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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
----------------------------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 199627, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)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)
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DELAWARE 95-3685934
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6455 LUSK BLVD. 92121-2779
SAN DIEGO, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 587-1121
----------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B)12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G)12(g) OF THE ACT:
COMMON STOCK
(TITLE OF CLASS)
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 12 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 90 days. YES X[X] NO __[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K ofor any amendment to this Form 10-K. [X][ ]
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2
The aggregate market value of the voting stock held by non affiliates
of the registrant as of November 25, 199616, 1998 was $2,414,522,124.3,345,651,578.*
The number of shares outstanding of the registrant's common stock
was 66,601,02970,712,862 as of November 25, 1996.16, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's Definitive Proxy Statement to be filed with
the Commission pursuant to Regulation 14A in connection with the 1996registrant's
1999 Annual Meeting are incorporated herein by reference into Part III of this
Report. Such proxy statement will be filed with the Securities and Exchange
Commission not later than 120 days after the registrant's fiscal year ended
September 29, 1996.27, 1998.
Certain Exhibits filed with the registrant's (i) Registration
Statement on Form S-1 (Registration No. 33-42782), as amended; (ii) Annual
Report on Form 10-K for the fiscal year ended September 27, 1992; (iii)
Registration Statement on Form S-3 (Registration No. 33-62724), as amended; (iv)
Annual Report on Form 10-K for the fiscal year ended September 26, 1993; (v)
Form 10-Q for the quarter ended March 27, 1994, as amended; (vi) Registration
Statement on Form S-8 (Registration No. 333-2750); (vii) Registration Statement
on Form S-8 (Registration No. 333-2752); (viii) Registration Statement Onon Form
S-8 (Registration No. 333-2754); (ix) Registration Statement on Form S-8
(Registration No. 333-2756); and (x) Current Report on Form 8-K dated as of
September 26, 1995,1995; (xi) Annual Report on Form 10-K for the fiscal year ended
September 29, 1996; and (xii) Registration Statement on Form S-3 (Registration
No. 333-26069), as amended, are incorporated hereinby reference into Part IV of this
Report. In addition, certain Exhibits filed by Leap Wireless International, Inc.
with that company's Registration Statement on Form 10, as amended (File No.
0-29752), are incorporated by reference into Part IV of this Report.
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* Excludes the Common Stock held by executive officers, directors and
stockholders whose ownership exceeds 5% of the Common Stock outstanding at
November 25, 1996.16, 1998. Exclusion of such shares should not be construed to indicate
that any such person possesses the power, direct or indirect, to direct or cause
the direction of the management or policies of the registrant or that such
person is controlled by or under common control with the registrant.
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QUALCOMM INCORPORATED
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 199627, 1998
INDEX
PAGE
----
PART I
Item 1. Business....................................................................Business................................................................ 1
Introduction................................................................Introduction............................................................ 1
Recent Developments.........................................................Developments..................................................... 2
Wireless Telecommunications Industry........................................ 3
Strategy....................................................................Industry Overview........................... 2
Strategy................................................................ 4
CDMA Technology and Products................................................Products............................................ 5
OmniTRACS...................................................................Globalstar.............................................................. 8
Microsoft Corporation Joint Venture..................................... 9
Globalstar..................................................................Spin-off of Leap Wireless International, Inc............................ 9
Government Systems...................................................... 10
Eudora Electronic Mail...................................................... 11
Government Systems.......................................................... 11
Manufacturing and Backlog................................................... 12Backlog............................................... 10
Research and Development.................................................... 12
Competition................................................................. 12Development................................................ 10
Competition............................................................. 10
Patents, Trademarks and Trade Secrets....................................... 13
Employees................................................................... 13Secrets................................... 11
Employees............................................................... 12
Executive Officers..........................................................Officers...................................................... 12
Risk Factors............................................................ 14
Risk Factors................................................................ 17
Reliance on Key Personnel................................................... 24
Volatility of Stock Price................................................... 25
Item 2. Properties.................................................................. 25Properties.............................................................. 24
Item 3. Legal Proceedings........................................................... 26Proceedings....................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders.........................Holders..................... 26
PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters........ 27Matters.......................................... 26
Item 6. Selected Consolidated Financial Data..................................................... 28Data.................................... 27
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................................................. 29Operations........................ 28
Item 7.A Quantitative and Qualitative Disclosure about Market Risk............... 36
Item 8. Financial Statements........................................................ 36Statements.................................................... 38
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures................................................................. 36Disclosures................................. 38
PART III
Item 10. Directors and Executive Officers of the Registrant.......................... 36Registrant...................... 38
Item 11. Executive Compensation...................................................... 36Compensation.................................................. 38
Item 12. Security Ownership of Certain
Beneficial Owners and Management.............. 36Management..................................... 38
Item 13. Certain Relationships and Related Transactions.............................. 36Transactions.......................... 39
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............. 37
Signatures ............................................................................ 408-K......... 39
Signatures.............................................................. 43
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34
TRADEMARKS AND TRADENAMES
OmniTRACS(R), PureVoice(TM), Q phone(TM), QCell(TM), QCore(TM),
QCP-820(TM), QCP1900(R), QCP-1920(TM), QCP-2700(R), QCT-8000(TM), PdQ(TM),
QEDesign(R) TRUckMAIL(TM), QWBS and QUALCOMM(R) are trademarks and/or
servicemarks of the Company. All other trademarks or servicemarks appearing in
this document are the property of their respective holders.
cdmaOne(TM) is a trademark of the CDMA Development Group.
5
PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, the
following discussion contains forward-looking statements that involve risks and
uncertainties. QUALCOMM Incorporated's (the("QUALCOMM" or the "Company") future
results could differ materially from those discussed here. Factors that could
cause or contribute to such differences include, but are not specifically
limited to: the ability to develop and introduce cost effective new products in
a timely product development, variationmanner; avoiding delays in the commercial implementation of royalty,the
Company's Code Division Multiple Access ("CDMA") technology; continued growth in
the CDMA subscriber population and the scale-up and operations of CDMA systems;
developments in current or future litigation; the Company's ability to
effectively manage growth and the intense competition in the wireless
communications industry; risks associated with vendor financing; timing and
receipt of license fees and other revenues,royalties; the Company's ability to successfully
manufacture and sell significant quantities of CDMA infrastructure products on
a timely basis; failure to satisfy performance obligations, uncertainty regarding the Company's
patents and propriety rights (including the risk that the Company may be forced
to engage in costly litigation to protect such patents and rights and the
material adverse consequences to the Company if there were unfavorable outcome
of any such litigation), difficulties in obtaining components needed for
production of wireless equipment and changes in economic conditions of various
markets the Company serves,obligations; as well as the other
risks detailed in this section, and in the sections entitled Risk Factors and
Management's Discussion and Analysis of Financial ConditionsCondition and Results of
Operations. The Company's consolidated financial data presented includes
QUALCOMM's Personal Electronics ("QPE") and certain other subsidiaries of the
Company.
INTRODUCTION
QUALCOMM is a leading provider of digital wireless communications products,
technologies and services. The Company designs, develops, marketsmanufactures and
manufacturesmarkets wireless communications, infrastructure and subscriber equipmentproducts and
designs, develops and markets Application Specific Integrated Circuits
("ASICs"), based on its Code
Division Multiple Access ("CDMA") technologyCDMA technology. The Company also licenses and has licensedreceives
royalty payments on its CDMA technology tofrom major domestic and international
telecommunications equipment supplierssuppliers. In addition, the Company designs,
manufactures, distributes and operates products and services for incorporation
into their wireless communications products. QUALCOMM designed and is
manufacturing, distributing and operating the OmniTRACS
system, a
satellite-based, two-way mobile communications and tracking system that provides
messaging, position reporting and other services for transportation companies
and other mobile and fixed-site customers.system. The Company also provides contract
development services, including the design and development of subscriber and
ground communications equipment for thehas contracts with Globalstar L.P. ("Globalstar") satellite-basedto
design, develop and manufacture subscriber products and ground communications
system. In addition, the Company develops,
marketssystems ("gateways"), and manufactures a variety of other communications products, including
Eudora, a leading Internet-based electronic mail software application, for
personal, commercial and government applications.to provide contract development services (the
"Globalstar System").
The Company's CDMA technology has been developedadopted as an industry standard for
implementation indigital cellular, personal communications servicesPersonal Communications Services ("PCS") and Wireless Local
Loop ("WLL") systemsnetworks as well as other wireless applications.services. Wireless networks
based on the Company's current implementation of CDMA technology, referred to as
cdmaOne, have been commercially deployed andor are under development in
a number of markets around the world.approximately 38 countries. The Company believes that CDMA has emerged as the
leading digital technology for cellular and PCS applicationscarriers have signed
on more than 16 million commercial subscribers worldwide, with extensive
deployment in the U.S., having
been adopted byCanada, South Korea and Hong Kong. In addition, CDMA
networks are planned or deployed in a number of other countries, including
Australia, Brazil, Chile, the largest cellularPeople's Republic of China, India, Mexico, the
Philippines, Puerto Rico, Russia and PCS carriers covering over
95% of the U.S. population. Internationally, CDMA has been introduced in Hong
Kong and South Korea and is being evaluated in numerous other markets worldwide.Ukraine.
To support the deploymentproliferation of CDMA equipment,technology and products and to
generate revenues for the Company, QUALCOMM has entered into a
number ofover 65
royalty-bearing license agreements with major domestic and international
telecommunications companies, throughout the world. These companies include Alps Electric, DENSO,
DSP Communications, Fujitsu, Hughes Network Systems ("Hughes"), Hyundai
Electronics, Kenwood, Kyocera, LGIC,including Lucent, Technologies ("Lucent"), Matsushita,
Maxon, Mitsubishi, Motorola, Nokia, NEC, NOKIA, Northern Telecom ("Nortel"), OKI
Electric,Nortel,
Samsung Electronics, Sanyo, Siemens, Sony, Toshiba and VLSI
Technology.Sony. QUALCOMM receives up-front license fees in addition to ongoing
royalties from its licensees based on their worldwide sales of CDMA subscriber,
infrastructure and ASICs products.
QUALCOMM is a major supplier of subscriber, network infrastructure and
ASICs products based on its CDMA technology. The Company, through its QPE joint
venture, is one of the largest manufacturers of CDMA handsets and its licensees are developing, marketingas of
September 1998, has shipped over seven million handsets. The Company is also a
manufacturer of CDMA network infrastructure products, including the QCell family
of Base Station Transceiver Subsystems ("BTSs") and manufacturingthe QCore family of Base
Station Controllers ("BSCs"). Finally, the Company designs and sells CDMA wireless infrastructure and subscriber equipment and ASICs
for incorporation into its own subscriber and infrastructure products and the
products of its licensees. As the developer of CDMA for commercial wireless
networks, worldwide. Thethe Company believes it has unique CDMA ASIC design capabilities.
Through September 1998, the Company has entered into agreements with
Hughes and Nortelshipped approximately 25 million Mobile
Station Modem ("MSM") ASICs to support the design and manufacture of CDMA infrastructure
equipment and a joint venture with Sony, QUALCOMM Personal Electronics ("QPE"),
to develop, manufacture and market subscriber equipment.
The Company's OmniTRACs systemhandset manufacturers worldwide, including
QPE.
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6
OmniTRACS provides two-way satellite-based data messaging and position
reporting services to mobile users, primarily transportation operators in the
long haullong-haul trucking industry. The Company has sold over 175,000250,000 OmniTRACS
terminals worldwide in 33 countries, both directly and through joint ventures
and strategic alliances. The Companyalliances, and operates aan Network Management Facility ("NMF") in the U.S.
which currentlythat the Company estimates processes an average of 4over five million messages and position
reports per day tofor over 650850 customers.
The Company is also developsdesigning, developing, manufacturing and licenses complementary softwareselling
gateway and subscriber products and providing contract development services which enhancefor
the functionalityGlobalstar System. The Globalstar System will be built and operated by a
partnership comprised of Loral Space & Communications, Ltd. and other
companies. The Company owns a 6.5% interest in the partnership.
RECENT DEVELOPMENTS
On September 23, 1998, the Company completed the spin-off of its
interests in several domestic and international emerging terrestrial-based
wireless telecommunications operating companies through a distribution to its
stockholders of all of the OmniTRACS systemshares of Leap Wireless International, Inc. ("Leap
Wireless"). In connection with the distribution, the Company also transferred to
Leap Wireless certain assets including cash and increase messaging unit volume.
1
4
RECENT DEVELOPMENTS
A numbercertain indebtedness owed to us
by the transferred operating companies. Further, if certain events occur within
18 months after the distribution, the Company will transfer to Leap Wireless its
equity interest in, and certain working capital loans from, a Ukrainian wireless
operating company. The Company also made a substantial funding commitment to
Leap Wireless in the form of important milestones toward large-scale commercializationa $265 million secured credit facility. In
connection with the distribution, Leap Wireless issued a warrant to QUALCOMM to
purchase approximately 18% of the Company's CDMA technology have been achieved. Infully diluted common stock of Leap Wireless at
the U.S., CDMA has emerged
as the leading digital technology for cellular and PCS applications. A numbertime of the largest domestic cellular carriers have selected CDMA as their digital
platform, including AirTouch Communications, ALLTEL Mobile, Ameritech, Comcast
Cellular Communications, GTE Mobilnet, Bell Atlantic Nynex Mobile, 360 degrees
Communications and US WEST. A significant number ofdistribution. The Company's primary reasons for completing the
largest PCS carriers
have announced their selection of CDMA for use in their systems, including
PrimeCo Personal Communications, L.P. ("PrimeCo"), a partnership of AirTouch
Communications, Bell Atlantic Nynex Mobile and US WEST; Sprint Spectrum L.P.
("Sprint Spectrum"), a partnership of Sprint Corporation, Tele-Communications
Inc., Cox Communications Inc. and Comcast Corp.; and NextWave Telecom, Inc.
("NextWave").
After extensive field testing and industry review and standardization, the
Company's CDMA technology is now being deployed in a number of markets around
the world. CDMA-based wireless systems were successfully launched in both south
Korea and Hong Kong and the Company believes the South Korean system was serving
approximately 600,000 subscribers as of November 1996. In the fall of 1996,
PrimeCo launched PCS service in 15 major U.S. cities, including Chicago, Dallas,
Fort Lauderdale, Ft. Worth, Honolulu, Houston, Jacksonville, Miami, Milwaukee,
New Orleans, Norfolk, Orlando, Richmond, San Antonio and Tampa. The launch
represented the largest domestic multimarket wireless system deployment to date,
covering a population of over 60 million, as well as the first commercial
multimarket launch of CDMA at 1900 MHz. The Company believes that, at November
30, 1996, commercial CDMA systems served approximately 700,000 subscribers
worldwide. Other CDMA networks are expected to be commercially deployed in the
U.S. and internationally in the coming year, including a number of U.S. cellular
and PCS service providers.
The Company has an agreement with Nortel providing for the production and
delivery of infrastructure equipment for CDMA wireless systems. Pursuant to the
agreement, Nortel has access to QUALCOMM's product designs for digital cellular,
PCS and WLL infrastructure products and in return purchases from QUALCOMM a
minimum percentage of Nortel's CDMA infrastructure equipment requirements for
resale to its customers. In February 1996, the Company announced it will supply
Nortel with approximately $200 million of PCS infrastructure equipment and RF
services as part of Nortel's estimated $1 billion equipment supply agreement
with Sprint Spectrum. Other major customers under this agreement include BCTel
Mobility Cellular and Bell Mobility. As of November 30, 1996, the Company has
shipped approximately 375 base stations and related infrastructure equipment to
PCS and cellular operators in North America.
In September 1996,spin-off included eliminating potential conflicts between the Company and
Hughes entered into an agreement
providing for designcertain of its customers and productionenabling both the Company and Leap Wireless to be
recognized and appropriately valued by the financial community.
On November 10, 1998, the Company and Microsoft Corporation
announced the formation of infrastructure equipment for CDMA
wireless systems. Pursuanta broad strategic partnership to the agreement, Hughes will haveenable secure and
airlink-independent Internet access to QUALCOMM's product designs forall mobile users. The new joint venture,
WirelessKnowledge, will be an equally held company. WirelessKnowledge will be
accessible over all digital cellular, PCS and WLL infrastructure
products and in return will purchase a minimum percentage of Hughes' CDMA
infrastructure equipment requirements for resale to its customers. In October
1996, Hughes announced a strategic supply agreement with NextWave under which
Hughes will supply up to $245 million of CDMA infrastructure equipment for
NextWave's PCS network, with an option to expand such amount to $1 billion over
the next six years under certain conditions. Pursuant to the agreement with
Hughes, QUALCOMM will supply a percentage of the infrastructure equipment to be
shipped by Hughes to NextWave.
During 1996, QPE dedicated a new manufacturing facility and completed the
installation of eight production lines in order to support existing and future
orders for CDMA telephones. In June 1996, Sprint Spectrum and PrimeCo announced
awards approximating $500 million and $350 million, respectively, to QPE for
CDMA subscriber equipment. Shipments under the contracts began in 1996 and are
scheduled to continue through 1998. As of September 30, 1996, the Company had
produced approximately 400,000 handsets for delivery, approximately 200,000 of
which were shipped in the fourth quarter of fiscal 1996.
In September 1996, Globalstar completed an important milestone when forward
and reverse link calls using the Company'swireless wide area networks, including those based
on CDMA technology, were successfully
completed in a laboratory environment. Globalstar has entered into a four-year
agreementTime Division Multiple Access ("TDMA")/Global System for
QUALCOMMMobile Communications ("GSM"), CDPD and Mobitex. WirelessKnowledge services will
enable carriers to designoffer their mobile customers wireless access to data and
develop subscriber equipmentapplications securely over their choice of wireless networks and 2
5
ground communications equipmententerprise
systems. Commercial availability is slated for the Globalstar system. Total revenues under
the contractfirst half of calendar 1999,
enabling carriers to QUALCOMM are estimateddeliver valuable new services to exceed $500 million at completion,
$213 milliontheir customers,
regardless of which has been recognized by QUALCOMM to date.technology or device preference.
WIRELESS TELECOMMUNICATIONS INDUSTRY Overview.OVERVIEW
Demand for wireless telecommunications services has grown
dramatically since the commercial introductioncontinues to grow at a
significant rate. The Strategis Group estimates that there will be over 285
million cellular/PCS subscribers worldwide in 1998, a number projected to reach
over 690 million in 2003. This implies a compound annual growth rate of cellular telephony in 1984.19%.
This demand is largely attributable to the widespread availability and
increasing affordability of mobile telephony, pagingtelephone and other emerging wireless
telecommunications services. Technological advances and a regulatory environment
more favorable to competition have also served to stimulate market growth. In
less developed countries, wireless services have become an alternative to fixed
wireline services whichthat are characterized by poor quality, limited capacity and
long installation waiting periods.
The Company believes the demand for wireless telecommunications will
continue to grow dramatically. Currently, wireless penetration in the U.S. is
estimated to be 16% and, according to Paul Kagan Associates, Inc., is expected
to be approximately 48% by 2006. As reported by the Cellular Telephone Industry
Association, the compound annual growth rate of cellular subscribers exceeded
45% from 1993 through 1995.2
7
Despite this rapid growth in the number of cellular subscribers,
wireless minutes of use currently represent only a small percentage of total
telecommunications traffic. The Company believes that the anticipated lower cost and
higher quality of wireless service, combined with technological improvements in
handsets, will fuel further growth inof the wireless market. In addition to lower
prices, the Company believes that increased voice quality, battery life and
functionality, andas well as awareness of the productivity, convenience and
emergency communications capability, particularly associated with CDMA wireless
services, will contribute to the growth in demand for wireless airtime.
Technology. Wireless telecommunications service is currently
available using either analog or digital technology. The majority of cellular services
transmit voice and data signals over analog-based networks by varying the
amplitude or frequency of one continuous electronic signal transmitted over a
single radio channel. Although it is currently
more widely deployed than digital technology, analog technology today has several
limitations compared to digital technology, including limited capacity, inconsistentless
consistent service quality (e.g., poorlower voice quality and more dropped calls),
lack
oflimited effectiveness in preventing "eavesdropping," greater susceptibility to
fraud and "cloning" and unreliabilityless reliability in data transfer. Digital wireless
telecommunications systems overcomeaddress the capacity constraints of analog systems by
converting voice or data signals into a stream of digits that is compressed
before transmission, enabling a single radio channel to carry multiple
simultaneous signal transmissions. This increased capacity, along with
enhancements in digital protocols, allows digital-based transfer systems to
offer new and advanced services including greater call privacy, low-priced
service options, greater fraud protection, single number service, integrated
voice and paging and enhanced wireless data transmission services such as
e-mail, facsimile and wireless connections to computer networks. Digital
wireless systems generally operate at either 800-900 MHz (generally referred to
as cellular) or 1800-1900 MHz (generally referred to as PCS).
Two primary digital technologies are available for cellular, PCSwireless
applications and WLL
applications -- CDMA and Time Division Multiple Access ("TDMA")/("GSM") Global
System for Mobile Communications. In July 1993,have been adopted as standards by the Telecommunications
Industry Association ("TIA"): CDMA, developed by the Company, and TDMA. In July
1993, the TIA adopted a North American interimindustry standard (IS-95)("IS-95") for cellular
telecommunications based on QUALCOMM's CDMA technology. In April 1995, the
Company's CDMA technology was approved as a standard for PCS whichthat was published
as ANSI standard J-STD-008. A form ofCDMA has been extensively deployed in the United
States, Canada and South Korea and is deployed or is under development in
approximately 35 other countries. TDMA has been adopted as a
standard for cellular and PCSdeployed primarily in the U.S.
and Latin America, while a variation of TDMA known as GSM, has been extensively
utilized in Europe, much of Asia and certain other markets. Other digital
wireless technologies, particularly GSM, to date, have been more widely adopted
asthan CDMA and there can be no assurance that wireless service providers will
select CDMA for their networks.
Infrastructure, subscriber and ASICs products for digital wireless
technology are widely available from a number of large, well-capitalized
telecommunication companies. According to the TIA, worldwide spending on
telecommunications products is expected to increase from $250 billion in 1997 to
$400 billion in 2001. Major providers of subscriber products include Ericsson,
Motorola, Nokia, Philips, Samsung and Sony. Significant wireless infrastructure
product manufacturers include Alcatel, Ericsson, Fujitsu, Lucent, Motorola,
NEC, Nokia and Nortel. Significant providers of CDMA ASICs include DSP
Communications, LSI Logic Corporation and VLSI Technology.
Emerging Next Generation Digital Standards. Industry participants
and the International Telecommunications Union ("ITU"), an organization based in
Geneva, Switzerland, are currently considering a variety of standards for third
generation wireless networks which will fulfill the requirements of the ITU's
IMT-2000 concept. The Company is advocating the standardization of a single,
converged CDMA-based third generation standard that accommodates equally the two
dominant network standards in use today. There can be no assurance that the
Company will be successful in promoting the adoption of a single CDMA standard
or that such a standard, for PCS in the U.S. and for cellular and PCS in Europe. Most major
telecommunications equipment manufacturers are offering both CDMA and TDMA/GSM
infrastructure and subscriber equipment, including Hughes, Lucent, Matsushita,
Mitsubishi, Motorola, Nortel and Samsung.if adopted, will be compatible with today's cdmaOne
networks. The Company believes that its CDMA networkspatent portfolio is applicable to
other CDMA proposals for other third generation standards and has informed
standards bodies and the ITU that it holds essential Intellectual Property
Rights for third generation proposals submitted for IMT-2000 based on CDMA.
Further, the Company intends to vigorously enforce and protect its intellectual
property position against any infringement. However, there can be no assurance
that the Company's CDMA patents will offer end-users significant advantages, including increased capacity,
higher quality, fewer dropped calls, lower system costsbe determined to be applicable to any
proposed standard or that the Company will be able to redesign its products on a
cost-effective and enhanced privacy,
when comparedtimely basis to analogincorporate next generation wireless
technology. The adoption of next generation standards which are incompatible
with cdmaOne or which are
3
8
determined not to rely on the Company's intellectual property could have a
material adverse effect on the Company's business, results of operations,
liquidity and other digitalfinancial position.
The Company has indicated its willingness to license its
intellectual property rights on fair, reasonable and non-discriminatory terms
for standards meeting a set of technical criteria based on three fairness
principles which support convergence of all proposed third generation CDMA
technologies. Personal Communications Services. PCSThe fairness principles are: (1) a single, converged worldwide
CDMA standard should be selected as the third generation standard; (2) the
converged CDMA standard must accommodate equally the two dominant network
standards in use today; and (3) disputes on specific technological points should
be resolved by selecting the proposal that either is a digital wireless communications
system using cellular wireless technologies operating at frequencies ranging
from 1800 MHz to 2000 MHz. In order to increase competitiondemonstrably superior in
wireless
communications and promote the rapid deploymentterms of advanced technologies,
Congress enacted legislation directing the FCC to assign radio frequency
licenses for PCS by competitive bidding. In March 1995, the FCC completed its
first auction, the A-Block and B-Block Auction, resultingperformance, features, or cost, or in the awardcase of two
licenses for 30 MHz each of spectrum in each of 51 major trading areas. Each
licensee must
3
6
construct networksalternatives with no
demonstrable material difference, the choice that serve at least one-third of the population in its
markets within five years of the grant of the applicable license and at least
two-thirds of the population within ten years. The C-Block Auction, comprised of
30 MHz basic trading area ("BTA") licenses, was recently completed and the
auction of the 10 MHz D-Block, E-Block and F-Block BTA licenses commenced in
August 1996. Asis most compatible with
digital cellular, PCS is expected to include a number of
attractive features, such as (i) the provision of all services to one
untethered, mobile number, (ii) low priced service options, (iii) in the near
future, medium-speed data transmissions to and from portable computers, advanced
paging services and facsimile services and (iv) increased security and fraud
protection.existing technology.
Wireless Local Loop. WLL systems provide fixed (non-mobile)
telephone services to users by transmitting voice messages over radio waves from
the public switched network to the location of the fixed telephone. WLL systems
are an attractive alternative to traditional copper and fiber based fixed services with the
potential to be implemented more quickly and at lower cost than wireline
services. The installation of WLL systems minimizes the need to obtain
right-of-ways and excavate existing roads and infrastructure to lay copper or
fiber cables. WLL systems increasingly are being adopted in developing markets in
order to quickly respond to the large unmet demand for communications services.
In many international markets, includingThe competitive challenges of this market are representative of a developing
industry. Restraints include convincing network operators of WLL's merits over
wireline systems, a finite supply or slow allocation of spectrum, and limited
availability of project financing. According to Frost & Sullivan, calendar year
1997 was the People's Republic of
China, India, Indonesia and Brazil, fixed telephone systems are inadequatefirst substantial year in revenue growth for WLL Products, with
forecast revenues to handle demand with telephone line penetration ranging from less than 1% to less
than 10% compared with over 50% in major developed markets.reach $16.5 billion by 2002.
STRATEGY
QUALCOMM's strategy is to be a leading provider of CDMA-based
digital
wireless communications products services and technologies. The Company
believes its proprietary CDMA technology to be an ideal base for digital
cellular service, PCS, WLL, data services, wireless Private Branch Exchange
("PBX") systems, satellite-based voice and data communications and other
wireless services serving broad geographic areas.services. Elements of our strategy include:
Promote Worldwide Commercialization of CDMA. A major component of
QUALCOMM's strategy include:
PROMOTE WORLDWIDE COMMERCIALIZATION OF CDMA
CDMA has emerged asis to promote the leading technology in North America for digital
cellular and PCS and systems, and is a leading technology internationally. This
acceptanceworldwide commercial implementation of the
Company's CDMA technology is evidenced by the broad commercial
deployment of CDMA already undertaken in numerous markets in the U.S., South
Korea and Hong Kong, and the commercial deployments announced in South America,
elsewhere in Asia, Europe and Africa. Based upon public announcements by PCS
licensees and cellular service providers, the Company estimates that CDMA
technology will be employed by cellular and PCS service providers whose networks
cover approximately 95% of the U.S. population. In order to generate licensing and royalty revenues
and product sales. To facilitate worldwide
implementationadoption of CDMA, the Company has entered into numerous royalty-bearing
license agreements, including agreements with twenty-one subscriber, nine
infrastructure, twodesigns and
markets proprietary CDMA ASICs and, fourteen test equipment licensees. Thethrough the Company's Consumer Products and
Infrastructure Products Divisions, it designs, develops, manufactures and
markets CDMA subscriber and infrastructure products. In addition, to promote the
advantages of CDMA and position CDMA as an important part of evolving digital
wireless technology standards, the Company continuesactively seeks to participatelicense its CDMA
technology to major telecommunications products manufacturers; works closely
with wireless providers and regulatory bodies; and participates actively in
various standards-setting organizations,groups and trade organizations and seminarsorganizations.
Continue Leadership in order to expand commercial implementation of
CDMA.
REMAIN A LEADER IN PRODUCT MANUFACTURING
During fiscal 1996,CDMA Products. QUALCOMM was the leading provider of CDMA-based digital
subscriber equipment, and a key component of the Company's strategy is to remain a leading supplier
of CDMA equipment provider. QUALCOMM manufactures infrastructureproducts, including ASICs. Through its Consumer Products and
subscriber equipment for direct sale to operatorsInfrastructure Products Divisions, the Company is a leading supplier of cellular, PCS and WLL
applications, and supplies proprietary ASICs to other CDMA
subscriber and infrastructure equipment suppliers.products. As the developer of CDMA for commercial
wireless networks, the Company believes it has unique expertise in supplying
products and ASICs specifically designed for CDMA systems. We plan to continue
to invest heavily in research and development in order to commercialize new
leading-edge CDMA-based products and services. The Company will continuesupports it CDMA
products sales by offering financing to expand its manufacturing capacity and establish strategic alliances with third partiescustomers.
Focus on Core Technologies. One of QUALCOMM's primary objectives is
to meet the demand for CDMA infrastructure and subscriber equipment. Further, the
Company intends to support the sales and marketingleverage its extensive intellectual property portfolio as a means of
its CDMA equipment by
arranging or providing for financing for purchasers of the Company's cellular,
PCS and WLL equipment where required.
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LEVERAGE INDUSTRY PARTNERSHIPS
Industry partnerships with leading domestic and international
communications companies help QUALCOMM facilitate the development, design,
funding and commercialization of new products and services, and enable the
Company to participate in a broader range of wireless communications product and
service opportunities. The Company is licensing its CDMA technology to equipment
manufacturers to encourage the wide-scale adoption of CDMA. In addition,
QUALCOMM has and will continue to enter into strategic alliances, such as those
with Nortel and Hughes, to promote the deployment of CDMA equipment and generate
manufacturing revenuegenerating revenues for the Company. The Company has formed QPE, a joint
venture with Sony, to develop and manufacture subscriber equipment. The Company
has also entered into service and equipment supply agreements with numerous
international partners, including Alcatel, to further the penetration of
OmniTRACs around the world. From time to time the Company may invest in domestic
or international wireless carriers (such as Globalstar, NextWave and Shinsegi
Mobile Telecom) where such investment strengthens the carriers' commitment to
CDMA and/or QUALCOMM's role as a supplier of equipment.
FOCUS ON CORE TECHNOLOGIES QUALCOMM's proprietary core technologies
are used in a variety of digital wireless communications systems that are
deployed in terrestrial, airborne or satellite-based products. The Company
continuesemploys over 2,800 engineers and scientists focused on developing and expanding
its core technology base, particularly as it relates to next generation digital
wireless communications technology. The Company will continue to place strong
emphasis on filing and obtaining U.S. and foreign patents and other forms of
intellectual
property protection for its technology. The Company has been issued approximately 90over 200 U.S. patents
and has 275over 500 patent applications pending in the United States. The Company believes that its issued patents provide broad
coverage for many digital wireless applications of CDMA, including satellite,
cellular, cordless telephone, PCS, wireless PBX and WLL applications, as well as
the Company's OmniTRACS system.U.S. The Company also
actively pursues foreign patent protection in other countries of interest to the
Company.
Leverage Industry Partnerships. The Company attemptshas an ongoing
commitment to leverage itsthe evolution and expansion of our technologies and products
through strategic partnerships and alliances. These partnerships and alliances
are designed to ensure product leadership and competitive advantage in the
marketplace. For example, the Company recently announced the
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9
formation of WirelessKnowledge, a joint venture with Microsoft Corporation,
which will focus on wireless data communication, information technology acrossand
computing. QUALCOMM also has entered into strategic infrastructure manufacturing
alliances, such as those with Hitachi, Hughes and Nortel. The Company and Sony
formed QPE, which manufactures CDMA-based subscriber products. The Company has
also entered into service and product and business areas.supply agreements with numerous
international partners, including Alcatel, to further the penetration of
OmniTRACS around the world.
CDMA TECHNOLOGY AND PRODUCTS
The Company's CDMA technology is a proprietary integrated software
and hardware system for digitally transmitting telecommunication signals in a
wireless network. Unlike analog or other digital systems, QUALCOMM's CDMA system
can reuse the same spectrum in each antenna sector of each cell in a cellular
system. This provides awireless
system to provide more efficient use of the allocated spectrum resulting
inand an increase in
capacity. Using the Company'sour CDMA technology, multiple calls are coded and transmitted
across a 1.25 MHz channel.channel instead of being transmitted on individual narrow band
frequency channels, as with Advanced Mobile Phone Systems (AMPS), or TDMA/GSM.
Each CDMA telephone is assigned its own code to encode analog voice signals that
have been converted into digital bit streams using the Company'sour proprietary PureVoice
vocoders. The coded signals are then transmitted over the air to the cell site,
where they are
then processed by a CDMA channel unit or modem.modem then processes them.
Advantages of CDMA
The Company'sincreasing number of commercial CDMA technology competes primarily with analog and TDMA/GSM
based systems to implement wireless systemshas confirmed the
results found in the cellular, PCS and WLL
markets. Repeatedrepeated field trials havewhich demonstrated that the Company'sour CDMA
technology provides the following advantages over analog technology and the
other digital technologies:
Increased Capacity. The Company's CDMA technology allows a greater
number of calls within the allocated frequency than other systems, thus
increasing subscriber capacity for each antenna sector to as much as 10 to 20
times the current analog system.
Under certain system configurations,systems and at least three to four times TDMA/GSM-based
systems. The Company believes future products in development will support even
greater capacity increases are
achievable.enhancements.
Higher Quality. There are inherent quality advantages in the Company'sour CDMA
technology that result in a consistently higher quality voice and data
transmission throughout the coverage area for mobile and portablefixed wireless
telephone operations.
Fewer Dropped Calls. The Company's CDMA technology is designed to
allow for "soft hand-off" when a user switches from one cell site to another,
thus reducing the number of dropped calls compared to analog and TDMA/GSM
systems.
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Enhanced Privacy.Privacy and Data Transmission. Because calls made over CDMA
systems are low power, wide band and coded, the Company'sour CDMA technology inherently
provides greatly improved privacy for users.users and virtually error free data
transmission.
Lower Power and Extended Talk Time. The Company's proprietary power
control system constantly monitors and adjusts mobile telephone power output to
the minimum level required to achieve high quality voice or data transmission.
As a result, the average transmitted power required to operatefor CDMA
handsets is typically
reduced from one-twenty-fifth to one-thousandth of the power required for analog
cellular telephones that are currently
available on the market.systems. Lower average transmitted power results in longer battery lifetalk time and lighter
weight, lower cost portable telephones, and also significantly
increases talk and standby time.telephones.
Lower Infrastructure Costs and Easier Transition. CDMA systems can
achieve the same level of coverage as the current analog or TDMA/GSM based
systems using fewer cells, which reduces overall infrastructure cost and the
subsequent maintenance cost of CDMA systems.
In addition, the Company'sLicensing of CDMA technology is expected to offer an easier transition from analog to
digital than competing technologies because less frequency must be
reallocated to produce acceptable capacity gains and high quality digital
service.
LICENSING OF CDMA TECHNOLOGYTechnology
As part of QUALCOMM's strategy to generate licensing revenues and
support worldwide adoption of its CDMA technology, QUALCOMMthe Company licenses to third
parties the rights to design, manufacture and sell products utilizing its CDMA
technology. The following charttable lists the Company'smajority of QUALCOMM's currently
signed licensees:
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INFRASTRUCTURE PRODUCTS SUBSCRIBER PRODUCTS TEST EQUIPMENT
- --------------------------------- -------------------------------- --------------------
INFRASTRUCTURE EQUIPMENT SUBSCRIBER EQUIPMENT TEST EQUIPMENT
-------------------------- -------------------------- --------------------------AT&T
Fujitsu Acer Peripherals, Inc. Advantest
Hitachi Alps Electric AdvantestAndo
Hughes DENSONetwork Systems Appeal Anritsu Corporation
Hyundai Electronics FujitsuAT&T Comarco Wireless
LGIC HughesCasio Grayson Electronics
Lucent Hyundai ElectronicsDENSO Hewlett-Packard
Motorola KenwoodFujitsu IFR Systems
NEC KyoceraHanwha Corporation Japan Radio Co., Ltd.
Nortel Haitai Electronics Co., Ltd. LCC
Nortel LGIC Racal
Samsung Electronics LucentHitachi Ltd. Racal Instruments
Hughes Network Systems Rohde & Schwarz
MatsushitaHyundai Electronics Rotadata
ASICS Maxon Safeco
-------------------------- MitsubishiKenwood Safco
- ------------ Kokusai Electric Co., Ltd. Sage Instruments
Motorola Tektronix
DSP Communications NECKyocera Corporation Tektronix
LSI Logic Corporation LGE Wavetek
PrairieComm, Inc. LGIC Willtech
VLSI Technology Lucent
Matsushita
Maxon OTHER
Mitsubishi -----
Motorola Lockheed Sanders
NEC Ortel Corporation
NOKIA
OKI Electric
Pantech Company
Philips Consumer Communications
SK Telecom Company
Samsung Electronics
Sanyo
Sharp Corporation
Siemens Wireless TerminalsROLM
Sony
Synertek
Toshiba
Uniden
The Company's CDMA license agreements generally provide
cross-licenses to QUALCOMM to use certain of its licensees' technology to
manufacture and sell certain CDMA equipment.products. In most cases, the Company's use of
its licensees' technology is royalty free. However, under some of the licenses,
if the Company incorporates certain of the licensed technology into certain of
its products, it is obligated to pay royalties on the sale of such products.
Motorola is entitled, subject to the terms of its license agreement, to share in
a percentage of third-party royalties paid by licensees to the Company.
Licensees are generally required to pay the Company up-front license fees as
well as ongoing royalties based on a percentage of the selling price of CDMA
subscriber and infrastructure equipment. Licenseproducts. Up-front fees are nonrefundable and are
generally paid in one or more
installments.installments and royalties generally continue throughout the life of the
underlying patents.
Subscriber Products
QUALCOMM designs, manufactures and markets wireless handsets and
accessories utilizing CDMA technology for use in mobile, fixed, wireless and
satellite networks. The Company was the first to market with a CDMA phone in
1995, and as of September 1998, through QPE, has shipped approximately seven
million CDMA phones. QUALCOMM's handset customers include AirTouch, Bell
Atlantic Mobile, PrimeCo and Sprint PCS. The Company produces a number of models
in its QCP line of phones including the QCP-2700, the first dual-band, dual-mode
CDMA digital PCS 1900 MHz/800 MHz analog phone, the QCP-820 dual-mode 800 MHz
CDMA digital/analog cellular phone and the QCP-1920 CDMA PCS 1900 MHz phone.
These models are light weight and offer a host of features including: a unique
dial shuttle allowing users to quickly and easily operate the phone with a
single touch; a new user interface to provide simple, rapid access to a host of
phone features; an ergonomically designed earpiece, providing users optimal
comfort and exceptional sound reception; intelligent internal charging controls;
and three battery options, including a slim NiMH battery, NiCd battery and an
extended Lithium Ion battery.
In many cases,September 1998, QUALCOMM introduced the "pdQ Smartphone," an
all-in-one digital phone and pen-based organizer that integrates QUALCOMM's CDMA
wireless technology with 3Com's Palm Computing platform. The pdQ Smartphone is
designed to maximize CDMA wireless data capabilities to provide users with the
ability not only to make voice calls, but also to keep track of appointments,
catalog contact information, send and receive e-mail, browse the Internet, and
receive alpha numeric pages, all from one device. QUALCOMM intends to
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commence market trials of the pdQ Smartphone in the calendar fourth quarter of
1998, with commercial availability expected in the first half of calendar year
1999.
The Company also produces a line of WLL telephones offering voice,
fax and data capabilities for the home or office.
Infrastructure Products
QUALCOMM designs, manufactures, markets and deploys infrastructure
products for use byin CDMA wireless networks. As of September 1998, the Company
of its licensees' technology is royalty free. In some cases, ifhad shipped over 2,000 base stations and related infrastructure products to
wireless operators around the Company incorporates any of this technology into its products, it is obligated
to pay royalties
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9
on the sale of such products. Lucent and Motorola are entitled, subject to the
terms of their respective agreements, to share in a percentage of third party
royalties and license fees paid by licensees to the Company.
INFRASTRUCTURE PRODUCTS
QUALCOMM is developing, manufacturing and marketing CDMA cellular, PCS and
WLL infrastructure products.world. The Company's infrastructure product lines include
Base Transceiver Stationline
includes BTS, Mobile Switching Centers ("BTS"MSC"), BSC and Base Station Controller ("BSC") equipmentother related products
built in compliance with the TIA IS-95 (cellular) and J-STD-008 standards.(PCS) standards
for both fixed, mobile and hybrid service networks. The Company's BTS product
line, the QCell family of products, contains the radio transceiver that
establishes wireless communications with a mobile telephone. The QCell product
line offers superior, scalable coverage and capacity at an economical cost using
the latest CDMA designs. The network intelligence to manage overall call
processing and CDMA control is housed in our QCore product line, including both
MSC and BSC have
been designed to provide a complete turnkey solution for cellular, PCSproducts. QCore also supports emerging wireless data standards and
WLL
applications, integrating traditional switching functionality with the BSC
equipment configuration and software functionality. The BSC links BTS equipment
together allowing communication between mobile equipment within the system using
packet based switching, and connecting these mobile units with existing wireline
networks. The BSC provides mobility management, vocoding functions, routing of
calls, service features, when applicable, such as customer billing and
operations, administration and maintenance functionality. In 1994,QUALCOMM's QCore 22X
integrates the Company announced the formation ofBSC and switching functionality in a strategic alliance with
Nortelhigh performance, compact
package. The QCore 22 BSC can connect to integrate the BTSother vendors' switching platforms
through standard open interfaces, and BSC technology of QUALCOMM with the wireless
products of Nortel. Pursuant to the agreement, Nortel has access to the
Company's product designs for digital cellular, PCS and WLL infrastructure
products and in return purchases from QUALCOMM a minimum percentage of Nortel's
CDMA infrastructure equipment requirements for resale to its customers. QUALCOMM
and Nortel will also provide turnkey installation of CDMA networks, including
network coverage and planning services, cell site commissioning, back-haul
equipment installation, customer training and support. In February 1996, the
Company announced its agreement to supply Nortel with approximately $200 million
of PCS infrastructure equipment and RF services as part of Nortel's estimated $1
billion equipment supply agreement with Sprint Spectrum. Other major customers
under this agreement include BCTel Mobility Cellular and Bell Mobility. As of
November 30, 1996, the Company has shipped approximately 375 base stationsformed strategic
partnerships and related infrastructure equipmentcompleted integration testing with major switch manufacturers
in support of these open interface solutions. Together, the QCell and QCore
products have been designed to PCS and cellularprovide a range of complete, flexible, turnkey
solutions for wireless operators in North America.both cellular and PCS bands. The Company
also offers QEDesign and QCTest, hardware and software suites designed to assist
in network planning, deployment and optimization.
