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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) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 26, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 0-19528
QUALCOMM INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
DELAWARE 95-3685934
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5775 MOREHOUSE DRIVE 92121-1714
SAN DIEGO, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (858) 587-1121
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 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] 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 or any amendment to this Form 10-K. [X]
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The aggregate market value of the voting stock held by non-affiliates of
the registrant as of November 15, 1999 was $56,211,906,160.*
The number of shares outstanding of the registrant's Common Stock was
164,957,845 as of November 15, 1999.
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 registrant's 2000
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 26, 1999.
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 on Form S-8
(Registration No. 333-2754); (ix) Registration Statement on Form S-8
(Registration No. 333-2756); (x) Current Report on Form 8-K dated as of
September 26, 1995; (xi) Annual Report on Form 10-K for the fiscal year ended
September 29, 1996; (xii) Registration Statement on Form S-3 (Registration No.
333-26069), as amended; (ix) Annual Report on Form 10-K for the fiscal year
ended September 28, 1997; (x) Quarterly Report on Form 10-Q for the quarter
ended March 29, 1998; (xi) Registration Statement on Form S-8 (Registration No.
333-69457); (xii) Quarterly Report on Form 10-Q for the quarter ended December
27, 1998; (xiii) Quarterly Report on Form 10-Q for the quarter ended March 28,
1999 and (xiv) Current report on Form 8-K dated May 24, 1999 are incorporated by
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 15, 1999. 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.
2
QUALCOMM INCORPORATED
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
INDEX
PAGE
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PART I
Item 1. Business.................................................... 5
Introduction................................................ 5
Wireless Telecommunications Industry Overview............... 6
Strategy.................................................... 8
Operating Segments.......................................... 8
Research and Development.................................... 12
Competition................................................. 12
Patents, Trademarks and Trade Secrets....................... 14
Employees................................................... 16
Executive Officers.......................................... 16
Risk Factors................................................ 18
Item 2. Properties.................................................. 28
Item 3. Legal Proceedings........................................... 29
Item 4. Submission of Matters to a Vote of Security Holders......... 31
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters..................................................... 32
Item 6. Selected Consolidated Financial Data........................ 33
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 34
Item 7A. Quantitative and Qualitative Disclosure about Market Risk... 44
Item 8. Financial Statements........................................ 46
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 46
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 47
Item 11. Executive Compensation...................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 47
Item 13. Certain Relationships and Related Transactions.............. 47
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 48
Signatures.................................................. 52
3
TRADEMARKS AND TRADENAMES
QUALCOMM(R), OmniTRACS(R), TruckMAIL(R), Eudora(R), Q Phone(TM), Thin
Phone(TM), QCP-860(TM), QCP-1960(TM), QCP-2760(TM), pdQ(TM), pdQ smartphone(TM),
MSM(TM), CSM(TM), MSM3000(TM), MSM3100(TM), RFT3100(TM), PM1000(TM),
SURF3100(TM), MSM5000(TM) and CSM5000(TM) are trademarks and/or servicemarks of
the Company. QUALCOMM, QUALCOMM Wireless Business Solutions, QWBS, OmniTRACS,
QUALCOMM CDMA Technologies, QCT, QUALCOMM Wireless Systems, QWS, QUALCOMM
Consumer Products and QCP are tradenames of the Company.
QUALCOMM Personal Electronics and QPE are trademarks, servicemarks and
tradenames of QUALCOMM Personal Electronics.
cdmaOne(TM) is a trademark of the CDMA Development Group. Globalstar(TM) is
a trademark and servicemark of Globalstar, L.P. Leap Wireless is a trademark,
servicemark and tradename of Leap Wireless International, Inc.
All other trademarks, servicemarks and/or tradenames appearing in this
document are the property of their respective holders.
4
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 ("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 manner, avoiding delays in the commercial implementation of the Code
Division Multiple Access ("CDMA") technology; risk that the rate of growth in
the CDMA subscriber population will decrease; risks associated with the
scale-up, acceptance and operations of CDMA systems, including high data rate
("HDR") technology; risks associated with component shortages; risks associated
with strategic opportunities or acquisitions, divestitures and investments the
Company may pursue; risks related to the ability to sustain or improve
operational efficiency and profitability; risks relating to the success of
Globalstar L.P.; developments in current or future litigation or arbitration;
the Company's ability to effectively manage growth and the intense competition
in the wireless communications industry; risks associated with vendor financing;
timing and receipt of license fees and royalties; risks associated with
international business activities; and risks related to customer receivables and
performance obligations, as well as the other risks detailed in this Form 10-K.
The Company's consolidated financial data includes QUALCOMM Personal Electronics
("QPE") and certain other consolidated subsidiaries of the Company.
QUALCOMM was incorporated in 1985 under the laws of the state of
California. In 1991, QUALCOMM reincorporated in the state of Delaware.
INTRODUCTION
QUALCOMM is a leading provider of digital wireless communications products,
technologies and services based on the Company's technology. The Company
designs, develops, manufactures and markets CDMA subscriber products and
designs, develops and markets CDMA chipsets and system software. The Company
also licenses and receives royalty payments on its CDMA technology from major
domestic and international telecommunications equipment suppliers. In addition,
the Company designs, manufactures and distributes products and provides services
for its OmniTRACS system. The Company also has contracts with Globalstar L.P.
("Globalstar"), a low-Earth-orbit ("LEO") satellite system (the "Globalstar
System") utilizing CDMA technology, to design, develop and manufacture
subscriber products and ground communications systems and to provide contract
development services.
The Company's CDMA technology has been adopted as an industry standard for
digital cellular, Personal Communications Services ("PCS") and other wireless
services. Wireless networks based on the Company's current implementation of
CDMA technology, referred to as cdmaOne, have been commercially deployed or are
under development in more than 35 countries around the world, with 27 countries
already in commercial deployments. The CDMA Development Group ("CDG") reports
that CDMA carriers have signed nearly 35 million commercial subscribers
worldwide, with extensive deployment in the U.S., Japan, Canada, and South
Korea. In addition, CDMA networks are planned or deployed in a number of other
countries and territories, including Australia, Brazil, Chile, the People's
Republic of China, India, Mexico, the Philippines, Puerto Rico and Russia.
QUALCOMM continues to invest in research and development projects focused
on improving current CDMA applications and products, developing and
commercializing next generation CDMA technology and products, interfacing with
other digital cellular standards, and developing and commercializing new leading
edge CDMA HDR technology, products and services. The Company believes HDR will
provide a high speed, cost-effective, fixed and mobile alternative for Internet
access, competing with digital subscriber loop cable and satellite networks. HDR
is designed to enable existing cdmaOne and future CDMA third generation service
providers to obtain higher capacities and superior performance by optimizing
voice and data spectrum separately, while serving both applications from the
same access point.
5
On September 14, 1999, QUALCOMM announced it is considering several
strategic options for its terrestrial-based phone business that currently holds
an industry leading position in CDMA handsets in the North American market. With
increased competition, parts shortages and industry consolidation reducing
margins in consumer products, QUALCOMM desires to transition the business to a
manufacturer that will support its customer base and employees while providing
economies of scale, a strong purchasing base and other operating efficiencies.
Discussions are underway with a number of companies that have expressed
interest. QUALCOMM has set an objective of completing discussions and entering
an agreement before the end of calendar year 1999, which may result in a
non-recurring charge to earnings. There can be no assurance the Company will be
able to transition this business to another manufacturer or enter an agreement
by the end of calendar year 1999, if at all.
WIRELESS TELECOMMUNICATIONS INDUSTRY OVERVIEW
Demand for wireless telecommunications continues to grow at a significant
rate. This demand is largely attributable to the widespread availability and
increasing affordability of mobile telephone 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 that are often characterized by poor
quality, limited capacity and long installation waiting periods.
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 the anticipated lower cost and
higher quality of wireless service, combined with technological improvements in
handsets and high speed data transmission and Internet access will fuel further
growth of the wireless market. In addition to lower prices, the Company believes
increased voice quality, battery life and functionality, as well as awareness of
the productivity, convenience, security 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. Analog technology has several
limitations compared to digital technology, including limited capacity, less
consistent service quality (e.g., lower voice quality and more dropped calls),
limited effectiveness in preventing "eavesdropping," greater susceptibility to
fraud and "cloning" and less reliability in data transfer. Digital wireless
telecommunications systems address 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 wireless applications
and have been adopted as standards by the Telecommunications Industry
Association ("TIA"): CDMA technology, developed by the Company, and Time
Division Multiple Access ("TDMA") or variations of TDMA known as Global System
for Mobile Communications ("GSM") technology. In July 1993, the TIA adopted a
North American industry standard ("IS-95") for cellular and Personal Digital
Communications ("PDC") telecommunications based on QUALCOMM's CDMA technology.
In April 1995, the Company's CDMA technology was approved as a standard for PCS
that was published as American National Standards Institute ("ANSI") standard
J-STD-008. CDMA has been commercially deployed or is under development in more
than 35 countries. TDMA has been deployed in the American continents, while 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 than CDMA and there can be no assurance that wireless service
providers will select CDMA for their networks.
6
Infrastructure and subscriber products for CDMA digital wireless technology
are widely available from a number of large, well-capitalized telecommunication
companies. Major providers of CDMA subscriber products include Motorola, Nokia,
Samsung, LG Information & Communications, Toshiba and Sanyo. Significant CDMA
wireless infrastructure product manufacturers include Ericsson, Lucent, Motorola
and Nortel.
Emerging Next Generation Digital Standards. Industry and government
participants of the International Telecommunications Union ("ITU") recently
considered a variety of standards which may be utilized in third generation
wireless networks. Among those standards that were approved by the relevant ITU
Study Group were three QUALCOMM advocated CDMA-based third generation standards
that will accommodate both of the dominant network standards in use today. The
Company cannot assure you that these CDMA standards will receive final approval
by the ITU Radio Communications Assembly or will be fully adopted in all regions
of the world or for use in all applicable frequency bands. The Company believes
that the Company's CDMA patent portfolio is applicable to the CDMA systems that
have been approved as third generation standards. The Company has informed
standards bodies and the ITU that the Company holds essential intellectual
property rights for the third generation proposals based on CDMA. Further, the
Company intends to vigorously enforce and protect the Company's intellectual
property position against any infringement. More than one dozen companies have
entered into royalty bearing licenses for the Company's third generation CDMA
systems patents. However, the Company cannot assure you that the Company's CDMA
patents will be determined to be applicable to any proposed standard or that the
Company will be able to redesign the Company's products on a cost-effective and
timely basis to incorporate next generation wireless technology.
The Company and Telefonaktiebolaget LM Ericsson ("Ericsson") concluded a
comprehensive series of agreements that resolved certain disputes between the
companies relating to CDMA technology. As a result of these agreements, QUALCOMM
and Ericsson have agreed to jointly support approval by the ITU of CDMA third
generation standards that encompass three optional modes of operation: (1)
International Mobile Telecommunications ("IMT") 2000 DMA Direct Spread, (2)
IMT-2000 CDMA Multi-Carrier including 1x and 3x, and (3) IMT-2000 CDMA Time
Division Duplex ("TDD"), with each mode supporting operation with both GSM
Multiple Access Protocol ("MAP") and ANSI-41 networks. The Company has committed
to the ITU to license its essential patents for these CDMA standards on a fair
and reasonable basis free from unfair discrimination.
Advantages of CDMA
The Company's 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 systems and at least three to four times TDMA/GSM-based systems.
The Company believes future products in development will support even greater
capacity enhancements.
Higher Quality. There are inherent quality advantages in the Company's CDMA
technology that result in a consistently higher quality voice and data
transmission throughout the coverage area for mobile and fixed wireless
telephone operations.
Fewer Dropped Calls. The Company's CDMA technology allows 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.
Enhanced Privacy and Data Transmission. Because calls made over CDMA
systems are low power, wide band and coded, the Company's CDMA technology
inherently provides greatly improved privacy for 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 for CDMA is typically reduced
7
from one-twenty-fifth to one-thousandth of the power required for analog
systems. Lower average transmitted power results in longer talk time and lighter
weight, lower cost portable phones.
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, reducing overall infrastructure cost and the subsequent maintenance
cost of CDMA systems.
STRATEGY
QUALCOMM's strategy is to be a leading provider of CDMA based wireless
communications technology, products and services. Elements of our strategy
include:
Continue Leadership in Wireless Communications Technology Products and
Services. QUALCOMM is currently the leading supplier of CDMA chipsets. As the
developer of CDMA for commercial wireless networks, the Company believes it has
unique expertise in designing and developing chipsets, system software and
services for CDMA systems. The Company plans to continue to invest heavily in
research and development in order to commercialize new leading-edge CDMA based
technology products and services.
Promote Worldwide Commercialization of CDMA. A major component of
QUALCOMM's strategy is to promote the continued worldwide commercial
implementation of the Company's CDMA technology in order to generate licensing
and royalty revenues and product sales. To facilitate adoption of CDMA, the
Company designs and markets proprietary CDMA chipsets. In addition, to promote
the advantages of CDMA and position CDMA as an important part of evolving
digital wireless technology standards, the Company actively seeks to license its
CDMA technology to major telecommunications products manufacturers, works
closely with wireless providers and regulatory bodies, and participates actively
in various standards-setting groups and trade organizations.
Focus on Core Technologies. One of QUALCOMM's primary objectives is to
leverage its extensive intellectual property portfolio as a means of generating
revenues for the Company. QUALCOMM's proprietary core technologies are used in a
variety of digital wireless communications systems that are deployed in
terrestrial, airborne and satellite-based products. The Company employs 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 protection for
licensing its technology.
Leverage Industry Partnerships. The Company has an ongoing commitment to
the evolution and expansion of its 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, in 1998, the Company announced the formation of Wireless Knowledge, a
joint venture with Microsoft Corporation, which is focused on wireless data
communications, information technology and computing. The Company announced an
agreement with Lucent Technologies to jointly develop and promote
standardization of a technology for locating the point of origin of an emergency
wireless phone call. The Company has also entered into service and product
supply agreements with numerous international partners, including Denso, to
further the penetration of the OmniTRACS product around the world.
Pursue Strategic Acquisitions. The Company continues to evaluate strategic
acquisitions that could enhance or further develop existing QUALCOMM
technologies. Potential acquisition candidates are evaluated on their potential
to increase the financial returns of QUALCOMM.
OPERATING SEGMENTS
- CDMA Technologies Segment ("QCT")
QUALCOMM's CDMA Technologies segment provides highly integrated hardware,
software and system support for CDMA wireless applications. QCT offers complete
solutions for handsets and infrastructure products including CDMA chipsets and
system software, and radio and power management devices.
8
QCT supplies chipsets to the world's leading CDMA handset and
infrastructure manufacturers. QCT is closely aligned with manufacturers and
operators in product planning, design specifications and development timelines.
During the 1999 fiscal year, QCT's shipments exceeded 39 million Mobile Station
Modem ("MSM") chips to customers worldwide, including QPE, increasing cumulative
shipments to date to more than 65 million MSM chips. During fiscal 1999,
approximately 70% of QCT's chipset sales have been made to international
customers, particularly in South Korea.
QCT currently utilizes several leading independent semiconductor foundries,
including IBM, Intel, Philips, Texas Instruments, TSMC and others, to
manufacture all of its semiconductor products. Second sourcing for products
allows the Company to adapt to meet its customer needs and changes in the
marketplace. Through strategic partnerships with each of its foundries and an
internal dedicated foundry engineering team, QCT has been able to deliver
products with excellent quality and reliability.
QCT's industry-leading CDMA chipsets and system software provide robust,
highly integrated solutions enabling manufacturers to design very small,
feature-rich handsets with longer standby times and support for higher data rate
services.
The Company has entered into royalty-bearing license arrangements with DSP
Communications, LSI Logic Corporation and PrairieComm, Inc. covering certain
patents belonging to QUALCOMM applicable to Application Specific Integrated
Circuits ("ASICs"). Pursuant to these arrangements, such parties are licensed to
manufacture and sell CDMA chips to subscriber licensees of the Company. To date,
most subscriber licensees have chosen to purchase their CDMA chipset and system
software requirements from the Company to ensure timely access to the latest
generation technology. Under the terms of their agreements, Motorola and Lucent
also have licenses under certain of the Company's patents to manufacture and
sell CDMA chips to certain of the Company's licensees that hold separate
licenses under all applicable intellectual property rights of the Company
incorporated in such chips. In every case, the right of such licensees to use or
resell such licensed ASICs or chips is subject to such licensees' payment of
royalties to the Company on the products into which such ASICs or chips are
incorporated.
The Company believes it has established a significant advantage over other
existing and potential providers of CDMA chipsets. The Company continues to lead
the industry by delivering proven, leading edge, high-quality and cost effective
solutions. With over ten years of proven CDMA hardware and software experience,
the Company has an established record of on-time delivery and comprehensive
product roadmaps for future generation products. To date, the Company's fifth
generation MSM3000 chipset and system software has been selected by 29 handset
manufacturers and eight CDMA handset manufacturers have begun volume shipments
of handsets based on the MSM3000 chipset and system software to markets
including Australia, Brazil, Canada, Japan, South Korea and the United States.
Another 21 manufacturers are actively designing products based on the MSM3000
chipset and system.
The MSM3000 solution was featured in handsets developed by three Japanese
manufacturers for Japan's first nationwide cdmaOne network, which was jointly
launched by DDI Corporation and IDO Corporation on April 14, 1999. In the summer
of 1999, High Speed Packet Data ("HSPD") trials in Japan and commercial
deployment in South Korea facilitated the use of handsets incorporating
QUALCOMM's MSM3000 chipset and system software to transfer wireless data at
speeds of up to 64 kbps.
Accompanying the continued success of the MSM3000 solution was the on-time
shipment of samples in September 1999 of QCT's sixth generation CDMA chipset and
system software solution, including the MSM3100, the RFT3100 transmit processor,
the PM1000 power management chip and the SURF3100 Subscriber Unit Reference
Development System. This latest generation solution features an increased level
of integration allowing a 50 percent reduction of the printed circuit board area
and up to 300 hours of standby time, enabling manufacturers to quickly design
very small, feature-rich handsets with longer standby times and support for
higher data rate services. Production volume shipments are scheduled for the end
of calendar 1999.
The Company is developing solutions to support a single worldwide CDMA
standard for third generation systems. Earlier this year, the Company announced
the development of the world's first third generation
9
CDMA 1x Multi-Carrier chipset and system software solutions for handset and
infrastructure products. The Company's seventh generation chipset and system
software solution, including the MSM5000 and the CSM5000, are scheduled for
field trials in early calendar 2000. These trials represent a significant step
toward accelerating the commercial deployment of third generation systems.
Chipsets and system software to support the two frequency division duplex
("FDD") modes including the Multi-Carrier mode, consisting of both 1x and 3x
spreading bandwidths, and Direct Spread ("DS") mode are under development.
- Technology Licensing Segment ("QTL")
QUALCOMM's Technology Licensing segment generates revenue from its CDMA
licenses in the form of up-front fees as well as ongoing royalties based on
worldwide sales by licensees of CDMA products. Up-front fees are generally
nonrefundable and may be paid in one or more installments. Ongoing royalties are
non-refundable, generally based upon a percentage of the selling price of
licensed products, and are recognized as income on a quarterly basis. Revenues
generated from up-front fees and royalties are subject to quarterly and annual
fluctuations. Fluctuations are the result of variations in the number of newly
licensed manufacturers and the resulting up-front fees, the timing of
recognition of CDMA up-front fees, product pricing and quantities of sales by
the Company's licensees, the Company's ability to estimate such sales, and the
impact of currency fluctuations associated with royalties generated from
international licensees.
- Wireless Systems Segment ("QWS")
QUALCOMM's Wireless Systems segment is comprised of two divisions, Wireless
Systems and Wireless Business Solutions. The Wireless Systems division designs,
develops, manufactures, and deploys infrastructure products and handsets for the
Globalstar System. In May 1999, the Company sold certain assets related to the
Wireless Systems division's terrestrial CDMA wireless infrastructure business to
Ericsson. The Wireless Business Solutions division (formerly OmniTRACS) provides
satellite based two-way data messaging and position reporting equipment and
services to transportation companies.
In 1994, Loral Space and Communications, Ltd., QUALCOMM and other companies
formed Globalstar to design, construct and operate a worldwide, low-Earth-orbit
satellite system. Through a planned constellation of 48 satellites, this system
will connect with existing terrestrial telecommunications systems to create a
seamless global network, enabling users to call, fax and send data to and from
virtually any place in the world. The Company holds an approximate 6.4% interest
in Globalstar through certain limited partnerships.
The Company has entered into a number of development and manufacturing
contracts with Globalstar. The Company's development agreement provides for the
design and development of the ground communications stations ("gateways") and
user terminals for the Globalstar System. Under the development agreement, the
Company is reimbursed for its services on a cost-plus basis. In April 1997, the
Company was awarded a contract to manufacture the commercial gateways for
deployment in the Globalstar System. In April 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.
QWS' OmniTRACS system 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 37
countries. Through September 1999, the Company has sold over 300,000 OmniTRACS
and TRUckMAIL 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. This architecture provides a
single network, eliminates the limited coverage and accuracy problems inherent
in land-based systems and allows 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.
10
In the U.S., QWS manufactures and sells OmniTRACS mobile terminals and
related software packages and provides ongoing messaging and maintenance
services. Customers for U.S. operations include over 1,100 U.S. transportation
companies, primarily in the trucking industry. QWS has sold OmniTRACS products
for use by private trucking fleets, service vans, ships, trains, federal
emergency vehicles, and for oil and gas pipeline control and monitoring sites.
Message transmissions for U.S. operations are formatted and processed at a
Network Management Facility in San Diego, California operated by QUALCOMM, with
a fully capable backup Network Management Facility located in Las Vegas, Nevada.
QWS estimates the Network Management Facilities worldwide currently process over
seven million messages and position reports per day.
Outside of the U.S., QWS works with telecommunications companies and
operators to establish the OmniTRACS concept and products in foreign markets.
The OmniTRACS system is currently operating throughout Europe and in the Middle
East and in Argentina, Brazil, Canada, China, Japan, Malaysia, Mexico, Russia
and South Korea. Internationally, QWS generates revenues from the OmniTRACS
system through license fees, sales of network products and terminals, messaging
royalties and service fees. Messaging services are provided by service providers
that operate network management centers for a region under licenses granted by
the Company.
- Consumer Products Segment ("QCP")
QUALCOMM's Consumer Products segment designs, manufactures, markets and
sells digital 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 handset in 1995, and as of September 1999, QCP has shipped
approximately 14 million CDMA phones to customers including AirTouch, Bell
Atlantic Mobile, PrimeCo and Sprint PCS.
QCP produces a range of CDMA digital wireless phones, including the Thin
Phone and the pdQ smartphone. The Thin Phone series features an ultra-thin
design with a permanent internal battery and hot-swappable battery options that
support up to ten hours of talk time or up to 17 days of standby time. The Thin
Phone, which weighs in at just over four ounces, is easily pocketable yet
supports state-of-the-art phone, pager, voice-mail and data transfer features.
The QUALCOMM Thin Phone series currently offers three handsets: the QCP-860, an
800 MHz dual-mode CDMA digital and analog cellular phone; the QCP-1960, a 1900
MHz CDMA digital PCS phone; and the QCP-2760, a dual-band, dual mode handset
that can operate in both 1900 MHz CDMA digital PCS mode and 800 MHz analog
cellular mode.
