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 24, 2000
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
SAN DIEGO, CALIFORNIA 92121-1714
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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, $.0001 PAR VALUE
(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. [ ]
===============================================================================
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant as of October 31, 2000 was
$45,528,642,556.*
The number of shares outstanding of the registrant's Common Stock was
748,425,359 as of October 31, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy Statement to be filed with
the Commission pursuant to Regulation 14A in connection with the registrant's
2001 Annual Meeting of Stockholders, to be filed subsequent to the date
hereof, are incorporated by reference into Part III of this Report. Such
Definitive Proxy Statement will be filed with the Securities and Exchange
Commission not later than 120 days after the conclusion of the registrant's
fiscal year ended September 24, 2000
- -------------------------
* Excludes the Common Stock held by executive officers, directors and
stockholders whose ownership exceeds 5% of the Common Stock outstanding
at October 31, 2000. This calculation does not reflect a determination
that such persons are affiliates for any other purposes.
QUALCOMM INCORPORATED
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 24, 2000
INDEX
PAGE
PART I
Item 1. Business.................................................................1
Overview.................................................................1
Recent Developments......................................................2
Wireless Telecommunications Industry Overview............................3
The Evolution of Wireless Standards......................................4
Strategy.................................................................5
Operating Segments.......................................................6
Strategic Alliances and Joint Ventures..................................10
Research and Development................................................10
Sales and Marketing.....................................................10
Competition.............................................................10
Patents, Trademarks and Trade Secrets...................................12
Employees...............................................................15
Executive Officers......................................................15
Risk Factors............................................................17
Item 2. Properties..............................................................28
Item 3. Legal Proceedings.......................................................28
Item 4. Submission of Matters to a Vote of Security Holders.....................30
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matter....31
Item 6. Selected Consolidated Financial Data....................................32
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation....................................................33
Item 7A. Quantitative and Qualitative Disclosure about Market Risk...............41
Item 8. Financial Statements and Supplementary Data.............................43
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure....................................................43
PART III
Item 10. Directors and Executive Officers of the Registrant......................44
Item 11. Executive Compensation..................................................44
Item 12. Security Ownership of Certain Beneficial Owners and Management..........44
Item 13. Certain Relationships and Related Transactions..........................44
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.........45
TRADEMARKS AND TRADE NAMES
QUALCOMM-Registered Trademark-, QUALCOMM Wireless Business
Solutions-Registered Trademark-, OmniTRACS-Registered Trademark-,
TruckMAIL-Registered Trademark-, OmniExpress-TM-, LINQ-TM-, Eudora-Registered
Trademark-, HDR, QCP-Registered Trademark-, QCT-Registered Trademark-,
MSM3000-TM-, MSM3300-TM-, MSM5000-TM-, CSM5000-TM-, gpsOne and SnapTrack are
trademarks and/or service marks of the Company. QUALCOMM, QUALCOMM Wireless
Business Solutions, QWBS, OmniTRACS, eQCOM, QUALCOMM CDMA Technologies, QCT,
SnapTrack, QUALCOMM Wireless Systems, QWS, QUALCOMM Digital Media, QDM,
Eudora, QUALCOMM Consumer Products and QCP are trade names of the Company.
QUALCOMM Personal Electronics and QPE are trademarks, service marks and
trade names of QUALCOMM Personal Electronics. Wingcast is a trademark,
service mark and/or trade name of Wingcast LLC.
cdmaOne-TM- is a trademark of the CDMA Development Group. cdma2000 is a
service mark and certification mark of the Telecommunications Industry
Association. Globalstar-TM- is a trademark and service mark of Globalstar,
L.P.
All other trademarks, service marks and/or trade names appearing in this
document are the property of their respective holders.
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'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: potential declines in the rate
of growth in the Code Division Multiple Access (CDMA) subscriber base; risks
associated with the scale-up, acceptance and operations of CDMA systems,
including high data rate, now known as 1xEV (previously HDR), and 3G
technology; potential component shortages; risks associated with strategic
opportunities or acquisitions, divestitures and investments the Company may
pursue, including investments in new ventures and operators, and the proposed
spin-off of its integrated circuit and system software business; risks
related to the ability to sustain or improve operational efficiency and
profitability; risks relating to the success of the Globalstar business;
developments in current or future litigation; the ability to develop and
introduce cost effective new products in a timely manner; the Company's
ability to effectively manage growth; the intense competition in the wireless
communications industry; risks associated with the timing and collection of
license fees and royalties; risk associated with international business
activities; and risks related to accounts receivable and finance receivables,
as well as the other risks detailed in this Form 10-K. The Company's
consolidated financial data includes SnapTrack, Inc. and 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.
OVERVIEW
Since first proposing CDMA technology to the wireless industry in 1989,
QUALCOMM has been widely recognized as the pioneer of CDMA technology for
wireless applications. The Company 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) to design,
develop and manufacture subscriber products and ground communications systems
utilizing CDMA technology and to provide contract development services.
Globalstar was formed to design, construct and operate a worldwide,
low-Earth-orbit satellite-based telecommunications system (the Globalstar
System).
QUALCOMM is also a leading developer and supplier worldwide of CDMA-based
wireless communication integrated circuits and system software solutions for
voice and data communications products and services. QUALCOMM's CDMA-based
products include system software and baseband, radio frequency, intermediate
frequency, and power amplification integrated circuit products for
manufacturers of wireless handsets. For manufacturers of wireless
infrastructure equipment, QUALCOMM offers baseband integrated circuit
products and system software solutions for processing voice and data signals
to and from wireless handsets in compliance with each of the leading
CDMA-based wireless communications standards. In July 2000, QUALCOMM
announced that it is planning to spin-off its integrated circuit and system
software solutions business. The separation will create two separate
companies and is designed to speed the worldwide growth and development of
CDMA wireless voice and data markets. The new company, QUALCOMM Spinco, Inc.
(Spinco), will focus on developing and delivering innovative wireless
communications integrated circuits and system software solutions for the
world's leading handset and infrastructure manufacturers.
The Company's CDMA technology has been adopted as a worldwide 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 41 countries
around the world, with 27 countries already in commercial deployments. In
August 2000, the CDMA Development Group reported that as of June 2000 CDMA
carriers had over 65 million commercial subscribers worldwide. The latest
figures demonstrate CDMA's market success in the Asia Pacific region and
rapid growth throughout Latin America, further solidifying the technology's
position as one of the top two wireless standards. From June 1999 to June
2000, CDMA subscribers increased 96 percent reaching more than 23 million
subscribers in North America, while the Asia Pacific region maintained its
leading position with 33
1
million subscribers. Latin America, including South and Central America, and
the Caribbean experienced the strongest growth by increasing 346 percent to 9
million subscribers.
QUALCOMM continues to invest in research and development projects focused
on improving current CDMA applications and products. QUALCOMM is developing
and commercializing 3G CDMA technology and products compatible with multiple
wireless technologies (multi-mode products) to enable worldwide roaming.
QUALCOMM is also developing and commercializing 1xEV wireless communication
technology to enable the increase in mobile Internet usage and wireless
multimedia applications. The Company believes 1xEV technology will provide a
high speed, cost-effective, fixed and mobile alternative for Internet access,
competing with digital subscriber line, cable, and satellite networks. 1xEV
technology is designed to enable existing wireless operators 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 base station.
QUALCOMM intends to continue to actively support the rapid deployment of
CDMA-based systems and technologies and the growing demand for high speed,
high capacity, wireless data and Internet access enabled by CDMA technology
to grow its royalty revenues and integrated circuit and software sales. The
Company plans to continue to broadly grant royalty-bearing licenses under its
technology and patents for CDMA and other wireless applications, build upon
its industry leading position in data applications and mobile data services
for the transportation industry, continue its Eudora and Government Systems
lines of business, and create new businesses, such as the Digital Cinema
system currently under development.
The Company has and will continue to increase its strategic investment
activities to promote the worldwide adoption of CDMA products and the growth
of CDMA-based wireless data and CDMA-based wireless Internet products and
solutions. In general, the Company enters into strategic relationships with
CDMA carriers and companies that have developed or are developing innovative
technologies or products for the wireless industry. QUALCOMM enters into
joint ventures with strategic partners that are designed to increase wireless
usage and dependence on wireless devices. Also, QUALCOMM provides financing
to facilitate the marketing and sale of CDMA equipment by licensed
manufacturers and makes investments in entities such as venture funds or
incubators focused on the wireless market.
The Company also has contracts with Globalstar to design, develop and
manufacture subscriber products and ground communications systems utilizing
CDMA technology and to provide contract development services. It is possible
that the anticipated market for the Globalstar System will not develop.
Globalstar may need to raise additional funds in order to maintain and
sustain the system at planned levels. If the ramp up of service is
significantly delayed, a significant 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.
As of September 24, 2000, the Company has approximately $618 million in
net asset exposure related to its business with Globalstar, including
receivables, inventory, deferred costs, unearned revenues and investment
related assets. 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.
RECENT DEVELOPMENTS
In July 2000, Ford Motor Company and QUALCOMM announced the creation of a
new company, Wingcast LLC (Wingcast), that will develop and deliver wireless
mobility services, including safety and security, information and
communications, and entertainment and mobile commerce, into cars and trucks.
QUALCOMM committed to contribute $125 million to the initial capital of
Wingcast, of which $75 million is payable in cash and $50 million is payable
in non-cash consideration. QUALCOMM may be further committed to fund an
additional $75 million in cash upon vehicle manufacturers committing to
enable certain volumes of vehicles to use Wingcast services.
In June 2000, the Federal Communications Commission (FCC) awarded a $125
million Auction Discount Voucher (ADV) to QUALCOMM to use in any FCC spectrum
auction for one or more licenses over a period of up to three years. Fully
transferable, the ADV may be used in whole or in part by any entity in any
auction, including those in which QUALCOMM is not a participant. The FCC
award is in response to a July 1999 U.S. Court of Appeals decision in which
the FCC was ordered to designate QUALCOMM a "pioneer" under the Commission's
Pioneer's Preference program, and grant QUALCOMM spectrum forthwith. The FCC
awarded the ADV to QUALCOMM in lieu of granting spectrum. The FCC has
scheduled two auctions, one in the 700 MHz
2
band and one for licenses reclaimed from former C-block license holders, over
the next several months. The Company is currently exploring opportunities to
participate in these auctions directly or through a partnership or consortium
with other parties or to sell the ADV to a third party. The Company will
record the realized value of the ADV if it is sold.
In March 2000, the Company completed the acquisition of all of the
outstanding capital stock of SnapTrack, Inc. (SnapTrack), a developer of
wireless position location technology, in a transaction accounted for as a
purchase. The purchase price was approximately $1 billion, representing the
market value of QUALCOMM shares issued to effect the purchase, the value of
vested and unvested options and warrants exchanged at the closing date and
estimated transaction costs of $2 million.
In February 2000, the Company sold its terrestrial-based CDMA wireless
consumer phone business, including its phone inventory, manufacturing
equipment and customer commitments, to Kyocera Wireless (Kyocera). Under the
agreement with Kyocera, Kyocera agreed to purchase a majority of its CDMA
integrated circuits and system software requirements from QUALCOMM for a
period of five years. Kyocera will continue its existing royalty-bearing CDMA
license agreement with QUALCOMM. QUALCOMM received $242 million, including
interest, during fiscal 2000 for the net assets sold.
As part of the agreement with Kyocera, QUALCOMM formed a new subsidiary
that has a substantial number of employees from QUALCOMM Consumer Products
business to provide services to Kyocera on a cost-plus basis to support
Kyocera's phone business for up to three years. In addition, selected
employees of QUALCOMM Personal Electronics (QPE), a 51% owned consolidated
subsidiary of the Company and manufacturer of phones for QUALCOMM, were
transferred to Kyocera. As a condition of the purchase, QPE paid down and
cancelled its two revolving credit agreements.
WIRELESS TELECOMMUNICATIONS INDUSTRY OVERVIEW
Wireless communications equipment and services have enjoyed tremendous
growth worldwide in both numbers of subscribers and subscriber usage.
International Data Corporation (IDC) estimates that between 1998 and 2000 the
number of worldwide wireless subscribers increased from approximately 303.5
million to 557.5 million and estimates that there will be approximately 1.1
billion subscribers by the end of 2003. Growth in the market for wireless
communications services has traditionally been fueled by demand for voice
communications. There have been several factors responsible for this
increasing demand, including:
- an increasingly mobile workforce with increased need for wireless
voice communications;
- lower cost of service, including flat-rate and bundled long-distance
call pricing plans;
- wireless networks becoming the primary telecommunications
infrastructure in developing countries due to the higher costs of and
longer time required for installing wireline networks;
- regulatory environments worldwide favoring increased competition in
wireless communications; and
- increased privacy, call clarity and security of digital networks based
on digital second-generation wireless technology standards.
In addition to the tremendous demand for wireless voice services,
wireless service providers are increasingly focused on providing wireless
data services, including wireless access to the Internet and position
location services. According to IDC, the number of Internet users will grow
from 144 million at the end of 1998 to 602 million by 2003, which the Company
expects will result in significant demand for access to the Internet through
wireless networks. The Company believes wireless technology standards
enabling faster data transmission rates and the introduction of
Internet-enabled handsets will facilitate mobile Internet access and
accelerate the proliferation of Internet use on a global basis. IDC estimates
that by 2003, over 40 million people will have wireless Internet browsing
capabilities, growing from less than 1.2 million in 1998. In addition, IDC
predicts the total value of wireless Internet services, including access
services provided by wireless operators, will increase from $4.3 billion in
1998 to more than $38.1 billion by 2003, representing a compound annual
growth rate of nearly 55%. Critical to the adoption of wireless Internet
devices and services is high-speed data connectivity, which is driving the
evolution of wireless standards. The Company expects that the spread of
high-speed, cost-effective Internet access will encourage the development of
other remote supervision, position location and telemetry applications.
3
THE EVOLUTION OF WIRELESS STANDARDS
The significant growth in wireless penetration worldwide and demand for
enhanced network functionality requires constant innovation to further
improve network reliability, expand capacity and introduce new types of
services. To meet these requirements, progressive generations of wireless
communications technology standards have been established.
FIRST GENERATION. The first generation wireless communications standard,
widely deployed in the late 1980s, was based on analog technology. While this
generation helped fuel the adoption of wireless communications usage, the
technology is characterized by inherent capacity limitations, minimal data
transfer capabilities, low security, inconsistent service levels and
significant power consumption.
SECOND GENERATION. As the deployment of cellular phone systems grew, the
limitations of analog technology drove the development of second generation,
digital-based technology standards. Second generation digital technology
provides for significantly enhanced efficiency within a broadcast spectrum as
well as greatly increased capacity compared to analog systems. Second
generation technologies also enabled numerous enhanced services, including
paging, e-mail and facsimile, connections to computer networks, greater
privacy, lower prices, a greater number of service options and greater fraud
protection. The three main second-generation digital technologies are CDMA,
called cdmaOne or IS-95A/B, which was developed by QUALCOMM, TDMA and GSM, a
form of TDMA.
CDMA. CDMA technology, developed and patented by QUALCOMM, offers 10 to
20 times the capacity of analog systems and more than three times the
capacity of TDMA-based systems, through more efficient utilization of
wireless operators' licensed spectrum. Some of the advantages of CDMA
technology over both analog and TDMA-based technologies include:
- ENHANCED VOICE QUALITY. CDMA technology provides significantly greater
voice quality than analog and other digital technologies.
- ENHANCED CALL SECURITY. CDMA transmissions are encrypted, making them
virtually impossible to decipher without having the appropriate code to
retrieve a transmission.
- INCREASED NETWORK CAPACITY. CDMA permits wireless networks to handle a
significantly greater number of calls than other digital technologies,
including TDMA, due in part to its efficient use of spectrum.
- FEWER DROPPED CALLS. While other digital technologies employ an abrupt
handoff of calls as the user travels between base stations or "cells,"
CDMA technology employs "soft handoffs," maintaining multiple
connections to base stations as a user travels between coverage areas.
- COMPATIBILITY WITH INTERNET PROTOCOLS. CDMA technology is more
compatible with Internet protocols than other digital technologies.
- LOWER POWER AND EXTENDED TALK TIME. The average transmitted power
required for CDMA is typically reduced 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.
THIRD-GENERATION TECHNOLOGY. As demand for wireless networks that carry
both data and voice traffic at faster speeds has increased significantly,
several 3G wireless standards have been proposed to the International
Telecommunications Union (ITU) by a variety of companies and alliances. These
proposals include both CDMA and TDMA-based technologies. The ITU, based in
Geneva, Switzerland, is an international union that determines which
technology or technologies will be established as 3G standards. A technology
standard selected for 3G must efficiently support significantly increased
data speeds and capacity over limited spectrum bandwidth, thereby enabling
new and enhanced services and applications such as mobile e-commerce,
position location and mobile multimedia Web browsing, including music and
video downloads.
CDMA-BASED 3G TECHNOLOGY. A 3G standard encompassing three CDMA wireless
modes has been adopted by the ITU. These three modes are: (1) two versions of
cdma2000, or Multi-Carrier; (2) WCDMA, or Direct Spread;
4
and (3) Time Division Duplex. The two versions of cdma2000 are cdma2000 1x
(1.25 MHz channel) and cdma2000 3x (5 MHz channel). cdma2000 1x utilizes the
same standard 1.25 MHz channel bandwidth as existing cdmaOne systems and, as
a result, is compatible with wireless operators' existing network equipment.
The Company believes cdma2000 1x provides approximately twice the voice
capacity of cdmaOne and six to eight times that of TDMA-based networks.
Additionally, cdma2000 1x initially provides peak data rates of 144 kbps,
with growth to 307 kbps planned, longer battery life and position location
functionality in compliance with FCC mandates for emergency 911 calls.
Commercial deployment of cdma2000 1X began this fall in South Korea and is
scheduled for 2001 in the U.S., making cdma2000 1x the first 3G technology to
be commercially deployed. By the end of fiscal 2000, QUALCOMM's 3G licensees
include Ericsson, Philips, Motorola, Lucent, Samsung, LG, Hyundai, Maxon,
Hitachi, Toshiba, Sanyo, Sharp, Sony, Agilent, Advantest and Willtech. In all
cases, the royalty rate paid to QUALCOMM is not dependent upon which standard
is implemented in the product.
In addition, QUALCOMM's 1xEV is currently being considered by the ITU for
inclusion in the cdma2000 mode of the 3G standard. 1xEV supports peak data
rates of 2.4 Mbps per second and uses the same standard 1.25 MHz channel
bandwidth as existing cdmaOne systems. As a result, 1xEV is compatible with
wireless operators' existing cdmaOne network equipment. Despite operating in
the standard 1.25 MHz bandwidth, 1xEV supports higher data rates than WCDMA,
which uses the 5 MHz channel bandwidth.
STRATEGY
QUALCOMM's strategy is to be a leading provider of CDMA-based wireless
communications technology, products and services. Elements of the Company's
strategy, which are subject to change, currently include:
CONTINUE PIONEERING ROLE IN THE DEVELOPMENT AND DEPLOYMENT OF CDMA. Since
shortly after its formation in 1985, QUALCOMM has allocated substantial
resources to developing, patenting and commercializing the use of CDMA
technology in wireless communications applications. QUALCOMM's intellectual
property portfolio has been widely recognized as being necessary for cdmaOne,
cdma2000, 1xEV and WCDMA. QUALCOMM has significant engineering resources,
including engineers with substantial expertise in CDMA technology. Using
these resources, QUALCOMM expects to develop new CDMA-based technology,
participate in the formation of new wireless communications standards and
assist in deployments of working networks around the world.
ACQUIRE COMPLEMENTARY PRODUCTS, TECHNOLOGIES OR COMPANIES. Capitalizing
upon its industry insight into wireless technologies and trends, its
experienced management team and its established industry relationships,
QUALCOMM intends to use the cash flow generated from its royalty business to
license and acquire new wireless technologies or businesses that are focused
on increasing wireless usage and providing new services, products or
technology that will accelerate the demand for CDMA's high-quality voice and
high-speed, high-capacity wireless data.
EXTEND QUALCOMM'S LEADING POSITION AS A COMPLETE, END-TO-END CDMA SYSTEM
SOLUTIONS PROVIDER. The Company plans to invest heavily in research and
development initiatives focused on extending its leadership position in the
market for wireless communications products using CDMA technology. QUALCOMM
has broad and unique expertise in designing and developing CDMA-based
integrated circuits, as well as the software, reference designs and tools and
providing technical support required to create a complete CDMA system
solution. The Company believes that its ability to deliver complete solutions
to its customers in both the handset and base station markets will strengthen
its competitive advantage over other providers of wireless communications
integrated circuits. The Company plans to further integrate additional
components and functionality into a single integrated circuit to help its
customers reduce product costs and size and to simplify customers' design
processes. In addition, the Company will continue to provide high quality
support to enable its customers to reduce their design cycles and meet their
time to market objectives.
CAPITALIZE ON THE GROWING DEMAND FOR HIGH-SPEED WIRELESS DATA AND
INTERNET ACCESS. The Company intends to be the technology leader in the
market for high-speed wireless data and Internet access. The Company is
devoting significant research and development resources toward innovations in
this area, including efforts relating to the 3G standard and 1xEV. The
Company believes that high-speed data transmission offers significant growth
opportunities in the wireless industry, which will enable its customers to
integrate new features such as Internet access and advanced multimedia
capabilities into new products.
STRATEGIC INVESTMENTS TO DRIVE THE USAGE AND ADOPTION OF CDMA AND NEW
APPLICATIONS OR MARKETS FOR CDMA. The Company's strategy is to invest in CDMA
carriers, licensed device manufacturers and start-up companies that the
Company believes open new markets for CDMA technology, support the design and
introduction of new
5
CDMA-based products or possess unique capabilities or technology. Examples
include the Company's investments in Korea Telecom Freetel (nationwide South
Korean PCS carrier), Vesper (a Brazilian carrier) and Handspring (personal
digital assistant products). Additionally, QUALCOMM has made and may continue
to make investments in venture funds, incubators or other entities that have
the requisite expertise, resources and networking capabilities to identify
and create (or assist others in creating) products, software or technologies
focused on the wireless market. For example, QUALCOMM has equity positions in
Ignition and IdeaEdge.
JOINT VENTURES WITH STRATEGIC PARTNERS. QUALCOMM has entered and will
continue to enter into joint ventures with strategic partners that are
designed to increase wireless usage and dependence on wireless devices. For
example, Wireless Knowledge, a joint venture with Microsoft, was formed to
provide secure, reliable wireless access to business-critical information by
connecting corporate resources to any wireless device. Wingcast, a joint
venture with Ford Motor Company, will deliver wireless mobility services into
cars and trucks. QUALCOMM expects to continue to form such strategic
alliances in the future.
CDMA EQUIPMENT FINANCING. To facilitate the marketing and sale of CDMA
equipment by licensed manufacturers, QUALCOMM has provided, and may continue
to provide, equipment financing either directly to CDMA carriers or to
licensed manufacturers on commercially reasonable terms. By providing such
financing, QUALCOMM expects not only to receive a reasonable return on its
investment, but also to ensure the deployment of CDMA networks, which in turn
results in increased royalty revenue as the networks are deployed and built
out. QUALCOMM has provided equipment financing to Ericsson on a shared basis
with respect to their sale of CDMA infrastructure in Brazil, Mexico and
elsewhere.
OPERATING SEGMENTS
CDMA TECHNOLOGIES SEGMENT (QCT)
QCT is the leading developer and supplier of CDMA-based integrated
circuits and system software solutions for wireless voice and data
communications products. QCT offers complete system solutions including
software and integrated circuits for wireless handsets and infrastructure
equipment. This complete system solution approach provides customers with
advanced wireless technology, enhanced component integration and
interoperability, and reduced time to market. QCT provides integrated
circuits and system software solutions to many of the world's leading
wireless handset and infrastructure manufacturers. Through fiscal year 2000,
QCT has shipped integrated circuit solutions for more than 118 million CDMA
handsets worldwide.
QCT supports both wireless handset and infrastructure manufacturers. For
wireless handset manufacturers, QCT's products include system software and
baseband, radio frequency, intermediate frequency, and power amplification
integrated circuit products. These robust, highly integrated solutions enable
manufacturers to design very small, feature-rich handsets with longer standby
times and support 1xEV services. For wireless infrastructure manufacturers,
QCT offers baseband integrated circuit products and system software solutions
that provide wireless standards-compliant processing of voice and data
signals to and from wireless handsets. In addition to the key components in a
wireless system, QCT provides its customers with system reference designs and
development tools to assist in customization of features and user interfaces,
integrate our solutions with components developed by others, and test
interoperability with existing and planned networks. Together, the handset
and infrastructure products and services form complete system solutions for
wireless communications manufacturers. QCT is also closely aligned with
manufacturers and operators in product planning, design specifications and
development timelines.
