<PAGE> 1
CONFORMED
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
/x/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1996 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, 65,616,859 shares as of May 9, 1996.
<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
DATED: May 10, 1996 /s/Anthony S. Thornley
---------------------------------
Senior Vice President, Finance
& Chief Financial Officer
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QUALCOMM INCORPORATED
INDEX
PART I. FINANCIAL INFORMATION PAGE
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 11-17
of Operations and Financial Condition
PART II. OTHER INFORMATION 18-19
Item 6. Exhibits and Reports on Form 8-K
Exhibit 11.1-Computation of Earnings Per Share
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>
March 31, 1996 September 24, 1995
-------------- ------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $220,221 $500,629
Investments 142,524 66,335
Accounts receivable, net 132,908 82,733
Inventories 108,535 44,010
Other current assets 21,355 10,923
-------- --------
Total current assets 625,543 704,630
PROPERTY, PLANT AND EQUIPMENT, NET 261,369 185,513
INVESTMENTS 17,029 12,032
OTHER ASSETS 70,112 38,542
-------- --------
TOTAL ASSETS $974,053 $940,717
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $108,776 $ 95,769
Unearned revenue 12,825 8,213
Current portion of long-term debt 972 1,015
-------- --------
Total current liabilities 122,573 104,997
LONG-TERM DEBT 29,246 33,479
OTHER LIABILITIES 2,030 2,624
-------- --------
Total liabilities 153,849 141,100
-------- --------
Commitments and contingencies (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.0001 par value - -
Common stock, $0.0001 par value 6 6
Paid-in capital 803,782 794,774
Retained earnings 16,416 4,837
-------- --------
Total stockholders' equity 820,204 799,617
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $974,053 $940,717
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
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QUALCOMM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------ ----------------
March 31, 1996 March 26, 1995 March 31, 1996 March 26, 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Communications systems $104,120 $56,626 $192,824 $106,968
Contract services 28,036 25,652 60,199 43,716
License and development fees 17,107 7,475 42,843 14,954
-------- ------- -------- --------
Total revenues 149,263 89,753 295,866 165,638
-------- ------- -------- --------
OPERATING EXPENSES:
Communications systems 78,866 32,398 141,618 58,124
Contract services 18,650 17,595 40,953 31,942
Research and development 35,324 17,701 67,579 35,209
Selling and marketing 16,539 8,619 32,029 15,754
General and administrative 8,464 9,183 19,570 16,338
-------- ------- -------- --------
Total operating expenses 157,843 85,496 301,749 157,367
-------- ------- -------- --------
OPERATING (LOSS) INCOME (8,580) 4,257 (5,883) 8,271
INTEREST INCOME, NET 5,985 939 13,170 2,000
MINORITY INTEREST IN LOSSES OF
CONSOLIDATED SUBSIDIARIES 2,669 1,957 6,984 3,902
EQUITY IN LOSS OF JOINT VENTURE - - (150) -
-------- ------- -------- --------
INCOME BEFORE INCOME TAXES 74 7,153 14,121 14,173
INCOME TAX BENEFIT (EXPENSE) 1,391 (1,106) (2,542) (2,179)
-------- ------- -------- --------
NET INCOME $ 1,465 $ 6,047 $ 11,579 $ 11,994
======== ======= ======== ========
NET EARNINGS PER COMMON SHARE
Primary $ 0.02 $ 0.11 $ 0.17 $ 0.22
======== ======= ======== ========
Fully diluted $ 0.02 $ 0.11 $ 0.17 $ 0.21
======== ======= ======== ========
SHARES USED IN PER SHARE CALCULATION
Primary 70,158 55,118 69,673 55,228
======== ======= ======== ========
Fully diluted 70,158 56,614 69,702 55,976
======== ======= ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
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QUALCOMM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
----------------
March 31, 1996 March 26, 1995
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 11,579 $ 11,994
Depreciation and amortization 24,419 13,666
Minority interest in losses of consolidated subsidiaries (6,984) (3,902)
Equity in loss of joint venture 150 -
Increase (decrease) in cash resulting from changes in:
Accounts receivable (50,175) (10,281)
Inventories (64,525) (4,111)
Other assets (8,082) 802
Accounts payable and accrued liabilities 13,007 (11,089)
Unearned revenue 4,612 2,203
Other liabilities (448) 471
--------- --------
Net cash used in operating activities (76,447) (247)
--------- --------
INVESTING ACTIVITIES:
Note receivable disbursement (Note 5) (25,000) -
Capital expenditures (95,844) (35,713)
Purchases of intangible assets (3,788) (2,700)
Purchases of investments (264,852) (19,141)
Maturities of investments 183,666 35,329
Investment in other entities (6,722) (4,131)
--------- --------
Net cash used in investing activities (212,540) (26,356)
--------- --------
FINANCING ACTIVITIES:
Proceeds from sale/leaseback transaction 10,248 -
Principal payments under long-term debt (20,498) (2,258)
Proceeds from issuance of notes payable 3,733 4,015
Minority interest investment in consolidated subsidiary 6,088 2,464
Net proceeds from issuance of common stock 9,008 4,353
--------- --------
Net cash provided by financing activities 8,579 8,574
--------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (280,408) (18,029)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 500,629 45,049
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 220,221 $ 27,020
========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
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QUALCOMM INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 24, 1995, 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 statement thereof. 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 1995 Annual Report on Form 10-K for the year ended
September 24, 1995.
