1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
[ x ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to .
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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, 66,310,283 shares as of July 28,
1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUALCOMM Incorporated
DATED: August 6, 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 10-17
of Operations and Financial Condition
PART II. OTHER INFORMATION 18
Item 6. Exhibits and Reports on Form 8-K
Exhibit 11.1- Computation of Earnings Per Share
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUALCOMM INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS
June 30, 1996 September 24, 1995
------------- ------------------
CURRENT ASSETS:
Cash and cash equivalents $ 99,437 $500,629
Investments 209,275 66,335
Accounts receivable, net 193,440 82,733
Inventories 129,726 44,010
Other current assets 16,585 10,923
---------- --------
Total current assets 648,463 704,630
PROPERTY, PLANT AND EQUIPMENT, NET 297,737 185,513
INVESTMENTS 17,011 12,032
OTHER ASSETS 71,382 38,542
---------- --------
TOTAL ASSETS $1,034,593 $940,717
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 153,839 $ 95,769
Unearned revenue 10,419 8,213
Current portion of long-term debt 1,293 1,015
---------- --------
Total current liabilities 165,551 104,997
LONG-TERM DEBT 37,269 33,479
OTHER LIABILITIES 2,050 2,624
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Total liabilities 204,870 141,100
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Commitments and contingencies (Note 4)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.0001 par value - -
Common stock, $0.0001 par value 7 6
Paid-in capital 811,794 794,774
Retained earnings 17,922 4,837
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Total stockholders' equity 829,723 799,617
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,034,593 $940,717
========== ========
See Notes to Condensed Consolidated Financial Statements.
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QUALCOMM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except for per share data)
(Unaudited)
Three months ended Nine months ended
------------------ -----------------
June 30, 1996 June 25, 1995 June 30, 1996 June 25, 1995
------------- ------------- ------------- -------------
REVENUES:
Communications systems $174,813 $61,257 $367,637 $168,225
Contract services 34,922 27,073 95,121 70,789
License, development fees and royalties 25,145 11,138 67,988 26,092
-------- ------- -------- --------
Total revenues 234,880 99,468 530,746 265,106
-------- ------- -------- --------
OPERATING EXPENSES:
Communications systems 135,412 33,537 277,030 91,661
Contract services 25,151 20,278 66,104 52,220
Research and development 46,670 21,251 114,249 56,460
Selling and marketing 18,907 11,332 50,936 27,086
General and administrative 14,359 9,715 33,929 26,053
-------- ------- -------- --------
Total operating expenses 240,499 96,113 542,248 253,480
-------- ------- -------- --------
OPERATING (LOSS) INCOME (5,619) 3,355 (11,502) 11,626
INTEREST INCOME, NET 4,141 1,236 17,311 3,236
MINORITY INTEREST IN LOSSES OF
CONSOLIDATED SUBSIDIARIES 3,314 3,506 10,298 7,408
EQUITY IN LOSS OF JOINT VENTURE - - (150) -
-------- ------- -------- --------
INCOME BEFORE INCOME TAXES 1,836 8,097 15,957 22,270
INCOME TAX EXPENSE 330 834 2,872 3,013
-------- ------- -------- --------
NET INCOME $ 1,506 $ 7,263 $ 13,085 $ 19,257
======== ======= ======== ========
NET EARNINGS PER COMMON SHARE
Primary $ 0.02 $ 0.13 $ 0.19 $ 0.35
======== ======= ======== ========
Fully diluted $ 0.02 $ 0.13 $ 0.19 $ 0.34
======== ======= ======== ========
SHARES USED IN PER SHARE CALCULATION
Primary 70,738 55,750 70,028 55,402
======== ======= ======== ========
Fully diluted 71,697 56,964 70,367 56,305
======== ======= ======== ========
See Notes to Condensed Consolidated Financial Statements.