QCT currently utilizes several leading independent semiconductor
foundries, including IBM, Motorola, Texas Instruments, Taiwan Semiconductor
Manufacturing Co. and others, to manufacture all of its semiconductor
products. Second sourcing for products allows the Company to better meet its
customer needs and react quickly to 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.
The Company believes it has established a significant advantage over
other existing and potential providers of CDMA integrated circuits. The
Company continues to lead the industry by delivering proven, leading-edge,
high-quality and cost-effective solutions. With more than 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 products.
To date, the Company's fifth generation MSM3000 integrated circuits and
system software has been
6
selected by more than 30 handset manufacturers, leading to MSM3000-based
handset availability in CDMA markets worldwide.
The Company's next-generation cdmaOne solution, the MSM3300 integrated
circuit and system software, enables the design of a new generation of CDMA
handsets and data devices with rich feature sets and industry-leading
performance. The MSM3300 provides advanced technologies, including gpsOne
position-location technology and Bluetooth, as well as multimedia features
such as Qtunes, Moving Picture Experts Group (MPEG-1) Layer-3 (MP3) player
software, and Compact Media Extension (CMX) Musical Instrument Digital
Interface (MIDI)-based multimedia software. Early shipment of samples of the
MSM3300 began in August 2000, enabling manufacturers worldwide to begin the
design of advanced wireless handsets that offer multimedia applications and
power-efficient position location features in very small and cost-effective
form-factors.
The Company's gpsOne solution meets the FCC's mandate requiring wireless
operators to provide the location of 911 calls (E9-1-1). The MSM3300 solution
also enables a broad range of future GPS-related software and services,
including navigation information, area-specific weather forecasts, traffic
reports and commercial tracking services, as well as a broad range of
e-commerce and entertainment applications, including localized travel and
event ticket bookings, zone-based advertising and community information, and
localized on-line chat and bulletin boards.
The MSM5000 integrated circuit and system software solution is the
world's first semiconductor and software implementation of 3G cdma2000
standards. The MSM5000 digital baseband solution is designed to support
cdma2000 1x for operation in a single 1.25 MHz channel. The cdma2000 1x
standard is fully compatible with current cdmaOne networks, allowing
operators to deploy 3G networks while maintaining existing coverage for all
subscribers eliminating the expense of moving to a new network. The MSM5000
features peak data rates of 153.6 kbps, provides up to a 50 percent increase
in handset standby time, and is feature- and pin-compatible with the MSM3000,
allowing manufacturers currently producing handsets using the MSM3000 to
rapidly implement 3G cdma2000 1x handset equipment.
In December 1999, QUALCOMM conducted successful over-the-air phone calls
using the MSM5000 integrated circuits. Handset manufacturers worldwide have
been receiving MSM5000 engineering samples, together with the system software
and development platforms, since January 2000. Field trials of cdma2000 1x
began in spring 2000 in South Korea. U.S. trials included testing and
verification of the 144 kbps 3G data capabilities using QCT's MSM5000
integrated circuits and system software, and CSM5000 base station integrated
circuit and system software. Commercial deployment of cdma2000 1x began this
fall in South Korea and is scheduled for 2001 in the U.S.
The Company has developed 1xEV technology designed to provide reliable,
cost-effective and always-on wireless Internet access to consumers. It is
fully compatible with existing cdmaOne and 3G cdma2000 mode technologies, and
is being standardized as part of the cdma2000 mode of the 3G standard. The
1xEV's versatility allows the technology to be embedded in handsets, laptop
and handheld computers, and other fixed, portable and mobile devices,
enabling manufacturers to deliver products with access to services that were
previously only available through wired connections to the Internet or
enterprise networks. The 1xEV technology allows operators to leverage their
current infrastructure investment and maintain backward compatibility with
existing subscriber equipment. The Company is designing and developing an
end-to-end solution in support of the industry-wide movement to standardize,
develop and deploy 1xEV technology in cdmaOne networks.
QCT's CSM5000 base station solution is the industry's first to support
the cdma2000 1x standard, based on IS-2000 for CDMA base stations as
specified by the ITU. The CSM5000 solution provides operators with up to
twice the overall capacity of voice users over IS-95A and IS-95B systems.
On-time shipments of the CSM5000 began in February 2000, and to date, fifteen
infrastructure manufacturers worldwide have selected the CSM5000 solution.
TECHNOLOGY LICENSING SEGMENT (QTL)
QUALCOMM's Technology Licensing segment generates revenue from its CDMA
(e.g., cdmaOne, cdma2000, WCDMA and TD-SCDMA) license fees as well as ongoing
royalties based on worldwide sales by licensees that design, manufacture and
sell products incorporating the Company's CDMA technology. License fees are
generally nonrefundable and may be paid in one or more installments. From
time to time the Company may also receive an
7
equity interest in its licensees. Ongoing royalties are nonrefundable,
generally based upon a percentage of the selling price of licensed products,
and are recognized as income when earned. Revenues generated from license
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 license 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, handset
products and packet data modems for use in CDMA-based networks for the
Globalstar System. The Wireless Business Solutions division designs,
develops, manufactures, and sells satellite and terrestrial-based two-way
data messaging, position reporting, equipment and services.
WIRELESS SYSTEMS. In 1994, Loral Space and Communications, Ltd., QUALCOMM
and other companies formed Globalstar to design, construct and operate a
worldwide, low-Earth-orbit satellite-based telecommunications system, the
Globalstar System. Through a constellation of 48 satellites, this system is
designed to connect with existing terrestrial telecommunications systems to
create a seamless global network, enabling users to call and send data to and
from virtually any place in the world. The Company currently holds an
approximate 6.3% interest in Globalstar through certain limited partnerships
and other indirect interests.
The Company continues to provide services and sell products under a
number of development and production 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 and several service providers to manufacture and supply portable
and fixed CDMA handsets that will operate on the Globalstar System.
WIRELESS BUSINESS SOLUTIONS. The Company provides satellite and
terrestrial-based two-way data messaging and position reporting services for
transportation companies and metropolitan-based fleets. The satellite-based
OmniTRACS system was first introduced in the U.S. in 1988 and is currently
operating in 37 countries. In 2000, QUALCOMM introduced and launched
commercial sales of its OmniExpress, a CDMA terrestrial-based system, and
LINQ, a GSM terrestrial-based system. Through September 2000, the Company has
sold over 360,000 OmniTRACS, TruckMAIL, OmniExpress and LINQ systems
worldwide. Message transmission and position tracking for the OmniTRACS and
TruckMAIL systems are provided by use of leased Ku-band and C-band
transponders on commercially available geostationary earth orbit satellites.
The OmniExpress and LINQ systems use wireless digital telecommunications
networks for messaging transmission, and the GPS constellation for position
tracking. These mobile communication systems help transportation companies
and metropolitan-based fleets 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, and position reports at regular intervals and vehicle and driving
performance information.
In the U.S., the Company manufactures and sells OmniTRACS, TruckMAIL and
OmniExpress mobile terminals and related software packages and provides
ongoing messaging and maintenance services. Customers for U.S. operations
include over 1,250 U.S. companies, primarily in the trucking industry. The
Company 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 Center (NMC)
in San Diego, California operated by the Company, with a fully redundant
backup NMC located in Las Vegas, Nevada. The Company estimates the NMC
currently processes over six million messages and position reports per day.
Outside of the U.S., the Company 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, Argentina, Brazil, Canada, China, Japan, Mexico, and South
Korea. Internationally, the Company generates revenues from the OmniTRACS
system through license fees, sales of
8
network products and terminals, messaging and service fees. OmniTRACS
messaging services are provided by service providers that operate network
management centers for a region under licenses granted by the Company. The
Company has also launched eQCOM, a Netherlands subsidiary, to bring mobile
communication products and messaging services to the European market. eQCOM
has established a European-based NMC to offer the terrestrial-based LINQ
messaging and position reporting service.
CONSUMER PRODUCTS SEGMENT (QCP)
In February 2000, the Company sold its terrestrial-based CDMA wireless
consumer phone business, including its phone inventory, manufacturing
equipment and customer commitments, to Kyocera. Under the agreement with
Kyocera, Kyocera agreed to purchase a majority of its CDMA integrated
circuits and system software requirements from QUALCOMM for a period of five
years. Kyocera will continue its existing royalty-bearing CDMA license
agreement with QUALCOMM. QUALCOMM received $242 million for the net assets
sold.
As part of the agreement with Kyocera, QUALCOMM formed a new subsidiary
that has a substantial number of employees from QUALCOMM Consumer Products
business to provide services to Kyocera on a cost-plus basis to support
Kyocera's phone business for up to three years. In addition, selected
employees of QUALCOMM Personal Electronics (QPE), a 51% owned consolidated
subsidiary of the Company and manufacturer of phones for QUALCOMM, were
transferred to Kyocera. As a condition of the purchase, QPE paid down and
cancelled its two revolving credit agreements. QUALCOMM recorded $83 million
in charges during fiscal 2000 to reflect the estimated difference between the
carrying value of the net assets and the consideration to be received from
Kyocera, less costs to sell, and employee termination costs.
OTHER BUSINESSES
QUALCOMM's other businesses include Eudora and the Company's Digital
Media Division. The Digital Media Division is comprised of the Government
Systems and Digital Cinema businesses.
EUDORA. The Company's multi-platform Eudora e-mail software products have
millions of users worldwide. The Company provides the Eudora e-mail software
to users and generates revenues from sponsor advertising within the program.
QUALCOMM supports its Eudora products with an experienced application,
server, and user interface development team. Approximately one million users
have migrated to a recently introduced advertising-supported version of
Eudora in the first seven months following its release. QUALCOMM also has
developed proprietary XML-based content-serving technology that caches
content into the Eudora client software. The Company also has introduced the
Eudora Internet Suite, containing both a browser and e-mail client for the
Palm OS.
GOVERNMENT SYSTEMS. The Government Systems business provides wireless
development, hardware and analysis expertise to U.S. Government agencies. 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 nearing completion of a contract with the U.S. Government to
develop CDMA terrestrial phones that operate in enhanced security modes that
incorporates end-to-end encryption and a net broadcast capability. The
Company is currently in discussions for an initial production contract to
provide the terrestrial phones to the U.S. Government. 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 and Globalstar products and services are being
marketed and sold for U.S. Government worldwide applications.
DIGITAL CINEMA. The Company is developing an end-to-end Digital Cinema
System for the delivery of motion pictures to theatres worldwide. The Digital
Cinema System combines QUALCOMM's expertise in advanced image compression,
electronic security, network management, integrated circuit design and
satellite communications technologies and will provide a turnkey solution to
the industry for the secure delivery of digitized motion pictures to theatres
worldwide. QUALCOMM is marketing its system and technology to the motion
picture industry and participating in the industry-wide standards setting
process. In addition, QUALCOMM will promote its image compression and
electronic security technologies for other potential applications within the
entertainment industry including such areas as archiving, asset management
and production and distribution of electronic media content in various forms.
In May 2000, the Company entered into a strategic alliance with Technicolor
Digital Cinema, Inc. (Technicolor) and formed a joint venture, Technicolor
Digital Cinema, LLC. The venture will market the QUALCOMM Digital Cinema
System and work with the motion picture industry as a technology enabler and
service provider while supporting open standards for the digital delivery of
motion pictures.
9
STRATEGIC ALLIANCES AND JOINT VENTURES
From time to time the Company has entered and expects to continue to
enter into alliances and joint ventures with strategic partners that are
designed to increase wireless usage and dependence on wireless devices. For
example, Wireless Knowledge, a joint venture with Microsoft, was formed to
provide secure, reliable wireless access to business critical information by
connecting corporate resources to any wireless device. Wingcast, a joint
venture with Ford Motor Company, will develop and deliver wireless mobility
services, including safety and security, information and communications, and
entertainment and mobile commerce, into cars and trucks. Technicolor Digital
Cinema, a joint venture with Technicolor, will market the QUALCOMM Digital
Cinema System.
In addition, the Company has a number of strategic alliances that relate
to its QCT business segment, including agreements with Ericsson, Lucent, RF
Micro Devices and Symbian.
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's research
and development team has a strong and proven track record of innovation in
wireless technologies. Company-sponsored research and development
expenditures in fiscal years 2000, 1999 and 1998 totaled approximately $340
million, $381 million and $349 million, respectively. Most of these
expenditures are related to the development of CDMA technology for wireless
applications including phones and infrastructure in 1998 and 1999 prior to
the sale of these businesses, integrated circuit product initiatives and
software development efforts and new 1xEV products. The Company intends to
use its substantial engineering resources and expertise to develop new
technologies, applications and services and make them available to licensees
to help grow the wireless market and generate new or expanded licensing
opportunities. In addition to internally sponsored research and development,
the Company performs contract research and development for various government
agencies and commercial contractors, including Globalstar.
SALES AND MARKETING
QCT markets and sells products in the United States through a sales force
based in San Diego, California, and internationally through a direct sales
force based in South Korea, Japan, China and Germany. QCT currently has
approximately 85 sales and marketing personnel. QCT sales and marketing
strategy is to achieve design wins with technology leaders in its targeted
markets by, among other things, providing superior field application and
engineering support.
The Wireless Business Solutions (QWBS) division of QWS markets and sells
products through a sales force and partnerships based in the United States,
Europe, Argentina, Brazil, Canada, China, Japan, South Korea and Mexico. QWBS
currently has approximately 119 sales and marketing personnel. QWBS sales and
marketing strategy is to achieve contract wins in its target markets by,
among other things, providing fleet management solutions to the
transportation industry and other logistics-based businesses.
In addition, QUALCOMM has approximately 251 sales and marketing personnel
focused on the balance of its product lines.
Marketing activities include participation in technical conferences,
business cases, competitive analyses and other marketing collateral,
publication of customer deployments, new product information and educational
articles in industry journals, maintenance of our World Wide Web site and
direct marketing to prospective customers.
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
established market positions, trade
10
names, trademarks, patents, copyrights, intellectual property rights and
substantial technological capabilities. Many of the Company's customers
currently face competition from existing telecommunication providers. 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 markets in which the Company's QCT division competes are intensely
competitive. QCT competes worldwide with a number of United States and
international manufacturers that are both larger and smaller than the Company
in terms of resources and market share. As a result of the trend toward
global expansion by foreign and domestic competitors, technological and
public policy changes, and relatively low barriers to entry in the industry,
the Company anticipates that additional competitors will enter this market.
The Company believes that the principal competitive factors for CDMA
integrated circuit providers to the Company-addressed markets are product
performance, level of integration, quality, compliance with industry
standards, price, time to market, system cost, design and engineering
capabilities, new product innovation and customer support. The specific bases
on which the Company competes against alternative CDMA integrated circuit
providers vary by product platform. The Company also competes against
alternative wireless technologies including but not limited to GSM, TDMA and
analog.
QCT's current competitors include major semiconductor companies such as
Intel, LSI Logic and Philips, as well as major telecommunication equipment
companies such as Motorola and Lucent. QCT also faces competition from the
in-house development efforts of many of the Company's key customers,
including Samsung. QCT also faces competition from start-up ventures, several
of which have begun shipping commercial products. Moreover, some of QCT's
customers have licenses from the Company that allow them to manufacture and
sell integrated circuits incorporating CDMA technology and may compete
directly with QCT.
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 materially and adversely
affect the QCT's results of operation, liquidity and financial position.
Moreover, competitors may offer more attractive product pricing or financing
terms than the Company does as a means of gaining access to the wireless
markets.
The Company has entered into royalty-bearing license arrangements with
Intel, LSI Logic Corporation, Philips and PrairieComm, Inc. covering patents
belonging to QUALCOMM applicable to integrated circuits. Pursuant to these
arrangements, licensees are licensed to manufacture and sell cdmaOne and
cdma2000 (and, in the case of Philips, WCDMA) integrated circuits to
subscriber equipment licensees of the Company. To date, most subscriber
equipment licensees have elected to purchase their CDMA integrated circuits
and system software requirements from the Company. Under the terms of their
agreements, Motorola and Lucent also have rights under Company patents to
manufacture and sell CDMA integrated circuits to licensees that hold separate
licenses. In every case, the right of the licensees to use or resell the
licensed integrated circuits is subject to the payment of royalties to
QUALCOMM on the products into which the integrated circuits are incorporated.
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 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 GSM has been extensively utilized in Europe, much of Asia and
certain other markets. To date, GSM and TDMA have been more widely adopted
than CDMA, and there can be no assurance that wireless service providers will
select CDMA for their networks. The Company faces additional competition in
the development of components for next-generation digital wireless technology
and services.
11
WIRELESS SYSTEMS SEGMENT (QWS)
Existing competitors offering alternatives to the Company's OmniTRACS,
TruckMAIL, OmniExpress and LINQ 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, may impact margins and intensify competition in new markets.
Currently, three handset manufacturers supply portable and fixed handsets
and accessories that will operate on the Globalstar System. QUALCOMM is
supplying a CDMA-based tri-mode mobile satellite phone that will operate with
the Globalstar satellite and ANSI 41 terrestrial networks. Ericsson and
Tellit Mobile Terminals, S.p.A. provide dual-mode phones that operate with
both Globalstar satellite and GSM networks. In addition, as terrestrial-based
telecommunications services expand into regions currently under served or not
served by cellular operators, the Company competes directly with
manufacturers of handsets for land-based systems. 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. QUALCOMM is also manufacturing packet data modems for the
Globalstar System. Currently, QUALCOMM is the only manufacturer of these
modems.
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 400 United
States patents and has over 900 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 has and will
continue to actively file for patent protection around the world and has
received CDMA patents with broad coverage throughout most of the world,
including China, Japan, South Korea, Europe, Brazil, North America and
elsewhere. 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. 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
that 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 and selling
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 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.
While the Company believes that its CDMA patent portfolio is applicable
to the CDMA-based systems that have been approved by the ITU as 3G standards,
there can be no assurance that such will be the case. The standards bodies
and the ITU have been informed that the Company holds essential intellectual
property rights for the 3G standards that are based on CDMA. 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.
12
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 current
CDMA licensees:
13
INFRASTRUCTURE SUBSCRIBER EQUIPMENT
COM DEV International, Ltd. Acer Peripherals, Inc. Seiko Instruments Inc.
Contela, Inc. AirPrime Inc. Sewon Co., Ltd.
ExiO Communications, Inc. Alps Electric Co., Ltd. Sharp Corporation
Fujitsu Limited Appeal Telecom Co., Ltd. Siemens Rolm Communications Inc.
Hitachi, Ltd. Casio Computer Co., Ltd. Sierra Wireless, Inc.
Hughes Network Systems, Inc. Cherish Telecom Co., Ltd. SK Telecom Co., Ltd.
Hyundai Electronics Industries Co., COM DEV International, Ltd. Sony Corporation
Ltd. Compal Electronics, Inc. Standard Telecom Co., Ltd.
Kisan Telecom Co., Ltd. Deltacom Co., Ltd. Synertek, Inc.
LG Information & Communications, Ltd. Denso Corporation Telefonaktiebolaget LM Ericsson
Lucent Technologies Inc. First International Computer, Inc. Telson Electronics Co., Ltd.
Motorola, Inc. Fujitsu Limited Telson Information & Communications
NEC Corporation Garmin Corporation Co., Ltd.
Nortel Networks Corporation Glenayre Electronics, Inc. Tellus Technology
Samsung Electronics Co. GTRAN Incorporated Toshiba Corporation
Telefonaktiebolaget LM Ericsson Haitai Electronics Co., Ltd Uniden Corporation
Handspring, Inc. United Computer & Telecommunication,
CABLE AND REPEATERS Hanwha Corporation Inc.
CI Wireless Hitachi, Ltd. Wide Telecom Co., Ltd.
Transcept Hughes Network Systems, Inc. YISO Telecom Co., Ltd.
Hyundai Electronics Industries Co.
TEST EQUIPMENT Ltd. SUBSCRIBER EQUIPMENT (GLOBALSTAR)
Advantest Corporation Kenwood Corporation Telefonaktiebolaget LM Ericsson
Agilent Technologies, Inc. Kokusai Electric Co., Ltd. Tellit Mobile Terminals S.p.A.
Allen Telecom Group Koninklijke Philips Electronics N.V.
Ando Electric Co., Ltd. Kyocera Corporation ASICS
Anritsu Corporation LG Information & Communications, DSP Communications, Inc. (a wholly
Comarco Wireless Technologies, Inc. Ltd. owned subsidiary of Intel
Grayson Electronics Company LG Electronics Inc. Corporation)
Hewlett-Packard Company Lucent Technologies Inc. Koninklijke Philips Electronics N.V.
IFR Systems, Inc. Matsushita Communication Industrial LSI Logic Corporation
Japan Radio Co., Ltd. Co., Ltd. PrairieComm Incorporated
LCC Corporation Maxon Electronics Co., Ltd
Motorola, Inc. Mitsubishi Electric Corporation RESEARCH & DEVELOPMENT
Racal Instruments Ltd. Motorola, Inc. Beijing Telecommunications Equipment
Rhode & Schwartz GmbH & Co. NEC Corporation Factory
Rotadata Limited NeoPoint, Inc. Chunghwa Telecom Laboratories
Sage Instruments Nokia Mobile Phones Ltd. Datang Telecom Technology Co, Ltd.
Tektronix, Inc. Novatel Wireless Inc. Eastern Communications Co., Ltd.
Telefonaktiebolaget LM Ericsson Oki Electric Industry Co., Ltd. Great Dragon Telecom
Wavetek GmbH Pantech Co., Ltd. Hangzhou Unitop Electric Co.
Willtech Research In Motion Limited Hisense Group Co., Ltd.
Zhongxing Telecom Corporation Huawei Technologies Co., Ltd.
Samsung Electronics Co. Langchao Group
Sanyo Electric Co., Ltd. LT Netcomm (S.H.) Co., Ltd.
Ningbo Bird Co., Ltd.
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 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 license fees as well as
ongoing royalties based on a percentage of the selling price of CDMA
subscriber, infrastructure, test and integrated
14
circuits products. License fees are paid in one or more installments, while
royalties generally continue throughout the life of the underlying patents.
EMPLOYEES
As of September 24, 2000, the Company and its consolidated subsidiaries
employed approximately 6,300 full-time and temporary employees.
EXECUTIVE OFFICERS
The executive officers of the Company and their ages as of September 24,
2000 are as follows:
IRWIN MARK JACOBS (age 66) has served as Chairman of the board and Chief
Executive Officer of QUALCOMM since it began operations in July 1985. He
served as QUALCOMM's President prior to May 1992. In July 2000, he was
appointed Chairman of the board of Spinco. Before joining QUALCOMM, Dr.
Jacobs was Executive Vice President and a director of M/A-COM, Inc., a
telecommunications company. From October 1968 to April 1985, Dr. Jacobs held
various executive positions at LINKABIT (M/A-COM LINKABIT after August 1980),
a company he co-founded. During most of his period of service with LINKABIT,
he was Chairman, President and Chief Executive Officer and was at all times a
director. Dr. Jacobs received his B.E.E. degree from Cornell University and
his M.S. and Sc.D. degrees from the Massachusetts Institute of Technology. He
is a member of the National Academy of Engineering and was awarded the
National Medal of Technology in 1994.
RICHARD SULPIZIO (age 50) serves as President of QUALCOMM, a position he
has held since July 1998. In July 2000, he was appointed Chief Executive
Officer and a director of Spinco. He served as QUALCOMM's Chief Operating
Officer since 1995. 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
position of Chief Operating Officer from May 1992 to February 1994. Mr.
Sulpizio joined QUALCOMM 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 Constructors, 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 (age 54) serves as Executive Vice President and Chief
Financial Officer of QUALCOMM, and has held these positions since November
1997 and March 1994, respectively. In July 2000, he was appointed as Spinco's
Interim Chief Financial Officer and Secretary. Prior to joining QUALCOMM, 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 (age 39) has served as Executive Vice President of the
Company since November 1997. Mr. Altman also has also served as President of
the Company's Technology Transfer and Strategic Alliance Division, which is
responsible for, among other things, licensing the Company's intellectual
property, since September 1995. Mr. Altman served as General Counsel of the
Company since joining the Company in October 1989 through September 2000. 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. Prior to joining the Company in October 1989, 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 (age 48), one of the founders of the Company, has
served as Executive Vice President and Chief Technical Officer of the Company
since July 1996, as Senior Vice President of Engineering from September 1992
to July 1996, and as Vice President of Engineering of the Company from August
1985 to September 1992. He served as a Director of the Company from August
1985 until February 1989. Prior to joining the Company, Mr. Antonio was
Assistant Vice President of Engineering of M/A-COM LINKABIT where he held
various
15
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.