QCP's pdQ smartphone combines the popular Palm Computing platform with a
CDMA digital wireless phone that supports wireless Internet access and e-mail
while giving customers access to the more than 1,000 applications available for
the Palm Computing platform. The pdQ smartphone offers businesses and consumers
end-to-end security for sensitive transactions through the use of standard
Internet protocols. Users can input data three ways: through Palm Computing's
Graffiti power writing software, the on-screen keyboard, or through a personal
computer's keyboard when connected to the pdQ smartphone with the included
HotSync technology. The pdQ smartphone series currently consists of the 800 MHz
pdQ smartphone, a dual-mode CDMA digital and analog cellular smartphone, and the
1900 MHz pdQ smartphone, a CDMA digital PCS smartphone.
On September 14, 1999, QUALCOMM announced it is considering several
strategic options for its terrestrial-based phone business, which currently
holds an industry-leading position in CDMA handsets in the North American
market. With increased competition, parts shortages and industry consolidation
reducing margins in consumer products, QUALCOMM desires to transition the
business to a manufacturer that will support its customer base and employees
while providing economies of scale, a strong purchasing base and other operating
efficiencies. Discussions are underway with a number of companies that have
expressed interest. QUALCOMM has set an objective of completing discussions and
entering an agreement before the end of the 1999 calendar year, which may result
in a non-recurring charge to earnings. There can be no assurance the Company
will be able to transition this business to another manufacturer or enter an
agreement
11
on favorable terms by the end of calendar year 1999, if at all. In the interim,
QUALCOMM is in the process of attempting to reduce expenses and improve margins
in its terrestrial-based phone business.
- Other
The Company performs a variety of work for various departments and agencies
of the U.S. Government involving communication-related technologies. The Company
is currently under contract with the U.S. Government to develop CDMA terrestrial
secure phones with a net broadcast capability that incorporates end-to-end
encryption. Under the same contract, the Company is providing the same
capabilities for 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, OmniTRACS products and services are being marketed and sold
worldwide for U.S. Government applications.
Future government business, leveraging off existing and new technologies
and products, continues to be an important element of the 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 existing and future government applications.
The Company is developing a Digital Cinema System which will combine
QUALCOMM's expertise in advanced image compression, electronic security, network
management, integrated circuit design and satellite communications to provide a
complete electronic delivery system to support the motion picture industry.
QUALCOMM is also marketing its system and technology to the motion picture
industry and participating in the industry-wide standards setting process.
The Company's Eudora Pro product is the leader in e-mail business and
personal communications software. Eudora Pro provides a broad array of features
that support Internet and multimedia standards. The Company sells the product
directly to customers and through retailers, distributors, electronic resellers,
Internet service providers and licensed original equipment manufacturers.
A subsidiary of the Company and a subsidiary of Sony Electronics Inc.
("Sony") participate in a joint venture general partnership, QUALCOMM Personal
Electronics ("QPE"), to manufacture CDMA handsets. The Company owns 51% of the
joint venture and consolidates QPE in its financial statements. Revenues and
expenses related to QPE's sales to Sony represent a separate nonreportable
operating segment.
RESEARCH AND DEVELOPMENT
The wireless telecommunications industry is characterized by rapid
technological change, requiring a continuous effort to enhance existing products
and develop new products and technologies. The Company maintains a substantial
program of research and product development. Company-sponsored research and
development expenditures in fiscal years 1999, 1998 and 1997 totaled
approximately $381 million, $349 million and $236 million, respectively. Most of
these expenditures are related to the development of CDMA technology for
wireless applications. The Company intends to continue to maintain a substantial
research and development program. In addition to Company sponsored research and
development, the Company performs contract research and development for various
government agencies and commercial contractors, including Globalstar.
COMPETITION
Competition in the wireless telecommunications industry in the United
States and throughout the world continues to increase at a rapid pace, as
businesses and foreign governments realize the market potential of
telecommunications services. 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 the Company's current and prospective competitors have
substantially greater financial, technical, marketing, sales and distribution
resources than those of the Company. In addition, many of these companies are
licensees of the Company's technology, and have
12
established market positions, trade names, trademarks, patents, copyrights,
intellectual property rights and substantial technological capabilities. Many of
the Company's customers currently face competition from existing
telecommunication providers. A number of large foreign and domestic
telecommunications companies are actively engaged in programs to develop and
commercialize telecommunications services in both developing and developed
countries. The Company may face competition throughout the world 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. The Company also expects that the price the Company
charges for its products and services may continue to decline rapidly as
competition intensifies.
- CDMA Technologies Segment (QCT)
The Company competes against its licensees in the manufacture of CDMA
chipset products. The Company is facing increasing competition as more of its
licensees introduce CDMA products. Many of the Company's licensees have longer
operating histories and a greater market presence than the Company. Many of the
major products suppliers have made substantial investments in TDMA and GSM
technology including Lucent, Motorola, Nokia, Nortel, Siemens and Ericsson, all
of whom are licensees of the Company. The Company's 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, and those efforts may have
a material adverse effect on the Company's results of operations, liquidity and
financial position. Moreover, certain competitors may offer more attractive
product pricing and/or financing terms than the Company as a means of gaining
access to the wireless markets.
The Company has entered into royalty-bearing license arrangements with DSP
Communications, LSI Logic Corporation and PrairieComm, Inc. covering certain
patents belonging to QUALCOMM applicable to Application Specific Integrated
Circuits ("ASICs"). Pursuant to these arrangements, such parties are licensed to
manufacture and sell CDMA chipsets to subscriber licensees of the Company. To
date, most subscriber licensees have chosen to purchase their CDMA chipset
requirements from the Company to ensure timely access to the latest generation
technology. Under the terms of their agreements, Motorola and Lucent also have
licenses under certain of the Company's patents to manufacture and sell CDMA
chips to certain of the Company's licensees that hold separate licenses under
all applicable intellectual property rights of the Company incorporated in such
chips. In every case, the right of such licensees to use or resell such licensed
ASICs or chips is subject to such licensees' payment of royalties to the Company
on the products into which such ASICs or chips are incorporated.
The Company faces additional competition in the development of components
for next generation digital wireless technology and services. The Company
supports a new CDMA based standard that is compatible with existing GSM and
cdmaOne systems. Other industry participants are aggressively promoting the
adoption of different standards.
- Technology Licensing Segment (QTL)
As part of the Company's strategy to generate new licensing revenues,
significant resources are allocated to develop leading edge technology for the
communications industry. There are no guarantees that the Company's technologies
will continue to be adopted, the Company will be the first to market, or the
Company will be able to secure patents for its technology to subsequently
license. Furthermore, there are no guarantees that existing systems and
applications cannot be replaced by competitors' technologies, thereby
jeopardizing the Company's existing royalty and licensing revenues.
On a worldwide basis, the Company competes primarily with two digital
wireless technologies. TDMA has been deployed 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 than
CDMA, and there can be no assurance that wireless service providers will select
CDMA for their networks.
13
- Wireless Systems Segment (QWS)
Existing competitors offering alternatives to the Company's OmniTRACS
products 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 the Company. Emergence of new competitors, particularly those
offering low cost terrestrial-based products and future LEO satellite-based
systems, may impact margins and intensify competition in new markets.
Currently, three handset manufacturers have been selected by Globalstar to
supply portable and fixed CDMA handsets and accessories that will operate on the
Globalstar System. QUALCOMM is supplying a tri-mode mobile satellite phone which
will operate with the Globalstar satellite, digital and North American analog
networks. Ericsson and Telital will provide dual-mode phones that operate with
both Globalstar satellite and GSM networks. There is no guarantee that the
Company will receive future orders to produce phones for the expansion of the
Globalstar subscriber network. Failure to receive future orders could have an
impact on the Company's results of operations, liquidity and financial position.
- Consumer Products Segment (QCP)
QCP operates in a highly competitive environment manufacturing and
marketing wireless handsets. Certain of QCP's competitors have greater
manufacturing capacity, enjoy significant market share and have considerable
purchasing power as a result of their size. Success in the wireless handset
business market is dependent on several factors such as being first to market,
product pricing and manufacturing capacity to meet carrier product demand.
Furthermore, certain product providers may offer more attractive pricing or
financing terms than the Company as a means of gaining more market share in the
wireless handset business.
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 granted more than 300 patents and has over 700
patent applications pending in the United States. The vast majority of such
patents and patent applications relate to the Company's CDMA digital wireless
technology. The Company also actively pursues patent protection in other
countries of interest to the Company. There can be no assurance that the pending
patent applications will be granted, that the Company's patents or copyrights
will provide adequate protection, or that the Company's competitors will not
independently develop or initiate technologies that are substantially equivalent
or superior to the Company's 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 case. There can also be no assurance that the confidentiality
agreements upon which the Company relies to protect its trade secrets and
proprietary information will be adequate. The cost of defending the Company's
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 which are claimed to be
important to the industry or to the Company. In addition, from time to time
third parties provide the Company with copies of their patents relating to
spread spectrum and other digital wireless technologies and offer licenses to
such technologies, and the Company evaluates such patents and the advisability
of such licenses. If any of the Company's 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 the Company's 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
on reasonable and nondiscriminatory terms. In connection with the settlement and
dismissal of the Company's patent litigation with InterDigital, the Company
received, among other rights, a fully-paid, royalty free license
14
to use and to sublicense the use of those patents claimed by InterDigital to be
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 the Company's CDMA technology.
As part of QUALCOMM's strategy to generate licensing revenues and support
worldwide adoption of its CDMA technology, the Company licenses to third parties
the rights to design, manufacture and sell products utilizing its CDMA
technology. The following table lists the majority of QUALCOMM's currently
signed licensees:
INFRASTRUCTURE SUBSCRIBER EQUIPMENT Siemens Rolm
Ericsson Acer Peripherals, Inc. Communications Inc.
Fujitsu Limited Alps Electric Co./Alpine Sierra Wireless, Inc.
Hitachi, Ltd. Electronics Inc. SK Telecom Co., Ltd.
Hughes Network Systems, Inc. Appeal Telecom Co., Ltd. Sony Corporation
Hyundai Electronics Industries Casio Computer Co., Ltd. Standard Telecom Co., Ltd.
Co. Ltd. Ericsson Synertek, Inc.
LG Information & Fujitsu Limited Telson Electronics Co., Ltd.
Communications, Ltd. GTRAN Incorporated Toshiba Corporation
Lucent Technologies Inc. Haitai Electronics Co., Ltd Uniden Corporation
Motorola, Inc. Hanwha Corporation United Computer &
NEC Corporation Hitachi, Ltd. Telecommunication, Inc.
Nortel Networks Corporation Hughes Network Systems, Inc. Wide Telecom Co., Ltd.
Samsung Electronics Co. Hyundai Electronics Industries
Co. Ltd. SUBSCRIBER EQUIPMENT
CABLE AND MISC. INFRASTRUCTURE Kenwood Corporation (GLOBALSTAR)
EQUIPMENT Kokusai Electric Company Ericsson OMC
Ortel Corporation Kyocera Corporation Telital S.r.l
Transcept LG Information &
Communications, Ltd. ASICS
TEST EQUIPMENT LG Electronics Inc. DSP Communications, Inc.
Advantest Corporation Lucent Technologies Inc. LSI Logic Corporation
ANDO Electric Co., Ltd. Matsushita Communication PrairieComm Incorporated
Anritsu Corporation Industrial Co.
Comarco Wireless Technologies, Maxon Electronics Co., Ltd
Inc. Mitsubishi Electric
Ericsson Corporation
Grayson Electronics Company Motorola, Inc.
Hewlett-Packard Company NEC Corporation
IFR Systems, Inc. NIPPONDENSO Co., Ltd.
Japan Radio Co., Ltd. (DENSO)
LCC Corporation Nokia Mobile Phones Ltd.
Motorola, Inc. Oki Electric Industry Co., Ltd
Racal Instruments Ltd. Pantech Co., Ltd.
Rhode & Schwartz GmbH & Co. Philips Electronics N.V.
Safco Corporation Samsung Electronics Co.
Sage Instruments Sanyo Electric Co., Ltd.
Tektronix, Inc. Sewon Co., Ltd.
Wavetek GmbH Sharp Corporation
Willtech Incorporated
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 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
15
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, infrastructure, test and
chipset products. Up-front license fees are paid in one or more installments,
while royalties generally continue throughout the life of the underlying
patents.
The Company is currently engaged in patent and other infringement
litigation relating to the Company's technology and products. See "Item
3 -- Legal Proceedings."
EMPLOYEES
As of September 30, 1999, the Company and its consolidated subsidiaries
employed approximately 9,700 full-time and temporary employees.
EXECUTIVE OFFICERS
The executive officers of the Company and their ages as of September 30,
1999 are as follows:
NAME AGE POSITION
---- --- --------
Irwin Mark Jacobs.................... 66 Chairman of the Board and Chief Executive
Officer
Andrew J. Viterbi.................... 64 Vice Chairman of the Board
Richard Sulpizio..................... 49 President and Chief Operating Officer
Anthony S. Thornley.................. 53 Executive Vice President and Chief Financial
Officer
Steven R. Altman..................... 38 Executive Vice President, General Counsel and
General Manager, Technology Transfer and
Strategic Alliances Division
Franklin P. Antonio.................. 47 Executive Vice President and Chief Technology
Officer
Gerald L. Beckwith................... 51 President, Wireless Systems Division
Paul E. Jacobs....................... 36 President, Consumer Products Division
Donald E. Schrock.................... 54 President, CDMA Technologies Division
Philip H. White...................... 37 President, Wireless Business Solutions Division
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
("M/A-COM"). 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.
degrees from the Massachusetts Institute of Technology ("MIT"). Dr. Jacobs is a
member of the National Academy of Engineering and a recipient of the National
Medal of Technology.
Andrew J. Viterbi, one of the founders of the Company, has served as Vice
Chairman of the Board of Directors since it began operations in July 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. From October 1968 to July 1983, 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. During most of his period of service with LINKABIT, he
was Vice-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. He is a member of both the National
Academy of Engineering and the National Academy of Sciences and is currently a
member of the President's Information Technology Advisory Committee.
Richard Sulpizio currently serves as the Company's President and Chief
Operating Officer. He was named President in July 1998 after having served as
the Company's Chief Operating Officer since 1995.
16
Mr. Sulpizio was President of QUALCOMM Wireless Business Solutions (formerly
QUALCOMM's OmniTRACS Division) from February 1994 to August 1995. Prior to his
assignment in the OmniTRACS division, he held the Chief Operating Officer title
from May 1992 to February 1994. Mr. Sulpizio joined the Company in May 1991 as
Vice President, Information Systems and was promoted to Senior Vice President in
September 1991. Prior to joining QUALCOMM, Mr. Sulpizio spent eight years with
Unisys Corporation, a diversified computer and electronics company. He also
spent ten years with Fluor Engineering and Construction, implementing computer
systems worldwide. Mr. Sulpizio holds a bachelor's degree in Liberal Arts from
California State University, Los Angeles and a master's 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, was promoted to Senior Vice President in
February 1996 and was promoted to Executive Vice President in November 1997.
Prior to that, Mr. Thornley was with Nortel, a telecommunications equipment
manufacturer, for sixteen years in various financial and information systems
management positions, including Vice President, Public Networks, Vice President
Finance NT World Trade 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 bachelor's of
Science 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, was promoted to
Senior Vice President in February 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, Ware & 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 Doctor 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 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.
Gerald L. Beckwith, a Senior Vice President of the Company, was named
President of the Company's Wireless Systems Division in November 1998. He served
as President, Communications Systems from September 1994 to November 1998 and
General Manager, Communications Systems from June 1991 to September 1994. Mr.
Beckwith joined the Company in 1987 as Program Manager for the development of
OmniTRACS, and was appointed Vice President of Commercial Programs in 1990.
Prior to joining QUALCOMM, Mr. Beckwith held various positions at M/A-COM
LINKABIT. Mr. Beckwith received his bachelor's and master's degrees in
Electrical Engineering from San Diego State University.
Paul E. Jacobs, a Senior Vice President of the Company, was named Vice
President and General Manager, Consumer Products Division in April 1995 and was
promoted to President, Consumer Products Division in 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 Laboratoire 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, Chairman of the
Board of Directors and Chief Executive Officer of the Company.
Donald E. Schrock, Senior Vice President of the Company, was named
President, CDMA Technologies Division (formerly known as ASIC Products Division)
in October 1997. He joined the Company in January 1996 as Corporate Vice
President, in June 1996 was promoted to General Manager, ASIC Products Division
17
and in February 1997 was named Senior Vice President. Prior to joining the
Company, he was Group Vice President and 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 Burr-Brown Corporation
and spent 15 years with Motorola Semiconductor. Mr. Schrock holds a B.S.E.E.
with Honors from the University of Illinois, as well as a M.S.E.E. and Advanced
Business Administration degree from Arizona State University.
Philip H. White was named President of QUALCOMM Wireless Business
Solutions, formerly known as QUALCOMM's OmniTRACS Division, in January 1999
after serving as Senior Vice President and General Manager of OmniTRACS since
March 1998. Within the OmniTRACS Division, he served as Vice President and
General Manager from November 1997 to March 1998 and as Vice President and
Assistant General Manager from April 1996 to November 1997. Mr. White joined the
Company in October 1987 as Manager of Commercial Financial Controls, was
appointed OmniTRACS Controller in June 1991, Vice President of Finance and
Administration of OmniTRACS in July 1994 and Vice President and General Manager
of OmniTRACS International Business in November 1994. Prior to joining QUALCOMM,
he held various finance management positions at Hughes and M/A-COM LINKABIT. Mr.
White holds bachelor's degrees in Business Administration and in History from
the University of California, Santa Barbara.
RISK FACTORS
This Risk Factor section is written to be responsive to the Securities and
Exchange Commission's recently enacted "Plain English" guidelines. In this 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. 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 operating results. As a result, we cannot assure you that we will
be able to sustain profitability on a quarterly or annual basis in the future.
Our future results will depend in part on the following factors:
Delays or Defects in the Manufacture of Our CDMA Products Would Adversely
Affect Our Business.
The manufacture of wireless communications products is a complex and
precise process involving specialized manufacturing and testing of equipment and
procedures. Demand for, and our revenues from, CDMA wireless communications and
consumer products increased substantially during fiscal 1999. 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 experienced component shortages in the last half of fiscal
1999. We expect shortages will continue, to some degree, in the first half of
fiscal 2000, which could adversely affect our operating results. We may
experience component failures or defects which could require significant product
recalls, reworks and/or repairs which are not covered by warranty reserves and
which could consume a substantial portion of our manufacturing capacity.
In addition, we cannot assure you that our foreign manufacturing facilities
will be commercially successful given that we will be required to establish,
manage and control operations in countries where we 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 consumer products at 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 consumer products through QPE, a
majority-owned joint venture between us and Sony. The risks associated with the
commercial manufacture of our consumer products that we describe in this
document also apply to the manufacture of consumer products by QPE. Our
business, results of operations, liquidity and financial position could be
materially and adversely affected to the extent
18
that QPE experiences any of the complications, delays or interruptions that we
have described in this document.
We May Engage in Strategic Transactions Which Could Adversely Affect Our
Business.
From time to time we consider strategic transactions and alternatives with
the goal of maximizing stockholder value. For example, in September 1998 we
completed the spin-off of Leap Wireless International, and in May 1999 we
completed the sale of our terrestrial CDMA wireless infrastructure business to
Ericsson. In September 1999, we announced that we are considering several
strategic options for our terrestrial-based phone business, with an objective of
completing discussions and entering into an agreement before the end of calendar
year 1999. We will continue to evaluate other potential strategic transactions
and alternatives which we believe may enhance stockholder value. These
additional potential transactions may include a variety of different business
arrangements, including acquisitions, spin-offs, strategic partnerships, joint
ventures, restructurings, divestitures, business combinations and investments.
We cannot assure you that any such transactions will be consummated on favorable
terms or at all, will in fact enhance stockholder value or will not adversely
affect our business or the trading price of our stock. Any such transaction may
require us to incur non-recurring or other charges and may pose significant
integration challenges and/or management and business disruptions, any of which
could materially and adversely affect our business and financial results.
Our International Business Activities Subject Us to Risks that Could Adversely
Affect Our Business.
A significant part of our strategy involves our continued pursuit of growth
opportunities in a number of international markets. In many international
markets, barriers to entry are created by long-standing relationships between
our potential customers and their equipment providers and protective
regulations, including local content and service requirements. In addition, our
pursuit of 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 opening 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 fiscal years presented:
YEAR % OF TOTAL REVENUES
---- -------------------
1995................................................ 20%
1996................................................ 36%
1997................................................ 30%
1998................................................ 34%
1999................................................ 38%
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. We have significant sales in Asian
19
countries with the largest concentration to South Korean customers. Sales to one
South Korean customer, Samsung Electronics Company, by QCT and QTL segments
comprised 9%, 11% and 9% of consolidated revenues in fiscal 1999, 1998 and 1997,
respectively. At September 30, 1999, South Korean customer receivables generally
were in accordance with agreed payment terms. Economies in Brazil, Chile and
Mexico have been volatile and we do not know the extent to which these economies
will continue to be negatively impacted by world economic events.
Our Results of Operations May Be Harmed by Foreign Currency Fluctuations.
We are exposed to risk from fluctuations in foreign currency which could
impact our results of operations and financial condition. Financial instruments
held by our consolidated subsidiaries and equity method investees which are not
denominated in the functional currency of those entities are subject to the
effects of currency fluctuations, which may affect reported earnings. As a
global concern, we face exposure to adverse movements in foreign currency
exchange rates. Recently, exposures to emerging market currencies, such as the
Brazilian real, have increased due to our expansion into such markets. At the
present time, we only hedge those currency exposures associated with certain
assets and liabilities denominated in nonfunctional currencies and certain
anticipated nonfunctional currency transactions. As a result, we could suffer
unanticipated gains or losses on anticipated foreign currency cash flows, as
well as economic losses with respect to the recoverability of our investments.
During fiscal 1999, a significant devaluation of the Brazilian real resulting in
a $25 million translation loss, recorded as a component of other comprehensive
income. We cannot assure you that foreign currency fluctuations which result in
economic loss will not occur in the future.
While we hedge certain transactions with non-U.S. customers, declines in
currency values in certain regions may, if not reversed, adversely affect future
product sales because our products may become more expensive to purchase in the
countries of the affected currencies. Our financing is generally dollar-
denominated. Any significant change in the value of the dollar against the
debtors' functional currencies could result in an increase in the debtors' cash
flow requirements and could thereby affect our ability to collect our
receivables. Significant foreign currency fluctuations would have an adverse
effect on our results of operations, liquidity and financial position.
If We Are Unable to Manage Growth in Our Business, Our Business Will Suffer.
We have experienced and continue to experience rapid domestic and
international growth that has placed, and is expected to continue to place
significant demands on our managerial, operational and financial resources. In
order to manage this growth, we have continued to improve and expand our
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 our employee base.
In particular, we must carefully manage production and inventory levels to meet
product demand, new product introductions 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 our demand forecasts could quickly result in
either insufficient or excessive inventories and disproportionate overhead
expenses. Our 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 our competitors and others for such individuals. If we
ineffectively manage our growth or are unsuccessful in recruiting and retaining
personnel, this could have a material adverse effect on our results of
operations, liquidity and financial position.
20
Our Business Depends on Product Sales and Sales to Certain Key Customers.
- CDMA Technologies Segment (QCT)
We are a major supplier of CDMA chipset products for wireless equipment
manufacturers. In order to generate revenues and profits from sales of chipset
and system software 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 or the growth pattern of
CDMA subscribers will continue.
CDMA chipset product revenue is, and is expected to continue to be,
concentrated with a limited number of customers. As a result, our performance
will depend on relatively large orders from a limited number of customers.
Certain of these customers are licensees and have the right to manufacture CDMA
chipsets for their own use. We cannot assure you that one or more significant
QCT chipset customers will not begin to manufacture their own CDMA chipsets, or
that other chipset manufacturing licensees will not begin the manufacture and
sale of CDMA chipsets to current key customers of QCT. Our performance will also
depend on the ability to gain additional customers within existing and new
wireless markets. In fiscal 1999, three CDMA chipset customers accounted for
approximately 50% of the segment's revenues. The loss of any significant
existing customer or failure to gain additional customers could have a material
adverse effect on our results of operations, liquidity and financial position.
- Technology Licensing Segment (QTL)
In order to generate revenues from licensing, licensees must continue to
produce and sell licensed communications devices in significant volumes. There
is no assurance that the demand for such wireless devices will continue. The
reduction in such demand, the loss of key existing licensees, or our failure to
gain additional licensees could have a material adverse effect on our results of
operations, liquidity and financial position.