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 these estimates.
The Company's consolidated financial statements include the assets, liabilities
and results of operations of majority-owned subsidiaries. The ownership of the
other interest holders is reflected as minority interest. The Company uses the
equity method to account for ownership interests in partnerships and for
investments in corporate entities in which it has voting interest of 20% to 50%
or in which it otherwise exercises significant influence. Investments in
corporate entities with less than 20% voting interest are generally accounted
for under the cost method. All significant intercompany accounts and
transactions have been eliminated.
Primary earnings per common share are calculated by dividing net income by the
weighted average number of common shares and dilutive common stock equivalents
using the treasury stock method. Fully diluted earnings per share reflect the
dilutive effect of common stock equivalents at the higher of the average or the
ending market price during the reporting period.
The Company operates and reports using a period ending on the last Sunday of
each month. As a result of this practice, fiscal 1996 will include 53 weeks. The
first half of fiscal 1996 had 27 fiscal weeks of activity as compared to 26
fiscal weeks of activity during the first half of fiscal 1995. The additional
week of activity occurred in the first quarter of fiscal 1996.
The Company has not elected early adoption of Financial Accounting Standard No.
123 ("FAS 123") "Accounting for Stock-Based Compensation." FAS 123 becomes
effective beginning with the Company's first quarter of fiscal year 1997, and
will not have a material effect on the Company's financial position or results
of operations. Upon adoption of FAS 123, the Company will continue to measure
compensation expense for its stock-based employee compensation plans using the
intrinsic value method prescribed by
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APB Opinion No. 25, "Accounting for Stock Issued to Employees" and will provide
pro forma disclosures of net income and earnings per share as if the fair value
based method prescribed by FAS 123 had been applied in measuring compensation
expense.
Operating results for interim periods are not necessarily indicative of
operating results for an entire fiscal year.
NOTE 2 - COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
<TABLE>
<CAPTION>
March 31, 1996 September 24, 1995
<S> <C> <C>
Accounts Receivable (in thousands):
Trade, net of allowance for doubtful
accounts of $5,676 and $2,853 respectively $ 99,475 $58,651
Long-term contracts:
Billed 9,434 7,882
Unbilled, net of progress payments of
$3,236 and $1,780 respectively 19,405 13,602
Other 4,594 2,598
-------- -------
$132,908 $82,733
======== =======
</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. Progress payments increased $1,456,000 and decreased $2,981,000 during
the first six months of fiscal 1996 and 1995, respectively.
<TABLE>
<CAPTION>
March 31, 1996 September 24, 1995
<S> <C> <C>
Inventories (in thousands):
Raw materials $ 78,594 $27,090
Work-in-progress 15,437 7,922
Finished goods 14,504 8,998
-------- -------
$108,535 $44,010
======== =======
</TABLE>
Increases in raw materials during the first six months of fiscal 1996 is due
primarily to the ramp up of QUALCOMM Personal Electronics ("QPE") phone
production and to meet requirements of the CDMA infrastructure and subscriber
businesses.
NOTE 3 - LONG-TERM DEBT
During the first quarter of fiscal 1996, the Company retired a $20,000,000 note
payable due to a bank with an original maturity date of April 2008. No gain or
loss resulted from the prepayment.
In December 1995, QPE entered into an agreement for the sale and leaseback of
certain manufacturing equipment with a net book value of approximately
$10,248,000. There was no gain or loss realized as a result of the sale. The
lease has a five year term and is non-recourse to the Company and the minority
interest holder in QPE. The lease is classified as a capital lease in accordance
with Statement of Financial Accounting Standards No. 13, "Accounting for
Leases."
8
<PAGE> 9
The following is a schedule of future minimum lease payments under the lease:
<TABLE>
<S> <C>
Fiscal years ending September 30, (in thousands)
1996 $ 317
1997 2,342
1998 2,912
1999 2,912
2000 2,912
Thereafter 728
-------
Total minimum lease payments 12,123
Amounts representing interest 1,875
-------
Present value of net minimum
payments 10,248
Current portion at March
31, 1996 569
-------
$ 9,679
=======
</TABLE>
NOTE 4 - INCOME TAXES
During the second quarter of fiscal 1996, the Company reduced its estimate of
the effective income tax rate on fiscal year 1996 earnings from approximately
28% to 18%. This is primarily due to allocations of Globalstar, L.P.
("Globalstar") partnership losses for income tax reporting purposes. Globalstar,
L.P. is a limited partnership formed to develop, own, and operate the Globalstar
low-earth orbiting satellite-based wireless communications system. Further
income tax reductions from these partnership losses resulted from a guarantee of
Globalstar vendor financing obligations. See Note 5. In addition, the income tax
rate was lowered due to increased qualified export sales of the Company's
Foreign Sales Corporation.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
INVESTMENTS AND OTHER COMMITMENTS
In November 1995, the Company originally provided a $25,000,000 short-term note
receivable to NextWave Telecom Inc. ("NextWave"), a privately held company.