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QUALCOMM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine months ended
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June 30, 1996 June 25, 1995
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OPERATING ACTIVITIES:
Net income $ 13,085 $ 19,257
Depreciation and amortization 39,722 21,535
Minority interest in losses of consolidated subsidiaries (10,298) (7,408)
Equity in loss of joint venture 150 -
Increase (decrease) in cash resulting from changes in:
Accounts receivable (110,708) (6,476)
Inventories (85,716) (16,102)
Other assets (12,708) (2,195)
Accounts payable and accrued liabilities 58,072 9,120
Unearned revenue 2,206 1,542
Other liabilities (576) 545
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Net cash (used) provided by operating activities (106,771) 19,818
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INVESTING ACTIVITIES:
Issuance of note receivable (Note 4) (25,000) -
Collection of note receivable (Note 4) 9,602 -
Capital expenditures (145,680) (58,679)
Purchases of intangible assets (3,788) (2,700)
Purchases of investments (420,092) (19,015)
Maturities of investments 272,174 78,423
Investment in other entities (6,520) (11,924)
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Net cash used in investing activities (319,304) (13,895)
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FINANCING ACTIVITIES:
Proceeds from sale/leaseback transaction 10,248 (1,033)
Principal payments under long-term debt (20,463) (2,031)
Proceeds from issuance of notes payable 11,770 6,126
Minority interest investment in consolidated subsidiary 6,310 3,499
Net proceeds from issuance of common stock 17,018 7,715
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Net cash provided by financing activities 24,883 14,276
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (401,192) 20,199
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 500,629 45,049
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 99,437 $ 65,248
========= ========
See Notes to Condensed Consolidated Financial Statements.
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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 three quarters of fiscal 1996 had 40 fiscal weeks of activity as compared
to 39 fiscal weeks of activity during the first three quarters 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 APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and will provide pro forma disclosures
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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
June 30, 1996 September 24, 1995
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Accounts Receivable (in thousands):
Trade, net of allowance for doubtful
accounts of $7,188 and $2,853 respectively $154,907 $58,651
Long-term contracts:
Billed 12,796 7,882
Unbilled, net of progress payments of
$2,858 and $1,780 respectively 20,051 13,602
Other 5,686 2,598
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$193,440 $82,733
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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 $1,078,000 and decreased $2,670,000 during
the first nine months of fiscal 1996 and 1995, respectively.
June 30, 1996 September 24, 1995
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Inventories (in thousands):
Raw materials $ 91,091 $27,090
Work-in-progress 22,471 7,922
Finished goods 16,164 8,998
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$129,726 $44,010
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NOTE 3 - 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, QUALCOMM Personal Electronics ("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."
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The following is a schedule of future minimum lease payments under the lease:
Fiscal years ending September 30, (in thousands)
1996 $ 159
1997 2,342
1998 2,912
1999 2,912
2000 2,912
Thereafter 728
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Total minimum lease payments 11,965
Amounts representing interest 1,717
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Present value of net minimum payments 10,248
Current portion at June 30, 1996 1,148
=======
$ 9,100
=======
In July 1996, QPE completed negotiations on two bank credit facilities totaling,
in the aggregate, $200 million. The secured revolving credit facilities are
non-recourse to the Company and the minority interest holder in QPE.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
INVESTMENTS AND OTHER COMMITMENTS
In November 1995, the Company paid $5,000,000 to purchase 1,666,666 shares of
Series B Common Stock and provided a $25,000,000 short-term note receivable to
NextWave Telecom Inc. ("NextWave"), a privately held company. As part of the
share purchase, the Company also received warrants to buy 1,111,111 additional
shares of Series B Common Stock at $3.00 per share. During March 1996, the
Company converted $15,000,000 of the note receivable into 5,000,000 shares of
Series B Common Stock. During June 1996, the Company collected $9,602,000 of the
short term note receivable and converted the remaining principal balance of
$398,000 into a 3 year promissory note convertible into 1,019,444 shares of
Series C Common Stock. At June 30, 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 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 also agreed to guarantee $25,500,000 of borrowings under an
existing bank financing agreement, which will expire in December 2000.
Globalstar had not borrowed any funds under this bank financing agreement as of
June 30, 1996. The amount of the Vendor Financing
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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 under which
manufacturing equipment may be leased under separate schedules, each with
approximately five year terms. The lease agreement is non-recourse to the
Company and the minority interest holder in QPE. Equipment under lease has both
early and end of term purchase options. If the purchase options have not been
exercised by the end of the lease term, QPE 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 equipment
leased as of June 30, 1996 is approximately $16,748,000. QPE accrues a pro-rata
portion of the maximum deficiency payments in periodic rental expense on a
straight-line basis over the lease term.
