist of the following (in
thousands):
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THREE MONTHS ENDED
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DECEMBER 26, DECEMBER 27,
1999 1998
------------ ------------
Foreign currency translation $ (866) $ (403)
Change in unrealized gain on securities, net of income taxes 33,292 -
Reclassification adjustment for gains included in net income,
net of income taxes (1,596) -
-------- --------
$ 30,830 $ (403)
======== ========
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." In May 1999, the FASB voted to
delay the effective date of FAS 133 by one year. The Company will be required to
adopt FAS 133 for fiscal year 2001. 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.
NOTE 2 - COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
Accounts receivable, net are comprised as follows (in thousands):
DECEMBER 26, SEPTEMBER 26,
1999 1999
------------ -------------
Trade, net of allowance for doubtful accounts
of $20,201 and $22,276, respectively $782,248 $674,211
Long-term contracts:
Billed 133,456 128,208
Unbilled 68,325 69,409
Other 14,171 11,812
-------- --------
$998,200 $883,640
======== ========
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 result from arrangements in which the Company has agreed
to provide its customers or certain CDMA customers of Ericsson (Note 7) with
long-term interest bearing debt financing for the purchase of equipment and/or
services. Such financing is generally collateralized by the related equipment.
Finance receivables are comprised as follows (in thousands):
DECEMBER 26, SEPTEMBER 26,
1999 1999
------------ -------------
Finance receivables $ 714,876 $ 585,482
Allowance for doubtful receivables (10,619) (10,623)
--------- ---------
704,257 574,859
Current maturities 24,167 26,377
--------- ---------
Noncurrent finance receivables, net $ 680,090 $ 548,482
========= =========
At December 26, 1999, commitments to extend long-term financing to CDMA
customers of Ericsson (Note 7) totaled approximately $355 million, which the
Company expects to fund over the next five years. Such commitments are subject
to the customers meeting certain conditions established in the financing
arrangements
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and, in most cases, to Ericsson also financing a portion of such sales.
Commitments represent the estimated amounts to be financed under these
arrangements; actual financing may be in lesser amounts. Inventories are
comprised as follows (in thousands):
DECEMBER 26, SEPTEMBER 26,
1999 1999
------------ -------------
Raw materials $ 87,678 $161,481
Work-in-process 35,759 51,003
Finished goods 136,531 45,457
-------- --------
$259,968 $257,941
======== ========
NOTE 3 - INVESTMENT INCOME (EXPENSE), NET
Investment income (expense) is comprised as follows (in thousands):
THREE MONTHS ENDED
-------------------------------
DECEMBER 26, DECEMBER 27,
1999 1998
------------ ------------
Interest income $ 41,558 $ 5,806
Realized gains on marketable securities 2,574 5,663
Minority interest in income of consolidated
subsidiaries (3,314) (3,698)
Equity in losses of investees (4,571) (1,021)
-------- --------
$ 36,247 $ 6,750
======== ========
NOTE 4 - INVESTMENTS IN OTHER ENTITIES
Globalstar L.P.
Through partnership interests held in certain intermediate limited
partnerships, the Company owns a 6.4% partnership interest in Globalstar L.P.
("Globalstar"), a limited partnership formed to develop, own and operate the
Globalstar low-Earth-orbit ("LEO") satellite system utilizing CDMA technology
("the Globalstar System").
At December 26 and September 26, 1999, $405 million and $349 million in
interest bearing financed amounts and $189 million and $171 million in accounts
receivable, including $54 million and $59 million in unbilled receivables, were
outstanding from Globalstar, respectively. The Company is finalizing
negotiations with Globalstar which will result in the financing of current and
future contract payments. Such financing is expected to be interest bearing and
paid by Globalstar in quarterly installments beginning January 15, 2001 through
August 15, 2003. As a result of these negotiations, the Company changed its
estimate of amounts collectible under the Globalstar development contract and
recorded previously unrecognized revenue of $9 million and interest income of $9
million during the first quarter of fiscal 2000. Interest bearing financed
amounts include $296 million at December 26, 1999 and $240 million at September
26, 1999 in trade receivables which were reclassified to non-current finance
receivables in anticipation of such financing. At December 26, 1999, $104
million in future contract payments are expected to be eligible for financing
under the anticipated financing agreement with Globalstar.
Korea Telecom Freetel
On November 24, 1999, the Company invested approximately $196 million in
Korea Telecom Freetel ("KT Freetel") and received 2,565,000 common shares,
representing a 1.9% interest in KT Freetel, and a zero coupon bond with warrants
to purchase approximately 1,851,000 additional shares. The exercise price of
the warrants is expected to be paid by tendering the bond as payment in full.
KT Freetel has agreed to commercially deploy high data rate ("HDR") technology,
subject to the successful completion of technical and marketing trials. If KT
Freetel meets certain obligations related to HDR technology, QUALCOMM is
required to
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exercise the warrants. If KT Freetel does not meet such obligations, QUALCOMM
will have the right to redeem the bond at a premium equal to 10% per annum.
Other Investments
The Company has entered into strategic alliances with domestic and
international emerging wireless telecommunications operating companies. These
alliances often involve investment by QUALCOMM of capital in these operating
companies. Funding commitments related to these investments total $103 million
at December 26, 1999, which the Company expects to fund over three years. Such
commitments are subject to the operating companies meeting certain conditions;
actual equity funding may be in lesser amounts.