During March 1996, the Company converted $15,000,000 of the $25,000,000
short-term note receivable from NextWave into a subscription for Series B Common
Stock. The remaining $10,000,000 note receivable balance matures thirty days
after the completion of the FCC C-Block auctions which ended in May 1996. At
March 31, 1996, the Company has included the remaining $10,000,000 principal
balance in other current assets.
With the conversion of the $15,000,000 note receivable balance into Series B
Stock, the Company has paid a total of $20,000,000 to purchase 6,666,666 shares
of Series B Common Stock of NextWave and warrants to buy 1,111,111 additional
shares of Series B Common Stock at $3.00 per share. Should NextWave be
unsuccessful in its attempts to obtain a PCS license from the FCC, the
subscription will become null and void, and the Company will be entitled to a
refund of the $20,000,000, less certain expenses. At March 31, 1996, the
$20,000,000 investment is included in other long-term assets and, as the Company
holds less than 10% of NextWave's outstanding shares, it is accounting for its
investment under the cost method. The Company expects its ownership percentage
to decrease in the future as NextWave raises additional equity.
The Company has a 49% interest in the Loral/QUALCOMM Partnership, L.P. ("LQP"),
a partnership with Loral Space & Communications LTD. LQP owns approximately 42%
of LQSS, L.P., a limited partnership which has acquired an interest in
Globalstar. Through the Company's ownership in LQP, the Company indirectly owns
approximately 7.2% of Globalstar and accounts for its investments in these
partnerships under the equity method. LQP may be obligated, subject to certain
conditions, to purchase
9
<PAGE> 10
from another investor in Globalstar, an additional 197,500 shares of Globalstar
for up to $9,375,000, a price discounted from the price paid by such investor.
Should LQP be required to purchase such investor's ownership interest, the
Company's pro rata contribution may be as much as $4,600,000.
During the second quarter of fiscal 1996, the Company guaranteed $17,000,000 of
certain vendor financing obligations of Globalstar (the "Vendor Financing
Guarantee"). The Vendor Financing Guarantee will expire no later than March
1997. The Company has agreed to guarantee $25,500,000 of borrowings under an
existing bank financing agreement. Globalstar had not borrowed any funds under
this bank financing agreement as of March 31, 1996. The amount of the Vendor
Financing Guarantee will decrease, dollar for dollar, if Globalstar borrows
funds under the existing bank financing agreement.
The Company's remaining required funding to the Shinsegi Telecomm, Inc.
("Shinsegi") joint venture is expected to be approximately $1,600,000 and will
be invested upon proper request from Shinsegi.
OPERATING LEASES
In February 1996, QPE entered into an operating lease agreement for certain
manufacturing equipment. The lease has a five year term and is non-recourse to
the Company and the minority interest holder in QPE. The lease has both early
and end of term purchase options for prices scheduled in the lease agreement. If
the purchase options have not been exercised by the end of the lease term, QPE
will be required to pay certain deficiency payments if proceeds from the sale of
the equipment fall below specified amounts. The maximum amount of deficiency
payments for the equipment under lease is approximately $8,595,000. QPE accrues
a pro-rata portion of the maximum deficiency payments in periodic rental expense
on a straight-line basis over the lease term.
Future rental payments under the leases, excluding the deficiency payments, from
fiscal 1996 through 2001 are $388,000, $675,000, $675,000, $675,000, $675,000,
and $169,000, respectively.
PURCHASE OBLIGATIONS
During the second quarter of fiscal 1996, the Company entered into long-term
purchase agreements with certain suppliers to purchase certain components and
estimates its remaining non-cancelable obligations under these agreements to be
$22,518,000 through fiscal 1997.
LITIGATION
During the second quarter of fiscal 1996, the Company and Hughes Aircraft
Company agreed to dismiss their respective litigation against each other without
payment by either party. In fiscal 1995, the Company had accrued $2,900,000 for
the anticipated liability for legal fees. As a result of the recent settlement
of this litigation, the Company reversed this accrual, resulting in a $2,900,000
reduction to General and Administrative expense.
PERFORMANCE GUARANTEES
To date, the Company has entered into one agreement to supply CDMA
infrastructure equipment, which provides for substantial performance guarantees.
These guarantees 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 equipment fails to meet certain performance criteria by such dates. If
the Company is unable to meet its performance obligations, the payment of the
performance guarantees could amount to a significant portion of the contract
value and would materially adversely affect product margins and the Company's
results of operations. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition".
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PART I. FINANCIAL INFORMATION
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 24, 1995 contained in the Company's 1995
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 actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
specifically limited to, timely product development, variation of royalty,
license and other revenues, failure to satisfy performance obligations,
difficulties in obtaining components needed for production of wireless equipment
and changes in economic conditions of various markets the Company serves, as
well as the other risks detailed in this section, and in the sections entitled
Results of Operations and Liquidity and Capital Resources, and those discussed
in the Company's Form 10-K for the year ended September 24, 1995.
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 has
also been involved in the development and commercialization of its proprietary
Code Division Multiple Access ("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.
