<PAGE> 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 DECEMBER 28, 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 (ZIP CODE)
OFFICES)
(619) 587-1121
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORTED)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past ninety days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $0.0001 per share par value, 68,940,149 shares as of
February 10, 1998.
<PAGE> 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
Executive Vice President, Finance
& Chief Financial Officer
Dated: February 11, 1998
2
<PAGE> 3
QUALCOMM INCORPORATED
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
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.................. 7-10
Item 2. Management's Discussion and Analysis of Results of Operations......... 11-20
PART II. OTHER INFORMATION 21
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
3
<PAGE> 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
<TABLE>
<CAPTION>
DECEMBER 28, SEPTEMBER 28,
1997 1997
------------ -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .............................................. $ 209,540 $ 248,837
Investments ............................................................ 443,661 448,235
Accounts receivable, net ............................................... 576,493 445,382
Finance receivables .................................................... 43,706 111,501
Inventories ............................................................ 281,606 225,156
Other current assets ................................................... 68,887 70,484
---------- ----------
Total current assets ........................................... 1,623,893 1,549,595
PROPERTY, PLANT AND EQUIPMENT, NET ....................................... 475,152 425,090
INVESTMENTS .............................................................. 111,733 111,786
FINANCE RECEIVABLES ...................................................... 22,896 --
OTHER ASSETS ............................................................. 192,675 188,209
---------- ----------
TOTAL ASSETS ............................................................. $2,426,349 $2,274,680
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ............................... $ 541,589 $ 409,156
Unearned revenue ....................................................... 45,769 45,084
Bank lines of credit ................................................... 78,000 110,000
Current portion of long-term debt ...................................... 3,317 3,238
---------- ----------
Total current liabilities ...................................... 668,675 567,478
LONG-TERM DEBT ........................................................... 7,087 7,729
OTHER LIABILITIES ........................................................ 17,762 15,295
---------- ----------
Total liabilities .............................................. 693,524 590,502
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 5) ...................................
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES ........................... -- --
COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST CONVERTIBLE
PREFERRED SECURITIES OF A SUBSIDIARY TRUST HOLDING SOLELY DEBT
SECURITIES OF THE COMPANY ............................................... 660,000 660,000
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.0001 par value ..................................... -- --
Common stock, $0.0001 par value ........................................ 7 7
Paid-in capital ........................................................ 918,258 906,373
Retained earnings ...................................................... 154,560 117,798
---------- ----------
Total stockholders' equity ..................................... 1,072,825 1,024,178
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................... $2,426,349 $2,274,680
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
QUALCOMM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
DECEMBER 28, DECEMBER 29,
1997 1996
------------ ------------
<S> <C> <C>
REVENUES:
Communications systems ...................................... $ 676,885 $ 324,580
Contract services ........................................... 64,031 38,679
License, royalty and development fees ....................... 44,938 25,681
--------- ---------
Total revenues ...................................... 785,854 388,940
--------- ---------
OPERATING EXPENSES:
Communications systems ...................................... 507,339 259,485
Contract services ........................................... 46,276 27,725
Research and development .................................... 74,801 46,178
Selling and marketing ....................................... 56,098 26,941
General and administrative .................................. 36,469 15,592
Other (Note 3) .............................................. 11,976 --
--------- ---------
Total operating expenses ............................ 732,959 375,921
--------- ---------
OPERATING INCOME .............................................. 52,895 13,019
INTEREST INCOME ............................................... 12,190 4,453
INTEREST EXPENSE .............................................. (2,689) (1,984)
DISTRIBUTIONS ON TRUST CONVERTIBLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST ............................................ (9,798) --
MINORITY INTEREST IN LOSS (INCOME) OF CONSOLIDATED SUBSIDIARIES 3,781 (3,320)
EQUITY IN EARNINGS OF INVESTEES ............................... (2,772) --
NET GAIN ON SALE OF INVESTMENTS (NOTE 4) ...................... 2,950 --
--------- ---------
INCOME BEFORE INCOME TAXES .................................... 56,557 12,168
INCOME TAX EXPENSE ............................................ (19,795) (3,042)
--------- ---------
NET INCOME .................................................... $ 36,762 $ 9,126
========= =========
NET EARNINGS PER COMMON SHARE:
Basic ....................................................... $ 0.54 $ 0.14
========= =========
Diluted ..................................................... $ 0.50 $ 0.13
========= =========
SHARES USED IN PER SHARE CALCULATION:
Basic ....................................................... 68,475 66,582
========= =========
Diluted ..................................................... 74,126 70,305
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
QUALCOMM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
DECEMBER 28, DECEMBER 29,
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................ $ 36,762 $ 9,126
Depreciation and amortization ............................. 30,974 19,004
Acquired in-process research and development .............. 6,976 --
Non-cash charge for impaired assets ....................... 5,000 --
Minority interest in (loss) income of consolidated
subsidiaries ............................................ (3,781) 3,320
Equity in earnings of investees ........................... 2,772 --
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net ............................... (131,111) (109,733)
Finance receivables .................................... 44,899 --
Inventories ............................................ (56,450) (73,337)
Other assets ........................................... 1,600 (1,956)
Accounts payable and accrued liabilities ............... 127,433 56,735
Unearned revenue ....................................... 685 2,676
Other liabilities ...................................... 2,467 542
--------- ---------
Net cash provided (used) by operating activities ............ 68,226 (93,623)
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures ...................................... (79,544) (15,573)
Purchases of investments .................................. (191,045) (103,848)
Maturities of investments ................................. 195,672 179,405
Purchases of intangibles .................................. (11,099) --
Investments in other entities ............................. (1,062) (7,269)
--------- ---------
Net cash (used) provided by investing activities ............ (87,078) 52,715
--------- ---------
FINANCING ACTIVITIES:
Net (repayments) borrowings under bank lines of credit .... (32,000) 56,300
Principal payments on long-term debt ...................... (563) (37)
Minority interest investment in consolidated subsidiaries . 233 --
Net proceeds from issuance of common stock ................ 11,885 1,237
--------- ---------
Net cash (used) provided by financing activities ............ (20,445) 57,500
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ........ (39,297) 16,592
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............ 248,837 110,143
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................. $ 209,540 $ 126,735
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 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 28, 1997 was derived from the audited consolidated balance
sheet at that date which is not presented herein. The Company operates and
reports using a period ending on the last Sunday of each month.
