1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-Q
---------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 29, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________.
COMMISSION FILE NUMBER 0-19528
QUALCOMM INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3685934
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO)
6455 LUSK BLVD., SAN DIEGO, CALIFORNIA 92121-2779
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(619) 587-1121
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORTED)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past ninety days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common Stock, $0.0001 per share par value, 67,941,929 shares as of
August 4, 1997.
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUALCOMM Incorporated
/s/ ANTHONY S. THORNLEY
------------------------------
Anthony S. Thornley
Senior Vice President, Finance
& Chief Financial Officer
Dated: August 6, 1997
2
3
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 7-12
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 13-21
PART II. OTHER INFORMATION 22
Item 6. Exhibits and Reports on Form 8-K
Exhibit 11.1 -- Computation of Earnings Per Share
3
4
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUALCOMM INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
ASSETS
JUNE 29, SEPTEMBER 29,
1997 1996
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 217,177 $ 110,143
Investments (Note 4) 464,478 236,129
Accounts receivable, net 320,614 217,433
Finance receivables (Note 3) 114,820 --
Inventories 228,724 171,511
Other current assets 39,148 15,974
------------- -------------
Total current assets 1,384,961 751,190
PROPERTY, PLANT AND EQUIPMENT, NET 380,902 352,699
INVESTMENTS 86,852 8,009
OTHER ASSETS (NOTE 5) 197,576 73,432
------------- -------------
TOTAL ASSETS $ 2,050,291 $ 1,185,330
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 301,419 $ 229,799
Unearned revenue 25,819 13,226
Bank lines of credit 71,200 80,700
Current portion of long-term debt 3,164 2,234
------------- -------------
Total current liabilities 401,602 325,959
LONG-TERM DEBT 8,492 10,908
OTHER LIABILITIES 15,343 3,550
------------- -------------
Total liabilities 425,437 340,417
------------- -------------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE TRUST PREFERRED SECURITIES
OF A SUBSIDIARY TRUST HOLDING SOLELY DEBT SECURITIES OF THE COMPANY (NOTE 7)
660,000 --
------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.0001 par value -- --
Common stock, $0.0001 par value 7 7
Paid-in capital 877,167 819,042
Retained earnings 87,680 25,864
------------- -------------
Total stockholders' equity 964,854 844,913
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,050,291 $ 1,185,330
============= =============
See Notes to Condensed Consolidated Financial Statements.
4
5
QUALCOMM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
REVENUES:
Communications systems $ 418,636 $ 174,813 $ 1,250,996 $ 367,637
Contract services 54,119 34,922 142,163 95,121
License, royalty and development fees 47,505 25,145 101,787 67,988
----------- ----------- ----------- -----------
Total revenues 520,260 234,880 1,494,946 530,746
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Communications systems 315,173 135,412 993,382 277,030
Contract services 40,250 25,151 104,445 66,104
Research and development 64,843 46,670 164,127 114,249
Selling and marketing 40,467 18,907 98,508 50,936
General and administrative 26,465 14,359 64,069 34,079
Other -- -- 8,792 --
----------- ----------- ----------- -----------
Total operating expenses 487,198 240,499 1,433,323 542,398
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) 33,062 (5,619) 61,623 (11,652)
INTEREST INCOME 12,115 4,847 23,116 19,374
INTEREST EXPENSE (3,002) (706) (8,198) (2,063)
GAIN ON SALE OF TRADING SECURITIES 3,946 -- 13,400 --
DISTRIBUTIONS ON CONVERTIBLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST (9,690) -- (13,585) --
MINORITY INTEREST IN (INCOME) LOSS OF
CONSOLIDATED SUBSIDIARY (600) 3,314 (6,030) 10,298
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 35,831 1,836 70,326 15,957
INCOME TAX BENEFIT (EXPENSE) 114 (330) (8,510) (2,872)
----------- ----------- ----------- -----------
NET INCOME $ 35,945 $ 1,506 $ 61,816 $ 13,085
=========== =========== =========== ===========
NET EARNINGS PER COMMON SHARE
Primary $ 0.49 $ 0.02 $ 0.86 $ 0.19
=========== =========== =========== ===========
Fully diluted $ 0.49 $ 0.02 $ 0.85 $ 0.19
=========== =========== =========== ===========
SHARES USED IN PER SHARE CALCULATION
Primary 72,694 70,738 72,058 70,028
=========== =========== =========== ===========
Fully diluted 72,694 71,697 72,370 70,367
=========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements.
5
6
QUALCOMM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
------------------------
JUNE 29, JUNE 30,
1997 1996
--------- ---------
OPERATING ACTIVITIES:
Net income $ 61,816 $ 13,085
Depreciation and amortization 65,888 39,722
Minority interest in income (loss) of consolidated subsidiary 6,030 (10,298)
Gain on sale of trading securities (13,400) --
Non cash charge for impaired assets 8,792 --
Recognition of deferred tax asset (21,887) --
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net (103,181) (110,708)
Finance receivables (114,820) --
Inventories (57,213) (85,716)
Other assets (47,530) (12,558)
Accounts payable and accrued liabilities 71,620 58,072
Unearned revenue 12,593 2,206
Other liabilities 11,793 (576)
Proceeds from sale of trading securities 23,129 --
Purchase of trading securities (9,729) --
--------- ---------
Net cash used in operating activities (106,099) (106,771)
--------- ---------
INVESTING ACTIVITIES:
Issuance of note receivable (8,585) (25,000)
Collection of note receivable -- 9,602
Capital expenditures (91,309) (145,680)
Purchases of intangible assets -- (3,788)
Purchases of investments (741,865) (420,092)
Maturities of investments 434,674 272,174
Investments in other entities (49,213) (6,520)
--------- ---------
Net cash used in investing activities (456,298) (319,304)
--------- ---------
FINANCING ACTIVITIES:
Sale/leaseback transaction -- 10,248
Net repayments on bank lines of credit (9,500) --
Proceeds from issuance of convertible preferred securities by subsidiary trust 660,000 --
Principal payments under long-term debt (1,486) (20,463)
Proceeds from issuance of notes payable -- 11,770
Minority interest investment in consolidated subsidiary 98 6,310
Net proceeds from issuance of common stock 20,319 17,018
--------- ---------
Net cash provided by financing activities 669,431 24,883
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 107,034 (401,192)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 110,143 500,629
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 217,177 $ 99,437
========= =========
See Notes to Condensed Consolidated Financial Statements.
6
7
QUALCOMM INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements
have been prepared by QUALCOMM Incorporated (the "Company"), without audit, in
accordance with the instructions to Form 10-Q and, therefore, do not necessarily
include all information and footnotes necessary for a fair presentation of its
financial position, results of operations and cash flows in accordance with
generally accepted accounting principles. The condensed consolidated balance
sheet at September 29, 1996 was derived from the audited consolidated balance
sheet at that date which is not presented herein.