As of June 30, 1996, future rental payments under the leases, excluding the
deficiency payments, from fiscal 1996 through 2001 are $345,000, $1,433,000,
$1,433,000, $1,433,000, $1,433,000, and $358,000, respectively.
PERFORMANCE GUARANTEES
The Company has entered into agreements to supply Code Division Multiple Access
("CDMA") equipment, certain of which provide for substantial performance
guarantees. These guarantees are triggered by delivery dates and equipment
performance criteria specified in the respective agreements. If the Company is
unable to meet its performance obligations, the impact of the performance
guarantees could amount to a significant portion of the contract value and could
materially adversely affect product margins and the Company's results of
operations.
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.
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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 166,000
OmniTRACS units worldwide. The Company has implemented a 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 for the
remainder of 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
1996, the Company significantly increased sales of CDMA component and subscriber
equipment. In the third quarter of fiscal 1996, the Company shipped
approximately 125,000 subscriber units, primarily to Hong Kong and Korea where
commercial CDMA networks are being deployed. In the future, the Company expects
to derive revenues from the sale of CDMA subscriber and network equipment, 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.
Although the Company expects to receive CDMA license and development fees
(including 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. Through the first three quarters of
fiscal 1996, the Company has recognized significant license fees and royalties
from licensees. However, license and development fees have fluctuated
significantly on a sequential quarter basis. 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, and continues
to incur high levels of research and development costs for its CDMA product
development, the Company's results of operations could 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. In
the fiscal third quarter, operating costs were significantly higher, although
operating costs as a percentage of revenue declined. The increase was primarily
due to increased research and development expenditures. For the balance of
fiscal 1996 and into fiscal 1997 the Company expects to
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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 provided
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 is 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. Backlog and contracts subject to contingencies
exceed $1.3 billion for CDMA products. Included in backlog and contracts subject
to contingencies are all customer commitments to purchase regardless of the
scheduled delivery dates. Because some of these contracts are subject to
contingencies and may be canceled without significant penalty, the total backlog
and contracts subject to contingencies 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. The Company
has entered into contracts which contain such performance guarantees. If the
Company is unable to deliver equipment on the scheduled dates, the 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 RF services
valued at approximately $200 million, 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 performance guarantees on the
SSLP order. Revenue recognition of shipments to SSLP will not occur until
commercial service is launched, currently planned for fiscal 1997.
In June 1996, SSLP and PrimeCo Personal Communications L.P. ("PrimeCo")
announced awards approximating $500 million and $350 million respectively to QPE
for CDMA subscriber equipment. QPE is the joint venture between the Company and
SONY which will manufacture and sell the handsets. Shipments under the contract
begin in 1996 and continue through 1998. Both agreements call for performance
guarantees.
The Company has expanded its high volume manufacturing of CDMA products and is
in the process of further expanding its manufacturing capacity. However, 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 investment could be
adversely affected.
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Certain 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 more 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")
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 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 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 additional capital or that delays
or technical or regulatory developments will not arise which could adversely
affect Globalstar's ability to fund payment for development of such equipment
from 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.