NOTE 5 - BANK LINES OF CREDIT
The Company has an unsecured credit facility under which banks are committed
to make up to $400 million in revolving loans to the Company. The credit
facility expires in March 2001. The facility may be extended on an annual basis
upon maturity. The Company is currently obligated to pay commitment fees equal
to 0.175% per annum on the unused amount of the credit facility. The credit
facility includes certain restrictive financial and operating covenants. At
December 26, 1999, there were no amounts or letters of credit issued or
outstanding under the credit facility.
Under terms of two identical revolving credit agreements, negotiated in 1996
and expiring in July 2000, QUALCOMM Personal Electronics ("QPE"), a 51% owned
consolidated subsidiary of the Company, may borrow a total of $150 million.
Borrowings under the facilities, which are drawn in equal amounts, totaled $124
million and $112 million at December 26 and September 26, 1999, respectively.
The interest rate under the facilities is at the applicable LIBOR rate plus
0.5%. The credit facilities include covenants, which, among other things,
require QPE to maintain a minimum tangible net worth.
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 charges to operations of $15 million during the second quarter
of fiscal 1999, including $10 million in employee termination costs, $3 million
in asset impairments and $1 million in estimated net losses on subleases or
lease cancellation penalties. The following table (in thousands) presents the
roll forward from the initial provision during the second quarter of fiscal 1999
to September 26, 1999, and from September 26, 1999 to December 26, 1999:
SEPTEMBER 26, DECEMBER 26,
Provisions Deductions 1999 Deductions 1999
------------- ---------- -------- ---------- ------
Employee termination costs $ 10,162 $(10,162) $ - $ - $ -
Facility exit costs 4,397 (3,866) 531 (414) 117
-------- -------- -------- -------- ------
Total $ 14,559 $(14,028) $ 531 $ (414) $ 117
======== ======== ======== ======== ======
NOTE 7 - DISPOSITION OF ASSETS AND OTHER CHARGES
On December 22, 1999, QUALCOMM announced an agreement with Kyocera
Corporation ("Kyocera") which will result in Kyocera acquiring QUALCOMM's
terrestrial-based wireless CDMA consumer phone business, including its phone
inventory, manufacturing equipment and customer commitments. Under the Kyocera
agreement, Kyocera has agreed to purchase at least a majority of its CDMA
chipset requirements from QUALCOMM for a period of five years. Kyocera will
continue its existing royalty-bearing CDMA license agreement with QUALCOMM. The
transaction, which is subject to regulatory approval and other customary closing
conditions, is expected to close by the end of February 2000.
As part of the Kyocera agreement, QUALCOMM will form a new subsidiary with a
substantial number of employees from QUALCOMM Consumer Products to provide
services to Kyocera on a cost-plus basis to support Kyocera's phone business for
up to three years. Selected employees of QPE will be transferred to Kyocera.
Upon the close of the transaction, it is anticipated that QPE manufacturing
assets will be
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liquidated. QUALCOMM recorded $27 million in charges in the first quarter of
fiscal 2000 to reflect the estimated difference between the carrying value of
the net assets and the consideration to be received from Kyocera, less costs to
sell. The Company estimates that additional charges in the second quarter of
fiscal 2000 relating to the disposition of the terrestrial-based wireless CDMA
phone business could total approximately $50 million. The additional charges
will primarily relate to Kyocera's right under the agreement to exclude certain
properties and equipment and employee termination costs.
In May 1999, the Company sold certain of its assets related to its
terrestrial CDMA wireless infrastructure business to Telefonaktiebolaget LM
Ericsson ("Ericsson") and entered into various license and settlement agreements
with Ericsson. The Company has received notice of Ericsson's intention to
dispute the purchase price (Note 9). Pursuant to the Company's agreement with
Ericsson, the Company will extend financing for possible future sales by
Ericsson of infrastructure equipment and related services to specific customers
in certain geographic areas, including Brazil, Chile, Mexico, and Russia or in
other areas selected by Ericsson (Note 2).
NOTE 8 - INCOME TAXES
The Company's income tax provisions for the first quarters of fiscal 2000 and
1999 reflect adjustments for the retroactive reinstatements of the R&D tax
credit. Excluding the adjustments, the Company currently estimates its annual
effective income tax rate to be approximately 38% for fiscal 2000, compared to
35% for fiscal 1999. NOTE 9 - COMMITMENTS AND CONTINGENCIES Litigation
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 four
patents. Three of the patents had already been alleged in previous litigation
between the parties. On August 18, 1997, Motorola filed another complaint
against the Company alleging infringement by the Company of seven additional
patents. All of the Motorola cases have been consolidated for pretrial
proceedings. On August 6, 1999, the court granted the Company's motion for
summary judgment that the Q Phone does not infringe two of Motorola's design
patents. On October 5, 1999, the U.S. District Court in San Diego granted the
Company's motions for summary judgment that the Q Phone does not infringe the
last two Motorola design patents remaining in the case. As a consequence of
these rulings and Motorola's decision to drop one utility patent from the case,
there are no design patents and a total of ten utility patents remaining in the
case. The cases have been set for a final pretrial conference in April 2000.