- Wireless Systems Segment (QWS)
Our sales to Globalstar accounted for 46% of the Wireless System segment
revenue in 1999. To remain competitive in the handset business for the
Globalstar System, new products must be first to market and in quantities to
meet market demand at an acceptable price. We cannot guarantee that carrier
demand will materialize or that we will be able to meet carrier demand at prices
that will be competitive with products in demand at a particular point in time.
Certain of our OmniTRACS 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 contract offsets to the
extent the products are not delivered by scheduled delivery dates or the systems
fail to meet specified performance criteria. We are dependent in part on the
performance of our suppliers and strategic partners to provide products and
services for the OmniTRACS system that are the subject of the guarantees. Thus,
our ability to deliver 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 would
have a material adverse effect on product margins and on our results of
operations, liquidity and financial position.
- Consumer Products Segment (QCP)
To remain competitive in the wireless handset business, new products must
be first to market and in quantities to meet market demand at an acceptable
price. We cannot guarantee that we will be able to meet carrier demand at prices
that will be competitive with products that will be in demand at a particular
point in time. Many of our competitors in the wireless handset business have
substantially greater resources, longer manufacturing histories and more
established reputations than we do.
21
Our Business May Be Harmed if Our Customers Do Not Repay Vendor Financing.
To the extent vendor financing is not repaid to us, it could have a
material adverse effect on our results of operations, liquidity and financial
position. 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
services, as well as future financing arrangements related to the sale of our
terrestrial CDMA wireless infrastructure business.
Many domestic and international wireless network operators to whom we have
provided vendor financing have limited 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 programs 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.
We May Need Additional Capital in the Future, and Such Additional Financing
May Not Be Available.
The design, development, manufacture and marketing of digital wireless
communication products and services are highly capital intensive. In addition,
wireless and satellite systems operators increasingly have required suppliers
like us to arrange or provide long-term financing or provide equity to them as a
condition to obtaining or bidding on projects. In particular we have substantial
funding requirements to Ericsson and Leap Wireless. In May 1999, we sold our
terrestrial CDMA wireless infrastructure business to Ericsson. The agreement
settled our litigation with Ericsson and provides for cross licensing of
intellectual property rights for all CDMA technologies. Pursuant to the
agreement with Ericsson, we will extend up to $400 million in financing for
possible future sales by Ericsson of cdmaOne or cdma2000 infrastructure
equipment and related services to specific customers in certain geographic
areas, including Brazil, Chile, Russia and Mexico or in other areas selected by
Ericsson. These commitments are subject to the customers meeting certain
conditions established in the financing arrangements and, in most cases, to
Ericsson also financing a portion of these cdmaOne or cdma2000 sales. To the
extent that vendor financing is not repaid to us, it could have a material
adverse effect on our results of operations, liquidity and financial position.
We believe we may be required to raise additional funds from a combination
of sources including potential debt or equity issuances. We cannot assure you
that additional financing will be available on reasonable terms or at all. In
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.
Our Business May Be Harmed if Leap Wireless Does Not Meet its Repayment
Obligations Under its Credit Facility with Us.
In connection with our 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 million secured credit facility. Amounts borrowed
under the credit facility will be due and payable on September 23, 2006. We
cannot assure you that Leap Wireless will be able to meet its payment
obligations to us. If Leap Wireless is unable 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.
Our Industries Are Subject to Rapid Technological Change, and We Must Keep
Pace With the Changes to Successfully Compete.
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 building and operating communications systems.
22
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.
Our future success will depend on our ability to continue to develop and
introduce new products and product enhancements on a timely basis. As with our
research and development efforts on HDR, there could be risks associated with
obtaining manufacturers and operators for HDR. Our future success will also
depend on our ability to keep pace with technological 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 commercially viable.
If Our Industry Does Not Adopt CDMA Standards That are Compatible with Today's
cdmaOne and its Supporting Network, Our Business May Suffer.
Industry and government participants of the ITU and regional standards
development organizations ("SDOs") are currently considering a variety of
standards which may be utilized in third generation wireless networks. We are
advocating the standardization of CDMA-based third generation standards that
accommodate equally the dominant network standards in use today -- GSM-MAP and
ANSI-41. Earlier this year, the Operator's Harmonization Group ("OHG") agreed to
such an arrangement, which would offer network operators three CDMA modes of
operation -- CDMA Multi-Carrier, which includes both 1x Radio Transmission
Technology ("RTT") and 3x RTT per the original cdma2000 submission to the ITU;
CDMA Direct Spread, which is a converged version of the earlier W-CDMA proposal
that has been modified since its adoption by ETSI; and Time Division Duplex mode
for use in unpaired bands of spectrum. Significantly, the third generation
standard will be interoperable with both GSM-MAP and ANSI-41, per the Company's
position. The third generation standard have since been approved by the relevant
ITU Study Group, and we anticipate that it will receive final approval by the
ITU Radio Communications Assembly and adopted as a third generation standard by
the regional SDOs.
We cannot assure you that we will be successful in promoting the worldwide
adoption of the CDMA standards. We believe that our CDMA patent portfolio is
applicable to all CDMA systems that have been approved as third generation
standards. We have informed standards bodies and the ITU that we hold essential
intellectual property rights for the 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 our intellectual property,
this could have a material adverse effect on our results of operations,
liquidity and financial position.
The Inadequacy of Our Intellectual Property Protection Could Adversely Affect
Our Business.
We rely on a combination of patents, copyrights, trade secrets, trademarks
and proprietary information to maintain and enhance our competitive position.
The vast majority of such patents and patent applications relate to our CDMA
digital wireless technology and much of the remainder of such patents and patent
applications relate to our OmniTRACS products. We also actively pursue patent
protection in other countries of interest to us. We cannot assure you that the
pending patent applications will be granted or that our patents or copyrights
will provide adequate protection.
Despite our extensive patent position and the license agreements we have
entered into with Ericsson and others which provide for royalties payable to us
for certain products employing such CDMA standards, there can be no assurance
that our CDMA patents will be determined to be applicable to any proposed
standard. The adoption of next generation CDMA standards, if any, which are
determined not to rely on our patents could have a material adverse effect on
our business, results of operations, liquidity and financial position.
23
We cannot assure you that the confidentiality agreements upon which we rely
to protect our trade secrets and proprietary information will be adequate. The
cost of defending our intellectual property has been and may continue to be
significant.
Third-Party Claims of Infringement of Their Intellectual Property Could
Adversely Affect Our Business.
From time to time, certain companies may assert exclusive patent, copyright
and other intellectual proprietary rights to technologies that are claimed to be
important to the industry or to us. In addition, from time to time third parties
provide us with copies of their patents relating to wireless products and
components and offer licenses to such technologies. We in turn evaluate such
patents and the advisability of obtaining such licenses. If any of our products
were found to infringe on protected technology, we could be required to redesign
such products, license such technology, and/or pay damages or other compensation
to the infringed party. If we are unable to license protected technology used in
our products or if we were required to redesign such products, we could be
prohibited from making and selling such products.
A number of third parties have claimed to own patents essential to various
proposed third generation CDMA standards and have committed to license such
patents on a reasonable and nondiscriminatory basis. If we 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 or our product margins or
profitability.
We are currently engaged in patent and other infringement litigation
relating to our technology and products. See "Item 3 -- Legal Proceedings."
If Globalstar and the Globalstar System Are Not Successful, Our Business May
Be Harmed.
We have entered into a number of development and manufacturing contracts
involving the Globalstar System. Our development agreement provides for the
design and development of the ground communications stations, known as gateways,
and user terminals of the Globalstar System. The Globalstar System is in the
first phase of deployment with 44 satellites in orbit. Satellite launches are
risky, with about 15% of attempts ending in failure. Globalstar has already had
one launch failure, and more failures may occur within the course of its launch
campaign. The cost of installing the Globalstar System has been revised upward
from the original estimates, and further increases are possible. Until the
system is fully deployed and tested, it is not certain that it will perform as
designed. Even if the system operates as it should, there is no certainty that
the anticipated market will develop.
Globalstar may need to raise substantial additional funds in order to
operate the system as planned. If the start of service is significantly delayed,
a larger proportion of Globalstar's debt service requirements will become due
before Globalstar has positive cash flow, which will increase the amount of
money Globalstar needs.
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 success of Globalstar and the Globalstar System. As of September 30, 1999,
our receivables from Globalstar were approximately $520 million. Globalstar is a
development stage company and has no operating history. From its inception,
Globalstar has incurred net losses and those losses are expected to continue
through the start of service. A substantial shortfall in meeting Globalstar's
capital needs could prevent completion of the Globalstar System and could
adversely affect our 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 Globalstar System.
The Globalstar System is exposed to the risks 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 perform at levels required for
commercial success. Globalstar may encounter various problems, delays and
expenses, many of which may be beyond Globalstar's control.
24
The Loss of Third-Party Suppliers Could Adversely Affect Our Business.
- CDMA Technologies Segment (QCT)
We are highly reliant upon suppliers to produce our proprietary CDMA
chipsets for incorporation into our subscriber products and sale to our
licensees for use in their products. During fiscal 1999, approximately 36% of
QCT's chipset purchases (in dollars) were from one supplier. Our reliance and
the reliance of our licensees on sole or limited source vendors involve risks.
These risks include possible shortages of certain key components, product
performance shortfalls, and reduced controls over delivery schedules,
manufacturing capability, quantity and costs. The loss of any customer as a
result of not being able to deliver product produced by our outside suppliers
could have a material adverse effect on our results of operations, liquidity and
financial position.
- Technology Licensing Segment (QTL)
The future revenues from licenses and royalties generated as a result of
new successful patents is highly dependent on key individuals. We must continue
to attract and retain high caliber individuals to develop new patentable
technology for the telecommunications industry. We must also have the ability to
fund significant capital for our research and development efforts. If we are not
successful in our efforts to hire and retain key individuals and fund internal
research and development, this could have a material adverse effect on our
business, results of operations, liquidity and financial position.
- Wireless Systems Segment (QWS)
Several of the critical products and services used in our existing and
proposed products, including chipsets, flash memory chips, radio frequency
components and certain custom and semi-custom very large scale integrated
circuits, other sophisticated electronic parts and major subassemblies used in
the OmniTRACS system, are currently available only from single or limited
sources. Our reliance and the reliance of our licensees on sole or limited
source vendors involves risks. These risks include possible shortages of certain
key components, product performance shortfalls, and reduced control over
delivery schedules, manufacturing capability, quality and costs. The inability
to obtain adequate quantities of significant compliant materials on a timely
basis could have a material adverse effect on our business, results of
operations, liquidity and financial position.
- Consumer Products Segment (QCP)
Our manufacturing activities rely significantly on foreign suppliers. 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 our operations by increasing the cost of goods sold or reducing
the availability of such components. While we believe that we could obtain
necessary components from other manufacturers, an unanticipated change in the
source of supply of these components could result in significant shipment delays
for our products. These delays could result in us being required to make
performance guarantee payments.
Certain components require an order lead time of six months or longer. To
meet forecasted production levels, we may be required to commit to certain long
lead time items prior to being awarded a production contract. If forecasted
orders are not received, we may be faced with large inventories of slow moving
or unusable parts. This could result in an adverse effect on our business,
results of operations, liquidity and financial position.
25
Our Business Depends on the Availability of Satellite and Other Networks for
Our OmniTRACS System and Other Communication Products.
Our OmniTRACS system currently operates in the U.S. market on leased
Ku-band satellite transponders. Our data satellite transponder and position
reporting satellite transponder lease runs through October 2001. System
enhancements currently under initial deployment should allow for increased
utilization of transponder capacity. Based on results of the system
enhancements, we believe that the U.S. OmniTRACS operations will not require
additional transponder capacity in fiscal 2000. We believe that in the event
additional transponder capacity would be required in fiscal 2000 or in future
years, additional capacity will be available on acceptable terms. However, we
cannot assure you that we will be able to acquire additional transponder
capacity on acceptable terms on a timely basis. If we fail to maintain adequate
satellite capacity this would have a material adverse effect on our business,
results of operations, liquidity and financial position. 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 the
Company's results of operations. We maintain a fully operational Network
Management Facility in Las Vegas, Nevada as a backup to our primary Network
Management Facility in San Diego, California.
Upon the commercial release of several new products planned in fiscal 2000,
the service for these products will be reliant on various terrestrial
communication networks not operated by QUALCOMM. We believe these terrestrial
networks will be available for our products; however no assurance can be made on
the continuing availability and performance of these networks. The lack of
availability or nonperformance of these network systems could have a material
adverse effect on our business, results of operations, liquidity and financial
position.
Our Business and Results of Operations May Be Harmed by Inflation 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 and their start-up projects in those countries,
including their ability to obtain financing. Brazil, Chile, and Mexico, for
example, have periodically experienced relatively high rates of inflation.
Significant inflation or deflation could have a material adverse effect on our
business, results of operations, liquidity and financial position.
Government Regulation May Adversely Affect Our Business.
Our products are subject to various Federal Communications Commission
regulations in the U.S. These regulations require that our products meet certain
radio frequency emission standards not cause unallowable interference to other
services, and in some cases must accept interference from other services. We are
also subject to government regulations and requirements by local and
international standards bodies outside the U.S., where we are less prominent
than local competitors and have less opportunity to participate in the
establishment of regulatory and standards policies. Changes in the regulation of
our activities, including changes in the allocation of available spectrum by the
U.S. Government and other governments, or exclusion of our technology by a
standards body, could have a material adverse effect on our business, results of
operations, liquidity and financial 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.
The Loss of Key Technical or Management Personnel Could Adversely Affect the
Performance of Our Stock.
Our success depends in large part upon our ability to attract and retain
highly qualified technical and management personnel. The loss of one or more of
these employees could have a material adverse effect on our results of
operations, liquidity and financial position. None of these individuals has an
employment contract with us. Our success also depends upon our ability to
continue to attract and retain highly qualified personnel in all disciplines. We
cannot assure you that we will be successful in hiring or retaining requisite
personnel.
26
Product Liability Claims Could Harm Our Business.
Testing, manufacturing, marketing and use of our products entail the risk
of product liability. While we currently have product liability insurance that
we believe is adequate to protect against product liability claims, we cannot
assure you that we will be able to continue to maintain such insurance at a
reasonable cost or in sufficient amounts to protect us against losses due to
product liability. Our inability to maintain insurance at an acceptable cost or
to otherwise protect against potential product liability could prevent or
inhibit the commercialization of our products. In addition, a product liability
claim or recall could have a material adverse effect on our business, results of
operations, liquidity and financial position.
News reports have asserted that power levels associated with hand-held
cellular telephones may pose certain health risks. We are not aware of any study
that has concluded that there are any significant health risks from using
hand-held cellular phones. If it were determined that electromagnetic waves
carried through the antennas of cellular phones create a significant health
risk, there could be a material adverse effect on our ability to market and sell
our wireless phone 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 phones.
Our Stockholders Rights Plan, Certificate of Incorporation and Delaware Law
Could Adversely Affect the Performance of Our Stock.
Our certificate of incorporation provides for cumulative voting in the
election of directors. In addition, our certificate of incorporation provides
for a classified board of directors and includes a provision that requires the
approval of holders of at least 66 2/3% of our voting stock as a condition to a
merger or certain other business transactions with, or proposed by, a holder of
15% or more of our voting stock. This approval is not required in cases where
certain of our directors approve the transaction or where certain minimum price
criteria and other procedural requirements are met. Our certificate of
incorporation also requires the approval of holders of at least 66 2/3% of our
voting stock to amend or change the provisions mentioned relating to the
classified board, cumulative voting or the transaction approval. Under our
By-laws, stockholders are not permitted to call special meetings of stockholders
of QUALCOMM. Finally, our certificate of incorporation provides that any action
required or permitted to be taken by our stockholders must be effected at a duly
called annual or special meeting rather than by any consent in writing.
The classified board, transaction approval, special meeting and other
charter provisions may discourage certain types of transactions involving an
actual or potential change in our control. These provisions may also discourage
certain types of transactions in which our stockholders might otherwise receive
a premium for their shares over then current market prices and may limit our
stockholders' ability to approve transactions that they may deem to be in their
best interests.
Further, we have distributed a dividend of one right for each outstanding
share of our common stock pursuant to the terms of our preferred share purchase
rights plan. In the event holders of our Trust Convertible Preferred Securities
convert those securities into shares of our common stock, each of those 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 us on terms not
approved by our board of directors and may have the effect of deterring hostile
takeover attempts. In addition, our Board of Directors has the authority to fix
the rights and preferences of and issue shares of preferred stock. This right
may have the effect of delaying or preventing a change in our control without
action by our stockholders.
Our Stock Price is Volatile.
The stock market in general, and the stock prices of technology-based
companies in particular, have experienced extreme volatility that often has been
unrelated to the operating performance of any specific
27
public companies. The market price of our common stock has fluctuated in the
past and is likely to fluctuate in the future as well. Factors that may have a
significant impact on the market price of our stock include:
- future announcements concerning us or our competitors, including the
selection of wireless technology by cellular, PCS and Wireless Local Loop
service providers and the timing of roll-out of those systems;
- receipt of substantial orders for subscriber and ASIC's products;
- quality deficiencies in services or products;
- announcements regarding financial developments or technological
innovations;
- new commercial products;
- changes in recommendations of securities analysts;
- government regulations;
- proprietary rights or product or patent litigation; or
- strategic transactions, such as acquisitions and divestitures.
Our future earnings and stock price may be subject to significant
volatility, particularly on a quarterly basis. Shortfalls in our revenues or
earnings in any given period relative to the levels expected by securities
analysts could immediately, significantly and adversely affect the trading price
of our common stock.
Our Business is Subject to Year 2000 Readiness Risks.
We believe our critical systems are Year 2000 ("Y2K") ready. However, there
is no guarantee that we have discovered all possible failure points. Specific
factors contributing to this uncertainty include failure to identify all
susceptible systems, non-readiness by third parties whose systems and operations
impact our operations and other similar uncertainties. A worst case scenario
might include one or more of our critical systems, suppliers, products or major
customers not being Y2K ready. This situation could result in a material
disruption to our operations and have a material adverse effect on the results
of operations, liquidity and financial position. See "Item 7 -- Management
Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 2. PROPERTIES
The Company is headquartered in San Diego, California where it occupies 27
properties totaling approximately 2,532,000 square feet. The Company owns ten of
these properties totaling approximately 1,696,000 square feet and leases the
remaining 17 properties. These facilities are used for manufacturing,
engineering and administration. The Company owns and leases, to a third party,
two additional properties in San Diego totaling 507,000 square feet and sublets
another property totaling approximately 23,000 square feet.
The Company leases approximately 168,000 square feet in 15 other U.S.
locations including sales and support offices; engineering facilities in
Boulder, Colorado; Boston, Massachusetts; Portland, Oregon; Santa Clara,
California; Scotts Valley, California; and a backup Network Management Facility
in Las Vegas, Nevada. The Company owns four properties in Boulder, Colorado;
three of these properties totaling approximately 94,000 square feet are used for
engineering and the remaining property is leased to another party. The Company
also owns additional land in Boulder, Colorado. The Company leases office space
internationally.
The Company believes its facilities are adequate for its present needs. In
the future, the Company may need to purchase, build or lease additional
facilities to meet the requirements projected in its long-term business plan.
28
ITEM 3. LEGAL PROCEEDINGS
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 then, recently announced, Q Phone infringes design and
utility patents held by Motorola as well as trade dress and common law rights
relating to the appearance of certain Motorola wireless telephone products. The
complaint denies such allegations and seeks a judicial declaration that the
Company's products do not infringe any patents held by Motorola. On March 10,
1997, Motorola filed a complaint against the Company (the "Motorola Complaint"),
alleging claims based primarily on the above-alleged infringement. The Company's
motion to transfer the Motorola Complaint to the U.S. District Court for the
Southern District of California was granted on April 3, 1997. On April 24, 1997,
the court denied Motorola's motion for a preliminary injunction thereby
permitting the Company to continue to manufacture, market and sell the Q Phone.
On April 25, 1997, Motorola appealed the denial of its motion for a preliminary
injunction. On January 16, 1998 the U.S. Court of Appeals for the Federal
Circuit denied Motorola's appeal and affirmed the decision of the U.S. District
Court for the Southern District of California refusing Motorola's request to
enjoin QUALCOMM from manufacturing and selling the Q Phone. On June 4, 1997,
Motorola filed another lawsuit alleging infringement by QUALCOMM of four
patents. Three of the patents had already been alleged in previous litigation
between the parties. On August 18, 1997, Motorola filed another complaint
against the Company alleging infringement by the Company of seven additional
patents. All of the Motorola cases have been consolidated for pretrial
proceedings. On August 6, 1999, the court granted the Company's motion for
summary judgment that the Q Phone does not infringe two of Motorola's design
patents. On October 5, 1999, the United States District Court in San Diego
granted the Company's motions for summary judgment that the Q Phone does not
infringe the last two Motorola design patents remaining in the case. As a
consequence of these rulings and Motorola's decision to drop one utility patent
from the case, there are no design patents and a total of ten utility patents
remaining in the case. The cases have been set for a final pretrial conference
in April 2000. 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 the claims are
without merit and will continue to vigorously defend the action.
On July 20, 1999, the Company filed a lawsuit against Motorola seeking a
judicial determination that the Company has the right to terminate all licenses
granted to Motorola under a 1990 Patent License Agreement, while retaining all
licenses granted by Motorola to the Company under the same agreement. The
Company's complaint was filed in the United States District Court for the
Southern District of California where the earlier actions between the Company
and Motorola described above have been pending for more than two years. The
complaint alleges that Motorola has committed breaches of the Patent License
Agreement that include pursuing a lawsuit against the Company for infringement
of patents that are in fact licensed to the Company under the agreement and a
failure to grant certain sublicenses to the Company in accordance with the terms
of the agreement. The Company's new filing also seeks a ruling that upon
termination of the Patent License Agreement, the patents formerly licensed to
Motorola would be infringed by CDMA handsets, integrated circuits and network
infrastructure equipment made and sold by Motorola. On August 5, 1999, the
Company amended its complaint to allege that Motorola's CDMA wireless phones
infringe three patents of the Company. The Company's new claims seek damages and
an injunction against Motorola's sale of infringing phones. Motorola has filed
counterclaims alleging breach of the Patent License Agreement and a DS-CDMA
Technology License Agreement also signed in 1990.
On or about June 5, 1997, Elisra Electronic Systems Ltd. ("Elisra")
submitted to the International Chamber of Commerce a Request for Arbitration of
a dispute with the Company based upon a Development and Supply Agreement ("DSA")
entered into between the parties effective November 15, 1995, alleging that the
Company wrongfully terminated the DSA, seeking monetary damages. The Company
thereafter submitted a Reply and Counterclaim, alleging that Elisra breached the
DSA, seeking monetary damages. Subsequently, the parties stipulated that the
dispute be heard before an arbitrator under the jurisdiction of the American
Arbitration Association, and to bifurcate the resolution of liability issues
from damage issues. To date, the arbitrator has heard testimony regarding the
liability or non-liability of the parties, and a briefing schedule has been set.
Although there can be no assurance that the resolution of these claims will not
have a
29
material adverse effect on the Company's results of operations, liquidity or
financial position, the Company believes that claims made by Elisra are without
merit and will vigorously defend against the claims.
On October 27, 1998, the Electronics and Telecommunications Research
Institute of Korea ("ETRI") submitted to the International Chamber of Commerce a
Request for Arbitration (the "Request") 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 filed an answer and counterclaims denying the allegations, seeking a
declaration establishing the termination of the JDA and monetary damages and
injunctive relief against ETRI. In accordance with the JDA, the arbitration will
take place in San Diego. No schedule for the arbitration proceedings has been
established. Although there can be no assurance that the resolution of these
claims will not have a material adverse effect on the Company's results of
operations, liquidity or financial position, the Company believes that the
claims are without merit and will vigorously defend the action.