In the opinion of management, the unaudited financial information for
the interim periods shown reflects all adjustments (which include only normal,
recurring adjustments) necessary for a fair presentation. These condensed
consolidated financial statements and notes thereto should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 1996 Annual Report on Form 10-K for the year ended
September 29, 1996. Operating results for interim periods are not necessarily
indicative of operating results for an entire fiscal year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue from communications systems and products is generally recognized
at the time the units are shipped and over the period during which message and
warranty services are provided, except for shipments under arrangements
involving significant acceptance requirements. Under such arrangements, revenue
is recognized when the Company has substantially met its performance
obligations. Revenue from long-term contracts and revenue earned under license
and development agreements with continuing performance obligations is recognized
using the percentage-of-completion method, based either on costs incurred to
date compared with total estimated costs at completion or using a units of
delivery methodology. Estimated contract losses are recognized when determined.
Non-refundable license fees are recognized when there is no material continuing
performance obligation under the agreement and collection is probable. Royalty
revenue is recorded in the period earned in accordance with the specific terms
of each license agreement when reasonable estimates of such amounts can be made.
The Company operates and reports using a period ending on the last
Sunday of each month. As a result of this practice, fiscal 1996 included 53
weeks. The first quarter of fiscal 1997 had 13 weeks of activity compared to 14
weeks of activity during the first quarter of fiscal 1996.
Certain prior period amounts have been reclassified to conform with the
current period presentation.
7
8
NOTE 2 COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
JUNE 29, SEPTEMBER 29,
1997 1996
------------- -------------
Accounts Receivable (in thousands):
Trade, net of allowance for doubtful
accounts of $17,930 and $8,223 respectively $ 249,185 $ 181,732
Long-term contracts:
Billed 39,162 12,363
Unbilled 23,236 20,052
Other 9,031 3,286
------------- -------------
$ 320,614 $ 217,433
============= =============
Unbilled receivables represent costs and profits recorded in excess of
amounts billable pursuant to contract provisions and are expected to be realized
within one year.
JUNE 29, SEPTEMBER 29,
1997 1996
------------- -------------
Inventories (in thousands):
Raw materials $ 104,942 $ 97,779
Work-in-progress 22,972 35,686
Finished goods 100,810 38,046
------------- -------------
$ 228,724 $ 171,511
============= =============
NOTE 3 FINANCE RECEIVABLES
Finance receivables result from sales arrangements in which the Company
has agreed to provide long-term financing. At June 29, 1997, the finance
receivables of $114.8 million primarily resulted from sales to one customer.
Subject to finalizing definitive terms and conditions, the Company has reached
an agreement in principle to sell loans receivable from the customer to a
financial institution at par value on a non-recourse basis. As a result, the
Company expects to realize the finance receivables within one year from June 29,
1997.
Commitments to extend long-term financing under sales arrangements at
June 29, 1997 including amounts in finance receivables at June 29, 1997,
aggregated approximately $274 million. Such commitments are subject to the
customer meeting certain conditions established in the financing arrangements.
Commitments represent the estimated amounts to be financed under these
arrangements, however, actual financing may be in lesser or greater amounts.
NOTE 4 INVESTMENTS - GTL COMMON STOCK
On February 12, 1997, the Company and Globalstar Telecommunications
Limited ("GTL") entered into an arrangement under which GTL agreed to accelerate
the vesting and exercisability of the Company's warrants to purchase 367,131
shares of GTL common stock at $26.50 per share. Also, GTL agreed to register for
resale the GTL common stock issued. The Company exercised such warrants in March
1997 and classified the common stock as trading securities under Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" recognizing an unrealized gain of $9.5 million in
the second quarter of fiscal 1997. The Company sold the GTL common stock during
the third quarter of fiscal 1997 resulting in an aggregate realized gain of
$13.4 million including a gain of $3.9 million recorded in the third quarter of
fiscal 1997.
As of June 29, 1997, the Company continued to maintain an approximate 7%
indirect limited partnership interest in Globalstar L.P. accounted for under the
equity method of accounting.
8
9
NOTE 5 OTHER ASSETS - INVESTMENT IN OTHER ENTITIES
In March 1997, the Company purchased $42 million of voting preferred
shares representing a 50% ownership interest in a corporate joint venture,
Chilesat Telefonia Personal S.A. ("Chilesat PCS"). The preferred shares are
entitled to a liquidation preference in an amount equal to the original purchase
price per share during a five year period beginning with commencement of
commercial operations of the joint venture.
The Company has agreed to provide a $58 million letter of credit on
behalf of Chilesat PCS. The letter of credit is required under a systems
equipment sales arrangement with Chilesat PCS in which the Company may be
required to reimburse Chilesat PCS a portion of Chilean government fines if
certain network build out milestones are not met. The amount that Chilesat PCS
may draw on the letter of credit will decline as interim milestones are met. The
letter of credit will expire no later than December 31, 1999.
NOTE 6 DEBT AND CREDIT FACILITIES
As of June 29, 1997 and September 29, 1996, QUALCOMM Personal
Electronics, ("QPE") had total outstanding bank borrowings of $71.2 million and
$80.7 million, respectively, under two revolving credit facilities totaling $200
million. These credit facilities have identical terms and expire in July 1998.
The interest rates under both facilities are at prime rate, or, at the Company's
option, at a mutually acceptable market rate. The weighted average interest rate
was 6.0% on borrowings outstanding during the first nine months of fiscal 1997
and 6.0% on borrowings outstanding at June 29, 1997.
NOTE 7 CONVERTIBLE PREFERRED SECURITIES OF SUBSIDIARY
In February 1997, QUALCOMM Financial Trust I (the "Trust"), the
Company's wholly-owned subsidiary trust created under the laws of the State of
Delaware, completed a private placement of $660 million of 5 3/4% Trust
Convertible Preferred Securities ("Convertible Preferred Securities"). The sole
assets of the Trust are QUALCOMM Incorporated 5 3/4% Convertible Subordinated
Debentures ("Convertible Subordinated Debentures") due February 24, 2012. The
obligations of the Trust related to the Convertible Preferred Securities are
fully and unconditionally guaranteed by the Company. The Convertible Preferred
Securities are convertible into Company common stock at the rate of 0.6882
shares of Company common stock for each Convertible Preferred Security
(equivalent to a conversion price of $72.6563 per share of common stock).
Distributions on the Convertible Preferred Securities are payable quarterly by
the Trust. The Convertible Preferred Securities are subject to mandatory
redemption on February 24, 2012, at a redemption price of $50 per preferred
security.
The Company may cause the Trust to defer the payment of distributions
for successive periods of up to twenty consecutive quarters. During such
periods, accrued distributions on the Convertible Preferred Securities will
compound quarterly and the Company may not declare or pay distributions on its
common stock or debt securities that rank equal or junior to the Convertible
Subordinated Debentures. Also during such period, if holders of Convertible
Preferred Securities convert such securities into Company common stock, the
holder will not receive any cash related to the deferred distribution.
Issuance costs of approximately $18 million related to the Convertible
Preferred Securities are deferred and are being amortized over the period until
mandatory redemption of the securities in February 2012.
NOTE 8 OTHER OPERATING EXPENSES
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", the Company recorded an $8.8 million non-cash pretax charge in
the second quarter of fiscal 1997 relating to the impairment of certain
long-lived assets. The $8.8 million charge represents the total value of these
assets and related disposition costs.