In the opinion of management, the unaudited financial information for the
interim periods 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 Annual Report on Form 10-K for the fiscal year ended
September 28, 1997. Operating results for interim periods are not necessarily
indicative of operating results for an entire fiscal year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue from communications systems and products is generally recognized at
the time the units are shipped and over the period during which message and
warranty services are provided, except for shipments under arrangements
involving significant acceptance requirements. Under such arrangements, revenue
is recognized when the Company has substantially met its performance
obligations. Revenue from long-term contracts and revenue earned under license
and development agreements with continuing performance obligations is recognized
using the percentage-of-completion method, based either on costs incurred to
date compared with total estimated costs at completion or using a units of
delivery methodology. Estimated contract losses are recognized when determined.
Non-refundable license fees are recognized when there is no material continuing
performance obligation under the agreement and collection is probable. Royalty
revenue is recorded as earned in accordance with the specific terms of each
license agreement when reasonable estimates of such amounts can be made.
The Company adopted Statement of Financial Accounting Standards No. 128 ("FAS
128"), "Earnings per Share" in the first quarter of fiscal 1998. FAS 128
superseded APB Opinion No. 15 ("APB 15"), "Earnings per Share" and replaced the
primary and fully diluted earnings per share ("EPS") computations pursuant to
APB 15 with basic and diluted EPS. Earnings per share data presented for the
first quarter of fiscal 1997 has been restated for comparative purposes.
Under FAS 128, basic earnings per common share are calculated by dividing net
income by the weighted average number of common shares outstanding during the
reporting period. Diluted earnings per common share reflect the potential
dilutive effect of additional common shares that are issuable upon exercise of
outstanding stock options and warrants. The number of additional common shares,
determined by the treasury stock method using the average market price of the
Company's common stock during the reporting period, amounted to 4,939,000 and
3,048,000 related to stock options outstanding during the first quarter of
fiscal 1998 and 1997, respectively, and 712,000 and 675,000, respectively
related to warrants. Options outstanding during the first quarter of fiscal 1998
and 1997, to purchase approximately 1,143,000 and 3,952,000 shares of common
stock, respectively, were anti-dilutive and have been excluded from the
computations of diluted EPS. The conversion of the Trust Convertible Preferred
Securities is not assumed for the first quarter of fiscal 1998 since its effect
would be anti-dilutive.
7
<PAGE> 8
NOTE 2 -- COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
<TABLE>
<CAPTION>
DECEMBER 28, SEPTEMBER 28,
1997 1997
------------ -------------
<S> <C> <C>
Accounts Receivable, net (in thousands):
Trade, net of allowance for doubtful
accounts of $22,930 and $18,892
respectively ....................... $464,613 $343,619
Long-term contracts:
Billed ............................. 68,887 53,159
Unbilled ........................... 25,534 32,230
Other ................................ 17,459 16,374
-------- --------
$576,493 $445,382
======== ========
</TABLE>
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 sales under arrangements in which the Company
has agreed to provide customers with the option to issue long-term interest
bearing notes to the Company for the purchase of equipment and/or services.
<TABLE>
<CAPTION>
DECEMBER 28, SEPTEMBER 28,
1997 1997
------------ -------------
<S> <C> <C>
Inventories (in thousands):
Raw materials ........... $139,700 $118,516
Work-in-progress ........ 69,393 55,088
Finished goods .......... 72,513 51,552
-------- --------
$281,606 $225,156
======== ========
</TABLE>
NOTE 3 -- OTHER OPERATING EXPENSES
During November 1997, the Company acquired, for approximately $10 million,
substantially all the assets of Now Software, Inc., a developer of advanced
scheduling and calendaring software products. In connection with this asset
purchase, acquired in-process research and development of $7 million,
representing the fair value of software products still in the development stage
that had not yet reached technological feasibility, was expensed at the
acquisition date.
Also during the first quarter of fiscal 1998, the Company recorded a $5
million non-cash charge to operations relating to the impairment of leased
manufacturing equipment that is no longer used in the manufacturing process. The
$5 million charge represents the estimated total cost of related lease
obligations, net of estimated recoveries.
NOTE 4 -- SALE OF INVESTMENTS
During the first quarter of fiscal 1998, the Company recognized a net gain of
$3 million from the sale of, and from other investing activities related to,
investments in other entities.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
GUARANTEES
The Company has issued a letter of credit to support a guarantee of up to
$22.5 million of Globalstar, L.P. ("Globalstar") 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 28, 1997, Globalstar had no borrowing
outstanding under the existing bank financing agreement.
8
<PAGE> 9
Under an agreement with Chilesat Telefonia Personal S.A. ("Chilesat PCS"),
the Company has agreed to provide a $58 million letter of credit on behalf of
Chilesat PCS in which the Company may be required to reimburse Chilesat PCS for
a portion of Chilean government fines if certain network build-out milestones
are not met. The amount that Chilesat PCS may draw on the letter of credit will
decline as interim milestones are met. The letter of credit will expire no later
than December 31, 1999, and is collateralized by a commensurate amount of the
Company's investments in debt securities.
