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. 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 2 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 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS QUALCOMM INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) (Unaudited) ASSETS
March 31, 1996 September 24, 1995 -------------- ------------------ 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 ======== ========
See Notes to Condensed Consolidated Financial Statements. 4 QUALCOMM INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except for per share data) (Unaudited)
Three months ended Six months ended ------------------ ---------------- March 31, 1996 March 26, 1995 March 31, 1996 March 26, 1995 -------------- -------------- -------------- -------------- 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 ======== ======= ======== ========
See Notes to Condensed Consolidated Financial Statements. 5 QUALCOMM INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Six months ended ---------------- March 31, 1996 March 26, 1995 -------------- -------------- 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 ========= ========
See Notes to Condensed Consolidated Financial Statements. 6 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 7 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
March 31, 1996 September 24, 1995 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 ======== =======
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.
March 31, 1996 September 24, 1995 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 ======== =======
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 The following is a schedule of future minimum lease payments under the lease: 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 =======
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 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". 10 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 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 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 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:
Three Months Ended Six Months Ended ------------------ ---------------- March 31, 1996 March 26, 1995 March 31, 1996 March 26, 1995 -------------- -------------- -------------- -------------- 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%
*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 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 $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 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 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
Shares Voting Shares Director In Favor Withheld -------- ---------- -------- 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
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
Votes in favor: 29,782,573 Votes against: 9,801,442 Abstentions: 203,650 Broker non-votes: 24,987,953
18 Proposal 3: Approval of the 1991 Employee Stock Purchase Plan as Amended
Votes in favor: 39,882,494 Votes against: 1,327,781 Abstentions: 176,725 Broker non-votes: 24,388,618
Proposal 4. Approval of the Executive Retirement Matching Contribution Plan
Votes in favor: 38,700,656 Votes against: 1,875,422 Abstentions: 299,859 Broker non-votes: 23,899,681
Proposal 5. Ratification of Selection of Independent Accountants
Votes in favor: 57,910,073 Votes against: 172,729 Abstentions: 102,257 Broker non-votes: 6,590,559
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