9
10
NOTE 9 INCOME TAXES
In the third quarter of fiscal 1997, the Company recognized deferred tax
assets of $59.7 million that met the "more likely than not" criteria for
recognition established by Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes." As a result, a $37.8 million tax benefit relating
to stock option deductions was recorded as a non-cash adjustment to paid in
capital. The remaining $21.9 million tax benefit relating to income recognition
differences and tax credits was recorded as part of the Company's tax provision
in its statement of income. Including the tax benefits to the statement of
income of recognizing the deferred tax assets, the Company estimates an
effective income tax rate of 20% on fiscal 1997 earnings. As of June 29, 1997,
the Company had recorded total deferred tax assets of $66.7 million.
NOTE 10 COMMITMENTS AND CONTINGENCIES
GUARANTEES
The Company has guaranteed approximately $17 million of certain vendor
financing obligations of Globalstar L.P. ("Globalstar") (the "Vendor Financing
Guarantee"). The Vendor Financing Guarantee will expire no later than September
1997. The Company has also agreed to guarantee up to $22.5 million of Globalstar
borrowings under an existing bank financing agreement which will expire in
December 2000. As of June 29, 1997, Globalstar had no outstanding borrowings
under the existing bank financing agreement. Under the terms of the agreements,
the Company's maximum aggregate guarantee for both vendor and bank financing
obligations is $22.5 million.
OPERATING LEASES
During the first nine months of fiscal 1997, QPE leased additional
equipment pursuant to an existing operating lease agreement for manufacturing
equipment that may be leased under separate schedules, each with approximately
five year terms. The lease agreement is non-recourse to the Company and the
minority interest holder in QPE. Equipment under lease has both early and end of
term purchase options. If the purchase options have not been exercised by the
end of the lease term, QPE may be required to pay certain contingent payments if
proceeds from the sale of the equipment fall below specified amounts. The
maximum amount of contingent payments for all equipment leased as of June 29,
1997, is approximately $61 million. Rental expense under this lease during the
first nine months of fiscal 1997, including an accrual for such contingent
payments, amounted to $9.3 million. As of June 29, 1997, the Company has accrued
$8.3 million in other liabilities for such contingent payments.
As of June 29, 1997, future annual rental payments under the lease,
excluding the contingent payments, from fiscal 1997 through 2002 are $1.2
million, $5.1 million, $5.1 million, $5.1 million, $4.0 million and $0.9
million, respectively.
LITIGATION
On September 23, 1996, Ericsson Inc. and Telefonaktiebolaget LM Ericsson
("Ericsson") filed suit against QUALCOMM in the U.S. District Court for the
Eastern District of Texas, Civil Action No. 2-96CV183. On December 17, 1996,
Ericsson also filed suit against QPE in the U. S. District Court for the
Northern District of Texas, Civil Action No. 3-96CV3373P. Both complaints allege
that various elements of the Company's CDMA equipment system and components
infringe one or more patents owned by Ericsson. In December 1996, QUALCOMM filed
a countersuit in the U.S. District Court for the Southern District of
California. The complaint alleges unfair competition by Ericsson based on a
pattern of conduct intended to impede the acceptance and commercial deployment
of QUALCOMM's CDMA technology. The complaint also charges that Ericsson's patent
infringement claims against the Company violate a 1989 agreement between the
companies. Finally, the lawsuit seeks a judicial declaration that certain of
Ericsson's patents are not infringed by QUALCOMM and are invalid. On April 9,
1997, the suit against Ericsson in the U.S. District Court for the Southern
District of California was dismissed so that all of QUALCOMM's claims in that
case can be litigated in the action filed by Ericsson in the U.S. District Court
for the Eastern District of Texas. Although there can be no assurances that an
unfavorable outcome would not have a material adverse effect on the Company's
liquidity, financial position or results of operations, the Company believes the
named Ericsson patents
10
11
are not required to produce IS-95 compliant systems and that Ericsson's claims
are without merit. The Company will vigorously defend itself against such
claims.
On November 8, 1996 the Company was served with a complaint in
connection with a lawsuit filed in the U.S. District Court for the Eastern
District of Pennsylvania by BTG USA Inc. The complaint alleges that the
Company's Global Positioning System, CDMA telecommunications products and the
OmniTRACS system components thereof infringe United States Patent No. Re.
34,004. The patent expired in November 1996. Although there can be no assurances
that an unfavorable outcome would not have a material adverse effect on the
Company's liquidity, financial position or results of operations, the Company
believes the complaint has no merit and will vigorously defend the action.
On March 5, 1997, the Company filed a complaint against Motorola, Inc.
("Motorola") in the U.S. District Court for the Southern District of California,
Civil Action No. CV00372. The complaint was filed in response to allegations by
Motorola that the Company's recently announced "Q" Phone infringes design and
utility patents held by Motorola as well as trade dress and common law rights
relating to the appearance of certain Motorola wireless telephone products. The
complaint denies such allegations and seeks a judicial declaration that the
Company's products do not infringe any patents held by Motorola. The complaint
also states that, pursuant to certain patent and technology license agreements
entered into in 1990 between the companies, Motorola is precluded from asserting
infringement of the utility patents. On March 10, 1997, Motorola filed a
complaint against the Company in the U.S. District Court for the Eastern
Division of Illinois, Civil Action No. 97 C 1616 (the "Motorola Complaint"),
alleging claims based primarily on the above alleged infringement. The Company's
motion to transfer the Motorola Complaint to the U.S. District Court for the
Southern District of California was granted on April 3, 1997. On April 24, 1997,
the court denied Motorola's motion for a preliminary injunction thereby
permitting QUALCOMM to continue to manufacture, market and sell the Q phone. On
April 25, 1997, Motorola appealed the denial of its motion for a preliminary
injunction. On June 4, 1997, Motorola filed another lawsuit in United States
District Court for the Southern District of California, alleging infringement by
QUALCOMM of four patents. Three of the patents had already been alleged in
previous litigation between the parties. The Company has filed a motion to
dismiss the complaint. Although there can be no assurance that an unfavorable
outcome of the dispute would not have a material adverse effect on the Company's
liquidity, financial position or results of operations, the Company believes
Motorola's complaint has no merit and will vigorously defend the action.
The Company is engaged in other legal actions arising in the ordinary
course of its business and believes that the ultimate outcome of these actions
will not have a material adverse effect on its liquidity, financial position or
results of operations.
PERFORMANCE GUARANTEES
The Company and QPE have entered into contracts that provide for
performance guarantees to protect customers against late delivery or failure to
perform. These performance guarantees, and any future commitments for
performance guarantees, are obligations entered into separately, and in some
cases jointly, with partners to supply CDMA subscriber and infrastructure
equipment. Certain of these obligations provide for substantial performance
guarantees that accrue at a daily rate based on percentages of the contract
value to the extent the equipment is not delivered by scheduled delivery dates
or the systems fail to meet certain performance criteria by such dates. The
Company is dependent in part on the performance of its suppliers and strategic
partners in order to provide equipment which is the subject of the guarantees.
Thus, the ability to timely deliver such equipment may be outside of the
Company's control. If the Company and QPE are unable to meet their performance
obligations, the payment of the performance guarantees could amount to a
significant portion of the contract value and would have a material adverse
effect on product margins and the Company's liquidity, financial position or
results of operations.