LITIGATION
On September 23, 1996, Ericsson Inc. and Telefonaktiebolaget LM Ericsson
("Ericsson") filed suit against the Company and on December 17, 1996, Ericsson
also filed suit against QPE with both complaints alleging 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
alleging, among other things, unfair competition by Ericsson based on a pattern
of conduct intended to impede the acceptance and commercial deployment of
QUALCOMM's CDMA technology and is seeking a judicial declaration that certain of
Ericsson's patents are not infringed by QUALCOMM and are invalid. On September
10, 1996, OKI America, Inc. ("OKI") filed a complaint against Ericsson seeking a
judicial declaration that certain of OKI's CDMA subscriber products do not
infringe nine patents of Ericsson and that such patents are invalid. The nine
patents are among the eleven patents at issue in the litigation between the
Company and Ericsson. In December 1996, the Company was joined as co-plaintiff
with OKI in the OKI-Ericsson case. The court granted the Company's motion on
August 25, 1997. This case has not yet been set for trial. Although there can be
no assurances that an unfavorable outcome would not have a material adverse
effect on the Company's results of operations, liquidity or financial position,
the Company believes the named Ericsson patents are not required to produce
IS-95 compliant systems and that Ericsson's claims are without merit.
On March 5, 1997, the Company filed a complaint against Motorola, Inc.
("Motorola"). The complaint was filed in response to allegations by Motorola
that the Company's recently announced Q phone infringes design and utility
patents held by Motorola as well as trade dress and common law rights relating
to the appearance of certain Motorola wireless telephone products. The complaint
denies such allegations and seeks a judicial declaration that the Company's
products do not infringe any patents held by Motorola. On March 10, 1997,
Motorola filed a complaint against the Company (the "Motorola Complaint"),
alleging claims based primarily on the above alleged infringement. The Company's
motion to transfer the Motorola Complaint to the U.S. District Court for the
Southern District of California was granted on April 3, 1997. On April 24, 1997,
the court denied Motorola's motion for a preliminary injunction thereby
permitting the Company to continue to manufacture, market and sell the Q phone.
On April 25, 1997, Motorola appealed the denial of its motion for a preliminary
injunction. On January 16, 1998 the U.S. Court of Appeals for the Federal
Circuit denied Motorola's appeal and affirmed the decision of the U.S. District
Court for the Southern District of California refusing Motorola's request to
enjoin QUALCOMM from manufacturing and selling the Q phone. On June 4, 1997,
Motorola filed another lawsuit alleging infringement by QUALCOMM of four
patents. Three of the patents had already been alleged in previous litigation
between the parties. On August 18, 1997, Motorola filed another complaint
against the Company alleging infringement by the Company of seven additional
patents. All of the Motorola cases have been consolidated for pretrial
proceedings. The cases have been set for a final pretrial conference in October
1998. Although there can be no assurance that an unfavorable outcome of the
dispute would not have a material adverse effect on the Company's results of
operations, liquidity or financial position, the Company believes Motorola's
complaint has no merit and will vigorously defend the action.
On May 19, 1997, the Company filed a complaint against U.S. Philips
Corporation ("Philips") seeking a judicial declaration that certain of the
Company's products do not infringe three patents held by Philips and that such
patents are invalid. The court stayed all proceedings in the action until
December 15, 1997 to allow the parties to hold settlement discussions. On
December 16, 1997, the Company dismissed the case without prejudice pursuant to
a stipulation whereby the parties agreed that the Company could refile the case
if a negotiated resolution is not reached. Although there can be no assurances
that an unfavorable outcome of litigation over the Philips patents would not
have a material adverse effect on the Company's results of operations, liquidity
or financial position, the
9
<PAGE> 10
Company believes the named Philips patents are not required to produce IS-95
compatible products and that such patents are not infringed by the Company.
The Company is engaged in other legal actions arising in the ordinary course
of its business and believes that the ultimate outcome of these actions will not
have a material adverse effect on its results of operations, liquidity or
financial position.
PERFORMANCE GUARANTEES
The Company and QPE have entered into contracts that provide for performance
guarantees to protect customers against late delivery or failure to perform.
These performance guarantees, and any future commitments for performance
guarantees, are obligations entered into separately, and in some cases jointly,
with partners to supply CDMA subscriber and infrastructure equipment. Certain of
these obligations provide for substantial performance guarantees that accrue at
a daily rate based on percentages of the contract value to the extent the
equipment is not delivered by scheduled delivery dates or the systems fail to
meet certain performance criteria by such dates. The Company is dependent in
part on the performance of its suppliers and strategic partners in order to
provide equipment which is the subject of the guarantees. Thus, the ability to
timely deliver such equipment may be outside of the Company's control. If the
Company and QPE are unable to meet their performance obligations, the payment of
the performance guarantees could amount to a significant portion of the contract
value and would have a material adverse effect on product margins and the
Company's results of operations, liquidity or financial position.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This information should be read in conjunction with the condensed
consolidated financial statements and the notes thereto included in Item 1 of
this Quarterly Report and the audited consolidated financial statements and
notes thereto and Management's Discussion and Analysis of Results of Operations
and Financial Condition for the year ended September 28, 1997 contained in the
Company's 1997 Annual Report on Form 10-K.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. QUALCOMM Incorporated's ("QUALCOMM" or the "Company") future
results could differ materially from those discussed here. Factors that could
cause or contribute to such differences include, but are not specifically
limited to: the Company's ability to successfully manufacture and sell
significant quantities of CDMA infrastructure and subscriber equipment on a
timely basis; 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; change in economic
conditions of various markets served by the Company or major customers of the
Company, including the Asian markets; continued currency fluctuations and risk;
continued growth in the CDMA subscriber population and the scale-up and
operations of CDMA systems; developments in current or future litigation; the
Company's ability to effectively manage growth and the intense competition in
the wireless communications industry; risks associated with vendor financing;
timing and receipt of license fees and royalties; failure to satisfy performance
obligations as well as the other risks detailed in this section, and in the
sections entitled Results of Operations and Liquidity and Capital Resources.
