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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(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 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-19528
QUALCOMM INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-3685934
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6455 LUSK BLVD. 92121-2779
SAN DIEGO, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 587-1121
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K of any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non affiliates of
the registrant as of November 25, 1996 was $2,414,522,124.*
The number of shares outstanding of the registrant's common stock was
66,601,029 as of November 25, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's Definitive Proxy Statement to be filed with the
Commission pursuant to Regulation 14A in connection with the 1996 Annual Meeting
are incorporated herein by reference into Part III of this Report. Such proxy
statement will be filed with the Securities and Exchange Commission not later
than 120 days after the registrant's fiscal year ended September 29, 1996.
Certain Exhibits filed with the registrant's (i) Registration Statement on
Form S-1 (Registration No. 33-42782), as amended; (ii) Annual Report on Form
10-K for the fiscal year ended September 27, 1992; (iii) Registration Statement
on Form S-3 (Registration No. 33-62724), as amended; (iv) Annual Report on Form
10-K for the fiscal year ended September 26, 1993; (v) Form 10-Q for the quarter
ended March 27, 1994, as amended; (vi) Registration Statement on Form S-8
(Registration No. 333-2750); (vii) Registration Statement on Form S-8
(Registration No. 333-2752); (viii) Registration Statement On Form S-8
(Registration No. 333-2754); (ix) Registration Statement on Form S-8
(Registration No. 333-2756); and (x) Current Report on Form 8-K dated as of
September 26, 1995, are incorporated herein by reference into Part IV of this
Report.
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* Excludes the Common Stock held by executive officers, directors and
stockholders whose ownership exceeds 5% of the Common Stock outstanding at
November 25, 1996. Exclusion of such shares should not be construed to
indicate that any such person possesses the power, direct or indirect, to
direct or cause the direction of the management or policies of the registrant
or that such person is controlled by or under common control with the
registrant.
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QUALCOMM INCORPORATED
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 1996
INDEX
PAGE
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PART I
Item 1. Business.................................................................... 1
Introduction................................................................ 1
Recent Developments......................................................... 2
Wireless Telecommunications Industry........................................ 3
Strategy.................................................................... 4
CDMA Technology and Products................................................ 5
OmniTRACS................................................................... 9
Globalstar.................................................................. 10
Eudora Electronic Mail...................................................... 11
Government Systems.......................................................... 11
Manufacturing and Backlog................................................... 12
Research and Development.................................................... 12
Competition................................................................. 12
Patents, Trademarks and Trade Secrets....................................... 13
Employees................................................................... 13
Executive Officers.......................................................... 14
Risk Factors................................................................ 17
Reliance on Key Personnel................................................... 24
Volatility of Stock Price................................................... 25
Item 2. Properties.................................................................. 25
Item 3. Legal Proceedings........................................................... 26
Item 4. Submission of Matters to a Vote of Security Holders......................... 26
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters........ 27
Item 6. Selected Financial Data..................................................... 28
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 29
Item 8. Financial Statements........................................................ 36
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures................................................................. 36
PART III
Item 10. Directors and Executive Officers of the Registrant.......................... 36
Item 11. Executive Compensation...................................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 36
Item 13. Certain Relationships and Related Transactions.............................. 36
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............. 37
Signatures ............................................................................ 40
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PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. QUALCOMM Incorporated's (the "Company") future results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include, but are not specifically limited to,
timely product development, variation of royalty, license and other revenues,
failure to satisfy performance obligations, uncertainty regarding the Company's
patents and propriety rights (including the risk that the Company may be forced
to engage in costly litigation to protect such patents and rights and the
material adverse consequences to the Company if there were unfavorable outcome
of any such litigation), difficulties in obtaining components needed for
production of wireless equipment and changes in economic conditions of various
markets the Company serves, as well as the other risks detailed in this section,
and in the sections entitled Risk Factors and Management's Discussion and
Analysis of Financial Conditions and Results of Operations.
INTRODUCTION
QUALCOMM is a leading provider of digital wireless communications products,
technologies and services. The Company designs, develops, markets and
manufactures wireless communications, infrastructure and subscriber equipment
and Application Specific Integrated Circuits ("ASICs") based on its Code
Division Multiple Access ("CDMA") technology and has licensed its CDMA
technology to major telecommunications equipment suppliers for incorporation
into their wireless communications products. QUALCOMM designed and is
manufacturing, distributing and operating the OmniTRACS system, a
satellite-based, two-way mobile communications and tracking system that provides
messaging, position reporting and other services for transportation companies
and other mobile and fixed-site customers. The Company also provides contract
development services, including the design and development of subscriber and
ground communications equipment for the Globalstar L.P. ("Globalstar")
satellite-based communications system. In addition, the Company develops,
markets and manufactures a variety of other communications products, including
Eudora, a leading Internet-based electronic mail software application, for
personal, commercial and government applications.
The Company's CDMA technology has been developed for implementation in
cellular, personal communications services ("PCS") and Wireless Local Loop
("WLL") systems as well as other wireless applications. Wireless networks based
on the Company's CDMA technology have been commercially deployed and are under
development in a number of markets around the world. CDMA has emerged as the
leading digital technology for cellular and PCS applications in the U.S., having
been adopted by a number of the largest cellular and PCS carriers covering over
95% of the U.S. population. Internationally, CDMA has been introduced in Hong
Kong and South Korea and is being evaluated in numerous other markets worldwide.
To support the deployment of CDMA equipment, the Company has entered into a
number of royalty-bearing license agreements with major telecommunications
companies throughout the world. These companies include Alps Electric, DENSO,
DSP Communications, Fujitsu, Hughes Network Systems ("Hughes"), Hyundai
Electronics, Kenwood, Kyocera, LGIC, Lucent Technologies ("Lucent"), Matsushita,
Maxon, Mitsubishi, Motorola, NEC, NOKIA, Northern Telecom ("Nortel"), OKI
Electric, Samsung Electronics, Sanyo, Siemens, Sony, Toshiba and VLSI
Technology. The Company and its licensees are developing, marketing and
manufacturing CDMA wireless infrastructure and subscriber equipment and ASICs
for wireless networks worldwide. The Company has entered into agreements with
Hughes and Nortel to support the design and manufacture of CDMA infrastructure
equipment and a joint venture with Sony, QUALCOMM Personal Electronics ("QPE"),
to develop, manufacture and market subscriber equipment.
The Company's OmniTRACs system provides two-way data messaging and position
reporting services to mobile users, primarily transportation operators in the
long haul trucking industry. The Company has sold over 175,000 OmniTRACS
terminals worldwide in 33 countries, both directly and through joint ventures
and strategic alliances. The Company operates a Network Management Facility
("NMF") in the U.S. which currently processes an average of 4 million messages
and position reports per day to over 650 customers. The Company also develops
and licenses complementary software products and services which enhance the
functionality of the OmniTRACS system and increase messaging unit volume.
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RECENT DEVELOPMENTS
A number of important milestones toward large-scale commercialization of
the Company's CDMA technology have been achieved. In the U.S., CDMA has emerged
as the leading digital technology for cellular and PCS applications. A number of
the largest domestic cellular carriers have selected CDMA as their digital
platform, including AirTouch Communications, ALLTEL Mobile, Ameritech, Comcast
Cellular Communications, GTE Mobilnet, Bell Atlantic Nynex Mobile, 360 degrees
Communications and US WEST. A significant number of the largest PCS carriers
have announced their selection of CDMA for use in their systems, including
PrimeCo Personal Communications, L.P. ("PrimeCo"), a partnership of AirTouch
Communications, Bell Atlantic Nynex Mobile and US WEST; Sprint Spectrum L.P.
("Sprint Spectrum"), a partnership of Sprint Corporation, Tele-Communications
Inc., Cox Communications Inc. and Comcast Corp.; and NextWave Telecom, Inc.
("NextWave").
After extensive field testing and industry review and standardization, the
Company's CDMA technology is now being deployed in a number of markets around
the world. CDMA-based wireless systems were successfully launched in both south
Korea and Hong Kong and the Company believes the South Korean system was serving
approximately 600,000 subscribers as of November 1996. In the fall of 1996,
PrimeCo launched PCS service in 15 major U.S. cities, including Chicago, Dallas,
Fort Lauderdale, Ft. Worth, Honolulu, Houston, Jacksonville, Miami, Milwaukee,
New Orleans, Norfolk, Orlando, Richmond, San Antonio and Tampa. The launch
represented the largest domestic multimarket wireless system deployment to date,
covering a population of over 60 million, as well as the first commercial
multimarket launch of CDMA at 1900 MHz. The Company believes that, at November
30, 1996, commercial CDMA systems served approximately 700,000 subscribers
worldwide. Other CDMA networks are expected to be commercially deployed in the
U.S. and internationally in the coming year, including a number of U.S. cellular
and PCS service providers.
The Company has an agreement with Nortel providing for the production and
delivery of infrastructure equipment for CDMA wireless systems. Pursuant to the
agreement, Nortel has access to QUALCOMM's product designs for digital cellular,
PCS and WLL infrastructure products and in return purchases from QUALCOMM a
minimum percentage of Nortel's CDMA infrastructure equipment requirements for
resale to its customers. In February 1996, the Company announced it will supply
Nortel with approximately $200 million of PCS infrastructure equipment and RF
services as part of Nortel's estimated $1 billion equipment supply agreement
with Sprint Spectrum. Other major customers under this agreement include BCTel
Mobility Cellular and Bell Mobility. As of November 30, 1996, the Company has
shipped approximately 375 base stations and related infrastructure equipment to
PCS and cellular operators in North America.
In September 1996, the Company and Hughes entered into an agreement
providing for design and production of infrastructure equipment for CDMA
wireless systems. Pursuant to the agreement, Hughes will have access to
QUALCOMM's product designs for digital cellular, PCS and WLL infrastructure
products and in return will purchase a minimum percentage of Hughes' CDMA
infrastructure equipment requirements for resale to its customers. In October
1996, Hughes announced a strategic supply agreement with NextWave under which
Hughes will supply up to $245 million of CDMA infrastructure equipment for
NextWave's PCS network, with an option to expand such amount to $1 billion over
the next six years under certain conditions. Pursuant to the agreement with
Hughes, QUALCOMM will supply a percentage of the infrastructure equipment to be
shipped by Hughes to NextWave.
During 1996, QPE dedicated a new manufacturing facility and completed the
installation of eight production lines in order to support existing and future
orders for CDMA telephones. In June 1996, Sprint Spectrum and PrimeCo announced
awards approximating $500 million and $350 million, respectively, to QPE for
CDMA subscriber equipment. Shipments under the contracts began in 1996 and are
scheduled to continue through 1998. As of September 30, 1996, the Company had
produced approximately 400,000 handsets for delivery, approximately 200,000 of
which were shipped in the fourth quarter of fiscal 1996.
In September 1996, Globalstar completed an important milestone when forward
and reverse link calls using the Company's CDMA technology were successfully
completed in a laboratory environment. Globalstar has entered into a four-year
agreement for QUALCOMM to design and develop subscriber equipment and
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ground communications equipment for the Globalstar system. Total revenues under
the contract to QUALCOMM are estimated to exceed $500 million at completion,
$213 million of which has been recognized by QUALCOMM to date.
WIRELESS TELECOMMUNICATIONS INDUSTRY
Overview. Demand for wireless telecommunications services has grown
dramatically since the commercial introduction of cellular telephony in 1984.
This demand is largely attributable to the widespread availability and
increasing affordability of mobile telephony, paging and other emerging wireless
telecommunications services. Technological advances and a regulatory environment
more favorable to competition have also served to stimulate market growth. In
less developed countries, wireless services have become an alternative to fixed
wireline services which are characterized by poor quality, limited capacity and
long installation waiting periods.
The Company believes the demand for wireless telecommunications will
continue to grow dramatically. Currently, wireless penetration in the U.S. is
estimated to be 16% and, according to Paul Kagan Associates, Inc., is expected
to be approximately 48% by 2006. As reported by the Cellular Telephone Industry
Association, the compound annual growth rate of cellular subscribers exceeded
45% from 1993 through 1995. Despite this rapid growth in the number of cellular
subscribers, wireless minutes of use represent only a small percentage of total
telecommunications traffic. The Company believes that the anticipated lower cost
and higher quality of wireless service, combined with technological improvements
in handsets, will fuel further growth in the wireless market. In addition to
lower prices, the Company believes that increased voice quality, battery life
and functionality and awareness of the productivity, convenience and emergency
communications capability associated with wireless services will contribute to
the growth in demand for wireless airtime.
Technology. Wireless telecommunications service is currently available
using either analog or digital technology. The majority of cellular services
transmit voice and data signals over analog-based networks by varying the
amplitude or frequency of one continuous electronic signal transmitted over a
single radio channel. Although it is more widely deployed than digital, analog
technology today has several limitations, including limited capacity,
inconsistent service quality (e.g., poor voice quality and dropped calls), lack
of effectiveness in preventing "eavesdropping," susceptibility to fraud and
"cloning" and unreliability in data transfer. Digital wireless
telecommunications systems overcome the capacity constraints of analog systems
by converting voice or data signals into a stream of digits that is compressed
before transmission, enabling a single radio channel to carry multiple
simultaneous signal transmissions. This increased capacity, along with
enhancements in digital protocols, allows digital-based transfer systems to
offer new and advanced services including greater call privacy, fraud
protection, single number service, integrated voice and paging and enhanced
wireless data transmission services such as e-mail, facsimile and wireless
connections to computer networks.