PAUL E. JACOBS (age 37) has served as Executive Vice President of the
Company since February 2000. He is expected to assume the title of President
following the spin-off of Spinco. He currently serves as a member of the
board for Wireless Knowledge, Ignition Corp, and Wingcast, all of which are
non-public companies. He served as President of the Consumer Products
Division from February 1997 to February 2000 and as Senior Vice President of
the Company and Vice President and General Manager of the Consumer Products
Division from April 1995 to February 1997. He joined the Company in September
1990 as Senior Engineer and was promoted to Engineering Director in April
1993. 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 (age 55) has served as Senior Vice President of the
Company since February 1997 and President of CDMA Technologies Division since
October 1997. In July 2000, he was appointed President and Chief Operating
Officer and a director of Spinco. He joined QUALCOMM in January 1996 as
Corporate Vice President and in June 1996 was promoted to General Manager,
QCT Products Division. Prior to joining QUALCOMM, 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
Circuits 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 degrees from Arizona State University.
16
RISK FACTORS
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 or entity. 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. You should consider each of the following factors as
well as the other information in this Annual Report in evaluating our business
and our prospects.
RISKS RELATED TO OUR BUSINESSES
IF OUR INDUSTRY DOES NOT BROADLY ADOPT STANDARDS BASED ON CDMA TECHNOLOGY, OR IF
CDMA TECHNOLOGY IS NOT WIDELY DEPLOYED, OUR REVENUES MAY NOT GROW AS ANTICIPATED
OR OUR STOCK PRICE COULD FALL.
We focus our business primarily on developing, patenting and commercializing
CDMA technology for wireless communications applications. If the global wireless
industry adopts standards for wireless communications applications that are not
compatible with our CDMA patent portfolio, our growth may be limited, our
revenues could decline and our stock price could fall. Industry and government
participants of the International Telecommunications Union, or ITU, and regional
standards development organizations are currently considering a variety of
standards that may be utilized in 3G wireless networks. We are advocating the
selection of 3G standards based on CDMA technology. We believe that our CDMA
patent portfolio is applicable to all CDMA systems that may serve as the basis
for such standards. However, we cannot assure you that the wireless industry
will adopt 3G standards based on CDMA technology, or that our CDMA patents will
be determined to be applicable to any proposed 3G standards.
In addition, other digital wireless technologies, particularly GSM,
technology, have been more widely adopted to date than CDMA technology. If CDMA
technology does not become the preferred industry standard in the countries
where our products and those of our customers and licensees are sold, or if
wireless service providers do not select CDMA technology for their networks, our
business and financial results could suffer.
WE MAY ENGAGE IN STRATEGIC TRANSACTIONS THAT COULD RESULT IN SIGNIFICANT CHARGES
OR MANAGEMENT DISRUPTION AND FAIL TO ENHANCE STOCKHOLDER VALUE.
From time to time we consider strategic transactions and alternatives with
the goal of maximizing stockholder value. For example, in July 2000 we announced
the planned spin-off of Spinco, a company comprised primarily of our integrated
circuits and system software solutions business. In addition, in February 2000
we completed the sale of our terrestrial wireless consumer products business to
Kyocera Wireless, in May 1999 we completed the sale of our terrestrial wireless
infrastructure business to Ericsson, and in September 1998 we completed the
spin-off of Leap Wireless International. Over the past year we also acquired
several businesses, entered into multiple joint ventures and made strategic
investments in venture funds, incubators and other companies. We will continue
to evaluate other potential strategic transactions and alternatives that we
believe may enhance stockholder value. These potential future 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 the spin-off of
Spinco or any other such potential strategic transaction will ultimately be
consummated on terms favorable to us or at all. Further, although our goal is
maximize shareholder value, such transactions may impair stockholder value or
otherwise adversely affect our business and 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 harm our results of operation and business
prospects.
OUR INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE, AND WE MUST KEEP PACE
WITH THE CHANGES TO SUCCESSFULLY COMPETE.
The market for our products and technology is characterized by many
factors, including:
- rapid technological advances and evolving industry standards;
- changes in customer requirements;
17
- frequent introductions of new products and enhancements; and
- evolving methods of building and operating communications systems.
Our future success will depend on our ability to continue to develop and
introduce new products, technology and enhancements on a timely basis. Our
future success will also depend on our ability to keep pace with technological
developments, satisfy varying customer requirements, price our products
competitively and achieve market acceptance. The introduction of products
embodying new technologies and the emergence of new industry standards could
render our existing products and technology, and products and technology
currently under development, obsolete and unmarketable. If we fail to anticipate
or respond adequately to technological developments or customer requirements, or
experience any significant delays in development, introduction or shipment of
our products and technology in commercial quantities, our competitive position
could be damaged. In addition, new technological innovations generally require a
substantial investment before they are commercially viable, and we may make
substantial, non-recoverable investments in new technologies that do not result
in meaningful revenues.
WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUE FROM A LIMITED NUMBER OF
CUSTOMERS AND LICENSEES. THE LOSS OF ANY ONE OF OUR MAJOR CUSTOMERS OR LICENSEES
COULD REDUCE OUR REVENUES AND MAY HARM OUR ABILITY TO ACHIEVE OR SUSTAIN
ACCEPTABLE LEVELS OF PROFITABILITY.
CDMA TECHNOLOGIES SEGMENT (QCT)
Sales to Samsung Electronics Ltd., LG Information and Communications, Ltd.,
and Hyundai Electronics Industries Co., Ltd. comprised 39% of QCT revenue in
2000. Accordingly, unless and until we diversify and expand our customer base,
our future success will significantly depend upon the timing and size of future
purchase orders, if any, from these customers and, in particular:
- the product requirements of these customers;
- the financial and operational success of these customers; and
- the success of these customers' products that incorporate our products.
The loss of any one of these customers or other customers or the delay, even
if only temporary, or cancellation of significant orders from any of these
customers would reduce our revenues and may harm our ability to achieve or
sustain acceptable levels of profitability.
TECHNOLOGY LICENSING SEGMENT (QTL)
Because we expect to derive a significant portion of our future revenues
from royalties on shipments by our licensees, our future success depends upon
the ability of our licensees to develop and introduce high volume products that
achieve and sustain market acceptance. We cannot assure you that our licensees
will be successful or that the demand for wireless devices will continue to
increase. In addition, our license fee revenues depend on our ability to gain
additional licensees within existing and new wireless communications markets. A
reduction in the demand for wireless devices, our loss of key existing licensees
or our failure to gain additional licensees could have a material adverse effect
on our business.
WIRELESS SYSTEMS SEGMENT (QWS)
Our sales to Globalstar accounted for 30% of QWS revenue in fiscal 2000. To
remain competitive in the handset business, Globalstar must continually
introduce new products on a timely basis, and it must be able to deliver such
new products in sufficient quantities to meet market demand at an acceptable
price. We cannot assure you that demand for Globalstar products will develop, or
that we will be able to meet any such demand at competitive prices.
Certain of our OmniTRACS, TruckMAIL, OmniExpress and LINQ 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
depend in part on the performance of our suppliers and strategic partners to
provide products and services for the various systems that are the subject of
the guarantees. Thus, timely delivery of such products and services 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 reduce our product margins and harm our results of operations.
18
WE DEPEND UPON A LIMITED NUMBER OF THIRD PARTY MANUFACTURERS TO PRODUCE AND TEST
OUR PRODUCTS. ANY DISRUPTIONS IN THE OPERATIONS OF, OR THE LOSS OF, ANY OF THESE
THIRD PARTIES COULD HARM OUR ABILITY TO MEET OUR DELIVERY OBLIGATIONS TO OUR
CUSTOMERS AND INCREASE OUR COST OF SALES.
CDMA TECHNOLOGIES SEGMENT (QCT)
We subcontract all of our manufacturing and assembly, and most of the
testing, of our integrated circuits. We depend upon a limited number of third
parties to perform these functions, some of which are only available from single
sources with which we do not have long-term contracts. For example, during 1999
and 2000, IBM, Motorola, Taiwan Semiconductor Manufacturing Co. and Texas
Instruments were the primary manufacturer of our family of integrated circuits.
Our reliance on a sole-source vendor primarily occurs during the start-up phase
of a new product. Once a new product reaches a significant volume level, we then
establish alternative suppliers for technologies that we consider critical. Our
reliance on sole or limited-source vendors involves risks. These risks include
possible shortages of capacity, product performance shortfalls, and reduced
controls over delivery schedules, manufacturing capability, quality assurance,
quantity and costs. We have no firm long-term commitments from our manufacturers
to supply products to us for any specific period, or in any specific quantity,
except as may be provided in a particular purchase order. As a result, these
manufacturers may allocate, and in the past have allocated, capacity to the
production of other products while reducing deliveries to us on short notice.
Our operations also may be harmed by lengthy or recurring disruptions at any
of the facilities of our manufacturers. These disruptions may include labor
strikes, work stoppages, fire, earthquake, flooding or other natural disasters.
These disruptions could cause significant delays in shipments until we are able
to shift the products from an affected manufacturer to another manufacturer. The
loss of a significant third party manufacturer or the inability of a third party
manufacturer to meet performance and quality specifications or delivery
schedules could harm our ability to meet our delivery obligations to our
customers.
In addition, one or more of our manufacturers may obtain licenses from us to
manufacture CDMA integrated circuits that compete with our products. In this
event, the manufacturer could elect to allocate scarce components and
manufacturing capacity to its own products and reduce deliveries to us. In the
event of a loss of, or a decision to change, a key third party manufacturer,
qualifying a new manufacturer and commencing volume production or testing could
involve delay and expense, resulting in lost revenues, reduced operating margins
and possible loss of customers.
WIRELESS SYSTEMS SEGMENT (QWS)
Several of the critical products and services used in our existing and
proposed products, including integrated circuits, flash memory chips, radio
frequency components, certain custom and semi-custom very large scale integrated
circuits, other sophisticated electronic parts and major subassemblies used in
the OmniTRACS, TruckMAIL, OmniExpress, and LINQ and Globalstar Systems, are
currently available only from single or limited sources. 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 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.
OUR FINANCIAL CONDITION MAY BE HARMED IF OUR CUSTOMERS DO NOT REPAY FINANCING.
We provide significant financing for CDMA networks. The amount of financing
that we currently are providing and that we expect to provide in the future is
substantial. To the extent this financing is not repaid to us, our results of
operations, liquidity and financial position could be harmed. We cannot assure
you that the borrowers will not default on any financing arranged or provided by
us for the purchase of our products.
Many domestic and international wireless network operators to whom we have
provided 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 borrowers
utilizing our financing may become unable to pay those debts from revenues
generated from their 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 that we finance. These licenses initially may
constitute the primary asset of wireless operators.
19
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 and user terminals
of the Globalstar System. The cost of installing the Globalstar System has been
revised upward from the original estimate, and further increases are possible.
It is possible that the anticipated market for the Globalstar System will not
develop. The Globalstar System is exposed to the risks inherent in a large-scale
complex telecommunications system employing advanced technologies that have
never been integrated into a single system for commercial use. Globalstar may
encounter various problems, delays and expenses, many of which may be beyond its
control, which could impair its ability to reach commercial success.
Globalstar may need to raise additional funds in order to maintain and
sustain the system at planned levels. If the ramp up of service is significantly
delayed, a significant 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.
As of September 24, 2000, we had approximately $618 million in net asset
exposure related to our business with Globalstar, including receivables,
inventory, deferred costs, unearned revenues and investment related assets.
Revenues from Globalstar accounted for approximately 7% of total revenues in
fiscal 2000. 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. Globalstar is a
development stage company and has no operating history. From its inception,
Globalstar has incurred net losses, and Globalstar anticipates that its losses
will increase as the system ramps up. A shortfall in Globalstar meeting its
capital needs could prevent success of the Globalstar System and could adversely
affect our results of operations, liquidity and financial position.
OUR BUSINESS DEPENDS ON THE AVAILABILITY OF SATELLITE AND OTHER NETWORKS FOR OUR
OMNITRACS, TRUCKMAIL, OMNIEXPRESS AND LINQ SYSTEMS AND OTHER COMMUNICATION
PRODUCTS.
Our OmniTRACS and TruckMAIL systems currently operate in the U.S. market on
leased Ku-band satellite transponders. Our data satellite transponder and
position reporting satellite transponder lease runs through October 2006. Based
on system capacity analysis, we believe that the U.S. OmniTRACS and TruckMAIL
operations will not require additional transponder capacity in 2001. We believe
that in the event additional transponder capacity would be required in fiscal
2001 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. A failure to
maintain adequate satellite capacity would harm our business, results of
operations, liquidity and financial position.
As a result of the commercial release of several new products in fiscal
2000, the service for these products will rely on various wireless terrestrial
communication networks operated by third parties. We believe these terrestrial
networks will be available for our products; however, we cannot assure you that
these networks will continue to be available to us or that they will perform
adequately for our needs. The unavailability or nonperformance of these network
systems could harm our business.
In addition, we are dependent upon Aeris.net and its microburst technology,
which uses the control channel on the American Mobile Phone Standard (AMPS)
network, for some terrestrial-based products. Should Aeris.net not maintain
adequate funding to support on-going operations and agreements to provide
nationwide service, our product service could be adversely affected, which could
have a material adverse effect on us.
Our Network Management Center operations are subject to the risk that a
failure or natural disaster could interrupt the services and have a material
adverse effect on our results of operations. For U.S. operations we maintain a
fully operational network Management Center in Las Vegas, Nevada as a backup to
our primary network Management Center in San Diego, California.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE, AND SUCH ADDITIONAL FINANCING MAY
NOT BE AVAILABLE.
The design, development and commercialization of digital wireless
communication technology and products is highly capital intensive. For example,
we must have the ability to fund significant capital for our internal research
and development efforts. In addition, wireless and satellite systems operators
increasingly have required long-term financing or equity. In particular, we have
substantial debt and equity funding commitments to various systems
20
operators. In order to meet our financing needs, 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 OPERATING RESULTS ARE SUBJECT TO SUBSTANTIAL QUARTERLY AND ANNUAL
FLUCTUATIONS AND TO MARKET DOWNTURNS.
Our revenues, earnings and other operating results have fluctuated
significantly in the past and may fluctuate significantly in the future.
Although we have had significant revenues and earnings growth in prior years, we
may not be able to sustain these growth rates. Our future operating results will
depend on many factors, including the following:
- our ability to retain existing or secure anticipated customers,
licensees or orders;
- decreases in average selling prices of our products;
- the availability and cost of products and services from our third
party suppliers;
- our ability to develop, introduce and market new technology, products
and services on a timely basis;
- changes in the mix of technology and products developed, licensed,
produced and sold;
- product defects;
- intellectual property disputes;
- seasonal customer demand;
- the general conditions of our industry, including cyclical downturns;
and
- the rate of adoption and acceptance of new industry standards in our
target markets.
General economic or other conditions causing a downturn in the market for
our products or technology, affecting the timing of customer orders or causing
cancellations or rescheduling of orders could also adversely affect our
operating results. Moreover, our customers may change delivery schedules or
cancel or reduce orders without incurring significant penalties and generally
are not subject to minimum purchase requirements.
The foregoing factors are difficult to forecast and these, as well as other
factors, could harm our quarterly or annual operating results. If our operating
results fail to meet the expectations of investment analysts or investors in any
period, the market price of our common stock may decline.
OUR BUSINESS AND RESULTS OF OPERATIONS WILL BE HARMED IF WE ARE UNABLE TO MANAGE
GROWTH IN OUR BUSINESS.
Since 1996, our businesses have experienced periods of rapid growth that
have placed, and are expected to continue to place, significant demands on our
managerial, operational and financial resources. In order to manage this growth,
we must continue to improve and expand our management, operational and financial
systems and controls, including quality control and delivery and service
capabilities. We also need to continue to expand, train and manage our employee
base. We must carefully manage research and development capabilities and
production and inventory levels to meet product demand, new product
introductions and product and technology transitions. We cannot assure you that
we will be able to timely and effectively meet that demand and maintain the
quality standards required by our existing and potential customers and
licensees.
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. If we ineffectively manage our growth or are unsuccessful
in recruiting and retaining personnel, our business and results of operations
will be harmed.
WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUES FROM SALES OUTSIDE THE UNITED
STATES, AND OUR INTERNATIONAL BUSINESS ACTIVITY SUBJECT US TO RISKS THAT COULD
REDUCE THE DEMAND FOR OUR PRODUCTS OR THOSE OF OUR LICENSEES AND INCREASE OUR
OPERATING EXPENSES.
A significant part of our strategy involves our continued pursuit of growth
opportunities in a number of international markets. Our revenues from
international customers as a percentage of total revenues were 34% in
21
fiscal 1998, 38% in fiscal 1999 and 47% in fiscal 2000. In many international
markets, barriers to entry are created by long-standing relationships between
our potential customers and their local providers and protective regulations,
including local content and service requirements. In addition, our pursuit of
international growth opportunities may require significant investments for an
extended period before we realize returns, if any, on our investments. Our
business could be adversely affected by:
- unexpected changes in legal or regulatory requirements;
- cultural differences in the conduct of business;
- difficulty in attracting qualified personnel;
- longer payment cycles for and greater difficulties collecting accounts
receivable;
- export controls, tariffs and other barriers;
- fluctuations in currency exchange rates;
- nationalization, expropriation and limitations on repatriation of cash;
- social, economic, banking and political risks;
- taxation; and
- changes in U.S. laws and policies affecting trade, foreign investment
and loans.
In addition to the general risks associated with our international sales,
licensing activities and operations, we are also subject to risks specific to
the individual countries in which our customers, our licensees, and we do
business. During fiscal 2000, 22% of our revenue was from customers and
licensees based in South Korea. A significant downturn in the economies of Asian
countries where our customers and licensees are located, particularly South
Korea's economy, would materially harm our business. We also are subject to
risks in certain markets in which our customers and licensees grant subsidies on
handsets to their subscribers. For example, in South Korea the government
recently limited the ability of handset manufacturers to provide subsidies on
handsets to its subscribers and this, in turn, reduced our revenues from those
sources. Further limitations on the ability of handset manufacturers to sell
their products in South Korea or in other countries may have additional negative
impacts on our revenues.
FOREIGN CURRENCY FLUCTUATIONS COULD NEGATIVELY AFFECT FUTURE PRODUCT SALES AND
HARM OUR ABILITY TO COLLECT RECEIVABLES.
We are exposed to risk from fluctuations in foreign currencies that could
impact our results of operations, liquidity and financial condition. Financial
instruments held by our consolidated subsidiaries and other companies in which
we invest that 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. Declines in currency values in selected regions may
adversely affect our results of operations because our products and those of our
customers and licensees may become more expensive to purchase in the countries
of the affected currencies. Our trade receivables are generally dollar
denominated. Accordingly, any significant change in the value of the dollar
against our customers' or licensees' functional currencies could result in an
increase in our customers' or licensees' cash flow requirements and could
consequently affect our ability to collect receivables. Our exposure to emerging
market currencies may increase as we expand into those markets.
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 licensees 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.
22
WE ARE SUBJECT TO INTENSE COMPETITION THAT COULD RESULT IN DECLINING AVERAGE
SELLING PRICES FOR OUR PRODUCTS AND DECREASE OUR CURRENT MARKET SHARE.
We currently face significant competition in our markets and expect that
intense competition will continue. Our ability to compete will be based on
numerous factors, including:
- comprehensiveness of product and technology solutions;
- product performance and quality;
- design and engineering capabilities;
- compliance with industry standards;
- time to market;
- system cost; and
- customer support.
This competition has resulted and is expected to continue to result in
declining average royalties for our licensed intellectual property and reduced
average selling prices for our products and those of our customers and
licensees. We anticipate that additional competitors will enter our markets as a
result of growth opportunities in wireless telecommunications, the trend toward
global expansion by foreign and domestic competitors, technological and public
policy changes and relatively low barriers to entry in selected segments of the
industry.
Our competitors include companies that promote non-CDMA technologies and
companies that design CDMA integrated circuits, such as Ericsson, Intel, LSI
Logic, Lucent, Motorola, Nokia, Nortel, Philips, Samsung and Siemens, all of who
are our licensees. With respect to our OmniTRACS, TruckMAIL, OmniExpress, and
LINQ products and services, our existing competitors are aggressively pricing
their products and services and could continue to do so in the future. In
addition, these competitors are offering new value-added products and services
similar in many cases to those we have developed or are developing. Emergence of
new competitors, particularly those offering low cost terrestrial-based products
and current as well as future satellite-based systems, may impact margins and
intensify competition in new markets.
Many of these current and potential competitors have advantages over us,
including:
- existing royalty-free cross-licenses to competing and emerging
technologies;
- longer operating histories and presence in key markets;
- greater name recognition;
- access to larger customer bases; and
- greater financial, sales and marketing, manufacturing, distribution,
technical and other resources than we have.
As a result of these factors, these competitors may be more successful than
us. In addition, we anticipate additional competitors to enter the market for
products based on 3G standards. These competitors may have more established
relationships and distribution channels in markets not currently deploying
wireless technology. These competitors also have established or may establish
financial or strategic relationships among themselves or with our existing or
potential customers, resellers or other third parties. These relationships may
affect customers' decisions to purchase products or license technology from us.
Accordingly, new competitors or alliances among competitors could emerge and
rapidly acquire significant market share to our detriment.
THE ENFORCEMENT AND PROTECTION OF OUR INTELLECTUAL PROPERTY RIGHTS MAY BE
EXPENSIVE AND COULD DIVERT VALUABLE COMPANY RESOURCES.
We rely primarily on patent, copyright, trademark and trade secret laws, as
well as nondisclosure and confidentiality agreements and other methods, to
protect our proprietary information, technologies and processes, including our
patent portfolio. Policing unauthorized use of our products and technologies is
difficult, and we cannot be certain that the steps we have taken will prevent
the misappropriation or unauthorized use of our proprietary information and
technologies, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as U.S. laws. On September 16, 2000, in Irvine,
California, a laptop computer containing
23
confidential and proprietary information was stolen from Dr. Irwin M. Jacobs,
our Chairman of the Board and Chief Executive Officer. Law enforcement agencies
are investigating the theft. However, we cannot assure you that the
confidential and proprietary information contained on the laptop computer will
not be misused.
The vast majority of our patents and patent applications relate to our CDMA
digital wireless technology and much of the remainder of our patents and patent
applications relate to our OmniTRACS, Globalstar and Eudora products. Litigation
may be required to enforce our intellectual property rights, protect our trade
secrets or determine the validity and scope of proprietary rights of others. As
a result of any such litigation, we could lose our proprietary rights or incur
substantial unexpected operating costs. Any action we take to protect our
intellectual property rights could be costly and could absorb significant
management time and attention, which, in turn, could negatively impact our
results of operations. In addition, failure to protect our trademark rights
could impair our brand identity.
CLAIMS BY THIRD PARTIES THAT WE INFRINGE THEIR INTELLECTUAL PROPERTY OR THAT
PATENTS ON WHICH WE RELY ARE INVALID COULD ADVERSELY AFFECT OUR BUSINESS.
From time to time, companies may assert patent, copyright and other
intellectual proprietary rights to technologies owned by us or used in our
industry generally. These claims may result in our involvement in litigation. We
may not prevail in such litigation given the complex technical issues and
inherent uncertainties in intellectual property litigation. If any products
incorporating our technology were found to infringe on protected technology, we
could be required to redesign or license such technology and/or pay damages or
other compensation to the infringed party. If we were unable to license
protected technology used in our products, we could be prohibited from making
and selling such products.
In addition, as the number of competitors in our market increases and the
functionality of products incorporating our technology is enhanced and overlaps
with the products of other companies, we may become subject to claims of
infringement or misappropriation of the intellectual property rights of others.
Any claims, with or without merit, could be time consuming, result in costly
litigation, divert the efforts of our technical and management personnel or
cause product shipment delays, any of which could have a material adverse effect
upon our operating results. In any potential dispute involving our patents or
other intellectual property, our licensees could also become the targets of
litigation. This could trigger obligations on us that could result in
substantial expenses. In addition to the time and expense required for us to
comply with our obligations to our licensees, any such litigation could severely
disrupt the business of our licensees, which in turn could hurt our relations
with our licensees and cause our revenues to decrease.
A number of third parties have claimed to own patents essential to various
proposed 3G CDMA standards. If we 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 products and
technologies and our profitability.