OVERVIEW
QUALCOMM, a Delaware corporation, is a leading provider of digital wireless
communications products, technologies and services. The Company designs,
develops, manufactures, markets and sells wireless communications,
infrastructure and subscriber equipment and Application Specific Integrated
Circuits ("ASICs") based on its CDMA technology and has licensed its CDMA
technology to major telecommunications equipment suppliers for incorporation
into their wireless communications products. The Company designed and is
manufacturing, distributing and operating the OmniTRACS system, a
satellite-based, two-way mobile communications and tracking system that provides
messaging, position reporting and other services for transportation companies
and other mobile and fixed-site customers. The Company also provides contract
development services, including the design and development of subscriber and
ground communications equipment for the Globalstar L.P. ("Globalstar")
satellite-based communications system. In addition, the Company develops,
manufactures, markets and sells a variety of other communications products,
including products for the U.S. government, and Eudora, a leading Internet-based
electronic mail software application, for personal, commercial and government
applications.
Due to recent events involving customers in South Korea, the Company expects
a reduction in second quarter fiscal 1998 earnings and communications systems
gross margin from the prior quarter. Two South Korean manufacturers informed the
Company of partial cancellation or postponement of ASICs orders originally
scheduled to ship during the second quarter of fiscal 1998. Further, following a
visit to South Korea, the Company recently concluded that a previously announced
order for 1800 MHz Q phones will not be fulfilled.
Sales of the Q phone are expected to be lower than planned in the second
fiscal quarter due to the loss of the South Korean order for 1800 MHz Q phones,
the delay in introducing the 800 MHz cellular dual-mode Q phone and a recent
reduction in demand for 1900 MHz PCS Q phones. As a result, the Company
anticipates a change in mix between the anticipated volumes of the Q phone, with
its higher labor content, and the QCP models, with their lower labor content,
which, combined with ongoing cost improvements and increased efficiencies,
resulted in a workforce reduction of approximately 700 temporary workers
announced in early February 1998. Accordingly, the Company expects that the
change in product mix will cause the communications systems gross margin to
decline in the second quarter of fiscal 1998.
11
<PAGE> 12
Second quarter royalties from South Korean licensees will be impacted by the
decline in the valuation of the South Korean won. In addition, the slowdown in
shipments to South Korean customers, beginning in the second quarter of fiscal
1998, may also cause fluctuations in royalties recognized in future periods.
The Company's revenues generated from its proprietary CDMA technology are
currently derived primarily from subscriber and infrastructure equipment and
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,
Personal Communication Services ("PCS") or Wireless Local Loop ("WLL") systems
could have a material adverse effect on quarterly and annual revenues.
Additionally, revenues generated from license, royalty and development fees will
fluctuate quarterly and yearly due to variations in the amount and timing of
recognition of CDMA license fees, the timing, pricing and amount of sales by the
Company's licensees and the Company's ability to estimate such sales, and the
impact of currency fluctuations and risk on royalties generated from
international licensees.
Sales of infrastructure equipment internationally are subject to a number of
risks, including substantial competition with other providers of CDMA, Global
Systems for Mobil Communications ("GSM"), and other competing wireless systems
(most of whom have substantially greater resources than the Company and are
well-established equipment manufacturers with long manufacturing histories) and
risks related to unexpected changes in regulatory requirements, export controls,
national standards, currency exchange rates, expropriation, tariffs and other
barriers, political risks and difficulties in staffing and managing foreign
operations. WLL systems in the U.S. and foreign countries are just beginning to
be implemented, and their market acceptance is uncertain. The wireless
telecommunications industry is experiencing significant technological changes.
As a result, the future prospects of the industry, the success of PCS, WLL and
other competing services and the Company's ability to generate substantial
revenues and profits from sales of CDMA infrastructure and subscriber equipment
are uncertain.
In order to commence operation, PCS and WLL operators will need, among other
things, to invest substantial capital and complete their system designs and
build-outs. Any delays in connection with the commercial rollout of CDMA
technology by the Company's major customers, or any delays in obtaining orders
for the Company's infrastructure equipment from both national and international
customers could result in under utilization of the Company's manufacturing
facility and have a material adverse effect on the Company's results of
operations, liquidity or financial position.
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.
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.
There can be no assurance that these licensees will be able to raise such
capital. During 1997 two C-Block licensees, holding the second and third largest
number of PCS licenses, 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, including those in which the Company has an ownership interest
(NextWave Telecom Inc., ("NextWave") and Chase Telecommunications, Inc.
("Chase")), will not file for similar protections. Additionally, during 1997 the
FCC granted the C-Block licensees three additional options to the installment
payment of debt. The deadline for the C-Block licensees to elect one of the four
options is February 26, 1998. Although the FCC has offered four payment options
there can be no assurance that C-Block licensees, including NextWave and Chase,
will be able to obtain sufficient financing to build-out their systems or meet
their payment obligations to the FCC. The failure of NextWave or Chase to obtain
sufficient financing or to meet their obligations to the FCC could adversely
affect the value of the Company's investments in
12
<PAGE> 13
these entities. The C, D, E and F-Block auctions were concluded over one year
following the conclusion of the A-Block and B-Block auctions, which provided the
A-Block and B-Block licensees with a significant time-to-market competitive
advantage over these licensees. There can be no assurance that the C, D, E and
F-Block licensees will be successful in building out their systems.
The manufacture of wireless communications equipment is a complex and precise
process involving specialized manufacturing and testing equipment and processes.
Defects or impurities in the components or materials used, equipment failure,
product design issues, or other difficulties could adversely affect the
Company's ability to meet planned production yields. There can be no assurance
that the Company will not encounter difficulties in achieving planned yields on
its products, which would adversely affect its margins, results of operations,
liquidity or financial position.