QUALCOMM is the industry leader in supporting IS-707 data services,
that is used for IS-95 CDMA services, on its infrastructure products. The
Company was the first to demonstrate packet data on a live network and the first
to commercialize circuit-switched, digital fax and packet data on its
infrastructure platforms. In response to the need for higher speed data
services, QUALCOMM is evolving cdmaOne networks to support higher data rates
(HDR). In September 1996,1998, the Company and Hughes entered into an agreement
providing for the design and production of infrastructure equipment for CDMA
wireless systems. Pursuant to the agreement, Hughes will have access to
QUALCOMM's product designs for digital cellular, PCS and WLL infrastructure
products and in return will purchase a minimum percentage of Hughes' CDMA
infrastructure equipment requirements for resale to its customers. In October
1996, Hughes announced a strategic supply agreement with NextWave under which
Hughes will supply up to $245 million of CDMA infrastructure equipment over the
next six years for NextWave's PCS network, with an option to expand such amount
to $1 billion under certain conditions. Pursuant to the agreement with Hughes,
QUALCOMM will supply a percentage of the infrastructure equipment to be shipped
by Hughes to NextWave.
Pursuant to an Equipment Requirements Agreement with QUALCOMM, upon
satisfaction of certain conditions, NextWave is obligated to purchase
approximately 50% of NextWave's infrastructure equipment requirements from
QUALCOMM. The agreement also provides that QUALCOMM will offer 100% financing
for equipment purchased under such agreement, on commercial terms. The terms of
the equipment purchases, including equipment financing arrangements, will be
establishedsuccessfully demonstrated this capability
in a further agreement to be negotiatedlive environment at a major trade event in good faith by the
parties. There can be no assurance that such an agreement will be concluded.
Cellular, PCSOrlando, Florida.
Wireless and WLL systemsatellite network operators, both domestic and
international, increasingly are requiringhave required their product suppliers to arrange or
provide long-term financing as a condition to obtaining or bidding on
infrastructure projects. These projects may requireCompetition among infrastructure product providers is
intense, and in order for the Company to arrange oreffectively compete, it is required to
provide financing of amounts ranging from modest sums to over a
billion dollars on any particular project. The Company has committed to arrange
or providesignificant financing for up to $200 million of PCSits infrastructure equipment and
related services and costs to Sprint Spectrum, and is currently in negotiations
with a number of PCS service providers regarding potentially significant
equipment supply agreements and related financing.
The Company's CDMA technology is in use or has been approved for use in a
number of markets around the world, including, among others, Brazil, Japan,
India, Indonesia, People's Republic of China, Pakistan, Russia, South Korea and
Vietnam. The Company plans to pursue international opportunities for the sale of
CDMA infrastructure equipment, either as a prime contractor, through its
agreements with Nortel and or
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Hughes or through international joint venture partners. As part of such
equipment sales, the Company may be required to arrange or provide long-term
financing.
SUBSCRIBER PRODUCTS
QUALCOMM designs, manufactures and markets digital phones utilizing CDMA
technology for cellular, PCS, and WLL applications. The cellular and PCS phones
are manufactured through QPE, a joint venture with SONY Electronics formed in
1994. In December 1995, QUALCOMM and SONY signed an agreement to expand the
partnership to jointly market, sell and support wireless CDMA portable phones in
the U.S. The agreement applies to handsets sold to carrier distribution
channels, OEMproduct customers
and corporate customers in the U.S. QUALCOMM maintains a
51% ownership in QPE.
In the first half of 1995, the Company introduced the QCP-800 and QCP-1900
portable telephones. The QCP-800 is a dual-mode (analog/CDMA) telephone designed
for cellular users at 800 MHz and provides up to five hours of talk time and 48
hours of standby time on a single battery when providing CDMA service. The
QCP-1900 is for PCS users at 1900 MHz and provides up to four hours of talk time
and 48 hours of standby time on a single battery. Both telephones support
advanced features including caller identification, voice mail notification, data
communications, facsimile, advanced paging, short message services and
over-the-air activation. Furthermore, both telephones support data transmission
rates approaching 14.4 Kbps and incorporate QUALCOMM's 13 Kbps PureVoice voice
coding which offers voice quality independently judged to be equal to that of a
wired telephone. Production volumes of the QCP-800 and the QCP-1900 telephones
are currently being shipped to service providers and licensees worldwide. The
Company is also designing next generation telephones for cellular, PCS and WLL
application, which are expected to provide for advanced data features and will
be lighter, use less power and have longer battery life than existing models.
In fiscal 1996, the Company experienced a significant increase in
subscriber unit production for both cellular and PCS phones. During this period,
the Company produced approximately 400,000 CDMA handsets, the majority of which
were allocated to the South Korean and Hong Kong markets where commercial CDMA
cellular systems are in operation. In 1996, the Company entered into contracts
to supply CDMA handsets with Sprint Spectrum and PrimeCo valued at $500 million
and $350 million, respectively. In the fourth quarter of fiscal 1996, large
volumes of PCS phones were produced for Sprint Spectrum and PrimeCo for
deployment in their PCS systems.
In 1996, the Company began to produce the QCT-1000 CDMA fixed wireless
telephone designed for worldwide use in residential and small business WLL
applications. Other WLL products under development include the QCT-6000, a full
feature system offering voice, fax and data capabilities for use in business
settings, and the QCT-8000 wireless PBX designed for locations with small
clusters of subscribers such as small villages or office and apartment
buildings.
ASIC PRODUCTS
The Company designs and incorporates its proprietary CDMA ASICs in its own
subscriber and infrastructure equipment and also sells them to its licensees for
incorporation in equipment under the terms of the related license agreements. In
fiscal 1996, the Company entered into license arrangements with DSP
Communications and VLSI Technology covering certain ASIC patents belonging to
QUALCOMM. The Company currently relies on several independent foundries to
manufacture all of its ASICs. The Company's strategy is to utilize a number of
qualified foundries that it believes provide cost, technology or capacity
advantages for specific products. The Company currently has arrangedvendor financing obligations with Intel,
IBMa
majority of its infrastructure customers, including Globalstar, Chase
Telecommunications, Inc. ("Chase Telcom"), Chilesat Telefonia Personal, S.A.
("Chilesat PCS") and PhilipsPegaso Telecomunicaiones, S.A. de C.V. ("Pegaso"). In
order to provide for such ASIC manufacturing. In support of its licensees
manufacturing CDMA equipment, QUALCOMM shipped over 2 million of its CDMAfinancing, the Company will likely be subject to
significant project, market, political, credit and foreign exchange risks.
See "Risk Factors -- Vendor Financing."
ASICs in fiscal 1996.
QUALCOMM ASICProducts
The Company's ASICs products provide complex solutions for a full range of
CDMA wireless communication products as well as a variety of wireless
communication applications including CDMA cellular, PCS, and WLLother applications.
Product offerings include a complete selection of integrated circuits for
frequency synthesis, forward error correction ("FEC"), voice compression and
automatic gain control ("AGC"). Frequency synthesizer products encompass direct
digital synthesizers and frequency synthesizer evaluation boards. FEC devices
include industry leading Viterbi decoders and trellis coders. Voice compression
products include variable rate vocoders and vocoder evaluation boards. AGC
amplifiers include both receive and transmit components.
CDMA ASICs include the Mobile Station Modem ("MSM"),MSM, Baseband Analog Processor ("BBA") and Cell Station Modem ("CSM").Modem.
The Company's CDMA chipsASICs are
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components, which reduces the size and overall costcosts of the manufactured
product. The Company designs its proprietary CDMA ASICs for incorporation in its
own subscriber and infrastructure products and sale to its licensees for use in
their products. The Company currently relies on several independent
semiconductor foundries, including Intel, IBM, Philips, Texas Instruments and
others, to manufacture all of its ASICs. Through September 1998, the Company has
shipped approximately 25 million MSM isASICs to CDMA handset manufacturers
worldwide, including QPE. To date, a complete, single integrated circuit solutionsubstantial portion of our ASICs sales have
been made to international customers, particularly in South Korea. See "Risk
Factors -- International Business."
The Company has entered into royalty-bearing license arrangements
with DSP Communications, LSI Logic Corporation, VSLI Technology and PrairieComm,
Inc. covering certain ASIC patents belonging to QUALCOMM. Pursuant to these
arrangements, such parties are licensed to manufacture and sell ASICs to
subscriber and infrastructure licensees of the Company. To date, most subscriber
and infrastructure licensees have chosen to
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purchase their ASIC requirements from the Company to ensure timely access to
latest generation technology. Under the terms of their agreements, Motorola and
Lucent also have the right to manufacture and sell CDMA ASICs of their own
design to licensees.
The Company believes it has a significant advantage over other
existing and potential manufacturers of CDMA ASICs as the developer of its ASICs
chips. For example, the Company recently introduced its fifth generation ASIC
chipset for use in CDMA and FM
digital baseband processing for dualmode CDMA/analog cellular telephones. In the
fourth quarter of fiscal 1996, the next generation MSM (MSM2.2) was introduced
to the marketplace for dual-mode CDMA/analog subscriber applications. The MSM
2.2 is an improved ASIC whichwireless handsets, featuring data rates greater than 64
kilobits per second ("Kbps"). This design supports both the 8 Kbps (normal) and 13 Kbps
PureVoiceQCELP, and 8 Kbps EVRC speech vocoders on a single chip for single chip
low-power dual-mode CDMA/analog cellular
and PCSwireless subscriber applications. With low power consumption and IS-95 compliant
performance, the MSM 2.2This ASIC
simplifies design decisions and reduces the complexity of the final product
which provides an important advantage to the telephone manufacturer in terms of
physical area,size, cost and battery life. Production
shipments of MSM 2.2 are expected to commenceIn addition, the Company provides ASICs for use in
the first quarter of fiscal
1997. The BBA implements the CDMA/FM portion of a dual-mode CDMA analog
telephone which bridges the analog RF processingQUALCOMM's and the digital processing
sections of the cellular telephone. The CSM provides a cost reduction and system
integration enhancement for theits licensees' base station unit. The CSM incorporates the CDMA
modulator, CDMA demodulator and serial Viterbi decoder functions on single chip,
providing reduced costs and improved functionality. All of the Company's CDMA
ASICs are currently available to QUALCOMM's CDMA licensees throughout the world.
QUALCOMM's Very Large Scale Integrated ("VLSI") products group designs and
sells a number of sophisticated signal system components in the electronics
industry. These processing elements include Viterbi and trellis decoders, speech
encoders, direct digital synthesizers and phase locked loops. Many of these
products are used as components of QUALCOMM's systems and products. QUALCOMM
also markets and distributes these products to communications system developers
throughout the world through a network of domestic and international sales
representatives. Designing its own circuits permits the Company to exercise
greater product control, enhance quality, reduce costs and rapidly bring its new
systems and products to market.
OMNITRACS
QUALCOMM'sequipment.
OmniTRACS
communications systemOmniTRACS provides satellite-based two-way data messaging and
position reporting services for transportation companies. The OmniTRACS system
was first introduced in the U.S. in 1988 and is currently operating in 33
countries. Through September 30, 1996,1998, the Company has sold over 175,000250,000 OmniTRACS
systems worldwide. Message transmission and position tracking are provided by
use of leased Ku-band and C-band transponders on commercially available
geostationary earth orbit satellites, providingsatellites. This architecture provides a single
network, eliminatingeliminates the limited coverage and accuracy problems inherent in
land-based systems and allowingallows dispatchers to remain in close contact with their
fleets at all times. The OmniTRACS system helps transportation companies improve
the rate of return on assets and increase efficiency and safety by improving
communications between drivers and dispatchers. System features include status
updates, load and pick-up reports, position reports at regular intervals and
vehicle and driving performance information.
The OmniTRACS system was first introduced in the U.S. in 1988, and is
currently operating in 32 countries around the world (in addition to the U.S.).
To implement the OmniTRACS system, the Company utilized its spread spectrum
technology to develop a proprietary signal processing technique that enables the
OmniTRACS system to operate without interfering with other satellite
transmissions and to tolerate legal levels of interference. The system operates
on leased commercial Ku-band or C-band satellite transponders. Position
reporting is accomplished through either the use of a pilot signal on a second
satellite using a proprietary feature of the OmniTRACS system called QASPR
(QUALCOMM Automatic Satellite Position Reporting System) or the use of the U.S.
Government-funded Global Positioning System.
UNITED STATES BUSINESS
The Company generates revenues from its OmniTRACS system in the U.S.
by manufacturing and selling OmniTRACS mobile terminals and related software
packages and by providing ongoing messaging and maintenance services. The
Company sells its OmniTRACS products in the U.S. primarily through its direct
sales force, including software systems and field engineering support personnel
in five regions throughout the United States. The Company provides field support
out of each sales office, including technical software support.
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Customers
for U.S. operations include over 650850 U.S. transportation companies, primarily in
the trucking industry. The Company is currently
processing approximately 4 million messages and position reports per day.
Message transmissions for U.S. operations utilize a Ku-band satellite
transponder and are formatted and processed at an NMF operated by QUALCOMM. The
primary NMF is located in San Diego, California and a fully capable backup NMF
is located in Las Vegas, Nevada. QUALCOMM is the only provider to have such a
backup hub to service its customers.
The Company has primarily targeted the for-hire, long-haul irregular route
truck load segment of the trucking market. The Company believes the targeted
truckload market in the U.S., including private carriers, consists of over
500,000 trucks and includes flatbeds, household movers, dry vans and
refrigerated carriers. The Company markets its OmniTRACS products and services
to other trucking market segments such as the less-than-truckload and to other
industries and has sold OmniTRACS products for use by
private trucking fleets, service vans, ships, trainstrains; and federal emergency
vehicles, and for oil and gas pipeline control and monitoring sites. INTERNATIONAL BUSINESS
The Company's strategy is to workCompany
estimates the Network Management Facility currently processes over five million
messages and position reports per day. Message transmissions for U.S. operations
are formatted and processed at an Network Management Facility in San Diego,
California operated by QUALCOMM, with internationala fully capable backup Network Management
Facility located in Las Vegas, Nevada.
Outside of the U.S., the Company works with telecommunications
companies and operators to establish OmniTRACS operations in foreign markets. The OmniTRACS
system is currently operating in 32 countries throughout Europe and the Middle East and in
Brazil, Canada, Japan, Brazil,Malaysia, Mexico, MalaysiaRussia and South Korea, in addition to its U.S.
operations.Korea.
Internationally, the Company generates revenues from the OmniTRACS system
through license fees, sales of network equipmentproducts and terminals, and fees
from engineering support services.service fees.
Messaging services are provided by service providers that operate network
management centers for a region under licenses granted by the Company.
On October 26, 1998, QUALCOMM distributes itsannounced the formation of QUALCOMM
Wireless Business Solutions of which OmniTRACS will be a key component. By
leveraging QUALCOMM's CDMA digital wireless technology and other complementary
technologies, the group's vision is to bring wireless data solutions to
businesses worldwide by developing new products through partners inand expanding into other
countries. In
these countriesmarkets. While maintaining the Company provides units forCompany's focus on the Ku-band or C-band
frequencies. Ku-band is allocated at a higher frequency spectrum than C-band. In
addition, the Company has invested or may choose to invest in certain of its
current or future operators.
In the Ku-Band, the Company distributes its products through partners in
Europe, Japan, Mexico and South Korea. In Europe, the Company has entered into a
joint venturelong-haul truckload
industry with Alcatel, known as ALCATEL QUALCOMM, which is owned 66% by
Alcatel N.V. and 34% by the Company. ALCATEL QUALCOMM commenced commercial
service in 1990 and has primary responsibility for managing and supporting the OmniTRACS European operations (referred to in Europeand TruckMAIL product lines, this division will
develop new products targeted at other areas of freight transportation, as "EutelTRACS")well
as other businesses with a need for mobile data.
GLOBALSTAR
In 1994, Loral Space and for
obtaining service providers in each country or territory. ALCATEL QUALCOMM also
has rights to develop, manage and support EutelTRACS in Eastern Europe, the
Middle East and North Africa. The Company sells the OmniTRACS terminals to
ALCATEL QUALCOMM for resale and shares in a percentage of the license and
maintenance fees paid to ALCATEL QUALCOMM. ALCATEL QUALCOMM has the option to
acquire a royalty bearing license from the Company to manufacture the OmniTRACS
terminals for sale only in the joint venture's territory. In Japan, the
Company's partners are Denso Corporation and Itochu, which commenced commercial
service in 1993. In Mexico, the Company's partner is Corporation Nacional de
Radiotermination SA, which commenced commercial service in 1994, and in South
Korea, the Company's partner is Samsung America, which commenced commercial
service in 1996.
In the C-band, the Company distributes its products through partners in
Brazil and Malaysia. In Brazil, the Company's partner is AUTOTRAC Commercia e
Telecomunicacoes SA which commenced commercial service in 1994, and in Malaysia,
the Company's partner is QUALCOMM ASEAN Co.Communications, Ltd., which commenced commercial
service in 1996.
GLOBALSTAR
QUALCOMM, Loral and other companies
have formed Globalstar a limited
partnership to design, construct and operate a worldwide, low-earth-orbitinglow-Earth-orbit
("LEO") satellite-based digitalsatellite system. Through a constellation of 48 satellites, this system
is being designed to connect with existing terrestrial telecommunications
system using QUALCOMM's CDMA
technology. Globalstar intendssystems to offer low-cost, high-quality voice telephonycreate a seamless global network, enabling users to call, fax and
other digital telecommunications services such assend data transmission, paging,
facsimileto and position location to areas currently under-served or not served by
existing wireline and cellular telecommuni-
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13
cations systems.from virtually any place in the world.
The system will allow existing service providers to rapidly
extend their coverage area and to enhance their provision of telecommunications
services to new and current users.
GlobalstarCompany has entered into a four-yearnumber of contracts involving the
Globalstar System which, in aggregate, provide for revenues to the Company of
approximately $1.3 billion over the life of such contracts. Through September
8
13
1998, the Company has recognized approximately $792 million in revenue
associated with these contracts. The Company's development agreement for QUALCOMM to design
and develop manufacture, install, testsubscriber products and maintain four gateways, twothe ground operations control centers and 100 pre-production subscriber terminals. A
portioncommunication stations of the
ground operations control centers is being developed and
manufactured under a subcontract by a Loral subsidiary. Total revenues underGlobalstar System provides for revenue of up to approximately $870 million over
the contract to QUALCOMM are estimated to exceed $500 million at completion, $213
millionlife of which have been recognized by QUALCOMM to date. QUALCOMMthe agreement. Under the agreement, the Company is reimbursed for
its development services on a cost-plus basis. In September 1996,
Globalstar completed an important milestone when forwardaddition, in April 1997 the
Company was awarded a $275 million contract to manufacture and reverse link calls
were successfully completed in a laboratory environment.
It is anticipated that Globalstar will require capital of approximately
$2.5 billion prior to full scalesupply commercial
implementation of its system. To
date, Globalstar has received funds and financing commitments totaling
approximately $1.4 billion. Such capital is being used, in part, to fund the
development agreement. 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 continue funding the development agreement and which would have a
material adverse affect on QUALCOMM's business and results of operations. The
Globalstar development agreement is terminable at the election of Globalstargateways for deployment in the eventGlobalstar System. This multi-year agreement has
subsequently grown to $330 million and could grow to approximately $600 million
as the Globalstar System is built out. In March 1998 the Company
entered into a $125 million agreement with Globalstar to manufacture and supply
portable and fixed CDMA handsets, including accessories, that will operate on
the Globalstar abandons its efforts to develop the satellite-based
communications system.System. The Company'sCompany holds an approximate 6.5% interest in
Globalstar is owned indirectly through certain limited partnerships. See "Risk Factors --
Globalstar."
In November 1998, the Company announced the formation of QUALCOMM
Wireless Systems Division, which combines its Wireless Infrastructure Division
and Communication Systems Division. The Company's current ownershipnew division, which focuses on CDMA
infrastructure for mobile and fixed service and the satellite-based Globalstar
system, will leverage the technologies and common strengths of these businesses.
MICROSOFT CORPORATION JOINT VENTURE
On November 10, 1998, the Company and Microsoft Corporation
announced the formation of a broad strategic partnership to enable secure and
airlink-independent Internet access to all mobile users. The new joint venture,
WirelessKnowledge, will be an equally held company. WirelessKnowledge will be
accessible over all digital wireless wide area networks, including those based
on CDMA technology, TDMA/GSM, CDPD and Mobitex. WirelessKnowledge services will
enable carriers to offer their mobile customers wireless access to data and
applications securely over their choice of wireless networks and enterprise
systems. Commercial availability is slated for the first half of 1999, enabling
carriers to deliver valuable new services to their customers, regardless of
technology or device preference.
SPIN-OFF OF LEAP WIRELESS INTERNATIONAL, INC.
On September 23, 1998 the Company completed the spin-off of its
joint venture and equity interests in several domestic and international
emerging terrestrial-based wireless telecommunications operating companies,
including Pegaso Telecomunicaciones, S.A. de C.V. ("Pegaso") (Mexico),
Metrosvyaz Limited (Russia), Orrengrove Investments Limited (Russia), ChileSat
Telefonia Personal, S.A. ("Chilesat PCS") (Chile), Chase Telecommunications,
Inc. ("Chase Telcom") (United States), OzPhone Pty. Ltd. (Australia) and certain
other development-stage businesses through a distribution to its stockholders of
all of the shares of Leap Wireless, a Delaware corporation. In addition,
QUALCOMM and Leap Wireless have agreed that, if certain events occur within 18
months after the distribution, QUALCOMM will transfer to Leap Wireless its
equity interest in Globalstar is
approximately 7.2%.
EUDORA ELECTRONIC MAILand working capital loan from Telesystems of Ukraine ("TOU"),
a wireless operating company in Ukraine. The Company has developed Eudora, an electronic mail software applicationalso transferred to Leap
Wireless $10 million cash and certain indebtedness of the operating companies
owed to the Company in the amount of approximately $113 million, approximately
$30.8 million of which is marketedindebtedness under certain convertible notes, as well
as indebtedness related to certain miscellaneous assets. The aggregate net
tangible book value of the assets transferred by QUALCOMM to Leap Wireless in
commercialconnection with the distribution was approximately $258 million. In connection
with the distribution, Leap Wireless issued to the Company a warrant to purchase
5,500,000 shares of Leap Wireless common stock, equaling approximately 18% of
the fully diluted common stock of Leap Wireless at the time of the distribution.
QUALCOMM provided a secured credit facility to Leap Wireless
consisting of two sub-facilities. The first sub-facility enables Leap Wireless
to borrow up to $35.2 million from QUALCOMM, solely to meet the normal working
capital and freeware versionsoperating expenses of Leap Wireless, including salaries, overhead,
and available for bothcredit facility fees, but excluding, among other things, strategic capital
investments in wireless operators, substantial acquisitions of capital products,
and/or the Macintoshacquisition of telecommunications licenses. The other sub-facility
enables Leap Wireless to borrow up to $229.8 million from QUALCOMM, solely to
use as investment capital to make certain identified portfolio investments.
Amounts borrowed under the credit facility will be due and Windows platforms.payable approximately
eight years following September 23, 1998. The Company estimates that Eudora currently
serves over 18 million users, including over 3 million userswill have a first priority
security interest in, subject to minor exceptions, substantially all of Eudora's
commercial version, makingthe
assets of Leap Wireless for so long as any amounts are outstanding under the
credit facility. Amounts borrowed under the credit facility will bear interest
at a variable rate equal to LIBOR plus 5.25% per annum. Interest will be payable
quarterly beginning
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14
September 30, 2001; and prior to such time, accrued interest shall be added to
the principal amount outstanding. Further, Leap Wireless may identify additional
investment requirements or opportunities for which it the leading Internet e-mail applicationneeds funding and QUALCOMM
may choose to participate in terms
of total subscribers. Eudora software adheres to Internet standards so users can
communicate with anyone on the Internet, regardless of platform or e-mail
software. The Company believes that the combination of Eudora and its CDMA
wireless technologies may create the opportunity to develop new wireless
products and services in the future.such funding.
GOVERNMENT SYSTEMS
QUALCOMMThe Company performs a variety of prime and subcontract work for the various departments
and agencies of the U.S. Government involving communication-related
technologies. QUALCOMMThe Company is incorporating encryption into itscurrently under contract with the U.S. Government
to develop CDMA digital
cellular system architectureterrestrial secure phones and a net broadcast capability that
incorporate end-to-end encryption. Under the same contract, the Company is
providing the same capabilities with a preliminary design of a Globalstar secure
phone. Products from these, and future development efforts, would likely service
a wide range of U.S. Government and potential commercial applications. In
addition to the development efforts, QUALCOMM's commercial products, such as
CDMA infrastructure products and OmniTRACS units are being marketed and sold
worldwide for use in multiple U.S. Government applications.
As a prime contractor, QUALCOMM is developing wireless secure phones and may be
developing deployable base stations for a wide variety of government uses. Many
of these products contain additional features and enhancement that are unique to
U.S. Government applications. One such effort is the addition of dispatch
capability to the digital cellular system. QUALCOMM is also involved in
providing Globalstar products and engineering services to the U.S. Government.
Like the terrestrial system, application dependent features are in review to
better support the U.S. Government use of Globalstar. Security and
interoperability are some of the unique requirements under study. The Company is
in the process of completing the production of its data link system for the U.S.
Department of Defense. The system is used to support air to ground
communications on training ranges and has been in production for the past four
years. The Company also sells other airborne and satellite subsystems to the
government and believes that futureFuture government business, isleveraging off existing and new
technologies and products, continues to be an important element of its strategy andthe Company's
overall strategy. Therefore, QUALCOMM will continue its pursuit of a wide range
of opportunities within the U.S. Government where the Company's technologies can
provide beneficial solutions to pursue work in this area for the
foreseeable future.
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14existing and future government applications.
MANUFACTURING AND BACKLOG
QUALCOMM began high volume manufacturing of its CDMA subscriber and
infrastructure equipmentproducts in 1996 and has been manufacturing OmniTRACS terminals
in high volumes since 1988. TheIn 1994 the Company is in the processformed QPE, a joint venture with
a subsidiary of expanding its
manufacturing capacity forSony, to manufacture CDMA subscriber products and infrastructure equipment.in fiscal 1996
began manufacturing and shipping significant volumes of CDMA subscriber
products. During fiscal 1996,1997, production capabilities at QPE were significantly
expanded which
resultedand the Company successfully made a transition to its new line of phone
models. As of September, 1998, the Company had shipped over 2,000 base stations
and related infrastructure products to wireless operations around the world. QPE
has the capacity to manufacture approximately 600,000 phones per month. QUALCOMM
maintains a 51% ownership in shipmentQPE. The Company commenced infrastructure products
production during fiscal 1996 and began shipping significant quantities of
approximately 200,000 subscriber unitsinfrastructure products to customer sites in the fourth
quarterfirst half of fiscal 1996 with higher production anticipated for fiscal 1997. TheIn
January 1997, the Company is completing construction ofcommenced operations in a 177,000 square foot facility
in San Diego, California to expand its capacity to manufacture CDMA
infrastructure equipment. As of November 30, 1996, the Company
has shipped approximately 375 base stationsproducts.
The Company's backlog and related infrastructure
equipment.
QUALCOMM has entered into strategic alliances with Nortel and Hughes
relating to the development and manufacture of CDMA infrastructure equipment.
See "--CDMA Technology and Products--Infrastructure Equipment" and "--Subscriber
Equipment."
At September 29, 1996, backlog andsupply contracts subject to contingencies
were approximately $1.7$2.0 billion for the Company.at September 30, 1998 compared to $2.3 billion
at September 30, 1997. Included in backlog and contracts
subject to contingenciesthese figures are all customer commitments to
purchase regardless of the scheduled delivery dates. Because someSome of these contracts may
be canceled without significant penalty and, as a result, the total backlog and
supply contracts subject to contingencies may not be indicative of future
results. A significant portion of
the $1.7 billion backlog and supply contract reflects large contract awards in
fiscal 1996. Those awards include approximately $200 million for QUALCOMM's
share of Nortel's infrastructure contract with Sprint Spectrum, nearly $500
million for the Sprint Spectrum contract award to QPE for PCS subscriber
equipment and approximately $350 million for PrimeCo's contract award to QPE for
cellular and PCS subscriber equipment.
RESEARCH AND DEVELOPMENT
The telecommunications industry is characterized by rapid
technological change, requiring a continuous effort to enhance existing products
and develop new products. The Company maintains a substantial program of
research and product development. Company sponsoredCompany-sponsored research and development
expenditures in fiscal years 1996, 1995,1998, 1997 and 19941996 totaled approximately $160$349
million, $80$236 million and $50$162 million, respectively. Most of these expenditures
are related to the Company'sour development of CDMA technology for cellular, PCS and WLL
applications and the continued development of the Company's OmniTRACS system.wireless applications. The
Company intends to continue to maintain a substantial research and development
program and expects research and development expenses to increase in the future.
In addition to Company sponsored research and development, the Company performs
contract research and development for various commercial and government agencies
and contractors, including Globalstar.
COMPETITION
CompetitionThere is increasing competition in the wireless communicationstelecommunications
industry is intense. The
industry consistsin the United States and throughout the world. There can be no
assurance that the Company will be able to compete successfully or that new
technologies and products that are more commercially effective than the
Company's technologies and products will not be developed. Many of major domestic and international companies, many of whichthe Company's
prospective competitors have substantially greater financial, technical,
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15
marketing, sales manufacturing,and distribution and
other resources substantially greater than those of the Company. In
addition, many of these companies are licensees of the Company's technology, and
have established market positions, trade names, trademarks, patents, copyrights
and intellectual property rights and substantial technological capabilities.
Although the implementation of advanced telecommunications services is in its
early stages in many developing countries, the Company believes competition is
intensifying as businesses and foreign governments realize the market potential
of telecommunications services. Many of the Company's customers currently face
competition from existing telecommunication providers. A number of large
American and European companies and large international telecommunications
companies are actively engaged in programs to develop and commercialize
telecommunications services in both developing and developed countries. In many
cases, the Company also competes against the landline carriers, including
government-owned telephone companies. In some cases, the competition is from
government-controlled or government-supported entities that are, or may in the
future be, privatized or otherwise become more efficient and competitive. In
addition, the Company throughout the world may face competition with new
technologies and services introduced in the future. Although the Company intends
to employ relatively new technologies, there will be a continuing competitive
threat from even newer technologies that may render the technologies employed by
the Company obsolete. See "Risk Factors -- Rapid Technological Change." The
Company competes onalso expects that the basis of product quality, reliability, price customer supportthe Company charges for its products and
responsiveness and product features.services in certain regions will decline over the next few years as competition
intensifies in its markets.
The Company believesfaces additional competition in the development of next
generation digital wireless services. The Company supports a new CDMA based
standard that it is competitivecompatible with respect to eachexisting GSM and cdmaOne systems. Other
industry participants are aggressively promoting the adoption of these factors.
CDMA. The primary competition with respect to CDMAdifferent
standards. There can be no assurance that our technology is from
current analog and digital TDMA-based systems, including GSM. GSM has been
adoptedwill be selected as the
standard for third generation digital cellular standard throughout Europewireless service technology or that our
current intellectual property will be applicable to such third generation
standards.
The Company also competes against its licensees in the manufacture
of CDMA subscriber, infrastructure and has received
substantial international acceptance in other countries. Industry publications
have reported that over 60 countries have adopted or are deploying GSM. In
Japan, the MinistryASICs products. The Company is facing
increasing competition as more of Posts and Telecommunications has adopted TDMA as its primary digital cellular standard, which has been widely deployed throughout the
country. Japan's proprietary TDMA system is not compatible with either GSM or
the U.S. IS-54 TDMA standard. However, in 1996, twolicensees introduce CDMA products. Many of
the three largest
cellular service providers in JapanCompany's licencees have announced plans to offer commercial
CDMA service in 1998. In addition,longer operating histories and a numbergreater market
presence than the Company. Many of alternative radio systems are
also being marketed for WLL applications. Severalthe major equipmentproducts suppliers have made
substantial investments in TDMA and GSM technology including Alcatel,
Hughes, Lucent,
Motorola, Nokia,
12
15 Nortel and Siemens, all of whom are licensees of the Company,
as well as Ericsson. The Company also competes against its licensees in the manufacture of
CDMA subscriber and infrastructure equipment. There can be no assurance that the
Company'sOur competitors will notmay devote a significantly greater amount
of their financial, technical, marketing and other resources to aggressively
market competitive communications systems or develop and adopt competitive
digital cellular technologies, and that suchthose efforts will not materially adversely
affect the Company'smay have a material adverse
effect on our business, results of operations, inliquidity and financial position.
Moreover, certain products providers may offer more attractive product pricing
and/or financing terms than the future.
OmniTRACS. The Company's primary competitionCompany as a means of gaining access to itsthe
wireless markets.
Existing competitors of OmniTRACS system
operations include AMSC and HighwayMaster Communications, Inc. AMSC and its
resellers are offering services through the AMSC satellite which was launched in
1995. Recently, Rockwell International, the primary reseller to date of AMSC
services, ceased acting as an AMSC reseller and transferred its customers to
AMSC, thereby increasing AMSC's market presence. These competitors are aggressively pricing their
products and services and could continue to do so in the future. In addition,
these competitors are offering new value-added products and services similar in
many cases to those developed or being developed by QUALCOMM.the Company. Emergence of
new competitors, particularly those offering lowerlow cost terrestrial-based products
and future LEO satellite communicationssatellite-based systems, may impact margins and intensify
competition in new markets.
The Company also faces competition abroad from numerous
suppliers of equipment and services. These include Inmarsat and its authorized
resellers through its Inmarsat C geostationary satellite service. In addition,
the Company is facing competition abroad from various terrestrial based systems
and specifically in Europe from GSM-based terrestrial systems. All of these
competitors are aggressively pricing their products and services and the Company
can continue to expect pricing pressures.
PATENTS, TRADEMARKS AND TRADE SECRETS
The Company relies on a combination of patents, copyrights, trade
secrets, trademarks and proprietary information to maintain and enhance its
competitive position. The Company has been issued approximately 90 U.S.granted over 200 patents and has approximately 275over
500 patent applications pending in the U.S.,United States. The vast majority of which 10such
patents and 8 patent applications relate to our CDMA digital wireless technology
and the Company's OmniTRACS products and
approximately 65remainder of such patents and approximately 260 patent applications relate to the
Company's CDMA digital wireless technology.our
OmniTRACS products. The Company also actively pursues foreign patent protection in other
countries of interest to the Company. The policy ofThere can be no assurance that the Company is to apply forpending
patent applications will be granted, that our patents or other appropriate proprietarycopyrights will provide
adequate protection, or statutory protection, when it develops valuable newthat our competitors will not independently develop or
improved technology. Theinitiate technologies that are substantially equivalent or superior to our
technologies. In addition, while the Company believes that its intellectual
property rights regarding CDMA technology will be applicable to third generation
CDMA systems, there can be no assurance that such will be the issued patents provide broad coverage for its
OmniTRACS system and many digital wireless applications of CDMA, including
satellite, cellular, cordless telephone, PCS, wireless PBX and WLL and other
wireless applications.
In addition to potential patent protection,case. There can
also be no assurance that the confidentiality agreements upon which the Company
relies on the laws
of unfair competition and trade secrets to protect its proprietary rights. The
Company attempts to protect its trade secrets and other proprietary information through agreements with customerswill be
adequate. The cost of defending our intellectual property has been and suppliers, proprietary information
agreements with employees and consultantsmay
continue to be significant. From time to time, certain companies may assert
exclusive patent, copyright and other security measures. Althoughintellectual proprietary rights to
technologies which are claimed to be important to the industry or to the
Company. In addition, from time to time third parties provide the Company intendswith
copies of their patents relating to protectspread spectrum and other digital wireless
technologies and offer licenses to such technologies, and the Company evaluates
such patents
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16
and the advisability of such licenses. If any of our products were
found to infringe on protected technology, the Company could be required to
redesign such products, license such technology, and/or pay damages to the
infringed party. If the Company is unable to license protected technology used
in our products or to redesign such products, the Company could be prohibited
from marketing such products.
Ericsson, Motorola and InterDigital have each advised the TIA that
they hold patent rights in technology embodied in IS-95. Lucent and OKI Electric
have claimed patent rights in IS-96. In accordance with TIA guidelines, each
company has confirmed to the TIA that it is willing to grant licenses under its
rights vigorously, there canon reasonable and nondiscriminatory terms. In connection with the
settlement and dismissal of our patent litigation with InterDigital, the Company
received, among other rights, a fully-paid, royalty free license to use and to
sublicense the use of those patents claimed by InterDigital to be no assurance
that these measures will be successful.essential to
IS-95. If the Company and other product manufacturers are required to obtain
additional licenses and/or pay royalties to one or more patent holders, this
could have a material adverse effect on the commercial implementation of our
CDMA technology.
The Company believes that, because of the rapid pace of technological
changeis currently engaged in the communications industry, patent and trade secret protections are
important but must be supported by other factors such as the expanding
knowledge, abilityinfringement
litigation relating to our technology and experience of the Company's personnel, new product
introductions and frequent product enhancements.products. See "Item 3--Legal
Proceedings."
EMPLOYEES
As of September 29, 1996,30, 1998, the Company and its subsidiaries employed approximately 6,00011,600
full-time and temporary employees. Of the total employees,
33% are involved in engineering and engineering support functions; 35% are
involved in manufacturing related functions; 7% are in sales and marketing; 7%
are general and administrative; and 18% are in various activities which support
all areas of the Company. None of the Company's employees is
represented by a collective bargaining agreement. The Company considers employee
relations to be good.
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EXECUTIVE OFFICERS
The executive officers of the Company and their ages as of
November 20,
1996September 30, 1998 are as follows:
NAME AGE POSITION
---------------------------------------- ---- --- -----------------------------------------------
Irwin Mark Jacobs...................... 63Jacobs.................................... 65 Chairman of the Board and Chief Executive Officer
Andrew J. Viterbi...................... 61Viterbi.................................... 63 Vice Chairman of the Board
Harvey P. White........................ 62Richard Sulpizio..................................... 48 President and Director
Richard Sulpizio....................... 46 Chief Operating Officer
and Executive
Vice President
Anthony S. Thornley.................... 50 SeniorThornley.................................. 52 Executive Vice President and Chief Financial Officer
Steven R. Altman....................... 35 SeniorAltman..................................... 37 Executive Vice President, General Counsel and
Assistant Secretary and General Manager,
Technology Transfer and Strategic Alliances Division
Franklin P. Antonio.................... 44Antonio.................................. 46 Executive Vice President and Chief Technology Officer
John E. Major........................................ 52 Executive Vice President and President and Chief
Executive Officer of WirelessKnowledge
Gerald L. Beckwith..................... 48 President, Communications Systems
Divisions
Thomas J. Bernard...................... 64 President, Wireless Infrastructure
Products Division
Ronald E. Foerster..................... 52Beckwith................................... 50 Senior Vice President and General
Manager,President,
Wireless Infrastructure
ProductsSystems Division
Paul E. Jacobs......................... 34Jacobs....................................... 35 Senior Vice President and General
Manager SubscriberPresident,
Consumer Products Division
John F. Sarto.......................... 48Donald E. Schrock.................................... 53 Senior Vice President and General
Manager, OmniTRACSPresident, ASIC
Products Division
Chris V. Simpson....................... 49John N. Dollard...................................... 44 Senior Vice President, Worldwide Manufacturing
and General
Manager Worldwide Sales and MarketingPresident, QPE
IRWIN MARK JACOBS, one of the founders of the Company, has served as
Chairman of the Board of Directors and Chief Executive Officer of the Company
since it began operations in July 1985. He also held the title of President
prior to May 1992. Before joining the Company, Dr. Jacobs was Executive Vice
President and a Director of M/A-COM, Inc., a telecommunications company. From
October 1968 to April 1985, Dr. Jacobs held various executive positions at
LINKABIT (M/A-COM LINKABIT after August 1980), a company he co-founded. During
most of his period of service with LINKABIT, he was Chairman, President and
Chief Executive Officer and was at all times a Director. Dr. Jacobs received his
B.E.E. degree from Cornell University and his M.S. and Sc.D.
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17
degrees from the Massachusetts Institute of Technology ("MIT"). Dr. Jacobs is a
member of the National Academy of Engineering and received the National Medal of
Technology in 1994.
ANDREW J. VITERBI, one of the founders of the Company, has served as
Vice-Chairman of the Board of Directors and as Chief Executive Officer of the
Company's Israel subsidiary since it began operations in July 1996.1985.
From July 1985 through July 1996 he also served as the Company's Chief Technical
Officer. From July 1983 to April 1985, Dr. Viterbi was Senior Vice President and
Chief Scientist of M/A-COM, Inc., a telecommunications company. From October
1968 to April 1985, Dr. Viterbi held various executive positions at LINKABIT
(M/A-COM LINKABIT after August 1980), a company he co-founded, and served as
President of the M/A-COM LINKABIT subsidiary of M/A-COM, Inc. During most of his
period of service with LINKABIT, he was vice-chairmanVice-Chairman and was at all times a
Director. Dr. Viterbi received his B.S. and M.S. degrees in Electrical
Engineering from MIT and his Ph.D. degree from the University of Southern
California. 14
17
HARVEY P. WHITE, oneHe is a member of both the National Academy of Engineering and the
National Academy of Sciences. In addition he is currently a member of the
founders of the Company, has served as
President since May 1992 and also as Chief Operating Officer from February 1994
to August 1995. Prior to May 1992 he was Executive Vice President and Chief
Operating Officer and has also been a Director of the Company since it began
operations in July 1985. From March 1978 to June 1985, Mr. White was an officer
of LINKABIT (M/A-COM LINKABIT after August 1980), where he was successively
Chief Financial Officer, Vice President, Senior Vice President and Executive
Vice President. Mr. White became Chief Operating Officer of LINKABIT in July
1979 and a Director of LINKABIT in December 1979. He holds a B.A. degree in
Economics from Marshall University.President's Information Technology Advisory Committee.