On February 26, 1999, the Lemelson Medical, Education & Research
Foundation, Limited Partnership, ("Lemelson") filed an industry-wide action in
the United States District Court for the District of Arizona. The complaint
names a total of 88 parties, including the Company, as defendants and purports
to assert claims for infringement of 15 patents. The complaint alleges that
application specific integrated circuit ("ASIC") devices sold by the Company, or
the processes by which such devices are manufactured, infringe the asserted
patents. On October 1, 1999, the Company and Lemelson entered into a settlement
agreement resolving all claims made against the Company in the complaint which
will not have a material effect on the financial results of the Company.
On May 6, 1999, Thomas Sprague, a former employee of the Company, filed a
putative class action against the Company, ostensibly on behalf of himself and
those of the Company's former employees who were offered employment with
Ericsson in conjunction with the sale to Ericsson of certain of the Company's
infrastructure division assets and liabilities and who elected not to
participate in a Retention Bonus Plan being offered to such former employees.
The complaint was filed in California Superior Court in and for the County of
San Diego and purports to state eight causes of action arising primarily out of
alleged breaches of the terms of the Company's 1991 Stock Option Plan, as
amended from time to time. The putative class sought to include former employees
of the Company who, among other things "have not or will not execute the Bonus
Retention Plan and accompanying full and complete release of QUALCOMM." The
complaint seeks an order accelerating all unvested stock options for the members
of the class. Of the 1,053 transitioning former employees who had unvested stock
options, 1,016 elected to participate in the Retention Bonus Plan offered by
QUALCOMM and Ericsson, which provides several benefits including cash
compensation based upon a portion of the value of their unvested options, and
includes a written release of claims against the Company. On July 30, 1999,
plaintiffs filed a First Amended Complaint incorporating the allegations set
forth in the original complaint, adding two new causes of action and expanding
the putative class to also include those former employees who chose to
participate in the Bonus Retention Plan. In October 1999, the court sustained
the Company's demurrer to the plaintiffs' cause of action for breach of
fiduciary duty. Counsel for the putative class has filed a Second Amended
Complaint, including additional class representatives, and substantially the
same allegations as the First Amended Complaint. 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 the claims are without merit and will vigorously
defend the action.
On June 29, 1999, GTE Wireless, Incorporated ("GTE") filed an action in the
United States District Court for the Eastern District of Virginia asserting that
wireless telephones sold by the Company infringe a single patent allegedly owned
by GTE. On September 15, 1999, the court granted the company's motion to
transfer the action to the United States District Court for the Southern
District of California. 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 the
action is without merit and will vigorously defend the action.
30
QUALCOMM has received notice from Ericsson that Ericsson intends to dispute
the determination of the purchase price under the Asset Purchase Agreement dated
as of March 24, 1999, as amended (the "Agreement"), pursuant to which Ericsson
acquired certain assets related to the Company's terrestrial wireless
infrastructure business in May 1999. QUALCOMM has also received notice from
Ericsson that Ericsson intends to assert claims for indemnification under the
Agreement. QUALCOMM and Ericsson are having on-going discussions aimed at
potentially resolving these claims. In the event the parties are unable to
resolve these claims, they are subject to dispute resolution procedures set
forth in the Agreement. Although there can be no assurance that the resolution
of these claims will not have a material adverse effect on the Company's results
of operations, liquidity or financial position, the Company believes the claims
are without merit and will vigorously defend them.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended September 26, 1999.
31
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
necessarily represent actual transactions.
HIGH LOW
------- -------
FISCAL 1999
First Quarter............................................ $ 30.00 $ 18.88
Second Quarter......................................... 59.97 25.31
Third Quarter.......................................... 137.50 54.25
Fourth Quarter......................................... 199.00 125.13
FISCAL 1998
First Quarter.......................................... $ 35.97 $ 22.75
Second Quarter......................................... 29.22 22.50
Third Quarter.......................................... 30.28 23.32
Fourth Quarter......................................... 33.69 20.47
As of November 15, 1999, there were 2,651 holders of record of the Common
Stock. On November 15, 1999, the last sale price reported on the Nasdaq National
Market for the Common Stock was $368.00 per share. The Company has never paid
cash dividends on its Common Stock and has no present intention to do so.
On April 14, 1999, the Company's Board of Directors declared a two-for-one
stock split of the Company's common stock in the form of a stock dividend. The
stock dividend was distributed on May 10, 1999 to stockholders of record on
April 21, 1999. All references to per share amounts have been restated to
reflect this stock split.
On November 2, 1999, the Company's Board of Directors approved, subject to
stockholders' approval, a four-for-one stock split of the Company's common stock
and an increase in the number of authorized shares of common stock to three
billion shares. The Board of Directors also authorized a special meeting of
stockholders for the purposes of approving the stock split and the proposed
share increase. The special stockholders meeting is expected to be held on or
about December 20, 1999. If the stockholders approve the stock split and the
proposed increase in the authorized number of shares, the stock split will be
implemented as soon as practicable following the special meeting.
32
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following statement of income and balance sheet data for the years
ended September 30, 1999 -- 1995 has been derived from the Company's audited
financial statements. Consolidated balance sheets at September 30, 1999 and 1998
and the related consolidated statements of income and of cash flows for each of
the three years in the period ended September 30, 1999 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.
YEARS ENDED SEPTEMBER 30,(1)
------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Revenues........................................ $3,937,299 $3,347,870 $2,096,365 $ 813,850 $386,612
---------- ---------- ---------- ---------- --------
Operating expenses:
Cost of revenues.............................. 2,485,072 2,333,399 1,518,006 535,861 213,170
Research and development...................... 381,139 349,483 235,922 162,340 80,171
Selling, general and administrative........... 425,941 410,347 236,188 123,085 72,672
Other(2)...................................... 240,007 11,976 8,792 -- --
---------- ---------- ---------- ---------- --------
Total operating expenses............... 3,532,159 3,105,205 1,998,908 821,286 366,013
---------- ---------- ---------- ---------- --------
Operating income (loss)......................... 405,140 242,665 97,457 (7,436) 20,599
Interest expense.............................. (14,698) (8,058) (11,012) (3,354) (2,264)
Investment income (expense), net.............. 24,576 (46,663) 45,266 37,417 21,545
Distributions on Trust Convertible Preferred
Securities of subsidiary trust.............. (39,297) (39,270) (23,277) -- --
Other(3)...................................... (69,035) -- -- -- --
---------- ---------- ---------- ---------- --------
Income before income taxes.................... 306,686 148,674 108,434 26,627 39,880
Income tax expense(4)......................... (105,807) (40,142) (16,500) (5,600) (9,700)
---------- ---------- ---------- ---------- --------
Net income.................................... $ 200,879 $ 108,532 $ 91,934 $ 21,027 $ 30,180
========== ========== ========== ========== ========
Net earnings per common share(5):
Basic......................................... $ 1.35 $ 0.78 $ 0.68 $ 0.16 $ 0.28
Diluted....................................... $ 1.24 $ 0.73 $ 0.64 $ 0.15 $ 0.26
Shares used in per share calculations(5):
Basic......................................... 148,678 138,406 134,670 131,115 106,833
Diluted....................................... 162,472 147,924 143,774 140,669 115,114
BALANCE SHEET DATA:
Cash, cash equivalents and investments.......... $1,684,926 $ 303,324 $ 808,858 $ 354,281 $578,996
Working capital................................. 2,101,861 655,611 982,117 425,231 599,633
Total assets.................................... 4,534,950 2,566,713 2,274,680 1,185,330 940,717
Bank lines of credit............................ 112,000 151,000 110,000 80,700
Other debt and capital lease obligations........ 3,894 6,921 10,967 13,142 39,494
Company-obligated mandatorily redeemable Trust
Convertible Preferred Securities of a
subsidiary trust holding solely debt
securities of the Company..................... 659,555 660,000 660,000 -- --
Total stockholders' equity...................... 2,871,755 957,596 1,024,178 844,913 799,617
- ---------------
(1) The Company's fiscal years end on the last Sunday in September. As a result,
fiscal 1996 includes 53 weeks.
(2) Consists of asset impairment and other charges related to the Ericsson
transaction and restructuring charges in 1999, acquired in-process research
and development and asset impairment charges in 1998, and asset impairment
charges in 1997 (see Item 7 -- "Management Discussion and Analysis of
Financial Condition and Results of Operations").
(3) Consists of non-operating charges related to financial guarantees on
projects which the Company will no longer pursue as a result of the Ericsson
transaction and the write-off of assets related to an investment in
33
the Ukraine and loans to an investee of Leap Wireless (see Item
7 -- "Management's Discussion and Analysis of Financial Condition and
Results of Operations").
(4) Includes the tax benefit of $22 million in 1997 and $3 million in 1995 from
a reduction in the valuation allowance to recognize deferred tax assets.
(5) Net earnings per common share and shares used in per share calculation were
retroactively restated for 1997 -- 1995 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." On April 14,
1999, the Company's Board of Directors declared a two-for-one stock split of
the Company's common stock in the form of a stock dividend. The stock
dividend was distributed on May 10, 1999 to stockholders of record on April
21, 1999. All references to number of shares and per share amounts have been
restated to reflect this stock split.
ITEM 7.MANAGEMENT'S 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'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 manner, avoiding delays in the
commercial implementation of the CDMA technology; risk that the rate of growth
in the CDMA subscriber population will decrease; risks associated with the
scale-up, acceptance and operations of CDMA systems, including HDR technology;
risks associated with component shortages; risks associated with strategic
opportunities or acquisitions, divestitures and investments the Company may
pursue; risks related to the ability to sustain or improve operational
efficiency and profitability; risks relating to the success of Globalstar;
developments in current or future litigation; the Company's ability to
effectively manage growth and the intense competition in the wireless
communications industry; risks associated with vendor financing; timing and
receipt of license fees and royalties; risks associated with international
business activities; and risks related to customer receivables and performance
obligations, as well as the other risks detailed in this Form 10-K. The
Company's consolidated financial data includes QPE and certain other
consolidated subsidiaries of the Company.
RECENT DEVELOPMENTS
On September 14, 1999, QUALCOMM announced it is considering several
strategic options for its terrestrial-based phone business that currently holds
an industry leading position in CDMA handsets in the North American market. With
increased competition, parts shortages and industry consolidation reducing
margins in consumer products, QUALCOMM desires to transition the business to a
manufacturer that will support its customer base and employees while providing
economies of scale, a strong purchasing base and other operating efficiencies.
Discussions are underway with a number of companies that have expressed
interest. QUALCOMM has set an objective of completing discussions and entering
an agreement before the end of the calendar year, which may result in a
non-recurring charge to earnings. There can be no assurance the Company will be
able to transition this business to another manufacturer or enter an agreement
by the end of calendar year 1999, if at all.
On July 27, 1999, the Company completed an offering of 6,900,000 shares of
common stock at a net price of $156.50 per share. The net proceeds of the
offering were approximately $1 billion.
On May 24,1999 (the "Closing Date"), QUALCOMM sold certain assets related
to the Company's terrestrial CDMA wireless infrastructure business to Ericsson
pursuant to the March 24, 1999 Asset Purchase Agreement (the "Agreement"), as
amended. The Company and Ericsson also entered into various license and
settlement agreements in connection therewith. Under the Agreement, (a) QUALCOMM
agreed to sell certain assets relating to its terrestrial CDMA wireless
infrastructure business to Ericsson in exchange for cash and the assumption of
certain liabilities, (b) QUALCOMM and Ericsson agreed to jointly support a
single worldwide CDMA standard with three optional modes for the next generation
of wireless communications, and (c) all of the existing litigation between the
companies was settled, and the companies entered into
34
royalty-bearing cross-licenses for their respective CDMA patent portfolios,
including cdmaOne, WCDMA and cdma2000. The cross-licenses are royalty bearing
for CDMA subscriber units sold by Ericsson and QUALCOMM. QUALCOMM also will
receive rights to sublicense certain Ericsson patents, including the patents
asserted in the litigation, to QUALCOMM's chipset customers. See "Item
3 -- Legal Proceedings."
As part of the Agreement, QUALCOMM and Ericsson have also agreed to jointly
support approval by the International Telecommunications Union ("ITU") and the
other standards bodies, including the U.S. Telecommunications Industry
Association ("TIA") and the European Telecommunications Standards Institute
("ETSI"), of a single CDMA third generation standard that encompasses three
optional modes of operation: 1) direct spread Frequency Division Duplex ("FDD"),
2) multi-carrier FDD, and 3) Time Division Duplex ("TDD"). Each mode supports
operation with both GSM MAP and ANSI-41 networks. The Company believes that
rapid adoption of the single CDMA standard is in the best interests of the
industry and will allow each operator to select which mode of operation to
deploy based on marketplace needs. As part of the Agreements, QUALCOMM and
Ericsson each committed to the ITU and to other standards bodies to license
their essential patents for the single CDMA standard or any of its modes to the
rest of the industry on a fair and reasonable basis free from unfair
discrimination. On the Closing Date, each of the companies notified the ITU and
other relevant standards bodies that any intellectual property rights blocking
previously in force have been withdrawn.
Pursuant to the Agreement, Ericsson purchased certain assets related to the
Company's terrestrial CDMA wireless infrastructure business, including its R&D
resources, located in San Diego, California and Boulder, Colorado, and assumed
selected customer commitments, including a portion of future vendor financing
obligations, related assets and personnel. The Company recorded charges of $66
million to reflect the difference between the carrying value of the net assets
and the consideration received from Ericsson, less costs to sell. Total
consideration will be based on a final determination of net assets as of the
Closing Date.
QUALCOMM has received notice from Ericsson that Ericsson intends to dispute
the determination of the purchase price under the Agreement, pursuant to which
Ericsson acquired certain assets related to the Company's terrestrial wireless
infrastructure business in May 1999. QUALCOMM has also received notice from
Ericsson that Ericsson intends to assert claims for indemnification under the
Agreement. QUALCOMM and Ericsson are having on-going discussions aimed at
potentially resolving these claims. In the event the parties are unable to
resolve these claims, they are subject to dispute resolution procedures set
forth in the Agreement. Although there can be no assurance that the resolution
of these claims will not have a material adverse effect on the Company's results
of operations, liquidity or financial position, the Company believes the claims
are without merit and will defend them vigorously.
Pursuant to the Agreement, the Company will extend up to $400 million in
financing for possible future sales by Ericsson of cdmaOne or cdma2000
infrastructure equipment and related services to specific customers in certain
geographic areas, including Brazil, Chile, Russia, and Mexico, or in other areas
selected by Ericsson. Such commitments are subject to the customers meeting
certain conditions established in the financing arrangements and, in most cases,
to Ericsson also financing a portion of such cdmaOne or cdma2000 sales.
Commitments represent the estimated amounts to be financed under these
arrangements, however, actual financing may be in lesser amounts.
The Company has retained certain terrestrial CDMA wireless infrastructure
business contracts. Equipment sales and deployment services under these
contracts may be subcontracted to Ericsson. The Company has ceased its
development and manufacture of terrestrial-based infrastructure base stations
and has no present intention to re-enter that business. Accordingly, the Company
reassessed the recoverability of the carrying value of remaining assets relating
to its terrestrial CDMA wireless infrastructure business. The Company recorded
charges of $43 million in other operating expenses during fiscal 1999 to reduce
the carrying value of certain other assets to their approximate net realizable
value related to its terrestrial CDMA wireless infrastructure business. The
Company also recorded $52 million in non-operating charges, including $37
million in reserves provided for financial guarantees on projects which the
Company will no longer pursue as a result of the Ericsson transaction and $15
million related to the write-off of TOU assets.
35
The Company and Ericsson announced that certain compensation benefits would
be provided to employees transferred to Ericsson. The Company recorded a $74
million charge in other operating expenses during fiscal 1999 relating to its
share of the employee compensation benefits.
On September 29, 1999, Leap Wireless announced its intention to withdraw
its support for Metrosvyaz, Ltd. ("Metrosvyaz"), an investee in Russia, and that
such withdrawal would result in the write-off of its investment in that entity.
As a result of Leap Wireless' decision, the Company recorded a $51 million
charge related to the impairment of receivables and products and deployment
services placed with Metrosvyaz for which the Company had not yet recognized
revenue, including $17 million in other non-operating expenses related to the
impairment of non-trade receivables.
On October 11, 1999, Globalstar officially introduced its mobile and fixed
telephone service, which is expected to bring affordable, high-quality telephony
service to virtually any place on earth. The satellite-based telecommunications
system is initiating a phased roll-out of service in regions of the world
covered by its first nine operational gateways, or ground stations. Globalstar
initially will provide limited distribution of service to selected individuals
during "friendly users" trials in the United States, Canada, Brazil, Argentina,
China, Korea, South Africa and parts of Europe, allowing service providers to
make final adjustments and refinements before launching full commercial service
over the next few months. During this period, marketing, distribution and
customer care systems in these locations will be tested and adjusted based on
feedback from early users, with the goal of providing high quality service when
Globalstar is more broadly introduced around the world in the coming months.
On October 18, 1999, Globalstar announced the successful launch of an
additional four LEO satellites, bringing the total number of Globalstar
satellites now in space to 44. Globalstar remains on schedule to launch a
further eight satellites on two launches in November and December of this year
to complete its planned constellation of 48 satellites and four in-orbit spares.
During fiscal 1999, the Company recorded $111 million in unrealized gains,
net of taxes, on available-for-sale securities. The gain was recorded in other
comprehensive income as a component of equity.
FISCAL 1999 COMPARED TO FISCAL 1998
Total revenues for fiscal 1999 were $3,937 million, an increase of $589
million over total revenues of $3,348 million for fiscal 1998. Revenue growth
for 1999 was primarily due to increased sales of CDMA chipsets and phone
products, significant growth in royalties and deployment of commercial gateways
in the Globalstar System.
Cost of revenues for fiscal 1999, which consisted primarily of cost of
sales of CDMA chipsets and phone products, was $2,485 million compared to $2,333
million for fiscal 1998. The dollar increase in costs primarily reflects
increased shipments of phone products and deployment of commercial gateways. The
decrease in cost of revenues as a percentage of revenues to 63% in fiscal 1999
from 70% in fiscal 1998 primarily reflects operational efficiencies, volume
discounts obtained from suppliers and increased royalty revenue. Cost of
revenues as a percentage of revenues may fluctuate in future quarters depending
on mix of products sold, competitive pricing, new product introduction costs and
other factors.
For fiscal 1999 research and development expenses were $381 million or 10%
of revenues, compared to $349 million or 10% of revenues for fiscal 1998. The
dollar increase was primarily due to new chipset product initiatives and
software development efforts, offset by a decrease in terrestrial CDMA wireless
infrastructure product research and development as a result of the sale of the
business in May 1999.
For fiscal 1999, selling, general and administrative expenses were $426
million or 11% of revenues, compared to $410 million or 12% of revenues for
fiscal 1998. The dollar increase for fiscal 1999 was primarily attributable to
continued growth in personnel and associated overhead expenses necessary to
support the overall growth in the Company's operations and increased patent and
information technology expenses, offset by a decrease in marketing expense for
terrestrial CDMA wireless infrastructure products, including reduced headcount
and proposal activity.
36
During fiscal 1999, other operating expenses were $240 million, compared to
$12 million for fiscal 1998. In March 1999, the Company sold certain assets
related to its terrestrial CDMA wireless infrastructure business to Ericsson.
Other operating expenses during fiscal 1999 were comprised primarily of $74
million in compensation benefits provided to employees transferred to Ericsson,
$66 million in charges to reflect the difference between the carrying value of
the net assets to be sold and the net consideration received and various license
and settlement agreements in connection therewith, $43 million in charges to
reduce the carrying value of certain other assets related to its terrestrial
CDMA wireless infrastructure business, $34 million related to the impairment of
receivables and other assets in connection with Leap Wireless' decision to
withdraw its support for Metrosvyaz, Ltd., and $15 million in restructuring
charges.
During fiscal 1998, the Company acquired substantially all of the assets of
Now Software, Inc. for $10 million. In connection with this asset purchase,
acquired in-process research and development of $7 million, representing the
fair value of software products still in the development stage that had not yet
reached technological feasibility, was expensed at the acquisition date. This
expense was included in other operating expenses. Also during the same period,
the Company recorded a $5 million non-cash charge to operations relating to the
impairment of leased manufacturing equipment that is no longer used in the
manufacturing process. The $5 million charge represented the estimated total
cost of related lease obligations, net of estimated recoveries.
For fiscal 1999, interest expense was $15 million compared to $8 million
for fiscal 1998. This increase is the result of increased bank borrowings during
fiscal 1999.
Investment income, net was $25 million in fiscal 1999 compared to
investment expense, net of $47 million for fiscal 1998. During fiscal 1999, the
Company recognized interest income of $50 million, minority interest in income
of consolidated subsidiaries of $13 million, and $15 million equity in losses of
investees as compared to interest income of $39 million, minority interest in
income of consolidated subsidiaries of $48 million, and $21 million in equity in
losses of investees in fiscal 1998. The minority interest represents other
parties' or stockholders' share of the income or losses of consolidated
subsidiaries, including QPE, a joint venture with Sony. Minority interest for
fiscal 1998 includes the impact of restructuring QPE. Equity in losses of
investees for all periods indicated relates to the Company's ownership interests
in domestic and international CDMA based wireless telecommunications businesses
and joint ventures. The majority of these investments were transferred to Leap
Wireless as part of the spin-off. The Company also recorded a $20 million
non-cash charge to write-off its investment in NextWave Telecom Inc. during
fiscal 1998 as a result of subsidiaries of NextWave Telecom, Inc. filing for
bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code in June 1998.
Distributions on Trust Convertible Preferred Securities of $39 million in
each of fiscal 1999 and fiscal 1998 relate to the private placement of $660
million of 5 3/4% Trust Convertible Preferred Securities by QUALCOMM in February
1997.
During fiscal 1999, the Company recorded $69 million in non-operating
charges, including $37 million in reserves provided for financial guarantees on
projects which the Company will no longer pursue as a result of the Ericsson
transaction, $17 million related to the impairment of non-trade receivables from
Metrosvyaz, and $15 million related to the write off of TOU assets.
Income tax expense was $106 million for fiscal 1999 compared to $40 million
for fiscal 1998, resulting primarily from higher pretax earnings and a higher
effective tax rate for fiscal 1999 as compared to fiscal 1998. The annual
effective tax rate for fiscal 1999 was 35%, excluding the effect of the
reinstatement of the 1998 R&D tax credit recorded in fiscal 1999, compared to
30% for fiscal 1998. The higher tax rate was a result of higher earnings
relative to the growth of R&D tax credits.
FISCAL 1998 COMPARED TO FISCAL 1997
Total revenues for fiscal 1998 were $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 increased sales of CDMA
37
chipsets, infrastructure and phone products, the sale of OmniTRACS products and
services, growth in royalties and sales of commercial gateways for deployment in
the Globalstar System.
Cost of revenues for fiscal 1998, which consisted primarily of cost of
sales of CDMA chipsets, infrastructure and phone products, was $2,333 million
compared to $1,518 million for fiscal 1997. The dollar increase in costs
primarily reflects increased shipments of CDMA chipsets, infrastructure and
phone products and initial sales of commercial gateways. The decrease in cost of
revenues as a percentage of revenues to 70% in fiscal 1999 from 72% in fiscal
1998 primarily reflects operational efficiencies, volume discounts obtained from
suppliers and increased royalty revenue.
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, general and administrative expenses were $410
million or 12% of revenues, compared to $236 million or 11% of revenues for
fiscal 1997. The dollar increase for fiscal 1998 was primarily attributable to
continued growth in personnel and associated overhead expenses necessary to
support the overall growth in the Company's operations, increased litigation and
information technology expenses, costs associated with the Leap Wireless
Spin-off, and an increase in national and international marketing activities and
advertising costs related to sales of CDMA phone products.