Two primary digital technologies are available for cellular, PCS and WLL
applications -- CDMA and Time Division Multiple Access ("TDMA")/("GSM") Global
System for Mobile Communications. In July 1993, the Telecommunications Industry
Association ("TIA") adopted a North American interim standard (IS-95) for
cellular telecommunications based on QUALCOMM's CDMA technology. In April 1995,
the Company's CDMA technology was approved as a standard for PCS which was
published as ANSI standard J-STD-008. A form of TDMA has been adopted as a
standard for cellular and PCS in the U.S. and GSM has been adopted as a standard
for PCS in the U.S. and for cellular and PCS in Europe. Most major
telecommunications equipment manufacturers are offering both CDMA and TDMA/GSM
infrastructure and subscriber equipment, including Hughes, Lucent, Matsushita,
Mitsubishi, Motorola, Nortel and Samsung. The Company believes CDMA networks
will offer end-users significant advantages, including increased capacity,
higher quality, fewer dropped calls, lower system costs and enhanced privacy,
when compared to analog and other digital technologies.
Personal Communications Services. PCS is a digital wireless communications
system using cellular wireless technologies operating at frequencies ranging
from 1800 MHz to 2000 MHz. In order to increase competition in wireless
communications and promote the rapid deployment of advanced technologies,
Congress enacted legislation directing the FCC to assign radio frequency
licenses for PCS by competitive bidding. In March 1995, the FCC completed its
first auction, the A-Block and B-Block Auction, resulting in the award of two
licenses for 30 MHz each of spectrum in each of 51 major trading areas. Each
licensee must
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construct networks that serve at least one-third of the population in its
markets within five years of the grant of the applicable license and at least
two-thirds of the population within ten years. The C-Block Auction, comprised of
30 MHz basic trading area ("BTA") licenses, was recently completed and the
auction of the 10 MHz D-Block, E-Block and F-Block BTA licenses commenced in
August 1996. As with digital cellular, PCS is expected to include a number of
attractive features, such as (i) the provision of all services to one
untethered, mobile number, (ii) low priced service options, (iii) in the near
future, medium-speed data transmissions to and from portable computers, advanced
paging services and facsimile services and (iv) increased security and fraud
protection.
Wireless Local Loop. WLL systems provide fixed (non-mobile) telephone
services to users by transmitting voice messages over radio waves from the
public switched network to the location of the fixed telephone. WLL systems are
an attractive alternative to traditional copper and fiber based fixed services
with the potential to be implemented more quickly and at lower cost than
wireline services. The installation of WLL systems minimizes the need to obtain
right-of-ways and excavate existing roads and infrastructure to lay copper or
fiber cables. WLL systems increasingly are being adopted in developing markets
in order to quickly respond to the large unmet demand for communications
services. In many international markets, including the People's Republic of
China, India, Indonesia and Brazil, fixed telephone systems are inadequate to
handle demand with telephone line penetration ranging from less than 1% to less
than 10% compared with over 50% in major developed markets.
STRATEGY
QUALCOMM's strategy is to be a leading provider of CDMA-based digital
wireless communications products, services and technologies. The Company
believes its proprietary CDMA technology to be an ideal base for digital
cellular service, PCS, WLL, data services, wireless Private Branch Exchange
("PBX") systems, satellite-based voice and data communications and other
wireless services serving broad geographic areas. Elements of QUALCOMM's
strategy include:
PROMOTE WORLDWIDE COMMERCIALIZATION OF CDMA
CDMA has emerged as the leading technology in North America for digital
cellular and PCS and systems, and is a leading technology internationally. This
acceptance of the Company's CDMA technology is evidenced by the broad commercial
deployment of CDMA already undertaken in numerous markets in the U.S., South
Korea and Hong Kong, and the commercial deployments announced in South America,
elsewhere in Asia, Europe and Africa. Based upon public announcements by PCS
licensees and cellular service providers, the Company estimates that CDMA
technology will be employed by cellular and PCS service providers whose networks
cover approximately 95% of the U.S. population. In order to facilitate worldwide
implementation of CDMA, the Company has entered into numerous royalty-bearing
license agreements, including agreements with twenty-one subscriber, nine
infrastructure, two ASICs and fourteen test equipment licensees. The Company
continues to participate actively in various standards-setting organizations,
trade organizations and seminars in order to expand commercial implementation of
CDMA.
REMAIN A LEADER IN PRODUCT MANUFACTURING
During fiscal 1996, QUALCOMM was the leading provider of CDMA-based digital
subscriber equipment, and a key component of the Company's strategy is to remain
a leading CDMA equipment provider. QUALCOMM manufactures infrastructure and
subscriber equipment for direct sale to operators of cellular, PCS and WLL
applications, and supplies proprietary ASICs to other CDMA subscriber and
infrastructure equipment suppliers. The Company will continue to expand its
manufacturing capacity and establish strategic alliances with third parties to
meet the demand for CDMA infrastructure and subscriber equipment. Further, the
Company intends to support the sales and marketing of its CDMA equipment by
arranging or providing for financing for purchasers of the Company's cellular,
PCS and WLL equipment where required.
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LEVERAGE INDUSTRY PARTNERSHIPS
Industry partnerships with leading domestic and international
communications companies help QUALCOMM facilitate the development, design,
funding and commercialization of new products and services, and enable the
Company to participate in a broader range of wireless communications product and
service opportunities. The Company is licensing its CDMA technology to equipment
manufacturers to encourage the wide-scale adoption of CDMA. In addition,
QUALCOMM has and will continue to enter into strategic alliances, such as those
with Nortel and Hughes, to promote the deployment of CDMA equipment and generate
manufacturing revenue for the Company. The Company has formed QPE, a joint
venture with Sony, to develop and manufacture subscriber equipment. The Company
has also entered into service and equipment supply agreements with numerous
international partners, including Alcatel, to further the penetration of
OmniTRACs around the world. From time to time the Company may invest in domestic
or international wireless carriers (such as Globalstar, NextWave and Shinsegi
Mobile Telecom) where such investment strengthens the carriers' commitment to
CDMA and/or QUALCOMM's role as a supplier of equipment.
FOCUS ON CORE TECHNOLOGIES
QUALCOMM's proprietary core technologies are used in a variety of digital
wireless communications systems that are deployed in terrestrial, airborne or
satellite-based products. The Company continues to place strong emphasis on
filing and obtaining U.S. and foreign patents and other forms of intellectual
property protection for its technology. The Company has been issued
approximately 90 U.S. patents and has 275 patent applications pending in the
United States. The Company believes that its issued patents provide broad
coverage for many digital wireless applications of CDMA, including satellite,
cellular, cordless telephone, PCS, wireless PBX and WLL applications, as well as
the Company's OmniTRACS system. The Company also actively pursues foreign patent
protection in other countries of interest to the Company. The Company attempts
to leverage its technology across product and business areas.
CDMA TECHNOLOGY AND PRODUCTS
The Company's CDMA technology is a proprietary integrated software and
hardware system for digitally transmitting telecommunication signals in a
wireless network. Unlike analog or other digital systems, QUALCOMM's CDMA system
can reuse the same spectrum in each antenna sector of each cell in a cellular
system. This provides a more efficient use of the allocated spectrum resulting
in an increase in capacity. Using the Company's CDMA technology, multiple calls
are coded and transmitted across a 1.25 MHz channel. Each CDMA telephone is
assigned its own code to encode analog voice signals that have been converted
into digital bit streams using the Company's proprietary PureVoice vocoders. The
coded signals are then transmitted over the air to the cell site, where they are
then processed by a CDMA channel unit or modem.
The Company's CDMA technology competes primarily with analog and TDMA/GSM
based systems to implement wireless systems in the cellular, PCS and WLL
markets. Repeated field trials have demonstrated that the Company's CDMA
technology provides the following advantages over analog technology and the
other digital technologies:
Increased Capacity. The Company's CDMA technology allows a greater number
of calls within the allocated frequency than other systems, thus increasing
subscriber capacity to as much as 10 to 20 times the current analog system.
Under certain system configurations, even greater capacity increases are
achievable.
Higher Quality. There are inherent quality advantages in the Company's
CDMA technology that result in a consistently higher quality voice and data
transmission throughout the coverage area for mobile and portable telephone
operations.
Fewer Dropped Calls. The Company's CDMA technology is designed to allow
for "soft hand-off" when a user switches from one cell site to another,
thus reducing the number of dropped calls compared to analog and TDMA/GSM
systems.
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Enhanced Privacy. Because calls made over CDMA systems are low power, wide
band and coded, the Company's CDMA technology inherently provides greatly
improved privacy for users.
Lower Power and Extended Talk Time. The Company's proprietary power
control system constantly monitors and adjusts mobile telephone power
output to the minimum level required to achieve high quality voice or data
transmission. As a result, the average power required to operate CDMA
handsets is typically reduced from one-twenty-fifth to one-thousandth of
the power required for analog cellular telephones that are currently
available on the market. Lower average power results in longer battery life
and lighter weight, lower cost portable telephones, and also significantly
increases talk and standby time.
Lower Infrastructure Costs and Easier Transition. CDMA systems can achieve
the same level of coverage as the current analog or TDMA/GSM based systems
using fewer cells, which reduces overall infrastructure cost and the
subsequent maintenance cost of CDMA systems. In addition, the Company's
CDMA technology is expected to offer an easier transition from analog to
digital than competing technologies because less frequency must be
reallocated to produce acceptable capacity gains and high quality digital
service.
LICENSING OF CDMA TECHNOLOGY
As part of QUALCOMM's strategy to support worldwide adoption of its CDMA
technology, QUALCOMM licenses to third parties the rights to design, manufacture
and sell products utilizing CDMA technology. The following chart lists the
Company's licensees:
INFRASTRUCTURE EQUIPMENT SUBSCRIBER EQUIPMENT TEST EQUIPMENT
-------------------------- -------------------------- --------------------------
Fujitsu Alps Electric Advantest
Hughes DENSO Anritsu Corporation
Hyundai Electronics Fujitsu Comarco Wireless
LGIC Hughes Grayson Electronics
Lucent Hyundai Electronics Hewlett-Packard
Motorola Kenwood IFR Systems
NEC Kyocera LCC
Nortel LGIC Racal
Samsung Electronics Lucent Rohde & Schwarz
Matsushita Rotadata
ASICS Maxon Safeco
-------------------------- Mitsubishi Sage Instruments
Motorola Tektronix
DSP Communications NEC Wavetek
VLSI Technology NOKIA
OKI Electric
Samsung Electronics
Sanyo
Siemens Wireless Terminals
Sony
Toshiba
The Company's CDMA license agreements generally provide cross-licenses to
QUALCOMM to use certain of its licensees' technology to manufacture and sell
certain CDMA equipment. Licensees are required to pay the Company license fees
as well as ongoing royalties based on a percentage of the selling price of CDMA
subscriber and infrastructure equipment. License fees are nonrefundable and are
generally paid in one or more installments. In many cases, the use by the
Company of its licensees' technology is royalty free. In some cases, if the
Company incorporates any of this technology into its products, it is obligated
to pay royalties
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on the sale of such products. Lucent and Motorola are entitled, subject to the
terms of their respective agreements, to share in a percentage of third party
royalties and license fees paid by licensees to the Company.
INFRASTRUCTURE PRODUCTS
QUALCOMM is developing, manufacturing and marketing CDMA cellular, PCS and
WLL infrastructure products. The Company's infrastructure product lines include
Base Transceiver Station ("BTS") and Base Station Controller ("BSC") equipment
built in compliance with the IS-95 and J-STD-008 standards. The BTS and BSC have
been designed to provide a complete turnkey solution for cellular, PCS and WLL
applications, integrating traditional switching functionality with the BSC
equipment configuration and software functionality. The BSC links BTS equipment
together allowing communication between mobile equipment within the system using
packet based switching, and connecting these mobile units with existing wireline
networks. The BSC provides mobility management, vocoding functions, routing of
calls, service features when applicable, customer billing, and operations,
administration and maintenance functionality.
In 1994, the Company announced the formation of a strategic alliance with
Nortel to integrate the BTS and BSC technology of QUALCOMM with the wireless
products of Nortel. Pursuant to the agreement, Nortel has access to the
Company's product designs for digital cellular, PCS and WLL infrastructure
products and in return purchases from QUALCOMM a minimum percentage of Nortel's
CDMA infrastructure equipment requirements for resale to its customers. QUALCOMM
and Nortel will also provide turnkey installation of CDMA networks, including
network coverage and planning services, cell site commissioning, back-haul
equipment installation, customer training and support. In February 1996, the
Company announced its agreement to supply Nortel with approximately $200 million
of PCS infrastructure equipment and RF services as part of Nortel's estimated $1
billion equipment supply agreement with Sprint Spectrum. Other major customers
under this agreement include BCTel Mobility Cellular and Bell Mobility. As of
November 30, 1996, the Company has shipped approximately 375 base stations and
related infrastructure equipment to PCS and cellular operators in North America.
In September 1996, the Company and Hughes entered into an agreement
providing for the design and production of infrastructure equipment for CDMA
wireless systems. Pursuant to the agreement, Hughes will have access to
QUALCOMM's product designs for digital cellular, PCS and WLL infrastructure
products and in return will purchase a minimum percentage of Hughes' CDMA
infrastructure equipment requirements for resale to its customers. In October
1996, Hughes announced a strategic supply agreement with NextWave under which
Hughes will supply up to $245 million of CDMA infrastructure equipment over the
next six years for NextWave's PCS network, with an option to expand such amount
to $1 billion under certain conditions. Pursuant to the agreement with Hughes,
QUALCOMM will supply a percentage of the infrastructure equipment to be shipped
by Hughes to NextWave.