The Company manufactures its CDMA based digital cellular and PCS subscriber
equipment through QPE, a joint venture between the Company and a subsidiary of
Sony. The risks associated with the commercial manufacture of the Company's
infrastructure and subscriber equipment products. which are described in this
document, also apply to the manufacture of subscriber equipment by QPE. To the
extent that QPE experiences any of the complications, delays or interruptions
described herein, the Company's results of operations, liquidity or financial
position would be adversely affected.
A significant portion of the Company's CDMA subscriber and infrastructure
equipment and ASICs components sales are, and are expected to continue to be,
concentrated with a limited number of customers. As a result, the Company's
performance will depend significantly on relatively large orders from a limited
number of customers, as well as gaining additional customers, both within
existing cellular, PCS and WLL markets and in new markets. The loss of any
existing customer for CDMA equipment and ASICs components or the failure of the
Company to gain additional customers could have a material adverse effect on the
Company's business, results of operations, liquidity or financial position.
Revenues from international customers accounted for approximately 30% of
total revenues in fiscal 1997. Since the Company is a relatively new entrant
into some of these markets and its competitors may have long-standing,
entrenched positions, it may be difficult for the Company to succeed in certain
markets, thereby limiting international sales. Due to recent events involving
customers in South Korea, the Company expects a reduction in second quarter
fiscal 1998 earnings and communications systems gross margin from the prior
quarter. Two South Korean manufacturers informed the Company of partial
cancellation or postponement of ASICs orders originally scheduled to ship during
the second quarter of fiscal 1998. Further, following a visit to South Korea,
the Company recently concluded that a previously announced order for 1800 MHz Q
phones will not be fulfilled. Other risks faced by the Company in its
international business include unexpected changes in economic conditions,
regulatory requirements, export controls, national standards, currency exchange
rates, expropriation, tariffs or other barriers, political risks, difficulties
in staffing and managing foreign operations and potentially negative tax
consequences. These factors could have an adverse impact on the Company's
operating results. In addition, because certain joint ventures between the
Company and foreign firms provide for a minority ownership position by the
Company in the joint venture, the Company may be limited in taking actions it
might otherwise wish to pursue. The Company is subject to U.S. export control
laws and regulations with respect to all of the Company's products and
technology that are exported from the United States. The Company is subject to
the risk that more stringent export control requirements could be imposed in the
future on product classes that include products exported by the Company, which
would result in additional compliance burdens on the Company or ensure the
enforceability of its contract rights. In addition, the laws of certain foreign
countries, including developing nations in Asia, South America, Africa and
Eastern Europe, may not protect the Company's intellectual property rights or
ensure the enforceability of its contract rights to the same extent as do the
laws of the United States.
The Company generates revenues from its domestic OmniTRACS business by
manufacturing and selling OmniTRACS terminals and related application software
packages and by providing ongoing messaging and maintenance services to domestic
OmniTRACS users. The Company generates revenues from its international OmniTRACS
business through license fees, sales of network equipment and terminals and fees
from engineering
13
<PAGE> 14
support services. International messaging services are provided by service
providers that operate network management centers for a region under licenses
granted by the Company.
The Company has entered into a development agreement with Globalstar to
design and develop subscriber equipment and the ground communication stations of
the Globalstar system. The revenues from this contract are expected to be in
excess of $700 million and the Company is reimbursed for its development
services on a cost-plus basis. During April 1997, the Company was awarded a $275
million contract to manufacture and supply commercial gateways for deployment of
Globalstar's worldwide Low-Earth-Orbiting satellite-based digital
telecommunications system. This multi-year agreement has subsequently grown to
$330 million and could grow to approximately $600 million as the Globalstar
network is built out. The Company expects to begin shipment of their production
gateways in mid-calendar 1998. Globalstar may require additional capital to fund
payment for the equipment to be developed by the Company. To date, Globalstar
has received funds and financing commitments totaling approximately $2.6
billion. There can be no assurance that Globalstar will be successful in raising
additional capital, if needed, or that delays or technical or regulatory
developments will not arise which could adversely affect Globalstar's ability to
continue funding the development agreement, which could have a material adverse
effect on the Company's business and results of operations. The Company's
interest in Globalstar is owned indirectly through certain limited partnerships.
The Company's current ownership interest in Globalstar is approximately 6.5%.
The Company has experienced, and expects to continue to experience, increased
operating expenses in absolute dollars. Although the Company expects to continue
its efforts in the overall expansion of its business base, it will continue to
emphasize control of operating expenses and reduction of these expenses as a
percentage of revenue. The Company expects to continue to add to its engineering
resources, increase its investments in research and development projects, expand
its sales and marketing efforts and continue the overall expansion of the
business base as the Company's products are marketed in major areas throughout
the world.
A review of the Company's current litigation is disclosed in the Notes to
Condensed Consolidated Financial Statements (see Notes to Condensed Consolidated
Financial -- Note 5 Commitments and Contingencies). The Company is also engaged
in other legal actions arising in the ordinary course of its business and
believes that the ultimate outcome of these actions will not have a material
adverse effect on its results of operations, liquidity or financial position.