Third parties also may commence actions seeking to establish the invalidity
of our patents. In the event that a third party challenges a patent, a court may
invalidate the patent or determine that the patent is not enforceable, which
would harm our competitive position. If any of our key patents are invalidated,
or if the scope of the claims in any of these patents is limited by court
decision, we could be prevented from licensing the invalidated or limited
portion of our technology and our licensees may be prevented from manufacturing
and selling the products that incorporate such technology without obtaining a
license to use a third party's technology. Even if a third party challenge is
not successful, it could be expensive and time consuming, divert management
attention from our business and harm our reputation.
GOVERNMENT REGULATION MAY ADVERSELY AFFECT OUR BUSINESS.
Our products and those of our customers and licensees are subject to various
Federal Communications Commission regulations in the U.S. and other
international regulations. These regulations require that these products meet
certain radio frequency emission standards, not cause unallowable interference
to other services, and in some cases accept interference from other services. We
are also subject to government regulations and requirements of local 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,
24
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.
DEFECTS IN COMPONENTS, MATERIALS OR SOFTWARE USED IN OUR PRODUCTS COULD HARM OUR
ABILITY TO SUPPLY OUR PRODUCTS ON A TIMELY BASIS. SIMILAR PROBLEMS RELATED TO
THE PRODUCTS OF OUR CUSTOMERS OR LICENSEES WOULD HARM OUR BUSINESS.
Defects or impurities in the components, materials or software used by us or
our customers or licensees, equipment failures or other difficulties could
adversely affect our ability and that of our customers and licensees to ship
products on a timely basis as well as our customers' or licensees' demand for
our products, which, in turn, would reduce our revenues and may harm our ability
to achieve or sustain acceptable levels of profitability. We and our customers
or licensees also may experience component or software 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
the capacity of our third party manufacturers or those of our customers or
licensees.
IF WE EXPERIENCE PRODUCT LIABILITY CLAIMS OR RECALLS, WE MAY INCUR SIGNIFICANT
EXPENSES AND EXPERIENCE DECREASED DEMAND FOR OUR PRODUCTS.
Testing, manufacturing, marketing and use of our products and those of our
licensees and customers entails the risk of product liability. Although we
believe our product liability insurance will be 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. Any inability by us to
maintain insurance at an acceptable cost or to otherwise protect against
potential product liability claims could prevent or inhibit the
commercialization of our products and those of our licensees and customers and
harm our future operating results. In addition, a product liability claim or
recall could harm our reputation and result in decreased demand for our
products.
IF WIRELESS HANDSETS POSE HEALTH AND SAFETY RISKS, WE MAY BE SUBJECT TO NEW
REGULATIONS, AND DEMAND FOR OUR PRODUCTS AND THOSE OF OUR LICENSEES AND
CUSTOMERS MAY DECREASE.
Media reports have suggested that radio frequency emissions from wireless
handsets may be linked to various health concerns, including cancer, and may
interfere with various electronic medical devices, including hearing aids and
pacemakers. Concerns over radio frequency emissions may have the effect of
discouraging the use of wireless handsets, which would decrease demand for our
products and those of our licensees and customers. In recent years, the FCC and
foreign regulatory agencies have updated the guidelines and methods they use for
evaluating radio frequency emissions from radio equipment, including wireless
handsets. In addition, interest groups have requested that the FCC investigate
claims that wireless technologies pose health concerns and cause interference
with airbags, hearing aids and medical devices. There also are some safety risks
associated with the use of wireless handsets while driving. Concerns over these
safety risks and the effect of any legislation that may be adopted in response
to these risks could reduce demand for our products and those of our licensees
and customers in the U.S. as well as foreign countries.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL NECESSARY FOR THE
DESIGN, DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS AND TECHNOLOGY.
Our future success depends largely upon the continued service of our
executive officers and other key management and technical personnel. Our success
also depends on our ability to continue to attract, retain and motivate
qualified personnel. Our key technical personnel represent a significant asset,
as the source of our technological and product innovations upon which our
revenues are highly dependent. The competition for these personnel is intense in
the wireless telecommunications industry.
We may have particular difficulty attracting and retaining key personnel in
periods of poor operating performance given the significant use of incentive
compensation both by our competitors and us. In addition, Spinco's separation
from our company may result in significant disruption of personnel and may
result in higher than normal turnover rates, including key managerial
departures. The loss of one or more of our key employees or our inability to
attract, retain and motivate qualified personnel could negatively impact our
ability to design, develop
25
and commercialize our products and technology. We do not have employment
agreements with our key management personnel and do not maintain key person
life insurance on any of our personnel.
OUR STOCKHOLDER 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
bylaws, stockholders are not permitted to call special meetings of our
stockholders. 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. 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 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:
- 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 the roll-out of those systems;
- receipt of substantial orders for integrated circuits and system
software products;
- quality deficiencies in services or products;
- announcements regarding financial developments or technological
innovations;
- international developments, such as technology mandates, political
developments or changes in economic policies;
- 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.
26
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION THAT COULD RESULT IN
SUBSTANTIAL COSTS AND DIVERT MANAGEMENT'S ATTENTION AND RESOURCES.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. Due to the volatility of our stock price, we may be the target of
securities litigation in the future. Securities litigation could result in
substantial costs and divert management's attention and resources.
RISKS RELATED TO SPINCO'S SEPARATION FROM OUR COMPANY
Following Spinco's separation from us we may face additional risks that we do
not currently face as a single company. Upon Spinco's separation from us you
should consider these risks in addition to those other risks described above.
IF WE DO NOT COMPLETE OUR DISTRIBUTION OF SPINCO'S COMMON STOCK, SPINCO AND WE
MAY NOT OBTAIN THE BENEFITS EXPECTED FROM THE SPIN-OFF TRANSACTION.
We currently anticipate that we will complete our divestiture of Spinco
during fiscal 2001 by distributing all of the Spinco common stock that we own to
our stockholders. However, we are not obligated to do so, and it is possible
that we may decide not to complete this distribution by that time or at all.
Completion of the distribution is subject to, among other things, approval by
our board of directors and market conditions. As a result, we and Spinco may not
obtain the benefits expected as a result of the spin-off transaction, including
greater strategic focus, elimination of potential conflicts with customers and
better incentives for employees. In addition, until this distribution occurs,
the risks discussed below relating to our control of Spinco and the potential
conflicts of interest between us and Spinco will continue to be relevant.
WE AND SPINCO MAY HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST WITH RESPECT TO
OUR PAST AND ONGOING RELATIONSHIPS THAT COULD HARM OUR BUSINESS OPERATIONS OR
THOSE OF SPINCO.
Conflicts of interest may arise between us and Spinco in a number of areas
relating to our past and on-going relationships. There can be no guarantee that
all conflicts will be resolved in a manner that is favorable to us or Spinco or
that conflicts will not result in harmful consequences to our business or
prospects or those of Spinco. Even if we do resolve any conflicts, the
resolution may be less favorable than if we were dealing with an unaffiliated
party. Furthermore, the agreements we will enter into with Spinco may be amended
upon agreement between the parties. While Spinco is controlled by us, we may be
able to require Spinco to agree to amendments to these agreements that may be
less favorable to Spinco than the current terms of the agreement.
THE DIRECTORS, EXECUTIVE OFFICERS AND EMPLOYEES OF OUR COMPANY AND SPINCO MAY
HAVE CONFLICTS OF INTEREST BECAUSE OF THEIR POSITIONS WITH BOTH COMPANIES AND
THEIR OWNERSHIP OF BOTH COMPANIES' COMMON STOCK.
Many of the directors, executive officers and employees of our company and
Spinco have a substantial amount of their personal financial portfolios in our
common stock and options to purchase our common stock, and after our
distribution of Spinco common stock these individuals will have similar
ownership interests in Spinco. Ownership of common stock and options to purchase
common stock of both companies by these directors, officers and employees could
create, or appear to create, potential conflicts of interest when these
directors, officers and employees are faced with decisions that could have
different implications for us and Spinco. In addition, Dr. Irwin M. Jacobs will
serve as Chairman of the Board of both companies, which also could create, or
appear to create, conflicts of interest.
Spinco's financial results will be included in our consolidated financial
statements prior to our distribution of Spinco's common stock to our
stockholders. The directors, officers and employees who will hold positions with
both companies, and who may be holders of both companies' common stock or
options to purchase both companies' common stock, may therefore consider not
only the short-term and long-term impact of financial and operating decisions on
Spinco, but also the impact of these decisions on our consolidated financial
results and our stockholders. In some instances, the impact of these decisions
could be disadvantageous to Spinco while advantageous to us, or vice versa.
27
SPINCO'S CLOSE RELATIONSHIP WITH US COULD LIMIT SPINCO'S POTENTIAL TO DO
BUSINESS WITH OUR COMPETITORS, AND VICE VERSA.
We expect that Spinco will have a variety of contractual relationships with
us. Whether or not we complete our distribution of Spinco's common stock,
Spinco's close relationship with us will continue for a significant period of
time. It cannot be predicted whether our existing and potential customers or
those of Spinco will be deterred from purchasing products or using services from
Spinco or us, respectively, by the existence of these relationships or the
historical ties between us and Spinco. If they are deterred, our business could
be harmed and Spinco's future growth could be hindered.
RISKS RELATED PRIMARILY TO SPINCO'S BUSINESS
The Company's integrated circuit and system software solutions business,
that will primarily comprise Spinco, may be exposed to certain specific risks
that relate to its particular line of business. For a description of those risks
relating primarily to Spinco's business and other risks that it may be more
likely to experience as a separate company, see those risk factors included as
Exhibit 99.1.
ITEM 2. PROPERTIES
At September 24, 2000, QUALCOMM occupied the indicated square footage in the
owned or leased facilities described below:
NUMBER TOTAL
OF SQUARE
BUILDINGS LOCATION STATUS FOOTAGE PRIMARY USE
- ----------- -------------------- -------- ----------- ----------------------------------------------------
11 United States Owned 1,214,069 Executive and administrative offices, manufacturing,
research and development, sales and marketing,
service functions, and network management hub.
30 United States Leased 738,315 Administrative offices, research and development,
sales and marketing, service functions, and network
management hub.
4 Japan Leased 17,771 Administrative offices and sales and marketing.
1 Israel Leased 53,262 Administrative offices and research and development.
2 Netherlands Leased 14,177 Administrative offices, research and development
and sales and marketing.
2 England Leased 12,905 Administrative offices, sales and marketing and
research and development.
9 Other International Leased 32,500 Administrative offices and sales and marketing.
-----------
TOTAL SQUARE FOOTAGE 2,082,999
===========
In addition to the facilities above, QUALCOMM also owns or leases an
additional 1,410,360 square feet of properties that are leased or subleased to
third parties.
QUALCOMM's leases expire at varying dates through 2007 not including
renewals that would be at the option of QUALCOMM. QUALCOMM believes that its
existing facilities are suitable and adequate for its present purposes, and that
the productive capacity in such facilities is substantially being utilized. In
the future, QUALCOMM may need to purchase, build or lease additional facilities
to meet the requirements projected in its long-term business plan.
ITEM 3. LEGAL PROCEEDINGS
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
28
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, post-
hearing briefs have been filed, and the parties have submitted oral argument.
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 (JDA) dated April 30, 1992, between ETRI and
the Company. In the Request, ETRI alleged that the Company breached certain
provisions of the JDA and sought 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. The arbitration hearing has concluded, and all argument has
been submitted to the arbitral panel. A decision is pending. 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 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 whom, 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 filed a Second Amended Complaint,
including substantially the same allegations as the First Amended Complaint, on
November 1, 1999. On March 10, 2000, counsel for plaintiffs and QUALCOMM filed a
Stipulation of Settlement with the court that would allocate a settlement
payment of $9 million, which will be funded by third parties, to all plaintiffs
who do not elect to opt out of the settlement on or before April 17, 2000. The
number of employees electing to opt out exceeded the limit, and the Company
elected to void the settlement. On September 15, 2000, the Court certified the
case as a class action. 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
U.S. 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 U.S. District Court for the Southern District of California. Trial
is scheduled to commence in this case on February 27, 2001. 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.
29
QUALCOMM and Ericsson are currently participating in an arbitration in which
Ericsson is disputing the determination of the purchase price under the asset
purchase 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 subject asset purchase agreement. QUALCOMM and
Ericsson are having on-going discussions aimed at potentially resolving these
claims. In the event the parties are unable to otherwise resolve these claims,
the pending arbitration with respect to the purchase price determination shall
continue to proceed forward and Ericsson's claims for indemnification will be
subject to resolution pursuant to the dispute resolution procedures set forth in
the asset purchase 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.
On February 2, 2000, Thomas Durante, James Curley, Curtis Parker and
Joseph Edwards, filed a putative class action against the Company, ostensibly
on behalf of themselves and those former employees of the Company whose
employment was terminated in April 1999. Virtually all of the purported class
of plaintiffs received severance packages at the time of the termination of
their employment, in exchange for a release of claims, other than federal age
discrimination claims, against the Company. The complaint was filed in
California Superior Court in and for the County of Los Angeles and purports
to state ten causes of action including breach of contract, age
discrimination, violation of Labor Code Section 200, violation of Labor Code
Section 970, unfair business practices, intentional infliction of emotional
distress, unjust enrichment, breach of the covenant of good faith and fair
dealing, declaratory relief and undue influence. The complaint seeks an order
accelerating all unvested stock options for the members of the class. On June
27, 2000, the case was ordered transferred from Los Angeles County Superior
Court to San Diego County Superior Court. On July 3, 2000, the Company
removed the case 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 claims are without merit and will vigorously defend the
action.
On June 13, 2000, Van May, Ruth Ann Feldman, Jeffrey Alan MacGuire and
Maurice Clark filed a putative class action lawsuit in San Diego County
Superior Court against the Company and against QUALCOMM Personal Electronics
(QPE), ostensibly on behalf of themselves and other former employees of QPE
who were offered benefits in QPE's Performance Unit Plan. The complaint
purports to state seven causes of action, including breach of contract,
violation of California Labor Code Section 970, fraud, unfair business
practices, unjust enrichment, breach of the covenant of good faith and fair
dealing and declaratory relief. 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.
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 24, 2000.
30
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY 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 7.50 4.72
Second Quarter 14.99 6.33
Third Quarter 34.38 13.56
Fourth Quarter 49.75 31.28
FISCAL 2000
First Quarter 130.53 45.33
Second Quarter 200.00 105.63
Third Quarter 162.56 59.98
Fourth Quarter 78.75 51.50
As of October 31, 2000, there were 9,793 holders of record of the Common
Stock. On October 31, 2000, the last sale price reported on the Nasdaq National
Market for the Common Stock was $65.11 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.
On November 2, 1999, the Company's Board of Directors declared 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 stock
was distributed on December 30, 1999 to stockholders of record on December 20,
1999.
All references to per share amounts have been restated to reflect each of
these stock splits.
31
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following balance sheet data and statements of income for the five
years ended September 30, 2000 has been derived from the Company's audited
consolidated financial statements. Consolidated balance sheets at September
30, 2000 and 1999 and the related consolidated statements of income and of
cash flows for each of the three years in the period ended September 30, 2000
and notes thereto appear elsewhere herein. The data should be read in
conjunction with the annual consolidated financial statements, related notes
and other financial information appearing elsewhere herein.
YEARS ENDED SEPTEMBER 30 (1)
-------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------- ------------ ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Revenues $ 3,196,780 $ 3,937,299 $ 3,347,870 $ 2,096,365 $ 813,850
------------ ------------ ------------ ------------ ----------
Operating expenses:
Cost of revenues 1,507,122 2,485,072 2,333,399 1,518,006 535,861
Research and development 340,407 381,139 349,483 235,922 162,340
Selling, general and administrative 342,940 425,118 409,291 235,816 123,085
Amortization of goodwill and other
acquisition-related intangible assets 145,643 823 1,056 372 -
Purchased in-process technology 60,030 - 6,976 - -
Other(2) 78,000 240,007 5,000 8,792 -
------------ ------------ ------------ ------------ ----------
Total operating expenses 2,474,142 3,532,159 3,105,205 1,998,908 821,286
------------ ------------ ------------ ------------ ----------
Operating income (loss) 722,638 405,140 242,665 97,457 (7,436)
Interest expense (4,923) (14,698) (8,058) (11,012) (3,354)
Investment income (expense), net 494,191 24,576 (46,663) 45,266 37,417
Distributions on Trust Convertible
Preferred Securities of subsidiary trust (13,039) (39,297) (39,270) (23,277) -
Other(3) (2,062) (69,035) - - -
------------ ------------ ------------ ------------ ----------
Income before income taxes 1,196,805 306,686 148,674 108,434 26,627
Income tax expense(4) (526,594) (105,807) (40,142) (16,500) (5,600)
------------ ------------ ------------ ------------ ----------
Net income $ 670,211 $ 200,879 $ 108,532 $ 91,934 $ 21,027
============ ============ ============ ============ ==========
Net earnings per common share(5):
Basic $ 0.93 $ 0.34 $ 0.20 $ 0.17 $ 0.04
Diluted $ 0.85 $ 0.31 $ 0.18 $ 0.16 $ 0.04
Shares used in per share calculations(5):
Basic 717,205 594,714 553,623 538,681 524,460
Diluted 800,121 649,889 591,697 575,097 562,678
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities $ 2,520,914 $ 1,684,926 $ 303,324 $ 808,858 $ 354,281
Working capital 2,257,687 2,101,861 655,611 982,117 425,231
Total assets 6,062,982 4,534,950 2,566,713 2,274,680 1,185,330
Bank lines of credit - 112,000 151,000 110,000 80,700
Company-obligated mandatorily redeemable
Trust Preferred Securities of a subsidiary trust
trust holding debt securities of the Company - 659,555 660,000 660,000 -
Total stockholders' equity $ 5,516,328 $ 2,871,755 $ 957,596 $ 1,024,178 $ 844,913
(1) The Company's fiscal year ends on the last Sunday in September. As a
result, fiscal 1996 includes 53 weeks.
(2) Consists of charges related to the sale of the terrestrial-based CDMA
consumer phone business and employee termination costs in 2000, asset
impairment and other charges related to the sale of the terrestrial CDMA
wireless infrastructure business and restructuring charges in 1999, and
asset impairment charges in 1998 and 1997 (see Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of
Operation").
(3) In 2000, consists of non-operating charges related to amounts advanced
to Metrosvyaz and the release of a contingent liability due to a
settlement. In 1999, consists of financial guarantees on projects which
the Company will no longer pursue as a result of the sale of the
terrestrial CDMA wireless infrastructure business and the write-off of
assets related to an investment in the Ukraine and loans to an investee
of Leap Wireless (see Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operation").
(4) Includes the tax benefit of $22 million in 1997 from a reduction in the
valuation allowance to recognize deferred tax assets.
(5) The Company effected a two-for-one stock split in May 1999 and a
four-for-one stock split in December 1999. All references to number of
shares and per share amounts have been restated to reflect these stock
splits.
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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: potential declines in the rate of
growth in the CDMA subscriber base; risks associated with the scale-up,
acceptance and operations of CDMA systems, including high data rate, now known
as 1xEV (previously HDR), and 3G technology; potential component shortages;
risks associated with strategic opportunities or acquisitions, divestitures and
investments the Company may pursue, including investments in new ventures and
operators, and the proposed spin-off of its integrated circuit and system
software business; risks related to the ability to sustain or improve
operational efficiency and profitability; risks relating to the success of the
Globalstar business; developments in current or future litigation; the ability
to develop and introduce cost effective new products in a timely manner; the
Company's ability to effectively manage growth; the intense competition in the
wireless communications industry; risks associated with the timing and
collection of license fees and royalties; risk associated with international
business activities; and risks related to accounts receivable and finance
receivables, as well as the other risks detailed in this Form 10-K. The
Company's consolidated financial data includes SnapTrack, Inc. and other
consolidated subsidiaries of the Company.
OVERVIEW
QUALCOMM designs, develops, manufactures, and markets digital wireless
communications products and services based on its CDMA technology. The Company
licenses and receives royalty payments on its CDMA technology from major
domestic and international telecommunications suppliers. In addition, the
Company designs, manufactures and distributes products and provides services for
its OmniTRACS system. The Company has contracts with Globalstar to design,
develop and manufacture consumer and ground communications equipment. On July
25, 2000, QUALCOMM announced that it intends to spin-off its integrated circuits
and system software solutions business. In connection with this announcement,
QUALCOMM filed a Current Report on Form 8-K dated July 25, 2000.
Revenues from hardware product sales are recorded upon shipment, or when
risk of loss passes to the customer, if later. Revenue from services is recorded
when earned. Revenue from long-term contracts, including technology development
agreements, is recognized using the percentage-of-completion method, based on
costs incurred to date compared with total estimated costs. Billings on
uncompleted contracts in excess of incurred cost and accrued profits are
classified as unearned revenue. Estimated contract losses are recognized when
determined.
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.
The Company recognizes software license revenue when all of the following
criteria are met: execution of a written agreement; delivery of software; the
license fee is fixed and determinable; collectibility of the proceeds is
assessed as being probable; and vendor-specific objective evidence exists to
allocate the total fee to elements of multiple-element arrangements.
Vendor-specific objective evidence is based on the price charged when an element
is sold separately, or if not yet sold separately, the price established by
authorized management or a substantive renewal rate for post-contract customer
support. Unearned revenue consists primarily of fees related to software
licenses under which the Company has not met delivery requirements or fulfilled
other contractual obligations.
STRATEGIC INVESTMENTS
In July 2000, Ford Motor Company and QUALCOMM announced the creation of a
new company, Wingcast, that will develop and deliver wireless mobility services,
including safety and security, information and communications, and entertainment
and mobile commerce, into cars and trucks. QUALCOMM committed to contribute $125
million to the initial capital of Wingcast, of which $75 million is payable in
cash and $50 million is payable in non-cash consideration. QUALCOMM may be
further committed to fund an additional $75 million in cash upon vehicle
manufacturers committing to enable certain volumes of vehicles to use Wingcast's
services.
33
In March 2000, the Company purchased 42 million Series B Preferred units,
representing an approximate 13% undiluted interest, in Ignition, a venture firm
formed to fund, mentor and build wireless Internet start-up companies. The
Company also received a warrant to purchase four million common units at $0.46
per unit. The Company made capital contributions of $17 million during fiscal
2000 and will be required to provide $25 million in additional equity
contributions over five years.
QUALCOMM also makes strategic investments in marketable equity and debt
securities from time to time. During fiscal 2000, QUALCOMM invested $144 million
in NetZero, Inc., $150 million in Leap Wireless International, Inc., and $196
million in Korea Telecom Freetel. For a discussion of these investments, see
Note 4 to the Consolidated Financial Statements.
In June 2000, the FCC awarded a $125 million Auction Discount Voucher
(ADV) to QUALCOMM to use in any FCC spectrum auction for one or more licenses
over a period of up to three years. Fully transferable, the ADV may be used
in whole or in part by any entity in any auction, including those in which
QUALCOMM is not a participant. The FCC award is in response to a July 1999
U.S. Court of Appeals decision in which the FCC was ordered to designate
QUALCOMM a "pioneer" under the Commission's Pioneer's Preference program, and
grant QUALCOMM spectrum forthwith. The FCC awarded the ADV to QUALCOMM in
lieu of granting spectrum. Two auctions, one in the 700 MHz band and one for
licenses reclaimed from former C-block license holders, have been scheduled
by the FCC over the next several months. The Company is currently exploring
opportunities to participate in these auctions directly or through a
partnership or consortium with other parties or to sell the ADV to a third
party. The Company will record the realized value of the ADV if it is sold.
ACQUISITION
In March 2000, the Company completed the acquisition of all of the
outstanding capital stock of SnapTrack, a developer of wireless position
location technology, in a transaction accounted for as a purchase. The purchase
price was approximately $1 billion, representing the value of QUALCOMM shares
issued to effect the purchase, the value of vested and unvested options and
warrants exchanged at the closing date and estimated transaction costs of $2
million. The preliminary allocation of purchase price, based on the estimated
fair values of the acquired assets and assumed liabilities, reflects acquired
goodwill of $948 million, purchased in-process technology of $60 million and
other intangible assets of $34 million. Tangible assets acquired and liabilities
assumed were not material to the Company's financial statements. The Company
expects to finalize the purchase price allocation within one year and does not
anticipate material adjustments to the preliminary purchase price allocation.
Amounts allocated to goodwill and other intangible assets are amortized on a
straight-line basis over their estimated useful lives of 4 years. The
acquisition has been treated as a non-cash transaction in the statement of cash
flows.
Purchased in-process technology was expensed upon acquisition because
technological feasibility had not been established and no future alternative
uses existed. The fair values for each of the in-process technologies were
determined by estimating the resulting net cash flows from such products after
their completion and commercialization, discounting the net cash flows to
present value, and applying the percentage completion of the projects thereto.