Pursuant to an Equipment Requirements Agreement with QUALCOMM, upon
satisfaction of certain conditions, NextWave is obligated to purchase
approximately 50% of NextWave's infrastructure equipment requirements from
QUALCOMM. The agreement also provides that QUALCOMM will offer 100% financing
for equipment purchased under such agreement, on commercial terms. The terms of
the equipment purchases, including equipment financing arrangements, will be
established in a further agreement to be negotiated in good faith by the
parties. There can be no assurance that such an agreement will be concluded.
Cellular, PCS and WLL system operators increasingly are requiring their
suppliers to arrange or provide long-term financing as a condition to obtaining
or bidding on infrastructure projects. These projects may require the Company to
arrange or provide financing of amounts ranging from modest sums to over a
billion dollars on any particular project. The Company has committed to arrange
or provide financing for up to $200 million of PCS infrastructure equipment and
related services and costs to Sprint Spectrum, and is currently in negotiations
with a number of PCS service providers regarding potentially significant
equipment supply agreements and related financing.
The Company's CDMA technology is in use or has been approved for use in a
number of markets around the world, including, among others, Brazil, Japan,
India, Indonesia, People's Republic of China, Pakistan, Russia, South Korea and
Vietnam. The Company plans to pursue international opportunities for the sale of
CDMA infrastructure equipment, either as a prime contractor, through its
agreements with Nortel and or
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Hughes or through international joint venture partners. As part of such
equipment sales, the Company may be required to arrange or provide long-term
financing.
SUBSCRIBER PRODUCTS
QUALCOMM designs, manufactures and markets digital phones utilizing CDMA
technology for cellular, PCS, and WLL applications. The cellular and PCS phones
are manufactured through QPE, a joint venture with SONY Electronics formed in
1994. In December 1995, QUALCOMM and SONY signed an agreement to expand the
partnership to jointly market, sell and support wireless CDMA portable phones in
the U.S. The agreement applies to handsets sold to carrier distribution
channels, OEM customers and corporate customers in the U.S. QUALCOMM maintains a
51% ownership in QPE.
In the first half of 1995, the Company introduced the QCP-800 and QCP-1900
portable telephones. The QCP-800 is a dual-mode (analog/CDMA) telephone designed
for cellular users at 800 MHz and provides up to five hours of talk time and 48
hours of standby time on a single battery when providing CDMA service. The
QCP-1900 is for PCS users at 1900 MHz and provides up to four hours of talk time
and 48 hours of standby time on a single battery. Both telephones support
advanced features including caller identification, voice mail notification, data
communications, facsimile, advanced paging, short message services and
over-the-air activation. Furthermore, both telephones support data transmission
rates approaching 14.4 Kbps and incorporate QUALCOMM's 13 Kbps PureVoice voice
coding which offers voice quality independently judged to be equal to that of a
wired telephone. Production volumes of the QCP-800 and the QCP-1900 telephones
are currently being shipped to service providers and licensees worldwide. The
Company is also designing next generation telephones for cellular, PCS and WLL
application, which are expected to provide for advanced data features and will
be lighter, use less power and have longer battery life than existing models.
In fiscal 1996, the Company experienced a significant increase in
subscriber unit production for both cellular and PCS phones. During this period,
the Company produced approximately 400,000 CDMA handsets, the majority of which
were allocated to the South Korean and Hong Kong markets where commercial CDMA
cellular systems are in operation. In 1996, the Company entered into contracts
to supply CDMA handsets with Sprint Spectrum and PrimeCo valued at $500 million
and $350 million, respectively. In the fourth quarter of fiscal 1996, large
volumes of PCS phones were produced for Sprint Spectrum and PrimeCo for
deployment in their PCS systems.
In 1996, the Company began to produce the QCT-1000 CDMA fixed wireless
telephone designed for worldwide use in residential and small business WLL
applications. Other WLL products under development include the QCT-6000, a full
feature system offering voice, fax and data capabilities for use in business
settings, and the QCT-8000 wireless PBX designed for locations with small
clusters of subscribers such as small villages or office and apartment
buildings.
ASIC PRODUCTS
The Company designs and incorporates its proprietary CDMA ASICs in its own
subscriber and infrastructure equipment and also sells them to its licensees for
incorporation in equipment under the terms of the related license agreements. In
fiscal 1996, the Company entered into license arrangements with DSP
Communications and VLSI Technology covering certain ASIC patents belonging to
QUALCOMM. The Company currently relies on several independent foundries to
manufacture all of its ASICs. The Company's strategy is to utilize a number of
qualified foundries that it believes provide cost, technology or capacity
advantages for specific products. The Company currently has arranged with Intel,
IBM and Philips for such ASIC manufacturing. In support of its licensees
manufacturing CDMA equipment, QUALCOMM shipped over 2 million of its CDMA ASICs
in fiscal 1996.
QUALCOMM ASIC products provide complex solutions for a variety of wireless
communication applications including CDMA cellular, PCS, and WLL applications.
Product offerings include a complete selection of integrated circuits for
frequency synthesis, forward error correction ("FEC"), voice compression and
automatic gain control ("AGC"). Frequency synthesizer products encompass direct
digital synthesizers and frequency synthesizer evaluation boards. FEC devices
include industry leading Viterbi decoders and trellis coders. Voice compression
products include variable rate vocoders and vocoder evaluation boards. AGC
amplifiers include both receive and transmit components. CDMA ASICs include the
Mobile Station Modem ("MSM"), Baseband Analog Processor ("BBA") and Cell Station
Modem ("CSM"). The CDMA chips are
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designed for increased functionality with fewer components, which reduces the
size and overall cost of the manufactured product.
The MSM is a complete, single integrated circuit solution for CDMA and FM
digital baseband processing for dualmode CDMA/analog cellular telephones. In the
fourth quarter of fiscal 1996, the next generation MSM (MSM2.2) was introduced
to the marketplace for dual-mode CDMA/analog subscriber applications. The MSM
2.2 is an improved ASIC which supports both the 8 Kbps (normal) and 13 Kbps
PureVoice speech vocoders on a single chip for dual-mode CDMA/analog cellular
and PCS subscriber applications. With low power consumption and IS-95 compliant
performance, the MSM 2.2 simplifies design decisions and reduces the complexity
of the final product which provides an important advantage to the telephone
manufacturer in terms of physical area, cost and battery life. Production
shipments of MSM 2.2 are expected to commence in the first quarter of fiscal
1997. The BBA implements the CDMA/FM portion of a dual-mode CDMA analog
telephone which bridges the analog RF processing and the digital processing
sections of the cellular telephone. The CSM provides a cost reduction and system
integration enhancement for the base station unit. The CSM incorporates the CDMA
modulator, CDMA demodulator and serial Viterbi decoder functions on single chip,
providing reduced costs and improved functionality. All of the Company's CDMA
ASICs are currently available to QUALCOMM's CDMA licensees throughout the world.
QUALCOMM's Very Large Scale Integrated ("VLSI") products group designs and
sells a number of sophisticated signal system components in the electronics
industry. These processing elements include Viterbi and trellis decoders, speech
encoders, direct digital synthesizers and phase locked loops. Many of these
products are used as components of QUALCOMM's systems and products. QUALCOMM
also markets and distributes these products to communications system developers
throughout the world through a network of domestic and international sales
representatives. Designing its own circuits permits the Company to exercise
greater product control, enhance quality, reduce costs and rapidly bring its new
systems and products to market.
OMNITRACS
QUALCOMM's OmniTRACS communications system provides two-way data messaging
and position reporting services for transportation companies. Through September
30, 1996, the Company has sold over 175,000 OmniTRACS systems worldwide. Message
transmission and position tracking are provided by use of transponders on
commercially available geostationary earth orbit satellites, providing a single
network, eliminating the limited coverage and accuracy problems inherent in
land-based systems and allowing dispatchers to remain in close contact with
their fleets at all times. The OmniTRACS system helps transportation companies
improve the rate of return on assets and increase efficiency and safety by
improving communications between drivers and dispatchers. System features
include status updates, load and pick-up reports, position reports at regular
intervals and vehicle and driving performance information.
The OmniTRACS system was first introduced in the U.S. in 1988, and is
currently operating in 32 countries around the world (in addition to the U.S.).
To implement the OmniTRACS system, the Company utilized its spread spectrum
technology to develop a proprietary signal processing technique that enables the
OmniTRACS system to operate without interfering with other satellite
transmissions and to tolerate legal levels of interference. The system operates
on leased commercial Ku-band or C-band satellite transponders. Position
reporting is accomplished through either the use of a pilot signal on a second
satellite using a proprietary feature of the OmniTRACS system called QASPR
(QUALCOMM Automatic Satellite Position Reporting System) or the use of the U.S.
Government-funded Global Positioning System.
UNITED STATES BUSINESS
The Company generates revenues from its OmniTRACS system in the U.S. by
manufacturing and selling OmniTRACS mobile terminals and related software
packages and by providing ongoing messaging and maintenance services. The
Company sells its OmniTRACS products in the U.S. primarily through its direct
sales force, including software systems and field engineering support personnel
in five regions throughout the United States. The Company provides field support
out of each sales office, including technical software support.
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Customers for U.S. operations include over 650 U.S. transportation
companies, primarily in the trucking industry. The Company is currently
processing approximately 4 million messages and position reports per day.
Message transmissions for U.S. operations utilize a Ku-band satellite
transponder and are formatted and processed at an NMF operated by QUALCOMM. The
primary NMF is located in San Diego, California and a fully capable backup NMF
is located in Las Vegas, Nevada. QUALCOMM is the only provider to have such a
backup hub to service its customers.
The Company has primarily targeted the for-hire, long-haul irregular route
truck load segment of the trucking market. The Company believes the targeted
truckload market in the U.S., including private carriers, consists of over
500,000 trucks and includes flatbeds, household movers, dry vans and
refrigerated carriers. The Company markets its OmniTRACS products and services
to other trucking market segments such as the less-than-truckload and to other
industries and has sold OmniTRACS products for use by private trucking fleets,
service vans, ships, trains and federal emergency vehicles and for oil and gas
pipeline control and monitoring sites.
INTERNATIONAL BUSINESS
The Company's strategy is to work with international telecommunications
companies and operators to establish OmniTRACS operations in foreign markets.
The OmniTRACS system is operating in 32 countries throughout Europe and in
Canada, Japan, Brazil, Mexico, Malaysia and South Korea, in addition to its U.S.
operations. Internationally, the Company generates revenues from the OmniTRACS
system through license fees, sales of network equipment and terminals and fees
from engineering support services. Messaging services are provided by service
providers that operate network management centers for a region under licenses
granted by the Company.
QUALCOMM distributes its products through partners in other countries. In
these countries the Company provides units for the Ku-band or C-band
frequencies. Ku-band is allocated at a higher frequency spectrum than C-band. In
addition, the Company has invested or may choose to invest in certain of its
current or future operators.
In the Ku-Band, the Company distributes its products through partners in
Europe, Japan, Mexico and South Korea. In Europe, the Company has entered into a
joint venture with Alcatel, known as ALCATEL QUALCOMM, which is owned 66% by
Alcatel N.V. and 34% by the Company. ALCATEL QUALCOMM commenced commercial
service in 1990 and has primary responsibility for managing and supporting the
OmniTRACS European operations (referred to in Europe as "EutelTRACS") and for
obtaining service providers in each country or territory. ALCATEL QUALCOMM also
has rights to develop, manage and support EutelTRACS in Eastern Europe, the
Middle East and North Africa. The Company sells the OmniTRACS terminals to
ALCATEL QUALCOMM for resale and shares in a percentage of the license and
maintenance fees paid to ALCATEL QUALCOMM. ALCATEL QUALCOMM has the option to
acquire a royalty bearing license from the Company to manufacture the OmniTRACS
terminals for sale only in the joint venture's territory. In Japan, the
Company's partners are Denso Corporation and Itochu, which commenced commercial
service in 1993. In Mexico, the Company's partner is Corporation Nacional de
Radiotermination SA, which commenced commercial service in 1994, and in South
Korea, the Company's partner is Samsung America, which commenced commercial
service in 1996.
In the C-band, the Company distributes its products through partners in
Brazil and Malaysia. In Brazil, the Company's partner is AUTOTRAC Commercia e
Telecomunicacoes SA which commenced commercial service in 1994, and in Malaysia,
the Company's partner is QUALCOMM ASEAN Co. Ltd., which commenced commercial
service in 1996.
GLOBALSTAR
QUALCOMM, Loral and other companies have formed Globalstar, a limited
partnership to design, construct and operate a worldwide, low-earth-orbiting
("LEO") satellite-based digital telecommunications system using QUALCOMM's CDMA
technology. Globalstar intends to offer low-cost, high-quality voice telephony
and other digital telecommunications services such as data transmission, paging,
facsimile and position location to areas currently under-served or not served by
existing wireline and cellular telecommuni-
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cations systems. The system will allow existing service providers to rapidly
extend their coverage area and to enhance their provision of telecommunications
services to new and current users.
Globalstar has entered into a four-year agreement for QUALCOMM to design,
develop, manufacture, install, test and maintain four gateways, two ground
operations control centers and 100 pre-production subscriber terminals. A
portion of the ground operations control centers is being developed and
manufactured under a subcontract by a Loral subsidiary. Total revenues under the
contract to QUALCOMM are estimated to exceed $500 million at completion, $213
million of which have been recognized by QUALCOMM to date. QUALCOMM is
reimbursed for its development services on a cost-plus basis. In September 1996,
Globalstar completed an important milestone when forward and reverse link calls
were successfully completed in a laboratory environment.