RICHARD SULPIZIO currently serves as the Company's President and
Chief Operating Officer. He has held the position of President since July 1998
and the position of Chief Operating Officer and was named Executive Vice President in July 1996.since August 1995. He returned to the Chief
Operating Officer position in August 1995 after servingserved as
President of the Company's OmniTRACS division from February 1994 to August 1995.
He previously held the Chief Operating Officer title from May 1992 to February
1994. He joined the Company in May 1991 as Vice President, Information Systems
and was promoted to Senior Vice President in September 1991. Prior to joining
the Company, Mr. Sulpizio held various positions with Unisys Corporation, a
diversified computer and electronics company, including manager of MIS and
Director of Program Management and most recently as Vice President and General
Manager of the Component Engineering and Procurement Division. Mr. Sulpizio
holds a B.A. degree in Liberal Arts from California State University, Los
Angeles and a Masters degree in Systems Management from the University of
Southern California.
ANTHONY S. THORNLEY joined the Company as Vice President of Finance
and Chief Financial Officer in March 1994, and was promoted to Senior Vice President
in February 1996.1996 and was promoted to Executive Vice President in November 1997.
Prior to that, Mr. Thornley was with Nortel, a telecommunications equipmentproducts
manufacturer, for sixteen16 years in various financial and information systems
management positions, includingincluding: Vice President, Public Networks,Networks; Vice
PresidentPresident: Finance NT World TradeTrade; and Corporate Controller, Nortel Limited. He
has also worked for Coopers &and Lybrand and is a Fellow of the Institute of
Chartered Accountants in England and Wales. Mr. Thornley received his Bachelors of ScienceB.S.
degree in Chemistry from the University of Manchester, England.
STEVEN R. ALTMAN has served as General Counsel since joining the
Company in October 1989. He was named Vice President in December 1992, and was
promoted to Senior Vice President in February 1996.1996 and was promoted to Executive
Vice President in November 1997. He was also named General Manager, Technology
Transfer and Strategic Alliances Division in September 1995. Prior to joining
the Company, Mr. Altman was a business lawyer in the San Diego law firm of Gray
Cary AmesWare & Frye,Freidenrich, where he specialized in intellectual property, mergers
and acquisitions, securities and general corporate matters. Mr. Altman received
a B.S. degree from Northern Arizona University and a Juris DoctorDoctorate from the
University of San Diego.
FRANKLIN P. ANTONIO, one of the founders of the Company, has served
as Executive Vice President and Chief Technology Officer of the Company since
July 1996, as Senior Vice President of Engineering from September 1992 to July
1996, and as Vice President of Engineering of the Company from August 1985 to
September 1992. He served as a Director of the Company from August 1985 until
February 1989. Prior to joining the Company, Mr. Antonio was Assistant Vice
President of Engineering of M/A-COM LINKABIT where he held various technical and
management positions from May 1972 through July 1985. Mr. Antonio received his
B.A. degree in Applied Physics and Information Science from the University of
California, San Diego.
JOHN E. MAJOR currently serves as an Executive Vice President of the
Company and in November 1998 was named President and Chief Executive Officer of
the newly formed WirelessKnowledge, a Microsoft and Qualcomm joint venture. He
has also served as President of the Company's Infrastructure Product Division
since joining the Company in May 1997. Prior to joining the Company, Mr. Major
served most recently as Senior Vice President and Staff Chief Technical Officer
at Motorola. Prior to that, he served as Senior Vice President and General
Manager for Motorola's Worldwide Systems Group of the Land Mobile Products
Sector. Mr. Major currently serves on the Board of Directors' Executive
Committee for the Telecommunications Industry Association ("TIA") and is
Vice-Chair for the Electronics Industry Association ("EIA"). He has served as
the Chairman of the EIA since January of 1998. He also serves on the Boards of
the Littlefuse Corporation and Lennox Corporation. He serves on the Visitor's
Board for the Software Engineering Institute of Carnegie Mellon and the Computer
Science and
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18
Telecommunications Board for the National Academy of Science. Additionally, he
is on the Trustee's Council for the University of Rochester. Mr. Major holds a
B.S. degree in Mechanical and Aerospace Engineering from the University of
Rochester, and an M.S. degree in Mechanical Engineering from the University of
Illinois. He also holds an M.B.A. degree, with distinction, from Northwestern
University and a Juris Doctor from Loyola University. Mr. Major received an
honorary doctorate from Westminster College in May, 1995.
GERALD L. BECKWITH, was nameda Senior Vice President of the Company assumed
responsibility for the newly formed QUALCOMM Wireless Systems Division in
November 1998 which combined its Wireless Infrastructure Division and
Communications System Division. He has also served as President of the Company's
Communications Systems division inDivision since September 1994. He served as Vice
President and General Manager, Communications Systems Division from June 1991 to
September 1994. Mr. Beckwith joined the Company in 1987 as Program Manager for
the development of OmniTRACS.OmniTRACS, and was appointed Vice President of Commercial
Programs in 1990. Prior to joining QUALCOMM, Mr. Beckwith held various positions
at LINKABIT. Mr. Beckwith received his Bachelor and Masters degrees in
electrical engineeringElectrical Engineering from San Diego State University.
THOMAS J. BERNARD has served asPAUL E. JACOBS, a Senior Vice President of the Wireless Infrastructure
Products Division of the Company, since April 1996. He retired in April 1994, but
returned to QUALCOMM in August 1995 as Executive Consultant and became Senior
Vice President, Marketing, in December 1995. Mr. Bernard first joined the
Company in September 1986. He served as Vice President and General Manager for
the
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18
OmniTRACS division and in September 1992 was promoted to Senior Vice President.
From March 1982 to September 1986, Mr. Bernard held various positions at M/A-COM
LINKABIT. Prior to joining the Company in September 1986, Mr. Bernard was
Executive Vice President and General Manager, M/A-COM Telecommunication
Division, Western Operations. Mr. Bernard has served on the Board of Directors
of Sigma Circuits, Inc., a circuit board manufacturing company, since April
1995.
RONALD E. FOERSTER joined the Company as Senior Vice President and General
Manager, Wireless Infrastructure Products Division, in November of 1994.
Previously he was Chief Technical Executive for U.S. West New Vector Group, a
cellular carrier, for three years. In former positions Dr. Foerster has served
as President, AT&E Laboratories, Inc.; Vice President Engineering, CXC
Corporation; Assistant Vice President and General Manager, Bell Northern
Research; and Director of Product Management and Strategic Planning, Nortel. Dr.
Foerster received his B.S. degree in Aeronautical Engineering from the
University of Minnesota and M.S. and Ph.D. from Stanford University.
PAUL E. JACOBS was named
Vice President and General Manager, SubscriberConsumer Products Division in April 1995 and
was promoted to Senior Vice President, Consumer Products Division in July 1996.February 1997. He
joined the Company in September 1990 as Senior Engineer and was promoted to
Engineering Director in April 1993. Dr. Jacobs' previous experience includes
positions as Post Doctoral Researcher at LaboratoriesLaboratoire d'Automatique et d'Analyse
des Systemes, Toulouse, France. Dr. Jacobs holds a B.S. degree in Electrical
Engineering and Computer Science, M.S. degree in Electrical Engineering and
Ph.D. degree in Electrical Engineering and Computer Science from the University
of California, Berkeley. Dr. Paul Jacobs is the son of Dr. Irwin Mark Jacobs,
Chief Executive Officer and Chairman of the Board of Directors and Chief Executive Officer of the Company.
JOHN F. SARTO, JR.DONALD E. SCHROCK, a Senior Vice President of the Company, was also
named President, ASIC Products Division in September 1997. He joined the Company
in January 19951996 as Corporate Vice President, of
Sales and Marketing, OmniTRACS Division,in June 1996 was promoted to
Vice President &
General Manager, OmniTRACSASIC Products Division and in August 1995 andFebruary 1997 was promoted tonamed Senior
Vice President in July 1996.President. Prior to joining the Company, he was at Overnite
Transportation Company, where his most recent position was that of SeniorGroup Vice President Customer Services and
Marketing.Division Manager with Hughes Aircraft Company. Prior to his employment with
Hughes, Mr. Schrock was Vice President of Operations with Applied Micro Circuit
Corporation. Mr. Schrock has also held positions as Vice President/Division
General Manager at Overnite,Burr-Brown Corporation and spent 15 years with Motorola
Semiconductor. Mr. Sarto wasSchrock holds a B.S.E.E. with Carolina Freight Corporation, where he enteredHonors from the companyUniversity of
Illinois, as well as a management traineeM.S.E.E. and advanced through a variety of positions, eventually
holdingAdvanced Business Administration from
Arizona State University.
JOHN N. DOLLARD, joined the position of Vice President, Sales. Mr. Sarto a B.A. degreeCompany in Business and English from Niagara University.
CHRIS V. SIMPSON has servedApril 1997 as Senior Vice
President of Subscriber Manufacturing Operations and General Manager,
Worldwide Sales and Marketing since April 1996. Mr. Simpson joined the Company in December 1988 as Vice President, Marketing and1997 was promoted tonamed
Senior Vice President of Worldwide Manufacturing and General Manager, International, Wireless Communications Division
in February 1995. He was instrumental in establishing the European introduction
and support for QUALCOMM's OmniTRACS system and service.President of Qualcomm
Personal Electronics. Prior to joining the Company, Mr. Simpson held a numberDollard was Vice
President and General Manager of financial and marketing positions in
satellite based companies such as Comsat and Contel ASC.the Americas Manufacturing Operations for
Toshiba America Information Systems, Inc. since 1987. Mr. Simpson received
his B.S.Dollard holds an
M.B.A. degree from Oklahoma State University.
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19Central Michigan University, Graduate School of Business and
a B.A. degree in Business Administration and Marketing from Loras College.
RISK FACTORS
This Risk Factor section is written to be responsive to the Security
and Exchange Commission's recently enacted "Plain English" guidelines. In the
Risk Factors section and elsewhere in this document, the words "we", "our",
"ours", and "us" refer only to QUALCOMM Incorporated and not any other person.
Uncertainty and Fluctuations of Operating Results. The Company hasResults
Although we have experienced an increase in both revenues and
profitability over the last several years, we have experienced and may continue
to experience quarterly variability in revenues and profitability. There canoperating results. As a result, we cannot
assure you that we will be no
assurance that the Company willable to sustain profitability on a quarterly or
annual basis in the future. The Company'sOur future results will depend in part on the
following factors:
- - the continued successsuccessful implementation of its OmniTRACS operations;CDMA technology and products;
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19
- - our ability to successfully manufacture, market and/or sell
commercial-scale quantities of CDMA infrastructure and subscriber
products, ASICs and other products on a timely and profitable basis both
domestically and in international markets;
- - the timing of introduction of products or product enhancements by us or
our competitors;
- - the timing and magnitude of CDMA licensing fees and royalties fromroyalties;
- - currency and economic fluctuations in foreign markets and other factors
affecting our international sales;
- - bad debt provisions and/or our inability to recognize revenues associated
with our vendor financing programs;
- - our recognition of start-up operating losses, impairment charges and/or
the Company's CDMA licensees;inability to recognize revenues and earnings associated with our
investments in emerging wireless telecommunications operating companies;
- - our ability to meet any applicable performance guarantees;
- - the successful
large-scale implementationcontinued success of the Company's CDMA technologyOmniTRACS; and
equipment;- - the continuation of the Globalstar development contract; and the Company's abilityproduction contracts.
Ability to successfully manufacture and sell commercial scale quantities of CDMA
infrastructure, subscriber and other equipment on a timely and profitable basis
and to meet any applicable performance guarantees. In particular, any delays in
commencement of commercial operation of CDMA-based cellular, PCS or WLL systems
couldManage Growth
We have a material adverse effect on quarterly and annual operating results.
The Company has experienced and may continue to experience fluctuations in
quarterlyrapid domestic and
annual operating results due to variations in the amount and
timing of CDMA fees and royalties. In addition, earnings in future periods could
be adversely affected in the eventinternational growth that the Company does not meet performance
obligations relative to scheduled delivery dates and performance specifications
for CDMA equipment.
Ability to Manage Growth. The Company is experiencing a period of rapid
growth which has placed, and is expected to continue to place
significant demands on the Company'sour managerial, operational and financial resources. The
management of suchIn
order to manage this growth, will require the Company to continuewe have continued to improve and expand the Company'sour
management, operational and financial systems and controls, including quality
control and delivery and service capabilities, and will need to continue to do
so. We will also need to continue to expand, train and manage itsour employee base.
In particular, the Companywe must carefully manage production and inventory levels to meet
increasing product demand, and new product introductions. Inaccuraciesintroductions and product transitions. We cannot
assure you that we will be able to timely and effectively meet such demand and
maintain the quality standards required by our existing and potential customers.
In addition, inaccuracies in the Company'sour demand forecasts could quickly
result in either insufficient or excessive inventories and disproportionate
overhead expenses. The CompanyOur international expansion plans will require us to
establish, manage and control operations in countries where we have limited or
no operating experience. Our experience in the expansion of production
facilities and capacity is also limited. In order to accommodate planned growth,
we expect that our operating expenses will continue to increase. We cannot
assure you that our revenues will grow faster than our expenses. We must also
continue to hire and retain qualified technical, engineering and other personnel
in the face of strong demand from the Company'sour competitors and others for such
individuals. Any ineffective management ofIf we ineffectively manage our growth or are unsuccessful recruitmentin
recruiting and retention
ofretaining personnel, this could have a material adverse effect on
the Company'sour business,
financial condition and results of operations.operations, liquidity and financial position.
Manufacturing of CDMA Products
The Companymanufacture of wireless communications products is experiencinga complex and
precise process involving specialized manufacturing and testing equipment and
processes. Demand for, and our revenues from, CDMA wireless communications
infrastructure and subscriber products increased substantially during fiscal
1998. Our manufacturing capacity is a critical element in meeting this demand.
We cannot assure you that we will be able to effectively meet customer demand in
a timely manner. Factors that could materially and adversely affect our ability
to meet production demand include defects or impurities in the components or
materials used, delays in the delivery of such components or materials, or
equipment failures or other difficulties. We may experience component failures
or defects which could require significant growth in connection with the
commercial implementationproduct recalls, reworks and/or
repairs which are not covered by warranty reserves and which could consume a
substantial portion of its CDMA technology, including significant
expansion ofour manufacturing test and installation capabilities, customer support
capabilities, and marketing and sales personnel, which requires significant
expenditures to build the necessary organizations. The Company is expanding its
business into international markets whichcapacity.
In addition, we cannot assure you that our foreign manufacturing
facilities will require itbe commercially successful given that we will be required to
establish, manage and control operations in countries where the Company haswe have limited or
no operating experience. Additionally, our business, results of operations,
liquidity and financial position could be materially and adversely affected if
we are unable to manufacture CDMA subscriber and infrastructure products at
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20
commercially acceptable costs and achieve acceptable yields. We also will be
impacted negatively if we expand our manufacturing capacity but are unable to
secure sufficient orders for our CDMA products.
We primarily manufacture our CDMA subscriber products through QPE, a
majority-owned joint venture between us and a subsidiary of Sony Electronics,
Inc. The Company's successrisks associated with the commercial manufacture of our infrastructure
and subscriber products that we describe in this document also apply to the
manufacture of subscriber products by QPE. Our business, results of operations,
liquidity and financial position could be materially and adversely affected to
the extent that QPE experiences any of the complications, delays or
interruptions that we have described in this document.
Competition
There is increasing competition in the wireless telecommunications
industry in the United States and throughout the world. We cannot assure you
that we will dependbe able to successfully compete or that our competitors will not
develop new technologies and products that are more commercially effective than
our own. Many of our competitors have financial, technical, marketing, sales,
and distribution resources greater than ours. In addition, many of these
companies are licensees of our technology and have established market positions,
trade names, trademarks, patents, copyrights, intellectual property rights and
substantial technological capabilities.
Although the implementation of advanced telecommunications services
is in its early stages in many developing countries, we believe competition is
intensifying as businesses and foreign governments realize the market potential
of telecommunications services. Many of our customers currently face competition
from existing telecommunication providers. A number of large American and
European companies and large international telecommunications companies are
actively engaged in programs to develop and commercialize telecommunications
services in both developing and developed countries. In many cases, we also
compete against the landline carriers, including government-owned telephone
companies. In some cases, our competition is from government-controlled or
government-supported entities that are, or may in the future be, privatized or
otherwise become more efficient and competitive. In addition, throughout the
world we may face competition with new technologies and services introduced in
the future. Although we intend to employ relatively new technologies, there will
be a continuing competitive threat from even newer technologies that may render
the technologies employed by us obsolete. See "- Rapid Technological Change
and New Products." We also expect that the price we charge for our products and
services in certain regions will decline as competition intensifies in those
markets.
We also compete in the manufacture of CDMA infrastructure and
subscriber products and in the development and design of ASICs. We are facing
increasing competition as more of our licensees introduce CDMA products. Many of
our licensees have longer operating histories and a greater market presence than
ours. Many of the major equipment suppliers have made substantial investments in
TDMA and GSM technology including Hughes, Lucent, Motorola, Nokia, Nortel and
Siemens, all of whom are our licensees, as well as Ericsson. We have entered
into royalty-bearing license arrangements covering certain ASIC patents
belonging to us. Pursuant to these arrangements, licensees such as DSP
Communications, LSI Logic Corporation, VLSI Technology and PrairieComm, Inc. are
licensed to manufacture and sell ASICs to subscriber and infrastructure
licensees of the Company. Our competitors may devote a significantly greater
amount of their financial, technical, marketing and other resources to
aggressively market competitive communications systems or develop and adopt
competitive digital cellular technologies. Likewise, those efforts may
materially adversely affect our business, results of operations, liquidity and
financial position. Moreover, certain equipment providers may offer more
competitive pricing and/or financing terms than we do as a means of gaining
access to the wireless markets.
Existing competitors of OmniTRACS are aggressively pricing their
products and services and could continue to do so in the future. In addition,
these competitors are offering new value-added products and services similar in
many cases to those we developed or are developing. Emergence of new
competitors, particularly those offering low cost terrestrial-based products and
current as well as future low-Earth-orbiting ("LEO") satellite-based systems,
may impact margins and intensify competition in new markets.
International Business
A significant part uponof our strategy involves our current and planned
activities in a number of developing nations. We intend to continue to pursue
growth opportunities in international markets. In many international markets,
barriers to entry are created by long-standing relationships between our
potential customers and their local providers and protective regulations,
including local content and service requirements. In addition, our pursuit of
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such international growth opportunities may require significant investments for
an extended period before we realize returns, if any, on our investments. Our
projects and investments could be adversely affected by:
- - reversals or delays in the Company'sopening of foreign markets to new competitors;
- - unexpected changes in regulatory requirements;
- - export controls, tariffs and other barriers;
- - exchange controls;
- - currency fluctuations;
- - investment policies;
- - nationalization, expropriation and limitations on repatriation of cash;
- - social and political risks;
- - taxation; and
- - other factors, depending on the country in which such opportunity arises.
Our revenues from international customers as a percentage of total
revenues were approximately as follows in each of the years presented:
YEAR % OF TOTAL REVENUES
1995 20%
1996 36%
1997 30%
1998 34%
In addition to the general risks associated with our international
sales and operations, we will also be subject to risks specific to the
individual countries in which we do business.
The financial problems in Asia have been significant and have
impacted international financial markets. We cannot guarantee that the Asian
markets will not continue to deteriorate. Continued market deterioration could
have a substantial adverse impact on our ability to successfully manage such growth. There can be no assurancecollect our receivables from
Asian customers. We have significant sales to Asian countries with the largest
concentration to Korean customers. At September 1998, Korean customer
receivables generally were in accordance with agreed payment terms.
The Russian economic and political environments recently have
experienced severe volatility. Further, our CDMA products have not yet been
approved in Russia for mobility applications. Any or all of these factors could
negatively impact our prospects in Russia and could have a material adverse
effect on our business, results of operations, liquidity and financial position.
We currently have approximately $19 million in Russian/Ukrainian receivables. We
have an additional $30 million in products and deployment services placed with
carriers for which we have not yet recognized revenues. We cannot guarantee that
these carriers will have sufficient resources to complete their planned
projects. The failure of any of these emerging service carriers to obtain
sufficient financing to meet their regulatory obligations could adversely affect
the Company's attemptsvalue of our receivables and inventories residing with these customers.
Economies in Australia, Brazil, Chile, Mexico and Ukraine also have
been volatile and we do not know the extent to expand its manufacturing, customer support and
marketing and sales organizations will be successful or will result in
additional sales or profitability in any future period. In order to accommodate
planned growth, it is expected that the rate of growth of the Company's
operating expenseswhich these economies will
continue to increase. There can be no assurance that
expense growth willnegatively impacted by world economic events. Mexico and Ukraine
have also been subject to much political instability. These conditions could
have a negative impact on our prospects in these countries.
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Currency Fluctuations
We are exposed to risk from fluctuations in foreign currency and
interest rates, which could impact our results of operations and financial
condition. Our financing of products and services is generally denominated in
dollars and any significant change in the value of the dollar against the
national currency where we are lending could result in the increase of costs to
the debtors and could restrict the debtors from fulfilling their contractual
obligations. Any devaluation in the local currency relative to the currencies in
which such liabilities are payable could have a material adverse effect on our
business. In some developing countries, including Chile, Mexico, Brazil, and
Russia, significant currency devaluation relative to the U.S. dollar have
occurred and may occur again in the future. In such circumstances, we may
experience economic loss with respect to the collectability of our receivables
and the recoverability of inventories and investments.
We attempt to hedge transactions with non-U.S. customers. However,
the decline in value of the Asia/Pacific currencies, or declines in currency
values in other regions, may, if not exceedreversed, adversely affect our future
product sales. This is because our products may become more expensive to
purchase for local customers doing business in the ratecountries of revenue growth.the affected
currencies. We have been adversely affected by the Asian economic downturn in
fiscal 1998 with regard to ASICs sales, CDMA royalties and the cancellation of a
CDMA handset supply agreement in South Korea. In addition, certain of our
customers in these foreign countries have encountered or may in the future
encounter financial difficulties resulting from such foreign currency
fluctuations. These financial difficulties could restrict our customers' ability
to fulfill their contractual obligations to us.
Dependence on Equipment Sales. An important element of the Company's
strategy is to remainProduct Sales and Key Customers
We are a major supplier of CDMA infrastructure, subscriber and ASICs
products for wireless and satellite service providers. In order to generate
revenues and profits from sales of infrastructure, subscriber and ASICs
products, we must continue to make substantial investments and technological
innovations, which are subject to a number of risks and uncertainties. Other
digital wireless technologies, particularly GSM, to date have been more widely
adopted than CDMA and we cannot assure you that wireless service providers will
select CDMA for their networks. Further, there are numerous companies that
supply CDMA infrastructure, subscriber and ASICs products. Many of these
companies have substantially greater resources, much longer manufacturing
histories and more established reputations than we do.
Sales of infrastructure and subscriber equipment worldwide for cellular, PCS and WLL service providers, including
C-Block PCS licensees in North America. The Company'sproducts internationally are
subject to the various risks associated with doing business outside of the
United States. See "-International Business." As a result, subject to the
success of international wireless operators, our ability to generate substantial
revenues and profits from international sales of its CDMA infrastructure and
subscriber equipment will require substantial capital investments by the Company
and is subject to risks and uncertainties. PCS systems have a limited operating
history in the United States, and the extent of demand for PCSproducts is uncertain.
WLL
systems in the U.S.Many wireless operators to which we may consider selling are
start-up entities attempting to provide service to markets where current
penetration of wireless service is low and foreign countries are just beginning to be implemented,
and their cost-competitiveness with wireline and other wireless systems and
market acceptance is uncertain. The wireless telecommunications industryIn addition,
these start-up entities are subject to all the risks inherent in the operation
of a new business, including the ability to obtain adequate financing, manage
growth, attract and retain qualified personnel and secure appropriate
third-party manufacturing and marketing support.
A significant portion of our CDMA subscriber, infrastructure and
ASICs product sales is, experiencing significant technological changes.and is expected to continue to be, concentrated with a
limited number of customers. As a result, the future
prospectsour performance will depend on
relatively large orders from a limited number of customers. Our performance will
also depend on our ability to gain additional customers within existing and new
wireless and satellite markets. Our loss of any existing customer or our failure
to gain additional customers could have a material adverse effect on our
business, results of operations, liquidity and financial position.
Certain of our contracts provide for performance guarantees to
protect customers against late delivery of our products or a failure to perform.
These performance guarantees generally provide for monetary payments or contract
offsets that accrue at a daily rate based on percentages of the industrycontract value
to the extent the products are not delivered by scheduled delivery dates or the
systems fail to meet specified performance criteria by such dates. We are
dependent in part on the performance of our suppliers and strategic partners to
provide products that are the success of PCS, WLL and other competing
services are uncertain. In order to commence operation, PCS and WLL operators
will need, among other things, to complete their system designs, acquire sites,
purchase and install equipment, hire personnel in each market and raise
sufficient capital to finance the construction costs and start-up operating
losses of their commercial systems.
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To complete system build-outs and implement their business plans, PCS and
WLL service providers will require substantial amounts of capital. The failuresubject of the Company's customersguarantees. Thus, our ability to
design, constructdeliver such products in a timely manner may be outside of our control. If we
are unable to meet our performance obligations, the performance guarantees could
amount to a significant portion of the contract value and launch their systems would have a material
adverse effect on the Company'sproduct margins and our business, results of operations,
liquidity and financial results. The Company
expects that a number of its potential infrastructureposition.
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Vendor Financing
Domestic and subscriber equipment
customers will be C-Block licensees. C-Block licensees are subject to a number
of risks in addition to those facing otherinternational wireless service providers. Many
C-Block licensees have limited financial resources, are highly leveraged and will require large amounts of capital to complete the build-out of their
systems. There can be no assurance that C-Block licensees will be able to raise
such capital. C-Block licensees will be subject to competition from up to five
additional PCS service providers, as well as the two cellular service providers
in each market. Many of such other PCS and cellular service providers will have
substantially greater resources than the C-Block licensees, who were required to
qualify as "small businesses" in order to bid in the C-Block auctions. Further,
there can be no assurance that future FCC auctions of wireless spectrum will not
reduce the competitiveness or attractiveness of C-Block licensees and their
systems, or that such licensees will not be sold at prices substantially less
than those recorded in the C-Block auctions. In addition, the C-Block auctions
were concluded over one year following the conclusion of the A-Block and B-Block
auctions, which provided the A-Block and B-Block licensees with a significant
time-to-market competitive advantage over C-Block licensees.
Risks Related to Vendor Financing. Cellular, PCS and WLL systemssatellite network operators increasingly
have required their equipment suppliers to arrange or provide long-term
financing for them as a condition to obtaining or bidding on infrastructure projects.
These projects may require the CompanyCompetition among infrastructure product providers is intense. In order for us
to arrange orcompete effectively we must provide significant financing of amounts ranging from modest sums to over a billion dollars on any particular
project. Internationally, potential service providersfor our
infrastructure products customers worldwide. We currently have limited governmental
or other financing sources and may have particular needs for vendor financing
offered or arranged byobligations with a majority of our infrastructure customers, including
substantial commitments to Sprint PCS (through Nortel), Globalstar, Chase
Telecom, Chilesat Telefonia Personal S.A. ("Chilesat PCS") and Pegaso
Telecomunicaciones, S.A. de C.V. ("Pegaso"). In order to provide for such
financing, we likely will be subject to significant project, market, political,
credit and foreign exchange risks. The amount of vendor financing that we
currently are providing and that we expect to provide in the Company.future is
substantial. Unfunded commitments to extend long-term financing under sales
arrangements at September 30, 1998 aggregated approximately $499 million through
fiscal 2002. Such amounts financed may include "soft
costs" (such as software, cell site leases and permits), and thus the amount
financed may exceed 100% of infrastructure equipment costs. Pursuant to an
Equipment Requirements Agreement with QUALCOMM,commitments are subject to the satisfaction ofcustomers meeting certain
conditions NextWave is obligated to purchase approximately 50% of its
infrastructure equipment requirements from QUALCOMM. The agreement also provides
that QUALCOMM will offer 100% financing for equipment purchased under such
agreement, on commercial terms. The terms of the equipment purchases, including
financing terms, will be established in a further agreementthe financing arrangements. Commitments represent the
estimated amounts to be negotiatedfinanced under these arrangements. Actual financing may
be in good faith between the parties. There can be no assurancelesser or greater amounts.
We cannot assure you that such an agreement
will be concluded.
The Company's ability to arrange or provide and be competitive with such
financing will depend on a number of factors, including the Company's capital
structure, level of available credit and ability to provide financing in
conjunction with third-party lenders. There can be no assurance that the Companywe will be able to arrange or provide such
financing on terms and conditions and in amounts that will be satisfactory to
such system operators. A numberour customers. Most of the
Company'sour competitors have substantially greater resources than
the Company,
whichwe do. These resources may enable them to offercompete against us for infrastructure
projects by offering more favorable pricing and/or financing terms and successfully
compete against the Company for infrastructure projects. The inabilityterms. Further, our
ability to provide vendor financing is dependent on our ability to raise outside
capital. If we are unable to arrange or provide such financing or to
successfully compete for infrastructure projects, our business, results of
operations, liquidity and financial position could be materially and adversely
affected.
To the extent vendor financing is not repaid to us, it could have a
material adverse effect on our business, results of operations, liquidity and
financial position. We have limited experience evaluating the Companycreditworthiness
or commercial viability of potential purchasers of CDMA products. As a result,
we cannot assure you that our customers will not default on any financing
arranged or provided by us for the purchase of our CDMA products and its businessservices.
Many domestic and prospects.
In orderinternational wireless network operators to arrangewhom
we may provide vendor financing have limited or provideno operating histories, are
faced with significant capital requirements, are highly leveraged and have
limited financial resources. Due to currency fluctuations and international
risks, foreign infrastructure customers utilizing our vendor financing for cellular, PCSprograms
may become unable to pay those debts from revenues generated from their
infrastructure projects that are denominated in local currency. Further, we may
not be permitted to retain a security interest in any licenses held by foreign
wireless operators. These licenses initially may constitute the primary asset of
many licensees.
The amounts that we finance may also include "soft costs" (such as
software, cell site leases and WLL
projects,permits). Thus, the Company will be required to expose itself to significant project,
market, political and credit risks. The Companytotal amount we finance may
be required toexceed 100% of infrastructure product costs. We may provide such financing
directly to licensees, and/or guarantyguarantee such financing through third partythird-party
lenders. The amount of such financing could become significant and, if not repaid by the
network operator, could have a material adverse effect on the Company's
operating results and liquidity. The CompanyWe may be required to maintain any
suchprovide extensions of credit, or remain obligated under
guarantees, until maturity, which could have a material adverse effect on the Company'smaterially and adversely affect our
credit rating. Although the Companywe may seek to have third partiesthird-parties assume some or all of
any such credit arrangements, therewe can be no assurancenot assure you that the Companywe will be able to do
so.
Many WLLRapid Technological Change and PCS network operators, including a numberNew Products
The market for our products is characterized by many factors,
including:
- - rapid technological advances and evolving industry standards;
- - changes in customer requirements;
- - frequent new products and enhancements; and
- - evolving methods of C-Block
licensees,building and operating communications systems.
The introduction of products embodying new technologies and the
emergence of new industry standards could render our existing products, and
products currently under development, obsolete and unmarketable. In
19
24
particular, we have limited or no operating histories, are facedexperience in high-volume manufacturing techniques
and rapid product cycles inherent in the subscriber products business.
Our future success will depend on our ability to continue to develop
and introduce new products and product enhancements on a timely basis. Our
future success will also depend on our ability to keep pace with significant
capitaltechnological
developments, satisfy varying customer requirements and achieve market
acceptance. If we fail to anticipate or respond adequately to technological
developments or customer requirements, or experience any significant delays in
product development, introduction or shipment of our products in commercial
quantities, our competitive position could be damaged. This could have a
material adverse effect on our business, results of operations, liquidity and
financial position. In addition, new technological innovations generally require
a substantial investment before they are high credit risks. Pursuant to FCC regulationscommercially viable.
Evolving Third Generation Standards
Industry participants and the International Telecommunications Union
("ITU") are currently considering a variety of standards which may be utilized
in third generation wireless networks. We are advocating the standardization of
a single, converged CDMA-based third generation standard that accommodates
equally the dominant network standards in use today. We cannot assure you that
that we will be successful in promoting the adoption of a single CDMA standard
or that such a standard, if adopted, will be compatible with today's cdmaOne
networks. We believe that our CDMA patent portfolio is applicable to C-Block licensees,other CDMA
systems that have been proposed as third generation standards. We have informed
standards bodies and the CompanyITU that we hold essential intellectual property rights
for several other third generation proposals based on CDMA. Further, we intend
to vigorously enforce and protect our intellectual property position against any
infringement. However, we cannot assure you that our CDMA patents will be
determined to be applicable to any proposed standard or that we will be able to
redesign our products on a cost-effective and timely basis to incorporate next
generation wireless technology. If the wireless industry adopts next generation
standards which are incompatible with cdmaOne or determines not be permitted to retainrely on our
intellectual property, this could have a security interest in any C-Block licenses, which initially will constitute the
primary assetmaterial adverse effect on our
business, results of many C-Block
18
21
licensees. C-Block licensees are faced with strict regulatory requirements under
applicable FCC regulations. Compliance with those regulations is outside of the
control of the Company. The failure of a C-Block licensee to comply with any of
those regulations could result in the revocation of that licensee's FCC
licenses.The Company has limited experience evaluating the credit worthiness or
commercial viability of potential purchasers of CDMA equipment,operations, liquidity and there can be
no assurances that such customers will not default on any financing arranged or
provided by the Company for the purchase of its CDMA equipment.
The Company may be required to provide vendor financing for a portion of
the Globalstar system prior to its full scale implementation. See "-- Dependence
on Key Customers."financial position.
Future Capital Needs.Needs
The design, development, manufacture and marketing of digital
wireless communication products and services are highly capital intensive. In
addition, cellular, PCSwireless and WLLsatellite systems operators increasingly have required
their suppliers like us to arrange or provide long-term financing foror provide equity to
them as a condition to obtaining or bidding on infrastructure products. To the extent
that such cash resources are insufficientprojects. In
particular we have substantial funding requirements to fund the Company's activities, the
Company mayLeap Wireless. We believe
we will be required to raise additional funds from a combination of sources
including potential debt or equity issuances. There can be no assuranceWe cannot assure you that
additional financing will be available on reasonable terms or at all. IfIn
addition, our credit facility, places restrictions on our ability to incur
additional indebtedness which could adversely affect our ability to raise
additional capital through debt financing.
Obligations to Leap Wireless
In connection with our recent spin-off and distribution to our
stockholders of Leap Wireless common stock, we made a substantial funding
commitment to Leap Wireless in the form of a $265.0 million secured credit
facility. Amounts borrowed under the credit facility will be due and payable
approximately eight years following September 23, 1998. We cannot assure you
that Leap Wireless will be able to meet its payment obligations to us. If Leap
Wireless is raised throughunable to meet its payment obligations to us, our business, results
of operations, liquidity and financial position may be materially adversely
affected. Further, Leap Wireless may identify additional investment requirements
or opportunities for which it needs funding and we may choose to participate in
such funding. See "-Future Capital Needs."
We and Leap Wireless have also agreed that, if certain events occur
within 18 months after the saledistribution, our equity interest in Telesystems of
additional equityUkraine ("TOU") and certain other assets will be transferred to Leap Wireless.
We cannot assure you that such events will occur or convertible debt securities, dilutionthat legal impediments to
transfer will be removed, or that our interest in TOU will ever be transferred
to Leap Wireless. Until such time as the Company's stockholders could occur.transfer is effected, if ever, we will
continue to recognize the losses of TOU and restrict revenue recognition of
product sales to TOU which may materially adversely affect our business, results
of operations, liquidity and financial position.
20
25
Patents and Proprietary Information. The Company reliesInformation
We rely on a combination of patents, copyrights, trade secrets,
trademarks and proprietary information to maintain and enhance itsour competitive
position. The Company hasWe have been granted approximately 90over 200 patents and has approximately 275have over 500 patent
applications pending in the United States,U.S. The vast majority of which 10such patents and 8 patent
applications relate to our CDMA digital wireless technology and the Company's OmniTRACS products and approximately 65remainder of
such patents and approximately
260 patent applications relate to the Company's CDMA digital wireless
technology. The Companyour OmniTRACS products. We also
actively pursuespursue patent protection in other countries of interest to the Company. There can be no assuranceus. We
cannot assure you that the pending patent applications will be granted or that
the Company'sour patents or copyrights will provide adequate protection, orprotection.
We believe that the Company's competitorsour intellectual property rights regarding CDMA
technology are applicable to third generation CDMA systems. We have also
informed appropriate standards bodies that we believe proposed standards require
our intellectual property. Further, we intend to vigorously enforce and protect
our intellectual property position against any infringement. However, we cannot
assure you that our CDMA patents will not
independently develop or initiate technologies that are substantially equivalent
or superiorbe determined to the Company's technologies. Therebe applicable to any
proposed standard. Neither can also be no assurancewe assure you that the confidentiality agreements
upon which the Company relieswe rely to protect itsour trade secrets and proprietary information will
be adequate. The cost of defending our intellectual property has been and may
continue to be significant.
From time to time, certain companies may assert exclusive patent,
copyright and other intellectual proprietary rights to technologies whichthat are
claimed to be important to the industry or to the Company.us. In addition, from time to time
third parties provide the Companyus with copies of their patents relating to spread
spectrum and other digital wireless technologies and offer licenses to such
technologies, and the
Company evaluatestechnologies. We in turn evaluate such patents and the advisability of obtaining
such licenses. If any of the Company'sour products were found to infringe on protected
technology, the
Companywe could be required to redesign such products, license such
technology, and/or pay damages to the infringed party. If the Company iswe are unable to
license protected technology used in the Company'sour products or if we were required to
redesign such products, the Companywe could be prohibited from marketing such products.
Ericsson, Motorola and InterDigital have each advised the TIA that
they hold patent rights in technology embodied in IS-95. Lucent and OKI Electric
have claimed patent rights in IS-96. In accordance with TIA guidelines, each
company has confirmed to the TIA that it is willing to grant licenses under its
rights on reasonable and nondiscriminatory terms. In connection with the
settlement and dismissal of the Company'sour patent litigation with InterDigital, the Companywe
received, among other rights, a fully-paid, royalty free license to use and to
sublicense the use of those patents claimed by InterDigital to be essential to
IS-95. If the Companywe and other equipmentproduct manufacturers are required to obtain additional
licenses and/or pay royalties to one or more patent holders, this could have ana
material adverse effect on the commercial implementation of the Company'sour CDMA technology.
On September 26, 1996, Ericsson Inc.We are currently engaged in patent and Telefonaktiebolaget LM Ericsson
("Ericsson") filed suitother infringement litigation
relating to our technology and products. See "Item 3--Legal Proceedings."
Globalstar
The value of our investment in and future business with Globalstar,
as well as our ability to collect outstanding receivables from Globalstar,
depends on the U.S. District Court forsuccess of Globalstar and the Eastern District of
Texas, Civil Action No. 2-96CV183. The complaint alleges that various elementsGlobalstar System. Globalstar is a
development stage company and has no operating history. From its inception,
Globalstar has incurred net losses and we expect losses to continue at least
until commercial operations of the Company's CDMA equipment systemGlobalstar System commence, which is expected
to be in calendar 1999. A substantial shortfall in meeting Globalstar's capital
needs could prevent completion of the Globalstar System and components infringe one or more
patents owned by Ericsson. The Company has not yet filed a formal response to
Ericsson's complaint. Although there can be no assurances that an unfavorable
outcome would not have a material adverse effect on
19
22
the Company's liquidity, financial position orcould materially and
adversely affect our business, results of operations, liquidity and financial
position. In addition, Globalstar can terminate its development agreement with
us if Globalstar abandons its efforts to develop the Company believes the complaint has no merit andGlobalstar System. We
cannot assure you that Globalstar will vigorously defend the
action.
On November 8, 1996 the Company was served withgrow into a complaint in connection
with a lawsuit filed in the U.S. District Court for the Eastern District of
Pennsylvania by BTG USA Inc. The complaint alleges that the Company's Global
Positioning System, CDMA telecommunications products and the OmniTRACS system
components thereof infringe United States Patent No. Re. 34,004. The patent
expired in November 1996. Although there can be no assurances that an
unfavorable outcome would not have a material adverse effect on the Company's
liquidity, financial position or results of operations, the Company believes the
complaint has no merit and will vigorously defend the action.
Manufacturing of CDMA Equipment. QUALCOMM has received orders for CDMA
wireless communications infrastructure and subscriber equipment and ASIC
components for delivery in fiscal 1997 and expectscommercially successful
enterprise. Globalstar's failure to receive additional orders
in the future. The Company is investing substantial amounts in product
development activities to maintain or improve its competitive position. The
Company may spend substantially more on such software and hardware development
than currently anticipated. The Company has significantly expanded and will
continue to significantly expand its infrastructure and subscriber equipment
manufacturing capabilities. Many of the Company's competitors have greater
resources and experience with such large scale manufacturing. There can be no
assurance that the Company will be able to timely or effectively accomplish such
increases in production volume.
Any delays or difficulties in connection with the planned increase in
manufacturing capacitybecome commercially successful could have a
material adverse effect on the Company'sour business, and results of operations. Ifoperations, liquidity and
financial position.
The Globalstar System is exposed to the Company isrisks inherent in a
large-scale complex telecommunications system employing advanced technologies
which have never been integrated in a single system for commercial use. The
failure to develop, produce and implement the system, or any of its diverse and
dispersed elements as required, could delay the in-service or full constellation
date of the Globalstar System or render it unable to manufacture CDMA
subscriberperform at levels required
for commercial success. Globalstar may encounter various problems, delays and
infrastructure equipment at commercially acceptable costs, or ifexpenses, many of which may be beyond Globalstar's control.
21
26
In September 1998, Globalstar had a launch failure in which 12
satellites were destroyed. Globalstar has stated that it has sufficient spare
satellites to complete its 48 satellite constellation and that this launch
failure was insured. Globalstar is assessing its options relating to its future
launch schedule and still intends to initiate commercial service before the Company expands its manufacturing capacity but is unable to secure
sufficient orders for its CDMA equipment, the Company's competitive positionend
of 1999.