The fair value of in-process technology was determined to be $60 million,
including Multimedia ASIC ($27 million), Server Release 2.0 ($23 million), DSP
Release 2.0 ($8 million) and the pager product ($2 million). Net cash flow
projections were made based on an assessment of customer needs and the expected
pricing and cost structure. Due to the limited operational history of SnapTrack,
its relatively new technologies and lack of operating profit before the
acquisition date, the expense and margin assumptions on which the cash flow
projections were based, differ significantly from the historical performance.
A meaningful comparison between projections and historical performance could not
be made at the date of acquisition.
DSP Release 2.0 is the software solution for position determination to be
implemented on cellular phones. DSP Release 2.0 was expected to be completed in
June 2000, with commercialization and material cash flows beginning in 2001. As
an alternative technology, SnapTrack was also developing Multimedia ASIC, a
standalone hardware solution based on a time domain approach. The Multimedia
ASIC is intended to provide a low cost solution and time-to-market advantage for
SnapTrack's customers. At the date of the acquisition, the project was expected
to be completed and commercialized in September 2000, with material cash flows
beginning in 2001. The pager product was intended to allow the use of a pager
product as a tracking device by providing a position location enabled two-way
paging solution. The project was scheduled for completion in May 2000;
commercialization and material cash
34
flows were expected to begin in 2001. The Server Release 2.0 was being
developed to support cellular phones for position determination. Server Release
2.0 was also designed to support SnapTrack's pager product.
The cost of equity was determined by combining a risk-free rate of return
with an equity risk premium multiplied by a volatility factor that is based on
the performance of common stock prices of similar publicly traded companies.
Employing these data, the discount rate attributable to the business was 19.0%,
which was used for valuing completed technology. The discount rate includes a
factor that takes into account the uncertainty surrounding the successful
development of the purchased in-process technology. Considering the stage of
completion and the technological risks, the risk-adjusted discount rate used in
the discounted cash flow model was 24% for DSP Release 2.0, Multimedia ASIC and
the Server Release 2.0, and 26.5% for the pager product.
All of the in-process technologies mentioned above had their system design
and detailed hardware and software designs completed; testing, software
implementation, integration testing phases had either not started or were
incomplete at the date of acquisition. Stage of completion was estimated by
considering time, cost, and complexity of tasks completed prior to the
acquisition as a percentage of total time, cost and effort required for the
total project to achieve technological feasibility. The concluded completion
percentages were 77% for DSP Release 2.0, 67% for Multimedia ASIC, 67% for
Server Release 2.0, and 47% for the pager product.
An inability to complete the in-process technology within the expected
timeframes could materially impact future revenues and earnings. QUALCOMM began
to benefit from the purchased in-process technology in fiscal 2000 and is
continuously monitoring its development projects. Management believes that the
assumptions used on the valuation of purchased in-process technology reasonably
estimate the future benefits attributable to the purchased in-process
technology. No assurance can be given that actual results will not deviate from
those assumptions in future periods.
GLOBALSTAR
The Company continues to provide services and sell products under a number
of development and production contracts involving the Globalstar System.
Revenues resulting from the agreements with Globalstar for fiscal 2000, 1999 and
1998 were $219 million, $435 million and $373 million, respectively. Because
telephone systems using low-Earth-orbit satellites are a new commercial
technology, demand for Globalstar's service is uncertain. If Globalstar fails to
generate sufficient cash flow from operations through the marketing efforts of
its service providers, it might be unable to fund its operating costs or service
its debt. On June 30, 2000, Globalstar defaulted on a $250 million bank facility
that QUALCOMM partially guaranteed in 1996. As a result of this default,
QUALCOMM's guaranty was called, and QUALCOMM paid $22 million to the subject
banks in full satisfaction of this guaranty. Pursuant to an agreement entered
into in 1996, Globalstar caused QUALCOMM to accept, in satisfaction of
QUALCOMM's subrogation rights, a subordinated promissory note issued by
Globalstar with a principal amount equal to the amount QUALCOMM paid under its
guaranty (the Globalstar Promissory Note). The Globalstar Promissory Note bears
interest at LIBOR plus 3%, and principal and interest are due and payable in
full on June 30, 2003.
In September 2000, Globalstar Telecommunications Limited (GTL) announced an
agreement with Bear Stearns & Co. Inc. under which Bear Stearns will invest,
subject to certain conditions, up to $105 million in GTL common shares. GTL is a
publicly traded company that owns an approximate 40% interest in Globalstar.
Globalstar has drawn down approximately $33 million of this financing.
Additional draws are contingent upon the GTL stock price trading above a price
of $4.50 per share. Globalstar concurrently announced that five of its founding
partners and a sixth partner will provide additional equity financing. Under the
terms of their subscription agreements, QUALCOMM, Loral Space & Communications,
Vodafone, Elsacom, T.E.S.A.M., and ChinaSat agreed to invest $68 million in GTL
common shares. Of this amount, $56 million has been funded to date, including
$12 million from QUALCOMM. GTL will use all proceeds to purchase partnership
interests in Globalstar, which, in turn, will use the proceeds for general
corporate purposes including capital expenditures, operations and interest
payments.
At September 24, 2000, the Company had approximately $618 million in net
asset exposure related to its business with Globalstar, including receivables,
inventory, deferred costs, unearned revenues, and investment-related assets. The
value of QUALCOMM's investment in and future business with Globalstar, as well
as QUALCOMM's ability to collect outstanding receivables from Globalstar,
depends on the success of Globalstar and the Globalstar System.
35
DIVESTITURE
In February 2000, the Company sold its terrestrial-based CDMA wireless
consumer phone business, including its phone inventory, manufacturing equipment
and customer commitments, to Kyocera. Under the agreement with Kyocera, Kyocera
agreed to purchase a majority of its CDMA integrated circuit sets and system
software requirements from QUALCOMM for a period of five years. Kyocera will
continue its existing royalty-bearing CDMA license agreement with QUALCOMM.
QUALCOMM received $242 million, including interest, during fiscal 2000 for the
net assets sold.
As part of the agreement with Kyocera, QUALCOMM formed a new subsidiary that
has a substantial number of employees from QUALCOMM Consumer Products business
to provide services to Kyocera on a cost-plus basis to support Kyocera's phone
business for up to three years. In addition, selected employees of QPE, a 51%
owned consolidated subsidiary of the Company and manufacturer of phones for
QUALCOMM, were transferred to Kyocera. As a condition of the purchase, QPE paid
down and cancelled its two revolving credit agreements.
FISCAL 2000 COMPARED TO FISCAL 1999
Total revenues for fiscal 2000 were $3,197 million compared to $3,937
million for fiscal 1999. The decrease in revenue for fiscal 2000 was
primarily due to a decrease in the terrestrial CDMA wireless consumer phone
product revenue as a result of the sale of this business in February 2000, a
decrease in the wireless infrastructure product revenue related to the sale
of this business in May 1999 and a decrease in average selling prices of
integrated circuits, offset by significant increases in royalty revenues and
in CDMA integrated circuits unit volume. Revenue from one South Korean
customer, Samsung Electronics Company, by the QCT and QTL segments comprised
an aggregate of 11% and 9% of total revenues in fiscal 2000 and fiscal 1999.
Cost of revenues for fiscal 2000 was $1,507 million compared to $2,485
million for fiscal 1999. The decrease in cost of revenues was primarily due
to a decrease in the terrestrial CDMA wireless consumer phone product costs
as a result of the sale of the business in February 2000, a decrease in the
wireless infrastructure product costs related to the sale of this business in
May 1999, and a reduction in the unit cost of integrated circuits, offset by
a significant increase in CDMA integrated circuits unit volume. Cost of
revenues decreased as a percentage of revenues to 47% for fiscal 2000 from
63% for fiscal 1999. This is primarily due to a change in business strategy
resulting in a higher percentage of revenues from high margin integrated
circuits and system software and royalties and lower revenues from lower
gross margin terrestrial CDMA wireless consumer phones and infrastructure
businesses exited in fiscal 2000 and fiscal 1999, respectively. 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 2000, research and development expenses were $340 million or
11% of revenues, compared to $381 million or 10% of revenues for fiscal 1999.
The decrease in research and development expenses was due to a decrease in
terrestrial CDMA wireless consumer phone and infrastructure product research
and development as a result of exiting these businesses, offset by increased
integrated circuit product initiatives and software development efforts and
new 1xEV products.
For fiscal 2000, selling, general and administrative expenses were $343
million or 11% of revenues, compared to $425 million or 11% of revenues for
fiscal 1999. The dollar decrease in selling, general and administrative
expenses from fiscal 1999 was due to a decrease in marketing costs in
terrestrial CDMA wireless consumer phone products as a result of the sale of
the business in February 2000 and a decrease in selling, general and
administrative expenses for terrestrial CDMA wireless infrastructure products
as a result of the sale of this business in May 1999, partially offset by
continued growth in personnel and associated overhead expenses necessary to
support other growing business operations, employer payroll tax on employee
non-qualified stock option exercises and investor relations expenses.
Amortization of goodwill and other acquisition-related intangible assets
increased to $146 million for fiscal 2000 compared to $1 million for fiscal
1999, primarily due to the acquisition of SnapTrack in March 2000.
Purchased in-process technology of $60 million for fiscal 2000 resulted from
the acquisition of SnapTrack. Purchased in-process technology was expensed upon
acquisition because technological feasibility had not been established and no
future alternative uses existed.
36
For fiscal 2000, other operating expenses were $78 million, compared to
$240 million for fiscal 1999. Other operating expenses during fiscal 2000
were comprised primarily of charges to reflect the estimated difference
between the carrying value of the net assets and the consideration received
from Kyocera related to the sale of the terrestrial CDMA wireless consumer
phone business, less costs to sell, and employee termination costs. During
fiscal 1999, the Company recorded $66 million in charges to reflect the
difference between the carrying value of the net assets to be sold to
Ericsson 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, $15 million in restructuring charges
and $74 million in compensation benefits provided to employees transferred to
Ericsson.
Interest expense was $5 million for fiscal 2000, compared to $15 million for
fiscal 1999. The decrease was due to decreased bank borrowings by QPE and the
subsequent payoff and cancellation of the QPE bank lines of credit in February
2000.
Net investment income was $494 million for fiscal 2000 compared to $25
million for fiscal 1999. The increase was primarily due to a $270 million
realized gain on the sale of marketable securities, interest earned on higher
cash balances and interest earned on finance receivables.
Distributions on Trust Convertible Preferred Securities decreased to $13
million for fiscal 2000 compared to $39 million for fiscal 1999 as a result of
conversions of the 5 3/4% Trust Convertible Preferred Securities outstanding
into common stock. During the second quarter of fiscal 2000, all remaining Trust
Convertible Preferred Securities were converted into common stock.
During fiscal 2000, the Company recorded $2 million in net non-operating
other charges, including $6 million in charges relating to amounts advanced to
Metrosvyaz, and the release of a $4 million contingent liability due to a
settlement. During fiscal 1999, the Company recorded $69 million in
non-operating charges, including $37 million related to the Ericsson transaction
and $15 million related to the write-off of non-operating assets.
Income tax expense was $527 million for fiscal 2000 compared to $106
million for fiscal 1999. The annual effective tax rate was 44% for fiscal
2000, compared to 35% for fiscal 1999. The higher tax rate is primarily a
result of nondeductible charges for purchased in-process technology and
amortization of goodwill and higher pre-tax earnings relative to tax
deductions. The Company has provided a valuation allowance on its net
deferred tax assets because of uncertainty regarding their realizability due
to the expectation that deductions from future employee stock option
exercises and related deductions will exceed future taxable income.
FISCAL 1999 COMPARED TO FISCAL 1998
Total revenues for fiscal 1999 were $3,937 million compared to $3,348
million for fiscal 1998. Revenue growth for 1999 was primarily due to increased
sales of CDMA integrated circuits 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 integrated circuits and phone products, was $2,485 million compared to
$2,333 million for fiscal 1998. The increase in cost of revenues 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.
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
increase in research and development expenses was primarily due to new
integrated circuit 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 $425
million or 11% of revenues, compared to $409 million or 12% of revenues for
fiscal 1998. The increase in selling, general and administrative expenses 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.
37
Amortization of goodwill and other acquisition-related intangible assets was
$1 million for each of fiscal 1999 and fiscal 1998.
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.
During fiscal 1999, other operating expenses were $240 million, compared to
$5 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. In fiscal 1998, 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.
38
QUALCOMM SEGMENT RESULTS
CDMA TECHNOLOGIES SEGMENT (QCT)
QCT segment revenues for fiscal 2000 were $1,239 million compared to $1,133
million for fiscal 1999. Earnings before taxes for fiscal 2000 were $392 million
compared to $428 million for fiscal 1999. Revenue growth was primarily due to
increased customer demand for CDMA integrated circuits in the United States,
South Korea, and Japan, offset by a decrease in average selling prices of
integrated circuits. The decrease in earnings before taxes was due to increased
research and development related to integrated circuit product initiatives,
including new 1xEV products, and software development efforts. Approximately 52
million MSM integrated circuits were sold during fiscal 2000, compared to
approximately 39 million for fiscal 1999.
TECHNOLOGY LICENSING SEGMENT (QTL)
QTL segment revenues for fiscal 2000 were $705 million compared to $454
million for fiscal 1999. Earnings before taxes for fiscal 2000 were $633 million
compared to $405 million for fiscal 1999. Growth in revenue and earnings before
taxes was primarily due to additional license fees and royalties received from
licensees resulting from an increase in worldwide demand for CDMA products.
WIRELESS SYSTEMS SEGMENT (QWS)
QWS segment revenues for fiscal 2000 were $721 million compared to $940
million for fiscal 1999. Earnings before taxes for fiscal 2000 were $272 million
compared to $20 million for fiscal 1999. Revenues decreased due to the sale of
certain assets of the Company's terrestrial CDMA wireless infrastructure
business in May 1999 to Ericsson, the completion of the delivery of the
Globalstar gateways and nearing completion of the Globalstar development work,
offset by increased OmniTRACS domestic and international unit demand and
messaging revenue and increased Globalstar phone sales. The Company shipped
approximately 56,000 OmniTRACS and other related communication systems during
fiscal 2000, compared to approximately 49,000 in fiscal 1999. The Company
shipped approximately 28,000 Globalstar portable and fixed phones in fourth
quarter of fiscal 2000, for a cumulative total of approximately 99,000
Globalstar portable and fixed phone units shipped since production began in
September 1999.
Earnings before taxes increased due to the sale of certain assets related to
the Company's terrestrial CDMA wireless infrastructure business in May 1999 to
Ericsson and an increase in interest income and fees on finance receivables.
During fiscal 2000, the Company recognized previously unamortized loan fees in
connection with the pay off and cancellation of certain credit facilities,
including the Leap facility.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that its cash and cash equivalents and marketable
securities balances of $2,521 million at September 24, 2000, including
interest to be earned thereon, will be used to fund its working and other
capital requirements, including investments in other companies and other
assets to support the growth of its business, financing for customers of CDMA
infrastructure products in accordance with the agreement with Ericsson, and
other commitments. 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. On July 25, 2000, QUALCOMM filed a Registration
Statement on Form S-1 related to an initial public offering of shares of
common stock for Spinco. Spinco would add the net proceeds of the offering to
funds available for its working capital and general corporate purposes,
including product development and selling and marketing.
The Company has an unsecured credit facility under which banks are committed
to make up to $400 million in revolving loans to the Company. The facility
expires in March 2001 and 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 facility. The facility includes certain restrictive
financial and operating covenants. At September 24, 2000, there were no amounts
or letters of credit issued or outstanding under the facility.
In fiscal 2000, $812 million in cash was provided by operating
activities, compared to $182 million in cash provided by operating activities
in fiscal 1999. Cash provided by operating activities in fiscal 2000 includes
$1,296 million of net cash flow provided by operations offset by $484 million
of net working capital requirements. The improved cash flow from operations
primarily reflects the increase in net income resulting from improved gross
margins and higher interest income. Net working capital requirements of $484
million primarily reflect increases in
39
finance receivables and decreases in accounts payable and accrued
liabilities, offset by a decrease in accounts receivable. The increase in
finance receivables in fiscal 2000 resulted from the financing of contract
payments under the development agreement with Globalstar and customers of
CDMA infrastructure products in accordance with the agreement with Ericsson,
and the decreases in accounts payable, accrued liabilities and accounts
receivable are primarily attributed to the sale of the terrestrial CDMA
wireless consumer phone business.
In fiscal 2000, $786 million in cash was used by the Company in investing
activities, including $274 million for business acquisitions and investments in
unconsolidated entities, $596 million in net purchases of marketable securities
and $163 million in capital expenditures, offset by $242 million in proceeds
from the sale of the terrestrial-based CDMA wireless consumer phone business.
The Company is increasing its strategic investment activities to promote the
worldwide adoption of CDMA technology products and the growth of CDMA-based
wireless data and CDMA-based wireless Internet products and solutions. The
Company generally enters into strategic transactions with CDMA carriers and
companies that have developed or are developing innovative technologies for the
wireless industry. The Company also provides equipment financing to facilitate
the marketing and sale of CDMA equipment by licensed manufacturers and enters
into joint ventures with strategic partners that are designed to increase
wireless usage and dependence on wireless devices. The Company also makes
investments in entities such as venture funds or incubators focused on the
wireless market. The Company expects to continue making significant investments
in other entities.
In fiscal 2000, the Company's financing activities provided $28 million,
including $144 million from the issuance of common stock under the Company's
stock option and employee stock purchase plans, offset by $112 million in net
repayments under bank lines of credit. In fiscal 1999, the Company's financing
activities provided net cash of $1,270 million, primarily from the sale of
common stock.
At September 30, 2000, commitments to extend long-term financing to CDMA
customers of Ericsson totaled approximately $255 million, which the Company
expects to fund over the next two years. 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 sales.
Commitments represent the estimated amounts to be financed under these
arrangements; actual financing may be in lesser amounts.
The Company intends to provide up to $400 million of financing to entities
deploying CDMA wireless telecommunications networks to enable such entities to
finance the purchase of CDMA infrastructure equipment and associated services.
At September 30, 2000 and 1999, $504 million and $349 million in interest
bearing financed amounts and $36 million and $171 million in accounts
receivable, respectively, were outstanding from Globalstar. In May 2000, the
Company and Globalstar signed definitive agreements to finance current and
future contract payments. The financing bears interest at 6% and is payable in
quarterly installments beginning January 15, 2001 through August 15, 2003. At
September 30, 2000, $18 million in future contract billings, including unbilled
receivables at September 30, 2000, are expected to be eligible for financing
under the financing agreement with Globalstar.
The Company makes strategic investments in companies that have developed or
are developing innovative wireless data applications and wireless carriers that
promote the worldwide deployment of CDMA and 1xEV systems. The Company is
committed to invest $150 million in Ignition and Wingcast over the next five
years. Funding commitments related to other strategic investments total $66
million at September 30, 2000, which the Company expects to fund in fiscal 2001.
Such commitments are subject to the investees meeting certain conditions; actual
equity funding may be in lesser amounts. It is not practicable to estimate the
fair value of these investments as the investments are predominantly closely
held and not publicly traded. 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.
Negotiations are underway whereby QUALCOMM would advance up to $200 million
to fund certain Latin American telecommunications projects. The financing is
expected to be in the form of convertible debt with a 5-year term, bearing
interest at LIBOR ranging from plus 4% to 12% depending on the final terms.
On December 22, 1999 and April 25, 2000, the Company and Pegaso
Telecomunicaciones, S.A. de C.V. (Pegaso), a wireless telecommunications
operating company investee of Leap Wireless, executed commitment
40
letters, in which the Company agreed to underwrite 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 debt facilities are expected to have final maturities
of seven to eight years. The Company currently has approximately $206 million
in interest bearing receivables from Pegaso and has guaranteed a $175 million
bridge facility. The Company is negotiating an amendment to the $175 million
facility to increase the amount available to $300 million and to extend the
term from November 2000 to June 2001. The bridge facility will be prepaid and
cancelled upon funding of either the $250 million senior secured facility or
the $250 million unsecured facility.
In addition to the debt financing commitment to Pegaso, the Company has $6
million of letters of credit and $16 million of other financial guarantees
outstanding as of September 30, 2000, none of which are collateralized.
On October 24, 2000, the Company agreed to invest $200 million in the
convertible preferred shares of Inquam Limited (Inquam). Inquam is a venture
fund formed to acquire, own, develop and manage wireless telecommunication
systems, either directly or indirectly, with the primary intent of deploying
CDMA-based technology. In October 2000, the Company funded $40 million of this
investment and advanced an additional $10 million under a promissory note that
matures on October 31, 2001 and bears interest at 10%. The Company expects to
fund its remaining equity commitment over three years.
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 delayed
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, certain
derivatives must be recognized as assets and liabilities and measured at fair
value. The Company is not currently engaged in hedging activities. The Company
will record certain derivative assets and liabilities at fair value as a result
of the adoption of this standard. Upon adoption, the Company expects to record a
gain on derivative instruments of approximately $217 million as a cumulative
effect of a change in accounting principle. Future gains and losses on these
instruments will be recorded in the income statement.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." In June 2000, the SEC staff amended SAB 101 to provide registrants
with additional time to implement SAB 101. The Company will be required to adopt
SAB 101 by the fourth quarter of fiscal 2001. The Company does not expect the
adoption of SAB 101 to have a material effect on its consolidated financial
position or results of operation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE MARKET RISK. The Company has fixed income securities
consisting of cash equivalents and investments in marketable debt securities.
Investments in marketable debt securities are classified as available-for-sale
and held-to-maturity. 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. (See Note 4 to the Consolidated Financial Statements
for information about investments in marketable debt securities.)
Finance receivables bear interest at both fixed and variable rates (see
Note 5 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 notes receivable from third parties included in other
assets. These facilities bear interest at variable rates. 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 following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. All financial
instruments are held for purposes other than trading. For the Company's fixed
income investment portfolio, finance receivables and credit facilities in other
assets, the table presents principal cash flows and related weighted-average
yield at cost and contractual interest rates for fixed income securities and
41
finance receivables or other credit facilities, respectively, by expected
maturity dates. Additionally, the Company has assumed that its fixed income
securities are similar enough to aggregate those securities for presentation
purposes.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
AVERAGE INTEREST RATE
(DOLLARS IN MILLIONS)
NO SINGLE FAIR
2001 2002 2003 2004 2005 THEREAFTER MATURITY TOTAL VALUE
---- ---- ---- ---- ---- ---------- --------- ----- -----
Fixed income securities $1,206 $ 364 $ 136 $ 15 $ 13 $ - $ 148 $1,882 $1,882
Interest rate 6.6% 7.1% 7.2% 7.5% 7.4% 7.3%
Finance receivables:
Fixed rate $ 106 152 $ 301 $ 1 $ 1 115 $ 675 $ 562
Interest rate 8.4% 9.3% 9.3% 12.0% 12.0% 9.2%
Variable rate (LIBOR) $ 22 - $ 23 $ 110 $ 77 $ 32 $ 264 $ 264
Margin over LIBOR 5.0% 5.0% 5.5% 5.1% 5.6%
Credit facilities in other assets $ 4 - $ 22 $ - $ - $ - $ 26 $ 26
Margin over LIBOR 4.5% 3.0%
EQUITY PRICE RISK. The Company received a warrant in connection with the
Leap Wireless spin-off to purchase Leap Wireless common stock at $6.11 per
share. At September 24, 2000, 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 $250 million, respectively, at September 24, 2000.
The estimated fair value of the warrant is directly correlated to movements in
the price of the Leap Wireless stock. 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 values of available-for-sale securities total $426
million at September 24, 2000. The fair values of these securities are directly
correlated to the market prices of the securities. The available-for-sale
securities are held for purposes other than trading.
The Company's investments in other entities consist substantially of
investments accounted for under the equity and cost methods that are
predominantly closely held and not publicly traded. These investments are held
for purposes other than trading. 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 foreign currency accounting
policies and information about the Company's currency exposure management
practices. 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 24, 2000, 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. At the present time, the Company may hedge
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 may 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 the Company's products may become more expensive to purchase in the
countries of the affected currencies.