14
<PAGE> 15
RESULTS OF OPERATIONS
The following table sets forth certain revenue and expense items as
percentages of revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
DECEMBER 28, DECEMBER 29,
1997 1996
------------ ------------
<S> <C> <C>
Revenues:
Communications systems .......................... 86% 83%
Contract services ............................... 8 10
License, royalty and development fees ........... 6 7
---- ----
Total revenues .......................... 100% 100%
---- ----
Operating expenses:
Communications systems .......................... 65% 67%
Contract services ............................... 6 7
Research and development ........................ 9 12
Selling and marketing ........................... 7 7
General and administrative ...................... 5 4
Other ........................................... 1 --
---- ----
Total operating expenses ................ 93% 97%
---- ----
Operating income .................................. 7 3
Interest income, net .............................. 1 1
Distributions on trust convertible preferred
securities of subsidiary trust ................... (1) --
Minority interest in (income) of consolidated
subsidiaries .................................... -- (1)
---- ----
Income before income taxes ........................ 7 3
Income tax expense ................................ 2 1
---- ----
Net income ........................................ 5% 2%
==== ====
Communications systems costs as a percentage of
communications systems revenues ................. 75% 80%
Contract services costs as a percentage of
contract services revenues ...................... 72% 72%
</TABLE>
FIRST QUARTER FISCAL 1998 COMPARED TO FIRST QUARTER FISCAL 1997
Total revenues for the first quarter of fiscal 1998 were $786 million, an
increase of $397 million or 102% compared to total revenues of $389 million for
the first quarter of fiscal 1997. The increase in revenue was primarily due to
strong continued growth in communications systems revenues driven by record
shipments of CDMA handsets and ASICs components and increased sales of
infrastructure equipment. Also contributing to the higher revenues was increased
contract services revenues from the Company's development agreement with
Globalstar, and an increase in license, royalty and development fees due to an
increase in royalties recognized in conjunction with the worldwide sales of CDMA
infrastructure and subscriber equipment by the Company's licensees.
Communications systems revenues, which consisted primarily of revenues from
CDMA subscriber and infrastructure equipment, ASICs sales to CDMA licensees and
the sales of the Company's OmniTRACS systems, were $677 million, an increase of
$352 million or 108% over the first quarter of fiscal 1997. The growth in
communications systems revenues for the first quarter of fiscal 1998 was
primarily attributable to the following: increased sales of CDMA subscriber
equipment, shipping more than twice the number of handsets shipped during the
first quarter of fiscal 1997; increased ASICs sales, approximately quadrupling
sales recorded in the first quarter of fiscal 1997; and increased infrastructure
sales. Additionally, OmniTRACS revenues continue to increase primarily driven by
increased messaging revenue due to the expansion of the installed OmniTRACS base
in the U.S. as well as increased unit sales both domestically and
internationally.
15
<PAGE> 16
Contract services revenues totaled $64 million in the first quarter of fiscal
1998 or 8% of total revenues, compared to $39 million or 10% of total revenues
for the first quarter of fiscal 1997. The dollar increase resulted primarily
from the development agreement with Globalstar which has continued to ramp up
since its inception in fiscal 1994.
License, royalty and development fees for the first quarter of fiscal 1998
were $45 million or 6% of total revenues, compared to $26 million or 7% of total
revenues in the first quarter of fiscal 1997. New licensees during the first
quarter of fiscal 1998 included Synertek, a subscriber equipment license.
Royalty income will fluctuate quarterly due to the timing and amount of sales by
the Company's licensees and the Company's ability to estimate such sales as well
as currency fluctuations, in particular the Korean won. The Company expects to
continue to experience considerable fluctuation in quarterly and yearly
operating results in the future due to variations in the amount and timing of
recognition of CDMA license, royalty and development fees.
Costs of communications systems, which consisted primarily of costs of sales
of CDMA subscriber and infrastructure equipment and ASICs components, were $507
million or 75% of communications systems revenues for the first quarter of
fiscal 1998, compared to $259 million or 80% of communications systems revenues
for the same period in the prior fiscal year. The dollar increase in costs
primarily reflects increased shipments of CDMA subscriber equipment and ASICs
components. The decrease in communications systems costs as a percentage of
communications systems revenues reflects lower costs achieved with high volume
sales and manufacturing of CDMA equipment. Communications systems costs as a
percentage of communications systems revenues may fluctuate in future quarters
depending on mix of products sold, competitive pricing, new product introduction
costs and other factors.
Due to recent events involving customers in South Korea, the Company expects
a reduction in second quarter fiscal 1998 earnings and communications systems
gross margin from the prior quarter. Two South Korean manufacturers informed the
Company of partial cancellation or postponement of ASICs orders originally
scheduled to ship during the second quarter of fiscal 1998. Further, following a
visit to South Korea, the Company recently concluded that a previously announced
order for 1800 MHz Q phones will not be fulfilled.
Sales of the Q phone are expected to be lower than planned in the second
fiscal quarter due to the loss of the South Korean order for 1800 MHz Q phones,
the delays in introducing the 800 MHz cellular dual-mode Q phone and a recent
reduction in demand for 1900 MHz PCS Q phones. Accordingly, the Company expects
that the change in product mix will cause the communications systems gross
margin to decline in the second quarter of fiscal 1998.
Contract services costs were $46 million or 72% of contract services revenues
for the first quarter of fiscal 1998 compared to $28 million or 72% of contract
services revenues for the first quarter of fiscal 1997. The dollar increase was
primarily related to the continued growth in the Globalstar development effort.
Contract services costs as a percent of contract services revenues may fluctuate
in future quarters depending on the mix of products sold and other factors.
Research and development expenses were $75 million or 9% of revenues for the
first quarter of fiscal 1998, compared to $46 million or 12% of revenues for the
first quarter of fiscal 1997. The dollar increase was primarily attributed to
the Company's on-going investment in the commercial development of its CDMA
related infrastructure, subscriber and ASICs products. The decline in research
and development expenses as a percentage of revenues is primarily due to the
significant growth in the revenue base in the first quarter of fiscal 1998.
Overall research and development efforts are expected to continue into future
quarters and research and development expenditures in absolute dollars are
expected to increase throughout fiscal 1998.