NOTE 11 RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS
128") applicable to entities with publicly held common stock or potential common
stock. This statement supersedes APB Opinion No. 15, "Earnings per Share"
("Opinion 15") and requires dual presentation of basic and diluted EPS for
entities with complex capital structures. Basic EPS excludes dilution
11
12
and replaces primary EPS. Diluted EPS is computed similarly to fully diluted EPS
pursuant to Opinion 15. FAS 128 is effective for financial statements issued for
periods ending after December 15, 1997. Pro forma EPS amounts calculated under
FAS 128 are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- ---------------------
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
1997 1996 1997 1996
-------- -------- -------- --------
NET EARNINGS PER COMMON SHARE
Basic $ 0.53 $ 0.02 $ 0.92 $ 0.20
======== ======== ======== ========
Diluted $ 0.50 $ 0.02 $ 0.86 $ 0.19
======== ======== ======== ========
SHARES USED IN PER SHARE CALCULATION
(IN THOUSANDS)
Basic 67,567 65,738 67,124 65,252
======== ======== ======== ========
Diluted 72,025 70,743 71,519 70,029
======== ======== ======== ========
In June 1997, the Financial Accounting Standards Board ("FASB") issued
FAS No. 130, "Reporting Comprehensive Income," effective for fiscal years
beginning after December 15, 1997. This statement requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company has not
determined the impact that the adoption of this new accounting standard will
have on its consolidated financial statements. The Company will adopt this
accounting standard in fiscal year 1999, as required.
In June 1997, the FASB issued FAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," effective for financial statements
for periods beginning after December 15, 1997. 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. The Company has not determined the impact that the adoption of this
new accounting standard will have on its consolidated financial statement
disclosures. The Company will adopt this accounting standard in fiscal year
1999, as required.
12
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This information should be read in conjunction with the condensed
consolidated financial statements and the notes thereto included in Item 1 of
this Quarterly Report and the audited consolidated financial statements and
notes thereto and Management's Discussion and Analysis of Results of Operations
and Financial Condition for the year ended September 29, 1996 contained in the
Company's 1996 Annual Report on Form 10-K.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's future results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not specifically limited to: the ability to develop and
introduce cost effective new products in a timely manner, avoiding delays in the
commercial implementation of the Company's Code Division Multiple Access
("CDMA") technology; continued growth in the CDMA subscriber population and the
scale-up and operations of CDMA systems; developments in current or future
litigation; the Company's ability to effectively manage growth and the intense
competition in the wireless communications industry; risks associated with
vendor financing; timing and receipt of license fees and royalties; the
Company's ability to successfully manufacture and sell significant quantities of
CDMA infrastructure equipment on a timely basis; failure to satisfy performance
obligations; as well as the other risks detailed in this section, in the
sections entitled Results of Operations and Liquidity and Capital Resources and
in the Form 10-K.
OVERVIEW
QUALCOMM commenced operations in July 1985, initially providing contract
research and development services and limited product manufacturing. In December
1988, the Company began shipping its two-way OmniTRACS mobile terminals and
providing messaging services to its OmniTRACS system customers. The Company is
also involved in the development and commercialization of its proprietary CDMA
technology for digital wireless communication applications, including digital
cellular, Personal Communications Services ("PCS") and Wireless Local Loop
("WLL") applications and now is involved in production of its own products for
those markets. The Company also provides contract development services,
including the design and development of subscriber and ground communications
equipment for the Globalstar satellite-based communications system. In addition,
the Company develops, markets and manufactures a variety of other communications
products, including Eudora, a leading Internet-based electronic mail software
application, for personal, commercial and government applications.
During fiscal 1997, the Company successfully completed the private
placement of $660 million of 5 3/4% Trust Convertible Preferred Securities
("Convertible Preferred Securities"). The proceeds will be used by the Company
for working and fixed capital requirements (including facilities) related to the
expansion of its operations, financing of customers of its CDMA infrastructure
equipment and investments in joint ventures or other companies and other assets
to support growth of its business.
The Company's revenues generated from its proprietary CDMA technology
are currently derived primarily from subscriber and infrastructure equipment and
Application Specific Integrated Circuits ("ASICs") component sales to domestic
and international wireless communications equipment suppliers and service
providers. In addition, the Company has derived significant revenues and margins
from license, royalty and development fees. Although the Company expects to
continue to receive CDMA license, royalty and development fees from its existing
agreements and may receive similar fees and royalties from new licensees, the
amount and timing of these CDMA fees and royalties will depend on the extent to
which and when the Company's CDMA technology is commercially implemented. Delays
in roll-out of future cellular, PCS or WLL systems could have a material adverse
effect on quarterly and annual revenues.
The Company began manufacturing and shipping significant volumes of CDMA
subscriber equipment during fiscal 1996. Production capabilities at QUALCOMM
Personal Electronics ("QPE") were significantly expanded and during the second
quarter of fiscal 1997, the Company achieved the milestone of shipping over one
million CDMA portable phones. During the third quarter of fiscal 1997, the
Company began transition to its new line of phone models, including the QUALCOMM
manufactured "Q" phone. The transition is expected to continue into the fourth
quarter of fiscal 1997 with phones coming to the market in time for the 1997
holiday selling season.
13
14
In addition to the 1996 commercial deployment of CDMA networks in Hong
Kong and Korea, a significant number of CDMA commercial system deployments were
implemented or announced since the end of fiscal 1996. During fiscal 1997, both
Sprint Spectrum L.P. ("Sprint PCS") and PrimeCo Personal Communications L.P.
("PrimeCo") announced commercial roll-outs of their PCS networks in selected
markets. In total, Sprint PCS has launched service in 56 cities across the
nation and PrimeCo has 18 PCS networks in operation. Subscriber equipment for
these networks was provided by QPE. QUALCOMM's CDMA technology presence
continues to expand throughout the world as other service providers worldwide
have also launched, expanded or announced intentions to launch their PCS,
cellular and WLL networks utilizing CDMA proprietary technology.
The Company commenced infrastructure equipment production during fiscal
1996 and began shipping significant quantities of infrastructure equipment to
customer sites in the first half of fiscal 1997. The Company began recognizing
revenues in the second quarter of fiscal 1997 with respect to base stations
installed under a major contract, commensurate with the commercial launch in the
U.S. generally of PCS networks. In January 1997, the Company commenced operation
of a 177,000 square foot facility in San Diego, California to expand its
capacity to manufacture CDMA infrastructure equipment.
In order to commence operation, PCS and WLL operators will need, among
other things, to invest substantial capital and complete their system designs
and build outs. Any delays in connection with the commercial rollout of CDMA
technology by the Company's major customers, or any delays in obtaining orders
for the Company's infrastructure equipment from both national and international
customers could result in under utilization of the manufacturing facility and
have a material adverse effect on the Company's results of operations.
An important element of the Company's strategy is to be a major supplier
of CDMA infrastructure and subscriber equipment worldwide for cellular, PCS and
WLL service providers, including C, D, E and F Block PCS licensees in North
America. The Company's ability to generate substantial revenues and profits from
sales of infrastructure and subscriber equipment will require continued
substantial capital investments by the Company and is subject to risks and
uncertainties.