During fiscal 1998, the Company acquired substantially all of the assets of
Now Software, Inc. for $10 million. In connection with this asset purchase,
acquired in-process research and development of $7 million, representing the
fair value of software products still in the development stage that had not yet
reached technological feasibility, was expensed at the acquisition date. This
expense was included in other operating expenses. Also during the same period,
the Company recorded a $5 million non-cash charge to operations relating to the
impairment of leased manufacturing equipment that is no longer used in the
manufacturing process. The $5 million charge represented the estimated total
cost of related lease obligations, net of estimated recoveries.
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.
Investment expense, net was $47 million in fiscal 1998 compared to
investment income, net of $45 million for fiscal 1997. During fiscal 1998, the
Company recognized interest income of $39 million, minority interest in income
of consolidated subsidiaries of $48 million, and $21 million in equity in losses
of investees as compared to interest income of $35 million and minority interest
in income of consolidated subsidiaries of $3 million. The minority interest
represents other parties' or stockholders' share of the income or losses of
consolidated subsidiaries, including 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. Minority interest for fiscal 1998 includes
the impact of restructuring QPE. Equity in losses of investees for all periods
indicated relates to the Company's ownership interests in domestic and
international CDMA based wireless telecommunications businesses and joint
ventures. The Company also recorded a $20 million non-cash charge to write-off
its investment in NextWave Telecom Inc. during fiscal 1998 as a result of
subsidiaries of NextWave Telecom, Inc. filing 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 February 1997.
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
as 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 "Accounting for Income Taxes." The annual effective
tax rate for fiscal 1998 was 30%, excluding an increase in certain estimated tax
credits, compared to 15% for fiscal 1997, which included the tax benefit from
recognizing the
38
deferred tax assets. The higher tax rate was a result of higher earnings
relative to the growth of R&D tax credits.
QUALCOMM SEGMENT RESULTS
The following should be read in conjunction with the 1999 financial results
of each reporting segment as detailed in Note 15, "Segment Information" of the
Consolidated Financial Statements and Notes.
CDMA Technologies Segment (QCT)
The QCT segment is a major supplier of components to manufacturers that
need to design CDMA into their phones or infrastructure equipment. QCT continues
its tradition of helping manufacturers produce smaller and more affordable
products by bringing new chipsets to the market with more functionality in a
substantially smaller package size. QCT's CDMA ASIC products include Mobile
Station Modem ("MSM") chips for telephone handsets, Cell Site Modem ("CSM")
chips for infrastructure base stations and a number of related chips that make
digital voice transmission and processing possible.
Segment revenues increased 29% to $1,133 million and earnings before taxes
increased 66% to $428 million. Revenue and earnings before taxes growth was
primarily due to increased customer demand for CDMA chipsets in the United
States, Korea, and Japan and to new product releases. Over 39 million MSM
chipsets were sold in fiscal 1999, contributing to the significant growth in
both the revenue and earnings before tax for the fiscal year ended September
1999. MSM chipset sales increased by more than 20 million over the prior year,
an increase of 160%.
In September 1999, QCT announced an alliance with Lucent Technologies to
commercialize a wireless technology designed to increase the capacity and data
capabilities of Lucent's network equipment based on CDMA.
In October 1999, QCT announced the development of MSM chipset and system
software solutions that will feature integrated support for wireless position
location technology. Called gpsOne, this MSM solution is intended to provide a
highly cost-effective solution for wireless position technology in a mobile
handset for CDMA cellular and PCS networks. In October 1999, QCT also announced
further development plans for MSM solutions that will support the single
worldwide CDMA standard for third generation systems. The new chipsets and
systems will pave the way for QUALCOMM to deliver complete solutions to
accelerate the global deployment of third generation CDMA products and services.
These solutions will enable manufacturers and operators worldwide to easily and
effectively evolve their products and services based on local market
requirements and deliver a new breed of feature-rich, voice and data-centric
wireless devices furthering the growth of the wireless industry.
Technology Licensing Segment (QTL)
QTL provides licenses to third parties related to the design, manufacture
and sale of products using the Company's technologies.
Segment revenues increased 57% to $454 million and earnings before taxes
increased 58% to $405 million. Revenue and earnings before taxes growth was
primarily due to royalties paid from licensees due to an increase in worldwide
demand for CDMA technologies.
Wireless Systems Segment (QWS)
QWS designs, manufactures, markets and deploys infrastructure and handset
products for use in terrestrial and non-terrestrial CDMA wireless and satellite
networks and provides satellite-based two-way data messaging and position
reporting equipment and services to transportation companies.
Segment revenues decreased 10% to $940 million and earnings before taxes
increased 138% to $20 million. Revenue decreased due to the sale of certain
assets of the Company's terrestrial CDMA wireless infrastructure business in May
1999 to Ericsson. Earnings before taxes growth was primarily due to
39
deployment of Globalstar gateways and OmniTRACS domestic unit demand from
existing customers and increase in messaging revenue due to expansion in
customer base, offset by the impact of the sale of infrastructure contracts to
Ericsson.
In October 1999, QWS announced Chinese government approval of its contract
with Guangdong South Satellite Telecommunications Service Co., Ltd. ("SST"), a
subsidiary of Guangdong Nanfang Communications Group, to provide satellite data
services in China. SST will offer QUALCOMM's OmniTRACS mobile information
management system to China's transportation industry. In August 1999, QWS also
announced a joint venture with AUTOTRAC Comercio e Telecomunicacoes S.A. of
Brazil to bring the OmniTRACS mobile information management system to Argentina.
This OmniTRACS system will provide two-way satellite-based communications,
including real-time Global Positioning System ("GPS") monitoring and a satellite
communications system to allow the transfer of data to and from a vehicle while
en route.
Consumer Products Segment (QCP)
QCP designs, manufactures and markets wireless handsets and accessories
using CDMA technology for use in mobile and fixed wireless networks.
Segment revenues increased 72% to $1,470 million and earnings before taxes
increased 76% to a $40 million loss. Revenue and earnings before taxes growth
was primarily due to an increase in demand for CDMA handsets, new product
releases, expanded manufacturing facilities with entrance into the Brazilian
market and improved manufacturing efficiencies.
In October 1999, QCP announced that Oracle Corporation, the world's leading
supplier of software for information management technology, has chosen
QUALCOMM's pdQ smartphone as one of the key platforms for its Customer
Relationship Management ("CRM") mobile sales and service applications. Oracle
CRM 3I is a complete suite of products for managing all aspects of customer
relations, from marketing to sales to service. With Oracle's mobile sales and
services applications, the pdQ smartphone provides enterprise companies with a
completely portable management tool, from customer and contact data to sales
forecasting and opportunity tracking plus clear CDMA voice capabilities.
On September 14, 1999, QUALCOMM announced it is considering several
strategic options for its terrestrial-based phone business. QUALCOMM desires to
transition the business to a manufacturer that will support its customer base
and employees while providing economies of scale, a strong purchasing base and
other operating efficiencies. QUALCOMM has set an objective of completing
discussions and entering an agreement before the end of the calendar year.
LIQUIDITY AND CAPITAL RESOURCES
On July 27, 1999, the Company completed an offering of 6,900,000 shares of
common stock at a net price of $156.50 per share. The net proceeds of the
offering were approximately $1 billion. The Company anticipates that its cash
and cash equivalents and investments balances of $1,685 million at September 30,
1999, together with the net proceeds of the offering, including interest earned
thereon, will be used to fund working and fixed capital requirements, including
facilities related to the expansion of its operations, financing for customers
of CDMA infrastructure products in accordance with the Agreement with Ericsson,
and investment in joint ventures or other companies and other assets to support
the growth of its business. In the event additional needs for cash arise, the
Company may raise additional funds from a combination of sources including
potential debt and equity issuance. There can, however, be no assurance that
additional financing will be available on acceptable terms or at all. In
addition, the Company's credit facility, as well as notes and indentures, place
restrictions on the Company's ability to incur additional indebtedness which
could adversely affect its ability to raise additional capital through debt
financing.
The Company has an unsecured credit facility ("Credit Facility") under
which banks are committed to make up to $400 million in revolving loans to the
Company. The Credit Facility expires in March 2001. The Facility may be extended
on an annual basis upon maturity. The Company is currently obligated to pay
commitment fees equal to 0.175% per annum on the unused amount of the Credit
Facility. The Credit Facility
40
includes certain restrictive financial and operating covenants. At September 30,
1999, there were no amounts or letters of credit issued outstanding under the
Credit Facility. The Company cancelled a $200 million credit facility on August
2, 1999.
In fiscal 1999, $182 million in cash was provided by operating activities,
compared to $25 million used by operating activities in fiscal 1998. Cash
provided by operating activities in fiscal 1999 includes $554 million of net
cash flow provided by operations offset by $372 million of net working capital
requirements. 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 $372 million primarily reflect increases in
accounts receivable and finance receivables which were primarily offset by a
decrease in inventories and an increase in accounts payable and accrued
liabilities. The increase in accounts and finance receivables in fiscal 1999
reflects the continued growth in products and component sales, and the deferral
of contract payments under the development agreement with Globalstar. The
increase in accounts payable and accrued liabilities are primarily attributable
to the growth of the business.
Investments in capital expenditures and other entities totaled $224 million
in fiscal 1999, compared to $429 million in fiscal 1998. Significant components
in fiscal 1999 consisted of the purchase of $180 million of capital assets and
the investment of $44 million in entities in which the Company holds less than a
50% interest. The Company expects to continue making significant investments in
capital assets, including new facilities and building improvements, throughout
fiscal 2000.
In fiscal 1999, the Company's financing activities provided $1,270 million.
Proceeds from the issuance of common stock under the Company's stock option and
employee stock purchase plans provided $1,312 million, offset by a $39 million
net repayment of bank lines of credit. In fiscal 1998, the Company's financing
activities provided net cash of $86 million, including $52 million from the
issuance of common stock under the Company's stock option and employee stock
purchase plans and $41 million in net borrowing under bank lines of credit.
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. During the
first quarter of fiscal 2000, the Company expects to finalize negotiations with
Globalstar which could result in the deferral of up to $400 million of future
contract payments under the development agreement, including $240 million in
trade receivables which were reclassified to non-current finance receivables at
September 30, 1999. Such deferrals will be interest bearing and paid by
Globalstar over a period not exceeding four years from the date of the deferral.
At September 30, 1999, approximately $349 million in interest bearing financed
amounts and approximately $171 million in accounts receivable, including $59
million in unbilled receivables, were outstanding from Globalstar.
At September 30, 1999, commitments to extend long-term financing for
possible future sales to customers, other than Globalstar, totaled approximately
$420 million, which the Company expects to fund over the next five years. 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 amounts.
Pursuant to the Ericsson Agreement, the Company will extend up to $400 million
in financing for possible future sales by Ericsson. Commitments outstanding at
September 30, 1999 include the commitment to Ericsson.
The Company 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, 1999, Globalstar had no borrowings outstanding
under the existing bank financing agreement.
41
In addition to the letter of credit on behalf of Globalstar, the Company
has $21 million of letters of credit and $103 million of other financial
guarantees outstanding as of September 30, 1999, none of which are
collateralized.
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 capital in the operating company. At
September 30, 1999, the Company's investments include Shinsegi Telecomm Inc.
(Korea), Vesper, S.A. (Brazil), Vesper Sao Paulo, S.A. (Brazil), and Wireless
Knowledge, L.L.C. (a Delaware limited liability company). Funding commitments
related to these investments total $119 million at September 30, 1999 which the
Company expects to fund over three years. Such commitments are subject to the
joint ventures meeting certain commitments; actual equity funding may be in
lesser amounts.
On October 29, 1999, the Company and Pegaso Telecomunicaciones ("Pegaso")
executed a commitment letter, subject to Pegaso shareholder approval, in which
the Company agreed to provide up to $500 million of debt financing to Pegaso and
its wholly-owned subsidiary, Pegaso Comunicaciones y Sistemas, a CDMA wireless
operating company in Mexico. The debt financing would consist of a $250 million
senior secured facility and a $250 million unsecured facility. The Company
currently has guaranteed a $100 million facility that would be refinanced by the
$250 million senior secured facility. The debt facilities will have final
maturities of seven to eight years.
QUALCOMM has a funding commitment to Leap Wireless in the form of a $265
million secured credit facility, which consists of two sub-facilities. The first
sub-facility enables Leap Wireless to borrow up to $35 million from QUALCOMM,
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 investments 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 $230 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 payable on September 23, 2006. QUALCOMM has 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 bear interest at a
variable rate equal to LIBOR plus 5.25% per annum. Interest is payable quarterly
beginning September 30, 2001; prior to such time, accrued interest shall be
added to the principal amount outstanding. At September 30, 1999, $126 million
was outstanding under this facility.
In October 1999, 1,803,792 Trust Convertible Preferred Securities were
converted into 2,482,739 shares of common stock. The conversion resulted in an
approximate $90 million reduction in the recorded obligation to Trust
Convertible Preferred Securities holders. The Company has the right and intends
to redeem the Trust Convertible Preferred Securities on or after March 4, 2000.
The holders of the Trust Convertible Preferred Securities have the option to
convert the securities into common stock or to redeem the securities at the
initial conversion price. A premium is payable over the conversion price if the
Company redeems prior to March 4, 2002. Upon conversion of all outstanding Trust
Convertible Preferred Securities, the approximately $660 million in Trust
Convertible Preferred Securities will convert into common stock on or after
March 4, 2000.
On November 10, 1999 QUALCOMM entered into an agreement with Korea Telecom
Freetel ("KT Freetel") pursuant to which QUALCOMM agreed to invest approximately
$200 million in KT Freetel to purchase 1.95% of KT Freetel's common stock and
zero coupon bonds of KT Freetel with warrants to purchase additional common
shares. KT Freetel has agreed to commercially deploy HDR technology, subject to
the successful completion of technical and marketing trials. If KT Freetel meets
certain obligations related to HDR technology, QUALCOMM is required to purchase
the shares underlying the warrants, for which the bond could be used as payment
in full.
42
YEAR 2000 READINESS
The Year 2000 ("Y2K") issue relates to the way computer systems and
programs define calendar dates. A system could fail or miscalculate a date
including "00" to mean 1900 rather than 2000. Also, other systems and products,
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 been working on the Y2K Project ("Project") since 1997. As
part of its strategy, a Y2K Program Office was formed and is led by the
Company's Chief Information Officer ("CIO"). It is sponsored by each division
President and is composed of Senior IT Managers/Directors within each division.
These leaders are responsible for working within their divisions to ensure Y2K
readiness with a primary focus on products and customers. Functional areas,
which support all divisions, are also members of the Program Office Team. These
include Supply Chain, Corporate Human Resources and Accounting, Logistics,
Facilities, and certain elements of Information Technology. The Company works
with outside consulting firms as well as certain industry consortiums to assist
with the effort. All Y2K efforts have been tracked and managed by the Program
Office, while detailed plans have been developed and are being executed at the
division and functional area levels. This strategy has reduced the Company's
level of uncertainty about the Y2K problem, and in particular, about the Y2K
readiness of the Company's critical customers and suppliers. The Company
believes that with the completion of the Project as scheduled, the possibility
of significant interruptions of normal operations will be reduced.
The Company's Y2K Project, designed to minimize the impact of Y2K problems
on operations, is proceeding on schedule. The members of the Company's Y2K
Program Office have been addressing the issues under four major sections:
Internal Readiness, Supply Chain Assessment, Product Readiness and Customer
Readiness. Each section is evaluated through four phases: Discovery, Assessment,
Remediation and Post-Remediation. Discovery is the process of identifying
potential Y2K issues throughout the Company's critical business process.
Assessment is the process of categorizing issues that were identified in the
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 addresses 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 what it
believes to be the critical systems and non-computer related items that are
required to be Y2K ready. Using supplier data and internal discovery methods,
remediation or replacement efforts are complete for our critical systems. The
Company has a dedicated Y2K readiness-testing lab used for testing the Company's
computing and communications infrastructure as well as the Company's critical
business tools. Non-ready critical systems have been retired, replaced, or
repaired. At this time, the Company's Internal Readiness of critical systems is
complete. There is an ongoing project to address Y2K readiness for all
non-critical computer and telecommunications systems by December 31, 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 completed formal communications with critical suppliers to
determine the Company's vulnerability to suppliers' Y2K issues. The Company has
been requesting that critical suppliers represent their products and services to
be Y2K ready and that they have a program to test for that readiness. At this
date, the Company has received Y2K readiness information from all critical
suppliers. The Company has engaged in Y2K information sharing meetings with all
of its critical suppliers. On-site visits of key suppliers for the purpose of
verifying Y2K readiness status have been conducted. At this time, 100% of the
Company's critical suppliers have been assessed by questionnaire,
information-sharing meetings, and/or on-site visits. Based on knowledge gained
through the supplier assessment process, the Company is developing contingency
plans as needed to ensure minimal interruption of supply. In addition, the
Company has been participating in the High Technology Consortium -- Year 2000
and Beyond, and leveraging that organization and resource pool to augment the
Company's efforts.
Product Readiness includes the review of QUALCOMM's products for Y2K
readiness. The Company's program office has been working with individual
business unit managers to review all QUALCOMM products
43
for Y2K readiness. At this time, all of the Company's Product Readiness section
is complete. All Company products have an upgrade or migration path for legacy
products.
Customer Readiness is the review of QUALCOMM's major customers for Y2K
readiness. The Program Office has organized a review targeted to cover a
significant portion of the Company's customers. Customer lists have been
generated and survey work is being done. At this time, all of the Company's
Customer Readiness section is complete.
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. Contingency plans are being developed to deal
with issues such as "at risk" suppliers and interruption of utility and other
services. The response of certain third parties is beyond the control of the
Company. Contingency plans are being developed for critical suppliers and
customers who have not supplied adequate Y2K readiness information. Contingency
plans 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,
from the implementation of such contingency plans.
The Company believes its critical systems are Y2K ready. However, there is
no guarantee that we have discovered all possible failure points. Specific
factors contributing to this uncertainty include failure to identify all
susceptible systems, non-readiness 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 critical systems, suppliers, products or
major customers not being Y2K ready. This situation could result in a 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-readiness could result
in the failure of the Company to perform on contracts, delayed delivery of
products to customers and inadequate customer service. Customer non-readiness
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 adverse effect on the Company's business, results of
operations, liquidity and financial position.
To date the Company has spent an estimated $17 million on this Project.
Total budgeted cost at this time is estimated at $21 million including
Post-Remediation efforts. The funding for this Project comes from operations and
working capital. The Company estimates the allocable time of employees using
average hourly rates for each class of employee. 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 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." In May 1999, the FASB voted to delay the
effective date of FAS 133 by one year. The Company will be required to adopt FAS
133 for fiscal year 2001. 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE MARKET RISK. The Company has fixed income investments
consisting of investments in marketable debt securities. Interest income earned
on the Company's short-term fixed income investment portfolio is affected by
changes in the general level of U.S. interest rates, while interest income
earned on long-term investments is not affected in the near term. The Company
believes that it is 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. See Notes 3 to the Consolidated
Financial Statements for information about investments in marketable debt
securities.
44
Finance receivables bear interest at both fixed and variable rates. See
Note 4 to the Consolidated Financial Statements for information about finance
receivables. 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 and/or LIBOR. Fair values will vary as interest rates change.
The Company has other credit facilities extended to third parties included
in other assets, including the credit facility provided to Leap Wireless. These
facilities bear interest at variable rates. See Note 14 to the Consolidated
Financial Statements for information regarding the Leap Wireless credit
facility. Interest earned on credit facilities included in other assets is
affected by changes in LIBOR, and fair value will vary as interest rates change.
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. Interest expense is affected by the general level of U.S. interest
rates and/or LIBOR. Increases in interest expense resulting from increases in
interest rates would be offset by corresponding increases 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
redemption price 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, finance receivables, credit facilities in other assets 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 short-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)
FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
---- ---- ---- ---- ---- ---------- ----- -----
Marketable debt securities.............. $767 $68 $ -- $-- $-- $ -- $835 $835
Interest rate........................... 5.8% 6.3% -- -- -- --
Finance receivables:
Fixed rate............................ $ 23 $48 $ 51 $12 $-- $ -- $134 $120
Interest rate......................... 5.5% 5.7% 6.2% 6.2% -- --
Variable rate (LIBOR)................. $ 3 $23 $ 27 $40 $70 $ 48 $211 $218
Margin over LIBOR..................... 5.4% 5.4% 5.5% 5.7% 6.5% 6.8%
Variable rate (reference bank
prime).............................. $ -- $90 $120 $30 $-- $ -- $240 $203
Margin over reference bank prime...... -- 2.0% 2.0% 2.0% -- --
Credit facilities in other assets....... $ -- $ 5 $ -- $-- $-- $126 $131 $131
Margin over LIBOR....................... -- 5.3% -- -- -- 5.3%
Bank lines of credit.................... $112 $-- $ -- $-- $-- $ -- $112 $112
Margin over LIBOR....................... 0.5% -- -- -- -- --
EQUITY PRICE RISK. The Company recorded a warrant in connection with the
Leap Wireless spin-off to purchase Leap Wireless common stock at $6.10625 per
share. At September 30, 1999, the Company is entitled to purchase 4.5 million
shares of Leap Wireless common stock. See Notes 1 and 2 to the Consolidated
Financial Statements for a description of the Company's accounting policy for
this instrument and further information. The recorded and fair values of the
warrant are $28 million and $90 million, respectively, at September 30, 1999.
The estimated fair value of the warrant, as calculated using the Black-Scholes
option pricing model, would decrease by approximately 11% as of September 30,
2000 if the price of the Leap Wireless stock were to decrease by 10%. This
hypothetical decrease is suggestive of the effect on fair values,
45
but not on future cash flows. The Company will pay a fixed price per share if
its warrant to purchase Leap Wireless common stock is exercised. The warrant is
held for purposes other than trading.
The Company holds available-for-sale securities subject to equity price
risk. The recorded and fair value of available-for-sale securities are $190
million at September 30, 1999. The fair value of these securities would decrease
by approximately 10% as of September 30, 2000 if the market prices of the
securities were to decrease by 10%.
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. The Company
manages its exposure to foreign exchange market risks when deemed appropriate,
through the use of derivative financial instruments, consisting primarily of
forward contracts. Derivative financial instruments are viewed as risk
management tools and are not used for speculative or trading purposes. At
September 30, 1999, the Company had no foreign currency forward contracts
outstanding.
Financial instruments held by consolidated subsidiaries and equity method
investees which are not denominated in the functional currency of those entities
are subject to the effects of currency fluctuations, which may affect reported
earnings. As a global concern, the Company faces exposure to adverse movements
in foreign currency exchange rates. Recently, exposures to emerging market
currencies, such as the Brazilian real, have increased due to the Company's
expansion into such markets. At the present time, the Company only hedges those
currency exposures associated with certain assets and liabilities denominated in
nonfunctional currencies and certain anticipated nonfunctional currency
transactions. As a result, the Company could suffer unanticipated gains or
losses on anticipated foreign currency cash flows, as well as economic loss with
respect to the recoverability of investments. While the Company hedges certain
transactions with non-U.S. customers, declines in currency values in certain
regions may, if not reversed, adversely affect future product sales because the
Company's products may become more expensive to purchase in the countries of the
affected currencies.
Finance receivables from the Company's international customers which do not
use the U.S. dollar as their functional currency subject the Company to credit
risk. Because the Company's financing is generally dollar denominated, any
significant change in the value of the dollar against the debtors' functional
currencies could result in an increase in the debtor's cash flow requirements
and could thereby affect the ability of the Company to collect its receivables.
At September 30, 1999, receivables from international customers totaled $200
million.
The analysis methods used by the Company to assess and mitigate risk
discussed above should not be considered projections of future risks.
ITEM 8. FINANCIAL STATEMENTS
The Company's consolidated financial statements at September 30, 1999 and
1998 and the Report of PricewaterhouseCoopers LLP, Independent Accountants, are
included in this report on Form 10-K on pages F-1 through F-30.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
46
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 29, 2000 (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
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."