Domestically, the Company generates revenues from its OmniTRACS system by
manufacturing and selling OmniTRACS terminals and related application software
packages and by providing ongoing messaging and maintenance services to
OmniTRACS users. The Company's OmniTRACS customers in the United States are
primarily in the long haul trucking industry and use the system for two-way
messaging and position tracking. The Company's software enables the interface of
the OmniTRACS system with the customer's in-house computer systems, including
various monitoring, reporting, tracking and operating applications.
Internationally, the Company's revenues from the OmniTRACS system include
license fees, sales of network equipment and terminals and fees from engineering
support services. Messaging services are provided by service providers that
operate network management centers for a region under licenses granted by the
Company. Since the product's introduction the Company has shipped over 155,000
OmniTRACS units worldwide. The Company has implemented a proactive pricing
strategy on sales of its OmniTRACS products and services which, notwithstanding
continued cost reduction programs, has resulted in a reduction of the margins of
such products and services. Additionally, unfavorable market conditions that
presently exist in the trucking industry have contributed to lower unit
shipments. These conditions are expected to continue to be a factor in fiscal
1996 and may be a factor in future periods as well.
The Company's revenues generated from its proprietary CDMA technology have
historically been derived primarily from license and development fees and
contract agreements with domestic and international wireless communications
equipment suppliers, service providers and research organizations. In fiscal
1995, and in the first half of fiscal 1996, the Company has recognized an
increased level of CDMA component and subscriber equipment sales. In the second
quarter of fiscal 1996, the Company shipped nearly 40,000 subscriber units,
primarily to Hong Kong and Korea where commercial
11
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CDMA networks are being deployed. In the future, the Company expects to derive
revenues from the sale of CDMA subscriber and network equipment manufactured by
QPE and the Company, the sale of CDMA chip sets and test equipment to licensees,
and additional license fees and royalties from sales of CDMA equipment by the
Company's licensees. In December 1995, the Company and SONY announced that they
will jointly market and sell wireless CDMA portable phones in the United States
through the QPE joint venture.
Although the Company expects to receive CDMA license and development fees and
royalties 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. In the first quarter of fiscal 1996, the
Company recognized significant license fees from both existing and new
licensees. However, license and development fees declined in the second quarter
of fiscal 1996. In the future, the Company expects to continue to experience
considerable fluctuations in quarterly and yearly operating results due to
variations in the amount and timing of CDMA fees and royalties. If the Company
does not receive significant CDMA fees in fiscal 1996, and continues to incur
high levels of research and development costs for its CDMA product development,
the Company's results of operations for those quarters will be materially
adversely affected.
As the Company has commenced commercial sales of CDMA equipment and components
in fiscal 1996, it has experienced and expects to continue to experience
increased operating costs to support the growth in the Company's business. The
Company also expects to continue to make substantial investments in research and
development of CDMA products and to increase sales and marketing expenses
related to its CDMA products throughout the world. Further, the Company is
currently incurring increasing costs to establish the field infrastructure and
customer service organizations and systems for anticipated orders. Manufacturing
costs associated with the production of initial commercial volumes of its CDMA
equipment are expected to continue to be high as a percentage of the sales price
for such products.
The timing and availability of commercial quantities of CDMA equipment by the
Company and its licensees will significantly affect the extent to which and when
the Company's CDMA technology is commercially implemented and will have an
impact on the amount and timing of related revenues from fees and royalties from
existing customers and any new licensees, as well as revenues from sales of
network and subscriber equipment. Although the Company intends to be a supplier
of certain CDMA network and subscriber equipment, the Company expects that a
major portion of the network and subscriber equipment that would be made
commercially available would be supplied by the Company's licensees.
The Company has received orders for CDMA wireless communications equipment and
components for delivery in fiscal 1996 and beyond and expects to receive
additional orders in the future. Through March 1996, backlog and contracts
subject to contingencies totaled approximately $460 million for CDMA products.
Included in backlog are all commitments to purchase regardless of the scheduled
delivery dates. However, the majority of this backlog is planned to be delivered
within one year. Because these contracts are subject to contingencies and may be
cancelable without significant penalty, backlog, as of any particular date, may
not be indicative of future results.
Increasingly, customers in the industry are demanding substantial performance
guarantees to protect against late delivery or failure to perform. To date, the
Company has entered into one such CDMA supply contract with performance
guarantees. If the Company is unable to deliver equipment on the scheduled
dates, the payment of existing or future performance guarantees could have a
material adverse effect on the Company and its results of operations.
In 1994, the Company entered into a strategic alliance with Northern Telecom
("Nortel"), under which Nortel has agreed to purchase a percentage of its CDMA
requirements from the Company. In February 1996, the Company announced it will
supply Nortel with 1900 MHz digital infrastructure equipment and
12
<PAGE> 13
RF services as part of Nortel's approximately $1 billion award by Sprint
Spectrum Limited Partners ("SSLP") formerly known as STV. The Company, through
Nortel, has provided for performance guarantees on the SSLP order. Nortel's
purchase of QUALCOMM services and equipment, valued at approximately $200
million, is contingent on successful completion of financing with SSLP. Revenue
recognition of shipments to SSLP is not expected until commercial service is
launched, currently planned for the first quarter of fiscal 1997.