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 the claims are without
merit and will continue to vigorously defend the action.
On July 20, 1999, the Company filed a lawsuit against Motorola seeking a
judicial determination that the Company has the right to terminate all licenses
granted to Motorola under a 1990 Patent License Agreement, while retaining all
licenses granted by Motorola to the Company under the same agreement. The
Company's complaint was filed in the U.S. District Court for the Southern
District of California where the earlier actions between the Company and
Motorola described above have been pending for more than two years. The
complaint alleges that Motorola has committed breaches of the Patent License
Agreement that include pursuing a lawsuit against the Company for infringement
of patents that are in fact licensed to the Company under the agreement and a
failure to grant certain sublicenses to the Company in accordance with the terms
of the agreement. The Company's new
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filing also seeks a ruling that upon termination of the Patent License
Agreement, the patents formerly licensed to Motorola would be infringed by CDMA
handsets, integrated circuits and network infrastructure equipment made and sold
by Motorola. On August 5, 1999, the Company amended its complaint to allege that
Motorola's CDMA wireless phones infringe three patents of the Company. The
Company's new claims seek damages and an injunction against Motorola's sale of
infringing phones. Motorola has filed counterclaims alleging breach of the
Patent License Agreement and a DS-CDMA Technology License Agreement also signed
in 1990. On January 14, 2000, the court entered an order staying the 1999 case
pending resolution of the consolidated 1997 cases.
On or about June 5, 1997, Elisra Electronic Systems Ltd. ("Elisra") submitted
to the International Chamber of Commerce a Request for Arbitration of a dispute
with the Company based upon a Development and Supply Agreement ("DSA") entered
into between the parties effective November 15, 1995, alleging that the Company
wrongfully terminated the DSA, seeking monetary damages. The Company thereafter
submitted a Reply and Counterclaim, alleging that Elisra breached the DSA,
seeking monetary damages. Subsequently, the parties stipulated that the dispute
be heard before an arbitrator under the jurisdiction of the American Arbitration
Association, and to bifurcate the resolution of liability issues from damage
issues. To date, the arbitrator has heard testimony regarding the liability or
non-liability of the parties, and a briefing schedule has been set. Although
there can be no assurance that the resolution of these claims will not have a
material adverse effect on the Company's results of operations, liquidity or
financial position, the Company believes that the claims made by Elisra are
without merit and will vigorously defend against the claims.
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 arising
out of a Joint Development Agreement ("JDA") dated April 30, 1992, 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 monetary damages and
injunctive relief against ETRI. In accordance with the JDA, the arbitration will
take place in San Diego. The arbitration hearing is scheduled to commence July
5, 2000. Although there can be no assurance that the resolution of these claims
will not have a material adverse effect on the Company's results of operations,
liquidity or financial position, the Company believes that the claims are
without merit and will vigorously defend the action.
On May 6, 1999, Thomas Sprague, a former employee of the Company, filed a
putative class action against the Company, ostensibly on behalf of himself and
those of the Company's former employees who were offered employment with
Ericsson in conjunction with the sale to Ericsson of certain of the Company's
infrastructure division assets and liabilities and who elected not to
participate in a Retention Bonus Plan being offered to such former 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 sought to include former 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. Of the 1,053 transitioning former employees who had unvested stock
options, 1,016 elected to participate 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, and
includes a written release of claims against the Company. On July 30, 1999,
plaintiffs filed a First Amended Complaint incorporating the allegations set
forth in the original complaint, adding two new causes of action and expanding
the putative class to also include those former employees who chose to
participate in the Bonus Retention Plan. In October 1999, the court sustained
the Company's demurrer to the plaintiffs' cause of action for breach of
fiduciary duty. Counsel for the putative class filed a Second Amended Complaint,
including substantially the same allegations as the First Amended Complaint, on
November 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 the claims
are without merit and will vigorously defend the action.
On June 29, 1999, GTE Wireless, Incorporated ("GTE") filed an action in the
U.S. District Court for the Eastern District of Virginia asserting that wireless
telephones sold by the Company infringe a single patent allegedly owned by GTE.
On September 15, 1999, the court granted the company's motion to transfer the
action to the U.S. District Court for the Southern District of California.
Although there can be no assurance that an
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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 the action is without merit and will vigorously defend the
action.
QUALCOMM has received notice from Ericsson that Ericsson intends to dispute
the determination of the purchase price under the Agreement, pursuant to which
Ericsson acquired certain assets related to the Company's terrestrial wireless
infrastructure business in May 1999. QUALCOMM has also received notice from
Ericsson that Ericsson intends to assert claims for indemnification under the
Agreement. QUALCOMM and Ericsson are having on-going discussions aimed at
potentially resolving these claims. In the event the parties are unable to
resolve these claims, they are subject to dispute resolution procedures set
forth in the Agreement. Although there can be no assurance that the resolution
of these claims will not have a material adverse effect on the Company's results
of operations, liquidity or financial position, the Company believes the claims
are without merit and will vigorously defend them.
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 to support a guarantee of up to
$22.5 million of Globalstar (Note 4) 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 December 26, 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
$21 million of letters of credit and $103 million of other financial guarantees
outstanding as of December 26, 1999, none of which are collateralized.