Dependence on Suppliers
The products and services we provide are complex and highly
technical in their nature. Accordingly, we rely on the ability of the Companyour suppliers
to achieveprovide critical parts and sub assemblies that meet our specifications, in a
profitable return on its CDMA research
and development expenditures could be materially impaired.
The manufacture of wireless communications equipment is a complex and
precise process involving specialized manufacturing and testing equipment and
processes. Defects or impurities in the components or materials used, equipment
failure or other difficulties could adversely affect the Company's ability to
meet planned production yields. There can be no assurance that the Company will
not encounter difficulties in achieving planned yields on its products, which
would adversely affect its margins and operating results.
The Company manufactures its CDMA cellular and PCS subscriber equipment
through QPE, a joint venture between the Company and a subsidiary of SONY
Electronics. The risks associated with the commercial manufacture of the
Company's infrastructure and subscriber equipment products which are described
in this document also apply to the manufacture of subscriber equipment by QPE.
To the extent that QPE experiences any of the complications, delays or
interruptions described herein, the Company's results of operations would be
adversely affected.
Dependence on Suppliers. The Company has fromtimely manner. From time to time we have experienced delays in obtaining
services and quantities of specification compliant RFradio frequency components,
plastics, connectors and other parts to meet the demandsdemand for its equipment.our products.
Several of the critical products and services used in the Company'sour existing
and proposed products, including ASICs, flash memory chips, and certain RFradio frequency
components used in the
Company's CDMA products and certain custom and semi-custom VLSIvery large scale integrated
("VLSI") circuits, and other sophisticated electronic parts and major subassemblies
used in the OmniTRACS system, are currently available only from single or
limited sources. TheOur reliance and the reliance of our licensees on sole or
limited source vendors by the Company and its licensees involves risks. These risks including the possibility ofinclude possible
shortages of certain key components, product performance shortfalls, and reduced
control over delivery schedules, manufacturing capability, quality and costs.
Our manufacturing activities may continue to expand internationally.
In certain cases we will be required to identify new local sources, due in part
to foreign regulations governing product content, to supply our international
manufacturing operations. The risks inherent in our ability to locate alternate
suppliers will be complicated by our inexperience in product manufacturing in
those countries. Business disruptions or financial difficulties of a sole or
limited source supplier of any particular component could materially and
adversely impact the Companyour operations by increasing the cost of goods sold or reducing
the availability of such components. While the
Company believeswe believe that itwe could obtain
necessary components from other manufacturers, an unanticipated change in the
source of supply of these components could trigger performance guarantees or causeresult in significant shipment delays
in the Company'sfor our products. 20
23
Unanticipated supply limitations could adversely affect the Company's
ability to meet its product orders. There can be no assurance that the supplier
commitments will be met. The Company is also working with its vendors to obtain
expanded volumes of specification compliant components. There may be significant
demand on the Company's suppliers from other manufacturers (including the
Company's licensees) for such components. Delays in the availability or reduced
quantities 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, whichThese delays could result in lost revenues and profits and
possibleus being required to make
performance guarantee payments. See "--Performance Guarantees."
Certain components require an order lead time of six months or
longer. Other components that currently are readily available may become difficult to
obtain in the future. There can be no assurance that the Company will not
experience delays in the receipt of certain of its key components. Delays or the
failure of the Company to order sufficient quantities of these components in
advance could prevent the Company from meeting production requirements and could
result in the requirement to pay performance guarantees. To meet forecasted production levels, the Companywe may be required to commit to
certain long lead time items prior to contract award.being awarded a production contract. If
forecasted orders are not awarded, the
Companyreceived, we may be faced with large inventories of
slow moving or unusable parts
whichparts. This could have an adverse affect on the Company's results of operations.
Rapid Technological Change and New Products. The market for the Company's
products is characterized by rapid technological advances, evolving industry
standards, changesresult in customer requirements and frequent new product
introductions and enhancements. The introduction of products embodying new
technologies and the emergence of new industry standards could render the
Company's existing products and products currently under development obsolete
and unmarketable. Accordingly, the Company's future success will depend upon its
ability to enhance its current products and develop and introduce new products
that keep pace with technological developments, satisfy varying customer
requirements and achieve market acceptance. Any failure by the Company to
anticipate or respond adequately to technological developments or customer
requirements, or any significant delays in product development or introduction,
could damage the Company's competitive position and have an adverse effect on revenues and results of operations. There can be no assurance that the Company
will be successful in developing and marketing new equipment products on a
timely basis or that the Company will not experience significant delays in the
future, which could have a material adverse effect on the Company'sour
business, and
operations. In addition, there can be no assurance that new products developed
by the Company will achieve market acceptance.
Performance Guarantees. QUALCOMM and QPE have entered into contracts that
provide for performance guarantees to protect customers against late delivery or
failure to perform. These performance guarantees, and any future commitments for
performance guarantees, are obligations entered into separately, and in some
cases jointly, with partners to supply CDMA subscriber and infrastructure
equipment. Certain of these obligations provide for substantial performance
guarantees that accrue at a daily rate based on percentages of the contract
value to the extent the equipment is not delivered by scheduled delivery dates
or the systems fail to meet certain performance criteria by such dates. The
Company is dependent in part on the performance of its suppliers and strategic
partners in order to provide equipment which is the subject of the guarantees.
Thus, the ability to timely deliver such equipment may be outside of the
Company's control. If the Company and QPE are unable to meet their performance
obligations, the payment of the performance guarantees could amount to a
significant portion of the contract value and would have a material adverse
effect on product margins and the Company's results of operations.
Dependence on Key Customers. A significant portion of the Company's CDMA
subscriber and infrastructure equipment sales are, and are expected to continue
to be, concentrated with a limited number of customers. As a result, the
Company's performance will depend significantly on relatively large orders from
a limited number of customers, as well as gaining additional customers, both
within existing cellular, PCS and WLL markets and in new markets. The loss of
any existing customer for CDMA equipment or the failure of the Company to gain
additional customers could have a material adverse effect on the Company's
business, financial condition and results of operations.
21
24
The Company has entered into a four-year development agreement with
Globalstar to design and develop subscriber equipment and ground communications
stations of the Globalstar system through 1998. Through September 29, 1996, the
Company has recognized revenues of approximately $213 million under the
Globalstar agreement and expects to recognize significant revenues under the
contract during fiscal years 1997 and 1998. It is anticipated that Globalstar
will require capital of approximately $2.5 billion prior to full scale
commercial implementation of its system. To date, Globalstar has received funds
and financing commitments totaling approximately $1.4 billion. Such capital is
being used, in part, to fund the development agreement. 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 continue funding the development
agreement and which would have a material adverse effect on QUALCOMM's business
and results of operations. The Globalstar development agreement is terminable at
the election of Globalstar in the event that Globalstar abandons its efforts to
develop the satellite-based communications system.
CDMA Commercialization. The Company's CDMA technology has been launched
commercially for PCS and cellular applications in the U.S., Hong Kong and South
Korea. The successful implementation and operation of such systems is a complex
process requiring coordination of a number of factors, including the successful
interface between infrastructure and subscriber equipment from multiple vendors
and the public wireline network, as well as avoiding interference from microwave
and cellular systems. There can be no assurance that unforeseen complications
will not arise as more subscribers are added to these systems or in the scale-up
and operation of other commercial CDMA systems that could materially delay or
limit the commercial use of the Company's CDMA technology. Further, if the
Company's licensees are unable to deliver CDMA equipment to the market on a
timely basis, or if carriers which have adopted CDMA fail to deploy their
systems on a timely basis, the Company's business and the reputation of the
Company's CDMA technology could be adversely affected.
A number of companies with international operations are developing and
implementing competing cellular, PCS and WLL technologies. While the Company
strongly believes that CDMA is superior to competing digital technologies and is
actively promoting the benefits of its CDMA technology outside of the U.S.,
there can be no assurance that the Company will receive significant
international acceptance of its CDMA technology for cellular, PCS or WLL
applications due to the installed base of GSM systems and competition from the
U.S. and Japanese TDMA systems. In some countries, the Company's CDMA products
may be required to undergo extensive testing and certification by government
entities before CDMA can be approved for commercial use in those countries.
Dependence on OmniTRACS. OmniTRACS systems, complementary software
products, related messaging service and maintenance services historically have
accounted for a significant portion of the Company's total revenues and margins.
The Company expects that revenues and margins from its OmniTRACS operations will
continue to represent a substantial portion of the Company's total revenues and
margins. A significant portion of the Company's OmniTRACS revenues is derived
from the North American trucking industry, particularly providers of long haul
transportation of goods and equipment. Any adverse events affecting the domestic
trucking industry could have a material adverse effect on the Company's
OmniTRACS revenues. Although an increasing portion of the Company's OmniTRACS
revenues is derived from ongoing messaging and maintenance revenues, new
customer sales of the Company's OmniTRACS systems are important to the Company
to maintain continued growth. In addition, the Company has been experiencing
pricing pressure from competitors on sales of its OmniTRACS products and
messaging services, which could result in further reduction of the margins for
such products and services. See "Business -- Competition." The Company expects
that an increasing portion of its future OmniTRACS sales will be derived from
international sales. There can be no assurance that the Company's domestic or
international OmniTRACS business will continue to grow at the levels experienced
in the past, which could have a material adverse effect on the Company's results
of operations.
Competition. Competition in the wireless communications industry is
intense. The industry consists primarily of major domestic and international
companies which have financial, technical, marketing, sales, manufacturing,
distribution and other resources substantially greater than those of the
Company. Many of
22
25
these companies are licensees of the Company's technology, and have established
market positions, trade names, trademarks, patents, copyrights and intellectual
property rights and substantial technological capabilities. See
"Business -- Competition."
The primary competition with respect to CDMA technology is from current
analog and digital TDMA-based systems, including GSM and DCS 1900, the GSM
implementation for PCS in the U.S. GSM has been adopted as the digital cellular
standard throughout Europe and has received substantial international acceptance
in other countries. Industry publications have reported that over 60 countries
have adopted or are deploying GSM. In Japan, the Ministry of Posts and
Telecommunications has adopted TDMA as its primary digital cellular standard,
which has been widely deployed throughout the country. Japan's proprietary TDMA
system is not compatible with either GSM or the U.S. IS-54 TDMA standard.
However, in 1996, two of the three largest cellular service providers in Japan
have announced plans to offer commercial CDMA service in 1998. In addition, a
number of alternative radio systems are also being marketed for WLL
applications. Many of the major equipment suppliers have made substantial
investments in TDMA and GSM technology including Alcatel, Hughes, Lucent,
Motorola, NOKIA, Nortel and Siemens (all of whom are licensees of the Company),
as well as Ericsson. The Company also competes against its licensees in the sale
of CDMA subscriber and infrastructure equipment. There can be no assurance that
the Company's competitors will not devote their significantly greater financial,
technical, marketing and other resources to aggressively market competitive
communications systems or develop and adopt competitive digital cellular
technologies, and that such efforts will not have a materially adverse effect on
the Company's results of operations, in the future. Moreover, certain equipment
manufacturers may offer extremely attractive financing terms as a means of
gaining access to the U.S. PCS market.
The Company's primary competition to its OmniTRACS system includes American
Mobile Satellite Corporation ("AMSC")liquidity and HighwayMaster Communications, Inc.
AMSC and its resellers are offering services through the AMSC satellite which
was launched in 1995. Recently, Rockwell International, the primary reseller to
date of AMSC services, ceased acting as an AMSC reseller and transferred its
customers to AMSC, thereby increasing AMSC's market presence. These competitors
are aggressively pricing their products and could continue to do so in the
future. In addition, these competitors are offering new value-added products and
services similar to those developed or being developed by QUALCOMM. Emergence of
new competitors, particularly those offering low cost products and future LEO
satellite communications systems, may impact margins and intensify competition
in new markets. The Company also faces competition abroad from numerous
suppliers of equipment and services. These include Inmarsat and its authorized
resellers through its Inmarsat C geostationary satellite service. In addition,
the Company is facing competition abroad from various terrestrial based systems
and specifically in Europe from GSM-based terrestrial systems. All of these
competitors are aggressively pricing their products and services and the Company
can continue to expect pricing pressures. As with the U.S. operations, the
international business may also experience competition in the future from LEO
Satellite communications systems.
Equipment Sales by CDMA Licensees. Full commercial implementation of the
Company's CDMA technology requires that subscriber and infrastructure equipment
be made available in commercial quantities in a timely and cost effective
manner. Although the Company is a supplier of certain CDMA subscriber and
infrastructure equipment, the Company expects that a major portion of the
subscriber and infrastructure equipment that will be made commercially available
will be supplied by the Company's licensees. If CDMA subscriber and
infrastructure equipment is not delivered to the market on a timely basis,
customers could select other digital wireless technologies. Availability of
equipment and other factors are critical for CDMA technology to be chosen for
wireless applications. The amount and timing of resources devoted by licensees
to the development of CDMA subscriber and infrastructure equipment are
controlled by such licensees, and thus the timing of the availability of third
party equipment is not under the Company's control.financial position.
Reliance on Satellite and Other Facilities for OmniTRACS Service. The
Company'sService
Our OmniTRACS system currently operates in the U.S. market on leased
Ku-band satellite transponders. The Company'sOur data satellite transponder and position
reporting satellite transponder lease runs through 2001. The Company's position reporting satellite transponder runs
through May 1997, with the rights to extend through May 1999. The Company
believes that its current domestic transponder capacity is adequate to support
over 180,000 OmniTRACS terminals, assuming current per unit message and position
reporting volumes. Future systemSystem enhancements
maycurrently under initial deployment should allow for increased
23
26 utilization of
transponder capacity. The Company believesBased on results of the system enhancements, we believe
that the U.S. OmniTRACS operations may not require additional transponder
capacity in fiscal year 1998 which
it believes1999. We believe that in the event additional transponder
capacity would be required in fiscal 1999 or in future years, additional
capacity will be available on acceptable terms. However, no assurance can be
givenwe cannot assure you
that the Companywe will be able to acquire additional transponder capacity on acceptable
terms on a timely basis. Any failure of the CompanyIf we fail to maintain adequate satellite capacity this
would have a material adverse effect on the
Company'sour business, results of operations,
liquidity and financial results. The Company's NMFposition. Our Network Management Facility operations are
subject to the risk that a failure or natural disaster could interrupt the
OmniTRACS service and have a material adverse effect on OmniTRACS revenues. The Company maintainsOmniTRACS' results of
operations. We maintain a fully operational NMFNetwork Management Facility in Las
Vegas, Nevada as a backup to itsour primary NMFNetwork Management Facility in San
Diego, California.
See "Business -- OmniTRACS."
Factors Affecting International Business. Revenues from internationalInflation and Deflation
Inflation has had and may continue to have adverse effects on the
economies and securities markets of certain emerging market countries and could
have adverse effects on our customers accountedand their start-up projects in those
countries, including their ability to obtain financing. Brazil, Chile, Mexico,
Russia and Ukraine, for approximately 36%example, have periodically experienced relatively high
rates of total revenues in fiscal 1996, 20%
of total revenues in fiscal 1995 and 23% of total revenues in fiscal 1994.
Because certain joint ventures between the Company and foreign firms provide for
a minority ownership position by the Company in the joint venture, the Company
may be limited in taking actions it might otherwise wish to pursue. Since the
Company is a relatively new entrant into some of these markets and its
competitors mayinflation. In addition, we believe risks associated with deflation have
long-standing, entrenched positions, it may be difficult
for the Company to succeedrecently increased, particularly given recent deflation in certain markets, thereby limiting international
sales. Other risks faced by the Company in its international business include
unexpected changes in regulatory requirements, export controls, national
standards, currency exchange rates, expropriation, tariffsparts of
Asia. Significant inflation or other barriers,
political risks, difficulties in staffing and managing foreign operations, and
potentially negative tax consequences. These factorsdeflation could have ana material adverse impacteffect on
the Company's operating results. The Company is subject to U.S. export
control lawsour business, results of operations, liquidity and regulations with respect to all of the Company's products and
technology that are exported from the United States. The Company is subject to
the risk that more stringent export control requirements could be imposed in the
future on product classes that include products exported by the Company, which
would result in additional compliance burdens on the Company or ensure the
enforceability of its contract rights. In addition, the laws of certain foreign
countries, including developing nations in Asia, South America, Africa and
Eastern Europe, may not protect the Company's intellectual property rights or
ensure the enforceability of its contract rights to the same extent as do the
laws of the United States.
Uncertainty offinancial position.
22
27
Government Regulation. The Company'sRegulation
Our products are subject to various FCCFederal Communications
Commission regulations in the U.S. These regulations require that the
Company'sour products
meet certain radio frequency emission standards and not cause unallowable
interference to other services. The Company isWe are also subject to government regulations
and requirements by local and international standards bodies outside the U.S.,
where the Company iswe are less prominent than local competitors and hashave less opportunity to
participate in the establishment of regulatory and standards policies. Changes
in the regulation of the Company'sour activities, including changes in the allocation of
available spectrum by the U.S. Government and other governments, or exclusion of
its technology by a standards body, could have a material adverse effect on the Company'sour
business, results of operations, liquidity and its ability to market its products and services. The Company isfinancial position. We are also
subject to state and federal health, safety and environmental regulations, as
well as regulations related to the handling of and access to classified
information.
Reliance on Key Personnel. The Company'sPersonnel
Our success depends in a large part upon itsour ability to retain highly
qualified technical and management personnel,
thepersonnel. The loss of one or more of whomthese
employees could have a material adverse effect on theour business, results of
the Company.operations, liquidity and financial position. None of these individuals has an
employment contract with the Company. The Company'sus. Our success also depends upon itsour ability to
continue to attract and retain highly qualified personnel in all disciplines. There can be no assuranceWe
cannot assure you that the Companywe will be successful in hiring or retaining requisite
personnel.
Product Liability.Liability
Testing, manufacturing, marketing and use of the
Company'sour products entail the
risk of product liability. While the Companywe currently hashave product liability insurance
that it believeswe believe is adequate to protect against product liability claims, no assurance canyou
cannot be givensure that the
Companywe will be able to continue to maintain such insurance at a
reasonable cost or in sufficient amounts to protect the Companyus against losses due to
product liability. AnOur inability to maintain insurance at an acceptable cost or
to otherwise protect against potential product liability could prevent or
inhibit the commercialization of the Company'sour products. In
24
27 addition, a product liability
claim or recall could have a material adverse effect on theour business, orresults of
operations, liquidity and financial condition of the Company.position.
News reports have asserted that power levels associated with
hand-held cellular telephones may pose certain health risks. The Company isWe are not aware of
any study that has concluded that there are any significant health risks from
using hand-held cellular telephones. If it were determined that electromagnetic
waves carried through the antennas of cellular telephones create a significant
health risk, there could be a material adverse effect on the Company'sour ability to market
and sell itsour wireless telephone products. In addition, there may also be certain
safety risks associated with the use of hand-held cellular phones while driving.
This could also have a material adverse effect on our ability to market and sell
our wireless telephones.
Year 2000 Issue
We believe that our mission critical systems will be Year 2000
compliant by September 1999. However, we cannot guarantee that these results
will be achieved. Specific factors leading to this uncertainty include failure
to identify all susceptible systems, non-compliance by third parties whose
systems and operations impact us, and other similar uncertainties. A worst case
scenario might include one or more of our internal systems, suppliers or
customers being non-compliant. An event such as this could result in a material
disruption to our operations. Specifically, we could experience software
application, computer network, manufacturing equipment and telephone
communication system failures. Supply chain and product non-compliance could
result in our failure to perform on contracts, delayed delivery of products to
customers and inadequate customer service. Customer non-compliance could result
in delayed payments for products and services and build up of inventories.
Should a worst case scenario occur, it could, depending on its duration, have
a material impact on our business, results of operations, liquidity and
financial position. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Year 2000 Readiness Disclosure."
Anti-Takeover Measures; Rights Plan. The Company's CertificatePlan
Our certificate of Incorporationincorporation provides for cumulative voting in
the election of directors. In addition, the Company's Certificateour certificate of Incorporationincorporation
provides for a classified Boardboard of Directorsdirectors and includes a provision (the "Fair Price Provision") that
requires the approval of the holders of at least 66 2/3% of the Company'sour voting stock as a
condition to a merger or certain other business transactions with, or proposed
by, a holder of more than 15% or more of the Company'sour voting stock,
exceptstock. This approval is not required
in
23
28
cases where certain of our directors approve the transaction or where certain
minimum price criteria and other procedural requirements are met. The Company's
CertificateOur
certificate of Incorporationincorporation also requires the approvals of holders of at least
66 2/3% of the Company'sour voting stock to amend or change the provisions mentioned relating
to the classified board, cumulative voting or the Fair Price Provision. The
Company's Certificatetransaction approval. Finally,
our certificate of Incorporation also requiresincorporation provides that any action required or permitted
to be taken by our stockholders of the Company must be effected at a duly called annual or
special meeting of stockholders of the Company and may not be
effectedrather than by any consent in writing.
The classified board, Fair Price Provisiontransaction approval and other charter
provisions may discourage certain types of transactions involving an actual or
potential change in controlour control. These provisions may also discourage certain
types of the Company, including transactions in which theour stockholders might otherwise receive a
premium for their shares over then current market prices and may limit theour
stockholders' ability of stockholders to approve transactions that they may deem to be in their
best interests.
Further, pursuant to the terms of
its preferred share purchase rights plan, the Company haswe have distributed a dividend of one right for each
outstanding share of Common Stock.our common stock pursuant to the terms of our preferred
share purchase rights plan. In the event the
Convertible Preferred Securities are convertedholders of our trust convertible
preferred securities convert those securities into Common Stock,shares of our common stock,
each share of such Common Stockthose shares will also be granted a right. These rights will cause
substantial dilution to the ownership of a person or group that attempts to
acquire the Companyus on terms not approved by the Boardour board of Directorsdirectors and may have the
effect of deterring hostile takeover attempts. In addition, the Boardour board of
Directorsdirectors has the authority to fix the rights and preferences of and issue
shares of Preferred Stock, whichpreferred stock. This right may have the effect of delaying or
preventing a change in our control of the Company without action by theour stockholders.
Volatility of Stock Price.Price
Historically, the Company'sour stock price has been volatile. The sales prices
for the Company's Common Stockour common stock have ranged from $30.38$40.94 to $54.50$71.94 during the past 52 weeks.fiscal year
ended September 27, 1998. See "Item 5. Market for Registrants' Common Stock and
Related Stockholders Matters."
FutureFactors that may have significant impact on our market price of our
stock include:
- - future announcements concerning the Companyus or itsour competitors, including the
selection of wireless technology by cellular, PCS and WLL service
providers and the timing of roll-out of those systems, thesystems;
- - receipt of substantial orders for infrastructure, subscriber and ASIC's
products;
- - quality deficiencies in services or subscriber
equipment,products;
- - results of technological innovations,innovations;
- - new commercial products,products;
- - changes in recommendations of securities analysts,analysts;
- - government regulations,regulations; and
- - proprietary rights or product or patent litigation, may have a significant
impact on the market price of the Company's Common Stock. The Company'slitigation.
Our future earnings and stock price may be subject to significant
volatility, particularly on a quarterly basis. Any shortfallsShortfalls in our revenues or
earnings fromin any given period relative to the levels expected by securities
analysts could have an immediateimmediately, significantly and significant adverse
effect onadversely affect the trading price
of the Company's Common Stock in any given period.our common stock.
ITEM 2. PROPERTIES
The Company occupies a number of facilitiesis headquartered in San Diego, California where it
occupies 29 properties totaling approximately 3,040,000 square feet. These
facilities are used for manufacturing, engineering and administration. The Company ownsOf the
land and
buildings for its Corporate Center which is used primarily for administration
and engineering. In 1994, the Company purchased another site nearby and has
completed the relocation of its NMF and principal manufacturing efforts in
addition to providing
25
28
additional administrative and engineering facilities. The Company also owns a
368,000 square foot manufacturing and research facility and 16.5 acres of
adjacent land in La Jolla, California which is used by QUALCOMM for subscriber
manufacturing operations. In 1996, the Company completed construction of a new
225,000 square foot building adjacent to the Corporate Center owned by the
Company which is being utilized primarily as an engineering facility. In the
third quarter of fiscal 1996 the Company commenced construction of a 177,000
square foot manufacturing facility owned by the Companytotal facilities in San Diego, which will
be dedicated to the production of infrastructure equipment. In the first quarter
of fiscal 1997, the Company began planningowns 12 of the properties, totaling
approximately 2,215,000 square feet and utilizes approximately 722,000 square
feet for the construction of a new 250,000
square foot building on QUALCOMM's Morehouse Campus which will be used primarily
as an engineering facility, and the Company has signed additional leases
totalling 185,000 square feet.manufacturing facilities. The Company continues to lease spaceremaining properties in San Diego are
used for engineering, research and administrative facilities.
24
29
The Company leases space for sales and support officesapproximately 217,000 square feet in 16 other
U.S. locations including Kansas City, Missouri; Washington, D.C.; Winston-Salem, North Carolina;
Norcross, Georgia; Salt Lake City, Utah; Pittsburgh, Pennsylvania; Irving,
Texas; Indianapolis, Indiana; Austell, Georgia;sales and support offices; engineering facilities in
Boulder, Colorado; Santa Clara, California; Scotts Valley, California; and a
backup NMFNetwork Management Facility in Las Vegas, Nevada. The Company also leases
office space internationallyinternationally.
In fiscal 1997, the Company also began construction of new buildings
in Haifa, Israel; Hong Kong; Beijing, China; New
Delhi, India; Baroda, India; Buenos Aires, Argentina; Sao Paulo, Brazil;
Ontario, Canada; Seoul, Korea; and Singapore.Boulder, Colorado totaling approximately 159,000 square feet. The Company
also owns additional property in Boulder, Colorado.
The Company believes its facilities are adequate for its present
needs. In the future, the Company willmay need to purchase, build or lease
additional facilities to meet the requirements projected in its long termlong-term
business plan.
ITEM 3. LEGAL PROCEEDINGS
On September 26,23, 1996, Ericsson Inc., and Telefonaktiebolaget LM
Ericsson ("Ericsson") filed suit against the Company in the U.S. District Court for the Eastern District ofMarshall, Texas Civil Action No. 2-96CV183. The complaint allegesand on
December 17, 1996, Ericsson also filed suit against QPE in Dallas, Texas with
both complaints alleging that various elements
of the Company's or QPE's CDMA equipment system and componentsproducts infringe one
or more patents owned by Ericsson. The suits were later amended to include a
total of 11 Ericsson patents. By order dated July 24, 1998, the Dallas action
was transferred to Marshall, Texas. In December 1996, QUALCOMM filed a
countersuit alleging, among other things, unfair competition by Ericsson based
on a pattern of conduct intended to impede the acceptance and commercial
deployment of QUALCOMM's CDMA technology and is seeking a judicial declaration
that certain of Ericsson's patents are not infringed by QUALCOMM and are
invalid. That countersuit has been consolidated with the Marshall, Texas action.
On September 10, 1996, OKI America, Inc. ("OKI") filed a complaint against
Ericsson seeking a judicial declaration that certain of OKI's CDMA subscriber
products do not infringe 9 patents of Ericsson and that such patents are
invalid. The 9 patents are among the 11 patents at issue in the litigation
between the Company and Ericsson. The OKI case has not yet been set for trial.
On October 14, 1998, Ericsson filed a formal response to
Ericsson's complaint.dismissal with prejudice of all of its
claims under three of the patents at issue in the Marshall, Texas case. The
Marshall case is set for trial on April 6, 1999. Although there can be no
assurances that an unfavorable outcome of the Marshall case would not have a
material adverse effect on the Company's liquidity,
financial position or results of operations, liquidity or
financial position, the Company believes the complaint
has no meritnamed Ericsson patents are not
required to produce IS-95 compliant systems and intends to vigorously defend the action.that Ericsson's claims are
without merit.
On November 8, 1996March 5, 1997, the Company was served withfiled a complaint in connection
with a lawsuitagainst Motorola,
Inc. ("Motorola"). The complaint was filed in response to allegations by
Motorola that the Company's recently announced Q phone infringes design and
utility patents held by Motorola as well as trade dress and common law rights
relating to the appearance of certain Motorola wireless telephone products. The
complaint denies such allegations and seeks a judicial declaration that the
Company's products do not infringe any patents held by Motorola. On March 10,
1997, Motorola filed a complaint against the Company (the "Motorola Complaint"),
alleging claims based primarily on the above alleged infringement. The Company's
motion to transfer the Motorola Complaint to the U.S. District Court for the
EasternSouthern District of PennsylvaniaCalifornia was granted on April 3, 1997. On April 24, 1997,
the court denied Motorola's motion for a preliminary injunction thereby
permitting the Company to continue to manufacture, market and sell the Q phone.
On April 25, 1997, Motorola appealed the denial of its motion for a preliminary
injunction. On January 16, 1998 the U.S. Court of Appeals for the Federal
Circuit denied Motorola's appeal and affirmed the decision of the U.S. District
Court for the Southern District of California refusing Motorola's request to
enjoin QUALCOMM from manufacturing and selling the Q phone. On June 4, 1997,
Motorola filed another lawsuit alleging infringement by BTG USA Inc.QUALCOMM of 4 patents.
Three of the patents had already been alleged in previous litigation between the
parties. On August 18, 1997, Motorola filed another complaint against the
Company alleging infringement by the Company of 7 additional patents. All of the
Motorola cases have been consolidated for pretrial proceedings. The complaint alleges that the Company's Global
Positioning System, CDMA telecommunications products and the OmniTRACS system
components thereof infringe United States Patent NO. Re. 34,004. The patent
expired in November 1996.cases have
been set for a final pretrial conference on March 1, 1999. Although there can be
no assurancesassurance that an unfavorable outcome of the dispute would not have a
material adverse effect on the Company's liquidity, financial position or results of operations, liquidity or
financial position, the Company believes theMotorola's complaint has no merit and
intends towill vigorously defend the action.
On October 27, 1998, the Electronics and Telecommunications Research
Institute of Korea ("ETRI") submitted to the International Chamber of Commerce a
Request for Arbitration of a dispute with the Company arising out of a Joint
Development Agreement dated April 30, 1992 ("JDA") between ETRI and the Company.
In the request, ETRI alleges that the Company has breached certain provisions of
the JDA and seeks monetary damages and an accounting. The Company's answer to
the request is not due until November 30, 1998. The Company plans to file an
answer and counterclaims denying the allegations, establishing the termination
of the JDA and seeking monetary damages against ETRI. In accordance with the
JDA, the arbitration will take place in San Diego. No arbitrator has yet been
appointed and no schedule for the arbitration proceedings has been established.
Although
25
30
the ultimate resolution of this dispute is subject to the uncertainties inherent
in litigation or arbitration, the Company does not believe that the resolution
of these claims will have a material adverse effect on the Company's results of
operations, liquidity or financial position.
The Company is engaged in other legal actions arising in the
ordinary course of its business and believes that the ultimate outcome of these
actions will not have a material adverse effect on the Company's liquidity, financial
position orits results of operations.operations,
liquidity or financial position.
ITEM 4. SUBMISSIONSUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended September 29, 1996.
26
2927, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION. The Common Stock of the Company is traded on
the Nasdaq National Market under the symbol "QCOM." The following table sets
forth the range of high and low sales prices on the National Market of the
Common Stock for the periods indicated, as reported by Nasdaq. Such quotations
represent inter-dealer prices without retail markup, markdown or commission and
may not necessarynecessarily represent actual transactions.
HIGH LOW
------- ----------- ---
FISCAL 19951998
First Quarter.................................................... $ 33.75 $ 22.25Quarter........................... $71.94 $45.50
Second Quarter................................................... 34.50 20.50Quarter.......................... 58.44 45.00
Third Quarter.................................................... 35.63 24.13Quarter........................... 60.56 46.63
Fourth Quarter................................................... 54.75 31.75Quarter.......................... 67.38 40.94
FISCAL 19961997
First Quarter.................................................... $ 47.50 $ 34.88Quarter........................... $46.75 $35.38
Second Quarter................................................... 49.75 35.50Quarter.......................... 63.75 39.13
Third Quarter.................................................... 54.50 30.38Quarter........................... 60.63 41.25
Fourth Quarter................................................... 52.88 36.38Quarter.......................... 56.88 43.25
As of November 25, 1996,16, 1998, there were 2,1692,235 holders of record of the
Common Stock. On November 25, 1996,16, 1998, the last sale price reported on the Nasdaq
National Market for the Common Stock was $42.00$54.25 per share. 27The Company has never
paid cash dividends on its Common Stock and has no present intention to do so.
RECENT SALES OF UNREGISTERED SECURITIES. On August 20, 1998, the
Company issued and sold 705,000 shares of its Common Stock to Airtouch
Communications, Inc. upon the full "net exercise" by that company of an
outstanding warrant to purchase 782,000 shares of the Company's Common Stock at
a purchase price equal to $5.50 per share. The Company relied on the exemption
provided by Section 4 (2) of the Securities Act of 1933, as amended (the "Act").
The shares are freely tradable pursuant to Rule 144(k) promulgated under the
Act.
26
3031
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following statement of income and balance sheet data for the
years ended September 30, 1998-1994 has been derived from the Company's audited
financial statements audited by
Price Waterhouse LLP, independent accountants.statements. Consolidated balance sheets at September 30, 19951998 and 19961997
and the related consolidated statements of income and of cash flows for each of
the three years in the period ended September 30, 19961998 and notes thereto appear
elsewhere herein. The data should be read in conjunction with the annual
financial statements, related notes and other financial information appearing
elsewhere herein.
All amounts shown are in thousands, except per share data.
YEARS ENDED SEPTEMBER 30,(1)
-------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
1993 1992
---------- -------- -------- -------- ------------------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)DATA)
STATEMENTSSTATEMENT OF OPERATIONSINCOME DATA:
Revenues:
Communications systems................... $582,953 $246,997 $194,037 $123,828systems ................ $ 84,3662,863,092 $ 1,733,169 $ 582,953 $ 246,997 $ 194,037
Contract services........................services ..................... 270,388 211,661 131,022 95,150 48,310 28,609 14,063
License, royalty and development fees....fees . 214,390 151,535 99,875 44,465 29,276
16,271 9,092
-------- -------- -------- -------- ------------------- ----------- ----------- ----------- -----------
Total revenues...................revenues .................. 3,347,870 2,096,365 813,850 386,612 271,623
168,708 107,521
Operating expenses:
Communications systems...................systems ................ 2,136,297 1,361,641 445,481 143,774 118,636
77,206 56,170
Contract services........................services ..................... 197,102 156,365 90,380 69,396 38,051
23,416 8,924
Research and development.................development .............. 349,483 235,922 162,340 80,171 49,586
27,415 25,211
Selling and marketing....................marketing ................. 246,975 147,040 74,114 37,754 23,687
16,335 9,868
General and administrative...............administrative ............ 163,372 89,148 48,971 34,918 18,696
12,085 9,305
Litigation settlement and related
costs.................................Other(2) .............................. 11,976 8,792 -- -- 13,017
326 --
-------- -------- -------- -------- ------------------- ----------- ----------- ----------- -----------
Total operating expenses.........expenses ........ 3,105,205 1,998,908 821,286 366,013 261,673
156,783 109,478
-------- -------- -------- -------- ------------------- ----------- ----------- ----------- -----------
Operating income (loss).................... ................. 242,665 97,457 (7,436) 20,599 9,950
11,925 (1,957)
Interest income, (expense), net.............net .................. 31,426 23,833 20,885 7,265 4,470
1,333 (326)Net gain on sale of investments ....... 2,950 13,400 -- -- --
Write-off of investments .............. (20,000) -- -- -- --
Distributions on Trust Convertible
Preferred Securities of subsidiary
Trust ............................... (39,270) (23,277) -- -- --
Minority interest in (income) loss of
consolidated subsidiary...............................subsidiaries ........... (48,366) (2,979) 13,178 12,016 2,893 -- --
Equity in losses of joint ventures.........investees ......... (20,731) -- -- -- (198) (1,261)
-------- -------- -------- -------- ----------
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes..........taxes ............ 148,674 108,434 26,627 39,880 17,313
13,060 (3,544)
Income tax expense.........................expense(3) ................. (40,142) (16,500) (5,600) (9,700) (2,120)
(1,000) (580)
-------- -------- -------- -------- ------------------- ----------- ----------- ----------- -----------
Net income (loss)...................................................... $ 108,532 $ 91,934 $ 21,027 $ 30,180 $ 15,193
$ 12,060 $ (4,124)
======== ======== ======== ======== =================== =========== =========== =========== ===========
Net income (loss)earnings per common share.........share(4):
Basic ................................. $ 1.57 $ 1.37 $ 0.32 $ 0.56 $ 0.30
Diluted ............................... $ 0.531.47 $ 0.28 $ 0.25 $ (0.10)
Fully diluted net income (loss) per common
share....................................1.28 $ 0.30 $ 0.52 $ 0.28
$ 0.25 $ (0.10)
Shares used in primary per share calculation.............................. 70,214 57,420 53,514 48,046 39,058
Shares used in fully diluted per share
calculation.............................. 70,468 58,194 53,562 48,326 39,058calculation(4):
Basic ................................. 69,203 67,335 65,558 53,417 51,009
Diluted ............................... 73,962 71,887 70,335 57,570 54,200
BALANCE SHEET DATA:
Cash, cash equivalents and
Investments ........................... $ 303,324 $ 808,858 $ 354,281 $ 578,996 $ 137,496
Working capital............................ $capital ....................... 655,611 982,117 425,231 $599,633 $151,448 $200,666 $ 56,578599,633 151,448
Total assets...............................assets .......................... 2,566,713 2,274,680 1,185,330 940,717 357,925 306,589 108,317
Capital lease obligations(2)............... 12,912 535 1,810 4,330 5,957
Bank lines of credit .................. 151,000 110,000 80,700 -- --
Other debt and long term
debt(2).................................. 80,930 33,959 25,676 26,215 4,202
Stockholders' equity.......................capital lease
Obligations... ........................ 6,921 10,967 13,142 39,494 27,486
Company-obligated mandatorily
Redeemable Trust Convertible
Preferred Securities of a
subsidiary trust holding solely
debt securities of the
Company ............................. 660,000 660,000 -- -- --
Total stockholders' equity ..... 957,596 1,024,178 844,913 799,617 262,170 236,696 68,807
- ----------------------------------
(1) The Company's fiscal periodsyears end on the last Sunday of each period.in September. As a
result, of this practice, fiscal 1996 includes 53 weeks.
(2) Consists of acquired in-process research and development and asset
impairment charges in 1998, asset impairment charges in 1997 and
litigation settlement and related costs in 1994.
(3) Includes currentthe tax benefit of $21.5 million in 1997, $3.0 million in 1995,
and long-term portions.
28$4.0 million in 1994 from a reduction in the valuation allowance to
recognize deferred tax assets.
(4) Net earnings per common share and shares used in per share calculation
were retroactively restated for 1997-1994 in connection with the adoption
of Statement of Financial Accounting Standards No. 128, "Earnings Per
Share." See Note 1 of "Notes to Consolidated Financial Statements."
27
3132
ITEM 7.MANAGEMENT'S7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Except for the historical information contained herein, the
following discussion contains forward-looking statements that involve risks and
uncertainties. Qualcomm Incorporated's (the "Company")The Company's future results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not specifically limited to: the ability to develop and
introduce cost effective new products in a timely product development, variationmanner, avoiding delays in the
commercial implementation of royalty,the CDMA technology; continued growth in the CDMA
subscriber population and the scale-up and operations of CDMA systems;
developments in current or future litigation; the Company's ability to
effectively manage growth and the intense competition in the wireless
communications industry; risks associated with vendor financing; timing and
receipt of license fees and other revenues,royalties; the Company's ability to successfully
manufacture and sell significant quantities of CDMA infrastructure equipment on
a timely basis; failure to satisfy performance obligations, uncertainty regarding the Company's
patents and propriety rights (including the risk that the Company may be forced
to engage in costly litigation to protect such patents and rights and the
material adverse consequences to the Company if there were unfavorable outcome
of any such litigation), difficulties in obtaining components needed for
production of wireless equipment and changes in economic conditions of various
markets the Company serves,obligations; as well as the other
risks detailed in this section and in the sections entitled Results of
Operations and Liquidity and Capital Resources.
OverviewResources
OVERVIEW
QUALCOMM commenced operations in July 1985, initially providing contract
researchis a leading provider of digital wireless communications
products, technologies 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.services. 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 Communication
Services ("PCS") and Wireless Local Loop ("WLL") applications and now is
involved in production of its own products for those markets.
The Company'sgenerates revenues generated from its proprietary CDMA technology have
historically been derived primarily
fromfrom: license royalty and development fees and contract agreements withroyalties paid by licensees of the Company's CDMA
technology; sales of CDMA subscriber, infrastructure and ASICs products to
domestic and international wireless communications equipment suppliers and
service providersproviders; sales of OmniTRACS terminals and research organizations. Althoughrelated software and
services to OmniTRACS users; and contract development services, including the
design and development of subscriber and ground communications products for the
Globalstar System. In addition, the Company expects to continue to receive CDMA license, royaltygenerates revenues from the design,
development, manufacture and development
feessale of a variety of other communications products
and services.
The Company generates revenue from its existing agreementsCDMA licensees in the form of
up-front license fees as well as ongoing royalties based on worldwide sales by
such licensees of CDMA subscriber and infrastructure products. License fees are
generally nonrefundable and may receive similarbe paid in one or more installments. Revenues
generated from license fees and royalties from new licensees, the amount and timing of these CDMA fees and royalties will
depend on the extentare subject to which and when the Company's CDMA technology is
commercially implemented. Delays in roll-out or commencement of commercial
operation of cellular, PCS or WLL systems could have a material adverse effect
on quarterly and annual
revenues. The Company has experienced and may continue
to experience fluctuations in quarterly and annual operating resultsfluctuations. This is due to variations in the amount and timing of recognition
of CDMA license fees, pricing and royalties.amount of sales by the Company's licensees and
the Company's ability to estimate such sales, and the impact of currency
fluctuations and risks associated with royalties generated from international
licensees.
The Company began manufacturing significant volumes ofmanufactures CDMA subscriber and
infrastructure equipment during fiscal 1996. Production capabilities at QUALCOMM
Personal Electronics ("QPE") were significantly expanded which resulted in
production of approximately 400,000 subscriber units in fiscal 1996 with higher
production anticipatedproducts for fiscal 1997.sale to
wireless network operators worldwide. The Company shipped the first
significant volumes of PCS phones in the fourth quarter of fiscal 1996.