PCS systems have a limited operating history in the U.S., and the extent
of demand for PCS is uncertain. Sales of infrastructure equipment
internationally are subject to a number of risks, including substantial
competition with other providers of CDMA, GSM and other competing wireless
systems (many of whom have substantially greater resources than the Company and
are well-established equipment manufacturers with long manufacturing histories)
and risks related to unexpected changes in regulatory requirements, export
controls, national standards, currency exchange rates, expropriation, tariffs
and other barriers, political risks and difficulties in staffing and managing
foreign operations. WLL systems in the U.S. and foreign countries are just
beginning to be implemented, and their market acceptance is uncertain. The
wireless telecommunications industry is experiencing significant technological
changes. As a result, the future prospects of the industry, the success of PCS,
WLL and other competing services and the Company's ability to generate
substantial revenues and profits from sales of CDMA infrastructure and
subscriber equipment are uncertain.
The Company's ability to generate substantial sales of CDMA
infrastructure and subscriber equipment to C, D, E and F-Block PCS licensees is
subject to a number of risks in addition to those facing other wireless service
providers. Many of these licensees have limited financial resources, are highly
leveraged and will require large amounts of capital to complete the build-out of
their systems. To date, there have been a number of unsuccessful efforts made by
C-Block licensees to raise additional capital through various sources. There can
be no assurance that these licensees will be able to raise such capital. During
March 1997, a C-Block licensee holding the second largest number of PCS licenses
and had planned to use competing GSM products, filed for protection under
Chapter 11 of the U.S. Bankruptcy Code. There can be no assurance that other C,
D, E and F-Block licensees will not file for similar protection.
Since the end of fiscal 1996, the Company, either directly or through
QPE, entered into a number of significant agreements to provide CDMA equipment
and services. International CDMA equipment contracts signed during fiscal 1997
include an agreement with Chilesat Telefonia Personal S.A. ("Chilesat PCS"), a
subsidiary of Telex-Chile S.A., to supply approximately $94 million of PCS
infrastructure and subscriber equipment and services; a multi-year contract with
JSC Personal Communications of Moscow, Russian Federation to supply its CDMA
digital wireless
14
15
infrastructure equipment, network planning and installation services; a four
year agreement valued at over $300 million with an affiliate of Telecom Great
Wall Development Company of Beijing for the purchase of QUALCOMM-branded CDMA
digital phones; and an agreement with Rostov Electorviaz of Rostov, Russia to
supply fixed wireless local loop infrastructure equipment and services.
Additionally in February 1997, US WEST Communications signed an agreement with
QPE to purchase approximately $80 million of CDMA handsets in support of its
plans to deploy CDMA digital services within its markets; and during May 1997,
Bell Mobility signed a $70 million contract for QUALCOMM's CDMA handsets to
support its commercial launch of PCS service. In March 1997, the Company entered
into an agreement with Hitachi Ltd. ("Hitachi"), under which the Company will
share its CDMA infrastructure product designs allowing Hitachi to accelerate its
time-to-market with cost-competitive feature-rich CDMA infrastructure products.
As part of this agreement, Hitachi will purchase a percentage of its CDMA
infrastructure requirements from the Company. Also during March 1997 the Company
entered into a multi-million dollar royalty-bearing license agreement with
Kokusai Electric Co., Ltd. ("Kokusai"), of Tokyo, Japan under which Kokusai has
been granted a patent and technical license to manufacture and sell CDMA
subscriber products. During May 1997, the Company signed a license agreement
with Sharp Corporation of Japan ("Sharp") which grants Sharp a worldwide,
royalty-bearing license to manufacture and sell CDMA subscriber products. The
Company also signed a multi-million dollar royalty-bearing license agreement
with Haitai Electronics Co., Ltd. of Seoul, Korea, to manufacture and sell CDMA
subscriber products for PCS in Korea.
Cellular, PCS and WLL systems operators are requiring their suppliers to
arrange or provide long-term financing for them as a condition to obtaining
infrastructure projects. These projects may require the Company to arrange or
provide significant amounts of financing either directly, and/or through a
guaranty of such financing through third party lenders. The inability to arrange
or provide such financing or to successfully compete for infrastructure projects
could have a material adverse effect on the Company. Also, in order for the
Company to arrange or provide financing for the cellular, PCS and WLL projects,
the Company will likely be subjected to significant project, market, political
and credit risks.
The Company generates revenues from its domestic OmniTRACS business by
manufacturing and selling OmniTRACS terminals and related application software
packages and by providing ongoing messaging and maintenance services to domestic
OmniTRACS users. Competition has resulted in a reduction of the margins on unit
sales and services in fiscal 1996 and through the first nine months of fiscal
1997. The Company generates revenues from its international OmniTRACS business
through license fees, sales of network equipment and terminals and fees from
engineering support services. International messaging services are provided by
service providers that operate network management centers for a region under
licenses granted by the Company.
In March 1994, the Company entered into a four year development
agreement with Globalstar, to design and develop subscriber equipment and ground
communications segments of the Globalstar system through 1998. The revenues from
this contract are expected to be in excess of $500 million. During April, 1997
the Company was awarded a $275 million contract to manufacture and supply
commercial gateways for deployment of Globalstar's worldwide Low-Earth-Orbiting
satellite-based digital telecommunications system. This multi-year agreement
could grow to approximately $600 million as the Globalstar network is built out.
The Company expects to begin shipping its gateways in early calendar 1998.
Globalstar will require substantial additional capital which will be used, in
part, to fund payment for the equipment to be developed by the Company. During
the second quarter of fiscal 1997 Globalstar's funding was strengthened as
Globalstar, L.P. announced a plan to raise approximately $140 million of equity
from the exercise of warrants and raised approximately $500 million from a high
yield securities offering. This brings the total capital raised by Globalstar to
approximately $2 billion. There can be no assurance that Globalstar will be
successful in raising additional capital or that delays or technical or
regulatory developments will not arise which could adversely affect Globalstar's
ability to fund payment for development of such equipment from the Company which
could have a material adverse effect on the Company's business and results of
operations. The Company's interest in Globalstar, which is approximately 7%, is
owned indirectly through certain limited partnerships.
The Company has experienced, and expects to continue to experience,
increased operating expenses as a result of the Company's overall expansion. In
the first nine months of fiscal 1997, operating expenses were significantly
higher, although operating expenses as a percentage of revenue declined. The
growth was primarily due to increased research and development expenditures,
expanded sales and marketing efforts, overall expansion of the business base,
and increased legal expenses associated with patent infringement litigation.
Through fiscal 1997, the Company
15
16
expects to continue its rapid growth and will continue to add to its engineering
resources and increase its investments in research and development projects, and
expand its sales and marketing efforts as the Company's products are marketed in
major areas throughout the world.