The Company currently has limited experience in high volume manufacturing of its
CDMA products and is in the process of establishing and expanding its
manufacturing capacity. There can be no assurance that the Company will be able
to manufacture quantities of its products at commercially acceptable costs in a
timely manner to meet industry requirements. Any delays or difficulties in
connection with the planned increase in manufacturing capacity or component
supply could have a material adverse effect on the Company's business and
results of operations. If the Company is unable to manufacture CDMA subscriber
and infrastructure equipment at commercially acceptable costs, the Company's
competitive position and the ability of the Company to achieve a profitable
return on its CDMA investment could be adversely affected.
Wireless service providers are also requiring that the Company and other
suppliers provide vendor financing related to sales of CDMA equipment for
cellular, PCS and WLL applications. The Company is substantially smaller and has
fewer resources than other suppliers of CDMA equipment and, consequently, its
ability to provide vendor financing is limited. Currently the Company does not
have any credit facilities available to provide financing. An inability to
provide sufficient vendor financing may impair the Company's ability to sell
CDMA equipment. The amount of such vendor financing could become significant
and, if not repaid, could have a material adverse effect on the Company's
operating results.
Several of the critical products and services used in the Company's existing and
proposed products, including Application Specific Integrated Circuits ("ASICs"),
flash memory chips and certain RF components used in the Company's CDMA products
and certain custom and semi-custom Very Large Scale Integrated ("VLSI") circuits
and other sophisticated electronic parts and major subassemblies of the
OmniTRACS system, are currently available only from single or limited sources.
The Company's reliance on these sole or limited source vendors involves certain
risks, including the possibility of a shortage of certain key components and
reduced control over delivery schedules, manufacturing capability, quality and
costs. Business disruptions or financial difficulties of a sole or limited
source supplier could materially and adversely impact the Company by increasing
the cost of goods sold or reducing the availability of such components. While
the Company believes that it could obtain necessary components from other
manufacturers, an unanticipated change in the source of supply of these
components could probably cause significant delays in the Company's shipment of
CDMA and other Company products. In the event components supplied to the Company
do not meet performance specifications and renders the Company's products
noncompliant with customer specifications, the Company may be required to seek
customer waivers of such performance specifications in order to meet committed
product delivery dates. There can be no assurance the Company would be able to
obtain any such waivers. The Company is currently experiencing delays in
obtaining specification compliant RF components in quantities necessary to fully
meet the increasing demand for the Company's CDMA subscriber equipment. The
Company is working with its vendors to obtain commercial volumes of
specification compliant components. Continued delays in the availability of
these components could adversely affect the Company's ability to manufacture
subscriber equipment in the volumes and within the time frames required by its
customers, which could have a material adverse effect on the Company's operating
results.
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 $300 million. It is anticipated that Globalstar
will require capital of approximately $2.2 billion prior to full scale
commercial
13
<PAGE> 14
implementation of the Globalstar system of which approximately $1.4 billion has
been raised to date. Such capital will be used, in part, to fund payment for the
equipment to be developed by QUALCOMM. There can be no assurance that Globalstar
will be successful in raising such capital or that delays or technical or
regulatory developments will not arise which could adversely effect Globalstar's
ability to purchase such equipment from QUALCOMM and which could have a material
adverse effect on QUALCOMM's business and results of operations.
During December 1995, the Company entered into its first Globalstar handset
license with Orbitel Limited Communications, to design, develop, manufacture and
sell dual-mode Globalstar/GSM user terminals.
RESULTS OF OPERATIONS
The following table sets forth certain revenue and expense items as percentages
of revenues:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
March 31, 1996 March 26, 1995 March 31, 1996 March 26, 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Communications systems 70% 63% 65% 65%
Contract services 19 29 20 26
License and development fees 11 8 15 9
--- --- --- ---
Total revenues 100% 100% 100% 100%
--- --- --- ---
Operating expenses:
Communications systems 53% 36% 48% 35%
Contract services 12 20 14 19
Research and development 24 20 23 21
Selling and marketing 11 9 11 10
General and administrative 6 10 6 10
--- --- --- ---
Total operating expenses 106% 95% 102% 95%
--- --- --- ---
Operating income (loss) (6) 5 (2) 5
Interest income (expense), net 4 1 5 1
Minority interest 2 2 2 2
--- --- --- ---
Income before income taxes * 8 5 8
Income tax benefit (expense) 1 (1) (1) (1)
--- --- --- ---
Net income 1% 7% 4% 7%
--- --- --- ---
Communications systems costs as a
percentage of communications
systems revenues 76% 57% 73% 54%
Contract services costs as a percentage
of contract services revenues 67% 69% 68% 73%
</TABLE>
*Less than 1%
Total revenues for the second quarter of fiscal 1996 were $149.3 million, an
increase of $59.5 million or 66% compared to total revenues of $89.8 million for
the second quarter of fiscal 1995. Total revenues for the first six months of
fiscal 1996 were $295.9 million, an increase of 79% over total revenues of
$165.6 million for the first six months of fiscal 1995. Revenue growth for the
second quarter and first six months of fiscal 1996 was primarily due to
significant growth in CDMA subscriber equipment and ASIC chip sales, higher CDMA
license fees, and increased contract service revenues from the Company's
development agreement with Globalstar.