Infrastructure production began during fiscal 1996 and is expected to continue
to grow into fiscal 1997. The Company, either directly or through QPE, has entered into agreements
regarding the manufacture and supply of CDMA infrastructure products with
Sprint Spectrum, PrimeCo Personal Communication
L.P. ("PrimeCo")Hitachi, Hughes and Northern Telecom ("Nortel") pursuant to which the Company
(or QPE) has agreed to provide approximately $500 million, $350 million and $200
million, respectively, in CDMA equipment and services.Nortel. The Company is subject to
performance guarantees on these orders. In September 1996,manufactures its CDMA subscriber
products primarily through QPE, a joint venture between the Company and Hughes Network Systems ("Hughes") entered into an agreement whereby Hughes has
agreed to purchase a
minimum percentagesubsidiary of Sony Electronics, Inc. The Company, through QPE, is one of the
largest manufacturers of CDMA infrastructure equipmenthandsets and has shipped over seven million
handsets to customers around the world. The Company has also generated
substantial revenue from QUALCOMMthe design and sale of CDMA ASICs to its licensees for
resale to Hughes' customers. Any delays or difficulties in
connection with the planned increase in manufacturing capacity could have a
material adverse effect on the Company's business and results of operations. If
the Company is unable to manufacture CDMAincorporation into their subscriber and infrastructure equipment at commercially acceptable costs and on a timely basis, the Company's
competitive position and the abilityproducts. As of
September 1998, the Company to achieve a profitable
return on its CDMA research and development expenditures could be materially
impaired. Revenues relatedhas shipped approximately 25 million MSM ASICs to
CDMA Application Specific Integrated Circuits
("ASIC") component shipments to licensees also realized significant growth in
fiscal 1996. To support the manufacture of CDMA equipment, QUALCOMM shipped over
2 million of its CDMA ASICs in fiscal 1996.
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32
Domestically, thehandset manufacturers worldwide, including QPE.
The Company generates revenues from its domestic OmniTRACS business
by manufacturing and selling OmniTRACS terminals and related application
software packages and by providing ongoing messaging and maintenance services to
domestic OmniTRACS users. Competition in 1996 resulted in a reduction of the
margins on unit sales and services. The Company generates revenues from its international
OmniTRACS business through license fees, sales of network equipmentproducts and
terminals, and fees from engineering support services. Messagingservice fees. International messaging services are provided by
service providers that operate network management centers for a region under
licenses granted by the Company.
SinceThe Company has entered into a number of development and
manufacturing contracts involving the introductionGlobalstar System. The Company's
development agreement provides for the design and development of OmniTRACS,the ground
communication stations and user terminals of the Globalstar System. Under the
agreement, the Company has shipped over 175,000 OmniTRACS units
worldwide.is reimbursed for its development services on a cost-plus
basis. In addition, in April 1997 the Company was awarded a contract to
manufacture and supply commercial gateways for deployment in the Globalstar
System. In March 1998 the Company entered into an agreement with Globalstar to
manufacture and supply portable and fixed CDMA handsets that will operate on the
Globalstar System.
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33
Revenues from international customers accounted for approximately
34%, 30% and 36% of total revenues for fiscal 1998, 1997 and 1996 respectively.
Sales of subscriber, infrastructure and ASICs products internationally are
subject to a number of risks. Wireless and satellite network operators, both
domestic and international, increasingly have required their suppliers to
arrange or provide long-term financing for them as a condition to obtaining or
bidding on infrastructure projects. In order to provide for such financing, the
Company likely will be subjected to vendor financing and currency fluctuation
risks. See "Risk Factors-Risks Relating to the Company-International Business,
Currency Fluctuations and Vendor Financing."
The Company has experienced, and expects to continue to experience,
increased operating expenses as a resultin absolute dollars. The Company continues to
emphasize control of the Company's overall expansion. In
fiscal 1996, operating expenses were significantly higher, although operatingand reduction of these expenses as a
percentage of revenue declined.revenue. The increase was primarily dueCompany is exposed to increased researchrisk from fluctuations in
foreign currency and development expenditures, expanded salesinterest rates, which could impact the Company's results of
operations and marketing
effortsfinancial condition. QUALCOMM's financing on products and
overall expansionservices is denominated in dollars and any significant change in the value of
the business base.dollar against the national currency where QUALCOMM is lending could result
in the increase of costs to the debtors and could restrict the debtors from
fulfilling their contractual obligations. Any devaluation in the local currency
relative to the currencies in which such liabilities are payable could have a
material adverse effect on the Company. In fiscal 1997some developing countries, including
Chile, Mexico, Brazil, Russia, and Ukraine significant currency devaluation
relative to the U.S. dollar have occurred and may occur again in the future. In
such circumstances, the Company expectsmay experience economic loss with respect to continuethe
collectability of its receivables and the recoverability of inventories as a
result of exchange rate fluctuations.
From time to make substantial investments in researchtime the Company evaluates various strategic
alternatives with regard to its businesses and development
and to increase sales and marketing expenses asoperating divisions with the Company's products are
marketed throughout the world.goal
of maximizing long-term stockholder value.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of total revenues represented by certain consolidated statementstatements of
operations data:
YEARS ENDED
SEPTEMBER 30,(1)
----------------------(*)
------------------------------------
1998 1997 1996 1995 1994
---- ---- ----
Revenues:
Communications systems........................................ 72 % 64 % 71 %systems ................... 86% 83% 72%
Contract services.............................................services ........................ 8 10 16 25 18
License, royalty and development fees.........................fees .... 6 7 12
11 11
--- --- ------- ---- ----
Total revenues........................................ 100 % 100 % 100 %revenues ................... 100% 100% 100%
==== ==== ====
Operating expenses:
Communications systems........................................ 55 % 37 % 44 %systems ................... 64% 65% 55%
Contract services.............................................services ........................ 6 8 11 18 14
Research and development......................................development ................. 11 11 20 21 18
Selling and marketing......................................... 9 10marketing .................... 7 7 9
General and administrative....................................administrative ............... 5 4 6
9 7
Litigation settlement and related costs.......................Other .................................... -- -- 4
--- --- -----
---- ---- ----
Total operating expenses.............................. 101 % 95 % 96 %
--- --- ---expenses ......... 93% 95% 101%
---- ---- ----
Operating income (loss)......................................... (1 ) .................... 7 5 4(1)
Interest income, net............................................net ....................... 1 1 3
2 2Net gain on sale of investments ............ -- -- --
Write-off of investment in other entity .... (1) -- --
Distributions on trust convertible preferred
Securities of subsidiary trust ........... (1) (1) --
Minority interest in (income) loss of
consolidated subsidiary............Consolidated subsidiaries ................ (1) -- 2 3 1
Equity in losses of joint ventures..............................investees .............. (1) -- --
--
--- --- ------- ---- ----
Income before income taxes......................................taxes ................. 4 10 75 4
Income tax expense..............................................expense ......................... 1 2 1 --- --- ---1
---- ---- ----
Net income...................................................... 3 % 8 % 6 %
=== === ===income ................................. 3% 4% 3%
==== ==== ====
Communications systems costs as a percentage
of communications systems revenues.............................................. 76 % 58 % 61 %revenues ....... 75% 79% 76%
Contract serviceservices costs as a percentage of
contract services revenues...................................................... 69 % 73 % 79 %revenues ............... 73% 74% 69%
- ---------------
(1)------------------
(*) The Company's fiscal periods end on the last Sunday of each period. 30As a
result, fiscal 1996 includes 53 weeks.
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3334
FISCAL 19961998 COMPARED TO FISCAL 19951997
Total revenues for fiscal 19961998 were $813.9$3,348 million, an increase of
$1,252 million over total revenues of $2,096 million for fiscal 1997. Revenue
growth for 1998 was primarily due to significant growth in revenues related to
communications systems.
Communications systems revenues for fiscal 1998, which consisted
primarily of revenues from CDMA subscriber, infrastructure and ASIC's products,
the sale of OmniTRACS products and services and sales of commercial gateways for
deployment in the Globalstar System, were $2,863 million, a 111%65% increase
compared to $386.6revenues of $1,733 million for fiscal 1995.1997. The increase for fiscal
1998 represents the higher volumes of CDMA subscriber, infrastructure and ASICs
products increased revenues from OmniTRACS system international sales and
expansion of the installed OmniTRACS base in the U.S., and sales of commercial
gateways for deployment in the Globalstar system.
Contract services revenues for fiscal 1998 increased to $270 million
from $212 million for fiscal 1997, an increase of 28%. The increase of $58
million resulted primarily from the development agreement with Globalstar.
License, royalty and development fees for fiscal 1998 were $214
million, compared to $152 million for fiscal 1997. The increase of $62 million
resulted primarily from increased royalty revenue and the accrual of royalties
during fiscal 1998. Beginning with the second quarter of fiscal 1998, the
Company began to accrue its estimate of certain royalty revenues earned that
previously could not be reasonably estimated prior to being reported by its
licensees. License, royalty and development fees may continue to fluctuate
quarterly due to the timing and amount of up-front fees on new licenses,
royalties from sales by the Company's licensees, and changes in foreign currency
exchange rates.
Costs of communications systems for fiscal 1998, which consisted
primarily of costs of sales of CDMA subscriber, infrastructure and ASICs
products, and OmniTRACS products and services, were $2,136 million or 75% of
communications systems revenues, compared to $1,362 million or 79% of
communications systems revenues for fiscal 1997. The dollar increase in costs
primarily reflects increased shipments of CDMA subscriber, infrastructure and
ASICs products and initial sales of commercial gateways. The decrease in
communications systems costs as a percentage of communications systems revenues
primarily reflects operational efficiencies and volume discounts obtained from
suppliers. Communications systems costs as a percentage of communications
systems revenues may fluctuate in future quarters depending on mix of products
sold, competitive pricing, new product introduction costs and other factors.
Contract services costs for fiscal 1998 were $197 million or 73% of
contract services revenues, compared to $156 million or 74% of contract services
revenues for fiscal 1997. The dollar increase in contract services costs was
primarily related to the Globalstar development contract.
For fiscal 1998 research and development expenses were $349 million
or 10% of revenues, compared to $236 million or 11% of revenues for fiscal 1997.
For fiscal 1998, selling and marketing expenses were $247 million or
7% of revenues, compared to $147 million or 7% of revenues for fiscal 1997. The
dollar increase in selling and marketing expenses for fiscal 1998 was primarily
due to increased national and international marketing activities and increased
advertising costs in connection with sales of CDMA subscriber products.
General and administrative expenses for fiscal 1998 were $163
million or 5% of revenues, compared to $89 million or 4% of revenues for fiscal
1997. The dollar increase for the fiscal year was attributable to continued
growth in personnel and associated overhead expenses necessary to support the
overall growth in the Company's operations, increased litigation expenses,
computer system implementations, and costs associated with the Leap Wireless
spin-off.
For fiscal 1998, interest income was $39 million compared to $35
million for fiscal 1997. The increase for fiscal 1998 reflects the interest
earned on the proceeds from the private placement of Trust Convertible Preferred
Securities, which occurred during March 1997.
For fiscal 1998, interest expense was $8 million compared to $11
million for fiscal 1997. This decrease is the result of decreased bank
borrowings during fiscal 1998 to support the working capital needs of QPE.
30
35
The net gain on sale of investments was $3 million compared to $13
million for fiscal 1997. During fiscal 1998, the Company recognized a net gain
of $3 million from the sale of, and from other investing activities related to,
investments in other entities. During fiscal 1997, the Company realized a $13
million gain on the sale of trading securities associated with the sale of
Globalstar Telecommunications, Ltd. common stock.
During the third quarter of fiscal 1998, the Company recorded a $20
million non-cash charge to write-off its investment in NextWave Telecom Inc.
Subsidiaries of NextWave Telecom, Inc. filed for bankruptcy protection under
Chapter 11 of the U.S. Bankruptcy Code in June 1998.
Distributions on Trust Convertible Preferred Securities of $39
million and $23 million for fiscal 1998 and fiscal 1997, respectively, relate to
the private placement of $660 million of 5 3/4% Trust Convertible Preferred
Securities by QUALCOMM in March 1997.
The minority interest represents other parties' or stockholders'
share of the income or losses of consolidated subsidiaries, including QPE, a
joint venture with a subsidiary of Sony Electronics Inc. Minority interest for
fiscal 1998 includes the impact of restructuring QPE. During March 1998, QPE
became solely a manufacturing venture. Previously, QPE had been a design and
sales venture in addition to a manufacturing venture.
Equity in losses of investees for all periods indicated relates to
the Company's ownership interests in domestic and international CDMA based
wireless telecommunications business and joint ventures. The majority of these
investments was transferred to Leap Wireless as part of the spin-off.
Income tax expense was $40 million for fiscal 1998 compared to $17
million for fiscal 1997, resulting primarily from higher pretax earnings for
fiscal 1998 compared to fiscal 1997 and the tax benefit from recognition, during
the third quarter of fiscal 1997, of deferred tax assets that satisfied the
"more likely than not" criteria for recognition established by Statement of
Financial Accounting Standards No. 109. Excluding an increase in certain
estimated tax credits, the annual effective tax rate for fiscal 1998 was 30%,
compared to 15% for fiscal 1997 which includes the tax benefit from recognizing
the deferred tax assets. The annual effective tax rate for fiscal 1998 was
increased by the expiration of the federal research credit as of June 30, 1998.
Subsequent to fiscal year end, the credit was reinstated retroactive to July 1,
1998. However, the retroactive effect of the credit cannot be recognized until
the first quarter of fiscal year 1999. Had the credit reinstatement occurred
prior to year end, the annual effective tax rate for fiscal year 1998 would have
been 24%.
FISCAL 1997 COMPARED TO FISCAL 1996
Total revenues for fiscal 1997 were $2,096 million, more than double
the revenues of $814 million for fiscal 1996. Revenue growth was primarily due
to the significant growth in communications systems which was driven byprimarily
attributable to increased revenues related tofrom CDMA subscriber, ASIC,ASICs and
infrastructure products. Also contributing were increased contract services
revenues from the Company's development agreement with Globalstar, and an
increase in royalties recognized in conjunction with the worldwide sales of
subscriber and infrastructure products as well as increased
messaging revenues and sales of OmniTRACS units internationally. Also
contributing were higher license, royalty and development fees related to
additionalutilizing the Company's CDMA licensing and royalties.technology
by licensees.
Communications systems revenues, which consisted primarily of revenues from
the sale of OmniTRACS products and services, sales
of CDMA subscriber and infrastructure equipment,products, ASICs to CDMA licensees and
ASICs chip salesservice providers and product and service revenues from the sale of the
Company's OmniTRACS system were $583.0$1,733 million in fiscal 1997, almost tripling
fiscal 1996 a 136% increase compared to revenues of $247.0 million for fiscal 1995.$583 million. The growth in communications systems
revenues for fiscal 19961997 was primarily attributable to the following: increased
sales in subscriber equipment, producing approximately
400,000 phones inproducts, which more than quadrupled fiscal 1996 andsales;
increased ASIC sales, with sales of over twowhich shipped approximately 8 million MSM chips to CDMA
licensees. Infrastructurehandset manufacturers worldwide, including QPE; and increased infrastructure
sales were also higherdue to revenue recognized during fiscal 1997 with respect to base stations
installed under a major contract with Nortel to deliver infrastructure products
to Sprint PCS. OmniTRACS domestic revenues continue to increase primarily driven
by component shipments to Nortel. OmniTRACSincreased messaging revenues continue
to increase due to the expansion of the installed OmniTRACS
base in the U.S. OmniTRACSThis was partially offset by a decline in international shipments increased 38% in fiscal 1996 due primarily to
expansion of unit
shipments.sales.
Contract services revenues for fiscal 19961997 were $131.0$212 million, a 38%62%
increase compared to $95.2$131 million for fiscal 1995.1996. The increase resulted
primarily from the development agreement with Globalstar which has continued to
ramp up since its inception in fiscal 1994.Globalstar.
License, royalty and development fees for fiscal 19961997 were $99.9$152
million, a 125%52% increase compared to $44.5revenues of $100 million for fiscal 1995.1996.
The increase was primarily as a resultdriven by increased royalties recognized in conjunction
31
36
with the worldwide sales of a number of newsubscriber units and infrastructure products
utilizing the Company's CDMA license agreements signed in
fiscal 1996. To date,technology by the Company has entered into numerous royalty-bearing
license agreements including agreements with twenty-one subscriber, nine
infrastructure, two ASICs and fourteen test equipmentCompany's licensees. Increased CDMA
royalties, generated through equipment sales by licensees, also contributed to
the revenue growth.
Costs of communications systems which consisted primarilywere $1,362 million or 79% of
costs of
manufacturing OmniTRACS units, operating the NMF and leasing Ku-band satellite
transponders and manufacturing CDMA subscriber and infrastructure equipment, and
ASICs components, were $445.5communications systems revenues for fiscal 1997, compared to $445 million or 76%
of communications systems revenues for fiscal 1996, compared to $143.8 million or 58% of1996. The increase in
communications systems revenues for fiscal 1995. The dollar increase in costs, primarily reflects
increased shipments of CDMA subscriber and infrastructure equipment and
increased ASICs volume. The increase in communications systems costs as a percentage
of communications systems revenues, was due to previously anticipated
start-up costs associated withprimarily reflected the manufacturing of CDMA subscriber,
infrastructure, and ASIC products and increasingsignificant increase
in sales volumes of CDMA subscriber
equipment and components. Such subscriber equipment generatesproducts, which averaged a lower marginsgross margin than
the Company's OmniTRACS business which was the major element of communication
systems revenues in fiscal 1995.revenues.
Contract services costs for fiscal 19961997 were $90.4$156 million or 74% of
contract services revenues, compared to $90 million or 69% of contract services
revenues compared to $69.4 million or 73% of contract
services revenues for fiscal 1995.1996. The increase in costs was primarily related to the
significant growth in the Globalstar development effort. The percentage decreaseincrease
in contract services costs as a percentage of contract services revenues was
related to the overall growth and relative mix of labor and subcontract costs
oncombined with lower fees associated with the Globalstar development contract.
Research and development costs were $162.3$236 million or 11% of revenues
for fiscal 1997, compared to $162 million or 20% of revenues for fiscal 1996, compared1996.
The Company continued to $80.2 million or 21% of revenues for fiscal 1995. This
dollar increase was attributable primarily to increased efforts towardinvest in the commercial development of commercialits CDMA
related infrastructure, ASICs and subscriber equipment, and ASIC
components. The Company anticipates continued growth of research and development
expenditures into fiscal 1997.products.
Selling and marketing expenses were $74.1$147 million or 7% of revenues
for fiscal 1997, compared to $74 million or 9% of revenues for fiscal 1996, compared to $37.8 million or 10% of revenues for fiscal 1995.1996. The
dollar increase in selling and marketing was due primarily to increased
marketing efforts both domestically and internationally as the growth in
personnelCompany expanded
its sales and other marketing expenses, primarily related toforce. Also during fiscal 1997, the introductionCompany launched a
multi-million dollar national advertising campaign promoting its broad line of
CDMA products in the domestic and international marketplace, and to support
sales growth in the OmniTRACS. The
31
34
Company opened three new international offices in fiscal 1996 and now has
offices in twelve countries to provide a base for operations, sales, marketing
and support of QUALCOMM products worldwide.subscriber products.
General and administrative expenses for fiscal 19961997 were $49.0$89 million
or 4% of revenues, compared to $49 million or 6% of revenues compared to $34.9 million or 9% of revenues for fiscal 1995. The1996.
Primarily, additional personnel drove the dollar increase was driven primarily by additional personnel and associated
overhead costs necessary to support the overall growth in the Company's
operations. Generaloperations and administrative costs as a percentage of revenues
declined due to the significantly increased revenue base in fiscal 1996. Also,
during the second quarter of fiscal 1996, the Company and Hughes agreed to
dismiss their respective litigation against each other without penalty by either
party. In fiscal 1995, the Company had accrued $2.9 million for the anticipated
liability for legal fees. As a result of the settlement of this litigation, the
Company reversed this accrual in the second quarter of fiscal 1996, resulting in
a $2.9 million reduction to general and administrative expense.fees associated with patent infringement
litigation.
Interest income was $24.2$35 million for fiscal 1996,1997, compared to $9.5$24
million for fiscal 1995.1996. The increase in fiscal 1996 was primarily due to interest generated
from the public offering proceeds received in August 1995.from the $660 million private placement of Trust
Convertible Preferred Securities during the second quarter of fiscal 1997.
Interest expense was $3.4$11 million for fiscal 1996,1997, compared to $2.2$3
million for fiscal 1995.1996. The increase was primarily dueis the result of increased bank borrowings
to support the working capital needs of QPE.
The gain on sale of trading securities of $13 million for fiscal
1997 relates to the increased outstanding
debt and capital leases relatedsale of Globalstar Telecommunications Ltd. common stock
obtained in exchange for the Company's guarantee of a Globalstar bank financing
agreement.
Distributions on Trust Convertible Preferred Securities of $23
million for fiscal 1997 relate to the QPE joint venture.$660 million of 5 3/4% Trust Convertible
Preferred Securities issued by the Company in March 1997. The securities are
convertible into common stock of the Company at a conversion price of $72.6563
per share of common stock.
The minority interest primarily consists of SONY'sSony's 49% share of the
losses
ofincome generated from QPE, a joint venture consolidated in the Company's
financial statements. QPE manufactures CDMA handsets developed jointly and
individually by both QUALCOMM and Sony.
Income tax expense was $5.6$17 million for fiscal 1996,1997, compared to $9.7$6
million for fiscal 1995. The decrease was primarily due to lower pretax earnings
in fiscal 1996 and the incorporation of the additional tax losses from the
guarantee of Globalstar vendor financing obligations. The effective tax rate in
fiscal 1996 was 21% compared to 24% in fiscal 1995.
The Company has not elected early adoption of Statement of Financial
Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based
Compensation." FAS 123 becomes effective beginning in 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 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.
FISCAL 1995 COMPARED TO FISCAL 1994
Total revenues for fiscal 1995 were $386.6 million, a 42% increase compared
to $271.6 million for fiscal 1994. Revenue growth was primarily due to the
growth in contract services revenues from the Company's development agreement
with Globalstar, increased sales of OmniTRACS products and services, higher
license, royalty and development fees related to additional CDMA licensing and
CDMA component sales.
Communications systems revenues, which consisted primarily of revenues from
the sale of OmniTRACS products and services, sales of CDMA subscriber equipment,
sales of VLSI chips to the telecommunications market, CDMA infrastructure and
ASICs sales were $247.0 million for fiscal 1995, a 27% increase compared to
revenues of $194.0 million for fiscal 1994. The growth in communications systems
revenues for fiscal 1995 was primarily attributable to higher messaging revenues
due to the expansion of the installed OmniTRACS base, growth in OmniTRACS
international shipments, and sales of chips to CDMA licensees (prior to the
fourth quarter of fiscal 1995, CDMA ASICs and infrastructure had been included
in contract services revenues). OmniTRACS international sales increased 43% in
fiscal 1995 due primarily to expansion of unit shipments in the Europe and
Brazil markets. Unit sales of domestic and international OmniTRACS for fiscal
1995, exclusive of Motorola CoveragePLUS conversions, were 38,366, a 26%
increase compared with 30,422 in the same period in fiscal 1994. Conversions of
former CoveragePLUS customers to OmniTRACS were 665 units, essentially
completing the Company's conversion of over 10,900 CoveragePLUS units to the
OmniTRACS system.
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35
Contract services revenues for fiscal 1995 were $95.2 million, a 97%
increase compared to $48.3 million for fiscal 1994. The increase resulted
primarily from the development agreement with Globalstar which began generating
revenues in the second quarter of fiscal 1994.
License, royalty and development fees for fiscal 1995 were $44.5 million, a
52% increase, compared to $29.3 million for fiscal 1994, primarily as a result
of a number of new CDMA license agreements signed in fiscal 1995.
Costs of communications systems, which consisted primarily of costs of
manufacturing OmniTRACS units, operating the NMF, and leasing Ku-band satellite
transponders, manufacturing subscriber equipment, and beginning in fourth
quarter of fiscal 1995, manufacturing CDMA infrastructure equipment and ASICs
components, were $143.8 million or 58% of communications systems revenues for
fiscal 1995, compared to $118.6 million or 61% of communications systems
revenues for fiscal 1994. The dollar increase in costs primarily reflects
increased manufacturing start up costs of CDMA subscriber equipment, and
incorporation of CDMA infrastructure and ASICs production into communications
systems in the fourth quarter of fiscal 1995. The decrease in communications
systems costs as a percentage of communications systems revenues was primarily
due to manufacturing efficiencies and material cost reductions of the OmniTRACS
units, the decrease in sales of lower margin units to former CoveragePLUS
customers, and the impact of higher messaging service revenues.
Contract services costs for fiscal 1995 were $69.4 million or 73% of
contract services revenues, compared to $38.1 million or 79% of contract
services revenues for fiscal 1994. The $31.3 million increase in costs was
primarily related to the significant growth on the Globalstar development
effort. The percentage decrease in contract services as a percentage of contract
services revenues was primarily related to the significant growth of the
Globalstar development contract.
Research and development costs for fiscal 1995 were $80.2 million or 21% of
revenues, compared to $49.6 million or 18% of revenues for fiscal 1994. This
increase was attributed primarily to increased efforts towards the development
of commercial CDMA subscriber and infrastructure equipment, continued OmniTRACS
product development, and the QuSAT hub and terminal development.
Selling and marketing expenses for fiscal 1995 were $37.8 million or 10% of
revenues, compared to $23.7 million or 9% of revenues for fiscal 1994. The
increase in selling and marketing expense was due to increased CDMA activity
both domestically and internationally and to support sales growth in the
OmniTRACS product line domestically and overseas.
General and administrative expenses for fiscal 1995 were $34.9 million or
9% of revenues, compared to $18.7 million or 7% of revenues for fiscal 1994. The
increase was driven primarily by additional personnel and associated overhead
costs necessary to support the overall growth in the Company's operations. Also
contributing to the growth were higher accrued legal expenses and increased
patent filing expense.
Litigation settlement and related costs in fiscal 1994 of $13.0 million are
related to the InterDigital Technology Corporation settlement and other
associated legal costs.
Interest income for fiscal 1995 was $9.5 million, compared to $6.5 million
for fiscal 1994. The increase in fiscal 1995 was primarily due to the public
offering proceeds received in August 1995.
Interest expense for fiscal 1995 was $2.2 million, compared to $2.0 million
for fiscal 1994. The increase was due to the increased note payable to SONY for
loans made to fund their portion of the joint venture, partially offset by a
decrease in interest expense on capital lease obligations and notes payable
outstanding as these obligation balances decreased from the prior year.
The minority interest reflects SONY's 49% share of the losses of QPE, a
joint venture consolidated in the Company's financial statements.
Income tax expense for fiscal 1995 was $9.7 million, compared to $2.1
million for fiscal 1994.1996. The increase was primarily due to full utilization of
tax loss carryforwards in fiscal 1994 and the increase in
33
36higher pretax
earnings in fiscal 1995. Also, income taxes for1997 substantially offset by the tax benefit from
recognition, during fiscal 1995 and 1994 were
positively impacted by $3.0 million and $4.0 million respectively due to the
recognition1997, of those deferred tax assets that satisfysatisfied the "more
likely than not" criteria for realizationrecognition established by FAS 109. In future periods, the Company
may recognize its remaining deferredThe effective
tax assets if they meet the "more likely
than not" criteria of realization established by Statement of Financial
Accounting Standard No. 109 (FAS 109).rate in fiscal 1997 was 15% compared to 21% in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
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37
The Company anticipates that theits cash and cash equivalents and
investmentinvestments balances of $354.3$303 million at September 29, 1996,30, 1998, including interest
earned thereon, will be used to fund working and fixed capital requirements,
including facilities related to the expansion of its operations, equipment vendor financing the acquisitionfor
customers of capital equipment,its CDMA infrastructure products and investment in joint ventures
or other companies and continued expansionother assets to support the growth of facilities.its business.
On March 11, 1998, the Company and a group of banks entered into a
credit facility (the "Credit Facility") under which the banks are committed to
make up to $400 million in revolving loans to the Company and to extend letters
of credit on behalf of the Company. The credit facility expires in March 2001
and may be extended on an annual basis thereafter, subject to approval of a
requisite percentage of the lenders. Letters of credit outstanding reduces the
amount available for borrowing. The Company is currently obligated to pay
commitment fees equal to 0.3% per annum on the unused amount of the credit
facility. The credit facility includes certain restrictive financial and
operating covenants. At September 30, 1998, $80 million in borrowings and $7.7
million of letters of credit were outstanding under the credit facility.
The design, development, manufacture and marketing of digital
wireless communications products and services are highly capital intensive.
The Company's business plan contemplates raising additional funds from a
combination of sources including potential debt and equity issuances. The
Company may also seek to expand the existing credit facility. There can be no
assurance that additional financing will be available on reasonable terms or at
all. In addition the Company may also invest in companies whose products
or services complement or supportCompany's Credit Facility, as well as notes and Indentures,
place restrictions on 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.ability to incur additional indebtedness
which could adversely affect its ability to raise additional capital through
debt financing.
In fiscal 1996, $69.81998, $25 million in cash was used by operations,operating
activities, compared to $37.7$29 million providedused by operationsoperating activities in fiscal 1995. The increase in cash1997.
Cash used by operations was primarily due to significant increasesoperating activities in fiscal 1998 includes $394 million of net
working capital requirements includingoffset by $369 million of net cash flow provided by
operations. The improved cash flow from operations primarily reflects the
increase in net income resulting from increased revenues and gross margins. Net
working capital requirements of $394 million primarily reflect increases in
accounts receivable, finance receivables and inventories, which were primarily
offset by an increase in accounts payable and accrued liabilities. The increase
in accounts and finance receivables in fiscal 1998 reflects the continued growth
in products and component sales. The increases in inventories and accounts
receivable. Receivablespayable and inventories wereaccrued liabilities are primarily attributable to the growth of the
business. Additionally, higher reflecting the significant CDMA equipment salesinventory balances reflect an increase in the second half of fiscal 1996. CDMA subscriber, infrastructureQ
phones and ASIC
requirements have expanded to support the continued volume growth anticipatedQCP phones in 1997. Also contributing to the higher levels of inventory were approximately $17
million of infrastructure products shipped to customer sites prior to commercial
launch of networks.
Cellular, PCS and WLL network operators increasingly have required their
suppliers to arrange or provide long-term financing for them as a condition to
obtaining or bidding on infrastructure projects. These projects may require the
Company to arrange or provide financing of amounts ranging from modest sums to
over a billion dollars on any particular project. Such amount financed may
include "soft costs" (such as software, cell site leases and permits), and thus
the amount financed may exceed 100% of infrastructure equipment costs. Pursuant
to an Equipment Requirements Agreement with QUALCOMM, subject to the
satisfaction of certain conditions, NextWave is obligated to purchase
approximately 50% of its infrastructure equipment requirements from QUALCOMM.
The agreement also provides that QUALCOMM will offer 100% financing for
equipment purchased under such agreement, on commercial terms. The terms of the
equipment purchases, including financing terms, will be established in a further
agreement to be negotiated in good faith between the parties. There can be no
assurance that such an agreement will be concluded. The Company's ability to
arrange or provide and be competitive with such financing will depend on a
number of factors, including the Company's capital structure, level of available
credit and ability to provide financing in conjunction with third-party lenders.
There can be no assurance that the Company will be able to arrange or provide
such financing on terms and conditions, and in amounts, that will be
satisfactory to such network operators. The Company may be required to hold any
loans, or remain obligated under guarantees, until maturity, which could have a
material adverse effect on the Company's credit rating. A number of the
Company's competitors have substantially greater resources than the Company,
which may enable them to offer more favorable financing terms and successfully
compete against the Company for infrastructure projects. The inability to
arrange or provide such financing or to successfully compete for infrastructure
projects could have a material adverse effect on the Company and its business
and prospects.
In order to arrange or provide for financing for cellular, PCS and WLL
projects, the Company will be required to expose itself to significant project,
market, political and credit risks. The Company may be required to provide such
financing directly, and/or guaranty such financing through third party lenders.
The amount of such financing could become significant and, if not repaid by the
carrier, could have a material adverse effect on the Company's operating results
and liquidity. Many WLL and PCS network operators, including a number of C-Block
licensees, have limited or no operating histories, are faced with significant
capital requirements and are high credit risks. Pursuant to FCC regulations
applicable to C-Block licensees, the Company will not be permitted to retain a
security interest in any C-Block licenses, which initially will
34
37
constitute the primary asset of many C-Block licensees. C-Block licensees, in
particular, are faced with strict regulatory requirements under applicable FCC
regulations. Compliance with those regulations is outside of the control of the
Company. The failure of a C-Block licensee to comply with any of those
regulations could result in the revocation of that licensee's FCC licenses. The
Company has limited experience evaluating the credit worthiness or commercial
viability of potential purchasers of CDMA equipment, and there can be no
assurances that such customers will not default on any financing arranged or
provided by the Company for the purchase of its CDMA equipment. In addition, the
Company may be required to provide vendor financing for a portion of the
Globalstar system prior to its full scale implementation.
The Company, either directly or through QPE, has entered into agreements
with Sprint Spectrum, PrimeCo and Nortel pursuant to which the Company (or QPE)
has agreed to provide approximately $500 million, $350 million and $200 million,
respectively, in CDMA equipment and services. In September 1996, the Company and
Hughes entered into an agreement whereby Hughes has agreed to purchase a minimum
percentage of CDMA infrastructure equipment from QUALCOMM for resale to Hughes
customers.finished goods inventory.
Investments in capital expenditures, intangible assets and other
entities totaled $226.9$442 million in fiscal 1996,1998, compared to $116.4$221 million in fiscal
1995.1997. Significant components in fiscal 19961998 consisted of the purchase of $216.6$322
million of capital assets, the purchase of $13 million of intangible assets of $3.8 million and
the investment of $6.5$107 million in entities in which the Company holds less than
a 50% interest. In 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
driven by overall Company growth. Also, in fiscal 1996 the Company commenced
construction of a 177,000 square foot manufacturing facility in San Diego which
will be dedicated to the production of infrastructure equipment.
In fiscal 1996 the Company provided $30 million in financing to NextWave in
connection with its 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 loan. In connection with this
investment, subject to the satisfaction of certain conditions, NextWave has
committed to purchase approximately 50% of its PCS infrastructure equipment
requirements from the Company. In March 1996, the Company increased its equity
investment to $20 million by converting $15 million of the convertible loan
balance to equity. Of the remaining $10 million loan, $9.6 million was repaid in
the fiscal third quarter and $0.4 million was converted into a three-year note
with an equity conversion option. The Company currently holds less than 5% of
NextWave's outstanding shares and is accounting for its investment under the
cost method. The Company expects its ownership percentage to decreasecontinue making significant investments
in the
future as NextWave raises additional equity. See Note 8 of Consolidated
Financial Statements.
In July 1996, QPE completed negotiations on two bank creditcapital assets, including new facilities totaling, in the aggregate, $200 million. With this credit facility, QPE repaid
all of its loan balances outstanding to QUALCOMM and SONY and atbuilding improvements throughout
fiscal year end
maintained a loan balance of approximately $80 million. The secured revolving
credit facilities are non-recourse to the Company and the minority interest
holder in QPE.1999.
In fiscal 1996,1998, the Company's financing activities provided net cash of
$87.4 million compared to $520.2 million in fiscal 1995. Fiscal 1996 included
proceeds from the QPE$86
million. Net borrowing under bank lines of credit the sale and lease back of
manufacturing equipment to QPE, and additional contributions receivedproceeds from SONY
related to the QPE joint venture, which were partially offset by the retirement
of the $20 million note on the San Diego Design Center. Net cash provided in
fiscal 1995 was primarily related to proceeds received from a public offering of
the Company's Common Stock, 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
plans provided $41 million and $50 million, respectively. In fiscal 1997, the
Company's financing activities provided net cash of $704 million. Fiscal 1997
included $660 million in proceeds from the issuance of the Trust Convertible
Preferred Securities, offset by $19 million of deferred costs, and $33 million
from the issuance of common stock upon the exercise of stock options under the
Company's stock option plans and employee stock purchases under the Company's
plan. Additionally, during fiscal 1997, QPE drew down $29 million under its
credit facility used in operations and to fund working capital requirements
necessary to support the significant expansion in production of subscriber
products.
During March 1998, the Company agreed to defer up to $100 million of
contract payments, with interest accruing at 5 3/4% capitalized quarterly, as
customer financing under its development contract with Globalstar. Financed
amounts outstanding as of January 1, 2000 will be repaid in eight equal
quarterly installments commencing as of that date, with final payment due
October 1, 2001 accompanied by all then unpaid accrued interest. At September
30, 1998, contract payments of approximately $89.7 million were outstanding from
Globalstar as interest bearing financed amounts. Subject to terms and
conditions, Globalstar is entitled to defer $4.2 million from each future
monthly development contract payment until the $100 million limit is reached.
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38
Unfunded commitments to extend long-term financing under sales
arrangements other than Globalstar at September 30, 1998 aggregated
approximately $489 million through fiscal 2002. Such commitments are subject to
the customers meeting certain conditions established in the financing
arrangements. Commitments represent the estimated amounts to be financed under
these arrangements. Actual financing may be in lesser or greater
amounts.
The actualCompany has issued a letter of credit to support a guarantee of
up to $22.5 million of Globalstar borrowings under an existing bank financing
agreement. The guarantee will expire in December 2000. The letter of credit is
collateralized by a commensurate amount of the Company's investments in debt
securities. At September 30, 1998, Globalstar had no borrowings outstanding
under the existing bank financing agreement.
Under an agreement entered into during fiscal 1997 with Chilesat
PCS, the Company agreed to provide a $58 million letter of credit on behalf of
Chilesat PCS in which the Company may be required to reimburse Chilesat PCS for
a portion of Chilean government fines if certain network build-out milestones
are not met. Chilesat PCS has received notification from the Chilean
Undersecretariat of Telecommunications ("SUBTEL") that phase one of the network
has passed certain acceptance tests performed by SUBTEL, and timinghas been cleared to
commence commercial operations. Chilesat PCS is required to successfully
complete certain remaining tests on phase two of the network no later than
December 1998. The amount that Chilesat PCS may draw on the letter of credit has
been reduced to $52 million and will decline further as additional milestones
are met. The letter of credit will expire no later than December 31, 1999, and
is collateralized by a commensurate amount of the Company's investments in debt
securities.
As part of the Company's strategy of supporting the
commercialization and sale of its CDMA technology and products, the Company may
from time to time enter into strategic alliances with domestic and international
emerging wireless telecommunications operating companies. These alliances often
involve the investment by QUALCOMM of substantial equity in the operating
company, as well as a commitment by the operating company to purchase CDMA
products from QUALCOMM. At September, 1998, the company has investments in
Shinsegi Telecomm Inc. (Korea) and Telesystems of Ukraine.
QUALCOMM has also made a substantial funding commitment to Leap
Wireless in the form of a $265.0 million secured credit facility. The credit
facility consists of two sub-facilities. The first sub-facility enables Leap
Wireless to borrow up to $35.2 million from QUALCOMM, subject to the terms
thereof, solely to meet the normal working capital and operating expenses of
Leap Wireless, including salaries, overhead and credit facility fees, but
excluding, among other things, strategic capital equipment
expendituresinvestments in wireless
operators, substantial acquisitions of capital products, and/or the acquisition
of telecommunications licenses. The other sub-facility enables Leap Wireless to
borrow up to $229.8 million from QUALCOMM, subject to the terms thereof, solely
to use as investment capital to make certain identified portfolio investments.
Amounts borrowed under the credit facility will be due and payable approximately
September 23, 2006. QUALCOMM will have a first priority security interest in,
subject to minor exceptions, substantially all of the assets of Leap Wireless
for so long as any amounts are outstanding under the credit facility. Amounts
borrowed under the credit facility will bear interest at a variable rate equal
to LIBOR plus 5.25% per annum. Interest will be payable quarterly beginning
September 30, 2001; and prior to such time, accrued interest shall be added to
the principal amount outstanding.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 ("Y2K") issue relates to the way computer systems and
programs define calendar dates. A system could fail or make miscalculations due
to the interpretation of a date including "00" to mean 1900 and not 2000. Also,
other systems and products that are not typically recognized as computer or
information technology related may contain embedded hardware or software that
would be affected by this issue.
The Company has developed a plan tied to specific completion dates.
As of September 30, 1998, the Company's Y2K Project ("Project"), designed to
minimize the impact of such computer problems on the results of operations, is
proceeding on schedule. However, the Company may incuris unable to completely determine
at this time whether the consequences of Y2K failures will have a material
impact on our results of operations, liquidity or financial condition. The
failure to correct a material Y2K problem could result in future periods may vary
significantly.an interruption in, or
a failure of, certain normal business activities or operations. Such failures
could materially and adversely affect our results of operations, liquidity and
financial condition. This will depend upon numerous factors, includingis due to the extent and
timinggeneral uncertainty inherent in the Y2K
problems, resulting in part from the uncertainty of the commercial deploymentY2K readiness of
third-party suppliers, customers and utility services.
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39
During fiscal 1997, the Company initiated a strategy to begin work
on the correction of Y2K problems. As part of this strategy, a Y2K Program
Office was formed consisting of a Program director, key individuals in the
business units, analysts and administrative support. The Program Office is
directly focusing attention and required resources on the Company's Y2K issues.
The Company has also engaged an outside consulting firm to assist with project
management, conversion and testing of Y2K issues. All Y2K efforts are being
coordinated through the Program Office to ensure consistency of approach and the
ultimate readiness of QUALCOMM. This strategy is expected to reduce our level of
uncertainty about the Y2K problem and in particular, about the Y2K compliance
and readiness of the Company's CDMA technologymaterial customers and suppliers. We believe that
with the completion of the Project as scheduled, the possibility of significant
interruptions of normal operations will be reduced.
The Y2K Company's Program Office is addressing the issues under four
major sections: Internal Readiness, Supply Chain Assessment, Product Compliance
and Customer Compliance. Each section is evaluated through four phases:
Discovery, Assessment, Remediation and Post-Remediation. Discovery is the
process of inventorying potential Y2K issues throughout the Company's business
process. Assessment is the process of categorizing issues that were identified
in the U.S.Discovery phase into "ready," "not ready" or "needs more study."
Remediation is the process of fixing and testing those items that must be ready
for the Y2K. Post-Remediation is the process of addressing Y2K issues that were
not previously or not adequately corrected.
Internal Readiness includes the computing and communications
infrastructure, the tools and systems used to develop products and run the
business, and internal service organizations. The Company has identified a
majority of the systems that require remediation or replacement and these
remediation efforts have begun. Those systems considered most critical to
continuing operations are given the highest priority, and all testing is
scheduled to be complete by June 1999. Non-compliant systems are scheduled to be
retired, replaced, or repaired by September 1999.