Selling and marketing expenses were $56 million or 7% of total revenues for
the first three months of fiscal 1998, compared to $27 million or 7% of total
revenues for the first three months of fiscal 1997. Selling and marketing
expenses increased primarily due to higher volume of sales of CDMA subscriber
equipment along with increased national and international marketing activities.
16
<PAGE> 17
General and administrative expenses were $36 million or 5% of total revenues
for the first quarter of fiscal 1998, compared to $16 million or 4% of total
revenues for the first quarter of fiscal 1997. The dollar increase was
attributable to continued growth in personnel and associated overhead costs to
support the overall growth in the Company's operations, as well as increased
litigation expenses.
During November 1997, the Company acquired, for $10 million, substantially
all of the assets of Now Software, Inc. In connection with this asset purchase,
acquired in-process research and development of $7 million, representing the
fair value of software products still in the development stage that had not yet
reached technological feasibility, was expensed at the acquisition date. This
expense was included in other operating expenses. Also during the first quarter
of fiscal 1998, the Company recorded a $5 million non-cash charge to operations
relating to the impairment of leased manufacturing equipment that is no longer
used in the manufacturing process. The $5 million charge represents the
estimated total cost of related lease obligations, net of estimated recoveries.
Interest income was $12 million during the first quarter of fiscal 1998,
compared to $4 million during the first quarter of fiscal 1997. The increase in
interest income was primarily due to interest generated from the proceeds
received from the Trust Convertible Preferred Securities during the second
quarter of fiscal 1997.
Interest expense was $3 million in the first quarter of fiscal 1998, compared
to $2 million in the first quarter of fiscal 1997. The increase was primarily
due to the increased outstanding debt and capital leases related to QPE.
Distributions on Trust Convertible Preferred Securities of $10 million for
the first quarter of fiscal 1998 relate to the $660 million of 5 3/4% Trust
Convertible Preferred Securities issued by the Company in March 1997.
The minority interest represents other parties' or stockholders' share of the
income or losses of consolidated subsidiaries, including QPE, a joint venture
with a subsidiary of Sony.
During the first quarter of fiscal 1998, the Company recognized a net gain of
$3 million from the sale of, and from other investing activities related to,
investments in other entities.
Income tax expense was $20 million during the first quarter of fiscal 1998,
reflecting a 35% effective tax rate, compared to $3 million, representing a 25%
effective tax rate in the first quarter of fiscal 1997. Higher pretax earnings
in the first quarter of fiscal 1998 coupled with the proportional impact of
certain tax credits resulted in an increase in the effective tax rate. In future
periods the Company expects that the effective tax rate will be reflective of
the tax rate of other California based companies.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that the cash and cash equivalents and investment
balances of $765 million at December 28, 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 quarter of fiscal 1998, $68 million in cash was provided by
operating activities, compared to $94 million used by operating activities in
the first quarter of fiscal 1997. Cash provided by operating activities in the
first quarter of fiscal 1998 includes $11 million of net working capital
requirements offset by $79 million of net cash flow provided by operations. The
improved cash flow from operations primarily reflects the increase in net income
resulting from increased revenues and gross margins. Net working capital
requirements of $11 million reflect increases in accounts receivable and
inventories which were offset by an increase in accounts payable and accrued
liabilities and a decrease in finance receivables. The increase in accounts
receivable in the first quarter of fiscal 1998 primarily reflects the continued
growth in equipment and component sales. The increases in inventories and
accounts payable and accrued liabilities are primarily attributable to the
growth of the business. The decrease in finance receivables is primarily the
result of the sale of loans receivable from a customer to a financial
institution at par value on a non-recourse basis.
17
<PAGE> 18
Investments in capital expenditures, intangible assets and other entities
totaled $92 million in the first quarter of fiscal 1998 compared to $23 million
in the same period in fiscal 1997. Significant components in the first quarter
of fiscal 1998 consisted of the purchase of $80 million of capital assets. The
Company also acquired substantially all the assets of Now Software, Inc. for a
purchase price of $10 million during the first quarter of fiscal 1998. In the
first quarter of fiscal 1997, the $23 million investment related primarily to
the purchase of $16 million of capital assets and the investment of $7 million
in entities in which the Company holds less than a 50% interest. The Company
expects to continue making significant investments in capital assets, including
new facilities and building improvements, throughout fiscal 1998.
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
entities may require substantial additional equity investments, loans or
advances in order to expedite the build-out and deployment of CDMA systems.
NextWave will require significant financing to complete its PCS network
build-out and to meet its payment obligations relating to the purchase of PCS
licenses from the FCC. NextWave's failure to obtain sufficient financing or to
meet its obligations to the FCC could adversely affect the value of the
Company's investment in NextWave. There can be no assurance that NextWave will
be successful in obtaining sufficient financing for its network build-out or in
meeting its payment obligations to the FCC. 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 results of operations, liquidity or financial position.
In the first quarter of fiscal 1998, the Company used $20 million for its
financing activities. QPE made $32 million net, in payments on its outstanding
credit facility. This use of cash was offset by $12 million in proceeds from the
issuance of common stock under the Company's stock option and employee stock
purchase plans. In the first quarter of fiscal 1997, the Company's financing
activities provided net cash of $58 million primarily reflecting net draws on
the QPE credit facility.
The design, development, manufacture and marketing of digital wireless
communication products and services are highly capital intensive. To the extent
that such cash resources are insufficient to fund the Company's activities, the
Company may be required to raise additional funds, potentially in the near term,
which may be derived through additional debt, equity financing, or other
sources. There can be no assurance that additional financing will be available
on reasonable terms or at all. 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. The Company is in the
process of establishing a significant line of credit and anticipates finalizing
terms of the credit facility during the second quarter of fiscal 1998. There can
be no assurances such additional financing, including the credit facility, 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; the growth in
personnel and related facility expansion; the increase in manufacturing
capacity; and the extension or change in terms of trade accounts receivable. In
addition, expenses related to any patent infringement, or other litigation, may
require additional cash resources and may have an adverse impact on the
Company's results of operations, liquidity or financial position.