Leap Wireless Commitments
QUALCOMM has a funding commitment to Leap Wireless in the form of a $265
million secured credit facility, which consists of two sub-facilities. The first
sub-facility enables Leap Wireless to borrow up to $35 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 $230 million from QUALCOMM, solely to use as investment capital to
make certain identified portfolio investments. Amounts borrowed under the credit
facility will be due and payable on September 23, 2006. QUALCOMM has 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 bear interest at a
variable rate equal to LIBOR plus 5.25% per annum. Interest is payable quarterly
beginning September 30, 2001; prior to such time, accrued interest shall be
added to the principal amount outstanding. At December 26, 1999, the remaining
commitment under this facility is $90 million.
NOTE 10. SEGMENT INFORMATION
The Company is organized on the basis of products and services. Reportable
segments are as follows: QUALCOMM CDMA Technologies ("QCT") designs and supplies
chipsets and software solutions to handset and infrastructure manufacturers;
QUALCOMM Technology Licensing ("QTL") provides licenses to third parties related
to the design, manufacture, and sale of products using the Company's
technologies; QUALCOMM Wireless Systems ("QWS") designs, manufactures, markets,
and deploys infrastructure and handset products for use in terrestrial and
non-terrestrial CDMA wireless and satellite networks and provides
satellite-based two-way data messaging, position reporting equipment and
services to transportation companies; and QUALCOMM Consumer Products ("QCP")
designs, manufactures, and markets wireless handsets and accessories using CDMA
technology for use in mobile and fixed wireless networks (Note 7).
The table below presents revenues and earnings before taxes ("EBT") for
reported segments for the three months ended December 26, 1999 and December 27,
1998 (in thousands):
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QCT QTL QWS QCP RECONCILING ITEMS TOTAL
---------- ---------- ---------- ---------- ----------------- ----------
DECEMBER 26, 1999
Revenues $ 352,395 $ 177,545 $ 214,964 $ 442,294 $ (67,125) $1,120,073
EBT 127,690 162,590 66,147 (17,546) (56,431) 282,450
DECEMBER 27, 1998
Revenues $ 193,315 $ 74,066 $ 300,081 $ 382,602 $ (8,841) $ 941,223
EBT 63,924 62,296 (14,875) (130) (39,631) 71,584
Reconciling items in the above table are comprised as follows (in thousands):
THREE MONTHS ENDED
--------------------------
December 26, December 27,
1999 1998
------------ ------------
Revenues
Elimination of intersegment revenue $(101,034) $ (99,788)
Other products 33,909 90,947
--------- ---------
Reconciling items $ (67,125) $ (8,841)
========= =========
EARNINGS BEFORE INCOME TAXES
(Unallocated) allocated corporate expenses $ (27,570) $ 4,551
Unallocated investment income, net 26,031 5,602
Distributions on Trust Convertible
Preferred Securities of subsidiary trust (11,045) (9,799)
Intracompany profit (31,905) (34,786)
Other (11,942) (5,199)
--------- ---------
Reconciling items $ (56,431) $ (39,631)
========= =========
Revenues from external customers and intersegment revenues are as follows (in
thousands):
QCT QTL QWS QCP
-------- -------- -------- --------
DECEMBER 26, 1999
Revenues from external customers $285,975 $143,861 $214,964 $441,364
Intersegment revenues 66,420 33,684 - 930
DECEMBER 27, 1998
Revenues from external customers $139,766 $ 50,221 $290,754 $369,535
Intersegment revenues 53,549 23,845 9,327 13,067
NOTE 11 - SUBSEQUENT EVENT
On January 6, 2000, the Company announced its intention to redeem its
remaining 5,397,908 outstanding Trust Convertible Preferred Securities as of
March 6, 2000. The redemption price is $51 per share plus accrued interest. The
holders of the Trust Convertible Preferred Securities have the option to convert
each such security into 5.5056 shares of the Company's common stock and 0.17205
shares of the common stock of Leap Wireless. The Company expects substantially
all holders to convert the Trust Convertible Preferred Securities rather than
allow redemption.
On January 26, 2000, QUALCOMM announced an agreement to acquire SnapTrack,
Inc. ("SnapTrack"), a company which designs and develops wireless position
location technology. Under the agreement, SnapTrack will become a wholly owned
subsidiary of QUALCOMM. QUALCOMM will pay approximately $1 billion in stock for
the
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acquisition of SnapTrack. The final purchase price may differ based on the
average trading price of QUALCOMM stock used to settle the transaction.
Completion of the agreement, which is subject to regulatory approval and other
customary closing conditions, is expected to occur in March, 2000.
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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 26, 1999
contained in the Company's 1999 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's future results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not specifically limited to: the ability to develop and
introduce cost effective new products in a timely manner; the risk that the rate
of growth in the CDMA subscriber population will decrease; risks associated with
the scale-up, acceptance and operations of CDMA systems, including HDR
technology; risks associated with component shortages and inventory balancing by
customers; risks associated with strategic opportunities or acquisitions,
divestitures and investments the Company may pursue; risks related to the
ability to sustain or improve operational efficiency and profitability; risks
relating to the success of Globalstar; developments in current or future
litigation; the Company's ability to effectively manage growth and the intense
competition in the wireless communications industry; and risks associated with
the timing and receipt of license fees and royalties; risk associated with
international business activities; and risks related to customer receivables, as
well as the other risks detailed in this Form 10-Q and in the Company's 1999
Annual Report on Form 10-K. The Company's consolidated financial data includes
QPE and certain other consolidated subsidiaries of the Company.