It is anticipated that Globalstar will require capital of approximately
$2.5 billion prior to full scale commercial implementation of its system. To
date, Globalstar has received funds and financing commitments totaling
approximately $1.4 billion. Such capital is being used, in part, to fund the
development agreement. There can be no assurance that Globalstar will be
successful in raising additional capital or that delays or technical or
regulatory developments will not arise which could adversely affect Globalstar's
ability to continue funding the development agreement and which would have a
material adverse affect on QUALCOMM's business and results of operations. The
Globalstar development agreement is terminable at the election of Globalstar in
the event that Globalstar abandons its efforts to develop the satellite-based
communications system.
The Company's interest in Globalstar is owned indirectly through certain
limited partnerships. The Company's current ownership interest in Globalstar is
approximately 7.2%.
EUDORA ELECTRONIC MAIL
The Company has developed Eudora, an electronic mail software application
which is marketed in commercial and freeware versions and available for both the
Macintosh and Windows platforms. The Company estimates that Eudora currently
serves over 18 million users, including over 3 million users of Eudora's
commercial version, making it the leading Internet e-mail application in terms
of total subscribers. Eudora software adheres to Internet standards so users can
communicate with anyone on the Internet, regardless of platform or e-mail
software. The Company believes that the combination of Eudora and its CDMA
wireless technologies may create the opportunity to develop new wireless
products and services in the future.
GOVERNMENT SYSTEMS
QUALCOMM performs a variety of prime and subcontract work for various
departments and agencies of the U.S. Government involving communication-related
technologies. QUALCOMM is incorporating encryption into its CDMA digital
cellular system architecture for use in multiple U.S. Government applications.
As a prime contractor, QUALCOMM is developing wireless secure phones and may be
developing deployable base stations for a wide variety of government uses. Many
of these products contain additional features and enhancement that are unique to
U.S. Government applications. One such effort is the addition of dispatch
capability to the digital cellular system. QUALCOMM is also involved in
providing Globalstar products and engineering services to the U.S. Government.
Like the terrestrial system, application dependent features are in review to
better support the U.S. Government use of Globalstar. Security and
interoperability are some of the unique requirements under study. The Company is
in the process of completing the production of its data link system for the U.S.
Department of Defense. The system is used to support air to ground
communications on training ranges and has been in production for the past four
years. The Company also sells other airborne and satellite subsystems to the
government and believes that future government business is an important element
of its strategy and will continue to pursue work in this area for the
foreseeable future.
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MANUFACTURING AND BACKLOG
QUALCOMM began high volume manufacturing of its CDMA subscriber and
infrastructure equipment in 1996 and has been manufacturing OmniTRACS terminals
in high volumes since 1988. The Company is in the process of expanding its
manufacturing capacity for CDMA subscriber and infrastructure equipment. During
fiscal 1996, production capabilities at QPE were significantly expanded which
resulted in shipment of approximately 200,000 subscriber units in the fourth
quarter of fiscal 1996 with higher production anticipated for fiscal 1997. The
Company is completing construction of a 177,000 square foot facility to
manufacture CDMA infrastructure equipment. As of November 30, 1996, the Company
has shipped approximately 375 base stations and related infrastructure
equipment.
QUALCOMM has entered into strategic alliances with Nortel and Hughes
relating to the development and manufacture of CDMA infrastructure equipment.
See "--CDMA Technology and Products--Infrastructure Equipment" and "--Subscriber
Equipment."
At September 29, 1996, backlog and contracts subject to contingencies were
approximately $1.7 billion for the Company. Included in backlog and contracts
subject to contingencies are all customer commitments to purchase regardless of
the scheduled delivery dates. Because some of these contracts may be canceled
without significant penalty, the total backlog and contracts subject to
contingencies may not be indicative of future results. A significant portion of
the $1.7 billion backlog and supply contract reflects large contract awards in
fiscal 1996. Those awards include approximately $200 million for QUALCOMM's
share of Nortel's infrastructure contract with Sprint Spectrum, nearly $500
million for the Sprint Spectrum contract award to QPE for PCS subscriber
equipment and approximately $350 million for PrimeCo's contract award to QPE for
cellular and PCS subscriber equipment.
RESEARCH AND DEVELOPMENT
The telecommunications industry is characterized by rapid technological
change, requiring a continuous effort to enhance existing products and develop
new products. The Company maintains a substantial program of research and
product development. Company sponsored research and development expenditures in
fiscal years 1996, 1995, and 1994 totaled approximately $160 million, $80
million, and $50 million, respectively. Most of these expenditures are related
to the Company's development of CDMA technology for cellular, PCS and WLL
applications and the continued development of the Company's OmniTRACS system.
The Company intends to continue to maintain a substantial research and
development program and expects research and development expenses to increase in
the future. In addition to Company sponsored research and development, the
Company performs contract research and development for various commercial and
government agencies and contractors, including Globalstar.
COMPETITION
Competition in the wireless communications industry is intense. The
industry consists of major domestic and international companies, many of which
have financial, technical, marketing, sales, manufacturing, distribution and
other resources substantially greater than those of the Company. The Company
competes on the basis of product quality, reliability, price, customer support
and responsiveness and product features. The Company believes that it is
competitive with respect to each of these factors.
CDMA. The primary competition with respect to CDMA technology is from
current analog and digital TDMA-based systems, including GSM. GSM has been
adopted as the digital cellular standard throughout Europe and has received
substantial international acceptance in other countries. Industry publications
have reported that over 60 countries have adopted or are deploying GSM. In
Japan, the Ministry of Posts and Telecommunications has adopted TDMA as its
primary digital cellular standard, which has been widely deployed throughout the
country. Japan's proprietary TDMA system is not compatible with either GSM or
the U.S. IS-54 TDMA standard. However, in 1996, two of the three largest
cellular service providers in Japan have announced plans to offer commercial
CDMA service in 1998. In addition, a number of alternative radio systems are
also being marketed for WLL applications. Several major equipment suppliers have
made substantial investments in TDMA and GSM technology including Alcatel,
Hughes, Lucent, Motorola, Nokia,
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Nortel and Siemens, all of whom are licensees of the Company, as well as
Ericsson. The Company also competes against its licensees in the manufacture of
CDMA subscriber and infrastructure equipment. There can be no assurance that the
Company's competitors will not devote a significantly greater amount of their
financial, technical, marketing and other resources to aggressively market
competitive communications systems or develop and adopt competitive digital
cellular technologies, and that such efforts will not materially adversely
affect the Company's results of operations in the future.
OmniTRACS. The Company's primary competition to its OmniTRACS system
operations include AMSC and HighwayMaster Communications, Inc. AMSC and its
resellers are offering services through the AMSC satellite which was launched in
1995. Recently, Rockwell International, the primary reseller to date of AMSC
services, ceased acting as an AMSC reseller and transferred its customers to
AMSC, thereby increasing AMSC's market presence. These competitors are
aggressively pricing their products and could continue to do so in the future.
In addition, these competitors are offering new value-added products and
services similar to those developed or being developed by QUALCOMM. Emergence of
new competitors, particularly those offering lower cost products and future LEO
satellite communications systems, may impact margins and intensify competition
in new markets. The Company also faces competition abroad from numerous
suppliers of equipment and services. These include Inmarsat and its authorized
resellers through its Inmarsat C geostationary satellite service. In addition,
the Company is facing competition abroad from various terrestrial based systems
and specifically in Europe from GSM-based terrestrial systems. All of these
competitors are aggressively pricing their products and services and the Company
can continue to expect pricing pressures.
PATENTS, TRADEMARKS AND TRADE SECRETS
The Company has been issued approximately 90 U.S. patents and has
approximately 275 patent applications pending in the U.S., of which 10 patents
and 8 patent applications relate to the Company's OmniTRACS products and
approximately 65 patents and approximately 260 patent applications relate to the
Company's CDMA digital wireless technology. The Company also actively pursues
foreign patent protection in countries of interest to the Company. The policy of
the Company is to apply for patents, or other appropriate proprietary or
statutory protection, when it develops valuable new or improved technology. The
Company believes that the issued patents provide broad coverage for its
OmniTRACS system and many digital wireless applications of CDMA, including
satellite, cellular, cordless telephone, PCS, wireless PBX and WLL and other
wireless applications.
In addition to potential patent protection, the Company relies on the laws
of unfair competition and trade secrets to protect its proprietary rights. The
Company attempts to protect its trade secrets and other proprietary information
through agreements with customers and suppliers, proprietary information
agreements with employees and consultants and other security measures. Although
the Company intends to protect its rights vigorously, there can be no assurance
that these measures will be successful.
The Company believes that, because of the rapid pace of technological
change in the communications industry, patent and trade secret protections are
important but must be supported by other factors such as the expanding
knowledge, ability and experience of the Company's personnel, new product
introductions and frequent product enhancements.
EMPLOYEES
As of September 29, 1996, the Company and its subsidiaries employed
approximately 6,000 full-time and temporary employees. Of the total employees,
33% are involved in engineering and engineering support functions; 35% are
involved in manufacturing related functions; 7% are in sales and marketing; 7%
are general and administrative; and 18% are in various activities which support
all areas of the Company. None of the Company's employees is represented by a
collective bargaining agreement. The Company considers employee relations to be
good.
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EXECUTIVE OFFICERS
The executive officers of the Company and their ages as of November 20,
1996 are as follows:
NAME AGE POSITION
--------------------------------------- --- ---------------------------------------
Irwin Mark Jacobs...................... 63 Chairman of the Board and Chief
Executive Officer
Andrew J. Viterbi...................... 61 Vice Chairman of the Board
Harvey P. White........................ 62 President and Director
Richard Sulpizio....................... 46 Chief Operating Officer and Executive
Vice President
Anthony S. Thornley.................... 50 Senior Vice President and Chief
Financial Officer
Steven R. Altman....................... 35 Senior Vice President, General Counsel
and Assistant Secretary and General
Manager, Technology Transfer and
Strategic Alliances Division
Franklin P. Antonio.................... 44 Executive Vice President and Chief
Technology Officer
Gerald L. Beckwith..................... 48 President, Communications Systems
Divisions
Thomas J. Bernard...................... 64 President, Wireless Infrastructure
Products Division
Ronald E. Foerster..................... 52 Senior Vice President, and General
Manager, Wireless Infrastructure
Products Division
Paul E. Jacobs......................... 34 Senior Vice President and General
Manager Subscriber Products Division
John F. Sarto.......................... 48 Senior Vice President and General
Manager, OmniTRACS Division
Chris V. Simpson....................... 49 Senior Vice President and General
Manager Worldwide Sales and Marketing
IRWIN MARK JACOBS, one of the founders of the Company, has served as
Chairman of the Board of Directors and Chief Executive Officer of the Company
since it began operations in July 1985. He also held the title of President
prior to May 1992. Before joining the Company, Dr. Jacobs was Executive Vice
President and a Director of M/A-COM, Inc., a telecommunications company. From
October 1968 to April 1985, Dr. Jacobs held various executive positions at
LINKABIT (M/A-COM LINKABIT after August 1980), a company he co-founded. During
most of his period of service with LINKABIT, he was Chairman, President and
Chief Executive Officer and was at all times a Director. Dr. Jacobs received
his B.E.E. degree from Cornell University and his M.S. and Sc.D. degrees from
the Massachusetts Institute of Technology ("MIT").
ANDREW J. VITERBI, one of the founders of the Company, has served as
Vice-Chairman of the Board of Directors and as Chief Executive Officer of the
Company's Israel subsidiary since July 1996. From July 1985 through July 1996 he
also served as the Company's Chief Technical Officer. From July 1983 to April
1985, Dr. Viterbi was Senior Vice President and Chief Scientist of M/A-COM Inc.,
a telecommunications company. From October 1968 to April 1985, Dr. Viterbi held
various executive positions at LINKABIT (M/A-COM LINKABIT after August 1980), a
company he co-founded, and served as President of the M/A-COM LINKABIT
subsidiary of M/A-COM Inc. During most of his period of service with LINKABIT,
he was vice-chairman and was at all times a Director. Dr. Viterbi received his
B.S. and M.S. degrees in Electrical Engineering from MIT and his Ph.D. degree
from the University of Southern California.
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HARVEY P. WHITE, one of the founders of the Company, has served as
President since May 1992 and also as Chief Operating Officer from February 1994
to August 1995. Prior to May 1992 he was Executive Vice President and Chief
Operating Officer and has also been a Director of the Company since it began
operations in July 1985. From March 1978 to June 1985, Mr. White was an officer
of LINKABIT (M/A-COM LINKABIT after August 1980), where he was successively
Chief Financial Officer, Vice President, Senior Vice President and Executive
Vice President. Mr. White became Chief Operating Officer of LINKABIT in July
1979 and a Director of LINKABIT in December 1979. He holds a B.A. degree in
Economics from Marshall University.
RICHARD SULPIZIO currently serves as the Company's Chief Operating Officer
and was named Executive Vice President in July 1996. He returned to the Chief
Operating Officer position in August 1995 after serving as President of the
Company's OmniTRACS division from February 1994 to August 1995. He previously
held the Chief Operating Officer title from May 1992 to February 1994. He joined
the Company in May 1991 as Vice President, Information Systems and was promoted
to Senior Vice President in September 1991. Prior to joining the Company, Mr.
Sulpizio held various positions with Unisys Corporation, a diversified computer
and electronics company, including manager of MIS and Director of Program
Management and most recently as Vice President and General Manager of the
Component Engineering and Procurement Division. Mr. Sulpizio holds a B.A. degree
in Liberal Arts from California State University, Los Angeles and a Masters
degree in Systems Management from University of Southern California.
ANTHONY S. THORNLEY joined the Company as Vice President of Finance and
Chief Financial Officer in March 1994 and was promoted to Senior Vice President
in February 1996. Prior to that, Mr. Thornley was with Nortel, a
telecommunications equipment manufacturer, for sixteen years in various
financial and information systems management positions, including Vice
President, Public Networks, Vice President Finance NT World Trade and Corporate
Controller Nortel Limited. He has also worked for Coopers & Lybrand and is a
Fellow of the Institute of Chartered Accountants in England and Wales. Mr.