Cellular, PCS and WLL network operators both domestic and international,
increasingly have required their suppliers to arrange or provide long-term
financing for them as a condition to obtaining or bidding on infrastructure
projects. 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
18
<PAGE> 19
through a guarantee of such financing through third-party lenders. The inability
to arrange or provide such financing or to successfully compete for
infrastructure projects could have a material adverse effect on the Company. The
amount of such financing could become significant and, if not repaid, could have
a material adverse effect on the Company's results of operations, liquidity or
financial position. The Company may be required to maintain any such extensions
of credit, or remain obligated under guarantees, until maturity, which could
have a material adverse effect on the Company's credit rating. Although the
Company may seek to have third parties assume some or all of any such credit
arrangements, there can be no assurance that the Company will be able to do so.
Such amounts financed may include "soft costs" (such as software, cell site
leases and permits), and thus the amount financed may exceed 100% of
infrastructure equipment costs. The Company has vendor financing obligations
with Sprint PCS (through Nortel), and directly with other service providers. The
Company has limited experience evaluating the credit worthiness or commercial
viability of potential purchasers of CDMA equipment, and there can be no
assurances that such customers will not default on any financing arranged or
provided by the Company for the purchase of its CDMA equipment and services. In
addition, during fiscal 1998, the Company expects to finalize negotiations with
Globalstar which could result in the deferral of approximately $100 million of
remaining contract payments under the development agreement, the majority of
which relates to contract services to be provided subsequent to December 28,
1997. Such deferrals will be interest bearing and paid by Globalstar over a
period not exceeding four years from the deferral.
The Company's ability to arrange or provide and be competitive with such
financing will depend on a number of factors, including the Company's capital
structure, level of available credit and ability to provide financing in
conjunction with third-party lenders. There can be no assurance that the Company
will be able to arrange or provide such financing on terms and conditions, and
in amounts, that will be satisfactory to such network operators. The Company may
be required to hold any loans, or remain obligated under guarantees, until
maturity, which could have a material adverse effect on the Company's credit
rating. Most of the Company's competitors have substantially greater resources
than the Company, which may enable them to offer more favorable financing terms
and successfully compete against the Company for infrastructure projects. The
inability to arrange or provide such financing or to successfully compete for
infrastructure projects could have a material adverse effect on the Company and
its business prospects.
The Company and QPE have entered into contracts that provide performance
guarantees to protect customers against late delivery or failure to perform.
These performance guarantees, and any future commitments for performance
guarantees, are obligations entered into separately, and in some cases jointly,
with partners to supply CDMA subscriber and infrastructure equipment. Certain of
these obligations provide for substantial performance guarantees that accrue at
a daily rate based on percentages of the contract value to the extent the
equipment is not delivered by scheduled delivery dates or the systems fail to
meet certain performance criteria by such dates. The Company is dependent in
part on the performance of its suppliers and strategic partners in order to
provide equipment which is the subject of the guarantees. Thus, the ability to
timely deliver such equipment may be outside the Company's control. If the
Company and QPE are unable to meet their performance obligations, the payment of
the performance guarantees could amount to a significant portion of the contract
value and would have a material adverse effect on product margins and the
Company's results of operations, liquidity or financial position.
YEAR 2000 ISSUE
The Year 2000 issue arises from the fact that most computer software programs
have been written using two digits rather than four to represent a specific
year. Any computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculation causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activities. Based on a recent assessment,
the Company believes that it will not be required to modify or replace
significant portions of its software in order to address its Year 2000 issue.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issue. There can be no assurance that the systems of other companies will be
converted timely, or that a failure to convert by another company, or a
conversion that is incompatible with the Company's systems, would not have a
material adverse effect on the Company.
19
<PAGE> 20
FUTURE ACCOUNTING REQUIREMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting
Comprehensive Income," which the Company will be required to adopt for fiscal
year 1999. This statement will require the Company to report in the financial
statements, in addition to net income, comprehensive income and its components
including, as applicable, foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. Upon adoption, the Company will also be required to
reclassify financial statements for earlier periods provided for comparative
purposes. The Company currently expects that the effect of adoption of FAS 130
may be primarily from foreign currency translation adjustments and has not yet
determined the manner in which comprehensive income will be displayed.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," which the Company will be required to adopt for fiscal year 1999.
This statement establishes standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Under FAS 131, operating segments are to
be determined consistent with the way that management organizes and evaluates
financial information internally for making operating decisions and assessing
performance. The Company has not determined the impact of the adoption of this
new accounting standard on its consolidated financial statement disclosures.
20
<PAGE> 21
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
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which this
report is filed.
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-27-1998
<PERIOD-START> SEP-29-1997
<PERIOD-END> DEC-28-1997
<CASH> 209,540
<SECURITIES> 443,661
<RECEIVABLES> 643,129
<ALLOWANCES> 22,930
<INVENTORY> 281,606
<CURRENT-ASSETS> 1,623,893
<PP&E> 700,558
<DEPRECIATION> 225,406
<TOTAL-ASSETS> 2,426,349
<CURRENT-LIABILITIES> 668,675
<BONDS> 21,787
660,000
0
<COMMON> 7
<OTHER-SE> 1,072,818
<TOTAL-LIABILITY-AND-EQUITY> 2,426,349
<SALES> 785,854
<TOTAL-REVENUES> 785,584
<CGS> 553,615
<TOTAL-COSTS> 553,615
<OTHER-EXPENSES> 11,976
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,689
<INCOME-PRETAX> 56,557
<INCOME-TAX> 19,795
<INCOME-CONTINUING> 36,762
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,762
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.50
</TABLE>