OVERVIEW
QUALCOMM is a leading provider of digital wireless communications products,
technologies and services based on the Company's technology. The Company
designs, develops, and markets CDMA chipsets and system software and designs,
develops, manufactures, and markets CDMA subscriber products. The Company also
licenses and receives royalty payments on its CDMA technology from major
domestic and international telecommunications equipment suppliers. In addition,
the Company designs, manufactures and distributes products and provides services
for its OmniTRACS system. The Company also has contracts with Globalstar to
design, develop and manufacture subscriber products and ground communications
systems utilizing CDMA technology and to provide contract development services.
The Company's CDMA technology has been adopted as an industry standard for
digital cellular, Personal Communications Services ("PCS") and other wireless
services. Wireless networks based on the Company's current implementation of
CDMA technology, referred to as cdmaOne, have been commercially deployed or are
under development in more than 35 countries around the world, with 27 countries
already in commercial deployments. In December 1999, the CDMA Development Group
("CDG") reported that CDMA carriers now have over 41 million commercial
subscribers worldwide as of September 1999.
QUALCOMM continues to invest in research and development projects focused on
improving current CDMA applications and products, developing and commercializing
next generation CDMA technology and products, interfacing with other digital
cellular standards, and developing and commercializing new leading edge CDMA HDR
technology, products and services. The Company believes HDR will provide a high
speed, cost-effective, fixed and mobile alternative for Internet access,
competing with digital subscriber loop, cable, and satellite networks. HDR is
designed to enable existing cdmaOne and future CDMA third-generation service
providers to obtain higher capacities and superior performance by optimizing
voice and data spectrum separately, while serving both applications from the
same access point.
QUALCOMM has entered into a number of development and manufacturing contracts
involving the Globalstar System. QUALCOMM's development agreement provides for
the design and development of the ground communications stations, known as
gateways, and user terminals of the Globalstar System. Since telephone systems
using LEO satellites are a new commercial technology, demand for Globalstar's
service is uncertain. If Globalstar fails to generate sufficient cash flow from
operations through the marketing efforts of its service providers, it will be
unable to fund its operating costs or service its debt.
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The value of QUALCOMM's investment in and future business with Globalstar, as
well as QUALCOMM's ability to collect outstanding receivables from Globalstar,
depends on the success of Globalstar and the Globalstar System. See "Notes to
Condensed Consolidated Financial Statements - Note 4 Investments in Other
Entities."
From time to time the Company considers strategic transactions and
alternatives with the goal of maximizing stockholder value. For example, in
September 1998, the Company completed the spin-off of Leap Wireless and in May
1999, the Company completed the sale of its terrestrial CDMA wireless
infrastructure business to Ericsson. In December 1999, the Company announced an
agreement with Kyocera relating to the sale of its terrestrial-based phone
business and in January 2000, the Company announced that it will acquire
SnapTrack. The Company will continue to evaluate other potential strategic
transactions and alternatives which management believes may enhance stockholder
value. These additional potential transactions may include a variety of
different business arrangements, including acquisitions, spin-offs, strategic
partnerships, joint ventures, restructurings, divestitures, business
combinations and investments. There can be no assurance that any such
transactions will be consummated on favorable terms or at all, will in fact
enhance stockholder value or will not adversely affect the Company's business or
the trading price of our stock. Any such transaction may require the Company to
incur non-recurring or other charges and may pose significant integration
challenges and/or management and business disruptions, any of which could
materially and adversely affect the Company's business and financial results.
RECENT DEVELOPMENTS
On November 24, 1999, the Company invested approximately $196 million in KT
Freetel. See "Notes to Condensed Consolidated Financial Statements - Note 4
Investments in Other Entities."
In December 1999, the Company effected a four-for-one stock split of its
common stock. See "Item 4 Submission of Matters to a Vote of Security Holders."
On December 22, 1999, QUALCOMM announced an agreement with Kyocera that will
result in Kyocera's acquiring QUALCOMM's terrestrial-based wireless CDMA
consumer phone business. See "Notes to Condensed Consolidated Financial
Statements - Note 7 Disposition of Assets and Other Charges."
On January 26, 2000, QUALCOMM announced that it will acquire SnapTrack. See
"Notes to Condensed Consolidated Financial Statements - Note 11 Subsequent
Event."
FIRST QUARTER OF FISCAL 2000 COMPARED TO FIRST QUARTER OF FISCAL 1999
Total revenues for the first quarter of fiscal 2000 were $1,120 million
compared to $941 million for the first quarter of fiscal 1999. Revenue growth
for the first quarter of fiscal 2000 was primarily due to increased sales of
CDMA chipsets and phone products, and significant growth in royalties, offset by
the decrease in terrestrial CDMA wireless infrastructure product revenue as a
result of the sale of this business in May 1999. Sales to one South Korean
customer, Samsung Electronics Company, by QCT and QTL segments comprised 11% of
total revenues in first quarter of fiscal 2000.