42
Finance receivables from the Company's international customers that do not
use the U.S. dollar as their functional currencies subject the Company to credit
risk. Because the Company's financing is 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 24, 2000, finance receivables from international customers totaled
$397 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 AND SUPPLEMENTARY DATA
The Company's consolidated financial statements at September 30, 2000 and
1999 and the Report of PricewaterhouseCoopers LLP, Independent Accountants, are
included in this Annual Report on Form 10-K on pages F-1 through F-28.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item regarding directors is incorporated by
reference to the QUALCOMM Incorporated Definitive Proxy Statement to be filed by
the Company with the Securities and Exchange Commission in connection with the
Annual Meeting of Stockholders to be held in 2001 (the "Proxy Statement") under
the heading "Election of Directors." Information regarding executive officers is
set forth in Item 1 of Part I of this Report under the caption "Executive
Officers."
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."
44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
PAGE
NUMBER
------
(a). Financial Statements:
(1) Report of Independent Accountants........................................................... F-1
Consolidated Balance Sheets at September 30, 2000 and 1999.................................. F-2
Consolidated Statements of Income for Fiscal 2000, 1999, and 1998........................... F-3
Consolidated Statements of Cash Flows for Fiscal 2000, 1999 and 1998........................ F-4
Consolidated Statements of Stockholders' Equity for Fiscal 2000, 1999 and 1998.............. 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.
(b) Reports on Form 8-K: The Company filed one report on Form 8-K during
the last quarter of the period covered by this report, as follows:
(1) A report on Form 8-K filed on July 25, 2000, reporting under
Item 5 the announcement that the Company is planning to
spin-off its integrated circuit and system software solutions
business via the formation of a new company, QUALCOMM Spinco,
Inc., and the anticipated distribution of shares of Spinco to
QUALCOMM stockholders in the form of a tax-free dividend.
(c) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
2.1 Separation and Distribution Agreement dated as of September
23, 1998, between the Company and Leap Wireless International,
Inc.(17)
2.2 Asset Purchase Agreement dated as of March 24, 1999 between
the Company and Telefonaktiebolaget LM Ericsson. (20)
2.3 Asset Purchase Agreement dated as of December 22, 1999 among
the Company, Kyocera Wireless Corp. and Kyocera International,
Inc. (25)
2.4 Agreement and Plan of Merger and Reorganization dated as of
January 25, 2000 among the Company, Falcon Acquisition
Corporation and SnapTrack, Inc. (27)
3.1 Restated Certificate of Incorporation.(1)
3.2 Certificate of Amendment of Restated Certificate of
Incorporation.(7)(26)
3.3 Certificate of Designation of Preferences.(12)
3.4 Bylaws.(2)
3.5 Amendment of the Bylaws.(14)
4.1 Certificate of Trust of QUALCOMM Financial Trust I, filed with the
Delaware Secretary of State on February 7, 1997.(13)
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.(13)
45
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.(13)
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.(13)
4.5 Form of 5 3/4% Trust Convertible Preferred Securities
(Included in Annex 1 to Exhibit 4.3 above).(13)
4.6 Form of 5 3/4% Convertible Subordinated Debt Securities (Included
in Annex 1 to Exhibit 4.3 above).(13)
4.7 Preferred Securities Guarantee Agreement, dated as of February 25,
1997, between QUALCOMM Incorporated, as Guarantor, and Wilmington
Trust Company, as Guarantee Trustee.(13)
10.1 Form of Indemnity Agreement between the Company, each director
and certain officers.(2)(11)
10.2 1991 Stock Option Plan, as amended.(11)(18)
10.4 Form of Supplemental Stock Option Grant under the 1991 Stock
Option Plan.(2)(11)
10.5 1991 Employee Stock Purchase Plan.(11)(18)
10.6 Form of Employee Stock Purchase Plan Offering under the 1991
Employee Stock Purchase Plan.(2)(11)
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").(11)(12)
10.18 Form of Stock Option Grant under the Directors' Plan, with
related schedule.(6)(11)
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.(11)(25)
10.22 1996 Non-qualified Employee Stock Purchase Plan.(10)(11)
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.(13)
46
EXHIBIT
NUMBER DESCRIPTION
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.(15)(16)
10.26 Warrant dated as of September 23, 1998 issued to the Company
by Leap Wireless International, Inc.(17)
10.27 Credit Agreement dated as of September 23, 1998 between the
Company and Leap Wireless International, Inc.(17)
10.28 Master Agreement Regarding Equipment Procurement dated as of
September 23, 1998 between the Company and Leap Wireless
International, Inc.(17)
10.29 1998 Non-Employee Director's Stock Option Plan.(11)(18)
10.30 Employment Agreement dated May 15, 1997 between the Company
and John E. Major.(11)(19)
10.31 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.(20)
10.32 Multi-Product License Agreement between QUALCOMM Incorporated
and Telefonaktiebolaget LM Ericsson dated March 24, 1999.(20)
10.33 Subscriber Unit License Agreement between QUALCOMM
Incorporated and Telefonaktiebolaget LM Ericsson dated March
24, 1999.(20)
10.34 Settlement Agreement and Mutual Release between QUALCOMM
Incorporated and Telefonaktiebolaget LM Ericsson dated March
24, 1999.(20)
10.35 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.(20)
10.36 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).(21)
10.37 Amendment to Stockholder Rights Plan dated November 15,
1999.(22)
10.38 Credit Agreement dated as of May 5, 2000 between Globalstar,
L.P. and the Company.(23)
21 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney. Reference is made to page 47.
27.0 Financial Data Schedule.
99.1 Additional risk factors relating to the Company's integrated
circuits and system software business.
- ----------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-3
(No. 33-62724).
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 33-42782).
(3) Certain confidential portions deleted pursuant to Order Granting
Application or Confidential Treatment pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934 dated December 12, 1991.
(4) Filed as an 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 the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 26, 1993.
(7) Filed as an exhibit to the 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 Registrant's Current Report on Form 8-K filed on
September 26, 1995.
47
(10) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(File No. 333-2750) filed on March 25, 1996.
(11) Indicates management or compensatory plan or arrangement required to be
identified pursuant to Item 14(c).
(12) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 29, 1996.
(13) Filed as an exhibit to the Registrant's Registration Statement on Form S-3
(No. 333-26069).
(14) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 28, 1997.
(15) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 29, 1998.
(16) 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 14, 1998.
(17) Filed as an exhibit to the Registration Statement on Form 10, as amended,
initially filed on July 1, 1998 by Leap Wireless International, Inc. (File
No. 0-29752).
(18) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(File No. 333-69457) filed on December 22, 1998.
(19) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 27, 1998.
(20) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 28, 1999.
(21) Filed as an exhibit to the Registrant's Current Report on Form 8-K filed on
May 24, 1999.
(22) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 26, 1999.
(23) Filed as an exhibit to the Quarterly Report on Form 10-Q filed by
Globalstar Telecommunications Limited for the quarter ended March 31, 2000.
(24) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 26, 1999.
(25) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 26, 1999.
(26) Filed as an exhibit to the Registrant's Current Report on Form 8-K filed on
December 23, 1999.
(27) Filed as an exhibit to the Registrant's Current Report on Form 8-K filed on
March 11, 2000.
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.
November 3, 2000
QUALCOMM Incorporated
By /s/ Irwin Mark Jacobs
-----------------------
Irwin Mark Jacobs,
CHIEF EXECUTIVE OFFICER AND CHAIRMAN
48
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 3, 2000
- ----------------------------------------------- (Principal Executive Officer)
Irwin Mark Jacobs
/s/ ANTHONY S. THORNLEY Executive Senior Vice President November 3, 2000
- ----------------------------------------------- and Chief Financial Officer
Anthony S. Thornley (Principal Financial and Accounting Officer)
/s/ RICHARD C. ATKINSON Director November 3, 2000
- -----------------------------------------------
Richard C. Atkinson
/s/ ADELIA A. COFFMAN Director November 3, 2000
- -----------------------------------------------
Adelia A. Coffman
/s/ DIANA LADY DOUGAN Director November 3, 2000
- -----------------------------------------------
Diana Lady Dougan
/s/ NEIL KADISHA Director November 3, 2000
- -----------------------------------------------
Neil Kadisha
/s/ ROBERT E. KAHN Director November 3, 2000
- -----------------------------------------------
Robert E. Kahn
/s/ JEROME S. KATZIN Director November 3, 2000
- -----------------------------------------------
Jerome S. Katzin
/s/ DUANE A. NELLES Director November 3, 2000
- -----------------------------------------------
Duane A. Nelles
/s/ PETER M. SACERDOTE Director November 3, 2000
- -----------------------------------------------
Peter M. Sacerdote
/s/ FRANK SAVAGE Director November 3, 2000
- -----------------------------------------------
Frank Savage
/s/ BRENT SCOWCROFT Director November 3, 2000
- -----------------------------------------------
49
SIGNATURE TITLE DATE
--------- ----- ----
Brent Scowcroft
/s/ MARC I. STERN Director November 3, 2000
- -----------------------------------------------
Marc I. Stern
/s/ ANDREW J. VITERBI Director November 3, 2000
- -----------------------------------------------
Andrew J. Viterbi
50
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 45 present fairly, in all material
respects, the financial position of QUALCOMM Incorporated and its
subsidiaries at September 30, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period
ended September 30, 2000 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item
14(a)(2) on page 45 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 auditing standards generally accepted in
the United States of America, 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 our
opinion.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
November 3, 2000
F-1
QUALCOMM INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
SEPTEMBER 30,
-----------------------------------
2000 1999
---------------- ----------------
Current assets:
Cash and cash equivalents $ 716,871 $ 660,016
Marketable securities 1,055,522 954,415
Accounts receivable, net 606,979 883,640
Finance receivables 128,515 26,377
Inventories, net 85,366 257,941
Other current assets 136,727 195,849
---------------- ----------------
Total current assets 2,729,980 2,978,238
Property, plant and equipment, net 431,705 555,991
Marketable securities 748,521 70,495
Finance receivables, net 799,404 548,482
Goodwill, net 821,834 1,833
Other assets 531,538 379,911
---------------- ----------------
Total assets $ 6,062,982 $ 4,534,950
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 112,856 $ 309,701
Payroll and other benefits related liabilities 128,836 148,710
Other current liabilities 162,182 249,896
Unearned revenue 68,419 56,070
Bank lines of credit - 112,000
---------------- ----------------
Total current liabilities 472,293 876,377
Other liabilities 27,718 75,667
---------------- ----------------
Total liabilities 500,011 952,044
---------------- ----------------
Commitments and contingencies (Notes 4, 12 and 15)
Minority interest in consolidated subsidiaries (Note 12) 46,643 51,596
---------------- ----------------
Company-obligated mandatorily redeemable Trust
Convertible Preferred Securities of a subsidiary trust
holding solely debt securities of the Company - 659,555
---------------- ----------------
Stockholders' equity:
Preferred stock, $0.0001 par value; issuable in series;
8,000 shares authorized; none outstanding at
September 30, 2000 and 1999 - -
Common stock, $0.0001 par value; 3,000,000 shares
authorized; 747,651 and 646,363 shares
outstanding at September 30, 2000 and 1999 (Note 9) 75 65
Paid-in capital 4,653,818 2,587,899
Retained earnings 871,090 200,879
Accumulated other comprehensive (loss) income (8,655) 82,912
---------------- ----------------
Total stockholders' equity 5,516,328 2,871,755
---------------- ----------------
Total liabilities and stockholders' equity $ 6,062,982 $ 4,534,950
================ ================
See accompanying notes.
F-2
QUALCOMM INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED SEPTEMBER 30,
---------------------------------------------------------
2000 1999 1998
----------------- ----------------- -------------------
Revenues $ 3,196,780 $ 3,937,299 $ 3,347,870
----------------- ----------------- -------------------
Operating expenses:
Cost of revenues 1,507,122 2,485,072 2,333,399
Research and development 340,407 381,139 349,483
Selling, general and administrative 342,940 425,118 409,291
Amortization of goodwill and other
acquisition-related intangible assets 145,643 823 1,056
Purchased in-process technology 60,030 - 6,976
Other 78,000 240,007 5,000
----------------- ----------------- -------------------
Total operating expenses 2,474,142 3,532,159 3,105,205
----------------- ----------------- -------------------
Operating income 722,638 405,140 242,665
Interest expense (4,923) (14,698) (8,058)
Investment income (expense), net 494,191 24,576 (46,663)
Distributions on Trust Convertible
Preferred Securities of subsidiary trust (13,039) (39,297) (39,270)
Other (2,062) (69,035) -
----------------- ----------------- -------------------
Income before income taxes 1,196,805 306,686 148,674
Income tax provision (526,594) (105,807) (40,142)
----------------- ----------------- -------------------
Net income $ 670,211 $ 200,879 $ 108,532
================= ================= ===================
Net earnings per common share:
Basic $ 0.93 $ 0.34 $ 0.20
================= ================= ===================
Diluted $ 0.85 $ 0.31 $ 0.18
================= ================= ===================
Shares used in per share calculations:
Basic 717,205 594,714 553,623
================= ================= ===================
Diluted 800,121 649,889 591,697
================= ================= ===================
See accompanying notes.
F-3
QUALCOMM INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------
2000 1999 1998
------------- ----------------- ------------
OPERATING ACTIVITIES:
Net income $ 670,211 $ 200,879 $ 108,532
Depreciation and amortization 243,842 158,429 141,892
Purchased in-process technology 60,030 - 6,976
Restructuring, impairments and other non-cash charges and credits 88,953 269,449 25,000
Gain on sale of available-for-sale securities (270,132) (5,663) -
Minority interest in income of consolidated subsidiaries 6,264 13,066 48,366
Equity in losses of investees 15,117 15,140 20,731
Non-cash income tax provision (benefit) 481,621 (96,595) (55,581)
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net 233,281 (275,846) (166,827)
Finance receivables, net (372,072) (304,546) (232,451)
Inventories, net (68,776) 40,102 (161,380)
Other current assets (21,507) (7,048) (66,603)
Trade accounts payable (164,756) (5,826) 100,706
Accrued liabilities (99,976) 179,633 174,113
Unearned revenue 10,012 (10,495) 22,039
Other liabilities - 11,554 9,820
------------- ----------------- ------------
Net cash provided (used) by operating activities 812,112 182,233 (24,667)
------------- ----------------- ------------
INVESTING ACTIVITIES:
Capital expenditures (163,182) (180,237) (321,566)
Purchases of available-for-sale securities (993,512) - -
Proceeds from sale of available-for-sale securities 571,492 7,163 -
Purchases of held-to-maturity investments (1,392,310) (858,108) (269,833)
Maturities of held-to-maturity investments 1,218,189 150,873 702,376
Issuance of notes receivable (229,916) (171,982) (124,765)
Collection of notes receivable 229,654 45,754 -
Proceeds from sale of businesses 246,990 98,097 -
Business acquisitions and investments in other entities (273,668) (43,568) (117,217)
Other items, net 281 (3,350) (2,995)
------------- ----------------- ------------
Net cash used by investing activities (785,982) (955,358) (134,000)
------------- ----------------- ------------
FINANCING ACTIVITIES:
Net reduction in borrowings under bank lines of credit (112,000) (39,000) 41,000
Net proceeds from issuance of common stock 143,768 1,311,925 51,556
Spin-off of Leap Wireless International, Inc. - - (10,000)
Other items, net (4,148) (2,621) 3,120
------------- ----------------- ------------
Net cash provided by financing activities 27,620 1,270,304 85,676
------------- ----------------- ------------
Effect of exchange rate changes on cash 3,105 (13,009) -
------------- ----------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 56,855 484,170 (72,991)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 660,016 175,846 248,837
------------- ----------------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 716,871 $ 660,016 $ 175,846
============= ================= ============
See accompanying notes.
F-4
QUALCOMM INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK ACCUMULATED OTHER
------------------------ PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) TOTAL
---------- ----------- --------- ---------- --------------- -----------
BALANCE AT SEPTEMBER 30, 1997 544,995 $ 54 $ 906,266 $ 117,798 $ 60 $ 1,024,178
Components of comprehesive income:
Net income - - - 108,532 - 108,532
Foreign currency translation - - - - (1,738) (1,738)
------------
Total comprehensive income 106,794
------------
Exercise of stock options 10,317 1 32,147 - - 32,148
Tax benefit from exercise of stock options - - 17,125 - - 17,125
Issuance for Employee Stock Purchase and
Executive Retirement Plans 3,774 - 19,408 - - 19,408
Issuance of common stock upon exercise of
warrant (Note 9) 5,640 1 (1) - - -
Spin-off of Leap Wireless International, Inc.
(Note 2) - - (15,727) (226,330) - (242,057)
---------- ----------- ---------- ----------- -------------- ----------
BALANCE AT SEPTEMBER 30, 1998 564,726 56 959,218 - (1,678) 957,596
Components of comprehesive income:
Net income - - - 200,879 - 200,879
Foreign currency translation - - - - (26,100) (26,100)
Change in unrealized gain on securities,
net of income taxes of $74,410 - - - - 110,690 110,690
----------
Total comprehensive income 285,469
----------
Exercise of stock options 48,994 5 205,223 - - 205,228
Tax benefit from exercise of stock options - - 290,817 - - 290,817
Issuance for Employee Stock Purchase and
Executive Retirement Plans 4,994 1 31,570 - - 31,571
Stock based compensation expense - - 8,613 - - 8,613
Sale of common stock 27,600 3 1,079,312 - - 1,079,315
Issuance of common stock upon conversion
of Trust Convertible Preferred Securities 49 - 445 - - 445
Spin-off of Leap Wireless International, Inc.
(Note 2) - - 12,701 - - 12,701
---------- ----------- ---------- ----------- ------------- ----------
BALANCE AT SEPTEMBER 30, 1999 646,363 65 2,587,899 200,879 82,912 2,871,755
Components of comprehesive income:
Net income - - - 670,211 - 670,211
Foreign currency translation - - - - 2,756 2,756
Change in unrealized gain on securities,
net of income taxes of $45,185 - - - - 67,216 67,216
Reclassification adjustment for gains
included in net income, net of income
taxes of $108,593 (161,539) (161,539)
-----------
Total comprehensive income 578,644
-----------
Exercise of stock options and warrants 22,101 2 109,825 - - 109,827
Tax benefit from exercise of stock options - - 217,846 - - 217,846
Issuance for Employee Stock Purchase and
Executive Retirement Plans 749 - 31,186 - - 31,186
Stock based compensation expense - - 25,400 - - 25,400
Shares issued for business acquisitions 5,815 1 1,036,940 - - 1,036,941
Issuance of common stock upon conversion
of Trust Convertible Preferred Securities 72,623 7 644,722 - - 644,729
----------- ----------- ---------- ----------- ------------- -----------
BALANCE AT SEPTEMBER 30, 2000 747,651 $ 75 $4,653,818 $ 871,090 $ (8,655) $ 5,516,328
=========== =========== ========== =========== ============= ===========
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. In addition, the Company designs, manufactures and distributes
products and provides services for its OmniTRACS system. The Company has
contracts with Globalstar L.P. (Globalstar), a partnership formed to develop,
own, and operate a worldwide, low-Earth-orbit satellite-based
telecommunications system (the Globalstar 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 and
other subsidiaries controlled by the Company. The ownership of the other
interest holders of consolidated subsidiaries 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 accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts and the
disclosure of contingent amounts in the Company's financial statements and
the accompanying notes. 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 from hardware product sales are recorded upon shipment, or when
risk of loss passes to the customer, if later. Revenue from services are
recorded when earned. Revenue from long-term contracts, including technology
development agreements, is recognized using the percentage-of-completion
method, based on costs incurred to date compared with total estimated costs.
Billings on uncompleted contracts in excess of incurred cost and accrued
profits are classified as unearned revenue. Estimated contract losses are
recognized when determined.
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.
The Company recognizes software license revenue when all of the following
criteria are met: execution of a written agreement; delivery of software; the
license fee is fixed and determinable; collectibility of the proceeds is
assessed as being probable; and vendor-specific objective evidence exists to
allocate the total fee to elements of multiple-element arrangements.
Vendor-specific objective evidence is based on the price charged when an
element is sold separately, or if not yet sold separately, the price
established by authorized management or a substantive renewal rate for
post-contract customer support. Unearned revenue consists primarily of fees
related to software licenses under which the Company has not met delivery
requirements or fulfilled other contractual obligations.
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
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 47%, 38% and 34% of total revenues
in fiscal 2000, 1999 and 1998, respectively. During fiscal 2000, 1999 and 1998,
sales to one South Korean customer by the QCT and QTL segments (Note 16)
comprised 11%, 9% and 11% of consolidated revenues, respectively. During fiscal
2000, 1999 and 1998, revenues from Globalstar (Note 12) accounted for 7%, 11%
and 11% 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 equivalents are comprised
of money market funds, certificates of deposit, commercial paper, loan
participations, medium-term notes, U.S. treasuries and government agencies'
securities. 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 to limit the amount of credit exposure.
MARKETABLE SECURITIES
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 fair
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, 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 related to its strategic investment and financing activities. Warrants
are not held for trading purposes. Warrants to purchase equity interests in
publicly traded companies that will be accounted for as available-for-sale
securities are stated at fair value. All other warrants 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 influence, and for 50% or less ownership interests in partnerships
and limited liability corporations. 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 that create additional basis
in the investee.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of purchase price and related costs over the
value assigned to the net tangible and identifiable intangible assets of
businesses acquired. Goodwill is amortized on a straight-line basis over its
useful
F-7
life, ranging from three to four years. Other intangible assets are amortized
on a straight-line basis over their useful lives, ranging from three to
twenty years.
LONG-LIVED AND INTANGIBLE ASSETS
The Company assesses potential impairments to its long-lived assets and
intangible assets when there is evidence that events or changes in circumstances
indicate that the carrying amount of an asset may not be recovered. An
impairment loss is recognized when the undiscounted cash flows expected to be
generated by an asset (or group of assets) is less than its carrying amount. Any
required impairment loss would be measured as the amount by which the asset's
carrying value exceeds its fair value, and would be recorded as a reduction in
the carrying value of the related asset and a charge to results of operations.
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
compensation 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 to non-employees for goods or services are
accounted for at fair value and are marked to market until service is complete
or a performance commitment date is reached.
FOREIGN CURRENCY
Foreign subsidiaries operating in a local currency environment use the local
currency as the functional currency. Assets and liabilities are translated to
U.S. dollars at year-end exchange rates; revenues, expenses, gains and losses
are translated at rates of exchange that approximate the rates in effect at the
transaction date. Resulting remeasurement gains or losses are recognized as a
component of other comprehensive income. During fiscal 1999, a significant
devaluation of the Brazilian real resulted in a $25 million translation loss
that was recorded as a component of other comprehensive income. The functional
currency of the Company's foreign investees that do not use local currencies is
the U.S. dollar. Where the U.S. dollar is the functional currency, the monetary
assets and liabilities are translated into U.S. dollars at the exchange rate in
effect at the balance sheet date. Revenues, expenses, gains and losses
associated with the monetary assets and liabilities are translated at the rates
of exchange that approximate the rates in effect at the transaction date.
Non-monetary assets and liabilities and related elements of expense, gains and
losses are translated at historical rates. Resulting remeasurement gains or
losses of these foreign investees are recognized in the statement of 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
Company had no foreign currency forward contracts outstanding as of September
30, 2000 or 1999. During fiscal 2000 and 1998, net foreign currency transaction
gains and (losses) included in the Company's statements of income totaled
approximately $(1) million and $6 million, respectively. During fiscal 1999, net
foreign currency transaction gains were not material.
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. The asset and liability approach is used to recognize
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of assets
and liabilities. 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.
F-8
COMPREHENSIVE INCOME
Components of accumulated other comprehensive income (loss) consist of the
following (in thousands):
SEPTEMBER 30,
------------------------------------------
2000 1999 1998
------------ ------------- -------------
Foreign currency translation $ (25,022) $ (27,778) $ (1,678)
Unrealized gain on securities,
net of income taxes 16,367 110,690 -
------------ ------------- -------------
$ (8,655) $ 82,912 $ (1,678)
============ ============= =============
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. On November 2, 1999, the Company's Board of Directors declared 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 stock
was distributed on December 30, 1999 to stockholders of record on December 20,
1999. All references to per share amounts have been restated to reflect these
stock splits.