On September 23, 1996, Ericsson Inc. and Telefonaktiebolaget LM Ericsson
("Ericsson") filed suit against QUALCOMM in the U.S. District Court for the
Eastern District of Texas, Civil Action No. 2-96CV183. On December 17, 1996,
Ericsson also filed suit against QPE in the U. S. District Court for the
Northern District of Texas, Civil Action No. 3-96CV3373P. Both complaints allege
that various elements of the Company's CDMA equipment system and components
infringe one or more patents owned by Ericsson. In December 1996, QUALCOMM filed
a countersuit in the U.S. District Court for the Southern District of
California. The complaint alleges unfair competition by Ericsson based on a
pattern of conduct intended to impede the acceptance and commercial deployment
of QUALCOMM's CDMA technology. The complaint also charges that Ericsson's patent
infringement claims against the Company violate a 1989 agreement between the
companies. Finally, the lawsuit seeks a judicial declaration that certain of
Ericsson's patents are not infringed by QUALCOMM and are invalid. On April 9,
1997, the suit against Ericsson in the U.S. District Court for the Southern
District of California was dismissed so that all of QUALCOMM's claims in that
case can be litigated in the action filed by Ericsson in the U.S. District Court
for the Eastern District of Texas. Although there can be no assurances that an
unfavorable outcome would not have a material adverse effect on the Company's
liquidity, financial position or results of operations, the Company believes the
named Ericsson patents are not required to produce IS-95 compliant systems and
that Ericsson's claims are without merit. The Company will vigorously defend
itself against such claims.
On November 8, 1996 the Company was served with a complaint in
connection with a lawsuit filed in the U.S. District Court for the Eastern
District of Pennsylvania by BTG USA Inc. The complaint alleges that the
Company's Global Positioning System, CDMA telecommunications products and the
OmniTRACS system components thereof infringe United States Patent No. Re.
34,004. The patent expired in November 1996. Although there can be no assurances
that an unfavorable outcome would not have a material adverse effect on the
Company's liquidity, financial position or results of operations, the Company
believes the complaint has no merit and will vigorously defend the action.
On March 5, 1997, the Company filed a complaint against Motorola, Inc.
("Motorola") in the U.S. District Court for the Southern District of California,
Civil Action No. CV00372. The complaint was filed in response to allegations by
Motorola that the Company's recently announced "Q" Phone infringes design and
utility patents held by Motorola as well as trade dress and common law rights
relating to the appearance of certain Motorola wireless telephone products. The
complaint denies such allegations and seeks a judicial declaration that the
Company's products do not infringe any patents held by Motorola. The complaint
also states that, pursuant to certain patent and technology license agreements
entered into in 1990 between the companies, Motorola is precluded from asserting
infringement of the utility patents. On March 10, 1997, Motorola filed a
complaint against the Company in the U.S. District Court for the Eastern
Division of Illinois, Civil Action No. 97 C 1616 (the "Motorola Complaint"),
alleging claims based primarily on the above alleged infringement. The Company's
motion to transfer the Motorola Complaint to the U.S. District Court for the
Southern District of California was granted on April 3, 1997. On April 24, 1997,
the court denied Motorola's motion for a preliminary injunction thereby
permitting QUALCOMM to continue to manufacture, market and sell the Q phone. On
April 25, 1997, Motorola appealed the denial of its motion for a preliminary
injunction. On June 4, 1997, Motorola filed another lawsuit in United States
District Court for the Southern District of California, alleging infringement by
QUALCOMM of four patents. Three of the patents had already been alleged in
previous litigation between the parties. The Company has filed a motion to
dismiss the complaint. Although there can be no assurance that an unfavorable
outcome of the dispute would not have a material adverse effect on the Company's
liquidity, financial position or results of operations, the Company believes
Motorola's complaint has no merit and will vigorously defend the action.
The Company is engaged in other legal actions arising in the ordinary
course of its business and believes that the ultimate outcome of these actions
will not have a material adverse effect on its financial position or results of
operations.
16
17
RESULTS OF OPERATIONS
The following table sets forth certain revenue and expense items as percentages
of revenues:
Three Months Ended Nine Months Ended
----------------------- -----------------------
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
-------- -------- -------- --------
Revenues:
Communications systems 81% 74% 84% 69%
Contract services 10 15 9 18
License, royalty and development fees 9 11 7 13
-------- -------- -------- --------
Total revenues 100% 100% 100% 100%
-------- -------- -------- --------
Operating expenses:
Communications systems 61% 58% 66% 52%
Contract services 8 11 7 12
Research and development 12 20 11 22
Selling and marketing 8 8 7 10
General and administrative 5 5 4 6
Other -- -- 1 --
-------- -------- -------- --------
Total operating expenses 94% 102% 96% 102%
-------- -------- -------- --------
Operating income (loss) 6 (2) 4 (2)
Interest income, net 2 2 1 4
Gain on sale of trading securities 1 -- 1 --
Distributions on convertible preferred
securities of subsidiary trust (2) -- (1) --
Minority interest -- 1 -- 1
-------- -------- -------- --------
Income before income taxes 7 1 5 3
Income tax benefit (expense) -- 0 (1) (1)
-------- -------- -------- --------
Net income 7% 1% 4% 2%
-------- -------- -------- --------
Communications systems costs as a
percentage of communications
systems revenues 75% 77% 79% 75%
Contract services costs as a percentage
of contract services revenues 74% 72% 73% 69%
Total revenues for the third quarter of fiscal 1997 were $520 million,
which more than doubles the revenues of $235 million for the third quarter of
fiscal 1996. For the nine months ended June 29, 1997, revenues increased to
$1,495 million, almost triple the revenues of $531 million for the first nine
months of fiscal 1996. Revenue growth for the third quarter and first nine
months of fiscal 1997 was due to significant growth in communications systems
which was primarily driven by increased revenues from CDMA subscriber and
infrastructure equipment and ASICs products, as well as increased contract
services revenues from the Company's development agreement with Globalstar and
an increase in royalties recognized in conjunction with the worldwide sales of
infrastructure and subscriber equipment utilizing the Company's CDMA technology
by licensees.
Communications systems revenues which consisted primarily of sales of
CDMA subscriber products, infrastructure equipment and ASICs to CDMA licensees
and service providers, and product and service revenues from the sale of the
Company's OmniTRACS system, were $419 million for the third quarter of fiscal
1997 and $1,251 million for the nine months ended June 29, 1997, compared to
$175 million and $368 million, respectively, for the same periods in fiscal
1996. This significant growth in revenues for the quarter and the first nine
months of fiscal 1997 was primarily attributable to increased shipments of CDMA
subscriber equipment and ASICs products. During the third quarter of fiscal
1997, the Company reached a major milestone with the cumulative shipment of over
6
17
18
million Mobile Station Modem (MSM) chips to CDMA handset manufacturers,
including QPE, worldwide. The Company began recognizing revenues in the second
quarter of fiscal 1997 with respect to base stations installed under a major
contract, commensurate with the commercial launch in the U.S. generally of PCS
networks. For the first nine months of fiscal 1997, OmniTRACS revenue growth was
attributable to increased domestic unit sales and higher domestic messaging
revenues but was partially offset by a decline in international unit sales.