Supply Chain Assessment involves evaluating the Y2K readiness of
QUALCOMM's suppliers and their ability to continue delivering materials and
services after 1999. The Company has initiated formal communications with
significant suppliers to determine the Company's vulnerability to suppliers' Y2K
issues. The Company is requesting that third party vendors represent their
products and services to be Y2K compliant and that they have a program to test
for that compliance. On-site visits of key suppliers will be conducted for Y2K
compliance. The Company expects to identify all critical suppliers
state-of-readiness for Y2K compliance by December 1998. At this date, if the
Company determines a critical supplier will not be Y2K compliant by June 1999,
the Company will continue to work with the supplier to assist them in achieving
compliance, while in parallel initiating a search for an alternate Y2K compliant
supplier to avoid supply chain interruptions.
Product Compliance includes the review of QUALCOMM's products for
Y2K compliance. The Company's program office has been working with individual
business unit managers to review all QUALCOMM products for Y2K compliance. The
Company believes that the majority of its products are compliant with further
formal verification being initiated where required. All testing for Y2K product
compliance is scheduled for completion by June 1999. The Company estimates all
products will be Y2K compliant by September 1999. The Company is scheduled to
issue a definitive statement of Y2K readiness for its products before July 1999.
Customer Compliance reviews QUALCOMM's major customers for Y2K
compliance. The Company's program office is in the preliminary stages of
organizing this review. The Company does not currently have any information
concerning the Y2K compliance status of the Company's major customers. The
Company will be requesting information from customers to understand their state
of readiness for Y2K compliance. We have scheduled this process to be complete
by June 1999.
While the Company expects these efforts will provide reasonable
assurance that material disruptions will not occur due to internal failure, the
potential for interruption still exists. The need for a contingency plan is
recognized and plans will be developed to deal with such issues as "at risk"
suppliers and interruption of utility and other services. The response of
certain third parties is beyond the control of the Company. If the Company does
not receive adequate Y2K compliant responses from its suppliers or customers
prior to April 1999, contingency plans will be developed and scheduled for no
later than April 1999. Contingency plans may include increasing inventory
levels, securing alternate sources of supply, adjusting alternate shutdown and
start-up schedules, and other appropriate measures. At this time, the Company
cannot estimate the additional cost, if any, that might develop from the
implementation of such contingency plans.
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worldwide, investments40
The Company believes its critical systems will be Y2K compliant by
June 1999. However, there is no guarantee that these results will be achieved.
Specific factors giving to this uncertainty include failure to identify all
susceptible systems, non-compliance by third parties whose systems and
operations impact the Company and other similar uncertainties. A worst case
scenario might include one or more of the Company's internal systems, suppliers
or customers being non-compliant. An event such as this could result in joint ventures or other formsa
material disruption to the Company's operations. Specifically, the Company could
experience software application, computer network, manufacturing products and
telephone system failures. Supply chain and product non-compliance could result
in the failure of strategic alliances,
the requirementCompany to provide CDMA vendor financingperform on contracts, delayed delivery of
products to customers and the growthinadequate customer service. Customer non-compliance
could result in personneldelayed payments for products and related facility expansionservices and the increase in manufacturing capacity. In
addition, expenses related to any patent infringement, or other litigation, may
require additional cash resources and maybuild up of
inventories. Should a worst case scenario occur, it could, depending on its
duration, have ana material adverse impacteffect on the Company's business, results of
operations, liquidity and financial position.
To become Y2K compliant, the Company's total cost associated with
required modifications is not expected to be material to our financial position.
To date the Company has spent an estimated $5 million on this Project. Total
budgeted cost at this time is estimated at $28 million of which $20 million
represents the cost of staff and consultants to perform the Project and $8
million is the cost of software tools for discovery and testing as well as
expenditures to replace older products that cannot be made Y2K compliant. The
sources of funding for this Project are from fiscal operating and working
capital budgets. None of the Company's other mission critical information
projects have been delayed due to the implementation of the Y2K Project.
FUTURE ACCOUNTING REQUIREMENTS
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 130 ("FAS 130"),
"Reporting Comprehensive Income," which the Company will be required to adopt
during the first quarter of fiscal year 1999. This statement will require the
Company to report in the financial statements, in addition to net income,
comprehensive income and its components including, as applicable, foreign
currency items, minimum pension liability adjustments and unrealized gains and
losses on certain investments in debt and equity securities. Upon adoption, the
Company will also be required to reclassify financial statements for earlier
periods provided for comparative purposes. The Company currently expects that
the effect of adoption of FAS 130 may be primarily from foreign currency
translation adjustments and has not yet determined the manner in which
comprehensive income will be displayed.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and
Related Information," which the Company will be required to adopt for fiscal
year 1999. This statement establishes standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Under FAS 131,
operating segments are to be determined consistent with the way that management
organizes and evaluates financial information internally for making operating
decisions and assessing performance. The Company has not determined the impact
of the adoption of this new accounting standard on its consolidated financial
statement disclosures.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("FAS 133"), "Accounting for Derivative Instruments and
Hedging Activities," which the Company will be required to adopt for fiscal year
2000. This statement establishes a new model for accounting for derivatives and
hedging activities. Under FAS 133, all derivatives must be recognized as assets
and liabilities and measured at fair value. The Company has not determined the
impact of the adoption of this new accounting standard on its consolidated
financial position or results of operations.
ITEM 7. (A) QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK FACTORS
INTEREST RATE MARKET RISK. The Company expectshas fixed income investments
consisting of cash equivalents, short-term investments in marketable debt
securities, and finance receivables. See Notes 4 and 3 to the Consolidated
Financial Statements for information about investments in marketable debt
securities and finance receivables, respectively. The Company's bank lines of
credit are at variable interest rates. See Note 6 to the Consolidated Financial
Statements for information about the bank lines of credit.
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41
Interest income earned on the Company's short-term investment
portfolio is affected by changes in the general level of U.S. interest rates,
while interest income earned on long-term investments are not affected in the
near term. The Company believes that it will require additional capitalis not exposed to significant changes in
fair value because such investments are classified as held to maturity. The fair
value of each investment approximates its amortized cost, and long-term
securities have maturities of less than two years.
Interest earned on certain finance receivables is at variable
interest rates and is affected by changes in the general level of U.S. interest
rates. The Company's practice is to fund these receivables with variable
interest rate debt to minimize the effects of interest rate changes.
Interest expense is affected by the general level of U.S. interest
rates and/or LIBOR. Increases in interest expense resulting from an increase in
interest rates would be offset by a corresponding increase in interest earned on
the Company's short-term investments in debt securities.
Distributions on Trust Convertible Preferred Securities are not
affected by changes in interest rates because they accrue distributions at a
fixed 5 3/4%. The Company believes that it is not exposed to significant changes
in fair value because of the fixed redemption price of the preferred securities.
The fixed and convertibility features are described in Note 7 to the
Consolidated Financial Statements.
The following table provides information about the Company's
financial instruments that are sensitive to changes in interest rates. For the
Company's investment portfolio and bank lines of credit, the table presents
principal cash flows and related weighted-average interest rates by expected
maturity dates. Additionally, the Company has assumed that its growthshort-term
investments are similar enough to aggregate those securities for presentation
purposes.
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate
(Dollars in millions)
THERE- FAIR VALUE
1999 2000 2001 2002 2003 AFTER TOTAL 9/30/98
Held to maturity investments ........... $127 $127 $127
Interest rate .......................... 6.3%
Finance receivables:
Fixed rate ........................... $ 8 $ 46 $ 52 $ 4 $ 4 $ 8 $122 $109
Interest rate ........................ 8.59% 6.35% 5.92% 8.50% 8.50% 8.50%
Variable rate ($) .................... $ 48 $ 33 $ 36 $ 52 $ 27 $ 31 $227 $227
Margin over LIBOR .................... 3.00% 3.00% 3.12% 3.79% 3.07% 3.00%
Bank lines of credit ................... $151 $151 $151
Margin over LIBOR ...................... 3.25%
EQUITY PRICE RISK. The Company has recorded derivative instruments
in connection with the Leap Wireless Spin-off, including (a) an effective call
option related to Leap Wireless' obligation to issue approximately 2.3 million
shares of common stock to holders of QUALCOMM Trust Convertible Preferred
Securities for no consideration; and (b) a warrant received by the Company to
purchase 5.5 million shares of Leap Wireless common stock at $6.10625 per share.
See Note 1 to the Consolidated Financial Statements for a description of the
Company's accounting policies for these instruments. See Notes 2 and 7 for
further information about the warrant and call option, respectively. The
recorded and fair values of these derivatives total $28.1 million and $12.7
million, respectively, at September 30, 1998. The estimated fair value of these
derivatives would decrease by approximately 10% as of year-end 1999 if the price
of the Leap Wireless stock were to decrease by 10%. This hypothetical decrease
is suggestive of the effect on fair values, but not on future cash flows. First,
the issuance of Leap Wireless common stock to holders of QUALCOMM Trust
Convertible Preferred Securities will not affect the cash flows of the Company.
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42
Second, the Company will pay a fixed price per share if its warrant to purchase
Leap Wireless common stock is exercised. These instruments are held for purposes
other than trading, and the increasing requirementoption is nontransferable.
The Company's investments in other entities consist substantially of
investments accounted for under the equity and cost methods which are
predominantly closely held and not publicly traded. Accordingly, the Company
believes that its exposure to market risk from these investments is not
material.
FOREIGN EXCHANGE MARKET RISK. See Note 1 to the Consolidated
Financial Statements for a description of the Company's currency translation and
transaction accounting policies and information about the Company's currency
exposure management practices held for purposes other than trading.
Foreign exchange financial instruments that are subject to the
effects of currency fluctuations which may affect reported earnings include
derivative financial instruments held for purposes other than trading,
consisting primarily of forward contracts, and other financial instruments which
are not denominated in the currency of the legal entity holding the instruments,
consisting of accounts payable and receivable and long-term financing
obligations of an equity investee. At September 30, 1998, the Company had no
foreign currency forward contracts outstanding. Accounts payable and receivable
are reflected at fair value in the financial statements. The Company's interest
in the fair value of the long-term financing obligations of an equity investee
would increase by $1.7 million as of year-end 1999 if the U.S. dollar were to
appreciate against the other currency by 10%. This hypothetical amount is
suggestive of the effect on fair value, but not on future cash flows assuming
that the equity investee will be able to meet its financing obligation.
The Company provides vendor financing which mayon infrastructure equipment
and service sales to certain customers. At September 30, 1998, finance
receivables from international customers totaled $291 million. Because the
Company's vendor financing is dollar denominated, any significant change in the
value of the dollar against the customers' functional currencies could result in
an increase in the customer's interest expense and cash flow requirements and
could thereby affect the ability of the Company to collect its finance
receivables.
The analysis methods used by the Company to assess and mitigate risk
discussed above should not be derived through
additional debt, equity financing, or other sources. The Company is evaluating
these alternatives, and is considering multiple sourcesconsidered projections of funding including
unsecured bank facilities, preferred securities and/or convertible debt. There
can be no assurances such capital will be available or, if available, that it
will be on acceptable terms.future risks.
ITEM 8. FINANCIAL STATEMENTS
The Company's consolidated financial statements at September 30,
19961998 and 1995, and for each of the three years in the period ended September 30, 19961997 and the Report of Price WaterhousePricewaterhouseCoopers LLP, Independent
Accountants, are included in this report on Form 10-K on pages F-1 through F-20.F-24.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding Directors is incorporated by reference to the
section entitled "Election of Directors" in the QUALCOMM Incorporated definitive
Proxy Statement to be filed with the Securities and Exchange Commission in
connection with the Annual Meeting of Stockholders to be held on February 11, 199723,
1999 (the "Proxy Statement"). Information regarding Executive Officers is set
forth in Item 1 of Part I of this Report under the caption "Executive Officers
of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference
to the Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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43
The information required by this item is incorporated by reference
to the Proxy Statement under the heading "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference
to the Proxy Statement under the heading "Certain Transactions."
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39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE
NUMBER
------
(a) Documents filed as part of the report:
(1) Report of Independent Accountants......................................Accountants F-1
Consolidated Balance Sheets at September 30, 19961998 and 1995............1997 F-2
Consolidated Statements of Income for Fiscal 1996, 19951998, 1997 and 1994......1996 F-3
Consolidated Statements of Cash Flows for Fiscal 1996, 19951998, 1997 and 1994..................................................................1996 F-4
Consolidated Statements of Stockholders' Equity for Fiscal 1996, 19951998, 1997 and 1994..............................................................1996 F-5
Notes to Consolidated Financial Statements............................Statements F-6
(2) Consolidated Financial Statement Schedule..............................
Schedule
II ValuationSchedule II-Valuation and Qualifying Accounts.........................Accounts S-1
Financial statement schedules other than those listed above have
been omitted because they are either not required, not applicable or the
information is otherwise included.
(3) Exhibits39
44
EXHIBITS
EXHIBIT
NUMBER DESCRIPTIONNumber Description
- ------ -----------------------------------------------------------------------------------------
2.1 Separation and Distribution Agreement dated as of September 23, 1998,
between the Company and Leap Wireless International, Inc.(20)
3.1 Restated Certificate of Incorporation.(1)
3.2 Certificate of Amendment of Restated Certificate of Incorporation.(7)
3.3 Certificate of Designation of Preferences.(15)
3.4 Bylaws.(2)
3.5 Amendment of the Bylaws.(17)
4.1 Certificate of Trust of QUALCOMM Financial Trust I, filed with the
Delaware Secretary of State on February 7, 1997.(16)
4.2 Declaration of Trust of QUALCOMM Financial Trust I, dated as of
February 7, 1997, among QUALCOMM Incorporated, as Sponsor, Wilmington
Trust Company, as Delaware Trustee and Property Trustee, and Irwin
Mark Jacobs, Harvey P. White, and Anthony Thornley, as Regular
Trustees.(16)
4.3 Amended and Restated Declaration of Trust of QUALCOMM Financial Trust
I, dated as of February 35, 1997, among QUALCOMM Incorporated, as
Sponsor, Wilmington Trust Company, as Delaware Trustee and Property
Trustee, and Irwin Mark Jacobs, Harvey P. White, and Anthony Thornley,
as Regular Trustees.(16)
4.4 Indenture for the 5-3/4% Convertible Subordinated Debt Securities,
dated as of February 25, 1997, among QUALCOMM Incorporated and
Wilmington Trust company, as Indenture Trustee.(16)
4.5 Form of 5-3/4% Trust Convertible Preferred Securities (Included in
Annex 1 to Exhibit 4.3 above).(16)
4.6 Form of 5-3/4% Convertible Subordinated Debt Securities (Included in
Annex 1 to Exhibit 4.3 above).(16)
4.7 Preferred Securities Guarantee Agreement, dated as of February 25,
1997, between QUALCOMM Incorporated, as Guarantor, and Wilmington
Trust Company, as Guarantee Trustee.(16)
10.1 Form of Indemnity Agreement between the Company, each director and
certain officers.(2)(14)
10.2 1991 Stock Option Plan, as amended.(10)(14)
10.3 Form of Incentive Stock Option Grant under the 1991 Stock Option
Plan.(2)(14)
10.4 Form of Supplemental Stock Option Grant under the 1991 Stock Option
Plan.(2)(14)
10.5 1991 Employee Stock Purchase Plan.(11)(14)
10.6 Form of Employee Stock Purchase Plan Offering under the 1991 Employee
Stock Purchase Plan.(2)(14)
10.7 Registration Rights Agreement dated September 11, 1991 between the
Company and various Stockholders.(2)
10.8 Satellite Service Agreement dated March 5, 1991 between the Company
and GTE Spacenet Corporation.(2)(3)
10.9 Joint Venture Agreement dated January 24, 1990 between the Company and
Alcatel Transmission par Faisceaux Hertziens.Hertizens.(2)(3)
10.10 Agreement dated April 17, 1989 between the Company and PACTEL
Corporation.(2)(3)
40
45
NUMBER DESCRIPTION
- ------ -----------
10.11 CDMA Technology Agreement and related Patent License Agreement, each
dated July 3, 1990 between the Company and American Telephone &
Telegraph Company.(2)(3)
10.12 DS-CDMA Technology Agreement and related Patent License Agreement,
each dated September 26, 1990 between the Company and MOTOROLA, Inc.(2)(3)
10.13 JSM Shareholders Agreement dated May 24, 1991 between the Company, C.
Itoh, Ltd. and Nippon Steel Corporation.(2)(3)
10.14 401(k) Plan.(2)
37
40
EXHIBIT
NUMBER DESCRIPTION
------ ------------------------------------------------------------------------------
10.15 Amendments dated January 15, 1992 and February 7, 1992 to that certain
Technology Agreement dated July 3, 1990 with American Telephone &
Telegraph Company.(4)
10.16 Amendment dated January 21, 1992 to that certain Technology Agreement
dated September 26, 1990 with MOTOROLA, Inc.(4)(5)
10.17 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan").(14)(15)
10.18 Form of Stock Option Grant under the Directors' Plan, with related
schedule.(6)(14)
10.19 Joint Venture and Partnership Agreement dated February 25, 1994
between QUALCOMM Investment Company and SONY ElectronicsSony Electronic CDMA
Investment, Inc.(7)(8)
10.20 Contract dated March 18, 1994 between the Company and Globalstar,
L.P.(7)(8)
10.21 Executive Retirement Matching Contribution Plan(12)Plan.(12)(14)
10.22 1996 Non-qualified Employee Stock Purchase Plan(13)Plan.(13)(14)
10.23 Stockholder Rights Plan(9)
11.1 CalculationPlan.(9)
10.24 Registration Rights Agreement, dated February 25, 1997, between
QUALCOMM Financial Trust I and Lehman Brothers, Bear Stearns & Co.,
Inc., Alex. Brown & Sons Incorporated, Goldman, Sachs & Co. and
Merrill Lynch & Co., as Initial Purchasers.(16)
10.25 Credit Agreement dated as of earnings per share.March 11, 1998, among QUALCOMM
Incorporated, as Borrower, the Lender Parties, Bank of America N.T.
& S.A., as Administrative Agent, Syndication Agent and Initial
Issuing Bank, and Citibank, N.A., as Documentation Agent and
Syndication Agent.(18)(19)
10.26 Warrant dated as of September 23, 1998 issued to the Company by Leap
Wireless International, Inc.(20)
10.27 Credit Agreement dated as of September 23, 1998 between the Company
and Leap Wireless International, Inc.(20)
10.28 Master Agreement Regarding Equipment Procurement dated as of September
23, 1998, between the Company and Leap Wireless International,
Inc.(20)
21 Subsidiaries of the Company
23.1 Consent of Price WaterhousePricewaterhouseCoopers LLP.
24.1 Power of Attorney. Reference is made to page 40.
2746.
27.0 Financial Data Schedule.
- ----------------------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-3
(No. 33-62724) or amendments thereto and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 33-42782) or amendments thereto and incorporated herein by reference.
41
46
(3) Certain confidential portions deleted pursuant to Order Granting
Application or Confidential Treatment issued in connection with
Registration Statement on Form S-1 (No. 33-42782) effective December 12,
1991.
(4) Filed as exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended September 27, 1992.
(5) Certain confidential portions deleted pursuant to orderOrder Granting
Application for Confidential Treatment pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934 dated March 19, 1993.
(6) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended September 26, 1993.
(7) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 27, 1994, as amended.
(8) Certain confidential portions deleted pursuant to Order Granting
Application for Confidential Treatment pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934 dated July 7, 1994.
(9) Filed as an exhibit to the Company's Form 8-K current report dated as of
September 26, 1995.
(10) Filed as an exhibit to the Registrant's Registration Statement on Form
S-8 (File No. 333-2754) filed on March 25, 1996.
(11) Filed as an exhibit to the Registrant's Registration Statement on Form
S-8 (File No. 333-2756) filed on March 25, 1996.
(12) Filed as an exhibit to the Registrant's Registration Statement on Form
S-8 (File No. 333-2752) filed on March 25, 1996.
(13) Filed as an exhibit to the Registrant's Registration Statement on Form
S-8 (File No. 333-2750) filefiled on March 25, 1996.
(14) Indicates management or compensatory plan or arrangement required to be
identified pursuant to Item 14(c).
38
41
(B) REPORTS ON FORM 8-K
There were no reports(15) Filed as an exhibit to the Registrant's Annual Report on Form 8-K filed by the Registrant during the fourth
quarter of10-K for
the fiscal year ended September 29, 1996.
(C) EXHIBITS
The exhibits required(16) Filed as an exhibit to the Registrant's Registration Statement on Form
S-3 (No. 333-26069) or amendments thereto and incorporated herein by
this Item are listedreference.
(17) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the fiscal year ended September 28, 1997.
(18) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 29, 1998.
(19) Certain confidential portions deleted pursuant to Order Granting
Application for Confidential Treatment pursuant to Rule 246-Z under Item 14(a)(3).
(D) FINANCIAL STATEMENTS SCHEDULES
The consolidated financial statement schedules requiredthe
Securities Exchange Act of 1934 dated July 14, 1998.
(20) Filed as an exhibit to the Registration Statement on Form 10, as amended
filed by this Item are
listed under Item 14 (a)(2).
39Leap Wireless International, Inc. (File No. O-29752) and
incorporated herein by reference.
42
4247
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
December 2, 1996November 23, 1998
QUALCOMM Incorporated
By /s/ IRWIN MARK JACOBS
-------------------------------
Irwin Mark Jacobs,
Chief Executive Officer and Chairman
POWER OF ATTORNEY
Know all persons by these presents, that each person whose signature
appears below constitutes and appoints Irwin Mark Jacobs and Harvey P. White,Richard Sulpizio,
and each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all amendments to this Report,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming that all said
attorneys-in-fact and agents, or any of them or their or his substitute or
substituted, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of
Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------------------------------- --------------------------- -------------------------- ----- ----
/s/ IRWIN MARK JACOBS Chief Executive Officer and December 2, 1996Chairman November 23, 1998
- ------------------------------------ (Principal Executive Officer)
Irwin Mark Jacobs Chairman (Principal
Executive Officer)
/s/ ANDREW J. VITERBI Vice-Chairman December 2, 1996November 23, 1998
- ------------------------------------
Andrew J. Viterbi
/s/ HARVEY P. WHITE President and Director December 2, 1996
Harvey P. White
/s/ ANTHONY S. THORNLEY Executive Senior Vice President, December 2, 1996
Anthony S. ThornleyNovember 23, 1998
- -------------------------------- Chief Financial Officer (Principal
Anthony S. Thornley Financial and Accounting Officer)
/s/ RICHARD C. ATKINSON Director December 2, 1996November 23, 1998
- -------------------------------
Richard C.AtkinsonC. Atkinson
/s/ ADELIA A. COFFMAN Director December 2, 1996November 23, 1998
- ------------------------------------
Adelia A. Coffman
40
43
SIGNATURE TITLE DATE
- ----------------------------------------------- --------------------------- -----------------
/s/ JEROME S. KATZIN Director December 2, 1996November 23, 1998
- ------------------------------------
Jerome S. Katzin
/s/ NEIL KADISHA Director December 2, 1996
KADISHANovember 23, 1998
- ------------------------------------
Neil Kadisha
/s/ DUANE A. NELLES Director December 2, 1996November 23, 1998
- ------------------------------------
Duane A. Nelles
/s/ PETER M. SACERDOTE Director December 2, 1996November 23, 1998
- ------------------------------------
Peter M. Sacerdote
/s/ MARC I. STERN Director December 2, 1996
STERNNovember 23, 1998
- ------------------------------------
43
48
Marc I. Stern
/s/ BRENT SCOWCROFT Director December 2, 1996November 23, 1998
- ------------------------------------
Brent Scowcroft
/s/ FRANK SAVAGE Director December 2, 1996November 23, 1998
- ------------------------------------
Frank Savage
/s/ ROBERT E. KAHN Director November 23, 1998
- ------------------------------------
Robert E. Kahn
4144
4449
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the
Stockholders of QUALCOMM Incorporated
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 3739 present fairly, in all material
respects, the financial position of QUALCOMM Incorporated and its subsidiaries
at September 30, 19961998 and 1995,1997, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 1996,1998,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSEPRICEWATERHOUSECOOPERS LLP
San Diego, California
November 8, 1996October 30, 1998
F-1
4550
QUALCOMM INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30,
------------------------
1996 1995------------------------------
1998 1997
---------- ------------------
ASSETS
Current assets:CURRENT ASSETS:
Cash and cash equivalents.......................................equivalents .......................................... $ 110,143 $500,629
Investments..................................................... 236,129 66,335175,846 $ 248,837
Investments ........................................................ 127,478 448,235
Accounts receivable, net........................................ 217,433 82,733
Inventories..................................................... 171,511 44,010net ........................................... 612,209 445,382
Finance receivables ................................................ 56,201 111,501
Inventories, net ................................................... 386,536 225,156
Other current assets............................................ 15,974 10,923assets ............................................... 178,950 70,484
---------- ------------------
Total current assets............................................ 751,190 704,630
Property, plant and equipment, net................................ 352,699 185,513
Investments....................................................... 8,009 12,032
Other assets...................................................... 73,432 38,542assets .............................................. 1,537,220 1,549,595
PROPERTY, PLANT AND EQUIPMENT, NET ................................... 609,682 425,090
INVESTMENTS .......................................................... -- 111,786
FINANCE RECEIVABLES, NET ............................................. 287,751 --
OTHER ASSETS ......................................................... 132,060 188,209
---------- --------
Total assets...................................................... $1,185,330 $940,717----------
TOTAL ASSETS ......................................................... $2,566,713 $2,274,680
========== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:CURRENT LIABILITIES:
Accounts payable and accrued liabilities........................liabilities ........................... $ 229,799660,428 $ 95,769409,156
Unearned revenue................................................ 13,226 8,213revenue ................................................... 67,123 45,084
Bank lines of credit............................................ 80,700 --credit ............................................... 151,000 110,000
Current portion of long-term debt............................... 2,234 1,015debt .................................. 3,058 3,238
---------- ------------------
Total current liabilities....................................... 325,959 104,997
Long-term debt.................................................... 10,908 33,479
Other liabilities................................................. 3,550 2,624liabilities ......................................... 881,609 567,478
LONG-TERM DEBT, LESS CURRENT PORTION ................................. 3,863 7,729
OTHER LIABILITIES .................................................... 25,115 15,295
---------- ------------------
Total liabilities............................................... 340,417 141,100liabilities ................................................. 910,587 590,502
---------- --------
Commitments and contingencies (Note 9)
Minority interest in consolidated subsidiary (Notes 1 & 8)........----------
COMMITMENTS AND CONTINGENCIES (NOTE 12)
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES (NOTE 11) ............. 38,530 --
--
Stockholders' equity:---------- ----------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST CONVERTIBLE PREFERRED
SECURITIES OF A SUBSIDIARY TRUST HOLDING SOLELY DEBT SECURITIES OF
THE COMPANY ....................................................... 660,000 660,000
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.0001 par valuevalue; issuable in series; 8,000 shares
authorized; none -- --
outstanding in 19961998 and 1995.................................1997 .................... -- --
Common stock, $0.0001 par value; 150,000300,000 shares authorized;
7 6
66,53570,591 and 64,69368,124 shares issued and outstanding in
19961998 and 1995.........................................................1997 .................................................... 7 7
Paid-in capital................................................. 819,042 794,774capital .................................................... 957,589 906,373
Retained earnings............................................... 25,864 4,837earnings .................................................. -- 117,798
---------- ------------------
Total stockholders' equity...................................... 844,913 799,617equity ........................................ 957,596 1,024,178
---------- --------
Total liabilities and stockholders' equity........................ $1,185,330 $940,717----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................... $2,566,713 $2,274,680
========== ==================
See accompanying notes.
F-2
4651
QUALCOMM INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------------
1998 1997 1996
1995 1994
-------- -------- ------------------- ----------- -----------
Revenues:REVENUES:
Communications systems................................... $582,953 $246,997 $194,037systems ......................... $ 2,863,092 $ 1,733,169 $ 582,953
Contract services........................................services .............................. 270,388 211,661 131,022 95,150 48,310
License, royalty and development fees....................fees .......... 214,390 151,535 99,875
44,465 29,276
-------- -------- ------------------- ----------- -----------
Total revenues...................................revenues ......................... 3,347,870 2,096,365 813,850
386,612 271,623
-------- -------- --------
Operating expenses:----------- ----------- -----------
OPERATING EXPENSES:
Communications systems...................................systems ......................... 2,136,297 1,361,641 445,481
143,774 118,636
Contract services........................................services .............................. 197,102 156,365 90,380 69,396 38,051
Research and development.................................development ....................... 349,483 235,922 162,340 80,171 49,586
Selling and marketing....................................marketing .......................... 246,975 147,040 74,114 37,754 23,687
General and administrative...............................administrative ..................... 163,372 89,148 48,971
34,918 18,696
Litigation settlement and related costs..................Other (Note 1) ................................. 11,976 8,792 --
----------- ----------- -----------
Total operating expenses ............... 3,105,205 1,998,908 821,286
----------- ----------- -----------
OPERATING INCOME (LOSS) .......................... 242,665 97,457 (7,436)
INTEREST INCOME .................................. 39,484 34,845 24,239
INTEREST EXPENSE ................................. (8,058) (11,012) (3,354)
NET GAIN ON SALE OF INVESTMENTS .................. 2,950 13,400 --
WRITE-OFF OF INVESTMENT IN OTHER ENTITY .......... (20,000) -- --
13,017
-------- -------- --------
Total operating expenses......................... 821,286 366,013 261,673
-------- -------- --------
Operating (loss) income.................................... (7,436) 20,599 9,950
Interest income............................................ 24,239 9,529 6,495
Interest expense........................................... (3,354) (2,264) (2,025)
Minority interest in losses of consolidated subsidiary.....DISTRIBUTIONS ON TRUST CONVERTIBLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST ................ (39,270) (23,277) --
MINORITY INTEREST IN (INCOME) LOSS OF CONSOLIDATED
SUBSIDIARIES .................................. (48,366) (2,979) 13,178
12,016 2,893
-------- -------- --------
Income before income taxes.................................EQUITY IN LOSSES OF INVESTEES .................... (20,731) -- --
----------- ----------- -----------
INCOME BEFORE INCOME TAXES ....................... 148,674 108,434 26,627
39,880 17,313
Income tax expense.........................................INCOME TAX EXPENSE ............................... (40,142) (16,500) (5,600)
(9,700) (2,120)
-------- -------- --------
Net income.................................................----------- ----------- -----------
NET INCOME ....................................... $ 108,532 $ 91,934 $ 21,027
=========== =========== ===========
NET EARNINGS PER COMMON SHARE:
Basic .......................................... $ 30,1801.57 $ 15,193
======== ======== ========
Net earnings per common share
Primary..................................................1.37 $ 0.32
=========== =========== ===========
Diluted ........................................ $ 1.47 $ 1.28 $ 0.30
$ 0.53 $ 0.28
======== ======== ========
Fully diluted............................................ $ 0.30 $ 0.52 $ 0.28
======== ======== ========
Shares used in per share calculation
Primary.................................................. 70,214 57,420 53,514
======== ======== ========
Fully diluted............................................ 70,468 58,194 53,562
======== ======== =================== =========== ===========
SHARES USED IN PER SHARE CALCULATION:
Basic .......................................... 69,203 67,335 65,558
=========== =========== ===========
Diluted ........................................ 73,962 71,887 70,335
=========== =========== ===========
See accompanying notes.
F-3
4752
QUALCOMM INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------
1998 1997 1996
1995 1994
-------- -------- ----------------- --------- ---------
Operating activities:OPERATING ACTIVITIES:
Net income...............................................income ........................................... $ 108,532 $ 91,934 $ 21,027
$ 30,180 $ 15,193
Depreciation and amortization............................amortization ........................ 141,892 93,598 56,817
30,919 18,809
RecognitionAcquired in-process research and development ......... 6,976 -- --
Non-cash charge for impaired assets .................. 5,000 8,792 --
Gain on sale of deferred tax asset........................trading securities ................... -- (3,000) (4,000)(13,400) --
Write-off of investment in other entity .............. 20,000 -- --
Minority interest in income (loss) of
consolidated subsidiaries .......................... 48,366 2,979 (13,178)
Equity in losses of consolidated subsidiary... (13,178) (12,016) (2,893)investees ........................ 20,731 -- --
Deferred income taxes ................................ 18,237 (21,531) --
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net..............................net .......................... (166,827) (227,949) (134,700)
(19,806) (28,791)
Inventories...........................................Finance receivables, net .......................... (232,451) (111,501) --
Inventories ....................................... (161,380) (53,645) (127,501)
(28,379) (1,554)
Other assets.......................................... (12,204) 1,507 775assets ...................................... (110,770) (34,260) (11,550)
Accounts payable and accrued liabilities..............liabilities .......... 245,168 179,357 134,030
36,790 29,597
Unearned revenue......................................revenue .................................. 22,039 31,858 5,013
1,774 588
Other liabilities.....................................liabilities ................................. 9,820 11,745 926
(227) (1,264)
-------- -------- --------Proceeds from sale of trading securities ............. -- 23,129 --
Purchase of trading securities ....................... -- (9,729) --
--------- --------- ---------
Net cash (used in) providedused by operating activities........ (69,770) 37,742 26,460
-------- -------- --------
Investing activities:activities .................. (24,667) (28,623) (69,116)
--------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures ................................. (321,566) (163,115) (216,554)
Purchases of investments ............................. (269,833) (978,745) (587,898)
Maturities of investments ............................ 702,376 662,862 422,127
Issuance of notenotes receivable (Note 8).............................................. (124,765) -- (25,000) -- --
Collection of note receivable (Note 8)................... 9,602........................ -- -- Capital expenditures..................................... (216,554) (99,455) (68,692)9,602
Purchases of intangible assets...........................assets ....................... (12,987) -- (3,843)
(5,054) (10,293)
Purchases of investments................................. (587,898) (84,343) (192,726)
Maturities of investments................................ 422,127 98,423 194,901
InvestmentInvestments in other entities.............................entities ........................ (107,225) (57,887) (6,500)
(11,925) (8,239)
-------- -------- ----------------- --------- ---------
Net cash used inby investing activities......................activities .................. (134,000) (536,885) (408,066)
(102,354) (85,049)
-------- -------- --------
Financing activities:
Sale/leaseback transaction............................... 10,248--------- --------- ---------
FINANCING ACTIVITIES:
Spin-off of Leap Wireless International, Inc. ........ (10,000) -- --
Proceeds fromNet borrowings under bank lines of credit.......................credit ............ 41,000 29,300 80,700 -- --
Principal payments under long-term debt.................. (46,036) (3,749) (5,718)
Proceeds from issuance of notes payable.................. 11,772 10,757 2,659
Minority interest investment in consolidated 6,397 5,917 (1,035)
subsidiary............................................
Tax benefit from exercisetrust convertible
preferred securities of stock options............... 654 8,102 3,750subsidiary trust ........... -- 660,000 --
Deferred offering costs .............................. (914) (18,624) --
Net proceeds from issuance of common stock...............stock ........... 49,825 32,519 23,615
499,165 6,529
-------- -------- --------Other items, net ..................................... 5,765 1,007 (17,619)
--------- --------- ---------
Net cash provided by financing activities.................. 87,350 520,192 6,185
-------- -------- --------
Net (decrease) increase in cash and cash equivalents.......activities .............. 85,676 704,202 86,696
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(72,991) 138,694 (390,486)
455,580 (52,404)
Cash and cash equivalents at beginning of year.............CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ......... 248,837 110,143 500,629
45,049 97,453
-------- -------- --------
Cash and cash equivalents at end of year................... $110,143 $500,629--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR ............... $ 45,049
======== ======== ========175,846 $ 248,837 $ 110,143
========= ========= =========
See accompanying notes.
F-4
4853
QUALCOMM INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
RETAINED
COMMON STOCK
EARNINGS
---------------------------------------------- PAID-IN (ACCUMULATEDRETAINED
SHARES AMOUNT CAPITAL DEFICIT)EARNINGS TOTAL
------ ------ -------- ------------ ------------------- ----------- ----------- ----------- -----------
Balance at SeptemberBALANCE AT SEPTEMBER 30, 1993......... 50,2681995 .......... 64,693 $ 5 $277,227 $(40,536) $236,696
Exercise of stock options............. 650 -- 2,772 -- 2,772
Tax benefit from exercise of stock
options............................. -- -- 3,750 -- 3,750
Exercise of stock warrants............ 385 -- 660 -- 660
Issuance for Employee Stock
Purchase Plan....................... 183 -- 3,099 -- 3,099
Net income............................ -- -- -- 15,193 15,193
------ --- -------- -------- --------
Balance at September 30, 1994......... 51,486 5 287,508 (25,343) 262,170
Exercise of stock options............. 1,458 -- 9,318 -- 9,318
Tax benefit from exercise of stock
options............................. -- -- 8,102 -- 8,102
Issuance of common stock, net of
issuance costs of $17,364........... 11,500 1 485,761 -- 485,762
Issuance for Employee Stock
Purchase Plan....................... 249 -- 4,085 -- 4,085
Net income............................ -- -- -- 30,180 30,180
------ --- -------- -------- --------
Balance at September 30, 1995......... 64,693 6 $ 794,774 $ 4,837 $ 799,617
Exercise of stock options.............options .............. 1,510 1 14,277 -- 14,278
Tax benefit from exercise of stock
options.............................options ............................. -- -- 654 -- 654
Issuance for Employee Stock
Purchase Plan and Executive Retirement
Plans...............................Plans ............................... 332 -- 9,337 -- 9,337
Net income............................income ............................. -- -- -- 21,027 21,027
------ --- -------- -------- --------
Balance at September----------- ----------- ----------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1996.........1996 .......... 66,535 7 819,042 25,864 844,913
Exercise of stock options .............. 1,208 -- 19,979 -- 19,979
Tax benefit from exercise of stock
options (Note 9) .................... -- -- 54,812 -- 54,812
Issuance for Employee Stock
Purchase and Executive Retirement
Plans ............................... 381 -- 12,540 -- 12,540
Net income ............................. -- -- -- 91,934 91,934
----------- ----------- ----------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1997 .......... 68,124 7 906,373 117,798 1,024,178
Exercise of stock options .............. 1,290 -- 30,417 -- 30,417
Tax benefit from exercise of stock
options ............................. -- -- 17,125 -- 17,125
Issuance of common stock upon exercise
of warrant (Note 8) ................. 705 -- -- -- --
Issuance for Employee Stock Purchase and
Executive Retirement Plans .......... 472 -- 19,408 -- 19,408
Spin-off of Leap Wireless International,
Inc. (Note 2) ....................... -- -- (15,734) (226,330) (242,064)
Net income ............................. -- -- -- 108,532 108,532
----------- ----------- ----------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1998 .......... 70,591 $ 7 $819,042 $ 25,864 $844,913
====== === ======== ======== ========957,589 $ -- $ 957,596
=========== =========== =========== =========== ===========
See accompanying notes.
F-5
4954
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
QUALCOMM Incorporated (the "Company" or "QUALCOMM"), a Delaware corporation,
designs, develops, manufactures, and markets wireless communications,
infrastructure, and subscriber equipment, and designs, develops and markets
ASICs, based on its CDMA (Code Division Multiple Access) technology. The Company
also licenses and operates advancedreceives royalty payments on its CDMA technology from major
domestic and international telecommunications suppliers. In addition, the
Company designed and is manufacturing, distributing and operating OmniTRACS, a
satellite-based, two-way mobile communications systems and products based ontracking system for
transportation companies and other customers. The Company also has contracts
with Globalstar L.P., a partnership formed to build and operate a worldwide,
low-Earth orbit satellite-based wireless digital wireless technology, including mobiletelecommunications system, to
design, develop and fixed
satellite communications systems and products and digital wireless telephone
systems and products using the Company's proprietary Code Division Multiple
Access ("CDMA") technology. Other products include secure communicationsmanufacture subscriber equipment and subsystemsgateways and a range of Very Large Scale Integrated circuit
components for use in commercial and government applications.to provide
contract development services.
Principles of Consolidation
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. All
significant intercompany accounts and transactions have been eliminated.
Financial Statement Preparation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Certain
prior year amounts have been reclassified to conform with the current year
presentation.
Fiscal Year
The Company operates and reports using a fiscal year ending on the last
Sunday in September. As a result of this practice, fiscal 1996 includes 53
weeks. The additional week of activity occurred in the first quarter of fiscal
1996. For presentation purposes, the Company has indicated its fiscal year as
ending on September 30.
Revenues
Revenue from communications systems and products is generally recognized at
the time the units are shipped and over the period during which message and
warranty services are provided, except for shipments under arrangements
involving significant acceptance requirements. Under such arrangements, revenue
is recognized when the Company has substantially met its performance
obligations. Other criteria considered for the purpose of revenue recognition
include the customer's financial condition, the amount and quality of financial
support provided by the customer's investors, and the political and economic
environment in which the customer operates. Revenue from long-term contracts and
revenue earned under license and development agreements with continuing
performance obligations is recognized using the percentage-of-completion method,
primarily based either on costs incurred to date compared with total estimated costs at
completion.completion or using a units of delivery methodology. Billings on uncompleted
contracts in excess of incurred cost and accrued profits are classified as
unearned revenue. Estimated contract losses are recognized when determined.
Non-refundable license fees are recognized when there is no material continuing
performance obligation under the agreement and collection is probable.
Royalty revenue is recorded as earned in accordance with the specific terms
of each license agreement.agreement when reasonable estimates of such amounts can be made.
Beginning with the second quarter of fiscal 1998, the Company
F-6
55
began to accrue its estimate of certain royalty revenues earned that previously
could not be reasonably estimated prior to being reported by its licensees.
Concentrations
A significant portion of the Company's CDMA revenues are derived from the North
American trucking industry, particularly providersconcentrated with a
limited number of long haul transportation
of goods and equipment, and,customers because the worldwide market for wireless telephone
systems and products is dominated by a small number of large corporations and
government agencies, aagencies. The Company also derives significant portion of the Company's CDMA revenues are
concentrated with a limited number of customers.
During fiscal 1996 and 1995, revenues from Globalstar (Note 8) accounted
for 15%the
North American trucking industry, particularly providers of long-haul
transportation of goods and 19% of revenues, respectively. No one customer accounted for more
than 10% of fiscal 1994 revenues.equipment.
Revenues from international customers exclusivewhich consisted of revenues fromexport sales,
including license and royalty fees, to customers outside of the ALCATEL QUALCOMM joint venture (Note 8),U.S. were
approximately 34%, 17%30% and 20%36% of total revenues in fiscal 1996, 19951998, 1997 and 1994,1996,
respectively. The 1996, 19951998, 1997 and 19941996 revenues included $221,000,000,
$43,000,000$697 million, $522
million and $33,300,000$221 million from Asia, respectively; $36,000,000, $12,700,000respectively. During fiscal 1998, 1997 and
$13,600,0001996, revenues from Canada, respectively;Globalstar (Note 11) accounted for 11%, 10% and $13,000,000, $10,000,00015% of
revenues, respectively. During fiscal 1998, revenues from one Korean customer
accounted for 11% of revenues.