Thornley received his Bachelors of Science degree in Chemistry from the
University of Manchester, England.
STEVEN R. ALTMAN has served as General Counsel since joining the Company in
October 1989. He was named Vice President in December 1992 and was promoted to
Senior Vice President in February 1996. He was also named General Manager,
Technology Transfer and Strategic Alliances Division in September 1995. Prior to
joining the Company, Mr. Altman was a business lawyer in the San Diego law firm
of Gray, Cary, Ames & Frye, where he specialized in intellectual property,
mergers and acquisitions, securities and general corporate matters. Mr. Altman
received a B.S. degree from Northern Arizona University and a Juris Doctor from
the University of San Diego.
FRANKLIN P. ANTONIO, one of the founders of the Company, has served as
Executive Vice President and Chief Technology Officer of the Company since July
1996, as Senior Vice President of Engineering from September 1992 to July 1996
and as Vice President of Engineering of the Company from August 1985 to
September 1992. He served as a Director of the Company from August 1985 until
February 1989. Prior to joining the Company, Mr. Antonio was Assistant Vice
President of Engineering of M/A-COM LINKABIT where he held various technical and
management positions from May 1972 through July 1985. Mr. Antonio received his
B.A. degree in Applied Physics and Information Science from the University of
California, San Diego.
GERALD L. BECKWITH was named President of the Company's Communications
Systems division in September 1994. He served as Vice President and General
Manager, Communications Systems from June 1991 to September, 1994. Mr. Beckwith
joined the Company in 1987 as Program Manager for the development of OmniTRACS.
and was appointed Vice President of Commercial Programs in 1990. Prior to
joining QUALCOMM, Mr. Beckwith held various positions at LINKABIT. Mr. Beckwith
received his Bachelor and Masters degrees in electrical engineering from San
Diego State University.
THOMAS J. BERNARD has served as President of the Wireless Infrastructure
Products Division of the Company since April 1996. He retired in April 1994, but
returned to QUALCOMM in August 1995 as Executive Consultant and became Senior
Vice President, Marketing, in December 1995. Mr. Bernard first joined the
Company in September 1986. He served as Vice President and General Manager for
the
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OmniTRACS division and in September 1992 was promoted to Senior Vice President.
From March 1982 to September 1986, Mr. Bernard held various positions at M/A-COM
LINKABIT. Prior to joining the Company in September 1986, Mr. Bernard was
Executive Vice President and General Manager, M/A-COM Telecommunication
Division, Western Operations. Mr. Bernard has served on the Board of Directors
of Sigma Circuits, Inc., a circuit board manufacturing company, since April
1995.
RONALD E. FOERSTER joined the Company as Senior Vice President and General
Manager, Wireless Infrastructure Products Division, in November of 1994.
Previously he was Chief Technical Executive for U.S. West New Vector Group, a
cellular carrier, for three years. In former positions Dr. Foerster has served
as President, AT&E Laboratories, Inc.; Vice President Engineering, CXC
Corporation; Assistant Vice President and General Manager, Bell Northern
Research; and Director of Product Management and Strategic Planning, Nortel. Dr.
Foerster received his B.S. degree in Aeronautical Engineering from the
University of Minnesota and M.S. and Ph.D. from Stanford University.
PAUL E. JACOBS was named Vice President and General Manager, Subscriber
Products Division in April 1995 and was promoted to Senior Vice President in
July 1996. He joined the Company in September 1990 as Senior Engineer and was
promoted to Engineering Director in April 1993. Dr. Jacobs' previous experience
includes positions as Post Doctoral Researcher at Laboratories d'Automatique et
d'Analyse des Systemes, Toulouse, France. Dr. Jacobs holds a B.S. degree in
Electrical Engineering and Computer Science, M.S. degree in Electrical
Engineering and Ph.D. degree in Electrical Engineering and Computer Science from
the University of California, Berkeley. Dr. Paul Jacobs is the son of Dr. Irwin
Mark Jacobs, Chairman of the Board of Directors and Chief Executive Officer of
the Company.
JOHN F. SARTO, JR. joined the Company in January 1995 as Vice President of
Sales and Marketing, OmniTRACS Division, was promoted to Vice President &
General Manager, OmniTRACS Division, in August 1995 and was promoted to Senior
Vice President in July 1996. Prior to joining the Company, he was at Overnite
Transportation Company, where his most recent position was that of Senior Vice
President, Customer Services and Marketing. Prior to his employment at Overnite,
Mr. Sarto was with Carolina Freight Corporation, where he entered the company as
a management trainee and advanced through a variety of positions, eventually
holding the position of Vice President, Sales. Mr. Sarto a B.A. degree in
Business and English from Niagara University.
CHRIS V. SIMPSON has served as Senior Vice President and General Manager,
Worldwide Sales and Marketing since April 1996. Mr. Simpson joined the Company
in December 1988 as Vice President, Marketing and was promoted to Senior Vice
President and General Manager, International, Wireless Communications Division
in February 1995. He was instrumental in establishing the European introduction
and support for QUALCOMM's OmniTRACS system and service. Prior to joining the
Company Mr. Simpson held a number of financial and marketing positions in
satellite based companies such as Comsat and Contel ASC. Mr. Simpson received
his B.S. degree from Oklahoma State University.
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RISK FACTORS
Uncertainty and Fluctuations of Operating Results. The Company has
experienced quarterly variability in revenues and profitability. There can be no
assurance that the Company will sustain profitability on a quarterly or annual
basis in the future. The Company's future results will depend in part on
continued success of its OmniTRACS operations; the timing and magnitude of
licensing fees and royalties from the Company's CDMA licensees; the successful
large-scale implementation of the Company's CDMA technology and equipment; the
continuation of the Globalstar development contract; and the Company's ability
to successfully manufacture and sell commercial scale quantities of CDMA
infrastructure, subscriber and other equipment on a timely and profitable basis
and to meet any applicable performance guarantees. In particular, any delays in
commencement of commercial operation of CDMA-based cellular, PCS or WLL systems
could have a material adverse effect on quarterly and annual operating results.
The Company has experienced and may continue to experience fluctuations in
quarterly and annual operating results due to variations in the amount and
timing of CDMA fees and royalties. In addition, earnings in future periods could
be adversely affected in the event that the Company does not meet performance
obligations relative to scheduled delivery dates and performance specifications
for CDMA equipment.
Ability to Manage Growth. The Company is experiencing a period of rapid
growth which has placed, and is expected to continue to place, significant
demands on the Company's managerial, operational and financial resources. The
management of such growth will require the Company to continue to improve and
expand the Company's management, operational and financial systems and controls,
including quality control and delivery and service capabilities, and to expand,
train and manage its employee base. In particular, the Company must carefully
manage production and inventory levels to meet increasing product demand and new
product introductions. Inaccuracies in the Company's demand forecasts could
quickly result in either insufficient or excessive inventories and
disproportionate overhead expenses. The Company must also continue to hire and
retain qualified technical, engineering and other personnel in the face of
strong demand from the Company's competitors and others for such individuals.
Any ineffective management of growth or unsuccessful recruitment and retention
of personnel could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company is experiencing significant growth in connection with the
commercial implementation of its CDMA technology, including significant
expansion of manufacturing, test and installation capabilities, customer support
capabilities, and marketing and sales personnel, which requires significant
expenditures to build the necessary organizations. The Company is expanding its
business into international markets which will require it to establish, manage
and control operations in countries where the Company has limited or no
operating experience. The Company's success will depend in part upon the
Company's ability to successfully manage such growth. There can be no assurance
that the Company's attempts to expand its manufacturing, customer support and
marketing and sales organizations will be successful or will result in
additional sales or profitability in any future period. In order to accommodate
planned growth, it is expected that the rate of growth of the Company's
operating expenses will continue to increase. There can be no assurance that
expense growth will not exceed the rate of revenue growth.
Dependence on Equipment Sales. An important element of the Company's
strategy is to remain a major supplier of CDMA infrastructure and subscriber
equipment worldwide for cellular, PCS and WLL service providers, including
C-Block PCS licensees in North America. The Company's ability to generate
substantial revenues and profits from sales of its CDMA infrastructure and
subscriber equipment will require substantial capital investments by the Company
and is subject to risks and uncertainties. PCS systems have a limited operating
history in the United States, and the extent of demand for PCS is uncertain. WLL
systems in the U.S. and foreign countries are just beginning to be implemented,
and their cost-competitiveness with wireline and other wireless systems and
market acceptance is uncertain. The wireless telecommunications industry is
experiencing significant technological changes. As a result, the future
prospects of the industry and the success of PCS, WLL and other competing
services are uncertain. In order to commence operation, PCS and WLL operators
will need, among other things, to complete their system designs, acquire sites,
purchase and install equipment, hire personnel in each market and raise
sufficient capital to finance the construction costs and start-up operating
losses of their commercial systems.
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To complete system build-outs and implement their business plans, PCS and
WLL service providers will require substantial amounts of capital. The failure
of the Company's customers to design, construct and launch their systems would
have a material adverse effect on the Company's financial results. The Company
expects that a number of its potential infrastructure and subscriber equipment
customers will be C-Block licensees. C-Block licensees are subject to a number
of risks in addition to those facing other wireless service providers. Many
C-Block licensees have limited financial resources, are highly leveraged and
will require large amounts of capital to complete the build-out of their
systems. There can be no assurance that C-Block licensees will be able to raise
such capital. C-Block licensees will be subject to competition from up to five
additional PCS service providers, as well as the two cellular service providers
in each market. Many of such other PCS and cellular service providers will have
substantially greater resources than the C-Block licensees, who were required to
qualify as "small businesses" in order to bid in the C-Block auctions. Further,
there can be no assurance that future FCC auctions of wireless spectrum will not
reduce the competitiveness or attractiveness of C-Block licensees and their
systems, or that such licensees will not be sold at prices substantially less
than those recorded in the C-Block auctions. In addition, the C-Block auctions
were concluded over one year following the conclusion of the A-Block and B-Block
auctions, which provided the A-Block and B-Block licensees with a significant
time-to-market competitive advantage over C-Block licensees.
Risks Related to Vendor Financing. Cellular, PCS and WLL systems operators
increasingly have required their suppliers to arrange or provide long-term
financing for them as a condition to obtaining or bidding on infrastructure
projects. These projects may require the Company to arrange or provide financing
of amounts ranging from modest sums to over a billion dollars on any particular
project. Internationally, potential service providers have limited governmental
or other financing sources and may have particular needs for vendor financing
offered or arranged by the Company. Such amounts financed may include "soft
costs" (such as software, cell site leases and permits), and thus the amount
financed may exceed 100% of infrastructure equipment costs. Pursuant to an
Equipment Requirements Agreement with QUALCOMM, subject to the satisfaction of
certain conditions, NextWave is obligated to purchase approximately 50% of its
infrastructure equipment requirements from QUALCOMM. The agreement also provides
that QUALCOMM will offer 100% financing for equipment purchased under such
agreement, on commercial terms. The terms of the equipment purchases, including
financing terms, will be established in a further agreement to be negotiated in
good faith between the parties. There can be no assurance that such an agreement
will be concluded.
The Company's ability to arrange or provide and be competitive with such
financing will depend on a number of factors, including the Company's capital
structure, level of available credit and ability to provide financing in
conjunction with third-party lenders. There can be no assurance that the Company
will be able to arrange or provide such financing on terms and conditions, and
in amounts, that will be satisfactory to such system operators. A number of the
Company's competitors have substantially greater resources than the Company,
which may enable them to offer more favorable financing terms and successfully
compete against the Company for infrastructure projects. The inability to
arrange or provide such financing or to successfully compete for infrastructure
projects could have a material adverse effect on the Company and its business
and prospects.
In order to arrange or provide financing for cellular, PCS and WLL
projects, the Company will be required to expose itself to significant project,
market, political and credit risks. The Company may be required to provide such
financing directly, and/or guaranty such financing through third party lenders.
The amount of such financing could become significant and, if not repaid by the
network operator, could have a material adverse effect on the Company's
operating results and liquidity. The Company may be required to maintain any
such extensions of credit, or remain obligated under guarantees, until maturity,
which could have a material adverse effect on the Company's credit rating.
Although the Company may seek to have third parties assume some or all of any
such credit arrangements, there can be no assurance that the Company will be
able to do so. Many WLL and PCS network operators, including a number of C-Block
licensees, have limited or no operating histories, are faced with significant
capital requirements and are high credit risks. Pursuant to FCC regulations
applicable to C-Block licensees, the Company will not be permitted to retain a
security interest in any C-Block licenses, which initially will constitute the
primary asset of many C-Block
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licensees. C-Block licensees are faced with strict regulatory requirements under
applicable FCC regulations. Compliance with those regulations is outside of the
control of the Company. The failure of a C-Block licensee to comply with any of
those regulations could result in the revocation of that licensee's FCC
licenses.The Company has limited experience evaluating the credit worthiness or
commercial viability of potential purchasers of CDMA equipment, and there can be
no assurances that such customers will not default on any financing arranged or
provided by the Company for the purchase of its CDMA equipment.
The Company may be required to provide vendor financing for a portion of
the Globalstar system prior to its full scale implementation. See "-- Dependence
on Key Customers."