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RESULTS OF OPERATIONS
The following table sets forth certain revenue and expense items as percentages
of revenues:
Three Months Ended Nine Months Ended
------------------ -----------------
June 30, 1996 June 25, 1995 June 30, 1996 June 25, 1995
------------- ------------- ------------- -------------
Revenues:
Communications systems 74% 62% 69% 63%
Contract services 15 27 18 27
License and development fees 11 11 13 10
--- --- --- ---
Total revenues 100% 100% 100% 100%
--- --- --- ---
Operating expenses:
Communications systems 58% 35% 52% 35%
Contract services 11 20 12 20
Research and development 20 21 22 21
Selling and marketing 8 11 10 10
General and administrative 5 10 6 10
--- --- --- ---
Total operating expenses 102% 97% 102% 96%
--- --- --- ---
Operating income (2) 3 (2) 4
Interest income (expense), net 2 1 4 1
Minority interest 1 4 1 3
--- --- --- ---
Income before income taxes 1 8 3 8
Income tax benefit (expense) 0 (1) 1 (1)
--- --- --- ---
Net income 1% 7% 2% 7%
--- --- --- ---
Communications systems costs as a
percentage of communications
systems revenues 77% 55% 75% 54%
Contract services costs as a percentage
of contract services revenues 72% 75% 69% 74%
Total revenues for the third quarter of fiscal 1996 were $234.9 million, an
increase of $135.4 million or 136% compared to total revenues of $99.5 million
for the third quarter of fiscal 1995. Total revenues for the first nine months
of fiscal 1996 were $530.7 million, an increase of 100% over total revenues of
$265.1 million for the first nine months of fiscal 1995. Revenue growth for the
third quarter and first nine months of fiscal 1996 was primarily due to
significant growth in CDMA subscriber equipment and ASIC chip sales, higher CDMA
license and development fees, and increased contract service revenues from the
Company's development agreement with Globalstar.
Communications systems revenues which consisted primarily of product and service
revenues from the sale of the Company's OmniTRACS system, sales of CDMA
subscriber and infrastructure equipment and ASIC sales to CDMA licensees and
service providers were $174.8 million, an increase of $113.6 million or 185%
over the third quarter in fiscal 1995. For the first nine months of fiscal 1996,
communications systems revenues were $367.6 million, a 119% increase compared to
revenues of $168.2 million for the same period in fiscal 1995. Significant
growth in revenues for the quarter and the first nine months were primarily
attributable to shipments of CDMA subscriber equipment and ASIC chip sales. For
the first nine months 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.
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Contract services revenues totaled $34.9 million in the third quarter of fiscal
1996 or 15% of total revenues, compared to $27.1 million or 27% of total
revenues for the third quarter of fiscal 1995. Contract services revenues for
the first nine months of fiscal 1996 increased to $95.1 million from $70.8
million for the same period in fiscal 1995, an increase of 34%. The increase of
$7.8 million for the quarter and $24.3 million for the first nine months
resulted from the development agreement with Globalstar.
License and development fees for the third quarter of fiscal 1996 increased to
$25.1 million or 11% of total revenues from $11.1 million or 11% of total
revenues for the third quarter of the prior fiscal year. License and development
fees for the first nine months of fiscal 1996 were $68.0 million, compared to
$26.1 million for the same period in fiscal 1995. In the third quarter of fiscal
1996, new CDMA license fees were generated from two subscriber agreements signed
with Kenwood Corporation and Siemens Rolm Communications Inc., and an ASIC
license agreement, as well as additional licenses, fees and royalties from
existing and new licensees. The Company expects to continue to experience
considerable fluctuations in quarterly and yearly operating results in the
future due to variations in the amount and timing of receipt of CDMA license
fees and royalties.
Communications systems costs were $135.4 million or 77% of communications
systems revenues for the third quarter of fiscal 1996, compared to $33.5 million
or 55% of communications systems revenues for the same period in the prior
fiscal year. For the first nine months of fiscal 1996, communications systems
costs were $277.0 million or 75% of communications systems revenues, compared to
$91.7 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 of CDMA subscriber, infrastructure and ASIC products and
increasing volumes of CDMA subscriber and ASIC 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 will continue into fiscal 1997.
Contract services costs were $25.2 million or 72% of contract services revenues
for the third quarter of fiscal 1996, compared to $20.3 million or 75% of
contract services revenues for the third quarter of fiscal 1995. Contract
services costs for the first nine months of fiscal 1996 were $66.1 million or
69% of contract services revenues, compared to $52.2 million or 74% of contract
services revenues for fiscal 1995. The dollar increase and 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 $46.7 million or 20% of revenues for the
third quarter of fiscal 1996, compared to $21.3 million or 21% of revenues for
the third quarter of fiscal 1995. For the first nine months of fiscal 1996,
research and development costs were $114.2 million or 22% of revenues, compared
to $56.5 million or 21% of revenues for the first nine 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 growth were significant efforts related to CDMA
ASIC development and continued OmniTRACS product development.