At September 30, 1998, the Company has approximately $19 million in
Russian/Ukrainian receivables and $7,300,000 from Latin America, respectively.
F-6
50
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)a further $30 million in products and
deployment services placed with carriers in Russia and Ukraine during the fourth
quarter of fiscal 1998 for which revenue has not been recognized. The Company
will continue to monitor the underlying economics of business in that region, as
well as other regions affected by the continuing world economic conditions.
Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents include money market funds, commercial paper and loan
participations. The carrying amount approximates the fair value due to the short
maturity of these instruments.
The Company's policy is to place its cash, cash equivalents and investments
with high credit quality financial institutions, government agencies and
corporate entities and to limit the amount of credit exposure.
Investments
In the first quarter of fiscal 1995, the Company adopted Statement of
Financial Accounting Standards No. 115 ("FAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities." Management determines the appropriate classification of marketable debt and
equity securities at the time of purchase and re-evaluates such designation as
of each balance sheet date. At September 30, 19961998 and 1995,1997, the Company's
investment portfolio consisted of marketable debt securities classified as
held-to-maturity and is presentedcarried at its amortized cost, which approximates fair
value.
Warrants
The Company holds warrants to purchase equity interests in other companies.
Typically, such warrants result from equity investment activities. During 1998,
the Company received a warrant in connection with the Leap Wireless Spin-off
(Note 2). Warrants are carried at cost.
There was
no cumulative effect asCall Option
The Company holds a resultnontransferable, effective call option related to Leap
Wireless's obligation to issue common stock to holders of adopting FAS 115QUALCOMM Trust
Convertible Preferred Securities upon the conversion of such securities (Note
7). The option is recorded at estimated fair value. Unrealized gains and losses
related to changes in fiscal 1995.the estimated fair value of this option are reported in
the statement of income.
Inventories
Inventories are valued at the lower of cost or market using the first-in,
first-out method.
F-7
56
Property, Plant and Equipment
Property, plant and equipment isare recorded at cost and depreciated or
amortized using the straight-line method over estimated useful lives. Buildings
and building improvements are depreciated over thirty years and fifteen years,
respectively. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the remaining term of the related lease. Other
property, plant and equipment have useful lives ranging from two to five years.
Maintenance, repairs and minor renewals and betterments are charged to expense.
Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121
("FAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", the Company reviews for the impairment of
long-lived assets and certain identifiable intangibles whenever events or
changesInvestments in circumstances indicate that the carrying amount of an asset may not
be recoverable. Under FAS 121, an impairment loss would be recognized when
estimated future cash flows expected to result from the use of the asset and its
eventual disposition is less than its carrying amount. No such impairment losses
have been identified by the Company.
Other Assets
Other assets include investments in other entities and intangibles.Entities
Investments in corporate entities with less than 20% voting interest are
accounted for under the cost method. 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 exerciseshas the ability to exercise significant
influence.influence and for less than 50.1% ownership interests in partnerships. Under the
equity method, the investment is originally recorded at cost and adjusted to
recognize the Company's share of net earnings or losses of the investee, limited
to the extent of the Company's investment in, advances to and financial
guarantees for the investee.
Intangible Assets
Intangible assets are recorded at cost and amortized over their estimated
useful lives, which currently range from three to fivetwenty years.
F-7
51
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)During November 1997, the Company acquired, for approximately $10 million,
substantially all the assets of Now Software, Inc., a developer of advanced
scheduling and calendaring software products. In connection with this asset
purchase, acquired in-process research and development of $7 million,
representing the fair value of software products still in the development stage
that had not yet reached technological feasibility, was expensed at the
acquisition date.
Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
total amount of an asset may not be recoverable. An impairment loss would be
recognized when estimated future cash flows expected to result from the use of
the asset and its eventual disposition is less than its carrying amount.
During fiscal 1998, the Company recorded a $5 million non-cash charge to
operations relating to the impairment of leased manufacturing equipment. The $5
million charge represents the estimated total cost of related lease obligations,
net of estimated recoveries. During fiscal 1997, the Company recorded an $8.8
million non-cash charge to operations relating to the impairment of certain
long-lived assets. The $8.8 million charge represents the total carrying value
of these assets and related net disposition costs.
Stock Options
The Company has not elected early adoption of Statement of Financial
Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based
Compensation." FAS 123 becomes effective beginning in 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 measuremeasures compensation expense for its stock-based employee and
non-employee directors compensation plans using the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and
will provideprovides pro forma disclosures of net income and net earnings per common share
as if the fair value based method prescribed by FAS 123 had been applied in measuring compensation
expense.
Foreign Currency
Local currencies are generally considered to be the functional currency for
operations outside the United States, except in countries treated as highly
inflationary. Assets and liabilities are translated at year-end exchange rates,rates;
income and expenses are translated at average rates of exchange prevailing
during the year. For operationsThe functional currency of the Company's foreign investees that
operate in countries treated as highly inflationary certain financial statement amountseconomies is the U.S. dollar. The monetary assets
and liabilities of these foreign investees are translated into U.S. dollars at
the exchange rate in effect at the balance sheet date. Revenues, expenses, gains
and losses are translated at the average exchange rate for the period, and
non-monetary assets and liabilities are translated at historical exchange rates,
with all other assets and liabilities translated at year-end exchange rates.
Resulting remeasurement gains or losses of
F-8
57
these foreign investees are recognized in the statement of income. The effects
of translating the financial position and results of operations of local
currency operations have not been significant to the Company's consolidated
financial statements.
The effects ofCompany enters into foreign currency forward contracts to hedge foreign
currency transactions areand probable anticipated foreign currency transactions.
The principal currency hedged is the Japanese yen over periods of up to three
months. Gains and losses arising from foreign currency forward contracts offset
gains and losses resulting from the underlying hedged transaction.
Forward contracts designated to hedge foreign currency transaction exposure
of approximately $7.8 million were outstanding as of September 30, 1997. The
Company had no foreign currency forward contracts outstanding as of September
30, 1998 or 1996.
During fiscal 1998, 1997 and 1996, net foreign currency transaction gains
included in the Company's statement of income. During fiscal 1996, the Company had a net foreign currency
transaction gain ofincome totaled approximately $1,400,000. During fiscal 1995$5.6
million, $0.6 million and 1994,
foreign currency transaction gains and losses were not significant.$1.4 million, respectively.
Income Taxes
Current income tax expense is the amount of income taxes expected to be
payable for the current year.year, prior to the recognition of benefits from stock
option deductions. A deferred tax asset and/or liability is computed for both
the expected future impact of differences between the financial statement and
tax basisbases of assets and liabilities and for the expected future tax benefit to
be derived from tax loss and tax credit carryforwards.carry forwards. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be "more likely than not" realized in future tax returns. Tax law and rate
changes are reflected in income in the period such changes are enacted.
Investment tax credits are reflected as a reduction of income tax expense using
the flow through method in the year in which they are realized.earned.
Net Earnings Per Common Share
PrimaryThe Company adopted Statement of Financial Accounting Standards No. 128
("FAS 128"), "Earnings per Share" in the first quarter of fiscal 1998. FAS 128
superseded Accounting Principles Board Opinion No. 15 ("APB 15"), "Earnings per
Share" and replaced the primary and fully diluted earnings per share ("EPS")
computations pursuant to APB 15 with basic and diluted EPS. Earnings per share
data presented for the years ended September 30, 1997 and 1996 have been
restated for comparative purposes.
Under FAS 128, basic earnings per common share are calculated by dividing
net income by the weighted average number of common shares 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 priceoutstanding during
the reporting period. Diluted earnings per common share reflect the potential
dilutive effect, determined by the treasury stock method, of additional common
shares that are issuable upon exercise of outstanding stock options and
warrants, as follows (in thousands):
YEARS ENDED SEPTEMBER 30
-----------------------------
1998 1997 1996
----- ----- -----
Options 4,124 3,860 4,095
Warrants 635 692 682
----- ----- -----
4,759 4,552 4,777
===== ===== =====
Options outstanding during the years ended September 30, 1998, 1997 and 1996
to purchase approximately 3,580,000, 1,763,000 and 1,252,000 shares of common
stock, respectively, were not included in the computation of diluted EPS because
the options' exercise price was greater than the average market price of the
common stock during the period and, therefore, the effect would be
anti-dilutive. The conversion of the Trust Convertible Preferred Securities
(Note 7) is not assumed for purposes of computing diluted EPS for fiscal 1998
and 1997 since its effect would be anti-dilutive.
F-9
58
FUTURE ACCOUNTING REQUIREMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement Preparation
The preparation of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting
Comprehensive Income," which the Company will be required to adopt in the first
quarter of fiscal 1999. This statement will require the Company to report in the
financial statements, in conformityaddition to net income, comprehensive income and its
components including, as applicable, foreign currency items, minimum pension
liability adjustments and unrealized gains and losses on certain investments in
debt and equity securities. Upon adoption, the Company will also be required to
reclassify financial statements for earlier periods provided for comparative
purposes. The Company currently expects that the effect of adoption of FAS 130
would be primarily from foreign currency translation adjustments, and has not
yet determined the manner in which comprehensive income will be displayed.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," which the Company will be required to adopt for fiscal year 1999.
This statement establishes standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Under FAS 131, operating segments are to
be determined consistent with generally
acceptedthe way that management organizes and evaluates
financial information internally for making operating decisions and assessing
performance. The Company has not determined the impact of the adoption of this
new accounting principles, requires managementstandard on its consolidated financial statement disclosures.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," which the Company will be required to make estimatesadopt for fiscal year 2000.
This statement establishes a new model for accounting for derivatives and
assumptions that affect the reported amounts ofhedging activities. Under FAS 133, all derivatives must be recognized as assets
and liabilities and disclosuresmeasured at fair value. The Company has not determined the
impact of contingentthe adoption of this new accounting standard on its consolidated
financial position or results of operations.
NOTE 2. SPIN-OFF OF LEAP WIRELESS INTERNATIONAL, INC.
On September 23, 1998, the Company completed the spin-off and distribution
(the "Distribution" or "Leap Wireless Spin-off") to its stockholders of shares
of Leap Wireless International, Inc., a Delaware corporation ("Leap Wireless").
As part of the Distribution, effective immediately after the close of market
trading on September 23, 1998, record holders of QUALCOMM common stock on
September 11, 1998 received a dividend of one share of common stock of Leap
Wireless for every four shares of common stock of QUALCOMM held by them as of
that date.
In connection with the Distribution, the Company transferred to Leap
Wireless its joint venture and equity interests in the following domestic and
international emerging terrestrial-based wireless telecommunications operating
companies: Pegaso Telecomunicaciones, S.A. de C.V. ("Pegaso") (Mexico),
Metrosvyaz Limited (Russia), Orrengrove Investments Limited (Russia), Chilesat
Telefonia Personal, S.A. (Chile), Chase Telecommunications, Inc. (United
States), OzPhone Pty. Ltd. (Australia), and certain other development-stage
businesses. QUALCOMM and Leap Wireless also agreed that, if certain events occur
within 18 months after the Distribution, QUALCOMM will transfer to Leap Wireless
its equity interests and working capital loan related to Telesystems of Ukraine
("TOU"), a wireless telecommunications company in Ukraine. In connection with
the Distribution, QUALCOMM also transferred to Leap Wireless, $10 million cash
and certain indebtedness of the operating companies owed to QUALCOMM in the
amount of approximately $113 million, as well as certain miscellaneous assets.
The aggregate net tangible book value of the assets transferred by QUALCOMM to
Leap Wireless in connection with the Distribution was approximately $258
million. Because the Company recorded certain assets and liabilitiesa liability related to
its agreement to transfer TOU in connection with the Leap Wireless Spin-off,
offsetting the Distribution, equity was reduced by approximately $242 million.
Leap Wireless has agreed to assume certain of QUALCOMM's other obligations
to manage operations of and finance costs relating to ongoing build-outs of the
wireless telecommunications systems being deployed by such
F-10
59
operating companies, including approximately $73.8 million of anticipated
funding obligations to certain of the operating companies, other than equipment
financing obligations, as well as certain miscellaneous liabilities. QUALCOMM
will continue to be a supplier of CDMA equipment and is expected to provide
significant vendor financing to Leap Wireless's wireless telecommunications
businesses and ventures.
Leap Wireless entered into a secured credit facility with the Company. The
credit facility consists of two sub-facilities. The first sub-facility enables
Leap Wireless to borrow up to $35.2 million from the Company. The proceeds from
this sub-facility may be used by Leap Wireless solely to meet the normal working
capital and operating expenses of Leap Wireless, including salaries and
overhead, but excluding, among other things, strategic capital investments in
wireless operators, substantial acquisitions of capital equipment, and/or the
acquisition of telecommunications licenses. The other sub-facility enables Leap
Wireless to borrow up to $229.8 million from the Company. The proceeds from this
second sub-facility may be used by Leap Wireless solely to make certain
identified portfolio investments
Amounts borrowed under the credit facility will be due and payable
approximately eight years following the Distribution date. The Company will have
a first priority security interest in, subject to some exceptions, substantially
all of the assets of Leap Wireless for so long as any amounts are outstanding
under the credit facility. Amounts borrowed under the credit facility will bear
interest at a variable rate equal to LIBOR plus 5.25% per annum. Interest will
be payable quarterly beginning September 30, 2001; and prior to such time,
accrued interest shall be added to the principal amount outstanding. At
September 30, 1998, $5.3 million is outstanding under the credit facility. The
recorded amount approximates fair value due to the variable interest rate.
As a result of the Distribution, QUALCOMM and Leap Wireless will operate as
independent publicly traded companies, with no common officers or directors. In
connection with the Distribution, however, Leap Wireless issued to QUALCOMM a
warrant to purchase 5,500,000 shares of Leap Wireless common stock at a purchase
price equal to the average of the last sales price per share of the Leap
Wireless common stock on the NASDAQ National Market for each of the five
consecutive trading days beginning with and including the date of the
financial
statementsDistribution, or $6.10625 per share. The Company recorded the warrant at its
predecessor basis of $24.2 million net of the related deferred tax liability.
The predecessor basis is an estimate of the Company's potential ownership
interest in the book value of net assets transferred to Leap Wireless. The
warrant is included in other noncurrent assets. The estimated fair value of the
warrant at September 30, 1998 is approximately $8.8 million based on the
application of the Black-Scholes option pricing model which incorporates current
stock price, expected stock price volatility, expected interest rates, and the
reportedexpected holding period of the warrant.
NOTE 3. FINANCE RECEIVABLES
Finance receivables result from sales under arrangements in which the
Company has agreed to provide customers with long-term interest bearing debt
financing for the purchase of equipment and/or services. Such financing is
generally collateralized by the related equipment. Finance receivables at
September 30 were as follows (in thousands):
SEPTEMBER 30,
--------------------------
1998 1997
--------- ---------
Finance receivables ............... $ 348,907 $ 111,501
Allowance for doubtful receivables (4,955) --
--------- ---------
343,952 111,501
Current maturities ................ 56,201 111,501
--------- ---------
Noncurrent finance receivables, net $ 287,751 $ --
========= =========
In March 1998, the Company agreed to defer up to $100 million of contract
payments, with interest accruing at 5 3/4% capitalized quarterly, as customer
financing under its development contract with Globalstar L.P. ("Globalstar").
Financed amounts outstanding as of revenuesJanuary 1, 2000, will be repaid in eight
equal quarterly installments commencing as of that date, with final payment due
October 1, 2001, accompanied by all then unpaid accrued interest. At September
30, 1998, contract payments of approximately $89.7 million were outstanding from
Globalstar as interest bearing financed amounts. Subject to terms and
expenses duringconditions, Globalstar is entitled to defer $4.2 million from each future
monthly development contract payment until the reporting period. Actual results could differ$100 million limit is reached.
F-11
60
At September 30, 1997, the finance receivables of $111.5 million primarily
resulted from those estimates.
Reclassifications
Certain priorsales to one customer having the ability to convert outstanding
amounts into loans receivable with interest at selected market rates plus
applicable margin and with an eight year principal amortization term. During
fiscal 1997, the Company entered into an agreement to sell loans receivable from
the customer to a financial institution at par value on a non-recourse basis.
At September 30, 1998, the fair value of finance receivables approximates
$336 million. The recorded amount of finance receivables at September 30, 1997
approximates fair value. The fair value of finance receivables is estimated by
discounting the future cash flows using current interest rates at which similar
financing would be provided to similar customers for the same remaining
maturities.
Maturities of finance receivables at September 30, 1998 are as follows (in
thousands):
FISCAL YEAR ENDING SEPTEMBER 30,
- --------------------------------
1999 $ 56,201
2000 79,437
2001 87,808
2002 55,881
2003 30,696
Thereafter 38,884
-------------
$ 348,907
=============
Vendor Finance Commitments
Unfunded commitments to extend long-term financing under sales arrangements
other than Globalstar at September 30, 1998 aggregated approximately $489
million. Such commitments are subject to the customers meeting certain
conditions established in the financing arrangements. Commitments represent the
estimated amounts to be financed under these arrangements, however, actual
financing may be in lesser or greater amounts.
Wireless network operators increasingly have been reclassifiedrequired their suppliers to
conform witharrange or provide long-term financing for them as a condition to obtaining
equipment and services contracts. As such, the current year presentation.
F-8Company may continue to enter
into significant future commitments to provide or guarantee long-term financing
for its customers.
NOTE 4. INVESTMENTS
At September 30, 1998 and 1997, all marketable debt securities were
classified as held-to-maturity and carried at amortized cost. Investments
consisted of the following (in thousands):
SEPTEMBER 30,
-----------------------
1998 1997
-------- --------
Current:
Certificates of deposit ... $ 1,388 $211,604
Commercial paper .......... 19,576 209,828
U.S. government securities 64,949 7,998
Corporate medium-term notes 41,565 18,805
-------- --------
$127,478 $448,235
======== ========
Noncurrent:
U.S. government securities $ -- $ 64,863
Corporate medium-term notes -- 46,923
-------- --------
$ -- $111,786
======== ========
At September 30, 1998 and 1997, the estimated fair value of each investment
approximated its amortized cost and, therefore, there were no significant
unrealized gains or losses.
F-12
52
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)61
NOTE 2.5. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
SEPTEMBER 30,
--------------------
1996 1995-----------------------
1998 1997
-------- ---------------
(IN THOUSANDS)
Accounts Receivable:receivable, net:
Trade, net of allowance for doubtful accounts
of $8,223$21,933 and $2,853, respectively....................................... $181,732 $58,651$18,892, respectively ...... $459,324 $343,619
Long-term contracts:
Billed..................................................... 12,363 7,882Billed ................................... 101,868 53,159
Unbilled net of progress payments of $1,572
and $1,780, respectively................................. 20,052 13,602
Other......................................................... 3,286 2,598................................. 49,784 32,230
Other ....................................... 1,233 16,374
-------- -------
$217,433 $82,733--------
$612,209 $445,382
======== ===============
The Company's trade receivables at September 30, 19961998 and 19951997 included 31%8%
and 57%10%, respectively, from customers in the trucking industryindustry. Predominantly
all of the remaining trade receivables at September 30, 1998 and 66% and 37%,
respectively,1997 were from
customers ofin the Company's CDMA technology including license,
royalty, development fees and telephone systems and products.wireless telecommunications industry.
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 on contract receivables decreased $208,000, $1,994,000
and $3,609,000 during fiscal 1996, 1995 and 1994, respectively.
F-9
53
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30,
----------------------
1996 1995
--------- --------------------------------
1998 1997
-------- --------
(IN THOUSANDS)
Inventories:Inventories, net:
Raw materials................................................ $ 97,779 $ 27,090
Work-in-progress............................................. 35,686 7,922materials .......................................... $180,957 $118,516
Work-in-progress ....................................... 81,479 55,088
Finished goods............................................... 38,046 8,998goods ......................................... 124,100 51,552
-------- -------
$ 171,511 $ 44,010--------
$386,536 $225,156
======== ===============
Property, Plant and Equipment:
Land.........................................................Equipment, net:
Land ................................................... $ 29,95536,310 $ 18,23732,904
Buildings and improvements................................... 135,239 71,594improvements ............................. 250,883 165,850
Computer equipment........................................... 158,165 86,566equipment ..................................... 340,623 232,119
Machinery and equipment...................................... 131,485 64,096equipment ................................ 257,516 153,483
Furniture and office equipment............................... 10,314 8,801equipment ......................... 26,910 20,904
Leasehold improvements....................................... 4,877 2,601improvements ................................. 27,074 20,764
-------- -------
470,035 251,895--------
939,316 626,024
Less accumulated depreciation and amortization............... 117,336 66,382amortization ......... 329,634 200,934
-------- -------
$ 352,699 $ 185,513--------
$609,682 $425,090
======== ===============
Other Assets:
Intangible assets, net of accumulated amortization
of $9,975$2,914 and $4,914, respectively..................................$6,697, respectively .................... $ 10,6904,266 $ 11,494
Investment2,473
Investments in other entities (Note 8)........................ 41,939 16,011
Due from minority partner in QPE11) ................ 35,510 99,826
Warrant and call option (Note 8).................... 16,808 10,027
Other........................................................ 3,995 1,0102) ....................... 38,440 --
Net deferred tax assets ................................ 865 32,969
Stadium naming rights, net of amortization of $1,275 and
$375, respectively .................................... 16,725 17,625
Deferred offering costs (Note 7) ....................... 17,400 17,906
Other .................................................. 18,854 17,410
-------- -------
$ 73,432 $ 38,542--------
$132,060 $188,209
======== ===============
Accounts Payable and Accrued Liabilities:
Trade payables............................................... $ 163,599 $ 54,311payables ......................................... $317,124 $216,660
Accrued payroll and related benefits......................... 33,591 24,065benefits ................... 77,777 58,297
Accrued warranty............................................. 9,286 2,366warranty ....................................... 75,177 48,626
Other accrued liabilities.................................... 23,323 15,027liabilities .............................. 190,350 85,573
-------- -------
$ 229,799 $ 95,769--------
$660,428 $409,156
======== ===============
F-10F-13
54
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)62
NOTE 3. INVESTMENTS
At September 30, 1996 and 1995, all marketable debt securities were
classified as held-to-maturity and carried at amortized cost. Investments
consisted of the following (in thousands):
CURRENT LONG-TERM
-------- ---------
1996
U.S. government securities................................... $ -- $ 5,000
Commercial paper............................................. 157,070 --
Corporate medium-term notes.................................. 9,000 3,000
Other debt securities........................................ 70,059 9
-------- -------
$236,129 $ 8,009
======== =======
1995
U.S. government securities................................... $ 1,000 $ 5,000
Commercial paper............................................. 55,361 --
Corporate medium-term notes.................................. -- 7,000
Other debt securities........................................ 9,974 32
-------- -------
$ 66,335 $12,032
======== =======
At September 30, 1996, maturities for long-term securities were between one
and two years. At September 30, 1996 and 1995, the estimated fair value of each
investment approximated the amortized cost and, therefore, there were no
significant unrealized gains or losses.
NOTE 4. INCOME TAXES
The components of income tax expense for the years ended September 30 are
as follows (in thousands):
1996 1995 1994
------ ------- -------
Current provision
Federal.............................................. $1,301 $ 8,946 $ 4,376
State................................................ 695 1,459 1,436
Foreign.............................................. 3,604 2,295 308
------ ------- -------
5,600 12,700 6,120
Recognition of deferred tax asset...................... -- (3,000) (4,000)
------ ------- -------
$5,600 $ 9,700 $ 2,120
====== ======= =======
During fiscal 1995 and 1994, the Company recognized deferred tax assets of
$3,000,000 and $4,000,000, respectively, based on management's assessment that
certain existing tax benefits will "more likely than not" be realized in future
tax returns based on the criteria of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes."
Management's assessment concerning the realizability of existing tax
benefits is based on various assumptions including estimates of future operating
results and the extent of the commercial deployment of the Company's CDMA
telephone systems and products under certain existing contractual arrangements.
A significant portion of the Company's performance obligations under such
arrangements are scheduled to occur in fiscal 1997 and, upon such occurrence,
may have a significant impact on the Company's assessment of the realizability
of tax benefits during future periods.
F-11
55
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation from the expected statutory federal
income tax expense to the Company's actual income tax expense for the years
ended September 30 (in thousands):
1996 1995 1994
------- ------- -------
Expected income tax expense at federal statutory tax
rate................................................ $ 9,316 $13,958 $ 6,060
State income tax expense.............................. 695 1,459 1,436
Foreign taxes......................................... 3,604 2,295 308
Income recognition differences........................ (4,866) 1,039 6,261
Utilization of NOL carryforwards...................... -- -- (3,905)
Deferred tax asset recognized......................... -- (3,000) (4,000)
Tax credit utilization................................ (3,575) (7,040) (4,432)
Other................................................. 426 989 392
------- ------- -------
Actual income tax expense............................. $ 5,600 $ 9,700 $ 2,120
======= ======= =======
At September 30, 1996 and 1995, the Company had total deferred tax assets
as follows (in thousands):
1996 1995
------- -------
Income recognition differences................................... $17,705 $22,571
Stock option tax deduction....................................... 37,973 16,901
Tax credits...................................................... 7,628 --
------- -------
Subtotal......................................................... 63,306 39,472
Less valuation allowance......................................... 56,306 32,472
------- -------
Net.............................................................. $ 7,000 $ 7,000
======= =======
The benefit for the stock option tax deduction is credited directly to
paid-in capital for financial reporting purposes, as utilized.
Cash amounts paid for income taxes were $4,752,000, $6,675,000 and
$1,574,000 for fiscal 1996, 1995 and 1994, respectively and exclusive of a
$2,190,000 refund received in fiscal 1996. At September 30, 1996, the Company
had unused research and development credits of approximately $6,200,000 expiring
in 2010, manufacturing investment credits of approximately $1,100,000 expiring
in 2004, and other unused tax credits of approximately $300,000.
F-12
56
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5.6. DEBT AND CREDIT FACILITIES
The principal balanceOn March 11, 1998, the Company and a group of long-term debt at September 30, 1996 and 1995
consisted of the following (in thousands):
1996 1995
------- -------
Note payable, interest at the bank's base rate, original maturity
of April 2008, collateralized by land and buildings, retired
during fiscal 1996 with no gain or loss resulting from the
prepayment. ................................................... $ -- $20,000
Unsecured revolving loan payable to SONY Electronics subordinate
to all non-affiliated QUALCOMM Personal Electronics debt (Note
8); bearing interest at prime plus 1%; original maturity of
March 2004, retired during fiscal 1996 with no gain or loss
resulting from the prepayment. ................................ -- 13,416
Capital lease obligations; future minimum lease payments in each
of the next five years from fiscal 1997 through 2001 of $2,955,
$3,672, $3,672, $3,672 and $917, respectively. ................ 12,912 535
Other............................................................ 230 543
------- -------
13,142 34,494
Less current portion............................................. 2,234 1,015
------- -------
$10,908 $33,479
======= =======
The annual principal installments for long-term notes payable, capital
leases and other obligations in each of the next five years from fiscal 1997
through 2001 are $2,276,000, $3,210,000, $3,270,000, $3,478,000 and $908,000,
respectively.
During fiscal 1996, QPE (Note 8)banks entered into an agreement fora $400
million unsecured revolving credit facility (the "Credit Facility") under which
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. QPE also entered into additional leases for manufacturing equipment with a
fair value of $2,664,000. All of these leasesbanks are for approximately five year
terms and are non-recoursecommitted to make loans to the Company and to extend letters of
credit on behalf of the minorityCompany. The Credit Facility expires in March 2001, and
may be extended on an annual basis thereafter, subject to approval of a
requisite percentage of the lenders. At the Company's option, interest holder in
QPE. They are classified as capital leases in accordance with Statementis at the
applicable LIBOR rate or the greater of Financial Accounting Standards No. 13, "Accountingthe administrative agent's reference
rate or 0.5% plus the Federal Funds effective rate, each plus an applicable
margin. The amount available for Leases."
Asborrowing is reduced by letters of credit
outstanding. The Company is currently obligated to pay commitment fees equal to
0.3% per annum on the unused amount of the $400 million credit facility. The
Credit Facility includes certain restrictive financial and operating covenants.
The weighted average interest rate was 6.2% on outstanding borrowings of $80
million at September 30, 1998 and during fiscal 1998. At September 30, 1998,
there were $7.7 million of letters of credit outstanding under the Credit
Facility.
During July 1996, QPE had outstanding bank borrowings of
$80,700,000 under(Note 11) entered into two separate $100,000,000$100 million
revolving credit facilities. The twofacilities, each with identical terms, expiring in July 1997.
In July 1997 and again in July 1998, QPE and its existing lenders entered into
separate identical amendments pursuant to which the expiration date of both
credit facilities have identical termswas extended to July 1998 and borrowingsJuly 1999, respectively. In July
1998, QPE and its existing lenders reduced each of the two separate facilities
from $100 million to $75 million. Borrowings under the credit facilities, which are
drawn in equal amounts. Both credit facilities expire in July 1997.amounts, totaled $71 million and $110 million at September 30,
1998 and 1997, respectively. The interest rate under the facilities is at the
primeapplicable LIBOR rate or, at the Company's
option, at a mutually acceptable market rate.plus 0.325%. The weighted average interest rate on
outstanding borrowings was 6.1%6.2% and 6.0% during fiscal 19961998 and 6.5%1997,
respectively, and 6.4% and 6.0% at September 30, 1996.1998 and 1997, respectively.
The credit facilities include covenants which, among other things, require QPE
to maintain a minimum tangible net worth. The credit facilities are non-recourse
to the Company and the minority interest holder in QPE and are collateralized by
QPE's accounts receivable and
inventories, which, at September 30, 1996,1998, on a consolidated basis,
amounted to $38,365,000 and $65,997,000, respectively. However, in the event that QPE cannot
repay the bank borrowings, both the Company and the minority interest holder in
QPE have agreed to provide subordinated loans to QPE in proportion to their
respective ownership interests, to the extent that the sum of QPE's tangible net
worth and the total loan commitments are not less than zero.$63.3 million. Under the terms of the credit facilities, amounts
that QPE may borrow outside of the credit facilities are limited.
The fair valuesvalue of the Company's debt andbank lines of credit facilities are estimated based on
comparison with similar issues or current rates offered to the Company for debt
of the same remaining maturities. At September 30, 19961998 and 1995,1997, the estimated
fair valuesvalue of the Company's debt andbank lines of credit facilities approximated their carrying
values.
F-13
57
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)value.
During fiscal 1996, QPE entered into an agreement for the sale and leaseback
of certain manufacturing equipment with a net book value of approximately $10.2
million. There was no gain or loss realized as a result of the sale. The lease
has an approximate five-year term and is non-recourse to the Company and the
minority interest holder in QPE. It is classified as a capital lease in
accordance with Statement of Financial Accounting Standards No. 13, "Accounting
for Leases."
The annual principal installments for capital leases and other obligations
are $3.0 million in fiscal 1999, $3.1 million in 2000 and $0.8 million in 2001.
Cash amounts paid for interest were $3,869,000, $2,058,000$10.8 million, $11.3 million and $1,879,000$3.9
million for fiscal 1996, 19951998, 1997 and 1994,1996, respectively.
NOTE 6. CAPITAL STOCK
Common Stock7. TRUST CONVERTIBLE PREFERRED SECURITIES OF SUBSIDIARY
In August 1995,February 1997, QUALCOMM Financial Trust I (the "Trust"), the Company's
wholly-owned subsidiary trust created under the laws of the State of Delaware,
completed a private placement of $660 million of 5 3/4% Trust Convertible
Preferred Securities ("Trust Convertible Preferred Securities"). The sole assets
of the Trust are QUALCOMM Incorporated 5 3/4% Convertible Subordinated
Debentures ("Convertible Subordinated Debentures") due February 24, 2012. The
obligations of the Trust related to the Trust Convertible Preferred Securities
are fully and unconditionally guaranteed by the Company. The Trust Convertible
Preferred Securities are convertible into Company completed its third public offering consistingcommon stock at the rate of
11,500,0000.6882 shares of Company common shares with net proceedsstock for each Trust Convertible Preferred
Security (equivalent to a conversion price of approximately $485,762,000.
Common Stock Warrants
In connection with certain notes$72.6563 per share of common
stock). Distributions on the Trust Convertible Preferred Securities are payable
issued in fiscal 1988 and 1989,quarterly by the Trust. The Trust Convertible Preferred Securities are subject
to mandatory redemption on February 24, 2012, at a redemption price of $50 per
preferred security. The
F-14
63
Company issued Series A warrants to purchase 3,076,000has reserved 9,084,000 shares of common stock as of September 30, 1998
for possible conversion of the Trust Convertible Preferred Securities at $4 per share.the
option of the holders.
As a result of the Leap Wireless Spin-off, and pursuant to a resolution of
the Board of Directors of QUALCOMM, each QUALCOMM Trust Convertible Preferred
Security is convertible, subject and pursuant to the terms of the Convertible
Subordinated Debentures, into both QUALCOMM Common Stock and Leap Wireless
Common Stock at the rate of 0.6882 and 0.17205 shares, respectively, for each
QUALCOMM Trust Convertible Preferred Security. The carrying amount of the
Company's obligation to holders of the Trust Convertible Preferred Securities
related to the anticipated settlement of a portion of the obligation with Leap
Wireless's common stock is marked to market. The mark to market adjustment is
calculated based on the market values of QUALCOMM and Leap Wireless common
stock. During the year ended September 30, 1998, no adjustment to the obligation
was recorded.
The Company recorded a call option at a fair value of $3.9 million related
to Leap Wireless's obligation to issue common stock to holders of QUALCOMM Trust
Convertible Preferred Securities upon the conversion of such securities. The
option is included in other noncurrent assets. During the year ended September
30, 1998, no unrealized gains or losses were recorded in connection with the
call option.
The Company may cause the Trust to defer the payment of distributions for
successive periods of up to twenty consecutive quarters. During such periods,
accrued distributions on the Trust Convertible Preferred Securities will
compound quarterly and the Company may not declare or pay distributions on its
common stock or debt securities that rank equal or junior to the Convertible
Subordinated Debentures. Also during such period, if holders of Trust
Convertible Preferred Securities convert such securities into Company common
stock, the holder will not receive any cash related to the deferred
distribution.
During fiscal 1994, warrants for 256,000 shares1997, issuance costs of common
stock$18.6 million related to the Trust
Convertible Preferred Securities were exchanged for 220,000 sharesdeferred and are being amortized over the
period until mandatory redemption of common stock. In addition, during
fiscal 1994 warrants for 165,000 shares of common stock were exercised with cash
payments and/or the cancellation of certain notes payable.securities in February 2012.
As of September 30, 1994, all1998 and 1997, the estimated fair value of the Trust
Convertible Preferred Securities was approximately $552 million and $701
million, respectively, based on the last reported bid price.
NOTE 8. CAPITAL STOCK
Preferred Stock
The Company has 8,000,000 shares of preferred stock authorized for issuance
in one or more series, at a par value of $0.0001 per share. In conjunction with
the distribution of Preferred Share Purchase Rights, the Company's Board of
Directors designated 1,500,000 shares of preferred stock as Series A warrants had been exercised.Junior
Participating Preferred Stock and reserved such shares for issuance upon
exercise of the Preferred Share Purchase Rights. At September 30, 1998 and 1997,
no shares of preferred stock were outstanding.
Common Stock Warrants
In November 1991, the Company issued seven-year warrants to purchase 782,000
shares of common stock at $5.50 per share to a company for the relinquishment of
all its claims to participation in certain future royalties, license fees and
profits. A total of 782,000During August, 1998, the Company issued 705,000 shares of common stock
is reserved
for issuance upon the full net exercise of thesethe warrants. As of September 30, 1996, none of
these warrants had been exercised.
Preferred Share Purchase Rights Plan
During fiscal 1996, the Board of Directors implemented a Preferred Share
Purchase Rights Plan ("Rights Plan") to protect stockholders' rights in the
event of a proposed takeover of the Company. Under the Rights Plan, the Company
declared a dividend of one preferred share purchase right (a "Right") for each
share of the Company's common stock outstanding as of October 16, 1995. Similar
Rights will generally be issued in respect to common stock subsequently issued.
Each Right becomes exercisable, uponentitles the occurrence of certain events, forregistered holder to purchase from the Company a one
one-hundredth of a share of Series A Junior Participating Preferred Stock, $0.0001
par value per share, at a purchase price of $250 per share (subject to adjustment). The
Rights are exercisable only if a person or group (an "Acquiring Person")
acquires
F-15
64
beneficial ownership of 15% or more of the Company's outstanding shares of
common stock. Upon exercise, holders, other than an Acquiring Person, will have
the right (subject to termination) to receive the Company's common stock or
other securities, cash or other assets having a market value (as defined) equal
to twice such purchase price.
The Rights are exercisable only if a person or group acquires beneficial
ownership of 15% or more of the Company's outstanding shares of common stock. The Rights, which expire on September 25, 2005,
are redeemable in whole, but not in part, at the Company's option at any time
for a price of $0.01 per Right.
NOTE 7.9. INCOME TAXES
The components of income tax provision for the years ended September 30 are
as follows (in thousands):
1998 1997 1996
-------- -------- --------
Current provision:
Federal ........ $ 86,488 $ 71,891 $ 1,301
State .......... 1,916 2,288 695
Foreign ........ 7,319 4,407 3,604
-------- -------- --------
95,723 78,586 5,600
-------- -------- --------
Deferred benefit:
Federal ........ (46,862) (51,186) --
State .......... (8,719) (10,900) --
-------- -------- --------
(55,581) (62,086) --
-------- -------- --------
$ 40,142 $ 16,500 $ 5,600
======== ======== ========
The following is a reconciliation from the expected statutory federal
income tax expense to the Company's actual income tax expense for the years
ended September 30 (in thousands):
1998 1997 1996
-------- -------- --------
Expected income tax expense at federal statutory
tax rate ...................................... $ 52,036 $ 37,956 $ 9,316
State income tax expense, net of federal benefit . 7,732 5,639 1,384
Foreign taxes .................................... 7,075 4,407 3,604
Income recognition differences ................... 5,754 3,523 (4,866)
Tax benefit from recognition of deferred tax ..... -- (21,531) --
assets
Tax credit utilization ........................... (34,015) (16,201) (4,264)
Other ............................................ 1,560 2,707 426
-------- -------- --------
Actual income tax expense ........................ $ 40,142 $ 16,500 $ 5,600
======== ======== ========
At September 30, 1998 and 1997, the Company had net deferred tax assets as
follows (in thousands):
1998 1997
-------- --------
Income recognition differences $ 84,793 $ 68,788
Stock option tax deductions .. 1,497 12,101
Tax credits .................. 6,959 298
-------- --------
$ 93,249 $ 81,187
======== ========
During fiscal 1997, the Company reduced its valuation allowance to recognize
deferred tax assets that met the "more likely than not" criteria for recognition
established by Statement of Financial Accounting Standards No. 109 ("FAS 109"),
"Accounting for Income Taxes." As a result, tax benefits relating to income
recognition differences and tax credits were recorded as part of the Company's
tax provision in the statement of income and the benefit for stock option tax
deductions was credited directly to paid-in capital.
At September 30, 1998 the Company had $13.2 million of unused manufacturing
research and alternative minimum tax credits expiring from 2004 through 2006.
Cash amounts paid for income taxes were $58 million, $18.2 million and $4.8
million for fiscal 1998, 1997 and 1996, respectively, and exclusive of a $2.2
million refund received in fiscal 1996.
F-16
65
NOTE 10. EMPLOYEE BENEFIT PLANS
Employee Savings and Retirement Plan
The Company has a 401(k) plan that allows eligible employees to contribute
up to 15% of their salary, subject to annual limits. The Company matches a
portion of the employee contributions and may, at its discretion, make
additional contributions based upon earnings. The Company's contribution expense
for fiscal 1998, 1997 and 1996 1995was $9.7 million, $5.9 million and 1994 was $3,535,000, $1,904,000 and $757,000,$3.5 million,
respectively.
Stock Option Plans
The Board of Directors may grant options to selected key employees, directors
and consultants to the Company to purchase shares of the Company's common stock,
at a price not less than 85%100% of the fair market value of the stock at the date
of grant. The 1991 Stock Option Plan (the "Plan"), as amended, authorizes up to
23,000,00033,400,000 shares to be granted no later than August 2001. The Plan provides for
the grant of both incentive stock options and non-qualified stock options.
Generally, options outstanding vest over a one to six year period F-14
58
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and are
exercisable for up to ten years from the grant date. At September 30, 1996, 1,854,0001998,
options for 5,720,000 shares were exercisable at prices ranging from $5.00$4.89 to
$38.78$68.43 for an aggregate exercise price of $35,434,000.$186.5 million.
The Company has a Non-Employee Directors' Stock Option Plan which authorizes
600,0001,070,000 shares to be granted no later than July 2003.February 2013. This plan provides
for non-qualified stock options to be granted to non-employee directors at fair
market value, vesting over periods not exceeding five years and are exercisable
at varying rates and fully exercisable withinfor up to ten years from the grant date. At September 30, 1996, 108,0001998, options for
337,500 shares were exercisable at priceprices ranging from $22.75$22.25 to $34.56$56.24 per
share for an aggregate exercise price of $3,166,000.$10 million.