Future Capital Needs. The design, development, manufacture and marketing
of digital wireless communication products and services are highly capital
intensive. In addition, cellular, PCS and WLL systems operators increasingly
have required their suppliers to arrange or provide long-term financing for them
as a condition to obtaining or bidding on infrastructure products. To the extent
that such cash resources are insufficient to fund the Company's activities, the
Company may be required to raise additional funds from a combination of sources
including potential debt or equity issuances. There can be no assurance that
additional financing will be available on reasonable terms or at all. If
additional capital is raised through the sale of additional equity or
convertible debt securities, dilution to the Company's stockholders could occur.
Patents and Proprietary Information. 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
approximately 90 patents and has approximately 275 patent applications pending
in the United States, of which 10 patents and 8 patent applications relate to
the Company's OmniTRACS products and approximately 65 patents and approximately
260 patent applications relate to the Company's CDMA digital wireless
technology. The Company also actively pursues patent protection in other
countries of interest to the Company. There can be no assurance that the pending
patent applications will be granted, that the Company's patents or copyrights
will provide adequate protection, or that the Company's competitors will not
independently develop or initiate technologies that are substantially equivalent
or superior to the Company's technologies. 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. From time to time,
certain companies may assert exclusive patent, copyright and other intellectual
proprietary rights to technologies which are claimed to be important to the
industry or to the Company. In addition, from time to time third parties provide
the Company with copies of their patents relating to spread spectrum and other
digital wireless technologies and offer licenses to such technologies, and the
Company evaluates such patents and the advisability of such licenses. If any of
the Company's products were found to infringe on protected technology, the
Company could be required to redesign such products, license such technology,
and/or pay damages to the infringed party. If the Company is unable to license
protected technology used in the Company's products or to redesign such
products, the Company could be prohibited from marketing such products.
Ericsson, Motorola and InterDigital have each advised the TIA that they
hold patent rights in technology embodied in IS-95. Lucent and OKI Electric have
claimed patent rights in IS-96. In accordance with TIA guidelines, each company
has confirmed to the TIA that it is willing to grant licenses under its rights
on reasonable and nondiscriminatory terms. In connection with the settlement and
dismissal of the Company's patent litigation with InterDigital, the Company
received, among other rights, a fully-paid, royalty free license to use and to
sublicense the use of those patents claimed by InterDigital to be essential to
IS-95. If the Company and other equipment manufacturers are required to obtain
additional licenses and/or pay royalties to one or more patent holders, this
could have an adverse effect on the commercial implementation of the Company's
CDMA technology.
On September 26, 1996, Ericsson Inc. and Telefonaktiebolaget LM Ericsson
("Ericsson") filed suit in the U.S. District Court for the Eastern District of
Texas, Civil Action No. 2-96CV183. The complaint alleges that various elements
of the Company's CDMA equipment system and components infringe one or more
patents owned by Ericsson. The Company has not yet filed a formal response to
Ericsson's complaint. Although there can be no assurances that an unfavorable
outcome would not have a material adverse effect on
19
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the Company's liquidity, financial position or results of operations, the
Company believes the complaint has no merit and will vigorously defend the
action.
On November 8, 1996 the Company was served with a complaint in connection
with a lawsuit filed in the U.S. District Court for the Eastern District of
Pennsylvania by BTG USA Inc. The complaint alleges that the Company's Global
Positioning System, CDMA telecommunications products and the OmniTRACS system
components thereof infringe United States Patent No. Re. 34,004. The patent
expired in November 1996. Although there can be no assurances that an
unfavorable outcome would not have a material adverse effect on the Company's
liquidity, financial position or results of operations, the Company believes the
complaint has no merit and will vigorously defend the action.
Manufacturing of CDMA Equipment. QUALCOMM has received orders for CDMA
wireless communications infrastructure and subscriber equipment and ASIC
components for delivery in fiscal 1997 and expects to receive additional orders
in the future. The Company is investing substantial amounts in product
development activities to maintain or improve its competitive position. The
Company may spend substantially more on such software and hardware development
than currently anticipated. The Company has significantly expanded and will
continue to significantly expand its infrastructure and subscriber equipment
manufacturing capabilities. Many of the Company's competitors have greater
resources and experience with such large scale manufacturing. There can be no
assurance that the Company will be able to timely or effectively accomplish such
increases in production volume.
Any delays or difficulties in connection with the planned increase in
manufacturing capacity could have a material adverse effect on the Company's
business and results of operations. If the Company is unable to manufacture CDMA
subscriber and infrastructure equipment at commercially acceptable costs, or if
the Company expands its manufacturing capacity but is unable to secure
sufficient orders for its CDMA equipment, the Company's competitive position and
the ability of the Company to achieve a profitable return on its CDMA research
and development expenditures could be materially impaired.
The manufacture of wireless communications equipment is a complex and
precise process involving specialized manufacturing and testing equipment and
processes. Defects or impurities in the components or materials used, equipment
failure or other difficulties could adversely affect the Company's ability to
meet planned production yields. There can be no assurance that the Company will
not encounter difficulties in achieving planned yields on its products, which
would adversely affect its margins and operating results.
The Company manufactures its CDMA cellular and PCS subscriber equipment
through QPE, a joint venture between the Company and a subsidiary of SONY
Electronics. The risks associated with the commercial manufacture of the
Company's infrastructure and subscriber equipment products which are described
in this document also apply to the manufacture of subscriber equipment by QPE.
To the extent that QPE experiences any of the complications, delays or
interruptions described herein, the Company's results of operations would be
adversely affected.
Dependence on Suppliers. The Company has from time to time experienced
delays in obtaining quantities of specification compliant RF components and
other parts to meet the demands for its equipment. Several of the critical
products and services used in the Company's existing and proposed products,
including ASICs, flash memory chips and certain RF components used in the
Company's CDMA products and certain custom and semi-custom VLSI circuits and
other sophisticated electronic parts and major subassemblies used in the
OmniTRACS system, are currently available only from single or limited sources.
The reliance on sole or limited source vendors by the Company and its licensees
involves risks, including the possibility of shortages of certain key
components, product performance shortfalls, and reduced control over delivery
schedules, manufacturing capability, quality and costs. Business disruptions or
financial difficulties of a sole or limited source supplier of any particular
component could materially and adversely impact the Company by increasing the
cost of goods sold or reducing the availability of such components. While the
Company believes that it could obtain necessary components from other
manufacturers, an unanticipated change in the source of supply of these
components could trigger performance guarantees or cause significant shipment
delays in the Company's products.
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23
Unanticipated supply limitations could adversely affect the Company's
ability to meet its product orders. There can be no assurance that the supplier
commitments will be met. The Company is also working with its vendors to obtain
expanded volumes of specification compliant components. There may be significant
demand on the Company's suppliers from other manufacturers (including the
Company's licensees) for such components. Delays in the availability or reduced
quantities of these components could adversely affect the Company's ability to
manufacture subscriber equipment in the volumes and within the time frames
required by its customers, which could result in lost revenues and profits and
possible performance guarantee payments. See "--Performance Guarantees."
Certain components require an order lead time of six months or longer.
Other components that currently are readily available may become difficult to
obtain in the future. There can be no assurance that the Company will not
experience delays in the receipt of certain of its key components. Delays or the
failure of the Company to order sufficient quantities of these components in
advance could prevent the Company from meeting production requirements and could
result in the requirement to pay performance guarantees. To meet forecasted
production levels, the Company may be required to commit to certain long lead
time items prior to contract award. If forecasted orders are not awarded, the
Company may be faced with large inventories of slow moving or unusable parts
which could have an adverse affect on the Company's results of operations.
Rapid Technological Change and New Products. The market for the Company's
products is characterized by rapid technological advances, evolving industry
standards, changes in customer requirements and frequent new product
introductions and enhancements. The introduction of products embodying new
technologies and the emergence of new industry standards could render the
Company's existing products and products currently under development obsolete
and unmarketable. Accordingly, the Company's future success will depend upon its
ability to enhance its current products and develop and introduce new products
that keep pace with technological developments, satisfy varying customer
requirements and achieve market acceptance. Any failure by the Company to
anticipate or respond adequately to technological developments or customer
requirements, or any significant delays in product development or introduction,
could damage the Company's competitive position and have an adverse effect on
revenues and results of operations. There can be no assurance that the Company
will be successful in developing and marketing new equipment products on a
timely basis or that the Company will not experience significant delays in the
future, which could have a material adverse effect on the Company's business and
operations. In addition, there can be no assurance that new products developed
by the Company will achieve market acceptance.
Performance Guarantees. QUALCOMM and QPE have entered into contracts that
provide for performance guarantees to protect customers against late delivery or
failure to perform. These performance guarantees, and any future commitments for
performance guarantees, are obligations entered into separately, and in some
cases jointly, with partners to supply CDMA subscriber and infrastructure
equipment. Certain of these obligations provide for substantial performance
guarantees that accrue at a daily rate based on percentages of the contract
value to the extent the equipment is not delivered by scheduled delivery dates
or the systems fail to meet certain performance criteria by such dates. The
Company is dependent in part on the performance of its suppliers and strategic
partners in order to provide equipment which is the subject of the guarantees.
Thus, the ability to timely deliver such equipment may be outside of the
Company's control. If the Company and QPE are unable to meet their performance
obligations, the payment of the performance guarantees could amount to a
significant portion of the contract value and would have a material adverse
effect on product margins and the Company's results of operations.
Dependence on Key Customers. A significant portion of the Company's CDMA
subscriber and infrastructure equipment sales are, and are expected to continue
to be, concentrated with a limited number of customers. As a result, the
Company's performance will depend significantly on relatively large orders from
a limited number of customers, as well as gaining additional customers, both
within existing cellular, PCS and WLL markets and in new markets. The loss of
any existing customer for CDMA equipment or the failure of the Company to gain
additional customers could have a material adverse effect on the Company's
business, financial condition and results of operations.
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The Company has entered into a four-year development agreement with
Globalstar to design and develop subscriber equipment and ground communications
stations of the Globalstar system through 1998. Through September 29, 1996, the
Company has recognized revenues of approximately $213 million under the
Globalstar agreement and expects to recognize significant revenues under the
contract during fiscal years 1997 and 1998. It is anticipated that Globalstar
will require capital of approximately $2.5 billion prior to full scale
commercial implementation of its system. To date, Globalstar has received funds
and financing commitments totaling approximately $1.4 billion. Such capital is
being used, in part, to fund the development agreement. There can be no
assurance that Globalstar will be successful in raising additional capital or
that delays or technical or regulatory developments will not arise which could
adversely affect Globalstar's ability to continue funding the development
agreement and which would have a material adverse effect on QUALCOMM's business
and results of operations. The Globalstar development agreement is terminable at
the election of Globalstar in the event that Globalstar abandons its efforts to
develop the satellite-based communications system.
CDMA Commercialization. The Company's CDMA technology has been launched
commercially for PCS and cellular applications in the U.S., Hong Kong and South
Korea. The successful implementation and operation of such systems is a complex
process requiring coordination of a number of factors, including the successful
interface between infrastructure and subscriber equipment from multiple vendors
and the public wireline network, as well as avoiding interference from microwave
and cellular systems. There can be no assurance that unforeseen complications
will not arise as more subscribers are added to these systems or in the scale-up
and operation of other commercial CDMA systems that could materially delay or
limit the commercial use of the Company's CDMA technology. Further, if the
Company's licensees are unable to deliver CDMA equipment to the market on a
timely basis, or if carriers which have adopted CDMA fail to deploy their
systems on a timely basis, the Company's business and the reputation of the
Company's CDMA technology could be adversely affected.
A number of companies with international operations are developing and
implementing competing cellular, PCS and WLL technologies. While the Company
strongly believes that CDMA is superior to competing digital technologies and is
actively promoting the benefits of its CDMA technology outside of the U.S.,
there can be no assurance that the Company will receive significant
international acceptance of its CDMA technology for cellular, PCS or WLL
applications due to the installed base of GSM systems and competition from the
U.S. and Japanese TDMA systems. In some countries, the Company's CDMA products
may be required to undergo extensive testing and certification by government
entities before CDMA can be approved for commercial use in those countries.
Dependence on OmniTRACS. OmniTRACS systems, complementary software
products, related messaging service and maintenance services historically have
accounted for a significant portion of the Company's total revenues and margins.
The Company expects that revenues and margins from its OmniTRACS operations will
continue to represent a substantial portion of the Company's total revenues and
margins. A significant portion of the Company's OmniTRACS revenues is derived
from the North American trucking industry, particularly providers of long haul
transportation of goods and equipment. Any adverse events affecting the domestic
trucking industry could have a material adverse effect on the Company's
OmniTRACS revenues. Although an increasing portion of the Company's OmniTRACS
revenues is derived from ongoing messaging and maintenance revenues, new
customer sales of the Company's OmniTRACS systems are important to the Company
to maintain continued growth. In addition, the Company has been experiencing
pricing pressure from competitors on sales of its OmniTRACS products and
messaging services, which could result in further reduction of the margins for
such products and services. See "Business -- Competition." The Company expects
that an increasing portion of its future OmniTRACS sales will be derived from
international sales. There can be no assurance that the Company's domestic or
international OmniTRACS business will continue to grow at the levels experienced
in the past, which could have a material adverse effect on the Company's results
of operations.
Competition. Competition in the wireless communications industry is
intense. The industry consists primarily of major domestic and international
companies which have financial, technical, marketing, sales, manufacturing,
distribution and other resources substantially greater than those of the
Company. Many of
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these companies are licensees of the Company's technology, and have established
market positions, trade names, trademarks, patents, copyrights and intellectual
property rights and substantial technological capabilities. See
"Business -- Competition."