14
<PAGE> 15
Communications systems revenues which consisted primarily of revenues from the
sale of the Company's OmniTRACS system, both products and services, sales of
CDMA subscriber and infrastructure equipment and ASIC sales to CDMA licensees
and service providers were $104.1 million, an increase of $47.5 million or 84%
over the second quarter in fiscal 1995. For the first six months of fiscal 1996,
communications systems revenues were $192.8 million, an 80% increase compared to
revenues of $107.0 million for the same period in fiscal 1995. Significant
growth in revenues for the quarter and the first six months were primarily
attributable to shipments of CDMA subscriber equipment and ASIC chip sales. CDMA
product revenues are expected to represent an increasing share of communications
system revenues as higher volumes of commercial products are shipped. For the
first half of fiscal 1996, OmniTRACS revenue growth was attributable to
increased international unit sales and higher domestic messaging revenues but
was partially offset by a decline in domestic unit sales.
Contract services revenues totaled $28.0 million in the second quarter of fiscal
1996 or 19% of total revenues, compared to $25.7 million or 29% of total
revenues for the second quarter of fiscal 1995. Contract services revenues for
the first six months of fiscal 1996 increased to $60.2 million from $43.7
million for the same period in fiscal 1995, an increase of 38%. The increase of
$2.3 million for the quarter and $16.5 million for the first six months resulted
from the development agreement with Globalstar, which was partially offset by
the decrease in CDMA contract services revenues due to the transitioning of the
infrastructure and ASICs businesses from the development to the production stage
and inclusion in communications systems.
License and development fees for the second quarter of fiscal 1996 increased to
$17.1 million or 11% of total revenues from $7.5 million or 8% of total revenues
for the second quarter of the prior fiscal year. License and development fees
for the first six months of fiscal 1996 were $42.8 million, compared to $15.0
million for the same period in fiscal 1995. In the second quarter of fiscal
1996, CDMA license fees were generated from a subscriber license agreement
signed with Nippondenso Co., Ltd., and additional new licenses and other fees
and royalties from existing licensees. The Company expects to continue to
experience considerable fluctuations in quarterly and yearly operating results
in fiscal 1996 and beyond due to variations in the amount and timing of receipt
of CDMA license fees and royalties.
Costs of communications systems, which consisted primarily of costs of
manufacturing OmniTRACS units, CDMA subscriber and infrastructure equipment and
ASICs components were $78.9 million or 76% of communications systems revenues
for the second quarter of fiscal 1996, compared to $32.4 million or 57% of
communications systems revenues for the same period in the prior fiscal year.
For the first six months of fiscal 1996, communications systems costs were
$141.6 million or 73% of communications systems revenues, compared to $58.1
million or 54% of communications systems revenues for the same period in fiscal
1995. The increase in communications systems costs as a percentage of
communications systems revenues was primarily due to start-up costs associated
with the manufacturing, increased customer service requirements, and increasing
volumes of CDMA subscriber, infrastructure, and ASICs products which generate
lower margins. In addition, OmniTRACS contributed to the increased cost as a
percentage of revenues, as domestic margins were affected by lower average
prices. The Company expects both of these trends to continue through fiscal
1996.
Contract service costs were $18.7 million or 67% of contract service revenues
for the second quarter of fiscal 1996, compared to $17.6 million or 69% of
contract service revenues for the second quarter of fiscal 1995. Contract
service costs for the first six months of fiscal 1996 were $41.0 million or 68%
of contract service revenues, compared to $31.9 million or 73% of contract
service revenues for fiscal 1995. The dollar increase or the percentage decrease
in contract services costs as a percentage of contract services revenues was
primarily related to the significant growth of the Globalstar development
contract.
Research and development expenses were $35.3 million or 24% of revenues for the
second quarter of fiscal 1996, compared to $17.7 million or 20% of revenues for
the second quarter of fiscal 1995. For the first six months of fiscal 1996,
research and development costs were $67.6 million or 23% of revenues, compared
to
15
<PAGE> 16
$35.2 million or 21% of revenues for the first six months of fiscal 1995. The
dollar increase was attributed primarily to increased efforts towards the
deployment of commercial CDMA infrastructure and subscriber equipment in 1996.
Also contributing to the dollar amount were significant efforts related to CDMA
ASIC development and continued OmniTRACS product development.
Selling and marketing expenses were $16.5 million or 11% of total revenues for
the second quarter fiscal 1996, compared to $8.6 million or 9% of total revenues
for the same quarter last year. For the first six months of fiscal 1996, selling
and marketing expenses were $32.0 million or 11% of revenues, compared to $15.8
million or 10% of revenues for the same period in fiscal 1995. The dollar
increase in selling and marketing expenses for the quarter and the six months
was due primarily to significant growth in personnel and marketing expenses
primarily related to the introduction of CDMA products in the domestic and
international marketplace. Other contributors in marketing expense growth
included trade shows, commissions, advertising and the establishment of foreign
offices.