47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of the report:
PAGE
NUMBER
------
(1) Report of Independent Accountants....................... F-1
Consolidated Balance Sheets at September 30, 1999 and
1998.................................................. F-2
Consolidated Statements of Income for Fiscal 1999, 1998
and 1997.............................................. F-3
Consolidated Statements of Cash Flows for Fiscal 1999,
1998 and 1997......................................... F-4
Consolidated Statements of Stockholders' Equity for
Fiscal 1999, 1998 and 1997............................ F-5
Notes to Consolidated Financial Statements............. F-6
(2) Schedule II -- Valuation and Qualifying 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.
EXHIBITS
NUMBER 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 25, 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.(14)(21)
10.4 Form of Supplemental Stock Option Grant under the 1991 Stock
Option Plan.(2)(14)
48
EXHIBITS
NUMBER DESCRIPTION
- -------- -----------
10.5 1991 Employee Stock Purchase Plan.(14)(21)
10.6 Form of Employee Stock Purchase Plan Offering under the 1991
Employee Stock Purchase Plan.(2)(14)
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
Hertizens.(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)(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 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, as
amended.(14)
10.22 1996 Non-qualified Employee Stock Purchase Plan.(13)(14)
10.23 Stockholder Rights Plan.(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 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)
10.29 1998 Non-Employee Director's Stock Option Plan.(14)(21)
10.30 Employment Agreement dated May 15, 1997 between the Company
and John E. Major.(14)(22)
10.31 Asset Purchase Agreement between QUALCOMM Incorporated and
Telefonaktiebolaget LM Ericsson dated as of March 24,
1999.(23)
49
EXHIBITS
NUMBER DESCRIPTION
- -------- -----------
10.32 Credit Agreement dated as of March 24, 1999, among QUALCOMM
Incorporated, as Borrower, the Lender Parties, Bank of
America National Trust & Savings Association as
Administrative Agent and Syndication Agent, and Citibank
N.A., as Documentation Agent and Syndication Agent.(23)
10.33 Multi-Product License Agreement between QUALCOMM
Incorporated and Telefonaktiebolaget LM Ericsson dated March
24, 1999.(23)
10.34 Subscriber Unit License Agreement between QUALCOMM
Incorporated and Telefonaktiebolaget LM Ericsson dated March
24, 1999.(23)
10.35 Settlement Agreement and Mutual Release between QUALCOMM
Incorporated and Telefonaktiebolaget LM Ericsson dated March
24, 1999.(23)
10.36 First Amendment to Revolving Credit Agreement between
QUALCOMM Incorporated, Bank of America National Trust &
Savings Association, et al, and Citibank N.A. dated March
24, 1999.(23)
10.37 Amendment No. 1 dated as of May 24, 1999 to the Asset
Purchase Agreement dated as of March 24, 1999 between
QUALCOMM Incorporated and Telefonaktiebolaget LM
Ericsson(publ).(24)
10.38 Amendment to Stockholder Rights Plan dated November 15,
1999.
21 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney. Reference is made to page 46.
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.
(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.
50
(13) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(File No. 333-2750) filed on March 25, 1996.
(14) Indicates management or compensatory plan or arrangement required to be
identified pursuant to Item 14(c).
(15) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 29, 1996.
(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 reference.
(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 the
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 Leap Wireless International, Inc. (File No. 0-29752) and
incorporated herein by reference.
(21) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(File No. 333-69457) filed on December 22, 1998.
(22) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 27, 1998.
(23) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 28, 1999.
(24) Filed as an exhibit to the Registrant's Current Report on Form 8-K dated
May 24, 1999.
51
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.
QUALCOMM Incorporated
By /s/ IRWIN MARK JACOBS
------------------------------------
Irwin Mark Jacobs,
Chief Executive Officer and Chairman
November 15, 1999
POWER OF ATTORNEY
Know all persons by these presents, that each person whose signature
appears below constitutes and appoints Irwin Mark Jacobs and 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 Chairman November 15, 1999
- ------------------------------------ (Principal Executive Officer)
Irwin Mark Jacobs
/s/ ANDREW J. VITERBI Vice-Chairman November 15, 1999
- ------------------------------------
Andrew J. Viterbi
/s/ ANTHONY S. THORNLEY Executive Senior Vice President and November 15, 1999
- ------------------------------------ Chief Financial Officer (Principal
Anthony S. Thornley Financial and Accounting Officer)
/s/ RICHARD C. ATKINSON Director November 15, 1999
- ------------------------------------
Richard C. Atkinson
/s/ ADELIA A. COFFMAN Director November 15, 1999
- ------------------------------------
Adelia A. Coffman
/s/ DIANA LADY DOUGAN Director November 15, 1999
- ------------------------------------
Diana Lady Dougan
/s/ NEIL KADISHA Director November 15, 1999
- ------------------------------------
Neil Kadisha
/s/ ROBERT E. KAHN Director November 15, 1999
- ------------------------------------
Robert E. Kahn
52
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JEROME S. KATZIN Director November 15, 1999
- ------------------------------------
Jerome S. Katzin
/s/ DUANE A. NELLES Director November 15, 1999
- ------------------------------------
Duane A. Nelles
/s/ PETER M. SACERDOTE Director November 15, 1999
- ------------------------------------
Peter M. Sacerdote
/s/ FRANK SAVAGE Director November 15, 1999
- ------------------------------------
Frank Savage
/s/ BRENT SCOWCROFT Director November 15, 1999
- ------------------------------------
Brent Scowcroft
/s/ MARC I. STERN Director November 15, 1999
- ------------------------------------
Mark I. Stern
53
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of QUALCOMM Incorporated
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 48 present fairly, in all material
respects, the financial position of QUALCOMM Incorporated and its subsidiaries
at September 30, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 1999 in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule listed in the index appearing under
Item 14(a)(2) on page 48 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule 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.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
November 10, 1999
F-1
QUALCOMM INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
SEPTEMBER 30,
------------------------
1999 1998
---------- ----------
Current Assets:
Cash and cash equivalents................................. $ 660,016 $ 175,846
Investments............................................... 954,415 127,478
Accounts receivable, net.................................. 883,640 612,209
Finance receivables....................................... 26,377 56,201
Inventories, net.......................................... 257,941 386,536
Other current assets...................................... 195,849 178,950
---------- ----------
Total current assets.............................. 2,978,238 1,537,220
Property, plant and equipment, net.......................... 555,991 609,682
Investments................................................. 70,495 --
Finance receivables, net.................................... 548,482 287,751
Other assets................................................ 381,744 132,060
---------- ----------
Total assets...................................... $4,534,950 $2,566,713
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities.................. $ 705,208 $ 660,428
Unearned revenue.......................................... 56,070 67,123
Bank lines of credit...................................... 112,000 151,000
Current portion of long-term debt......................... 3,099 3,058
---------- ----------
Total current liabilities......................... 876,377 881,609
Long-term debt.............................................. 795 3,863
Other liabilities........................................... 74,872 25,115
---------- ----------
Total liabilities................................. 952,044 910,587
---------- ----------
Commitments and contingencies (Note 14)
Minority interest in consolidated subsidiaries (Note 11).... 51,596 38,530
---------- ----------
Company-obligated mandatorily redeemable Trust Convertible
Preferred Securities of a subsidiary trust holding solely
debt securities of the Company............................ 659,555 660,000
---------- ----------
Stockholders' Equity:
Preferred stock, $0.0001 par value; issuable in series;
8,000 shares authorized; none outstanding at September
30, 1999 and 1998...................................... -- --
Common stock, $0.0001 par value; 300,000 shares
authorized; 161,591 and 141,181 shares issued and
outstanding at September 30, 1999 and 1998 (Note 16)... 16 14
Paid-in capital........................................... 2,587,948 959,260
Retained earnings......................................... 200,879 --
Accumulated other comprehensive income (loss)............. 82,912 (1,678)
---------- ----------
Total stockholders' equity........................ 2,871,755 957,596
---------- ----------
Total liabilities and stockholders' equity........ $4,534,950 $2,566,713
========== ==========
See accompanying notes.
F-2
QUALCOMM INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED SEPTEMBER 30
--------------------------------------
1999 1998 1997
---------- ---------- ----------
Revenues............................................... $3,937,299 $3,347,870 $2,096,365
---------- ---------- ----------
Operating expenses:
Cost of revenues..................................... 2,485,072 2,333,399 1,518,006
Research and development............................. 381,139 349,483 235,922
Selling, general and administrative.................. 425,941 410,347 236,188
Other................................................ 240,007 11,976 8,792
---------- ---------- ----------
Total operating expenses............................... 3,532,159 3,105,205 1,998,908
---------- ---------- ----------
Operating income....................................... 405,140 242,665 97,457
Interest expense....................................... (14,698) (8,058) (11,012)
Investment income (expense), net....................... 24,576 (46,663) 45,266
Distributions on Trust Convertible Preferred Securities
of subsidiary trust.................................. (39,297) (39,270) (23,277)
Other.................................................. (69,035) -- --
---------- ---------- ----------
Income before income taxes............................. 306,686 148,674 108,434
Income tax expense..................................... (105,807) (40,142) (16,500)
---------- ---------- ----------
Net income............................................. $ 200,879 $ 108,532 $ 91,934
========== ========== ==========
Net earnings per common share:
Basic................................................ $ 1.35 $ 0.78 $ 0.68
========== ========== ==========
Diluted.............................................. $ 1.24 $ 0.73 $ 0.64
========== ========== ==========
Shares used in per share calculations:
Basic................................................ 148,678 138,406 134,670
========== ========== ==========
Diluted.............................................. 162,472 147,924 143,774
========== ========== ==========
See accompanying notes.
F-3
QUALCOMM INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED SEPTEMBER 30
------------------------------------
1999 1998 1997
---------- --------- ---------
OPERATING ACTIVITIES:
Net income............................................ $ 200,879 $ 108,532 $ 91,934
Depreciation and amortization......................... 158,429 141,892 93,598
Acquired in-process research and development.......... -- 6,976 --
Restructuring, impairments and other non-cash
charges............................................ 269,449 25,000 8,792
Gain on sale of trading securities.................... -- -- (13,400)
Gain on sale of available-for-sale securities......... (5,663) -- --
Minority interest in income of consolidated
subsidiaries....................................... 13,066 48,366 2,979
Equity in losses of investees......................... 15,140 20,731 --
Deferred income tax benefit........................... (96,595) (55,581) (62,086)
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net........................... (275,846) (166,827) (227,949)
Finance receivables, net........................... (304,546) (232,451) (111,501)
Inventories........................................ 40,102 (161,380) (53,645)
Other assets....................................... (7,048) (66,603) (36,416)
Accounts payable and accrued liabilities........... 173,807 274,819 222,068
Unearned revenue................................... (10,495) 22,039 31,858
Other liabilities..................................... 11,554 9,820 11,745
Proceeds from sale of trading securities.............. -- -- 23,129
Purchase of trading securities........................ -- -- (9,729)
---------- --------- ---------
Net cash provided (used) by operating activities........ 182,233 (24,667) (28,623)
---------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures.................................. (180,237) (321,566) (163,115)
Purchases of held-to-maturity investments............. (858,108) (269,833) (978,745)
Maturities of held-to-maturity investments............ 150,873 702,376 662,862
Proceeds from sale of available-for-sale securities... 7,163 -- --
Issuance of notes receivable.......................... (171,982) (124,765) --
Collection of notes receivable........................ 45,754 -- --
Disposition (acquisition) of assets, net of
liabilities........................................ 98,097 (9,992) --
Investments in other entities......................... (43,568) (107,225) (57,887)
Other items, net...................................... (3,350) (2,995) --
---------- --------- ---------
Net cash used by investing activities................... (955,358) (134,000) (536,885)
---------- --------- ---------
FINANCING ACTIVITIES:
Net (repayments) borrowings under bank lines of
credit............................................. (39,000) 41,000 29,300
Net proceeds from issuance of common stock............ 1,311,925 51,556 32,445
Proceeds from issuance of Trust Convertible Preferred
Securities of subsidiary trust, net of $18,624
deferred offering costs............................ -- -- 641,376
Spin-off of Leap Wireless International, Inc.......... -- (10,000) --
Other items, net...................................... (2,621) 3,120 1,081
---------- --------- ---------
Net cash provided by financing activities............... 1,270,304 85,676 704,202
---------- --------- ---------
Effect of exchange rate changes on cash................. (13,009) -- --
---------- --------- ---------
Net increase (decrease) in cash and cash equivalents.... 484,170 (72,991) 138,694
Cash and cash equivalents at beginning of year.......... 175,846 248,837 110,143
---------- --------- ---------
Cash and cash equivalents at end of year................ $ 660,016 $ 175,846 $ 248,837
========== ========= =========
See accompanying notes.
F-4
QUALCOMM INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK OTHER
---------------- PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) TOTAL
------- ------ ---------- --------- ------------- ----------
BALANCE AT SEPTEMBER 30,
1996......................... 133,070 $14 $ 819,049 $ 25,864 $ (14) $ 844,913
Net income..................... -- -- -- 91,934 -- 91,934
Exercise of stock options...... 2,416 -- 19,905 -- -- 19,905
Tax benefit from exercise of
stock options................ -- -- 54,812 -- -- 54,812
Issuance for Employee Stock
Purchase and Executive
Retirement Plans............. 762 -- 12,540 -- -- 12,540
Foreign currency translation... -- -- -- -- 74 74
------- --- ---------- --------- -------- ----------
BALANCE AT SEPTEMBER 30,
1997......................... 136,248 14 906,306 117,798 60 1,024,178
Net income..................... -- -- -- 108,532 -- 108,532
Exercise of stock options...... 2,580 -- 32,148 -- -- 32,148
Tax benefit from exercise of
stock options................ -- -- 17,125 -- -- 17,125
Issuance for Employee Stock
Purchase and Executive
Retirement Plans............. 943 -- 19,408 -- -- 19,408
Issuance of common stock upon
exercise of warrant (Note
8)........................... 1,410 -- -- -- -- --
Foreign currency translation... -- -- -- -- (1,738) (1,738)
Spin-off of Leap Wireless
International, Inc. (Note
2)........................... -- -- (15,727) (226,330) -- (242,057)
------- --- ---------- --------- -------- ----------
BALANCE AT SEPTEMBER 30,
1998......................... 141,181 14 959,260 -- (1,678) 957,596
Net income..................... -- -- -- 200,879 -- 200,879
Exercise of stock options...... 12,249 1 205,227 -- -- 205,228
Tax benefit from exercise of
stock options................ -- -- 290,817 -- -- 290,817
Issuance for Employee Stock
Purchase and Executive
Retirement Plans............. 1,249 -- 31,571 -- -- 31,571
Stock based compensation
expense...................... -- -- 8,613 -- -- 8,613
Issuance of common stock....... 6,900 1 1,079,314 -- -- 1,079,315
Issuance of common stock upon
conversion of Trust
Convertible Preferred
Securities................... 12 -- 445 -- -- 445
Foreign currency translation... -- -- -- -- (26,100) (26,100)
Spin-off of Leap Wireless
International, Inc. (Note
2)........................... -- -- 12,701 -- -- 12,701
Change in unrealized gain on
securities, net of income
taxes of $74,410............. -- -- -- -- 110,690 110,690
------- --- ---------- --------- -------- ----------
BALANCE AT SEPTEMBER 30,
1999......................... 161,591 $16 $2,587,948 $ 200,879 $ 82,912 $2,871,755
======= === ========== ========= ======== ==========
See accompanying notes.
F-5
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 digital wireless
communications products and services based on its Code Division Multiple Access
("CDMA") technology. The Company licenses and receives royalty payments on its
CDMA technology from major domestic and international telecommunications
suppliers. The Company has contracts with Globalstar L.P. ("Globalstar"), a
partnership formed to build and operate a worldwide, low-Earth-orbit
satellite-based telecommunications system, to design, develop and manufacture
consumer and ground communications equipment.
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. For presentation purposes, the Company has indicated its
fiscal year as ending on September 30.
Revenues
Revenues on product sales are generally recognized at the time units are
shipped and over the period during which message and warranty services are
provided, except for shipments under arrangements involving significant
acceptance requirements. Under such arrangements, revenue is recognized when the
Company has substantially met its performance obligations. Revenue from
long-term contracts and revenue earned under license and development agreements
with continuing performance obligations is recognized using the
percentage-of-completion method, based either on costs incurred to date compared
with total estimated costs at completion or using a units of delivery
methodology. 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 delivery requirements have
been met and collection is probable. Royalty revenue is recorded as earned in
accordance with the specific terms of each license agreement when reasonable
estimates of such amounts can be made. 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.
Concentrations
A significant portion of the Company's revenues are concentrated with a
limited number of customers as the worldwide market for wireless telephone
systems and products is dominated by a small number of large
F-6
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
corporations and government agencies. The Company also derives significant
revenues from the North American trucking industry, particularly providers of
long-haul transportation of goods and equipment.
Revenues from international customers, consisting of export sales and
license and royalty fees, were approximately 38%, 34% and 30% of total revenues
in fiscal 1999, 1998 and 1997, respectively. Such revenues included $1,041
million, $697 million and $522 million from Asia, respectively. During fiscal
1998, sales to one South Korean customer comprised 11% of consolidated revenues.
During fiscal 1999, 1998 and 1997, revenues from Globalstar (Note 11) accounted
for 11%, 11% and 10% of revenues, respectively.
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash and cash
equivalents include money market funds, certificates of deposit, commercial
paper and loan participations. The carrying amounts approximate fair value due
to the short maturities of these instruments.
The Company's policy is to place its cash, cash equivalents and investments
with high quality financial institutions, government agencies and corporate
entities and to limit the amount of credit exposure.
Investments
Management determines the appropriate classification of marketable
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Held-to-maturity securities are carried at amortized cost,
which approximates fair value. Available-for-sale securities are stated at
market value as determined by the most recently traded price of each security at
the balance sheet date. The net unrealized gains or losses on available-for-sale
securities are reported as a component of comprehensive income (loss), net of
tax. The specific identification method is used to compute the realized gains
and losses on debt and equity securities.
Warrants
The Company holds warrants to purchase equity interests in certain other
companies. Warrants to purchase equity interests are carried at cost.
Inventories
Inventories are valued at the lower of cost or market using the first-in,
first-out method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and depreciated or
amortized using the straight-line method over their estimated useful lives.
Direct external and internal computer software development costs subsequent to
the preliminary stage of development are capitalized. 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.
Investments in Other Entities
Investments in corporate entities with less than a 20% voting interest are
generally accounted for under the cost method. The Company uses the equity
method to account for investments in corporate entities in which it has a voting
interest of 20% to 50%, or in which it otherwise has the ability to exercise
significant
F-7
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 twenty years.
During November 1997, the Company acquired substantially all the assets of
Now Software, Inc., a developer of advanced scheduling and calendaring software
products, for $10 million. 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 is
recognized when estimated future cash flows expected to result from the use of
the asset and its eventual disposition are less than its carrying amount.
Warranty
Estimated future warranty obligations related to certain products are
provided by charges to operations in the period in which the related revenue is
recognized.
Stock-Based Compensation
The Company measures compensation expense for its stock-based employee and
non-employee directors compensation plans using the intrinsic value method and
provides pro forma disclosures of net income and net earnings per common share
as if the fair value method had been applied in measuring compensation expense.
Equity instruments issued for goods or services to non-employees are
accounted for at fair value and are marked to market until a performance
commitment date is reached.
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;
income and expenses are translated at average rates of exchange prevailing
during the year. The functional currency of the Company's foreign investees that
operate in highly inflationary economies 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 rates.
Resulting remeasurement gains or losses of these foreign investees are
recognized in the statement of income. During fiscal 1999, a significant
devaluation of the Brazilian real resulted in a $25 million translation loss
which was recorded as a component of other comprehensive income.
The Company enters into foreign currency forward contracts to hedge certain
foreign currency transactions and probable anticipated foreign currency
transactions. Gains and losses arising from foreign currency forward contracts
offset gains and losses resulting from the underlying hedged transaction. The
F-8
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company had no foreign currency forward contracts outstanding as of September
30, 1999 or 1998. During fiscal 1999, net foreign currency transaction gains
were not material. During fiscal 1998 and 1997, net foreign currency transaction
gains included in the Company's statements of income totaled approximately $6
million and $1 million, respectively.
Income Taxes
Current income tax expense is the amount of income taxes expected to be
payable for the current 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 bases of assets and liabilities and for the expected future tax benefit to
be derived from tax loss and tax credit carry forwards. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to "more likely than not" be realized in future tax returns. Tax law and rate
changes are reflected in income in the period such changes are enacted.
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130
("FAS 130"), "Reporting Comprehensive Income," in the first quarter of fiscal
1999. As required by FAS 130, the Company displays the accumulated balance of
other comprehensive income or loss separately in the equity section of the
consolidated balance sheets. Prior year financial statements have been
reclassified to conform to the current year presentation. Total comprehensive
income, which is comprised of net income and other comprehensive income (loss),
amounted to approximately $285 million, $107 million and $92 million for fiscal
years 1999, 1998, and 1997, respectively. Components of accumulated other
comprehensive income (loss) consist of the following (in thousands):
YEARS ENDED SEPTEMBER 30,
---------------------------
1999 1998 1997
-------- ------- ----
Foreign currency translation............................ $(27,778) $(1,678) $60
Change in unrealized gain on securities, net of income
taxes................................................... 110,690 -- --
-------- ------- ---
$ 82,912 $(1,678) $60
======== ======= ===
Stock Split
On April 14, 1999, the Company's Board of Directors declared a two-for-one
stock split of the Company's common stock in the form of a stock dividend. The
stock dividend was distributed on May 10, 1999 to stockholders of record on
April 21, 1999. Stockholders' equity has been restated to give retroactive
recognition to the stock split for all periods presented by reclassifying the
par value of the additional shares arising from the split from paid-in capital
to common stock. All references in the financial statements and notes to number
of shares and per share amounts have been restated to reflect this stock split.
Net Earnings Per Common Share
Basic earnings per common share are calculated by dividing net income by
the weighted average number of common shares outstanding during the reporting
period. Diluted earnings per common share ("diluted
F-9
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EPS") 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,
---------------------------
1999 1998 1997
------- ------ ------
Options.................................................... 13,794 8,248 7,720
Warrants................................................... -- 1,270 1,384
------ ----- -----
13,794 9,518 9,104
====== ===== =====
Options outstanding during the years ended September 30, 1999, 1998 and
1997 to purchase approximately 3,373,000, 7,161,000, and 3,526,000 shares of
common stock, respectively, were not included in the computation of diluted EPS
because the options' exercise prices were greater than the average market prices
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 1999,
1998 and 1997 since its effect would be anti-dilutive.
Future Accounting Requirements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." In May 1999, the FASB voted to
delay the effective date of FAS 133 by one year. The Company will be required to
adopt FAS 133 for fiscal year 2001. 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 completed its determination of the impact of the
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").
In connection with the Distribution, the Company transferred to Leap
Wireless its joint venture and equity interests in certain domestic and
international emerging terrestrial-based wireless telecommunications operating
companies and recorded a $17 million liability in connection with its agreement
to transfer its ownership interest in Telesystems of Ukraine ("TOU"), a wireless
telecommunications company in Ukraine, and its working capital loan receivable
from TOU ("TOU assets") to Leap Wireless if certain events occurred within 18
months of the Leap Wireless Spin-off. During the first six months of fiscal
1999, the Company provided an additional $2 million working capital loan to TOU
and recorded 100% of the losses of TOU, net of eliminations, because the other
investors' equity interests were depleted. During March 1999, the Company
reassessed the recoverability of TOU assets in light of recent developments
affecting the TOU business and the disposition of other assets related to the
terrestrial CDMA wireless infrastructure business (Note 13). As a result, the
Company recorded a $15 million non-operating charge to write off the TOU assets,
as well as a $12 million charge to operations to write off other assets related
to the TOU contract (Note 13), and the adjusted liability to transfer TOU to
Leap Wireless of $15 million was reversed against equity as an adjustment to the
Distribution. As of September 30, 1999, all TOU assets were written off.