Contract services revenues increased to $54 million in the third quarter
of fiscal 1997, a 55% increase over the third quarter of fiscal 1996. Contract
services revenues for the first nine months of fiscal 1997 were $142 million or
10% of total revenues compared to $95 million or 18% of total revenues for the
same period in fiscal 1996. The dollar increase for the quarter and first nine
months of fiscal 1997 resulted from the development agreement with Globalstar
L.P.
License, royalty and development fees were $48 million, or 9% of total
revenues for the third quarter of fiscal 1997, compared to $25 million or 11% of
total revenues for the year ago period. For the first nine months of fiscal
1997, license, royalty, and development fees were $102 million, a 50% increase
over the same period in fiscal 1996. The increase in the quarter and for the
first nine months of fiscal 1997 is primarily due to an increase in royalties
associated with the worldwide sales of infrastructure equipment and subscriber
units utilizing the Company's CDMA technology by the Company's licensees.
Royalty income will fluctuate quarter to quarter due to the timing and amount of
sales by the Company's licensees. During the third quarter of fiscal 1997, the
Company entered into several license agreements including a subscriber license
agreement with Sharp Corporation, an ASICs license agreement with LSI Logic
Corporation, and a CDMA wireless repeator agreement with Ortel Corporation. The
Company expects to continue to experience considerable fluctuations in quarterly
and yearly operating results in the future due to variations in the amount and
timing of recognition of CDMA license, royalty and development fees.
Communications systems costs were $315 million or 75% of communications
systems revenues for the third quarter of fiscal 1997, compared to $135 million
or 77% of communications systems revenues for the same period in the prior
fiscal year. The decrease in communications systems costs as a percentage of
communications systems revenues during the quarter was primarily driven by the
increase in ASICs sales during the quarter and improved subscriber margins
during the current quarter. For the first nine months of fiscal 1997,
communications systems costs were $993 million or 79% of communications systems
revenues, compared to $277 million or 75% of communications systems revenues for
the same period in fiscal 1996. The increase in communications systems costs as
a percentage of communications systems revenues reflects the significant
increase in sales volumes of CDMA products, which realized a lower gross margin
than OmniTRACS revenues, and the related costs associated with the rapid
expansion of production capacity for CDMA equipment. Communications systems
costs as a percent of communication 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 were $40 million or 74% of contract services
revenues for the third quarter of fiscal 1997, compared to $25 million or 72% of
contract services revenues for the third quarter of fiscal 1996. Contract
services costs for the first nine months of fiscal 1997 were $104 million or 73%
of contract services revenues, compared to $66 million or 69% of contract
services revenues for fiscal 1996. The dollar increase in contract services
costs was primarily related to the Globalstar development contract. The increase
in contract services costs as a percentage of contract services revenues was
primarily driven by a change in the cost mix towards higher material content.
Research and development expenses were $65 million or 12% of revenues
for the third quarter of fiscal 1997, compared to $47 million or 20% of revenues
for the third quarter of fiscal 1996. For the first nine months of fiscal 1997,
research and development costs were $164 million or 11% of revenues, compared to
$114 million or 22% of revenues for the first nine months of fiscal 1996. The
dollar increase was attributed primarily to increased expenditures for the
development of commercial CDMA infrastructure and subscriber equipment,
including the development of new phone models and ASIC development.
Selling and marketing expenses were $40 million or 8% of total revenues
for the third quarter fiscal 1997, compared to $19 million or 8% of total
revenues for the same quarter last year. For the first nine months of fiscal
1997, selling and marketing expenses were $99 million or 7% of revenues,
compared to $51 million or 10% of
18
19
revenues for the same period in fiscal 1996. The dollar increase in selling and
marketing expenses for the quarter and the nine months relates to increased
marketing activities both domestically and internationally as the Company
launched a global effort to increase awareness of its products and services.
Also during the third quarter of fiscal 1997, the Company launched a
multi-million dollar national advertising campaign promoting its broad line of
CDMA subscriber products.
General and administrative expenses were $26 million or 5% of total
revenues for the third quarter of fiscal 1997, compared to $14 million or 5% of
total revenues for the third quarter of fiscal 1996. General and administrative
expenses for the first nine months of fiscal 1997 were $64 million or 4% of
revenues, compared to $34 million or 6% of revenues for the same period in
fiscal 1996 The dollar increase in the first nine months of the fiscal year was
primarily due to additional personnel and associated overhead costs necessary to
support the overall growth in the Company's operations as well as increased
legal fees associated with patent infringement litigation. Although the Company
is experiencing rapid growth, it continues to emphasize control of operating
expenses and reduction of expenses as a percentage of revenue.
Interest income was $12 million during the third quarter of fiscal 1997
compared to $5 million in the third quarter of fiscal 1996. For the first nine
months of fiscal 1997, interest income was $23 million compared to $19 million
for the same period in fiscal 1996. The increase in the third quarter and for
the first nine months of fiscal 1997 was due to the interest earned on the
proceeds received from the $660 million private placement of Trust Convertible
Preferred Securities during the second quarter of fiscal 1997.
Interest expense increased to $3 million in the third quarter of fiscal
1997 compared to $1 million in the third quarter of fiscal 1996. For the first
nine months of fiscal 1997 interest expense was $8 million compared to $2
million for the same period in fiscal 1996. The increase is the result of
increased bank borrowing to support the working capital needs of QPE.
The gain on sale of trading securities of $4 million for the third
quarter of fiscal 1997 and $13 million for the nine months ended June 29, 1997,
relates to the sale of Globalstar Telecommunications Ltd. common stock during
the third quarter of fiscal 1997.
Distributions accrued on Convertible Preferred Securities of $10 million
for the third quarter of fiscal 1997, and $14 million for the first nine months
of fiscal 1997 relate to the $660 million of 5 3/4% Trust Convertible Preferred
Securities issued by the Company in March 1997. The securities are convertible
into common stock of the Company at a conversion price of $72.6563 per share of
common stock.
The minority interest reflects SONY's 49% share in the profit or loss of
QPE, a joint venture consolidated in the Company's financial statements. The
Company manufactures and sells subscriber products both through QPE and
independently.
The Company realized an income tax benefit of $0.1 million during the
third quarter of fiscal 1997 compared to an expense of $0.3 million for the
third quarter of fiscal 1996. Income tax expense was $9 million for the first
nine months of fiscal 1997 compared to $3 million for fiscal 1996. Taxes for the
third quarter of fiscal 1997 were positively impacted by the recognition of
deferred tax assets that satisfy the "more likely than not" criteria for
recognition established by FAS 109.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that the cash and cash equivalents and
investment balances of $769 million at June 29, 1997, including interest earned
thereon, will be used to fund working and fixed capital requirements including
facilities related to the expansion of its operations, financing for customers
of its CDMA infrastructure equipment and investment in joint ventures or other
companies and other assets to support the growth of its business.
In the first nine months of fiscal 1997, $106 million in cash was used
in operations, compared to $107 million used in operations in the first nine
months of fiscal 1996, reflecting continued expenditures for working capital
requirements including inventories and accounts receivable. The dollar growth in
receivables and inventories was due
19
20
primarily to the significant growth in CDMA equipment sales. Investments in
other assets include the capitalization of approximately $18 million in broker's
fees associated with the issuance of the Convertible Preferred Securities during
the second quarter of fiscal 1997, and a one time payment of approximately $18
million to the City of San Diego in exchange for certain naming rights to San
Diego Jack Murphy Stadium. The stadium was renamed QUALCOMM Stadium with certain
rights obtained for signage in and around the facility for a twenty-year period.