The Company anticipates that shipments of its phone chips in the second
quarter of fiscal 2000 may be lower than the first quarter of fiscal 2000 due to
seasonal factors, inventory balancing by customers due to continued shortages of
other phone components, and customers transitioning to next generation chips. In
addition, the Company anticipates that shipments of its handsets in the second
quarter of fiscal 2000 may be lower than the first quarter of fiscal 2000 due to
the sale of this business in the quarter, as well as seasonal factors.
Cost of revenues for the first quarter of fiscal 2000 was $649 million
compared to $642 million for the first quarter of fiscal 1999. The decrease in
cost of revenues as a percentage of revenues to 58% in the first quarter of
fiscal 2000 from 68% in the first quarter of fiscal 1999 primarily reflects an
increase in royalty revenue, a decrease in terrestrial CDMA wireless
infrastructure cost as a result of the sale of this business in May 1999, and
improved operational efficiencies.
For the first quarter of fiscal 2000, research and development expenses were
$83 million or 7% of revenues, compared to $100 million or 11% of revenues for
the first quarter of fiscal 1999. The dollar and percent decreases were due to a
decrease in terrestrial CDMA wireless infrastructure product research and
development as a result of the sale of this business in May 1999, offset by
increased chipset product initiatives and development of HDR products.
For the first quarter of fiscal 2000, selling, general and administrative
expenses were $102 million or 9% of revenues, compared to $121 million or 13% of
revenues for the first quarter of fiscal 1999. The dollar and percent decreases
from the first quarter of fiscal 1999 were due to a decrease in marketing
expense for terrestrial CDMA wireless infrastructure products as a result of the
sale of this business, offset by continued growth in personnel and associated
overhead expenses necessary to support the overall growth in the Company's
operations and increased patent and information technology expenses.
Interest expense was $3 million for each of the first quarters of fiscal 2000
and 1999.
Investment income, net was $36 million in the first quarter of fiscal 2000
compared to $7 million for the first quarter of fiscal 1999. The increase was
largely due to the $1 billion in cash proceeds from a stock offering in July
1999, interest from finance receivables, higher interest rates, and a change in
the estimate of amounts collectible
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under the Globalstar development contract. See "Notes to Condensed Consolidated
Financial Statements - Note 4 Investment in Other Entities."
Distributions on Trust Convertible Preferred Securities of $11 million for
the first quarter of fiscal 2000 compared to $10 million for the first quarter
of fiscal 1999 relate to the 5 3/4% Trust Convertible Preferred Securities
outstanding. See "Item 2 Management's Discussion and Analysis of Results of
Operations and Financial Condition - Liquidity and Capital Resources."
Income tax expense was $105 million for the first quarter of fiscal 2000
compared to $23 million for the first quarter of fiscal 1999, resulting
primarily from higher pretax earnings and a higher effective tax rate for the
first quarter of fiscal 2000 as compared to the first quarter of fiscal 1999.
The Company's income tax provisions for the first quarters of fiscal 2000 and
1999 reflect adjustments for the retroactive reinstatements of the R&D tax
credit. Excluding the adjustments, the Company currently estimates its annual
effective income tax rate to be approximately 38% for fiscal 2000, compared to
35% for fiscal 1999. The higher tax rate is the result of higher earnings
relative to the growth of R&D tax credits.
SEGMENT RESULTS FOR THE FIRST QUARTER OF FISCAL 2000 COMPARED TO FIRST QUARTER
OF FISCAL 1999
The following should be read in conjunction with the first quarter financial
results of fiscal 2000 for each reporting segment. See "Notes to Condensed
Consolidated Financial Statements - Note 10 Segment Information."
CDMA Technologies Segment ("QCT")
The QCT segment is a major supplier of chipsets and software solutions to
handset and infrastructure manufacturers. QCT helps manufacturers produce
smaller and more affordable products by bringing new chipsets to the market with
more functionality in a substantially smaller package size. QCT's CDMA ASIC
products include Mobile Station Modem ("MSM") chips for telephone handsets, Cell
Site Modem ("CSM") chips for infrastructure base stations and a number of
related chips that make digital voice transmission and processing possible.
QCT segment revenues for the first quarter of fiscal 2000 were $352 million
compared to $193 million for the first quarter of fiscal 1999. Earnings before
taxes for the first quarter of fiscal 2000 were $128 million compared to $64
million for the first quarter of fiscal 1999. Revenue and earnings before taxes
growth was primarily due to increased customer demand for CDMA chipsets in the
United States, Korea, and Japan and to new product releases. Over 14 million MSM
chipsets were sold during the first quarter of fiscal 2000, contributing to the
significant growth in both the revenue and earnings before tax. The Company
anticipates that shipments of its phone chips in the second quarter of fiscal
2000 may be lower than the first quarter of fiscal 2000 due to seasonal factors,
inventory balancing by customers due to continued shortages of other phone
components, and customers transitioning to next generation chips.
Technology Licensing Segment ("QTL")
QTL provides licenses to third parties related to the design, manufacture and
sale of products using the Company's technologies.