A summary of stock option transactions for the plans follows (in thousands,
except per share data)(number of
shares in thousands):
OPTIONS OUTSTANDING
OPTIONS ----------------------------------------------------------------------------------------------
AVAILABLE NUMBER EXERCISE PRICE PER SHARE
FOR GRANT OF SHARES RANGE AVERAGE
--------- --------- ---------------- ----------------------------- --------
SeptemberSEPTEMBER 30, 1993................. 4,228 7,568 $ 0.50 - $40.06 $ 16.39
Options granted.................. (5,081) 5,081 15.50 - 42.44 23.94
Options canceled................. 2,015 (2,015) 4.00 - 42.44 32.78
Options exercised................ -- (650) 1.00 - 12.13 4.26
------ -------
September 30, 1994................. 1,162 9,984 $ 0.50 - $38.78 $ 17.72
Additional shares reserved....... 4,000
Options granted.................. (4,317) 4,317 22.87 - 52.43 31.01
Options canceled................. 506 (506) 4.00 - 46.50 24.76
Options exercised................ -- (1,458) 4.00 - 29.81 6.25
------ -------
September 30, 1995.................1995 ........... 1,351 12,337 $ 0.50 - $52.43 $ 23.44
Additional shares reserved.......reserved . 6,000
Options granted..................granted ............ (5,929) 5,929 31.56 - 52.25 42.69
Options canceled.................canceled ........... 683 (683) 5.00 - 52.43 30.98
Options exercised................exercised .......... -- (1,510) 1.00 - 29.75 9.21
------ -------
September------
SEPTEMBER 30, 1996.................1996 ........... 2,105 16,073 $ 0.50 - $52.43 $ 31.55
Additional shares reserved . 5,400
Options granted ............ (4,291) 4,291 37.50 - 62.37 47.29
Options canceled ........... 674 (674) 6.81 - 60.25 37.27
Options exercised .......... -- (1,208) 0.50 - 46.31 16.44
------ ------
SEPTEMBER 30, 1997 ........... 3,888 18,482 $ 5.00 - $62.37 $ 35.99
Additional shares reserved . 5,470
Options granted ............ (6,154) 6,154 44.56 - 69.96 58.20
Options canceled ........... 809 (809) 15.50 - 69.96 43.22
Options exercised .......... -- (1,290) 6.81 - 57.75 24.93
------ ------
SEPTEMBER 23, 1998(a) ........ 4,013 22,537 $ 5.00 - $69.96 $ 42.42
Options granted ............ (48) 48 17.97 - 68.43 48.88
Options canceled ........... 13 (13) 40.89 - 62.35 53.86
------ ------
SEPTEMBER 30, 1998 ........... 3,978 22,572 $ 4.89 - $68.43 $ 41.50
====== =============
During February 1994,- ------------------
(a) On September 23, 1998, in connection with the Leap Wireless Spin-off, the
Company canceled 1,657,000 employeeadjusted the option exercise prices to maintain the economic value of
the options that existed at the time of the Spin-off. The range and weighted
average exercise prices of options outstanding at September 23, 1998 were $4.89
to $68.43 and $41.50, respectively, as adjusted in connection with the Leap
Wireless Spin-off.
F-17
66
The following table summarizes information about fixed stock options
exclusiveoutstanding at September 30, 1998 (number of those held by officers and directors, with option pricesshares in excess of the then current market price of the Company's stock. The Company
then reissued an equivalent number of options with extended vesting periods at
the current market price.thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- -------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF NUMBER LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OF SHARES (IN YEARS) PRICE OF SHARES PRICE
------------------ --------- ------------ ----------- ------------ -----------
$ 4.89 to $18.18 515 2.5 $16.91 235 $16.95
$18.46 to $27.14 4,467 5.7 23.91 2,073 23.58
$27.39 to $39.86 5,468 6.7 34.84 2,177 32.22
$39.97 to $49.70 5,497 8.2 45.25 1,261 44.92
$50.00 to $68.43 6,625 9.2 57.66 311 54.11
--------- ----------
22,572 7.5 41.50 6,057 32.43
========= ==========
Employee Stock Purchase Plans
The Company has employee stock purchase plans for all eligible employees to
purchase shares of common stock at 85% of the lower of the fair market value on
the first or the last day of each six-month offering period. Employees may
authorize the Company to withhold up to 15% of their compensation during any
offering period, subject to certain limitations. The 1991 Employee Stock
Purchase Plan, as amended, authorizes up to 2,000,0004,200,000 shares to be granted no
later than August 2001. The 1996 Non-Qualified Employee Stock Purchase Plan
authorizes up to 25,000 shares to be granted at anytime. During fiscal 1996,
19951998,
1997 and 1994,1996, shares totaling 326,000, 249,000439,000, 370,000 and 182,000326,000 were issued under
the plans at an average price of $28.55, $16.40$44.14, $33.77 and $16.98$28.55 per share,
respectively. At September 30, 1996, 924,0001998, 2,315,000 shares were reserved for future
issuance.
F-15
59
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Executive Retirement Plans
The Company has voluntary retirement plans that allow eligible executives to
defer up to 100% of their income on a pretax basis. On a quarterly basis,
participants receive up to a 7.5% match of their deferral in the Company's
common stock based on the then current market price, to be issued to the
participant upon eligible retirement. The income deferred and the Company match
are unsecured and subject to the claims of general creditors of the Company. At
September 30,The
plans authorize up to 100,000 shares to be allocated to participants at anytime.
During fiscal 1998, 1997 and 1996, approximately 33,000, 11,000 and 6,000
shares, had beenrespectively, were allocated under the plans and the Company's matching
contribution during fiscal 1998, 1997 and 1996 amounted to $276,000.$1.6 million, $0.5
million and $0.3 million, respectively. At September 30, 1998, 50,000 shares
were reserved for future allocation.
Accounting for Stock-Based Compensation
As permitted under FAS 123, the Company has elected to follow APB 25 and
related Interpretations, in accounting for stock-based awards to employees and
non-employee directors. Under APB 25, the Company generally recognizes no
compensation expense with respect to such awards.
Pro forma information regarding net income and net earnings per common share
is required by FAS 123. This information is required to be determined as if the
Company had accounted for its stock-based awards to employees and non-employee
directors (including stock option plans and shares issued under the Employee
Stock Purchase Plans, collectively called "options") granted subsequent to
September 30, 1995 under the fair value method of that Statement. The fair value
of options granted in fiscal years 1998, 1997 and 1996 reported below has been
estimated at the date of grant using the Black-Scholes option-pricing model
using the following weighted average assumptions:
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67
EMPLOYEE STOCK
STOCK OPTION PLANS PURCHASE PLANS
---------------------------- ----------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Risk-free interest rate 5.5% 6.3% 6.1% 5.1% 5.1% 5.1%
Volatility ............ 50.0% 50.0% 50.0% 50.0% 50.0% 50.0%
Dividend yield ........ 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Expected life (years) . 6.0 6.0 6.0 0.5 0.5 0.5
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's options have characteristics significantly different than those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of the fair
value of its options. The weighted average estimated fair value of stock options
granted during fiscal years 1998, 1997 and 1996 was $31.76, $26.37 and $23.67
per share, respectively. The weighted average estimated fair value of shares
granted under the Employee Stock Purchase Plans during fiscal years 1998, 1997
and 1996 was $15.90, $13.58 and $13.74, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is assumed to be amortized to expense over the options' vesting period.
The Company's pro forma information for the years ended September 30 are as
follows (in thousands, except for net earnings per share):
1998 1997 1996
------------------------ ------------------------- --------------------------
As reported Pro forma As reported Pro forma As reported Pro forma
----------- --------- ----------- --------- ----------- ---------
Net income ................... $ 108,532 $ 57,747 $ 91,934 $ 73,197 $ 21,027 $ 6,019
Net earnings per common share:
Basic ..................... $ 1.57 $ 0.83 $ 1.37 $ 1.09 $ 0.32 $ 0.09
Diluted ................... $ 1.47 $ 0.78 $ 1.28 $ 1.02 $ 0.30 $ 0.09
The Company did not recognize a tax benefit relating to pro forma
compensation expense under FAS 123 for fiscal 1996 as such benefit did not meet
the "more likely than not" criteria for recognition of deferred tax assets. Pro
forma net income for fiscal 1997 includes the recognition of the tax benefit
relating to fiscal 1997 pro forma compensation expense and the recognition of
the previously unrecognized fiscal 1996 tax benefit. Pro forma net income for
fiscal 1998 includes tax effected pro forma compensation expense of $8.1 million
related to the modification of options in connection with the Leap Wireless
Spin-off. The effects on pro forma disclosures of applying FAS 123 are not
likely to be representative of the effects on pro forma disclosures of future
years because FAS 123 is applicable only to options granted subsequent to
September 30, 1995.
NOTE 8.11. INVESTMENTS IN OTHER ENTITIES
ALCATEL QUALCOMM S.A.Personal Electronics
In fiscal 1994, a subsidiary of the Company and a subsidiary of Sony
Electronics Inc. ("Sony Electronics") entered into a joint venture general
partnership, QUALCOMM Personal Electronics ("QPE"), to manufacture CDMA
subscriber equipment for cellular, PCS and other wireless applications. The
Company currently has a 34% interest in a French joint venture for the
sale, marketing and serviceowns 51% of its OmniTRACS products, services and
communications hub equipment in Europe. The Company originally contributed a
license to use certain technology for its ownership interest. The Company is not
required to record equity allocations in the joint venture untiland consolidates QPE in its financial
statements. Sony Electronics' 49% general partnership share in QPE is presented
as a minority interest in the Company's financial statements.
Under the terms of cumulative equity income exceeds cumulative losses or unless it increases its
investment basis.bank lines of credit, Sony Electronics is obligated to
provide subordinated loans to QPE in the event that QPE cannot repay the bank
credit facilities (Note 6). At September 30, 1998 and 1997, Sony Electronics had
outstanding subordinated loan commitments of $24.5 million to QPE. As a result
of Sony Electronics commitments to fund QPE, the Company did not record anyhas included in other
assets accumulated minority interest losses in excess of equity allocationscontributions of
$13.5 million as of September 30, 1997.
During fiscal 1998, 1997 and 1996, QPE sales to Sony Electronics amounted to
$684.3 million, $56.6 million and $50.2 million, respectively. Purchases of
inventory and capital equipment from Sony Electronics and other Sony affiliates
F-19
68
amounted to $68.8 million and $69.4 million, respectively during fiscal years 1996, 19951998,
$92 million and 1994. The Company has no continuing
obligation to fund or guarantee the liabilities of the joint venture.
Sales to the joint venture included in communications systems$6 million, respectively during fiscal 1997 and license,
royalty$23.9 million
and development fees were $14,545,000, $12,449,000$0.9 million, respectively, during fiscal 1996. At September 30, 1998 and
$8,393,000 for
fiscal 1996, 1995 and 1994, respectively. Accounts1997, outstanding accounts receivable from the joint
venture at September 30, 1996Sony Electronics amounted to $52.1
million and 1995 were $1,224,000$12.1 million, respectively, and $1,847,000,accounts payable to all Sony
affiliated companies amounted to $51.1 million and $21.6 million, respectively.
Globalstar, L.P.
Through partnership interests held in certain intermediate limited
partnerships, the Company owns a 7.2%6.5% partnership interest in Globalstar, L.P.
("Globalstar"), a limited partnership formed to develop, own and operate the
Globalstar low-earthlow-Earth orbiting satellite-based wireless communications system.
The Company accounts for its investment under the equity method. The Company's
partnership interest in Globalstar was reduced from 7.9% during fiscal 1996
resulting from purchases of Globalstar partnership interests by non-affiliated
entities.
As a result of the intermediate limited partnership agreements, Globalstar
profits and losses are allocated to the Company in accordance with its
percentage ownership interest, provided that no loss shall be allocated to the
Company if such allocation would create negative balances in the Company's
intermediate partnership adjusted capital accounts. For financial reporting
purposes, the Company's investment in the intermediate partnerships had no basis
during each of fiscal 1996, 19951998, 1997 and 1994,1996, and, as a result, the Company has not
recorded any equity losses during those respective fiscal years.
Subject to certain conditions, the Company, through an intermediate
partnership, may be required to purchase approximately 97,000 additional shares
from another investor in Globalstar for up to $4,600,000,$4.6 million, a price discounted
from the price paid by such investor. The Company is unable to predict the
likelihood of the occurrence of any of the conditions which would require the
additional investment.
During the second quarter of fiscal 1996, the Company guaranteed
$17,000,000 of certain vendor financing obligations ofIn return for providing a guarantee under a Globalstar ("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. The
amount of the Vendor Financing Guarantee will decrease, dollar for dollar, if
Globalstar borrows funds under the existing bank financing
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QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreement. Globalstar had no outstanding borrowings under the bank financing
agreement as of September 30, 1996.
As a result of providing the guarantee under the bank financing agreement,(Note 12), the Company received approximately 367,000 warrants to purchase 734,262 shares of
common stock in Globalstar Telecommunications Limited ("GTL"), a general partner
in Globalstar, at an exercise price of $26.50$13.25 per share.
The warrants vestshare (shares and are exercisableexercise
price reflect a two-for-one stock split of GTL common stock that occurred in May
1997). On February 12, 1997, the Company and GTL entered into an arrangement
under certain conditions, as specified
underwhich GTL agreed to accelerate the term,vesting and exercisability of the
bank guarantee agreement.Company's warrants to purchase GTL common stock. The Company exercised such
warrants in March 1997, and classified the GTL shares as trading securities in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" consistent with the
Company's intent to sell the GTL shares on a near term basis. The Company sold
the GTL common stock during the third quarter of fiscal 1997 resulting in an
aggregate realized gain of $13.4 million.
The Company and Globalstar have entered into a development agreement under
which Globalstar is funding the Company to design and develop by 1998,the subscriber
equipment and ground communications segments of the Globalstar system. Total
receivablesaccounts receivable due from Globalstar under the development contract at
September 30, 19961998 and 19951997 were $10,391,000$39.4 million and $15,166,000,$50.5 million, respectively.
Contract services revenues included inresulting from the Company'sdevelopment agreement for fiscal
1998, 1997 and 1996 1995were $252 million, $205.1 million and 1994 Consolidated Statements of Income
include $120,307,000, $72,636,000 and $20,631,000$120.3 million from
Globalstar, respectively. QUALCOMM Personal Electronics
In fiscal 1994, a subsidiary ofMarch 1998, the Company agreed to defer up to $100
million of contract payments, with interest accruing at 5 3/4% capitalized
quarterly, as customer financing under its development contract with Globalstar.
Financed amounts outstanding as of January 1, 2000, will be repaid in eight
equal quarterly installments commencing as of that date, with final payment due
October 1, 2001, accompanied by all then unpaid accrued interest. At September
30, 1998, contract payments of approximately $89.7 million were outstanding from
Globalstar as interest bearing financed amounts. Subject to terms and
a subsidiary of SONY
Electronics Inc. ("SONY Electronics")conditions, Globalstar is entitled to defer $4.2 million from each future
monthly development contract payment until the $100 million limit is reached.
During fiscal 1997, the Company entered into a joint venture general
partnership, QUALCOMM Personal Electronicscontract to manufacture and
supply ground communications segments ("QPE"Gateways"), and related services to
develop and manufacture
CDMA subscriber equipment for cellular, PCS and other wireless applications.Globalstar. The Company owns 51%recognized approximately $121 million in revenue related
to production of the joint venture and consolidates QPE in its financial
statements. SONY Electronics' 49% general partnership share in QPE is presented
as a minority interest in the Company's financial statements.
Under the terms of bank lines of credit (Note 5), the minority interest
holder in QPE is obligated to provide subordinated loans to QPE to the extent of
its negative partnership capital balance in the event that QPE cannot repay the
bank credit facilities.Gateways during fiscal 1998. At September 30, 1996,1998, accounts
receivable under this contract total $97.4 million.
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69
Telesystems of Ukraine
During fiscal 1997, the minorityCompany invested approximately $8.8 million for a
49% ownership interest holder hadin Telesystems of Ukraine ("TOU"), a $24,500,000 outstanding subordinatedUkrainian limited
liability company. During fiscal 1998, the Company invested an additional $2
million and provided a working capital loan commitmentof $8.9 million to QPE which exceeded the
commitment then requiredTOU. The Company
may provide further equity and debt contributions to TOU as necessary to support
future build-out and operational needs. The Company accounts for its investment
under the bank credit facilities. As a resultequity method of accounting. The Company will be allocated all of the
minority interest holder's commitmentsprofits of TOU until the Company's investment has been returned, thereafter,
profits will be allocated according to fund QPE,the Company's ownership interest. Losses
are allocated to the Company has included in other assets accumulated minority interest losses in excess of equity
contributions of $16,808,000 and $10,027,000, as of September 30, 1996 and 1995,
respectively.
During fiscal 1996 and 1995, QPE sales to SONY Electronics amounted to
$50,169,000 and $1,365,000, respectively. Purchases from SONY Electronics and
other SONY affiliates for inventory and capital equipment amounted to
$23,933,000 and $914,000, respectivelyaccordance with its ownership interest; however,
during fiscal 1996,1998, the Company recorded 100% of the losses of TOU because the
other investors' equity interests have been depleted.
On September 23, 1998, the Company recorded a $17.1 million liability in
connection with its agreement to transfer its ownership interest in TOU and $1,617,000 and
$9,893,000, respectively during fiscal 1995. At September 30, 1996 and 1995,
outstanding accounts receivable from SONY Electronics amountedits
working capital loan to $10,163,000
and $1,557,000, respectively, and accounts payableTOU to all SONY affiliated
companies amounted to $6,730,000 and $11,229,000, respectively. Interest expense
on notes payable to SONY Electronics (Note 5) amounted to $1,517,000 and
$588,000 during fiscal 1996 and 1995, respectively. Related party activity to
SONY Electronics and other SONY affiliated companies during fiscal 1994 was not
significant.Leap Wireless if certain events occur within 18
months of the Leap Wireless Spin-off.
NextWave Telecom Inc.
In November 1995, the Company paid $5,000,000$5 million to purchase 1,666,666 shares
of Series B Common Stock and provided a $25,000,000$25 million 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 per share. During March 1996, the Company
converted $15,000,000$15 million of the note receivable into 5,000,000 shares of Series B
Common Stock. The conversion was treated as a non cashnon-cash transaction for the
Consolidated Statementconsolidated statement of Cash Flows. Duringcash flows
In June 1996,1998, the Company collected
$9,602,000recorded a $20 million non-cash charge to
write-off its investment in NextWave. Subsidiaries of
NextWave filed for bankruptcy protection in June 1998 under Chapter 11 of the
short-term note receivable and convertedU.S. Bankruptcy Code. There is significant uncertainty as to the remaining
principal balance of $398,000 into a 3 year promissory note convertible into
1,019,444 shares of Series C Common
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QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock. At September 30, 1996, the $20,000,000 investment is included in other
long-term assets and, as the Company estimates that it holds less than 5% of
NextWave's outstanding voting shares, it is accounting for its investment under
the cost method. It is not practicable to estimate the fair valueoutcome of the
investment as NextWave is a closely held corporation and is not publicly traded.bankruptcy proceedings.
Other Joint Ventures
The Company has entered into other agreements for domestic and international joint ventures
to provideproviding advanced communications systems, products and productsservices based on
wireless technology. The Company's combined investment in these joint ventures
as of September 30, 19961998 and 1995,1997, amounted to $21,939,000$27 million and $16,011,000,$29 million,
respectively. At September 30, 1996,1998, effective ownership interests in the joint
ventures ranged from 2% to 15%34%, and there were no unfunded equity contributions amounted to approximately $1,600,000 to be funded upon request of
investees.
Predominately all of these investments are treated under the cost method of
accounting.commitments.
It is not practicable to estimate the total fair value of the Company's
investment in these other joint ventures as the investments are predominantly
closely held and not publicly traded. The Company's investees are principally
engaged in development of new products and commercial deployment and expansion
of wireless networks and services. An investee's failure to successfully develop
and provide competitive products and services due to lack of financing, market
demand or favorable economic environment could adversely affect the value of the
Company's investment in the investee. There can be no assurance that the
investees will be successful in their efforts.
Investments in Other Entities Transferred to Leap Wireless
In March 1997, the Company purchased $42 million of voting preferred shares
representing a 50% ownership interest in a corporate joint venture, Chilesat
Telefonia Personal S.A. ("Chilesat PCS"). The Company transferred its ownership
interest in Chilesat PCS to Leap Wireless as part of the Leap Wireless Spin-off.
The book value of the equity investment transferred to Leap Wireless was $39.3
million. During fiscal 1998 and 1997, sales to Chilesat PCS amounted to $77.4
million and $1.5 million, respectively.
During fiscal 1998, the Company invested approximately $110.0 million for
ownership interests in Pegaso Telecommunications, S.A. de C.V., OzPhone Pty.
Ltd., Metrosvyaz Limited, and Orrengrove Investments Limited. During fiscal
1997, the Company invested $4 million for an ownership interest in Chase
Telecommunications, Inc. These investments were transferred to Leap Wireless as
part of the
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70
Leap Wireless Spin-off at approximately $107.4 million net book value. The
Company also transferred net loans receivable from these entities to Leap
Wireless totaling approximately $90.2 million.
At September 30, 1998, the Company holds warrants to purchase approximately
1.3 million shares of the Class B common stock (approximately 14.6% of equity)
of Chase at a price of $0.01 per share. The warrants vest based upon a
percentage of usage of a $25 million credit facility provided to Chase by
QUALCOMM and subsequently transferred to Leap Wireless. At September 30, 1998,
warrants to purchase approximately 0.9 million shares are vested. The warrants
will expire in 2008. Because Chase is a private company, it is not practicable
to estimate fair value of the warrants. There are no recorded amounts related to
these warrants at September 30, 1998.
NOTE 9.12. COMMITMENTS AND CONTINGENCIES
Litigation
On September 23, 1996, Ericsson Inc. and Telefonaktiebolaget LM Ericsson
("Ericsson") filed suit against the Company in Marshall, Texas and on December
17, 1996, Ericsson also filed suit against QPE in Dallas, Texas with both
complaints alleging that the Company's or QPE's CDMA products infringe one or
more patents owned by Ericsson. The suits were later amended to include a total
of 11 Ericsson patents. By order dated July 24, 1998, the Dallas action was
transferred to Marshall, Texas. In December 1996, QUALCOMM filed a countersuit
alleging, among other things, unfair competition by Ericsson based on a pattern
of conduct intended to impede the acceptance and commercial deployment of
QUALCOMM's CDMA technology and is seeking a judicial declaration that certain of
Ericsson's patents are not infringed by QUALCOMM and are invalid. That
countersuit has been consolidated with the Marshall, Texas action. On September
10, 1996, OKI America, Inc. ("OKI") filed a complaint against Ericsson seeking a
judicial declaration that certain of OKI's CDMA subscriber products do not
infringe 9 patents of Ericsson and that such patents are invalid. The 9 patents
are among the 11 patents at issue in the litigation between the Company and
Ericsson. The OKI case has not yet been set for trial. On October 14, 1998,
Ericsson filed a dismissal with prejudice of all of its claims under three of
the patents at issue in the Marshall, Texas case. The Marshall case is set for
trial on April 6, 1999. Although there can be no assurances that an unfavorable
outcome of the Marshall case would not have a material adverse effect on the
Company's results of operations, liquidity or financial position, the Company
believes the named Ericsson patents are not required to produce IS-95 compliant
systems and that Ericsson's claims are without merit.
On March 5, 1997, the Company filed a complaint against Motorola, Inc.
("Motorola"). The complaint was filed in response to allegations by Motorola
that the Company's recently announced Q phone infringes design and utility
patents held by Motorola as well as trade dress and common law rights relating
to the appearance of certain Motorola wireless telephone products. The complaint
denies such allegations and seeks a judicial declaration that the Company's
products do not infringe any patents held by Motorola. On March 10, 1997,
Motorola filed a complaint against the Company (the "Motorola Complaint"),
alleging claims based primarily on the above-alleged infringement. The Company's
motion to transfer the Motorola Complaint to the U.S. District Court for the
Southern District of California was granted on April 3, 1997. On April 24, 1997,
the court denied Motorola's motion for a preliminary injunction thereby
permitting the Company to continue to manufacture, market and sell the Q phone.
On April 25, 1997, Motorola appealed the denial of its motion for a preliminary
injunction. On January 16, 1998 the U.S. Court of Appeals for the Federal
Circuit denied Motorola's appeal and affirmed the decision of the U.S. District
Court for the Southern District of California refusing Motorola's request to
enjoin QUALCOMM from manufacturing and selling the Q phone. On June 4, 1997,
Motorola filed another lawsuit alleging infringement by QUALCOMM of 4 patents.
Three of the patents had already been alleged in previous litigation between the
parties. On August 18, 1997, Motorola filed another complaint against the
Company alleging infringement by the Company of 7 additional patents. All of the
Motorola cases have been consolidated for pretrial proceedings. The cases have
been set for a final pretrial conference on March 1, 1999. Although there can be
no assurance that an unfavorable outcome of the dispute would not have a
material adverse effect on the Company's results of operations, liquidity or
financial position, the Company believes Motorola's complaint has no merit and
will vigorously defend the action.
On October 27, 1998, the Electronics and Telecommunications Research Institute
of Korea ("ETRI") submitted to the International Chamber of Commerce a Request
for Arbitration of a dispute with the Company arising out of a Joint Development
Agreement dated April 30, 1992 ("JDA") between ETRI and the Company. In the
Request, ETRI alleges that the Company has breached certain provisions of the
JDA and seeks monetary damages and an
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71
accounting. The Company's answer to the Request is not due until November 30,
1998. The Company plans to file an answer and counterclaims denying the
allegations, establishing the termination of the JDA, and for monetary damages
against ETRI. In accordance with the JDA, the arbitration will take place in San
Diego. No arbitrator has yet been appointed and no schedule for the arbitration
proceedings has been established. Although the ultimate resolution of this
dispute is subject to the uncertainties inherent in litigation or arbitration,
the Company does not believe that the resolution of these claims will have a
material adverse effect on the Company's results of operations, liquidity or
financial position.
The Company is engaged in other legal actions arising in the ordinary course
of its business and believes that the ultimate outcome of these actions will not
have a material adverse effect on its results of operations, liquidity or
financial position.
Operating Leases
During fiscal 1996, QPE has entered into an operating lease agreement, under which manufacturing
equipment may be leased under separate schedules, each with approximately
five yearfive-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 willmay be required to pay certain deficiencycontingent payments if
proceeds from the sale of the equipment fall below specified amounts. The
maximum amount of deficiencycontingent payments for equipment leased as of September 30,
19961998 is approximately $16,748,000.$54.9 million. Rental expense under this lease, including
an accrual for deficiencysuch contingent payments, amounted to $2,021,000$13.0 million, $13.5
million and $2.0 million during fiscal 1996.1998, 1997 and 1996, respectively. As of
September 30, 1996,1998 and 1997, the Company had accrued $20.9 million and $11.4
million, respectively, in other liabilities for such contingent payments. As of
September 30, 1998, future rental payments under the lease, excluding deficiencycontingent
payments, are $4.4 million in each of the next five years from fiscal 1997 through1999 and 2000, $3.6 million in 2001 are $1,433,000, $1,433,000, $1,433,000, $1,433,000 and
$358,000,
respectively.$0.8 million in 2002.
The Company leases certain of its other facilities and equipment under
non-cancelable operating leases, with terms ranging from two to sixten years and
with provisions for cost-of-living increases. Rental expense for these
facilities and equipment for fiscal 1998, 1997 and 1996 1995was $10.8 million, $6.9
million and 1994 was $5,417,000,
$3,292,000 and $3,288,000,$5.4 million, respectively. Future minimum lease payments in each of
the next five years from fiscal 19971999 through 20012003 are $15.7 million, $12.4
million, $10.9 million, $9.3 million and thereafter are
$6,514,000, $6,129,000, $4,333,000, $3,476,000, $2,598,000$6.6 million, respectively, and $5,748,000,
respectively.$9.0
million thereafter.
Purchase Obligations
The Company has agreements with certain suppliers to providepurchase certain
components, and estimates its non-cancelable obligations under these agreements
to be approximately $207,793,000$121.5 million through fiscal 1998.2001. The Company also has a
commitment to purchase communications services for approximately $11,880,000$12.3 million
annually through June 2001.
Litigation
In April 1992,fiscal 2001, $1.2 million in 2002, and $0.1 million in 2003.
Letters of Credit and Financial Guarantees
Under an agreement entered into during fiscal 1997 with Chilesat PCS, the
Company filedagreed to provide a $58 million letter of credit on behalf of Chilesat
PCS in the Superior Court of the State of
California, County of San Diego, a complaint for breach of contract and other
grievances against Hughes Aircraft Company ("Hughes Aircraft"), a former
subcontractor, seeking recovery of monetary damages for the subcontractor's
failure to
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62
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
perform certain contractual obligations. The subcontractor filed a
cross-complaint for the alleged value of services it alleged to have rendered towhich the Company inmay be required to reimburse Chilesat PCS for a portion
of Chilean government fines if certain network build-out milestones are not met.
Chilesat PCS has received notification from the sumChilean Undersecretariat of
$4,300,000, plus damages and related costs. The trial
commenced in November 1994. On February 14, 1995, Hughes Aircraft's motion for
nonsuit was granted by the Court, and the Company's claims were dismissed. A
judgment was entered in the Court on March 22, 1995 in favor of Hughes Aircraft
on the nonsuit and the Company accrued $2,900,000 for an anticipated liability
for Hughes Aircraft's legal fees. During the second quarter of fiscal 1996, the
Company and Hughes Aircraft agreed to dismiss their respective litigation
against each other without payment by either party. As a result of the
settlement of this litigation, the Company reversed its accrual, resulting in a
$2,900,000 reduction to general and administrative expense.
In November, 1994, the Company entered into a settlement with InterDigital
Communications CorporationTelecommunications ("IDC"SUBTEL") and InterDigital Technology Corporation
("ITC"), resulting in the dismissal of their respective CDMA patent litigation.
ITC had filed a lawsuit against the Company in April 1993 alleging that certain
CDMA products built by the Company in compliance with IS-95, a North American
CDMA digital cellular standard, infringed three of ITC's patents. The Company
had filed a lawsuit against IDC alleging that IDC's broadband-CDMA development
activities infringedphase one of the network has passed certain
acceptance tests performed by SUBTEL, and has been cleared to commence
commercial operations. Chilesat PCS is required to successfully complete certain
remaining tests on phase two of the network no later than December 1998. The
amount that Chilesat PCS may draw on the letter of credit has been reduced to
$52 million and will decline further as additional milestones are met. The
letter of credit will expire no later than December 31, 1999, and is
collateralized by a commensurate amount of the Company's patents. Both lawsuitsinvestments in debt
securities. As of September 30, 1998, no amounts have been dismissed.
Underdrawn on the termsletter
of the settlement agreement, the Company paid ITC a
one-time settlement payment of $5,500,000 in exchange for a worldwide,
royalty-free license to the Company to use and sublicense certain existing and
future ITC patents.credit.
The Company has also grantedissued a letter of credit to ITCsupport a royalty-bearing
licenseguarantee of up to
use certain CDMA patents and royalty-free license to use one CDMA
patent$22.5 million of Globalstar borrowings under an existing bank financing
agreement. The guarantee will expire in certain ITC non-IS-95 products.December 2000. The Company charged the settlement
paymentletter of $5,500,000 and related costs of approximately $7,500,000 to
operations in fiscal 1994.
On September 26, 1996, Ericsson Inc., and Telefonaktiebolaget LM Ericsson
("Ericsson") filed suit in the United States District Court for Eastern District
of Texas. The complaint alleges that various elementscredit is
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72
collateralized by a commensurate amount of the Company's CDMA
equipment systeminvestments in debt
securities. As of September 30, 1998, Globalstar had no borrowings outstanding
under the existing bank financing agreement.
In addition to letters of credit on behalf of Globalstar (Note 11) and
components products infringe one or more patents owned by
Ericsson. The Company has not yet filed a formal response to Ericssons'
complaint. Although there can be no assurance that an unfavorable outcome would
not have a material adverse affect on the Company's liquidity, financial
position or result of operations, the Company believes that the complaint has no
merit and will vigorously defend the action.
On November 8, 1996 the Company was served with a complaint in connection
with a lawsuit filed in the U.S. District Court for the Eastern District of
Pennsylvania by BTG USA Inc. The complaint alleges that the Company's Global
Positioning System, CDMA telecommunications products and the OmniTRACS system
components thereof infringe United States Patent No. Re. 34,004. The patent
expired in November 1996. Although there can be no assurances that an
unfavorable outcome would not have a material adverse effect on the Company's
liquidity, financial position or results of operations, the Company believes the
complaint has no merit and will vigorously defend the action.
The Company is engaged in other legal actions arising in the ordinary
course of its business and believes that the ultimate outcomes will not have a
material adverse effect on its liquidity, financial position or results of
operations.
Financing Commitment
Under an OEM agreement and a financing arrangement with Northern Telecom,
Inc. ("Nortel"),Chilesat PCS, the Company has an off balance sheet financing commitment to
accept$65.3 million of letters of credit and $18.6
million of other financial guarantees outstanding, respectively, as payment for product sales the assignment of loan receivables due to
Nortel as a resultSeptember
30, 1998, none of a vendor credit facility with Sprint Spectrum. Upon
assignment of the loan receivables, the Company will have all the rights and
obligations under the vendor credit facility. The Company's financing commitment
requires Nortel to meet certain conditions established in
F-19
63
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the financing arrangement. The Company's initial commitment under the financing
arrangement has been designated at $200,000,000, representing an estimated
amount which may result in actual loan receivable assignments of a lesser or
greater amount.are collateralized.
Performance Guarantees
During fiscal 1996, theThe Company and QPE have entered into agreementscontracts that provide for performance
guarantees to protect customers against late delivery or failure to perform.
These performance guarantees, and any future commitments for performance
guarantees, are obligations entered into separately, and in some cases jointly,
with partners to supply CDMA equipmentsubscriber and equipment designs, certaininfrastructure equipment. Certain of
whichthese obligations provide for substantial performance guarantees. These guarantees are triggeredthat accrue at
a daily rate based on percentages of the contract value to the extent the
equipment is not delivered by scheduled delivery dates and
equipmentor the systems fail to
meet certain performance criteria specifiedby such dates. The Company is dependent in
part on the respective agreements.
Additionally,performance of its suppliers and strategic partners in order to
provide equipment which is the Company'ssubject of the guarantees. Thus, the ability to
meet its performance obligations under
certain agreements is dependent upon the ability of certain suppliers totimely deliver necessary quantities of components to support the Company's production
schedules. As of September 30, 1996, the Company has included an assessment of
its ability to meet its performance obligations in estimates of margins under
such agreements. However, significant remaining portionsequipment may be outside of the Company's performance obligations under the agreements are scheduled to occur during
fiscal 1997.control. If the
Company isand QPE are unable to meet itstheir performance obligations, the financial impactpayment of
nonthe performance guarantees could amount to a significant portion of the respective agreements' contract
value and could materially adversely affectwould have a material adverse effect on product margins and the
Company's results of operations.operations, liquidity or financial position.
NOTE 10.13. SUMMARIZED QUARTERLY DATA (UNAUDITED)
The following financial information reflects all normal recurring
adjustments which are, in the opinion of management, necessary for a fair
statement of the results of the interim periods. Summarized quarterly data for
fiscal 19961998 and 19951997 is as follows (in thousands, except per share data):
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
1996
Revenues.............................1998
Revenues.................................... $ 146,603785,854 $ 149,263760,553 $ 234,880875,497 $ 283,104925,966
Gross profit(1)...................... 61,548 51,747 74,317 90,377............................. 232,239 226,221 250,817 305,194
Operating income..................... 2,697 (8,580) (5,619) 4,066income ........................... 52,895 51,301 53,353 85,116
Net income........................... 10,114 1,465 1,506 7,942
Primaryincome.................................. 36,762 26,011 5,843 39,916
Basic net earnings per common share(2).............. $ 0.150.54 $ 0.020.38 $ 0.020.08 $ 0.11
Fully diluted0.57
Diluted net earnings per common share(2)............................... $ 0.150.50 $ 0.020.36 $ 0.020.08 $ 0.11
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
1995
Revenues............................. $75,885 $89,753 $99,4680.54
1997
Revenues.................................... $ 121,506388,940 $ 585,746 $ 520,260 $ 601,419
Gross profit(1)...................... 35,812 39,760 45,653 52,217............................. 101,730 130,552 164,837 181,240
Operating income..................... 4,014 4,257 3,355 8,973income............................ 13,019 15,542 33,062 35,834
Net income........................... 5,947 6,047 7,263 10,923
Primaryincome.................................. 9,126 16,745 35,945 30,118
Basic net earnings per common share(2).............. $ 0.110.14 $ 0.110.25 $ 0.53 $ 0.44
Diluted net earnings per common share(2).... $ 0.13 $ 0.17
Fully diluted earnings per
share(2)...........................0.23 $ 0.110.50 $ 0.11 $ 0.13 $ 0.170.42
- ---------------------
(1) Gross profit is calculated by subtracting operating expenses for
communications systems and contract services from total revenues.
(2) Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly net earnings per share will
not necessarily equal the total for the year.
F-20F-24
6473
SCHEDULE II
QUALCOMM INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTCOSTS AND END OF
PERIOD EXPENSES DEDUCTIONS OTHER PERIOD
------------------ -------- ---------- ---------- ------- --------------- ------
Year ended September 30, 1994(1)
Allowance for doubtful accounts
-- trade receivables................... $ 1,111 $ 1,089 $ 170 $ -- $ 2,030
Inventory reserves........................ 2,401 4,253 -- -- $ 6,654
------- ------- ------- ------- -------
$ 3,512 $ 5,342 $ 170 $ -- $ 8,684
======= ======= ======= ======= =======
Year ended September 30, 1995(1)
Allowance for doubtful accounts
-- trade receivables................... $ 2,030 $ 1,503 $ 100 ($ 580) $ 2,853
-- notes receivables(2)................ -- 1,520 -- 580 2,100
Inventory reserves........................ 6,654 10,221 -- -- $ 16,875
------- ------- ------- ------- -------
$ 8,684 $ 13,244 $ 100 $ -- $ 21,828
======= ======= ======= ======= =======
Year ended September 30, 1996(1)
Allowance for doubtful accounts
-- trade receivables...................receivables............ $ 2,853 $ 7,681 $ 2,311 $ -- $ 8,223
-- notes receivables(2)................receivable(2).......... 2,100 -- 2,100 -- --
Inventory reserves........................reserves................. 16,875 11,090 8,933 -- $ 19,032
---------- --------- --------- ------- ------- ------- ------- ----------------
$ 21,828 $ 18,771 $ 13,344 $ -- $ 27,255
========== ========= ========= ======= =========
Year ended September 30, 1997(1)
Allowance for doubtful accounts
-- trade receivables............ $ 8,223 $ 17,980 $ 7,311 $ -- $ 18,892
Inventory reserves................. 19,032 32,277 15,285 -- 36,024
---------- --------- --------- ------- ---------
$ 27,255 $ 50,257 $ 22,596 $ -- $ 54,916
========== ========= ========= ======= =========
Year ended September 30, 1998(1)
Allowance for doubtful accounts
-- trade receivables............ $ 18,892 $ 5,508 $ 2,467 $ -- $ 21,933
-- finance receivables.......... -- 4,955 -- -- 4,955
Inventory reserves................. 36,024 47,597 40,835 -- 42,786
---------- --------- --------- ------- ----------
$ 54,916 $ 58,060 $ 43,302 $ -- $ 69,674
========== ========= ========= ======= ======= =================
- -------------------
(1) The Company's fiscal year ends on the last Sunday of September.
(2) Included in non-current other long-term assets.
S-1
65
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ------------------------------------------------------------------------ ------------
3.1 Restated Certificate of Incorporation.(1)...............................
3.2 Certificate of Amendment of Restated Certificate of Incorporation.(7)...
3.3 Certificate of Designation of Preferences...............................
3.4 Bylaws.(2)..............................................................
10.1 Form of Indemnity Agreement between the Company, each director and
certain officers.(2)(14)................................................
10.2 1991 Stock Option Plan, as amended.(10)(14).............................
10.3 Form of Incentive Stock Option Grant under the 1991 Stock Option
Plan.(2)(14)............................................................
10.4 Form of Supplemental Stock Option Grant under the 1991 Stock Option
Plan.(2)(14)............................................................
10.5 1991 Employee Stock Purchase Plan.(11)(14)..............................
10.6 Form of Employee Stock Purchase Plan Offering under the 1991 Employee
Stock Purchase Plan.(2)(14).............................................
10.7 Registration Rights Agreement dated September 11, 1991 between the
Company and various Stockholders.(2)....................................
10.8 Satellite Service Agreement dated March 5, 1991 between the Company and
GTE Spacenet Corporation.(2)(3).........................................
10.9 Joint Venture Agreement dated January 24, 1990 between the Company and
Alcatel Transmission par Faisceaux Hertziens.(2)(3).....................
10.10 Agreement dated April 17, 1989 between the Company and PACTEL
Corporation.(2)(3)......................................................
10.11 CDMA Technology Agreement and related Patent License Agreement, each
dated July 3, 1990 between the Company and American Telephone &
Telegraph Company.(2)(3)................................................
10.12 DS-CDMA Technology Agreement and related Patent License Agreement, each
dated September 26, 1990 between the Company and MOTOROLA, Inc.(2)(3)...
10.13 JSM Shareholders Agreement dated May 24, 1991 between the Company, C.
Itoh, Ltd. and Nippon Steel Corporation.(2)(3)..........................
10.14 401(k) Plan.(2).........................................................
10.15 Amendments dated January 15, 1992 and February 7, 1992 to that certain
Technology Agreement dated July 3, 1990 with American Telephone &
Telegraph Company.(4)...................................................
10.16 Amendment dated January 21, 1992 to that certain Technology Agreement
dated September 26, 1990 with MOTOROLA, Inc.(4)(5)......................
10.17 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan").(14).............................................................
10.18 Form of Stock Option Grant under the Directors' Plan, with related
schedule.(6)(14)........................................................
10.19 Joint Venture and Partnership Agreement dated February 25, 1994 between
QUALCOMM Investment Company and SONY Electronics CDMA Investment,
Inc.(7)(8)..............................................................
10.20 Contract dated March 18, 1994 between the Company and Globalstar,
L.P.(7)(8)..............................................................
10.21 Executive Retirement Matching Contribution Plan(12)(14).................
66
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ------------------------------------------------------------------------ ------------
10.22 1996 Non-qualified Employee Stock Purchase Plan(13)(14).................
10.23 Stockholder Rights Plan(9)..............................................
11.1 Calculation of earnings per share.......................................
23.1 Consent of Price Waterhouse LLP.........................................
24.1 Power of Attorney. Reference is made to page 40.........................
27 Financial Data Schedule.................................................
- ---------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-3
(No. 33-62724) or amendments thereto and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 33-42782) or amendments thereto and incorporated herein by reference.
(3) Certain confidential portions deleted pursuant to Order Granting
Application or Confidential Treatment issued in connection with
Registration Statement on Form S-1 (No. 33-42782) effective December 12,
1991.
(4) Filed as exhibit to Registrant's Annual Report on Form 10-K for the fiscal
year ended September 27, 1992.
(5) Certain confidential portions deleted pursuant to order Granting
Application for Confidential Treatment pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934 dated March 19, 1993.
(6) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended September 26, 1993.
(7) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 27, 1994, as amended.
(8) Certain confidential portions deleted pursuant to Order Granting
Application for Confidential Treatment pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934 dated July 7, 1994.
(9) Filed as an exhibit to the Company's Form 8-K current report dated as of
September 26, 1995.
(10) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(File No. 333-2754) filed on March 25, 1996.
(11) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(File No. 333-2756) filed on March 25, 1996.
(12) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(File No. 333-2752) filed on March 25, 1996.
(13) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(File No. 333-2750) file on March 25, 1996.
(14) Indicates management or compensatory plan or arrangement required to be
identified pursuant to Item 14(c)(4).