General and administrative expenses were $8.5 million or 6% of total revenues
for the second quarter of fiscal 1996, compared to $9.2 million or 10% of total
revenues for the second quarter of fiscal 1995. General and administrative
expenses for the first six months of fiscal 1996 were $19.6 million or 6% of
revenues, compared to $16.3 million or 10% of revenues for the same period in
fiscal 1995. The decrease in the second quarter of fiscal 1996 was attributable
to a one-time favorable settlement of outstanding litigation with Hughes
Aircraft Company which had resulted in the release to income of a previously
disclosed accrual of $2.9 million recorded in the second half of fiscal 1995.
The dollar increase in the first half 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, which was partially offset by the
reversal of the accrual. See Note 5.
Interest income was $6.7 million during the second quarter of fiscal 1996,
compared to $1.6 million in the second quarter of fiscal 1995. For the first six
months of fiscal 1996, interest income was $14.5 million compared to $3.3
million for the same period in fiscal 1995. The increase in the second quarter
and for the first six months in fiscal 1996 was due to the public offering
proceeds received in August 1995.
The minority interest reflects SONY's 49% share in the loss of QPE, a joint
venture consolidated in the Company's financial statements.
The income tax benefit of $1.4 million during the second quarter of fiscal 1996
represents a decrease of $2.5 million as compared to the second quarter of
fiscal 1995. Income tax expense was $2.5 million for the first six months of
fiscal 1996 compared to $2.2 million for fiscal 1995. The benefit in the second
quarter of fiscal 1996 was the result of the Company adjusting its year to date
effective tax rate. The lower effective tax rate was generated primarily from
additional tax losses from the Globalstar venture, providing a guarantee of
Globalstar vendor financing obligations and increased qualified export sales of
its Foreign Sales Corporation. See Note 4.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that the cash and cash equivalents and investment
balances of $379.8 million at March 31, 1996, including interest earned thereon,
will be used to fund working capital requirements related to the expansion of
its operations, which includes increases in manufacturing capacity and
facilities expansion, including construction or purchase of new buildings. Funds
will also be used to support the continued development and deployment of the
Company's CDMA technology and products for cellular, PCS and WLL applications,
investment in joint ventures, equipment vendor financing, the acquisition of
capital equipment and continued expansion of facilities. In addition, the
Company may also invest in companies whose products or services complement or
support the Company's manufacturing and supply capabilities or whose products or
services complement or enhance the Company's current or future product or
service offerings.
16
<PAGE> 17
In the first half of fiscal 1996, $76.5 million in cash was used by operations,
compared to $0.2 million used by operations in the first half of fiscal 1995.
The increase in cash used by operations was primarily due to significant
increases in net working capital requirements including inventories and accounts
receivable. Inventories were $64.5 million higher due primarily to increased
procurement of components necessary to support the significant CDMA product
manufacturing ramp-up which also involved increased supplier purchase
commitments. The growth in receivables was due primarily to the increase of
revenues.
Investments in capital expenditures, intangible assets and other entities
totaled $106.3 million in the first half of fiscal 1996, compared to $42.5
million in the same period of fiscal 1995. Significant components in the first
half of fiscal 1996 consisted of the purchase of $95.8 million of capital
assets, the purchase of intangible assets of $3.8 million and the investment of
$6.7 million in entities in which the Company holds less than a 50% interest. In
the first half of fiscal 1996, the Company purchased a manufacturing and
research facility for approximately $31.5 million. In addition, capital
expenditures were higher due to the construction of a new engineering facility,
increased building improvements relating primarily to the new manufacturing and
research facility, and higher computer, machinery and equipment expenditures.
The Company has provided $30 million in financing to NextWave in connection with
their plans to bid on PCS licenses in the current C-block auctions by the FCC.
The funding originally consisted of $5 million of equity and $25 million in a
convertible secured loan. Funds used for the financing were primarily derived
from the public offering made in August 1995. As part of the transaction,
NextWave has committed to purchase a portion of its PCS infrastructure and
subscriber equipment requirements from the Company. In March 1996, the Company
increased its equity stake to $20 million by converting $15 million of the
convertible secured loan balance to equity. The loan balance is now $10 million.
The Company holds less than 10% of NextWave's outstanding shares and is
accounting for its investment under the cost method. The Company expects its
ownership percentage to decrease in the future as NextWave raises additional
equity. See Note 5.
In the first half of fiscal 1996, the Company's financing activities provided
net cash of $8.6 million compared to $8.6 million in the first half of fiscal
1995. The first half 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 San Diego
Design Center. Net cash provided in the first half of fiscal 1995 was primarily
related to 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.
The Company is continually evaluating potential strategic alliances with U.S.
and international companies for further commercialization of its CDMA technology
for cellular, PCS and WLL applications worldwide.
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 ventures or other forms of strategic alliances,
the requirement to provide CDMA vendor financing, the growth in personnel and
related facility expansion and the increase in manufacturing capacity.
The Company may need additional capital which may be derived through additional
debt or equity financing, or through other sources. There can be no assurances
such capital will be available or, if available, that it will be on acceptable
terms.