Investments in capital expenditures, intangible assets and other
entities totaled $141 million in the first nine months of fiscal 1997, compared
to $156 million in the same period of fiscal 1996. Significant components of
such investments in the first nine months of fiscal 1997 include the purchase of
$91 million of capital assets, the purchase of $42 million of voting preferred
shares representing a 50% ownership interest in a corporate joint venture,
Chilesat PCS, and the investment of $7 million in entities in which the Company
holds less than a 50% interest. In the first nine months of fiscal 1996,
significant components of such investments included the purchase of $146 million
of capital assets, the investment of $4 million in intangible assets and the
investment of $7 million in entities in which the Company holds less than a 50%
interest. Included in fiscal 1996 capital expenditures was the purchase of a
manufacturing and research facility for approximately $32 million, the
construction of a new engineering facility and increased building improvements
relating primarily to the new manufacturing and research facility. The Company
expects to continue making significant investments in capital assets, including
new facilities and building improvements, throughout fiscal 1997.
Investments in other entities include investments in C-Block licensees,
(including $20 million in NextWave Telecom, Inc.) and foreign entities and joint
ventures, which may expose the Company to certain financial risks. Some of these
investments may require additional equity investments, loans, or advances in
order to expedite the buildout and deployment of CDMA systems. The Company may
continue to make similar investments in future periods in an effort to expand
its infrastructure business. There can be no assurances that these current or
future investments, loans, or advances will provide an adequate financial or
market return. As a result, such investments, loans and advances may have a
material adverse effect on the Company's liquidity or financial position.
In the first nine months of fiscal 1997, the Company's financing
activities provided net cash of $669 million compared to $25 million in the
first nine months of fiscal 1996. The first nine months of fiscal 1997 included
$660 million in proceeds from the issuance of the Convertible Preferred
Securities and $20 million from the issuance of common stock under the Company's
stock option and employee stock purchase plan. Additionally, QPE made payments
of $10 million on its outstanding credit facility. The first nine months of
fiscal 1996 included proceeds from the sale and lease back of manufacturing
equipment to QPE, additional contributions received from SONY related to the QPE
joint venture, and the issuance of common stock under the Company's stock option
and employee stock purchase plan, which were partially offset by the retirement
of the $20 million note on the Company's corporate headquarters.
The design, development, manufacture and marketing of digital wireless
communication products and services are highly capital intensive. In addition,
cellular, PCS and WLL systems operators increasingly have required their
suppliers to arrange or provide long-term financing for them as a condition to
obtaining or bidding on infrastructure products. To the extent that such cash
resources are insufficient to fund the Company's activities, the Company may be
required to raise additional funds which may be derived through additional debt,
equity financing, or other sources. If additional capital is raised through the
sale of additional equity or convertible debt securities, dilution to the
Company's stockholders could occur. The Company continues to evaluate financing
alternatives, including unsecured bank facilities, extension of the current QPE
secured revolving credit facilities, or other sources of debt or equity
financing. There can be no assurances such additional financing will be
available or, if available, that it will be on acceptable terms.
The actual amount and timing of working capital and capital equipment
expenditures that the Company may incur in future periods may vary
significantly. This will depend upon numerous factors, including the extent and
timing of the commercial deployment of the Company's CDMA technology in the U.S.
and worldwide, investments in joint ventures or other forms of strategic
alliances, the requirement to provide CDMA vendor financing and the growth in
personnel and related facility expansion and the increase in manufacturing
capacity. In addition, expenses related to any patent infringement or other
litigation may require additional cash resources and may have an adverse impact
on the Company's results of operations, liquidity or financial position.
20
21
Cellular, PCS and WLL network operators increasingly have required their
suppliers to arrange or provide long-term financing for them as a condition to
obtaining or bidding on infrastructure projects. In order to arrange or provide
for such financing, the Company will likely be subjected to significant project,
market, political and credit risks. The Company may be required to provide such
financing directly, and/or guaranty such financing through third party lenders.
The amount of such financing could become significant and, if not repaid by the
carrier, could have a material adverse effect on the Company's operating results
and liquidity. Such amounts financed may include "soft costs" (such as software,
cell site leases and permits), and thus the amount financed may exceed 100% of
infrastructure equipment costs. The Company has vendor financing obligations
with Sprint PCS (through Nortel), and directly with other service providers. The
Company has limited experience evaluating the credit worthiness or commercial
viability of potential purchasers of CDMA equipment, and there can be no
assurances that such customers will not default on any financing arranged or
provided by the Company for the purchase of its CDMA equipment. In addition, the
Company may be required to provide vendor financing for a portion of the
Globalstar system prior to its full scale implementation.
The Company's ability to arrange or provide and be competitive with such
financing will depend on a number of factors, including the Company's capital
structure, level of available credit and ability to provide financing in
conjunction with third-party lenders. There can be no assurance that the Company
will be able to arrange or provide such financing on terms and conditions, and
in amounts, that will be satisfactory to such network operators. The Company may
be required to hold any loans, or remain obligated under guarantees, until
maturity, which could have a material adverse effect on the Company's credit
rating. A number of the Company's competitors have substantially greater
resources than the Company, which may enable them to offer more favorable
financing terms and successfully compete against the Company for infrastructure
projects. The inability to arrange or provide such financing or to successfully
compete for infrastructure projects could have a material adverse effect on the
Company and its business prospects.
The Company and QPE have entered into contracts that provide for
performance guarantees to protect customers against late delivery or failure to
perform. These performance guarantees, and any future commitments for
performance guarantees, are obligations entered into separately, and in some
cases jointly, with partners to supply CDMA subscriber and infrastructure
equipment. Certain of these obligations provide for substantial performance
guarantees that accrue at a daily rate based on percentages of the contract
value to the extent the equipment is not delivered by scheduled delivery dates
or the systems fail to meet certain performance criteria by such dates. The
Company is dependent in part on the performance of its suppliers and strategic
partners in order to provide equipment which is the subject of the guarantees.
Thus, the ability to timely deliver such equipment may be outside of the
Company's control. If the Company and QPE are unable to meet their performance
obligations, the payment of the performance guarantees could amount to a
significant portion of the contract value and would have a material adverse
effect on product margins and the Company's results of operations, liquidity or
financial position.
A recent ruling of the U.S. Court of Appeals for the District of
Columbia required the FCC to review a two year old decision by the FCC which
denied QUALCOMM a "Pioneer's Preference" PCS license for the provision of
wireless voice and data services. The Company is currently in discussions with
the FCC regarding the impact of this ruling, which may allow the Company to
purchase one or more PCS licenses. In the event QUALCOMM is awarded one or more
licenses, the Company may decide to commit funds for the purchase of such
licenses and for the construction of related wireless networks.
21
22
PART II OTHER INFORMATION
Item 1. Legal Proceedings
See Note 5 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
None.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
11.1 - Computation of Earnings Per Share
(b) Reports on Form 8K
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
22