The primary competition with respect to CDMA technology is from current
analog and digital TDMA-based systems, including GSM and DCS 1900, the GSM
implementation for PCS in the U.S. GSM has been adopted as the digital cellular
standard throughout Europe and has received substantial international acceptance
in other countries. Industry publications have reported that over 60 countries
have adopted or are deploying GSM. In Japan, the Ministry of Posts and
Telecommunications has adopted TDMA as its primary digital cellular standard,
which has been widely deployed throughout the country. Japan's proprietary TDMA
system is not compatible with either GSM or the U.S. IS-54 TDMA standard.
However, in 1996, two of the three largest cellular service providers in Japan
have announced plans to offer commercial CDMA service in 1998. In addition, a
number of alternative radio systems are also being marketed for WLL
applications. Many of the major equipment suppliers have made substantial
investments in TDMA and GSM technology including Alcatel, Hughes, Lucent,
Motorola, NOKIA, Nortel and Siemens (all of whom are licensees of the Company),
as well as Ericsson. The Company also competes against its licensees in the sale
of CDMA subscriber and infrastructure equipment. There can be no assurance that
the Company's competitors will not devote their significantly greater financial,
technical, marketing and other resources to aggressively market competitive
communications systems or develop and adopt competitive digital cellular
technologies, and that such efforts will not have a materially adverse effect on
the Company's results of operations in the future. Moreover, certain equipment
manufacturers may offer extremely attractive financing terms as a means of
gaining access to the U.S. PCS market.
The Company's primary competition to its OmniTRACS system includes American
Mobile Satellite Corporation ("AMSC") and HighwayMaster Communications, Inc.
AMSC and its resellers are offering services through the AMSC satellite which
was launched in 1995. Recently, Rockwell International, the primary reseller to
date of AMSC services, ceased acting as an AMSC reseller and transferred its
customers to AMSC, thereby increasing AMSC's market presence. These competitors
are aggressively pricing their products and could continue to do so in the
future. In addition, these competitors are offering new value-added products and
services similar to those developed or being developed by QUALCOMM. Emergence of
new competitors, particularly those offering low cost products and future LEO
satellite communications systems, may impact margins and intensify competition
in new markets. The Company also faces competition abroad from numerous
suppliers of equipment and services. These include Inmarsat and its authorized
resellers through its Inmarsat C geostationary satellite service. In addition,
the Company is facing competition abroad from various terrestrial based systems
and specifically in Europe from GSM-based terrestrial systems. All of these
competitors are aggressively pricing their products and services and the Company
can continue to expect pricing pressures. As with the U.S. operations, the
international business may also experience competition in the future from LEO
Satellite communications systems.
Equipment Sales by CDMA Licensees. Full commercial implementation of the
Company's CDMA technology requires that subscriber and infrastructure equipment
be made available in commercial quantities in a timely and cost effective
manner. Although the Company is a supplier of certain CDMA subscriber and
infrastructure equipment, the Company expects that a major portion of the
subscriber and infrastructure equipment that will be made commercially available
will be supplied by the Company's licensees. If CDMA subscriber and
infrastructure equipment is not delivered to the market on a timely basis,
customers could select other digital wireless technologies. Availability of
equipment and other factors are critical for CDMA technology to be chosen for
wireless applications. The amount and timing of resources devoted by licensees
to the development of CDMA subscriber and infrastructure equipment are
controlled by such licensees, and thus the timing of the availability of third
party equipment is not under the Company's control.
Reliance on Satellite and Other Facilities for OmniTRACS Service. The
Company's OmniTRACS system currently operates in the U.S. market on leased
Ku-band satellite transponders. The Company's data satellite transponder lease
runs through 2001. The Company's position reporting satellite transponder runs
through May 1997, with the rights to extend through May 1999. The Company
believes that its current domestic transponder capacity is adequate to support
over 180,000 OmniTRACS terminals, assuming current per unit message and position
reporting volumes. Future system enhancements may allow for increased
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utilization of transponder capacity. The Company believes that U.S. OmniTRACS
operations may require additional transponder capacity in fiscal year 1998 which
it believes will be available on acceptable terms. However, no assurance can be
given that the Company will be able to acquire additional transponder capacity
on acceptable terms on a timely basis. Any failure of the Company to maintain
adequate satellite capacity would have a material adverse effect on the
Company's financial results. The Company's NMF operations are subject to the
risk that a failure or natural disaster could interrupt the OmniTRACS service
and have a material adverse effect on OmniTRACS revenues. The Company maintains
a fully operational NMF in Las Vegas, Nevada as a backup to its primary NMF in
San Diego, California. See "Business -- OmniTRACS."
Factors Affecting International Business. Revenues from international
customers accounted for approximately 36% of total revenues in fiscal 1996, 20%
of total revenues in fiscal 1995 and 23% of total revenues in fiscal 1994.
Because certain joint ventures between the Company and foreign firms provide for
a minority ownership position by the Company in the joint venture, the Company
may be limited in taking actions it might otherwise wish to pursue. Since the
Company is a relatively new entrant into some of these markets and its
competitors may have long-standing, entrenched positions, it may be difficult
for the Company to succeed in certain markets, thereby limiting international
sales. Other risks faced by the Company in its international business include
unexpected changes in regulatory requirements, export controls, national
standards, currency exchange rates, expropriation, tariffs or other barriers,
political risks, difficulties in staffing and managing foreign operations, and
potentially negative tax consequences. These factors could have an adverse
impact on the Company's operating results. The Company is subject to U.S. export
control laws and regulations with respect to all of the Company's products and
technology that are exported from the United States. The Company is subject to
the risk that more stringent export control requirements could be imposed in the
future on product classes that include products exported by the Company, which
would result in additional compliance burdens on the Company or ensure the
enforceability of its contract rights. In addition, the laws of certain foreign
countries, including developing nations in Asia, South America, Africa and
Eastern Europe, may not protect the Company's intellectual property rights or
ensure the enforceability of its contract rights to the same extent as do the
laws of the United States.
Uncertainty of Government Regulation. The Company's products are subject
to various FCC regulations in the U.S. These regulations require that the
Company's products meet certain radio frequency emission standards and not cause
unallowable interference to other services. The Company is also subject to
government regulations and requirements by local and international standards
bodies outside the U.S., where the Company is less prominent than local
competitors and has less opportunity to participate in the establishment of
regulatory and standards policies. Changes in the regulation of the Company's
activities, including changes in the allocation of available spectrum by the
U.S. Government and other governments, or exclusion of its technology by a
standards body, could have a material adverse effect on the Company's results of
operations and its ability to market its products and services. The Company is
also subject to state and federal health, safety and environmental regulations
as well as regulations related to the handling of and access to classified
information.
Reliance on Key Personnel. The Company's success depends in a large part
upon its ability to retain highly qualified technical and management personnel,
the loss of one or more of whom could have a material adverse effect on the
business of the Company. None of these individuals has an employment contract
with the Company. The Company's success also depends upon its ability to
continue to attract and retain highly qualified personnel in all disciplines.
There can be no assurance that the Company will be successful in hiring or
retaining requisite personnel.
Product Liability. Testing, manufacturing, marketing and use of the
Company's products entail the risk of product liability. While the Company
currently has product liability insurance that it believes is adequate to
protect against product liability claims, no assurance can be given that the
Company will be able to continue to maintain such insurance at a reasonable cost
or in sufficient amounts to protect the Company against losses due to product
liability. An inability to maintain insurance at an acceptable cost or to
otherwise protect against potential product liability could prevent or inhibit
the commercialization of the Company's products. In
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addition, a product liability claim or recall could have a material adverse
effect on the business or financial condition of the Company.
News reports have asserted that power levels associated with hand-held
cellular telephones may pose certain health risks. The Company is not aware of
any study that has concluded that there are any significant health risks from
using hand-held cellular telephones. If it were determined that electromagnetic
waves carried through the antennas of cellular telephones create a significant
health risk, there could be a material adverse effect on the Company's ability
to market and sell its wireless telephone products.
Anti-Takeover Measures; Rights Plan. The Company's Certificate of
Incorporation provides for cumulative voting in the election of directors. In
addition, the Company's Certificate of Incorporation provides for a classified
Board of Directors and includes a provision (the "Fair Price Provision") that
requires the approval of the holders of at least 66 2/3% of the Company's voting
stock as a condition to a merger or certain other business transactions with, or
proposed by, a holder of more than 15% or more of the Company's voting stock,
except in cases where certain directors approve the transaction or certain
minimum price criteria and other procedural requirements are met. The Company's
Certificate of Incorporation also requires the approvals of holders of at least
66 2/3% of the Company's voting stock to amend or change the provisions relating
to the classified board, cumulative voting or the Fair Price Provision. The
Company's Certificate of Incorporation also requires that any action required or
permitted to be taken by stockholders of the Company must be effected at a duly
called annual or special meeting of stockholders of the Company and may not be
effected by any consent in writing.
The classified board, Fair Price Provision and other charter provisions may
discourage certain types of transactions involving an actual or potential change
in control of the Company, including transactions in which the stockholders
might otherwise receive a premium for their shares over then current market
prices, and may limit the ability of stockholders to approve transactions that
they may deem to be in their best interests. Further, pursuant to the terms of
its preferred share purchase rights plan, the Company has distributed a dividend
of one right for each outstanding share of Common Stock. In the event the
Convertible Preferred Securities are converted into Common Stock, each share of
such Common Stock will also be granted a right. These rights will cause
substantial dilution to the ownership of a person or group that attempts to
acquire the Company on terms not approved by the Board of Directors and may have
the effect of deterring hostile takeover attempts. In addition, the Board of
Directors has the authority to fix the rights and preferences of and issue
shares of Preferred Stock, which may have the effect of delaying or preventing a
change in control of the Company without action by the stockholders.
Volatility of Stock Price. Historically, the Company's stock price has
been volatile. The sales prices for the Company's Common Stock have ranged from
$30.38 to $54.50 during the past 52 weeks. See "Item 5. Market for Registrants'
Common Stock and Related Stockholders Matters." Future announcements concerning
the Company or its competitors, including the selection of wireless technology
by cellular, PCS and WLL service providers, the timing of roll-out of those
systems, the receipt of substantial orders for infrastructure or subscriber
equipment, results of technological innovations, new commercial products,
changes in recommendations of securities analysts, government regulations,
proprietary rights or product or patent litigation, may have a significant
impact on the market price of the Company's Common Stock. The Company's future
earnings and stock price may be subject to significant volatility, particularly
on a quarterly basis. Any shortfalls in revenues or earnings from the levels
expected by securities analysts could have an immediate and significant adverse
effect on the trading price of the Company's Common Stock in any given period.
ITEM 2. PROPERTIES
The Company occupies a number of facilities in San Diego, California, used
for manufacturing, engineering and administration. The Company owns the land and
buildings for its Corporate Center which is used primarily for administration
and engineering. In 1994, the Company purchased another site nearby and has
completed the relocation of its NMF and principal manufacturing efforts in
addition to providing
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additional administrative and engineering facilities. The Company also owns a
368,000 square foot manufacturing and research facility and 16.5 acres of
adjacent land in La Jolla, California which is used by QUALCOMM for subscriber
manufacturing operations. In 1996, the Company completed construction of a new
225,000 square foot building adjacent to the Corporate Center owned by the
Company which is being utilized primarily as an engineering facility. In the
third quarter of fiscal 1996 the Company commenced construction of a 177,000
square foot manufacturing facility owned by the Company in San Diego which will
be dedicated to the production of infrastructure equipment. In the first quarter
of fiscal 1997, the Company began planning for the construction of a new 250,000
square foot building on QUALCOMM's Morehouse Campus which will be used primarily
as an engineering facility, and the Company has signed additional leases
totalling 185,000 square feet. The Company continues to lease space in San Diego
and leases space for sales and support offices in other U.S. locations including
Kansas City, Missouri; Washington, D.C.; Winston-Salem, North Carolina;
Norcross, Georgia; Salt Lake City, Utah; Pittsburgh, Pennsylvania; Irving,
Texas; Indianapolis, Indiana; Austell, Georgia; engineering facilities in
Boulder, Colorado; and a backup NMF in Las Vegas, Nevada. The Company leases
office space internationally in Haifa, Israel; Hong Kong; Beijing, China; New
Delhi, India; Baroda, India; Buenos Aires, Argentina; Sao Paulo, Brazil;
Ontario, Canada; Seoul, Korea; and Singapore.
The Company believes its facilities are adequate for its present needs. In
the future, the Company will need to purchase, build or lease additional
facilities to meet the requirements projected in its long term business plan.
ITEM 3. LEGAL PROCEEDINGS
On September 26, 1996, Ericsson Inc., and Telefonaktiebolaget LM Ericsson
("Ericsson") filed suit in the U.S. District Court for the Eastern District of
Texas, Civil Action No. 2-96CV183. The complaint alleges that various elements
of the Company's CDMA equipment system and components infringe one or more
patents owned by Ericsson. The Company has not yet filed a formal response to
Ericsson's complaint. Although there can be no assurances that an unfavorable
outcome would not have a material adverse effect on the Company's liquidity,
financial position or results of operations, the Company believes the complaint
has no merit and intends to vigorously defend the action.
On November 8, 1996 the Company was served with a complaint in connection
with a lawsuit filed in the U.S. District Court for the Eastern District of
Pennsylvania by BTG USA Inc. The complaint alleges that the Company's Global
Positioning System, CDMA telecommunications products and the OmniTRACS system
components thereof infringe United States Patent NO. Re. 34,004. The patent
expired in November 1996. Although there can be no assurances that an
unfavorable outcome would not have a material adverse effect on the Company's
liquidity, financial position or results of operations, the Company believes the
complaint has no merit and intends to 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 the Company's liquidity, financial
position or results of operations.
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 29, 1996.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
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 necessary represent
actual transactions.