QTL segment revenues for the first quarter of fiscal 2000 were $178 million
compared to $74 million for the first quarter of fiscal 1999. Earnings before
taxes for the first quarter of fiscal 2000 were $163 million compared to $62
million for the first quarter of fiscal 1999. Revenue and earnings before taxes
growth was primarily due to royalties paid from licensees resulting from an
increase in worldwide demand for CDMA products.
Wireless Systems Segment ("QWS")
QWS designs, manufactures, markets and deploys infrastructure and handset
products for use in terrestrial and non-terrestrial CDMA wireless and satellite
networks and provides satellite-based two-way data messaging, position reporting
equipment, and services to transportation companies.
QWS segment revenues for the first quarter of fiscal 2000 were $215 million
compared to $300 million for the first quarter of fiscal 1999. Earnings before
taxes for the first quarter of fiscal 2000 were $66 million compared to $15
million loss for the first quarter of fiscal 1999. Revenues decreased while
earnings before taxes increased due to the sale of certain assets of the
Company's terrestrial CDMA wireless infrastructure business in May 1999 to
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Ericsson and the completion of production of Globalstar gateways, offset by
OmniTRACS domestic unit demand from existing customers and increase in messaging
revenue due to an increase in customer base.
Consumer Products Segment ("QCP")
QCP designs, manufactures and markets wireless handsets and accessories using
CDMA technology for use in mobile and fixed wireless networks.
QCP segment revenues for the first quarter of fiscal 2000 were $442 million
compared to $383 million for the first quarter of fiscal 1999. For the first
quarter of fiscal 2000, QCP recorded a loss of $18 million compared to breaking
even for the first quarter of fiscal 1999. Revenue growth was primarily due to
an increase in demand for CDMA handsets and new product releases. Losses were a
result of declining average sales prices per handset, which were not fully
offset by decreases in related manufacturing cost. The Company anticipates that
shipments of its handsets in the second quarter of fiscal 2000 may be lower than
the first quarter of fiscal 2000 due to the sale of this business in the
quarter, as well as seasonal factors.
QUALCOMM has entered into an agreement with Kyocera that will result in
Kyocera's acquiring QUALCOMM's terrestrial-based wireless CDMA consumer phone
business. See "Notes to Condensed Consolidated Financial Statements - Note 7
Disposition of Assets and Other Charges."
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that its cash and cash equivalents and investments
balances of $1,556 million at December 26, 1999, including interest earned
thereon, will be used to fund its working and other capital requirements,
including investments in other entities and other assets to support the growth
of its business, financing for customers of CDMA infrastructure products in
accordance with the agreement with Ericsson, and facilities related to the
expansion of the Company's operations. In the event additional needs for cash
arise, the Company may raise additional funds from a combination of sources
including potential debt and equity issuance. There can, however, be no
assurance that additional financing will be available on acceptable terms or at
all. In addition, the Company's credit facility places 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 an unsecured credit facility under which banks are committed
to make up to $400 million in revolving loans to the Company. The facility
expires in March 2001 and may be extended on an annual basis upon maturity. The
Company is currently obligated to pay commitment fees equal to 0.175% per annum
on the unused amount of the facility. The facility includes certain restrictive
financial and operating covenants. At December 26, 1999, there were no amounts
or letters of credit issued or outstanding under the facility.
In the first quarter of fiscal 2000, $81 million in cash was provided by
operating activities, compared to $138 million used by operating activities in
the first quarter of fiscal 1999. Cash provided by operating activities in the
first quarter of fiscal 2000 includes $350 million of net cash flow provided by
operations offset by $269 million of net working capital requirements. The
improved cash flow from operations primarily reflects the increase in net income
resulting from increased revenues and gross margins. Net working capital
requirements of $269 million primarily reflect increases in accounts receivable,
finance receivables, and other current assets. The increases in accounts and
finance receivables in the first quarter of fiscal 2000 result from the
continued growth in products and component sales and the deferral of contract
payments under the development agreement with Globalstar.
Investments in capital expenditures and other entities and issuance of notes
receivable totaled $304 million in the first quarter of fiscal 2000, compared to
$95 million in the first quarter of fiscal 1999. Significant components in first
quarter of fiscal 2000 consisted of the purchase of $38 million of capital
assets, the investment of $121 million in entities in which the Company holds
less than a 50% interest, and the issuance of $146 million in notes receivable.
The Company expects to continue making significant investments in capital
assets, including new facilities and building improvements, and in other
entities throughout fiscal 2000.
In the first quarter of fiscal 2000, the Company's financing activities
provided $42 million, including $31 million from the issuance of common stock
under the Company's stock option and employee stock purchase plans and $12
million in net borrowing under bank lines of credit. In the first quarter of
fiscal 1999, the Company's financing activities provided net cash of $144
million, including $8 million from the issuance of common stock under the
Company's stock option and employee stock purchase plans and $137 million in net
borrowing under bank lines of credit.
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The Company is finalizing negotiations with Globalstar which will result in
the financing of current and future contract payments. See "Notes to Condensed
Consolidated Financial Statements - Note 4 Investments in Other Entities."
On October 29, 1999, the Company and Pegaso Telecomunicaciones ("Pegaso")
executed a commitment letter, subject to Pegaso shareholder approval, in which
the Company agreed to underwrite up to $500 million of debt financing to Pegaso
and its wholly-owned subsidiary, Pegaso Comunicaciones y Sistemas, a CDMA
wireless operating company in Mexico. The debt financing would consist of a $250
million senior secured facility and a $250 million unsecured facility. The
Company currently has guaranteed a $100 million facility that would be
refinanced by the $250 million senior secured facility. The debt facilities are
expected to have final maturities of seven to eight years.