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 EPS) reflect the potential
dilutive effect, calculated using the treasury stock method, of additional
common shares that are issuable upon exercise of outstanding stock options and
warrants and the potential dilutive effect for the period prior to conversion of
shares issuable upon conversion of Trust Convertible Preferred Securities,
determined on an if-converted basis, as follows (in thousands):
YEARS ENDED SEPTEMBER 30,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
Options 64,802 55,175 32,996
Warrants - - 5,078
Trust Convertible Preferred Securities 18,114 - -
------------- ------------- -------------
82,916 55,175 38,074
============= ============= =============
Options outstanding during the years ended September 30, 2000, 1999 and 1998
to purchase approximately 2,625,000, 13,494,000, and 28,643,000 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. Net income in the computation of diluted EPS for fiscal 2000 is
increased by $7 million, representing the assumed savings of distributions, net
of taxes, on the Trust Convertible Preferred Securities. The additional common
shares assuming the conversion of the Trust Convertible Preferred Securities
(Note 8) are not included for purposes of computing diluted EPS for fiscal 1999
and 1998 because the effect would have been 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 delayed
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, certain
derivatives must be recognized as assets and liabilities and measured at fair
value. The Company is not currently engaged in hedging activities. The Company
will record certain derivative assets and liabilities at fair value as a result
of the adoption of this standard. Upon adoption, the Company expects to record a
F-9
gain on derivative instruments of approximately $217 million as a cumulative
effect of a change in accounting principle. Future gains and losses on these
instruments will be recorded in the income statement.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." In June 2000, the SEC staff amended SAB 101 to provide registrants
with additional time to implement SAB 101. The Company will be required to adopt
SAB 101 by the fourth quarter of fiscal 2001. The Company does not expect the
adoption of SAB 101 to have a material effect on its consolidated financial
position or results of operation.
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. In March 1999, the Company reassessed
the recoverability of TOU assets in light of certain 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, 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 enable Leap Wireless to
meet Federal Communications Commission regulatory requirements. The estimated
fair values of the warrant at September 30, 2000 and 1999 are $250 million and
$90 million, respectively, as calculated using the Black-Scholes option-pricing
model.
NOTE 3. ACQUISITIONS
SNAPTRACK, INC.
In March 2000, the Company completed the acquisition of all of the
outstanding capital stock of SnapTrack, Inc. (SnapTrack), a developer of
wireless position location technology, in a transaction accounted for as a
purchase. The purchase price was approximately $1 billion, representing the
value of QUALCOMM shares issued to effect the purchase, the value of vested and
unvested options and warrants exchanged at the closing date and estimated
transaction costs of $2 million. The preliminary allocation of purchase price,
based on the estimated fair values of the acquired assets and assumed
liabilities, reflects acquired goodwill of $948 million, purchased in-process
technology of $60 million and other intangible assets of $34 million. Tangible
assets acquired and liabilities assumed were not material to the Company's
financial statements. The Company expects to finalize the purchase price
allocation within one year and does not anticipate material adjustments to the
preliminary purchase price allocation. Amounts allocated to goodwill and other
intangible assets are amortized on a straight-line basis over their estimated
useful lives of four years. The acquisition has been treated as a non-cash
transaction in the statement of cash flows.
Purchased in-process technology was expensed upon acquisition because
technological feasibility had not been established and no future alternative
uses existed. The fair values for each of the in-process technologies were
determined by estimating the resulting net cash flows from such products after
their completion and commercialization, discounting the net cash flows to
present value, and applying the percentage completion of the projects thereto.
The fair value of in-process technology was determined to be $60 million,
including Multimedia
F-10
ASIC ($27 million), Server Release 2.0 ($23 million), DSP Release 2.0 ($8
million) and the pager product ($2 million). Net cash flow projections were
made based on an assessment of customer needs and the expected pricing and
cost structure. If these projects are not developed, future revenue and
profitability of QUALCOMM may be adversely affected. Additionally, the value
of other intangible assets acquired may become impaired.
The consolidated financial statements include the operating results of
SnapTrack from the date of acquisition. Unaudited pro forma operating results
for the Company, assuming the acquisition of SnapTrack had been made at the
beginning of the years ended September 30, are as follows (in thousands, except
per share data):
2000 1999
--------------- ---------------
(unaudited)
Revenues $ 3,197,119 $ 3,937,364
--------------- ---------------
Net income (loss) $ 619,226 $ (50,915)
=============== ===============
Basic earnings (loss) per common share $ 0.86 $ (0.08)
=============== ===============
Diluted earnings (loss) per common share $ 0.78 $ (0.08)
=============== ===============
These pro forma results have been prepared for comparative purposes only and
may not be indicative of the results of operations which actually would have
occurred had the combination been in effect at the beginning of the respective
periods or of future results of operations of the consolidated entities.
TECHNOLOGY DEVELOPMENT GROUP OF TELLIT COMMUNICATIONS LTD.
In February 2000, the Company purchased the Technology Development Group of
Tellit Communications Limited (Tellit), a U.K.-based company. The initial
purchase price of $12 million was paid in cash. An additional $9 million in
consideration is payable in cash through March 31, 2001 if certain performance
and other milestones are reached. The preliminary allocation of purchase price,
based on the estimated fair values of acquired assets and liabilities assumed,
reflects acquired goodwill of $11 million and assembled workforce of $1 million.
The Company expects to finalize the purchase price allocation within one year
and does not anticipate material adjustments to the preliminary purchase price
allocation. Any adjustments to the purchase price related to contingent
consideration are expected to increase goodwill. Amounts allocated to goodwill
and assembled workforce are amortized on a straight-line basis over their
estimated useful lives of three years. The consolidated financial statements
include the operating results of the Technology Development Group of Tellit from
the date of acquisition. Pro forma results of operations have not been presented
because the effect of this acquisition is not material.
NOTE 4. MARKETABLE SECURITIES
Marketable securities are comprised as follows (in thousands):
F-11
CURRENT NONCURRENT
-------------------------------- -------------------------------
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
--------------- --------------- -------------- --------------
Held-to-maturity:
Certificates of deposit $ 201,338 $ 193,534 $ - $ 10,000
Commercial paper 289,761 465,953 - -
U.S. government securities - - 10,000 -
Corporate medium-term notes 194,576 107,662 312,791 57,564
--------------- --------------- -------------- --------------
685,675 767,149 322,791 67,564
Available-for-sale:
Commercial paper 2,956 - - -
U.S. government securities 110,256 - - -
Corporate medium-term notes 108,748 - - -
Mortgage-backed securities 28,347 - - -
Asset-backed securities 119,540 - - -
Equity securities - 187,266 425,730 2,931
--------------- --------------- -------------- --------------
369,847 187,266 425,730 2,931
--------------- --------------- -------------- --------------
$ 1,055,522 $ 954,415 $ 748,521 $ 70,495
=============== =============== ============== ==============
F-12
As of September 30, 2000, the contractual maturities of debt securities are
as follows (in thousands):
YEARS TO MATURITY NO SINGLE
----------------------------
LESS THAN ONE TO MATURITY
ONE YEAR FIVE YEARS DATE
-------------- ------------ ------------
Held-to-maturity $ 685,675 $ 322,791 $ -
Available-for-sale 15,550 206,410 147,887
-------------- ------------ ------------
$ 701,225 $ 529,201 $ 147,887
============== ============ ============
Securities with no single maturity date include mortgage-backed securities
and asset-backed securities.
Available-for-sale securities are comprised as follows at September 30 (in
thousands):
UNREALIZED UNREALIZED FAIR VALUE
COST GAIN LOSS
------------ ------------ ------------- --------------
2000
Equity securities $ 400,114 $ 180,787 $ (155,171) $ 425,730
Debt securities 368,095 2,446 (694) 369,847
------------ ------------ ------------- --------------
Total $ 768,209 $ 183,233 $ (155,865) $ 795,577
============ ============ ============= ==============
1999
Equity securities $ 5,097 $ 185,100 $ - $ 190,197
============ ============ ============= ==============
The fair values of held-to-maturity debt securities at September 30, 2000
and 1999 approximate cost.
In April 2000, the Company purchased approximately 11,500,000 shares of the
common stock of NetZero, Inc. (NetZero), representing a 9.9% interest, for $144
million in cash. NetZero is a publicly traded company that provides Internet
access and services to consumers and on-line direct marketing services to
advertisers. The fair value of the NetZero investment is $35 million at
September 30, 2000.
In February 2000, the Company purchased 308,000 units of Leap Wireless'
senior discount notes with warrants for $150 million. The notes mature in April
2010 and bear interest at 14.5%. The warrants are detachable and entitle each
holder to purchase 2.503 common shares per each senior discount note unit held.
The exercise price is $96.80 per common share. Leap Wireless used $227 million
of the proceeds from the issuance of senior discount notes and senior notes to
pay down its credit facility with the Company. The credit facility was cancelled
in the second quarter of fiscal 2000. The fair value of the senior discount
notes with warrants is $136 million at September 30, 2000.
In November 1999, the Company purchased 2,565,000 common shares of Korea
Telecom Freetel (KT Freetel), representing a 1.9% interest, for $110 million and
an $86 million zero coupon bond with warrants to purchase approximately
1,851,000 additional shares. If KT Freetel meets certain obligations related to
the commercial deployment of 1xEV technology, the Company will be required to
exercise the warrants. The exercise price of the warrants is expected to be paid
by tendering the bond as payment in full. If KT Freetel does not meet such
obligations, the Company will have the right to redeem the bond at face value
plus a premium equal to 10% per year. The Company uses the cost method to
account for 1,924,000 of the common shares and approximately 1,388,000 shares
under warrant as those shares are restricted through June 1, 2002; the recorded
value of the restricted securities is $147 million. The remaining shares and
warrants, with a cost basis of $49 million, are recorded at fair value and
classified as marketable securities; the fair value of these marketable
securities is $38 million at September 30, 2000.
F-13
NOTE 5. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
ACCOUNTS RECEIVABLE
SEPTEMBER 30,
---------------------------
2000 1999
------------- ------------
(IN THOUSANDS)
Trade, net of allowance for doubtful accounts
of $9,610 and $22,276, respectively $ 542,288 $ 674,211
Long-term contracts:
Billed 38,059 128,208
Unbilled 21,185 69,409
Other 5,447 11,812
------------- ------------
$ 606,979 $ 883,640
============= ============
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.
FINANCE RECEIVABLES
Finance receivables result from arrangements in which the Company has agreed
to provide its customers or certain Code Division Multiple Access (CDMA)
customers of Telefonaktiebolaget LM Ericsson (Ericsson) (Note 13) with long-term
interest bearing debt financing for the purchase of equipment and/or services.
Such financing is generally collateralized by the related equipment. Finance
receivables are comprised as follows:
SEPTEMBER 30,
-----------------------------------
2000 1999
--------------- -----------------
(IN THOUSANDS)
Finance receivables $ 939,063 $ 585,482
Allowance for doubtful receivables (11,144) (10,623)
--------------- -----------------
927,919 574,859
Current maturities 128,515 26,377
--------------- -----------------
Noncurrent finance receivables, net $ 799,404 $ 548,482
=============== =================
At September 30, 2000 and 1999, the fair value of finance receivables
approximated $826 million and $541 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, 2000 are as follows (in
thousands):
FISCAL YEAR ENDING SEPTEMBER 30,
-------------------------------------
2001 $ 128,515
2002 151,517
2003 323,928
2004 110,326
2005 77,818
Thereafter 146,959
------------
$ 939,063
============
At September 30, 2000, commitments to extend long-term financing to CDMA
customers of Ericsson (Note 13) totaled approximately $255 million, which the
Company expects to fund over the next two years. 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
sales. Commitments represent the estimated amounts to be financed under these
arrangements; actual financing may be in lesser amounts.
F-14
INVENTORIES
SEPTEMBER 30,
---------------------------
2000 1999
------------ -------------
(IN THOUSANDS)
Raw materials $ 47,952 $ 161,481
Work-in-process 8,370 51,003
Finished goods 29,044 45,457
------------ -------------
$ 85,366 $ 257,941
============ =============
PROPERTY, PLANT AND EQUIPMENT
SEPTEMBER 30,
---------------------------
2000 1999
------------ ------------
(IN THOUSANDS)
Land $ 37,953 $ 36,310
Buildings and improvements 279,265 285,762
Computer equipment 254,675 244,605
Machinery and equipment 193,194 274,353
Furniture and office equipment 14,424 16,515
Leasehold improvements 33,798 33,207
------------ ------------
813,309 890,752
Less accumulated depreciation
and amortization (381,604) (334,761)
------------ ------------
$431,705 $555,991
============ ============
At September 30, 2000, buildings and leasehold improvements with a net book
value of $145 million, including accumulated depreciation of $36 million, are
leased or held for lease to third parties.
INTANGIBLE ASSETS
At September 30, 2000 and 1999, goodwill is presented net of $144 million
and $2 million in accumulated amortization, respectively. At September 30, 2000
and 1999, intangible assets totaling $45 million and $17 million, respectively,
are presented net of $8 million and $3 million in accumulated amortization,
respectively.
NOTE 6. INVESTMENT INCOME (EXPENSE), NET
Investment income (expense), net for the years ended September 30 is
comprised as follows (in thousands):
2000 1999 1998
------------ ------------- ------------
Interest income $245,440 $ 50,392 $ 39,484
Realized gains on marketable securities 270,132 5,663 2,950
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 (6,264) (13,066) (48,366)
Equity in losses of investees (15,117) (15,140) (20,731)
------------ ------------- ------------
$ 494,191 $ 24,576 $(46,663)
============ ============= ============
F-15
NOTE 7. DEBT AND CREDIT FACILITIES
The Company has an unsecured 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 year on the unused amount of the credit facility. The credit
facility includes certain restrictive financial and operating covenants. At
September 30, 2000 and 1999, there were no amounts or letters of credit issued
or outstanding under the credit facility.
Under terms of two identical revolving credit agreements, cancelled in
February 2000 as a condition of the sale of the Company's terrestrial-based CDMA
wireless consumer phone business (Note 13), QUALCOMM Personal Electronics (QPE)
(Note 12) could borrow a total of $150 million. Borrowings under the facilities
totaled $112 million at September 30, 1999. The interest under the facilities
was at the applicable LIBOR rate plus 0.5%. The weighted average interest rate
on outstanding borrowings was 6.4%, 5.9% and 6.2% during fiscal 2000, 1999 and
1998, respectively, and 6.0% at September 30, 1999.
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, the estimated fair
value of the Company's bank lines of credit approximated their carrying value.
Cash amounts paid for interest were $5 million in fiscal 2000 and $11
million in each of fiscal years 1999 and 1998.
NOTE 8. 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 were QUALCOMM Incorporated 5
3/4% Convertible Subordinated Debentures due February 24, 2012. The obligations
of the Trust related to the Trust Convertible Preferred Securities were fully
and unconditionally guaranteed by the Company. The Trust Convertible Preferred
Securities were convertible into Company common stock at the rate of 5.5056
shares of Company common stock for each Trust Convertible Preferred Security
(equivalent to a conversion price of $9.082054 per share of common stock).
Distributions on the Trust Convertible Preferred Securities were payable
quarterly by the Trust. The Trust Convertible Preferred Securities were subject
to mandatory redemption on February 24, 2012, at a redemption price of $50 per
preferred security. The Company had the right to convert the Trust Convertible
Preferred Securities, in whole or in part, on or after March 4, 2000. The
Company was required to pay a premium over the initial conversion price if
securities were converted 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 was 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
5.5056 and 0.17205 shares, respectively, for each QUALCOMM Trust Convertible
Preferred Security.
During fiscal 2000 and 1999, approximately 13,191,000 and 8,910 Trust
Convertible Preferred Securities were converted into approximately 72,623,000
and 49,000 shares of common stock, respectively. All Trust Convertible Preferred
Securities have been converted into common stock.
NOTE 9. CAPITAL STOCK
COMMON STOCK WARRANTS
In November 1991, the Company issued seven-year warrants to purchase
6,252,000 shares of common stock at $0.6875 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 5,640,000
shares of common stock upon the full net exercise of the warrants.
In March 2000, the Company assumed warrants to purchase 11,000, 68,000, and
7,000 shares of common stock at $10.21, $2.91, and $6.56 per share,
respectively, as a result of the acquisition of SnapTrack. In April 2000, the
Company issued 86,000 shares of common stock upon the full cash exercise of the
warrants.
F-16
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, 2000 and 1999,
no shares of preferred stock were outstanding.
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. 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 $400. 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.
NOTE 10. INCOME TAXES
The components of income tax provision for the years ended September 30 are
as follows (in thousands):
2000 1999 1998
-------------- -------------- ---------------
Current provision:
Federal $ 289,135 $ 143,534 $ 86,488
State 54,423 22,211 1,916
Foreign 62,385 36,657 7,319
-------------- -------------- ---------------
405,943 202,402 95,723
-------------- -------------- ---------------
Deferred provision (benefit):
Federal 97,522 (86,996) (46,862)
State 23,129 (9,599) (8,719)
-------------- -------------- ---------------
120,651 (96,595) (55,581)
-------------- -------------- ---------------
$ 526,594 $ 105,807 $ 40,142
============== ============== ===============
The following is a reconciliation from the expected statutory federal income
tax provision to the Company's actual income tax provision for the years ended
September 30 (in thousands):
F-17
2000 1999 1998
--------- --------- ---------
Expected income tax provision at federal
statutory tax rate $ 418,881 $ 107,363 $ 52,036
State income tax provision, net of federal
benefit 62,234 15,951 7,732
Foreign taxes 62,385 36,657 7,075
Permanent differences 16,278 2,108 5,754
Goodwill amortization and purchased
in-process technology 79,811 -- --
Tax credits (104,497) (56,800) (34,015)
Other (8,498) 528 1,560
--------- --------- ---------
Actual income tax provision $ 526,594 $ 105,807 $ 40,142
========= ========= =========
U.S. income taxes and foreign withholding taxes were not provided for on a
cumulative total of approximately $13 million of undistributed earnings for
certain non-U.S. subsidiaries. The Company intends to reinvest these earnings
indefinitely in operations outside the United States. At September 30, 2000 and
1999, the Company had net deferred tax assets as follows (in thousands):
2000 1999
--------- ---------
Accrued liabilities $ 144,095 $ 232,397
Unrealized loss on marketable securities 62,658 -
Unused net operating losses 289,613 73,962
Tax credits 214,349 51,864
--------- ---------
Total gross assets 710,715 358,223
Valuation allowance (584,001) -
--------- ---------
Total deferred assets 126,714 358,223
--------- ---------
Purchased intangible assets (11,496) -
Unrealized gain on marketable securities (73,659) (74,409)
Other basis differences (41,559) (41,809)
--------- ---------
Total deferred liabilities (126,714) (116,218)
--------- ---------
$ - $ 242,005
========= =========
The Company has provided a valuation allowance on its net deferred tax
assets because of uncertainty regarding their realizability due to the
expectation that deductions from future employee stock option exercises and
related deductions will exceed future taxable income. If or when recognized, the
tax benefit of these deferred assets will be accounted for as a credit to
shareholders' equity rather than as a reduction of the income tax provision.
At September 30, 2000, 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 $44 million, $68 million and $58
million for fiscal 2000, 1999 and 1998, respectively.
NOTE 11. EMPLOYEE BENEFIT PLANS
EMPLOYEE SAVINGS AND RETIREMENT PLAN
The Company has a 401(k) plan that allows eligible employees to contribute
up to 15% of their salary, subject to annual limits. The Company matches a
portion of the employee contributions and may, at its discretion, make
additional contributions based upon earnings. The Company's contribution expense
for fiscal 2000, 1999 and 1998 was $17 million, $17 million and $10 million,
respectively.
F-18
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
295,200,000 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 periods not exceeding six years and are
exercisable for up to ten years from the grant date. At September 30, 2000,
options for 46,124,000 shares were exercisable at prices ranging from $2.19 to
$147.87 for an aggregate exercise price of $336 million.
The Company has a Non-Employee Directors' Stock Option Plan that authorizes
8,560,000 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, 2000, options for
2,555,000 shares were exercisable at prices ranging from $2.78 to $133.00 per
share for an aggregate exercise price of $12 million.
In March 2000, the Company assumed 1,560,000 outstanding stock options under
the SnapTrack, Inc. 1995 Stock Option Plan (the SnapTrack Plan), as amended with
respect to the acquisition. The SnapTrack Plan expired on the date of
acquisition, and no additional shares may be granted under that plan. The
SnapTrack Plan provided for the grant of both incentive stock options and
non-qualified stock options. Generally, options outstanding vest over periods
not exceeding four years and are exercisable for up to ten years from the grant
date. At September 30, 2000, options for 171,000 shares were exercisable at
prices ranging from $0.02 to $5.30 for an aggregate exercise price of $0.2
million.
A summary of stock option transactions for the plans follows (number of
shares in thousands):
OPTIONS OUTSTANDING
----------------------------------------------
EXERCISE PRICE PER SHARE
OPTIONS -------------------------------
AVAILABLE NUMBER WEIGHTED
FOR GRANT OF SHARES RANGE AVERAGE
------------ ------------- ----------------- -----------
BALANCE AT SEPTEMBER 30, 1997 31,104 147,849 $0.63 to $7.80 $ 4.50
Additional shares reserved 43,760 - - -
Options granted (49,232) 49,232 5.57 to 8.75 7.28
Options canceled 6,472 (6,472) 1.94 to 8.75 5.40
Options exercised - (10,317) 0.85 to 7.22 3.12
------------ -------------
BALANCE AT SEPTEMBER 23, 1998 (a) 32,104 180,292 $0.63 to $8.75 $ 5.30
Options granted (384) 384 2.25 to 8.56 6.11
Options canceled 104 (104) 5.11 to 7.80 6.73
------------ -------------
BALANCE AT SEPTEMBER 30, 1998 31,824 180,572 $0.61 to $8.56 $ 5.19
Additional shares reserved 28,000 - - -
Options granted (18,964) 18,964 4.95 to 48.10 13.03
Options canceled 25,336 (25,336) 0.61 to 29.39 5.85
Options exercised - (48,994) 0.61 to 8.56 4.39
------------ -------------
BALANCE AT SEPTEMBER 30, 1999 66,196 125,206 $1.09 to $48.10 $ 6.56
Additional shares reserved (b) 1,560 - - -
Options exchanged (b) (1,560) 1,560 0.02 to 5.30 1.32
Options granted (9,523) 9,523 46.93 to 172.38 84.30
Options canceled 4,306 (4,306) 2.06 to 140.00 13.94
Options exercised - (22,015) 0.02 to 112.50 4.96
------------ -------------
BALANCE AT SEPTEMBER 30, 2000 60,979 109,968 $0.02 to $172.38 $ 13.25
============ =============
(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 $0.61 to $8.56 and $5.19, respectively, as adjusted in connection
with the Leap Wireless Spin-off.
(b) Represents activity related to options that were assumed as a result of the
acquisition of SnapTrack in March 2000.
F-19
The following table summarizes information about fixed stock options
outstanding at September 30, 2000 (number of shares in thousands):
OPTIONS OUTSTANDING
-------------------------------------------
WEIGHTED
AVERAGE OPTIONS EXERCISABLE
----------------------------
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF NUMBER LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OF SHARES (IN YEARS) PRICE OF SHARES PRICE
- -------------------------- --------------- ------------ --------- ------------- -----------
$0.02 to $3.38 11,380 4.23 $ 2.84 10,546 $ 2.95
$3.39 to $6.05 40,301 5.48 4.95 23,271 4.75
$6.06 to $8.02 41,016 7.40 7.10 12,060 7.02
$8.09 to $19.25 6,367 8.42 16.08 1,506 16.85
$23.83 to $51.82 4,075 8.94 44.05 746 42.57
$53.31 to $83.50 4,089 8.96 80.15 568 83.01
$86.63 to $172.38 2,740 9.49 118.35 153 115.41
--------------- -------------
109,968 6.59 13.25 48,850 7.13
=============== =============
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 33,600,000 shares to be granted no
later than August 2001. The 1996 Non-Qualified Employee Stock Purchase Plan
authorizes up to 200,000 shares to be granted at anytime. During fiscal 2000,
1999 and 1998, shares totaling 749,000, 4,774,000 and 3,511,000 were issued
under the plans at an average price of $37.75, $5.44 and $5.52 per share,
respectively. At September 30, 2000, 12,998,000 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,
the Company matches up to 10% of the participants' deferral in Company common
stock based on the then-current market price, to be distributed to the
participant upon eligible retirement. The income deferred and the Company
match held in trust are unsecured and subject to the claims of general
creditors of the Company. Company contributions begin vesting based on certain
minimum participation or service requirements, and are fully vested at age 65.
Participants who terminate employment forfeit their unvested shares. All
shares forfeited are used to reduce the Company's future matching
contributions. The plans authorize up to 800,000 shares to be allocated to
participants at anytime. During fiscal 2000 no shares, and during fiscal 1999
and 1998, 220,000 and 263,000 shares net of forfeitures, respectively, were
issued under the plans. The Company's matching contribution net of amounts
forfeited during fiscal 2000, 1999 and 1998 amounted to $2 million, $1
million and $2 million, respectively. At September 30, 2000, 341,000 shares,
including 163,000 issued and unallocated forfeited shares, were reserved for
future allocation.