In connection with the Distribution, Leap Wireless issued to QUALCOMM a
warrant to purchase 5,500,000 shares of Leap Wireless common stock at $6.10625
per share. The Company recorded the warrant at its predecessor basis of $24
million net of the related deferred tax liability. In March 1999, the Company
agreed to reduce the number of shares under warrant to 4,500,000 in exchange for
$3 million in consideration from Leap Wireless, resulting in a pre-tax loss of
$3 million. The Company agreed to the cancellation to
F-10
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
enable Leap Wireless to meet Federal Communications Commission regulatory
requirements. The estimated fair value of the warrant at September 30, 1999 is
$90 million, as calculated using the Black-Scholes option-pricing model.
At September 30, 1999, the Company holds warrants to purchase approximately
1,400,000 shares of the Class B common stock (approximately 13.9% of equity) of
Chase Telecommunications, Inc. ("Chase"), an investee of Leap Wireless, 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, 1999, warrants to purchase
approximately 1,300,000 shares are vested. The warrants will expire in 2008.
Because Chase is a private company, it is not practicable to estimate the fair
value of the warrants. There are no recorded amounts related to these warrants
at September 30, 1999.
On September 29, 1999, Leap Wireless announced its intention to withdraw
its support for Metrosvyaz, Ltd. ("Metrosvyaz"), an investee in Russia, and that
such withdrawal would result in the write-off of its investment in that entity.
As a result of Leap Wireless' decision, the Company recorded a $51 million
charge related to the impairment of receivables and products and deployment
services placed with Metrosvyaz for which the Company had not yet recognized
revenue, including $17 million in other non-operating expenses related to the
impairment of non-trade receivables.
NOTE 3. INVESTMENTS
At September 30, 1999 and 1998, investments consisted of the following (in
thousands):
CURRENT NONCURRENT
-------------------- ------------------
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ------------------
1999 1998 1999 1998
-------- -------- ------- -------
Held-to-maturity:
Certificates of deposit......................... $193,534 $ 1,388 $10,000 $ --
Commercial paper................................ 465,953 19,576 -- --
U.S. government securities...................... -- 64,949 -- --
Corporate medium-term notes..................... 107,662 41,565 57,564 --
-------- -------- ------- -------
767,149 127,478 67,564 --
Available-for-sale:
Equity securities............................... 187,266 -- 2,931 --
-------- -------- ------- -------
$954,415 $127,478 $70,495 $ --
======== ======== ======= =======
At September 30, 1999, held-to-maturity debt securities of $767 million and
$68 million have maturities of one year or less and maturities of more than one
year through five years, respectively.
At September 30, 1999, the cost basis and gross unrealized gains on
available-for-sale securities are approximately $5 million and $185 million,
respectively.
F-11
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
SEPTEMBER 30,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
Accounts receivable, net:
Trade, net of allowance for doubtful accounts of
$22,276 and $21,933, respectively.................... $674,211 $459,324
Long-term contracts:
Billed............................................... 128,208 101,868
Unbilled............................................. 69,409 49,784
Other.................................................. 11,812 1,233
-------- --------
$883,640 $612,209
======== ========
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.
Predominantly all of the trade receivables at September 30, 1999 and 1998
are from customers in the wireless telecommunications industry.
SEPTEMBER 30,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
Finance receivables.................................... $585,482 $348,907
Allowance for doubtful receivables..................... (10,623) (4,955)
-------- --------
574,859 343,952
Current maturities..................................... 26,377 56,201
-------- --------
Noncurrent finance receivables, net.................... $548,482 $287,751
======== ========
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.
At September 30, 1999 and 1998, the fair value of finance receivables
approximated $541 million and $336 million, respectively. 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, 1999 are as follows (in
thousands):
FISCAL YEAR ENDING SEPTEMBER 30,
--------------------------------
2000...................................................... $ 26,377
2001...................................................... 160,948
2002...................................................... 198,260
2003...................................................... 81,547
2004...................................................... 70,297
Thereafter................................................ 48,053
--------
$585,482
========
At September 30, 1999, commitments to extend long-term financing for
possible future sales to customers, other than Globalstar (Note 11), totaled
approximately $420 million, which the Company expects to fund over the next five
years. Such commitments are subject to the customers meeting certain conditions
F-12
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
established in the financing arrangements. Commitments represent the estimated
amounts to be financed under these arrangements; actual financing may be in
lesser amounts. These commitments include the total finance commitments
associated with the sale of certain assets to Ericsson (Note 13).
SEPTEMBER 30,
----------------------
1999 1998
--------- ---------
(IN THOUSANDS)
Inventories, net:
Raw materials............................................. $ 161,481 $ 180,957
Work-in-process........................................... 51,003 81,479
Finished goods............................................ 45,457 124,100
--------- ---------
$ 257,941 $ 386,536
========= =========
Property, plant and equipment, net:
Land...................................................... $ 36,310 $ 36,310
Buildings and improvements................................ 285,762 250,883
Computer equipment........................................ 244,605 340,623
Machinery and equipment................................... 274,353 257,516
Furniture and office equipment............................ 16,515 26,910
Leasehold improvements.................................... 33,207 27,074
--------- ---------
890,752 939,316
Less accumulated depreciation and amortization............ (334,761) (329,634)
--------- ---------
$ 555,991 $ 609,682
========= =========
At September 30, 1999, buildings and leasehold improvements with a net book
value of $54 million, including accumulated depreciation of $14 million, are
leased or held for lease to third parties.
NOTE 5. INVESTMENT INCOME (EXPENSE), NET
Investment income (expense), net for the years ended September 30 is
comprised as follows (in thousands):
1999 1998 1997
-------- -------- -------
Interest income..................................... $ 50,392 $ 39,484 $34,845
Realized gains on marketable securities............. 5,663 2,950 13,400
Loss on cancellation of warrants (Note 2)........... (3,273) -- --
Write-off of investment in other entity............. -- (20,000) --
Minority interest in income of consolidated
subsidiaries...................................... (13,066) (48,366) (2,979)
Equity in losses of investees....................... (15,140) (20,731) --
-------- -------- -------
$ 24,576 $(46,663) $45,266
======== ======== =======
NOTE 6. DEBT AND CREDIT FACILITIES
On March 11, 1998, the Company and a group of banks entered into a $400
million unsecured revolving credit facility (the "Credit Facility") under which
the banks are committed to make 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. At the Company's option, interest is at the
applicable LIBOR rate or the greater of the administrative agent's reference
rate or 0.5% plus the Federal Funds effective rate, each plus an applicable
margin. The amount available for borrowing is reduced by letters of credit
outstanding. The Company is currently obligated to pay
F-13
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
commitment fees equal to 0.175% per annum on the unused amount of the Credit
Facility. The Credit Facility includes certain restrictive financial and
operating covenants. The weighted average interest rates were 5.8% and 6.2% on
outstanding borrowings during fiscal 1999 and 1998, respectively. At September
30, 1999, there were no amounts or letters of credit outstanding under the
Credit Facility. At September 30, 1998, there were borrowings of $80 million and
letters of credit of $8 million outstanding under the Credit Facility; the
weighted average interest rate on outstanding borrowings was 6.2%.
Under terms of two identical revolving credit agreements, negotiated in
1996 and expiring in July 2000, QUALCOMM Personal Electronics ("QPE") (Note 11)
may borrow a total of $150 million. Borrowings under the facilities, which are
drawn in equal amounts, totaled $112 million and $71 million at September 30,
1999 and 1998, respectively. The interest rate under the facilities is at the
applicable LIBOR rate plus 0.5%. The weighted average interest rate on
outstanding borrowings was 5.9%, 6.2% and 6.0% during fiscal 1999, 1998 and
1997, respectively, and 6.0% and 6.4% at September 30, 1999 and 1998,
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 which, at September 30, 1999, on a
consolidated basis, amounted to $65 million. Under the terms of the credit
facilities, amounts that QPE may borrow outside of the credit facilities are
limited.
The fair value of the Company's bank lines of credit 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, 1999 and 1998, the estimated
fair value of the Company's bank lines of credit approximated their carrying
value.
The annual principal installments for capital leases and other obligations
are $3 million in fiscal 2000 and $1 million in 2001.
Cash amounts paid for interest were $11 million in each of fiscal years
1999, 1998 and 1997.
NOTE 7. TRUST CONVERTIBLE PREFERRED SECURITIES OF SUBSIDIARY
In 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. The sole assets of the Trust are QUALCOMM Incorporated
5 3/4% 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 common stock at the rate of
1.3764 shares of Company common stock for each Trust Convertible Preferred
Security (equivalent to a conversion price of $36.328215 per share of common
stock). Distributions on the Trust Convertible Preferred Securities are payable
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 Company has the right and intends to redeem the Trust
Convertible Preferred Securities, in whole or in part, on or after March 4,
2000. The Company will pay a premium over the initial conversion price if
securities are redeemed prior to March 4, 2002. 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 1.3764 and
0.17205 shares, respectively, for each QUALCOMM Trust Convertible Preferred
Security.
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
F-14
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 the Company's
common stock, the holder will not receive any cash related to the deferred
distribution.
During fiscal 1997, issuance costs of $19 million related to the Trust
Convertible Preferred Securities were deferred and are being amortized over the
period until mandatory redemption of the securities in February 2012.
During fiscal 1999, 8,910 Trust Convertible Preferred Securities were
converted into common stock. The Company has reserved 18,156,000 shares of
common stock as of September 30, 1999 for possible conversion of the Trust
Convertible Preferred Securities at the option of the holders (Note 16).
As of September 30, 1999 and 1998, the estimated fair value of the Trust
Convertible Preferred Securities was approximately $3,571 million and $552
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 Junior
Participating Preferred Stock and reserved such shares for issuance upon
exercise of the Preferred Share Purchase Rights. At September 30, 1999 and 1998,
no shares of preferred stock were outstanding.
Common Stock Warrants
In November 1991, the Company issued seven-year warrants to purchase
1,564,000 shares of common stock at $2.75 per share to a company for the
relinquishment of all its claims to participate in certain future royalties,
license fees and profits. During August 1998, the Company issued 1,410,000
shares of common stock upon the full net exercise of the warrants.
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.
Pursuant to the Rights Plan, each Right entitles the registered holder to
purchase from the Company a one one-hundredth share of Series A Junior
Participating Preferred Stock, $0.0001 par value per share, at a purchase price
of $250. In November 1999, the Rights Plan was amended to provide that the
purchase price be set at $1,600, subject to adjustment to $400 upon consummation
of the four-for-one stock split approved by the Company's Board of Directors in
November 1999 (Note 16). The Rights are exercisable only if a person or group
(an "Acquiring Person") acquires 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, 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 $0.005 per Right.
F-15
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. INCOME TAXES
The components of income tax provision for the years ended September 30 are
as follows (in thousands):
1999 1998 1997
-------- -------- --------
Current provision:
Federal.......................................... $143,534 $ 86,488 $ 71,891
State............................................ 22,211 1,916 2,288
Foreign.......................................... 36,657 7,319 4,407
-------- -------- --------
202,402 95,723 78,586
-------- -------- --------
Deferred benefit:
Federal.......................................... (86,996) (46,862) (51,186)
State............................................ (9,599) (8,719) (10,900)
-------- -------- --------
(96,595) (55,581) (62,086)
-------- -------- --------
$105,807 $ 40,142 $ 16,500
======== ======== ========
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):
1999 1998 1997
-------- -------- --------
Expected income tax expense at federal statutory
tax rate......................................... $107,363 $ 52,036 $ 37,956
State income tax expense, net of federal benefit... 15,951 7,732 5,639
Foreign taxes...................................... 36,657 7,075 4,407
Permanent differences.............................. 2,108 5,754 3,523
Tax benefit from recognition of deferred tax
assets........................................... -- -- (21,531)
Tax credits........................................ (56,800) (34,015) (16,201)
Other.............................................. 528 1,560 2,707
-------- -------- --------
Actual income tax expense.......................... $105,807 $ 40,142 $ 16,500
======== ======== ========
At September 30, 1999 and 1998, the Company had net deferred tax assets as
follows (in thousands):
1999 1998
-------- -------
Income recognition differences.......................... $116,179 $84,793
Unused net operating losses............................. 73,962 1,497
Tax credits............................................. 51,864 6,959
-------- -------
$242,005 $93,249
======== =======
At September 30, 1999, the Company had unused net operating losses,
manufacturing, research, foreign tax and alternative minimum tax credits
expiring from 2002 through 2019. The unused net operating tax losses were
generated by the exercise of non-qualified employee stock options.
Cash amounts paid for income taxes were $68 million, $58 million and $18
million for fiscal 1999, 1998 and 1997, respectively.
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
F-16
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
discretion, make additional contributions based upon earnings. The Company's
contribution expense for fiscal 1999, 1998 and 1997 was $17 million, $10 million
and $6 million, respectively.
Stock Option Plans
The Board of Directors may grant options to selected employees, directors
and consultants to the Company to purchase shares of the Company's common stock
at a price not less than the fair market value of the stock at the date of
grant. The 1991 Stock Option Plan (the "Plan"), as amended, authorizes up to
73,800,000 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 and are
exercisable for up to ten years from the grant date. At September 30, 1999,
options for 8,209,000 shares were exercisable at prices ranging from $7.58 to
$34.22 for an aggregate exercise price of $151 million.
The Company has a Non-Employee Directors' Stock Option Plan which
authorizes 2,140,000 shares to be granted no later than 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 for up to ten years from the grant date. At September 30, 1999,
options for 800,000 shares were exercisable at prices ranging from $11.13 to
$23.54 per share for an aggregate exercise price of $11 million.
A summary of stock option transactions for the plans follows (number of
shares in thousands):
OPTIONS OUTSTANDING
----------------------------------------
OPTIONS EXERCISE PRICE PER SHARE
AVAILABLE NUMBER ---------------------------
FOR GRANT OF SHARES RANGE AVERAGE
--------- --------- ---------------- -------
SEPTEMBER 30, 1996................... 4,210 32,146 $0.25 to $26.22 $15.78
Additional shares reserved........... 10,800 -- -- --
Options granted.................... (8,582) 8,582 18.75 to 31.19 23.65
Options canceled................... 1,348 (1,348) 3.41 to 30.13 18.64
Options exercised.................. -- (2,416) 0.25 to 23.16 8.22
------- -------
SEPTEMBER 30, 1997................... 7,776 36,964 $2.50 to $31.19 $18.00
Additional shares reserved......... 10,940 -- -- --
Options granted.................... (12,308) 12,308 22.28 to 34.98 29.10
Options canceled................... 1,618 (1,618) 7.75 to 34.98 21.61
Options exercised.................. -- (2,580) 3.41 to 28.88 12.47
------- -------
SEPTEMBER 23, 1998(A)................ 8,026 45,074 $2.50 to $34.98 $21.21
Options granted.................... (96) 96 8.99 to 34.22 24.44
Options canceled................... 26 (26) 20.45 to 31.18 26.93
------- -------
SEPTEMBER 30, 1998................... 7,956 45,144 $2.45 to $34.22 $20.75
Additional shares reserved......... 7,000 -- -- --
Options granted.................... (4,741) 4,741 19.80 to 192.40 52.12
Options canceled................... 6,334 (6,334) 2.45 to 117.56 23.39
Options exercised.................. -- (12,248) 2.45 to 34.22 17.55
------- -------
SEPTEMBER 30, 1999................... 16,549 31,303 $4.37 to $192.40 $26.23
======= =======
- ---------------
(a) On September 23, 1998, in connection with the Leap Wireless Spin-off, the
Company adjusted 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 $2.45 to $34.22 and $20.75, respectively, as adjusted in
connection with the Leap Wireless Spin-off.
F-17
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about fixed stock options
outstanding at September 30, 1999 (number of shares in thousands):
OPTIONS OUTSTANDING
------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ---------------------
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
NUMBER LIFE EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OF SHARES (IN YEARS) PRICE OF SHARES PRICE
------------------------ --------- ----------- -------- --------- --------
$ 4.37 to $ 16.51............... 6,885 4.6 $ 12.84 4,430 $12.53
$16.75 to $ 22.46............... 6,841 6.7 19.81 1,939 19.70
$22.50 to $ 27.35............... 6,242 7.6 24.30 1,602 23.86
$27.42 to $ 29.47............... 5,961 8.7 27.97 691 28.11
$29.99 to $ 77.00............... 4,871 8.6 43.13 347 31.59
$95.31 to $192.40............... 503 9.8 136.24 -- 0.00
------ -----
$ 4.37 to $192.40............... 31,303 7.1 26.23 9,009 18.02
====== =====
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 8,400,000 shares to be granted no
later than August 2001. The 1996 Non-Qualified Employee Stock Purchase Plan
authorizes up to 50,000 shares to be granted at anytime. During fiscal 1999,
1998 and 1997, shares totaling 1,193,000, 878,000 and 741,000 were issued under
the plans at an average price of $21.79, $22.07 and $16.89 per share,
respectively. At September 30, 1999, 3,437,000 shares were reserved for future
issuance.
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 10% 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. The
plans authorize up to 200,000 shares to be allocated to participants at anytime.
During fiscal 1999, 1998 and 1997, approximately 55,000, 66,000 and 21,000
shares, respectively, were allocated under the plans and the Company's matching
contribution during fiscal 1999, 1998 and 1997 amounted to $1 million, $2
million and $1 million, respectively. At September 30, 1999, 45,000 shares were
reserved for future allocation.
F-18
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Accounting for Stock-Based Compensation
Pro forma information regarding net income and net earnings per common
share has been estimated at the date of grant using the Black-Scholes
option-pricing model based on the following assumptions:
EMPLOYEE STOCK
STOCK OPTION PLANS PURCHASE PLANS
-------------------- --------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
Risk-free interest rate.................. 5.2% 5.5% 6.3% 4.7% 5.1% 5.1%
Volatility............................... 51.0% 50.0% 50.0% 51.0% 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 values of stock
options granted during fiscal years 1999, 1998 and 1997 were $28.56, $15.88 and
$13.19 per share, respectively. The weighted average estimated fair values of
shares granted under the Employee Stock Purchase Plans during fiscal years 1999,
1998 and 1997 were $11.18, $7.95 and $6.79, 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):
1999 1998 1997
----------------------- ----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
Net income........................ $200,879 $149,100 $108,532 $57,747 $91,934 $73,197
Net earnings per common share:
Basic........................... $ 1.35 $ 1.00 $ 0.78 $ 0.42 $ 0.68 $ 0.54
Diluted......................... $ 1.24 $ 0.92 $ 0.73 $ 0.39 $ 0.64 $ 0.51
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 million related to the modification of options in connection with the Leap
Wireless Spin-off. The effects on pro forma disclosures of applying the fair
value method are not likely to be representative of the effects on pro forma
disclosures of future years because the fair value method is applicable only to
options granted subsequent to September 30, 1995.
NOTE 11. INVESTMENTS IN OTHER ENTITIES
QUALCOMM 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, QPE, to manufacture CDMA consumer equipment for cellular, PCS and
other wireless applications. The Company owns 51% 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.
F-19
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During fiscal 1999, 1998 and 1997, QPE sales to Sony Electronics amounted
to $249 million, $684 million and $57 million, respectively. Purchases of
inventory and capital equipment from Sony Electronics and other Sony affiliates
amounted to $79 million and $1 million, respectively during fiscal 1999, $69
million and $69 million, respectively, during fiscal 1998 and $92 million and $6
million, respectively, during fiscal 1997. At September 30, 1999 and 1998,
outstanding accounts receivable from Sony Electronics amounted to $26 million
and $52 million, respectively, and accounts payable to all Sony Electronics
affiliated companies amounted to $14 million and $51 million, respectively.
Globalstar L.P.
Through partnership interests held in certain intermediate limited
partnerships, the Company owns a 6.4% partnership interest in Globalstar, a
limited partnership formed to develop, own and operate the Globalstar
low-Earth-orbit satellite system utilizing CDMA technology ("the Globalstar
System"). The Company accounts for its investment under the equity method.
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 1999, 1998 and 1997, 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 $5 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.
In return for providing a guarantee under a Globalstar bank financing
agreement (Note 14), the Company received warrants to purchase 734,262 shares of
common stock in Globalstar Telecommunications Limited ("GTL"), a general partner
in Globalstar, at an exercise price of $13.25 per share (shares and exercise
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 which GTL agreed to accelerate the vesting and exercisability of the
Company's warrants to purchase GTL common stock. The Company exercised such
warrants in March 1997, and classified the GTL shares as trading 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 million.
The Company and Globalstar have entered into a development agreement under
which Globalstar is funding the Company to design and develop the consumer
equipment and ground communications segments of the Globalstar System and
production agreements to manufacture and supply ground communication and
consumer equipment and to supply related services to Globalstar. Revenues
resulting from the agreements with Globalstar for fiscal 1999, 1998 and 1997
were $435 million, $373 million and $205 million, respectively. 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. 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.
The Company expects to finalize negotiations with Globalstar during the
first quarter of fiscal 2000 which could result in the deferral of up to $400
million of current and future contract payments under the development agreement,
including $240 million in trade receivables which were reclassified to
non-current finance receivables at September 30, 1999. Such deferrals are
expected to be interest bearing and paid by Globalstar over a period not
exceeding four years from the deferral. At September 30, 1999 and 1998,
F-20
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
approximately $349 million and $90 million in interest bearing financed amounts
and approximately $171 million and $141 million in accounts receivable,
including $59 million and $47 million in unbilled receivables, were outstanding
from Globalstar, respectively.
The value of the Company's investment in and future business with
Globalstar, as well as its ability to collect outstanding receivables from
Globalstar, depends on the success of Globalstar and the Globalstar System. From
its inception, Globalstar has incurred net losses and those losses are expected
to continue through the start of service. A substantial shortfall in meeting
Globalstar's capital needs could prevent completion of the Globalstar System and
could adversely affect the Company's results of operations, liquidity and
financial position. In addition, Globalstar can terminate its development
agreement with the Company if Globalstar abandons its efforts to develop the
Globalstar System.
The Globalstar System is exposed to the risks 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 perform at levels required for
commercial success. Globalstar may encounter various problems, delays and
expenses, many of which may be beyond Globalstar's control.
NextWave Telecom Inc.
In November 1995, the Company paid $5 million to purchase 1,666,666 shares
of Series B Common Stock and provided a $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 million of the note receivable into 5,000,000 shares of Series B
Common Stock. The conversion was treated as a non-cash transaction for the
consolidated statement of cash flows.
In June 1998, the Company recorded 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 U.S. Bankruptcy Code.
There is significant uncertainty as to the outcome of the bankruptcy
proceedings.
Other Joint Ventures
The Company has entered into other domestic and international joint
ventures providing advanced communications systems, products and services based
on wireless technology. The Company's combined investment in these joint
ventures as of September 30, 1999 and 1998, amounted to $51 million and $27
million, respectively. At September 30, 1999, effective ownership interests in
the joint ventures ranged from 2% to 34%. Unfunded equity commitments totaled
$119 million at September 30, 1999, which the Company expects to fund over three
years. Such commitments are subject to the joint ventures meeting certain
conditions; actual equity funding may be in lesser amounts.
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, 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 unfavorable 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.
F-21
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. RESTRUCTURING
During January 1999, the Company completed a review of its operating
structure to identify opportunities to improve operating effectiveness. As a
result of this review, management approved a formal restructuring plan, and the
Company recorded a restructuring charge to operations of $15 million. The
restructuring plan was comprised of employee termination and facility exit costs
resulting primarily from the Company's plan to exit certain activities in its
infrastructure equipment business. The Company eliminated 651 positions as a
result of the plan. Facility exit costs include approximately $3 million of
asset impairments and $1 million of estimated net losses on subleases or lease
cancellation penalties. The Company expects to complete implementation of the
plan by the end of the second quarter of fiscal 2000. The accrued restructuring
costs and amounts charged against the provision as of September 30, 1999 were as
follows (in thousands):
SEPTEMBER 30,
PROVISIONS DEDUCTIONS 1999
---------- ---------- -------------
Employee termination costs....................... $10,162 $(10,162) $ --
Facility exit costs.............................. 4,397 (3,866) 531
------- -------- ----
Total............................................ $14,559 $(14,028) $531
======= ======== ====
NOTE 13. DISPOSITION OF ASSETS AND OTHER CHARGES
On May 24, 1999 (the "Closing Date"), the Company sold certain of its
assets related to its terrestrial CDMA wireless infrastructure business to
Telefonaktiebolaget LM Ericsson ("Ericsson"). The Company and Ericsson also
entered into various license and settlement agreements in connection therewith,
pursuant to the March 24, 1999 Asset Purchase Agreement (the "Agreement"), as
amended. The Company recorded charges of $66 million in other operating expenses
during fiscal 1999 to reflect the difference between the carrying value of the
net assets and the consideration received from Ericsson, less costs to sell.