Selling and marketing expenses were $18.9 million or 8% of total revenues for
the third quarter fiscal 1996, compared to $11.3 million or 11% of total
revenues for the same quarter last year. For the first nine months of fiscal
1996, selling and marketing expenses were $50.9 million or 10% of revenues,
compared to $27.1 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
nine months was due primarily to significant growth in personnel and other
marketing expenses primarily related to the introduction of CDMA products in the
domestic and international marketplace. Other marketing expense growth included
trade shows, commissions, advertising and the establishment of foreign offices.
General and administrative expenses were $14.4 million or 5% of total revenues
for the third quarter of fiscal 1996, compared to $9.7 million or 10% of total
revenues for the third quarter of fiscal 1995. General
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and administrative expenses for the first nine months of fiscal 1996 were $33.9
million or 6% of revenues, compared to $26.1 million or 10% of revenues for the
same period in fiscal 1995. The dollar increase in the first nine months of the
fiscal year was primarily due to additional personnel and associated overhead
costs necessary to support the overall growth in the Company's operations.
Interest income was $4.8 million during the third quarter of fiscal 1996,
compared to $1.5 million in the third quarter of fiscal 1995. For the first nine
months of fiscal 1996, interest income was $19.4 million compared to $4.8
million for the same period in fiscal 1995. The increase in the third quarter
and for the first nine 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.
Income tax expense was $.3 million during the third quarter of fiscal 1996
representing a decrease of $.5 million as compared to the third quarter of
fiscal 1995. Income tax expense was $2.9 million for the first nine months of
fiscal 1996 compared to $3.0 million for fiscal 1995. Fiscal 1996 taxes were
favorably impacted by incorporation of additional tax losses from the guarantee
of Globalstar vendor financing obligations. In fiscal 1995, income taxes for the
first nine months were positively impacted $3.0 million by recognition of
deferred tax assets that satisfy the "more likely than not" criteria for
realization established by FAS 109.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that the cash and cash equivalents and investment
balances of $325.7 million at June 30, 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.
In the nine months of fiscal 1996, $106.8 million in cash was used by
operations, compared to $19.8 million provided by operations in the nine months
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 $69.6 million higher due primarily to
increased procurement of components necessary to support the significant CDMA
product manufacturing ramp-up. The growth in receivables was due primarily to
the increase of revenues.
Investments in capital expenditures, intangible assets and other entities
totaled $156.0 million in the first nine months of fiscal 1996, compared to
$73.3 million in the same period of fiscal 1995. Significant components in the
first nine months of fiscal 1996 consisted of the purchase of $145.7 million of
capital assets, the purchase of intangible assets of $3.8 million and the
investment of $6.5 million in entities in which the Company holds less than a
50% interest. In the first nine months 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. Also, in the third fiscal quarter the Company has
commenced construction of a 177,000 square foot manufacturing facility in San
Diego which will be dedicated to the production of infrastructure equipment.
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The Company had originally provided $30 million in financing to NextWave in
connection with their plans to bid on PCS licenses in the recently completed
C-block auctions conducted by the FCC. The financing 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. Of the
remaining $10 million loan, $9.6 million was repaid in the fiscal third quarter
and $.4 million was converted into a three-year note with an equity conversion
option. 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 4.
In the first nine months of fiscal 1996, the Company's financing activities
provided net cash of $24.9 million compared to $14.3 million in the first half
of fiscal 1995. The first nine months of fiscal 1996 included proceeds from the
sale and lease back of manufacturing equipment to QPE, additional contributions
received from SONY related to the QPE joint venture, and the issuance of common
stock under the Company's stock option and employee stock purchase plan, which
were partially offset by the retirement of the $20 million note on the San Diego
Design Center. Net cash provided in the first nine months of fiscal 1995 were
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.
In July 1996, QPE completed negotiations on two bank credit facilities totaling,
in the aggregate, $200 million. The secured revolving credit facilities are
non-recourse to the Company and the minority interest holder in QPE.
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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 5 of Notes to Condensed Consolidated Financial Statements.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
11.1-Computation of Earnings Per Share
(b) Reports on Form 8K
No reports on Form 8-K have been filed during the quarter for which this
report is filed.
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