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
-------------------------- ---------------------------
2000 1999 1998 2000 1999 1998
------- -------- ------- ------- ------- --------
Risk-free interest rate 6.3% 5.2% 5.5% 5.7% 4.7% 5.1%
Volatility 57.0% 51.0% 50.0% 72.0% 51.0% 50.0%
Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Expected life (years) 5.5 6.0 6.0 0.5 0.5 0.5
F-20
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 and negotiable in a free trading market. 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 from 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 2000, 1999 and 1998 were $48.62, $7.14 and $3.97 per share,
respectively. The weighted average estimated fair values of shares granted under
the Employee Stock Purchase Plans during fiscal years 2000, 1999 and 1998 were
$31.95, $2.80 and $1.99, 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 periods.
The pro forma effects of recognizing compensation expense under the fair value
method on net income and net earnings per common share for the years ended
September 30 are as follows (in thousands, except for net earnings per share):
2000 1999 1998
----------------------------------- -------------------------------- ---------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
-------------- ------------- --------------- ------------- ----------- -----------
Net income $ 670,211 $ 570,044 $ 200,879 $ 149,100 $ 108,532 $ 57,747
Net earnings per common
share:
Basic $ 0.93 $ 0.79 $ 0.34 $ 0.25 $ 0.20 $ 0.10
Diluted $ 0.85 $ 0.71 $ 0.31 $ 0.23 $ 0.18 $ 0.10
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 12. INVESTMENTS IN OTHER ENTITIES
GLOBALSTAR L.P.
Through partnership interests held in certain intermediate limited
partnerships and other indirect interests, the Company owns an approximate 6.3%
interest in Globalstar, a limited partnership formed to develop, own and operate
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 2000, 1999 and 1998, and, as a result, the Company has not
recorded any equity losses during those respective fiscal years.
The Company continues to provide services and sell products under a number
of development and production contracts involving the Globalstar System.
Revenues resulting from the agreements with Globalstar for fiscal 2000, 1999 and
1998 were $219 million, $435 million and $373 million, respectively.
At September 30, 2000 and 1999, $504 million and $349 million in interest
bearing financed amounts and $37 million and $171 million in accounts
receivable, respectively, were outstanding from Globalstar. In May 2000, the
Company and Globalstar signed definitive agreements to finance current and
future contract payments. The financing bears interest at 6% and is payable in
quarterly installments beginning January 15, 2001 through August 15, 2003. The
Company received warrants to purchase 3,450,000 ordinary partnership interests
in Globalstar as part of the financing arrangement for $42.25 per unit, which
approximates the market value of the common shares of Globalstar
Telecommunications Ltd. (GTL) on the transaction date assuming a just over
one-to-four relationship. GTL is a publicly traded company that owns an
approximate 40% interest in Globalstar. Seventy-five percent of the warrants are
vested and the remaining twenty-five percent of the warrants vest on September
1, 2001. The vested warrants were recorded at an estimated fair value of $36
million, resulting in a corresponding discount to the
F-21
finance receivables. The Company changed its estimate of amounts collectible
under Globalstar contracts and recorded previously unrecognized revenue of $8
million and interest income of $10 million during fiscal 2000. At September 30,
2000, $18 million in future contract billings, including unbilled receivables at
September 30, 2000, are expected to be eligible for financing under the
financing agreement with Globalstar.
On June 30, 2000, Globalstar defaulted on a $250 million bank facility that
QUALCOMM partially guaranteed in 1996. As a result of this default, QUALCOMM's
guaranty was called, and QUALCOMM paid $22 million to the subject banks in full
satisfaction of this guaranty. Pursuant to an agreement entered into in 1996,
with respect to the original provision of this guaranty, Globalstar caused
QUALCOMM to accept, in satisfaction of QUALCOMM's subrogation rights, a
subordinated promissory note issued by Globalstar with a principal amount equal
to the amount QUALCOMM paid under its guaranty (the Globalstar Promissory Note).
The Globalstar Promissory Note bears interest at LIBOR plus 3%, and principal
and interest are due and payable in full on June 30, 2003.
In September 2000, Globalstar announced that five of its founding
partners and a sixth partner will provide the company with additional equity
financing. Under the terms of their subscription agreements, QUALCOMM, Loral
Space & Communications, Vodafone, Elsacom, T.E.S.A.M., and ChinaSat will
invest $68 million in GTL common shares. GTL will use all proceeds to
purchase partnership interests in Globalstar, which, in turn, will use the
proceeds for general corporate purposes including capital expenditures,
operations and interest payments. In the first quarter of fiscal 2001,
QUALCOMM funded its $12 million commitment and received 1,120,187 shares of
GTL common stock.
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. If
Globalstar fails to generate sufficient cash flow from operations through the
marketing efforts of its service providers, it might be unable to fund its
operating costs or service its debt.
IGNITION, LLC
In March 2000, the Company purchased 42 million Series B Preferred units,
representing an approximate 13% undiluted interest, in Ignition, LLC (Ignition),
a venture firm formed to fund, mentor and build wireless Internet start-up
companies. The Company also received a warrant to purchase four million common
units at $0.46 per unit. The Company made capital contributions of $17 million
during fiscal 2000 and will be required to provide $25 million in additional
equity contributions over five years.
WINGCAST, LLC
In July 2000, Ford Motor Company and QUALCOMM announced the creation of a
new company, Wingcast, LLC (Wingcast), that will develop and deliver wireless
mobility services, including safety and security, information and
communications, and entertainment and mobile commerce, into cars and trucks.
QUALCOMM committed to contribute $125 million to the initial capital of
Wingcast, of which $75 million is payable in cash and $50 million is payable in
non-cash consideration. QUALCOMM may be further committed to fund an additional
$75 million in cash upon vehicle manufacturers committing to enable certain
volumes of vehicles to use Wingcast's services. QUALCOMM holds a 15% interest in
Wingcast.
QUALCOMM PERSONAL ELECTRONICS
In fiscal 1994, a subsidiary of the Company and a subsidiary of Sony
Electronics Inc. (Sony Electronics) entered into a general partnership, QUALCOMM
Personal Electronics (QPE), to manufacture CDMA consumer equipment for cellular,
PCS and other wireless applications. The Company owns 51% of the 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. In February 2000, the Company sold its terrestrial-based
CDMA wireless consumer phone business (Note 13). As a result, QPE has no
on-going operations.
During fiscal 2000, 1999 and 1998, QPE sales to Sony Electronics amounted to
$6 million, $249 million and $684 million, respectively. Purchases of inventory
and capital equipment from Sony Electronics and other Sony affiliates during
fiscal 2000, 1999 and 1998 amounted to $3 million, $80 million and $138 million,
respectively. At September 30, 2000 and 1999, outstanding accounts receivable
from Sony Electronics amounted to $2 million and $26 million, respectively. The
$2 million receivable at September 30, 2000 is the result of on-going business
F-22
unrelated to QPE. At September 30, 1999, accounts payable to all Sony
Electronics affiliated companies amounted to $14 million.
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 INVESTMENTS
The Company makes strategic investments in companies that have developed or
are developing innovative wireless data applications and wireless carriers that
promote the worldwide deployment of CDMA and high data rate, 1xEV, systems.
Other strategic investments as of September 30, 2000 and 1999, amounted to $148
million and $51 million, respectively. At September 30, 2000, effective
ownership interests in the investees ranged from 1% to 50%. Funding commitments
related to these investments total $66 million at September 30, 2000, which the
Company expects to fund in fiscal 2001. Such commitments are subject to the
investees meeting certain conditions; actual equity funding may be in lesser
amounts. It is not practicable to estimate the fair value of these investments
as the investments are predominantly closely held and not publicly traded. 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.
NOTE 13. DISPOSITION OF ASSETS AND OTHER CHARGES
In February 2000, the Company sold its terrestrial-based CDMA wireless
consumer phone business, including its phone inventory, manufacturing equipment
and customer commitments, to Kyocera Wireless (Kyocera). Under the agreement
with Kyocera, Kyocera agreed to purchase a majority of its CDMA integrated
circuit sets and system software requirements from QUALCOMM for a period of five
years. Kyocera will continue its existing royalty-bearing CDMA license agreement
with QUALCOMM. QUALCOMM received $242 million, including interest, during fiscal
2000 for the net assets sold.
As part of the agreement with Kyocera, QUALCOMM formed a new subsidiary that
has a substantial number of employees from QUALCOMM Consumer Products business
to provide services to Kyocera on a cost-plus basis to support Kyocera's phone
business for up to three years. In addition, selected employees of QPE were
transferred to Kyocera. As a condition of the purchase, QPE paid down and
cancelled its two revolving credit agreements. QUALCOMM recorded $83 million in
charges during fiscal 2000 to reflect the estimated difference between the
carrying value of the net assets and the consideration received from Kyocera,
less costs to sell, and employee termination costs.
In May 1999, the Company sold certain of its assets related to its
terrestrial CDMA wireless infrastructure business to Ericsson and entered into
various license and settlement agreements with Ericsson. Pursuant to the
Company's agreement with Ericsson, the Company has and will extend financing for
possible future sales by Ericsson of 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 (Note 5). The
Company recorded charges of $251 million during fiscal 1999 related to the sales
of its terrestrial CDMA wireless infrastructure business. Ericsson has notified
the Company that it is disputing the purchase price (Note 15).
The Company leases certain facilities to Ericsson and Kyocera under
noncancelable operating leases, with provisions for cost-of-living increases.
The leases expire on various dates through May 31, 2004 and February 20, 2005,
respectively, and generally provide for renewal options thereafter. Future
minimum rentals in each of the next five years from fiscal 2001 to 2005 are $22
million, $22 million, $23 million, $19 million and $5 million, including $1
million in fiscal 2001 and 2002 related to subleases.
F-23
On July 25, 2000, QUALCOMM announced that it intends to spin-off its
integrated circuits and system software solutions business. In connection with
this announcement, QUALCOMM filed a Current Report on Form 8-K dated July 25,
2000.
NOTE 14. RESTRUCTURING
During January 1999, the Company completed a review of its operating
structure to identify opportunities to improve operating effectiveness in
connection with the Company's plan to exit certain activities in its
infrastructure equipment business. As a result of this review, management
approved a formal restructuring plan that eliminated 651 positions. The Company
recorded charges to operations of $15 million during the second quarter of
fiscal 1999, including $10 million in employee termination costs, $3 million in
asset impairments and $1 million in estimated net losses on subleases or lease
cancellation penalties. The activities related to the restructuring have been
completed. The following table presents the roll forward from the initial
provision during fiscal 1999 to September 30, 2000 (in thousands):
SEPTEMBER 30, SEPTEMBER 30,
PROVISIONS DEDUCTIONS 1999 DEDUCTIONS 2000
------------- ------------ ------------- -------------- ---------------
Employee termination costs $ 10,162 $ (10,162) $ - $ - $ -
Facility exit costs 4,397 (3,866) 531 (531) -
------------- ------------ ------------- -------------- ---------------
Total $ 14,559 $ (14,028) $ 531 $ (531) $ -
============= ============ ============= ============== ===============
NOTE 15. COMMITMENTS AND CONTINGENCIES
LITIGATION
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, post-hearing briefs have been filed, and the
parties have submitted oral argument. 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 (JDA) dated April 30, 1992, between ETRI and
the Company. In the Request, ETRI alleged that the Company breached certain
provisions of the JDA and sought 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. The arbitration hearing has concluded, and all argument has
been submitted to the arbitral panel. A decision is pending. 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 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 whom, 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
F-24
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 filed a Second Amended Complaint,
including substantially the same allegations as the First Amended Complaint, on
November 1, 1999. On March 10, 2000, counsel for plaintiffs and QUALCOMM filed a
Stipulation of Settlement with the court that would allocate a settlement
payment of $9 million, which will be funded by third parties, to all plaintiffs
who do not elect to opt out of the settlement on or before April 17, 2000. The
number of employees electing to opt out exceeded the limit, and the Company
elected to void the settlement. On September 15, 2000, the Court certified the
case as a class action. 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
U.S. 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 U.S. District Court for the Southern District of California. Trial
is scheduled to commence in this case on February 27, 2001. 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 and Ericsson are currently participating in an arbitration in which
Ericsson is disputing the determination of the purchase price under the asset
purchase 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 subject asset purchase agreement. QUALCOMM and
Ericsson are having on-going discussions aimed at potentially resolving these
claims. In the event the parties are unable to otherwise resolve these claims,
the pending arbitration with respect to the purchase price determination shall
continue to proceed forward and Ericsson's claims for indemnification will be
subject to resolution pursuant to the dispute resolution procedures set forth in
the asset purchase 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.
On February 2, 2000, Thomas Durante, James Curley, Curtis Parker and Joseph
Edwards, filed a putative class action against the Company, ostensibly on behalf
of themselves and those former employees of the Company whose employment was
terminated in April 1999. Virtually all of the purported class of plaintiffs
received severance packages at the time of the termination of their employment,
in exchange for a release of claims, other than federal age discrimination
claims, against the Company. The complaint was filed in California Superior
Court in and for the County of Los Angeles and purports to state ten causes of
action including breach of contract, age discrimination, violation of Labor Code
ss. 200, violation of Labor Code ss. 970, unfair business practices, intentional
infliction of emotional distress, unjust enrichment, breach of the covenant of
good faith and fair dealing, declaratory relief and undue influence. The
complaint seeks an order accelerating all unvested stock options for the members
of the class. On June 27, 2000, the case was ordered transferred from Los
Angeles County Superior Court to San Diego County Superior Court. On July 3,
2000, the Company removed the case 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 claims are without merit and will vigorously defend the
action.
On June 13, 2000, Van May, Ruth Ann Feldman, Jeffrey Alan MacGuire and
Maurice Clark filed a putative class action lawsuit in San Diego County Superior
Court against the Company and against QUALCOMM Personal Electronics (QPE),
ostensibly on behalf of themselves and other former employees of QPE who were
offered benefits in QPE's Performance Unit Plan. The complaint purports to state
seven causes of action, including breach
F-25
of contract, violation of California Labor Code Section. 970, fraud, unfair
business practices, unjust enrichment, breach of the covenant of good faith
and fair dealing and declaratory relief. 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.
The Company is engaged in other legal actions arising in the ordinary course
of its business and believes that the ultimate outcome of these actions will not
have a material adverse effect on its results of operations, liquidity or
financial position.
OPERATING LEASES
The Company leases certain of its 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 2000, 1999 and 1998 was $19 million, $17
million and $11 million, respectively. Future minimum lease payments in each of
the next five years from fiscal 2001 through 2005 are $20 million, $16 million,
$10 million, $7 million and $5 million, respectively, and $5 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 $30 million through fiscal 2003. The Company also has a
commitment to purchase communications services for approximately $25 million in
fiscal 2001, $26 million in fiscal 2002, $21 million in fiscal 2003 and $15
million in each of the subsequent fiscal years through 2006.
LETTERS OF CREDIT, FINANCIAL GUARANTEES AND OTHER FINANCIAL COMMITMENTS
On December 22, 1999 and April 25, 2000, the Company and Pegaso
Telecomunicaciones, S.A. de C.V. (Pegaso), a wireless telecommunications
operating company investee of Leap Wireless, executed commitment letters, in
which the Company agreed to underwrite 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 debt
facilities are expected to have final maturities of seven to eight years. The
Company currently has approximately $206 million in interest-bearing receivables
from Pegaso and has guaranteed a $175 million bridge facility. The Company is
negotiating an amendment to the $175 million facility to increase the amount
available to $300 million and to extend the term from November 2000 to June
2001. The bridge facility will be prepaid and cancelled upon funding of either
the $250 million senior secured facility or the $250 million unsecured facility.
In addition to the debt financing commitment to Pegaso, the Company has $6
million of letters of credit and $16 million of other financial guarantees
outstanding as of September 30, 2000, none of which are collateralized.
METROSVYAZ LTD.
In fiscal 1999, the Company recorded $51 million in charges to reflect the
impairment of assets related to Metrosvyaz Ltd. (Metrosvyaz), a company formed
to develop and manage investments in wireless operating companies in Russia, as
a result of Leap Wireless' announcement of its intention to withdraw its support
for Metrosvyaz. In February 2000, as a result of ongoing discussions and
QUALCOMM's continued interest in promoting CDMA in Russia, the Company signed a
Memorandum of Understanding (MOU) with Metrosvyaz, pursuant to which, the
Company advanced $6 million under a previously existing loan facility. The
amount advanced was deemed to be nonrecoverable, and the $6 million charge was
recorded as other non-operating expense. In March 2000, the parties agreed to
accelerate certain provisions of the MOU, and as a result, QUALCOMM will receive
a 30% interest in Metrosvyaz before Metrosvyaz meets additional funding
milestones. The MOU provides specific milestones that Metrosvyaz must meet to
obtain an additional $10 million in funding. If the additional funding occurs,
QUALCOMM will receive an additional 5% interest in Metrosvyaz. The Company also
has a commitment to provide up to approximately $30 million in vendor financing
to Metrosvyaz related to potential future sales made by Ericsson to Metrosvyaz
(Note 5).
F-26
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 for the various systems 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 on the Company's results of operations, liquidity and financial position.
NOTE 16. SEGMENT INFORMATION
The Company is organized on the basis of products and services. Reportable
segments are as follows: QUALCOMM CDMA Technologies (QCT) is a leading developer
and supplier worldwide of CDMA-based wireless communication integrated circuits
and system and applications software solutions for voice and data communications
products and services; QUALCOMM Technology Licensing (QTL) licenses third
parties to design, manufacture, and sell products incorporating the Company's
technologies; and QUALCOMM 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. The Company sold its terrestrial-based
CDMA wireless consumer phone business, the former operating segment, QUALCOMM
Consumer Products (QCP), to Kyocera in February 2000 (Note 13).
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, including depreciation and amortization expense
related to unallocated corporate assets. Segment data includes intersegment
revenues. 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.
The table below presents information about reported segments for the years
ended September 30 (in thousands):
RECONCILING
QCT QTL QWS ITEMS TOTAL
----------- ----------- ----------- ----------- -----------
2000
Revenues $ 1,238,702 $ 705,484 $ 720,907 $ 531,687 $ 3,196,780
EBT 391,519 633,336 272,202 (100,252) 1,196,805
Total assets 296,054 160,604 1,118,644 4,487,680 6,062,982
1999
Revenues $ 1,133,422 $ 454,163 $ 939,780 $ 1,409,934 $ 3,937,299
EBT 427,994 404,947 20,220 (546,475) 306,686
Total assets 187,517 91,368 868,143 3,387,922 4,534,950
1998
Revenues $ 879,858 $ 289,934 $ 1,048,957 $ 1,129,121 $ 3,347,870
EBT 258,369 256,401 (53,054) (313,042) 148,674
Total assets 156,626 49,728 599,166 1,761,193 2,566,713
Other reconciling items for the years ended September 30 are comprised as
follows (in thousands):
F-27
2000 1999 1998
------------- -------------- --------------
REVENUES
Revenues from external customers of
QCP segment sold $ 541,856 $ 1,469,637 $ 855,101
Elimination of intersegment revenue (190,950) (382,796) (458,259)
Other products 180,781 323,093 732,279
------------- -------------- --------------
Reconciling items $ 531,687 $ 1,409,934 $ 1,129,121
============= ============== ==============
EARNINGS BEFORE INCOME TAXES
Unallocated corporate expenses $(337,456) $(337,723) $ (19,413)
EBT of QCP segment sold (70,073) (39,983) (168,714)
Unallocated interest expense (2,204) (11,595) (4,579)
Unallocated investment income, net 391,749 26,610 22,434
Distributions on Trust Convertible
Preferred Securities of subsidiary trust (13,039) (39,297) (39,270)
Intracompany profit (73,848) (130,676) (102,418)
Other 4,619 (13,811) (1,082)
------------- -------------- --------------
Reconciling items $(100,252) $(546,475) $ (313,042)
============= ============== ==============
Generally, revenues between operating segments are based on prevailing
market rates or an approximation thereof. Unallocated corporate expenses for
fiscal 2000 include $83 million in charges related to the sale of the
terrestrial-based CDMA phone business, $60 million for in-process technology
related to the SnapTrack acquisition, and $146 million for amortization of
goodwill and other acquisition-related intangible assets. Unallocated corporate
expenses for fiscal 1999 include $331 million related to the sale of certain
assets of the Company's terrestrial CDMA wireless infrastructure business (Note
13), restructuring charges (Note 14), and the impairment of assets in connection
with Leap Wireless' decision to withdraw its support of Metrosvyaz (Note 2).
Specified items included in segment EBT for years ended September 30 are as
follows (in thousands):
QCT QTL QWS
-------------- -------------- ---------------
2000
Revenues from external customers $ 1,130,216 $ 628,766 $ 715,161
Intersegment revenues 108,486 76,718 5,746
Interest income - - 110,419
Equity in losses of investees - - (1,206)
1999
Revenues from external customers $ 896,484 $ 343,242 $ 928,696
Intersegment revenues 236,938 110,921 11,084
Interest income - - 16,889
Equity in losses of investees - - (7,074)
1998
Revenues from external customers $ 583,111 $ 218,480 $ 1,012,344
Intersegment revenues 296,747 71,454 36,613
Equity in losses of investees - - (20,551)
Sales information by geographic area for the years ended September 30 is as
follows (in thousands):
2000 1999 1998
------------- ---------------- ----------------
United States $ 1,681,104 $ 2,459,838 $ 2,213,738
South Korea 711,588 881,494 633,142
Other Foreign 804,088 595,967 500,990
------------- ---------------- ----------------
$ 3,196,780 $ 3,937,299 $ 3,347,870
============= ================ ================
F-28
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 $10 million, $16 million and $15 million at September 30, 2000, 1999 and
1998, respectively.
NOTE 17. SUBSEQUENT EVENTS
In October 2000, the Company agreed to invest $200 million in the
convertible preferred shares of Inquam Limited (Inquam). Inquam is a venture
fund formed to acquire, own, develop and manage wireless telecommunication
systems, either directly or indirectly, with the primary intent of deploying
CDMA-based technology. In October 2000, the Company funded $40 million of this
investment and advanced an additional $10 million under a promissory note that
matures on October 31, 2001 and bears interest at 10%. The Company expects to
fund its remaining equity commitment over three years.
F-29
NOTE 18. SUMMARIZED QUARTERLY DATA (UNAUDITED)
The following financial information reflects all normal recurring
adjustments that are, in the opinion of management, necessary for a fair
statement of the results of the interim periods. Summarized quarterly data for
fiscal 2000 and 1999 is as follows (in thousands, except per share data):
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
------------- ------------- ------------- -------------
2000
Revenues (1) $ 1,120,073 $ 727,741 $ 713,521 $ 635,445
Gross profit (2) 471,325 377,345 438,569 402,419
Operating income 259,921 71,791 217,434 173,492
Net income 177,119 199,716 154,701 138,675
Basic net earnings per common share (3) $ 0.27 $ 0.28 $ 0.21 $ 0.19
Diluted net earnings per common share (3) $ 0.23 $ 0.25 $ 0.19 $ 0.17
1999
Revenues $ 941,223 $ 932,395 $ 1,004,066 $1,059,615
Gross profit(2) 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 (3) $ 0.09 $ (0.07) $ 0.10 $ 0.21
Diluted net earnings (loss) per common share (3) $ 0.08 $ (0.07) $ 0.09 $ 0.18
(1) The decrease in revenues from the first quarter to the second quarter of
fiscal 2000 was primarily due to a decrease in the terrestrial-based CDMA
consumer product revenue as a result of the sale of the business in February
2000.
(2) Gross profit is calculated by subtracting cost of revenues from total
revenues.
(3) Earnings per share are computed independently for each quarter and the full
year based upon respective average shares outstanding. Therefore, the sum of
the quarterly net earnings per share amounts may not equal the annual
amounts reported.
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, 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)
============= ============= ============== ============= ============
Year ended September 30, 2000
Allowance for doubtful accounts:
-- trade receivables $(22,276) $ 4,195 $ 8,471 $ - $ (9,610)
-- finance receivables (10,623) (525) 4 - (11,144)
Inventory reserves (44,884) (46,615) 32,028 38,637 (C) (20,834)
Valuation allowance on deferred tax assets - - - (584,001) (D) (584,001)
------------- ------------- -------------- ------------- ------------
$(77,783) $(42,945) $ 40,503 $(545,364) $(625,589)
============= ============= ============== ============= ============
(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.
(C) Disposition in connection with the sale of assets related to the
terrestrial-based CDMA consumer product business in February 2000.
(D) Balance was charged to paid-in capital (see Note 10 to the Consolidated
Financial Statements).
S-1