17
<PAGE> 18
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
The Company's Annual Meeting of Stockholders (the "Annual Meeting") was held on
February 6, 1996. At the Annual Meeting, the stockholders of the Company (i)
elected each of the persons listed below to serve as a Class II director of the
Company until the 1999 Annual Meeting of Stockholders or until his/her successor
is elected; (ii) approved the Company's 1991 Stock Option Plan, as amended, to
increase the aggregate number of shares of Common Stock authorized for issuance
under such plan by 6,000,000 shares; (iii) approved the Company's 1991 Employee
Stock Purchase Plan, as amended, to increase the aggregate number of shares of
Common Stock authorized for issuance under such plan by 1,000,000 shares; (iv)
approved the Company's Executive Retirement Matching Contribution Plan and
authorized 100,000 shares of Common Stock for issuance under such plan; and (v)
ratified the selection of Price Waterhouse LLP as the Company's independent
accountants for the fiscal year ending September 29, 1996.
The Company had 64,775,618 shares of Common Stock outstanding as of December 15,
1995, the record date for the Annual Meeting. At the Annual Meeting, holders of
a total of 58,276,396 shares of Common Stock were present in person or
represented by proxy. The following sets forth information regarding the results
of the voting at the Annual Meeting:
Proposal 1: Election of Class II Directors
<TABLE>
<CAPTION>
Shares Voting Shares
Director In Favor Withheld
-------- ---------- --------
<S> <C> <C>
Jerome S. Katzin 58,092,112 184,284
Duane A. Nelles 58,125,421 150,975
Janice Obuchowski 58,156,453 119,943
Brent Scowcroft 58,096,743 179,653
Frank Savage 57,476,319 800,077
</TABLE>
Directors whose term of office continued after the annual meeting are: Harvey P.
White, Richard C. Atkinson, Peter M. Sacerdote, Marc I. Stern, Irwin Mark
Jacobs, Andrew J. Viterbi, Adelia A. Coffman and Neil Kadisha.
Proposal 2: Approval of the 1991 Stock Option Plan as Amended
<TABLE>
<CAPTION>
<S> <C>
Votes in favor: 29,782,573
Votes against: 9,801,442
Abstentions: 203,650
Broker non-votes: 24,987,953
</TABLE>
18
<PAGE> 19
Proposal 3: Approval of the 1991 Employee Stock Purchase Plan as Amended
<TABLE>
<CAPTION>
<S> <C>
Votes in favor: 39,882,494
Votes against: 1,327,781
Abstentions: 176,725
Broker non-votes: 24,388,618
</TABLE>
Proposal 4. Approval of the Executive Retirement Matching Contribution Plan
<TABLE>
<CAPTION>
<S> <C>
Votes in favor: 38,700,656
Votes against: 1,875,422
Abstentions: 299,859
Broker non-votes: 23,899,681
</TABLE>
Proposal 5. Ratification of Selection of Independent Accountants
<TABLE>
<CAPTION>
<S> <C>
Votes in favor: 57,910,073
Votes against: 172,729
Abstentions: 102,257
Broker non-votes: 6,590,559
</TABLE>
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.
19
<PAGE> 1
Exhibit 11.1
QUALCOMM Incorporated
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, 1996 March 26, 1995 March 31, 1996 March 26, 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
NET INCOME(1) $ 1,465 $6,047 $11,579 $11,994
======= ======= ======= =======
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING 65,262 51,881 65,009 51,734
COMMON STOCK
EQUIVALENT SHARES(2) 4,896 3,237 4,664 3,494
------- ------- ------- -------
TOTAL NUMBER OF SHARES
FOR COMPUTING PRIMARY
EARNINGS PER SHARE 70,158 55,118 69,673 55,228
INCREMENTAL SHARES FOR
COMPUTING FULLY
DILUTED EARNINGS
PER SHARE(3) -- 1,496 29 748
------- ------- ------- -------
TOTAL NUMBER OF
SHARES FOR
COMPUTING FULLY
DILUTED EARNINGS
PER SHARE 70,158 56,614 69,702 55,976
======= ======= ======= ======
PRIMARY EARNINGS
PER SHARE $ 0.02 $ 0.11 $ 0.17 $ 0.22
FULLY DILUTED
EARNINGS PER
SHARE(4) $ 0.02 $ 0.11 $ 0.17 $ 0.21
</TABLE>
- - -----------
(1) The Company's fiscal quarter ended on the last Sunday of March.
(2) Includes outstanding options and warrants for common stock.
(3) The incremental shares for fully diluted earnings per share reflects
the dilutive effect of stock options and warrants at the higher of the
average or ending market price during the reporting period.
(4) This calculation is submitted in accordance with Regulation S-K item
601(b)(11).
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 220,221
<SECURITIES> 159,553
<RECEIVABLES> 132,908
<ALLOWANCES> 0
<INVENTORY> 108,535
<CURRENT-ASSETS> 21,355
<PP&E> 261,369
<DEPRECIATION> 0
<TOTAL-ASSETS> 974,053
<CURRENT-LIABILITIES> 122,573
<BONDS> 31,276
0
0
<COMMON> 803,788
<OTHER-SE> 16,416
<TOTAL-LIABILITY-AND-EQUITY> 974,053
<SALES> 149,263
<TOTAL-REVENUES> 149,263
<CGS> 97,516
<TOTAL-COSTS> 97,516
<OTHER-EXPENSES> 60,327
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (5,985)
<INCOME-PRETAX> 74
<INCOME-TAX> (1,391)
<INCOME-CONTINUING> 1,465
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,465
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