During the first quarter of fiscal 2000, 7,793,182 Trust Convertible
Preferred Securities were converted into 42,906,040 shares of common stock. The
conversions resulted in a $390 million reduction in the recorded obligation to
Trust Convertible Preferred Securities holders. On January 6, 2000, the Company
announced its intention to redeem its remaining 5,397,908 outstanding Trust
Convertible Preferred Securities as of March 6, 2000. The redemption price is
$51 per share plus accrued interest. The holders of the Trust Convertible
Preferred Securities have the option to convert each such security into 5.5056
shares of the Company's common stock and 0.17205 shares of the common stock of
Leap Wireless. The Company expects substantially all holders to convert the
Trust Convertible Preferred Securities rather than allow redemption.
Information regarding the Company's financial commitments at December 26,
1999 is provided in the Notes to the Condensed Consolidated Financial
Statements. See "Notes to Condensed Consolidated Financial Statements - Note 2
Composition of Certain Balance Sheet Captions and Note 9 Commitments and
Contingencies."
YEAR 2000
The Company has completed its Year 2000 ("Y2K") Project ("Project") as
scheduled, including addressing leap year calendar date calculation concerns.
The possibility of significant interruptions of normal operations has been
reduced. As of January 27, 2000, the Company's products, computing, and
communications infrastructure systems have operated without Y2K related problems
and appear to be Y2K ready. The Company is not aware that any of its major
customers or third-party suppliers have experienced significant Y2K related
problems.
The Company believes all its critical systems are Y2K ready. However, there
is no guarantee that the Company has discovered all possible failure points.
Specific factors contributing to this uncertainty include failure to identify
all systems, non-ready third parties whose systems and operations impact the
Company, and other similar uncertainties.
Contingency plans are complete and will be implemented if required. Should a
significant problem occur, the Company would revert to standard manual
contingency procedures to continue operation until the problem is corrected.
To date, the Company has spent an estimated $20 million on this Project. The
funding for this Project comes from operations and working capital. 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 has been delayed due to the implementation of the Y2K Project.
The Company identified and fixed several Y2K system bugs. In addition, the
Company received other benefits from the Y2K Project, including acceleration of
the development of alternative sourcing for our supply base risk mitigation
plans which are valid and beneficial to long term supply assurance, refinement
of the Company's Disaster Recovery Plan, improvement of diagnostic procedures
for core information technology services and asset management, and establishment
of a more consistent computer desktop environment which should ultimately reduce
support costs.
FUTURE ACCOUNTING REQUIREMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging Activities."
In May 1999, the FASB voted to delay the effective date of FAS 133 by one year.
The Company will be required to adopt FAS 133 for fiscal year 2001. This
statement establishes a new model for accounting for derivatives and hedging
activities. Under FAS 133, all
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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
Discussion and analysis of the Company's market risks is described in the
Company's 1999 Form 10-K. At December 26, 1999, there have been no other
material changes to the market risks described at September 26, 1999.
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
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.
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
On November 2, 1999, the Company's Board of Directors approved, subject to
stockholders' approval, a four-for-one stock split of the Company's common stock
and an increase in the number of authorized shares of common stock to three
billion shares. The Board of Directors also authorized a special meeting of
stockholders for the purposes of approving the stock split and the proposed
share increase. The special stockholders meeting was held on December 20, 1999.
Stockholders approved the stock split and the increase in the authorized number
of shares. The stock was distributed on December 30, 1999 to stockholders of
record on December 20, 1999.
The proposal to approve an amendment to the Company's Restated Certificate of
Incorporation to increase the authorized number of shares from 300 million to
three billion received the following votes:
For: 121,573,417 73.69%
Against: 22,601,301 13.69%
Abstain: 983,472 0.60%
Broker Non-votes: 0
The foregoing proposal was approved and accordingly ratified.
The proposal to approve an amendment to the Company's Restated Certificate of
Incorporation to effect a four-for-one stock split received the following votes:
For: 141,553,720 85.80%
Against: 124,730 0.08%
Abstain: 526,807 0.32%
Broker Non-votes: 2,952,933 1.78%
The foregoing proposal was approved and accordingly ratified.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.2 Asset Purchase Agreement, among QUALCOMM Incorporated, KII
Acquisition Company and Kyocera International, Inc., dated as of
December 22, 1999. (1) (2)
3.2 Certificate of Amendment of Restated Certificate of Incorporation.
(3)
10.21 Executive Retirement Matching Contribution Plan, as amended.
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27.0 Financial Data Schedule.
(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.
(3) Previously filed as an exhibit to QUALCOMM's Current Report on Form 8-K
dated December 20, 1999 and incorporated herein by reference.
(b) Reports on Form 8-K
Report on Form 8-K dated December 20, 1999, containing information relating
to the approval by QUALCOMM's stockholders of an amendment to QUALCOMM's
Restated Certificate of Incorporation to effect a four-for-one stock split
of the Common Stock and to increase the number of authorized shares of
Common Stock.
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