Total consideration will be based on a final determination of net assets as of
the Closing Date. The Company has received notice of Ericsson's intention to
dispute the purchase price (Note 14).
In addition, the Company and Ericsson agreed to jointly support a single
worldwide CDMA standard with three optional modes for the next generation of
wireless communications and have agreed to settle all of the existing litigation
between the companies and enter into cross-licenses for portions of their
respective CDMA patent portfolios. As part of the agreements, the Company and
Ericsson will each commit to the International Telecommunication Union ("ITU")
and to other standards bodies to license their essential patents for the single
CDMA standard or any of its modes to the rest of the industry on a fair and
reasonable basis free from unfair discrimination.
Pursuant to the Agreement, the Company will extend up to $400 million in
financing for possible future sales by Ericsson of cdmaOne or cdma2000
infrastructure equipment and related services to specific customers in certain
geographic areas, including Brazil, Chile, Mexico, and Russia or in other areas
selected by Ericsson. Such commitments are subject to the customers meeting
certain conditions established in the financing arrangements and, in most cases,
to Ericsson also financing a portion of such cdmaOne or cdma2000 sales.
Commitments represent the estimated amounts to be financed under these
arrangements; however, actual financing may be in lesser amounts.
As a result of the Ericsson transaction, the Company reassessed the
recoverability of the carrying value of remaining assets relating to its
terrestrial CDMA wireless infrastructure business. The Company recorded charges
of $117 million in other operating expenses during fiscal 1999, including $74
million for compensation benefits provided to employees transferred to Ericsson,
$31 million to reduce the carrying value of certain other assets to their
approximate net realizable value and $12 million related to the TOU contract
(Note 2). The Company also recorded $52 million in non-operating charges during
fiscal 1999, including $37 million in
F-22
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
reserves provided for financial guarantees on projects which the Company will no
longer pursue as a result of the Ericsson transaction and $15 million related to
the write-off of TOU assets (Note 2).
The Company leases certain facilities to Ericsson under noncancelable
operating leases, with provisions for cost-of-living increases. The leases
expire on May 31, 2004 and provide for renewal options thereafter. Future
minimum rentals in each of the next five years from fiscal 2000 to 2004 are $10
million, $10 million, $10 million, $11 million and $7 million.
NOTE 14. COMMITMENTS AND CONTINGENCIES
Litigation
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 then, recently announced, Q Phone infringes design and
utility patents held by Motorola as well as trade dress and common law rights
relating to the appearance of certain Motorola wireless telephone products. The
complaint denies such allegations and seeks a judicial declaration that the
Company's products do not infringe any patents held by Motorola. On March 10,
1997, Motorola filed a complaint against the Company (the "Motorola Complaint"),
alleging claims based primarily on the above-alleged infringement. The Company's
motion to transfer the Motorola Complaint to the U.S. District Court for the
Southern District of California was granted on April 3, 1997. On April 24, 1997,
the court denied Motorola's motion for a preliminary injunction thereby
permitting the Company to continue to manufacture, market and sell the Q Phone.
On April 25, 1997, Motorola appealed the denial of its motion for a preliminary
injunction. On January 16, 1998 the U.S. Court of Appeals for the Federal
Circuit denied Motorola's appeal and affirmed the decision of the U.S. District
Court for the Southern District of California refusing Motorola's request to
enjoin QUALCOMM from manufacturing and selling the Q Phone. On June 4, 1997,
Motorola filed another lawsuit alleging infringement by QUALCOMM of four
patents. Three of the patents had already been alleged in previous litigation
between the parties. On August 18, 1997, Motorola filed another complaint
against the Company alleging infringement by the Company of seven additional
patents. All of the Motorola cases have been consolidated for pretrial
proceedings. On August 6, 1999, the court granted the Company's motion for
summary judgment that the Q Phone does not infringe two of Motorola's design
patents. On October 5, 1999, the United States District Court in San Diego
granted the Company's motions for summary judgment that the Q Phone does not
infringe the last two Motorola design patents remaining in the case. As a
consequence of these rulings and Motorola's decision to drop one utility patent
from the case, there are no design patents and a total of ten utility patents
remaining in the case. The cases have been set for a final pretrial conference
in April 2000. 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 the claims are
without merit and will continue to vigorously defend the action.
On July 20, 1999, the Company filed a lawsuit against Motorola seeking a
judicial determination that the Company has the right to terminate all licenses
granted to Motorola under a 1990 Patent License Agreement, while retaining all
licenses granted by Motorola to the Company under the same agreement. The
Company's complaint was filed in the United States District Court for the
Southern District of California where the earlier actions between the Company
and Motorola described above have been pending for more than two years. The
complaint alleges that Motorola has committed breaches of the Patent License
Agreement that include pursuing a lawsuit against the Company for infringement
of patents that are in fact licensed to the Company under the agreement and a
failure to grant certain sublicenses to the Company in accordance with the terms
of the agreement. The Company's new filing also seeks a ruling that upon
termination of the Patent License Agreement, the patents formerly licensed to
Motorola would be infringed by CDMA handsets, integrated circuits and network
infrastructure equipment made and sold by Motorola. On August 5, 1999, the
Company amended its complaint to allege that Motorola's CDMA wireless phones
infringe three patents of
F-23
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Company. The Company's new claims seek damages and an injunction against
Motorola's sale of infringing phones. Motorola has filed counterclaims alleging
breach of the Patent License Agreement and a DS-CDMA Technology License
Agreement also signed in 1990.
On or about June 5, 1997, Elisra Electronic Systems Ltd. ("Elisra")
submitted to the International Chamber of Commerce a Request for Arbitration of
a dispute with the Company based upon a Development and Supply Agreement ("DSA")
entered into between the parties effective November 15, 1995, alleging that the
Company wrongfully terminated the DSA, seeking monetary damages. The Company
thereafter submitted a Reply and Counterclaim, alleging that Elisra breached the
DSA, seeking monetary damages. Subsequently, the parties stipulated that the
dispute be heard before an arbitrator under the jurisdiction of the American
Arbitration Association, and to bifurcate the resolution of liability issues
from damage issues. To date, the arbitrator has heard testimony regarding the
liability or non-liability of the parties, and a briefing schedule has been set.
Although there can be no assurance that the resolution of these claims will not
have a material adverse effect on the Company's results of operations, liquidity
or financial position, the Company believes that the claims made by Elisra are
without merit and will vigorously defend against the claims.
On October 27, 1998, the Electronics and Telecommunications Research
Institute of Korea ("ETRI") submitted to the International Chamber of Commerce a
Request for Arbitration (the "Request") 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 filed an answer and counterclaims denying the allegations, seeking a
declaration establishing the termination of the JDA and monetary damages and
injunctive relief against ETRI. In accordance with the JDA, the arbitration will
take place in San Diego. No schedule for the arbitration proceedings has been
established. Although there can be no assurance that the resolution of these
claims will not have a material adverse effect on the Company's results of
operations, liquidity or financial position, the Company believes that the
claims are without merit and will vigorously defend the action.
On February 26, 1999, the Lemelson Medical, Education & Research
Foundation, Limited Partnership, ("Lemelson") filed an industry-wide action in
the United States District Court for the District of Arizona. The complaint
names a total of 88 parties, including the Company, as defendants and purports
to assert claims for infringement of 15 patents. The complaint alleges that
application specific integrated circuit ("ASIC") devices sold by the Company, or
the processes by which such devices are manufactured, infringe the asserted
patents. On October 1, 1999, the Company and Lemelson entered into a settlement
agreement resolving all claims made against the Company in the complaint which
will not have a material effect on the financial results of the Company.
On May 6, 1999, Thomas Sprague, a former employee of the Company, filed a
putative class action against the Company, ostensibly on behalf of himself and
those of the Company's former employees who were offered employment with
Ericsson in conjunction with the sale to Ericsson of certain of the Company's
infrastructure division assets and liabilities and who elected not to
participate in a Retention Bonus Plan being offered to such former employees.
The complaint was filed in California Superior Court in and for the County of
San Diego and purports to state eight causes of action arising primarily out of
alleged breaches of the terms of the Company's 1991 Stock Option Plan, as
amended from time to time. The putative class sought to include former employees
of the Company who, among other things, "have not or will not execute the Bonus
Retention Plan and accompanying full and complete release of QUALCOMM." The
complaint seeks an order accelerating all unvested stock options for the members
of the class. Of the 1,053 transitioning former employees who had unvested stock
options, 1,016 elected to participate in the Retention Bonus Plan offered by
QUALCOMM and Ericsson, which provides several benefits including cash
compensation based upon a portion of the value of their unvested options, and
includes a written release of claims against the Company. On July 30, 1999,
plaintiffs filed a First Amended Complaint incorporating the allegations set
forth in the
F-24
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
original complaint, adding two new causes of action and expanding the putative
class to also include those former employees who chose to participate in the
Bonus Retention Plan. In October 1999, the court sustained the Company's
demurrer to the plaintiffs' cause of action for breach of fiduciary duty.
Counsel for the putative class have indicated that they will be filing a Second
Amended Complaint, including additional class representatives, and substantially
the same allegations as the First Amended Complaint. 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 the claims are without merit and will vigorously
defend the action.
On June 29, 1999, GTE Wireless, Incorporated ("GTE") filed an action in the
United States District Court for the Eastern District of Virginia asserting that
wireless telephones sold by the Company infringe a single patent allegedly owned
by GTE. On September 15, 1999, the court granted the company's motion to
transfer the action to the United States District Court for the Southern
District of California. 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 the
action is without merit and will vigorously defend the action.
QUALCOMM has received notice from Ericsson that Ericsson intends to dispute
the determination of the purchase price under the Agreement, pursuant to which
Ericsson acquired certain assets related to the Company's terrestrial wireless
infrastructure business in May 1999. QUALCOMM has also received notice from
Ericsson that Ericsson intends to assert claims for indemnification under the
Agreement. QUALCOMM and Ericsson are having on-going discussions aimed at
potentially resolving these claims. In the event the parties are unable to
resolve these claims, they are subject to dispute resolution procedures set
forth in the Agreement. Although there can be no assurance that the resolution
of these claims will not have a material adverse effect on the Company's results
of operations, liquidity or financial position, the Company believes the claims
are without merit and will vigorously defend them.
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.
Leap Wireless Commitments
QUALCOMM has a funding commitment to Leap Wireless in the form of a $265
million secured credit facility, which consists of two sub-facilities. The first
sub-facility enables Leap Wireless to borrow up to $35 million from QUALCOMM,
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 investments 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 $230 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 payable on September 23, 2006. QUALCOMM has 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 bear interest at a
variable rate equal to LIBOR plus 5.25% per annum. Interest is payable quarterly
beginning September 30, 2001; prior to such time, accrued interest shall be
added to the principal amount outstanding. At September 30, 1999 and 1998, $126
million and $5 million were outstanding under this facility, respectively. At
September 30, 1999 and 1998, the fair value of the credit facility approximated
the recorded value. The Company estimates fair value by discounting the future
cash flows using current interest rates at which similar financing would be
provided to similar companies for the same remaining maturities.
F-25
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Operating Leases
QPE has entered into an operating lease agreement, under which
manufacturing equipment may be leased under separate schedules, each with
approximately five-year terms. The lease agreement is non-recourse to the
Company and the minority interest holder in QPE. Equipment under lease has both
early and end-of-term purchase options. If the purchase options have not been
exercised by the end of the lease term and if proceeds from the sale of the
equipment fall below specified amounts, QPE may be required to pay certain
contingent payments. The maximum amount of contingent payments for equipment
leased as of September 30, 1999 is approximately $55 million. Rental expense
under this lease, including an accrual for such contingent payments, amounted to
$16 million, $13 million and $13 million during fiscal 1999, 1998 and 1997,
respectively. As of September 30, 1999 and 1998, the Company had accrued $33
million and $21 million, respectively, in other liabilities for such contingent
payments. As of September 30, 1999, future rental payments under the lease,
excluding contingent payments, are $4 million in each of 2000 and 2001 and $1
million in 2002.
The Company leases certain of its other facilities and equipment under
noncancelable operating leases, with terms ranging from two to ten years and
with provisions for cost-of-living increases. Rental expense for these
facilities and equipment for fiscal 1999, 1998 and 1997 was $17 million, $11
million and $7 million, respectively. Future minimum lease payments in each of
the next five years from fiscal 2000 through 2004 are $16 million, $14 million,
$12 million, $8 million and $5 million, respectively, and $4 million thereafter.
Purchase Obligations
The Company has agreements with certain suppliers to purchase certain
components, and estimates its noncancelable obligations under these agreements
to be approximately $34 million through fiscal 2002. The Company also has a
commitment to purchase communications services for approximately $23 million
annually through fiscal 2001 and $2 million in fiscal 2002.
Letters of Credit and Financial Guarantees
The Company has issued a letter of credit to support a guarantee of up to
$22.5 million of Globalstar (Note 11) 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. As of September 30, 1999, Globalstar had no borrowings
outstanding under the existing bank financing agreement.
In addition to the letter of credit on behalf of Globalstar, the Company
has $21 million of letters of credit and $103 million of other financial
guarantees outstanding as of September 30, 1999, none of which are
collateralized.
Performance Guarantees
Certain of the Company's contracts provide for performance guarantees to
protect customers against late delivery of its products or a failure to perform.
These performance guarantees generally provide for contract offsets to the
extent the products are not delivered by scheduled delivery dates or the systems
fail to meet specified performance criteria. The Company is dependent in part on
the performance of its suppliers and strategic partners to provide products and
services that are the subject of the guarantees. Thus, the Company's ability to
deliver such products and services in a timely manner may be outside of its
control. If the Company is unable to meet its performance obligations, the
performance guarantees could amount to a significant portion of the contract
value and would have a material adverse effect on product margins and the
Company's results of operations, liquidity and financial position.
F-26
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 131
("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," in fiscal 1999. FAS 131 establishes standards for reporting
information about operating segments in annual financial statements and requires
disclosure of selected information about operating segments to shareholders. The
statement also establishes standards for related disclosures about products and
services, geographic areas and major customers. Under FAS 131, operating
segments are determined consistent with the way that management organizes and
evaluates financial information internally for making operating decisions and
assessing performance. The adoption of FAS 131 did not affect results of
operations or financial position.
The Company is organized on the basis of products and services. The
Company's segments are divisions that offer different products and services.
Three segments have been aggregated into the Wireless Systems segment.
Reportable segments are as follows:
CDMA Technologies (QCT) -- designs and supplies CDMA chipsets and software
solutions.
Technology Licensing (QTL) -- provides licenses to third parties related to
the design, manufacture and sale of products using the Company's CDMA
technology.
Wireless Systems (QWS) -- designs, manufactures, markets and deploys
infrastructure and handset products for use in terrestrial and
non-terrestrial CDMA wireless and satellite networks and provides
satellite-based two-way data messaging, position reporting equipment and
services to transportation companies.
Consumer Products (QCP) -- designs, manufactures and markets wireless
handsets and accessories using CDMA technology for use in mobile and fixed
wireless networks.
The Company evaluates the performance of its segments based on earnings
before income taxes ("EBT"). EBT includes the allocation of certain corporate
expenses to the segments. Segment data includes intersegment revenues. The table
below presents information about reported segments for the years ending
September 30 (in thousands):
RECONCILING
QCT QTL QWS QCP ITEMS TOTAL
---------- -------- ---------- ---------- ----------- ----------
1999:
Revenues................... $1,133,422 $454,163 $ 939,780 $1,469,637 $ (59,703) $3,937,299
EBT........................ 427,994 404,947 20,220 (39,983) (506,492) 306,686
Total assets............... 187,517 91,368 868,143 566,218 2,821,704 4,534,950
1998:
Revenues................... $ 879,858 $289,934 $1,048,957 $ 855,101 $ 274,020 $3,347,870
EBT........................ 258,369 256,401 (53,054) (168,714) (144,328) 148,674
Total assets............... 156,626 49,728 599,166 446,994 1,314,199 2,566,713
1997:
Revenues................... $ 549,681 $215,966 $ 645,325 $ 520,985 $ 164,408 $2,096,365
EBT........................ 62,188 195,172 (65,664) (61,505) (21,757) 108,434
Total assets............... 100,318 11,465 342,357 263,702 1,556,838 2,274,680
Segment assets are comprised of accounts receivable, finance receivables
and inventory. Total segment assets differ from total assets on a consolidated
basis as a result of unallocated corporate assets.
F-27
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other reconciling items for the years ended September 30 are comprised as
follows (in thousands):
1999 1998 1997
--------- --------- ---------
REVENUES
Elimination of intersegment revenue............. $(382,796) $(458,259) $(249,732)
Other products.................................. 323,093 732,279 414,140
--------- --------- ---------
Reconciling items............................. $ (59,703) $ 274,020 $ 164,408
========= ========= =========
EARNINGS BEFORE INCOME TAXES
Unallocated corporate expenses.................. $(337,723) $ (19,413) $ (6,699)
Unallocated interest expense.................... (11,595) (4,579) (5,822)
Unallocated investment income, net.............. 26,610 22,434 48,245
Distributions on Trust Convertible Preferred
Securities of subsidiary trust................ (39,297) (39,270) (23,277)
Intracompany profit............................. (130,676) (102,418) (14,022)
Other........................................... (13,811) (1,082) (20,182)
--------- --------- ---------
Reconciling items............................. $(506,492) $(144,328) $ (21,757)
========= ========= =========
Generally, revenues between operating segments are based on prevailing
market rates or an approximation thereof, with the exception of QCT's sales to
QCP which are recorded by QCP at QCT's cost. Intracompany profit eliminations
include the elimination of profits recorded on QCT's sales to QCP. Unallocated
corporate expenses in fiscal 1999 include $331 million in charges related to the
sale of certain assets related to the Company's terrestrial CDMA wireless
infrastructure business to Ericsson, restructuring charges, and the impairment
of assets in connection with Leap Wireless' decision to withdraw its support of
Metrosvyaz.
Specified items included in segment EBT for the years ending September 30
are as follows (in thousands):
QCT QTL QWS QCP
-------- -------- ---------- ----------
1999:
Revenues from external customers........... $896,484 $343,242 $ 928,696 $1,445,784
Intersegment revenues...................... 236,938 110,921 11,084 23,853
Interest income............................ -- -- 16,889 --
Equity in losses of investees.............. -- -- (7,074) --
1998:
Revenues from external customers........... $583,111 $218,480 $1,012,344 $ 801,656
Intersegment revenues...................... 296,747 71,454 36,613 53,445
Equity in losses of investees.............. -- -- (20,551) --
1997:
Revenues from external customers........... $361,502 $156,318 $ 645,017 $ 519,388
Intersegment revenues...................... 188,179 59,648 308 1,597
Sales information by geographic area for the years ended September 30 is as
follows (in thousands):
1999 1998 1997
---------- ---------- ----------
United States.................................. $2,459,838 $2,213,738 $1,469,051
South Korea.................................... 881,494 633,142 451,989
Other Foreign.................................. 595,967 500,990 175,325
---------- ---------- ----------
$3,937,299 $3,347,870 $2,096,365
========== ========== ==========
F-28
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company distinguishes revenues from external customers by geographic
areas based on customer location.
The net book value of long-lived assets located outside of the United
States was $16 million, $15 million and $1 million at September 30, 1999, 1998
and 1997, respectively.
NOTE 16. SUBSEQUENT EVENTS
In October 1999, 1,803,792 Trust Convertible Preferred Securities were
converted into 2,482,739 shares of common stock. The conversion resulted in an
approximate $90 million reduction in the recorded obligation to Trust
Convertible Preferred Securities holders.
On November 2, 1999, the Company's Board of Directors approved, subject to
stockholders' approval, a four-for-one stock split of the Company's common stock
and an increase in the number of authorized shares of common stock to three
billion shares. The Board of Directors also authorized a special meeting of
stockholders for the purposes of approving the stock split and the proposed
share increase. The special stockholders meeting is expected to be held on or
about December 20, 1999. If the stockholders approve the stock split and the
proposed increase in the authorized number of shares, the stock split will be
implemented as soon as practicable following the special meeting. Common stock
shares outstanding (in thousands), giving retroactive effect to the stock split,
at September 30, 1999 and 1998 are 646,363 and 564,726, respectively
(unaudited). Pro forma earnings per common share, giving retroactive effect to
the stock split, are as follows (shares in thousands):
YEARS ENDED SEPTEMBER 30,
--------------------------------
1999 1998 1997
-------- -------- --------
(UNAUDITED)
Net earnings per common share:
Basic............................................ $ 0.34 $ 0.20 $ 0.17
======== ======== ========
Diluted.......................................... $ 0.31 $ 0.18 $ 0.16
======== ======== ========
Shares used in per share calculations:
Basic............................................ 594,714 553,623 538,681
======== ======== ========
Diluted.......................................... 649,889 591,697 575,097
======== ======== ========
On November 10, 1999, QUALCOMM entered into an agreement with Korea Telecom
Freetel ("KT Freetel") pursuant to which QUALCOMM agreed to invest approximately
$200 million in KT Freetel to purchase 1.95% of KT Freetel's common stock and
zero coupon bonds of KT Freetel with warrants to purchase additional common
shares. KT Freetel has agreed to commercially deploy high data rate ("HDR")
technology, subject to the successful completion of technical and marketing
trials. If KT Freetel meets certain obligations related to HDR technology,
QUALCOMM is required to purchase the shares underlying the warrants, for which
the bond could be used as payment in full.
F-29
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17. 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 1999 and 1998 is as follows (in thousands, except per share data):
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
1999
Revenues....................................... $941,223 $932,395 $1,004,066 $1,059,615
Gross profit(1)................................ 298,833 308,620 406,399 438,375
Operating income............................... 77,948 5,189 98,379 223,624
Net income (loss).............................. 48,530 (42,620) 58,948 136,021
Basic net earnings (loss) per common
share(2)..................................... $ 0.34 $ (0.29) $ 0.39 $ 0.86
Diluted net earnings (loss) per common
share(2)..................................... $ 0.33 $ (0.29) $ 0.35 $ 0.73
1998
Revenues....................................... $785,854 $760,553 $ 875,497 $ 925,966
Gross profit(1)................................ 232,239 226,221 250,817 305,194
Operating income............................... 52,895 51,301 53,353 85,116
Net income..................................... 36,762 26,011 5,843 39,916
Basic net earnings per common share(2)......... $ 0.27 $ 0.19 $ 0.04 $ 0.28
Diluted net earnings per common share(2)....... $ 0.25 $ 0.18 $ 0.04 $ 0.27
- ---------------
(1) Gross profit is calculated by subtracting cost of revenues 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-30
SCHEDULE II
QUALCOMM INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
PERIOD(A) EXPENSES DEDUCTIONS OTHER PERIOD(A)
------------ ---------- ---------- ------ ----------
Year ended September 30, 1997
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
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
======= ======= ======= ====== =======
Year ended September 30, 1999
Allowance for doubtful accounts:
-- trade receivables............... $21,933 $ 2,154 $ 1,766 $ 45(B) $22,276
-- finance receivables............. 4,955 5,909 241 -- 10,623
Inventory reserves................. 42,786 22,840 16,284 4,458(B) 44,884
------- ------- ------- ------ -------
$69,674 $30,903 $18,291 $4,503 $77,783
======= ======= ======= ====== =======
- ---------------
(A) The Company's fiscal year ends on the last Sunday of September.
(B) Disposition in connection with sale of assets related to the terrestrial
CDMA wireless infrastructure business in May 1999.
S-1