HIGH LOW
------- -------
FISCAL 1995
First Quarter.................................................... $ 33.75 $ 22.25
Second Quarter................................................... 34.50 20.50
Third Quarter.................................................... 35.63 24.13
Fourth Quarter................................................... 54.75 31.75
FISCAL 1996
First Quarter.................................................... $ 47.50 $ 34.88
Second Quarter................................................... 49.75 35.50
Third Quarter.................................................... 54.50 30.38
Fourth Quarter................................................... 52.88 36.38
As of November 25, 1996, there were 2,169 holders of record of the Common
Stock. On November 25, 1996, the last sale price reported on the Nasdaq National
Market for the Common Stock was $42.00 per share.
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ITEM 6. SELECTED FINANCIAL DATA
The following data has been derived from financial statements audited by
Price Waterhouse LLP, independent accountants. Consolidated balance sheets at
September 30, 1995 and 1996 and the related consolidated statements of income
and of cash flows for the three years ended September 30, 1996 and notes thereto
appear elsewhere herein. The data should be read in conjunction with the annual
financial statements, related notes and other financial information appearing
elsewhere herein. All amounts shown are in thousands, except per share data.
YEARS ENDED SEPTEMBER 30,(1)
------------------------------------------------------
1996 1995 1994 1993 1992
---------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
STATEMENTS OF OPERATIONS DATA:
Revenues:
Communications systems................... $582,953 $246,997 $194,037 $123,828 $ 84,366
Contract services........................ 131,022 95,150 48,310 28,609 14,063
License, royalty and development fees.... 99,875 44,465 29,276 16,271 9,092
-------- -------- -------- -------- --------
Total revenues................... 813,850 386,612 271,623 168,708 107,521
Operating expenses:
Communications systems................... 445,481 143,774 118,636 77,206 56,170
Contract services........................ 90,380 69,396 38,051 23,416 8,924
Research and development................. 162,340 80,171 49,586 27,415 25,211
Selling and marketing.................... 74,114 37,754 23,687 16,335 9,868
General and administrative............... 48,971 34,918 18,696 12,085 9,305
Litigation settlement and related
costs................................. -- -- 13,017 326 --
-------- -------- -------- -------- --------
Total operating expenses......... 821,286 366,013 261,673 156,783 109,478
-------- -------- -------- -------- --------
Operating income (loss).................... (7,436) 20,599 9,950 11,925 (1,957)
Interest income (expense), net............. 20,885 7,265 4,470 1,333 (326)
Minority interest in loss of consolidated
subsidiary............................... 13,178 12,016 2,893 -- --
Equity in losses of joint ventures......... -- -- -- (198) (1,261)
-------- -------- -------- -------- --------
Income (loss) before income taxes.......... 26,627 39,880 17,313 13,060 (3,544)
Income tax expense......................... (5,600) (9,700) (2,120) (1,000) (580)
-------- -------- -------- -------- --------
Net income (loss).......................... $ 21,027 $ 30,180 $ 15,193 $ 12,060 $ (4,124)
======== ======== ======== ======== ========
Net income (loss) per common share......... $ 0.30 $ 0.53 $ 0.28 $ 0.25 $ (0.10)
Fully diluted net income (loss) per common
share.................................... $ 0.30 $ 0.52 $ 0.28 $ 0.25 $ (0.10)
Shares used in primary per share
calculation.............................. 70,214 57,420 53,514 48,046 39,058
Shares used in fully diluted per share
calculation.............................. 70,468 58,194 53,562 48,326 39,058
BALANCE SHEET DATA:
Working capital............................ $ 425,231 $599,633 $151,448 $200,666 $ 56,578
Total assets............................... 1,185,330 940,717 357,925 306,589 108,317
Capital lease obligations(2)............... 12,912 535 1,810 4,330 5,957
Bank lines of credit and long term
debt(2).................................. 80,930 33,959 25,676 26,215 4,202
Stockholders' equity....................... 844,913 799,617 262,170 236,696 68,807
- ---------------
(1) The Company's fiscal periods end on the last Sunday of each period. As a
result of this practice, fiscal 1996 includes 53 weeks.
(2) Includes current and long-term portions.
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Qualcomm Incorporated's (the "Company") future results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include, but are not specifically limited to,
timely product development, variation of royalty, license and other revenues,
failure to satisfy performance obligations, uncertainty regarding the Company's
patents and propriety rights (including the risk that the Company may be forced
to engage in costly litigation to protect such patents and rights and the
material adverse consequences to the Company if there were unfavorable outcome
of any such litigation), difficulties in obtaining components needed for
production of wireless equipment and changes in economic conditions of various
markets the Company serves, as well as the other risks detailed in this section,
and in the sections entitled Results of Operations and Liquidity and Capital
Resources.
Overview
QUALCOMM commenced operations in July 1985, initially providing contract
research and development services and limited product manufacturing. In December
1988, the Company began shipping its two-way OmniTRACS mobile terminals and
providing messaging services to its OmniTRACS system customers. The Company has
also been involved in the development and commercialization of its proprietary
Code Division Multiple Access ("CDMA") technology for digital wireless
communication applications, including digital cellular, Personal Communication
Services ("PCS") and Wireless Local Loop ("WLL") applications and now is
involved in production of its own products for those markets.
The Company's revenues generated from its proprietary CDMA technology have
historically been derived primarily from license, royalty and development fees
and contract agreements with domestic and international wireless communications
equipment suppliers, service providers and research organizations. Although the
Company expects to continue to receive CDMA license, royalty and development
fees from its existing agreements and may receive similar fees and royalties
from new licensees, the amount and timing of these CDMA fees and royalties will
depend on the extent to which and when the Company's CDMA technology is
commercially implemented. Delays in roll-out or commencement of commercial
operation of cellular, PCS or WLL systems could have a material adverse effect
on quarterly and annual revenues. The Company has experienced and may continue
to experience fluctuations in quarterly and annual operating results due to
variations in the amount and timing of CDMA fees and royalties.
The Company began manufacturing significant volumes of CDMA subscriber and
infrastructure equipment during fiscal 1996. Production capabilities at QUALCOMM
Personal Electronics ("QPE") were significantly expanded which resulted in
production of approximately 400,000 subscriber units in fiscal 1996 with higher
production anticipated for fiscal 1997. The Company shipped the first
significant volumes of PCS phones in the fourth quarter of fiscal 1996.
Infrastructure production began during fiscal 1996 and is expected to continue
to grow into fiscal 1997. The Company, either directly or through QPE, has
entered into agreements with Sprint Spectrum, PrimeCo Personal Communication
L.P. ("PrimeCo") and Northern Telecom ("Nortel") pursuant to which the Company
(or QPE) has agreed to provide approximately $500 million, $350 million and $200
million, respectively, in CDMA equipment and services. The Company is subject to
performance guarantees on these orders. In September 1996, the Company and
Hughes Network Systems ("Hughes") entered into an agreement whereby Hughes has
agreed to purchase a minimum percentage of CDMA infrastructure equipment from
QUALCOMM for resale to Hughes' customers. Any delays or difficulties in
connection with the planned increase in manufacturing capacity could have a
material adverse effect on the Company's business and results of operations. If
the Company is unable to manufacture CDMA subscriber and infrastructure
equipment at commercially acceptable costs and on a timely basis, the Company's
competitive position and the ability of the Company to achieve a profitable
return on its CDMA research and development expenditures could be materially
impaired. Revenues related to CDMA Application Specific Integrated Circuits
("ASIC") component shipments to licensees also realized significant growth in
fiscal 1996. To support the manufacture of CDMA equipment, QUALCOMM shipped over
2 million of its CDMA ASICs in fiscal 1996.
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Domestically, the Company generates revenues from its domestic OmniTRACS
business by manufacturing and selling OmniTRACS terminals and related
application software packages and by providing ongoing messaging and maintenance
services to OmniTRACS users. Competition in 1996 resulted in a reduction of the
margins on unit sales and services. The Company generates revenues from its
international OmniTRACS business through license fees, sales of network
equipment and terminals and fees from engineering support services. Messaging
services are provided by service providers that operate network management
centers for a region under licenses granted by the Company. Since the
introduction of OmniTRACS, the Company has shipped over 175,000 OmniTRACS units
worldwide.
The Company has experienced, and expects to continue to experience,
increased operating expenses as a result of the Company's overall expansion. In
fiscal 1996, operating expenses were significantly higher, although operating
expenses as a percentage of revenue declined. The increase was primarily due to
increased research and development expenditures, expanded sales and marketing
efforts and overall expansion of the business base. In fiscal 1997 the Company
expects to continue to make substantial investments in research and development
and to increase sales and marketing expenses as the Company's products are
marketed throughout the world.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of total revenues represented by certain consolidated statement of operations
data:
YEARS ENDED
SEPTEMBER 30,(1)
----------------------
1996 1995 1994
---- ---- ----
Revenues:
Communications systems........................................ 72 % 64 % 71 %
Contract services............................................. 16 25 18
License, royalty and development fees......................... 12 11 11
--- --- ---
Total revenues........................................ 100 % 100 % 100 %
Operating expenses:
Communications systems........................................ 55 % 37 % 44 %
Contract services............................................. 11 18 14
Research and development...................................... 20 21 18
Selling and marketing......................................... 9 10 9
General and administrative.................................... 6 9 7
Litigation settlement and related costs....................... -- -- 4
--- --- ---
Total operating expenses.............................. 101 % 95 % 96 %
--- --- ---
Operating income (loss)......................................... (1 ) 5 4
Interest income, net............................................ 3 2 2
Minority interest in loss of consolidated subsidiary............ 2 3 1
Equity in losses of joint ventures.............................. -- -- --
--- --- ---
Income before income taxes...................................... 4 10 7
Income tax expense.............................................. 1 2 1
--- --- ---
Net income...................................................... 3 % 8 % 6 %
=== === ===
Communications systems costs as a percentage of communications
systems revenues.............................................. 76 % 58 % 61 %
Contract service costs as a percentage of contract services
revenues...................................................... 69 % 73 % 79 %
- ---------------
(1) The Company's fiscal periods end on the last Sunday of each period.
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FISCAL 1996 COMPARED TO FISCAL 1995
Total revenues for fiscal 1996 were $813.9 million, a 111% increase
compared to $386.6 million for fiscal 1995. Revenue growth was primarily due to
the growth in communications systems which was driven by increased revenues
related to subscriber, ASIC, and infrastructure products, as well as increased
messaging revenues and sales of OmniTRACS units internationally. Also
contributing were higher license, royalty and development fees related to
additional CDMA licensing and royalties.
Communications systems revenues, which consisted primarily of revenues from
the sale of OmniTRACS products and services, sales of CDMA subscriber and
infrastructure equipment, and ASICs chip sales were $583.0 million in fiscal
1996, a 136% increase compared to revenues of $247.0 million for fiscal 1995.
The growth in communications systems revenues for fiscal 1996 was primarily
attributable to increased sales in subscriber equipment, producing approximately
400,000 phones in fiscal 1996, and increased ASIC sales, with sales of over two
million chips to CDMA licensees. Infrastructure sales were also higher primarily
driven by component shipments to Nortel. OmniTRACS messaging revenues continue
to increase due to the expansion of the installed OmniTRACS base in the U.S.
OmniTRACS international shipments increased 38% in fiscal 1996 due primarily to
expansion of unit shipments.
Contract services revenues for fiscal 1996 were $131.0 million, a 38%
increase compared to $95.2 million for fiscal 1995. The increase resulted
primarily from the development agreement with Globalstar which has continued to
ramp up since its inception in fiscal 1994.
License, royalty and development fees for fiscal 1996 were $99.9 million, a
125% increase, compared to $44.5 million for fiscal 1995. The increase was
primarily as a result of a number of new CDMA license agreements signed in
fiscal 1996. To date, the Company has entered into numerous royalty-bearing
license agreements including agreements with twenty-one subscriber, nine
infrastructure, two ASICs and fourteen test equipment licensees. Increased CDMA
royalties, generated through equipment sales by licensees, also contributed to
the revenue growth.
Costs of communications systems, which consisted primarily of costs of
manufacturing OmniTRACS units, operating the NMF and leasing Ku-band satellite
transponders and manufacturing CDMA subscriber and infrastructure equipment, and
ASICs components, were $445.5 million or 76% of communications systems revenues
for fiscal 1996, compared to $143.8 million or 58% of communications systems
revenues for fiscal 1995. The dollar increase in costs primarily reflects
increased shipments of CDMA subscriber and infrastructure equipment and
increased ASICs volume. The increase in communications systems costs as a
percentage of communications systems revenues was due to previously anticipated
start-up costs associated with the manufacturing of CDMA subscriber,
infrastructure, and ASIC products and increasing volumes of CDMA subscriber
equipment and components. Such subscriber equipment generates lower margins than
the Company's OmniTRACS business which was the major element of communication
systems revenues in fiscal 1995.
Contract services costs for fiscal 1996 were $90.4 million or 69% of
contract services revenues, compared to $69.4 million or 73% of contract
services revenues for fiscal 1995. The increase in costs was primarily related
to the significant growth in the Globalstar development effort. The percentage
decrease in contract services costs as a percentage of contract services
revenues was related to the overall growth and relative mix of labor and
subcontract costs on the Globalstar development contract.
Research and development costs were $162.3 million or 20% of revenues for
fiscal 1996, compared to $80.2 million or 21% of revenues for fiscal 1995. This
dollar increase was attributable primarily to increased efforts toward the
development of commercial CDMA infrastructure and subscriber equipment, and ASIC
components. The Company anticipates continued growth of research and development
expenditures into fiscal 1997.
Selling and marketing expenses were $74.1 million or 9% of revenues for
fiscal 1996, compared to $37.8 million or 10% of revenues for fiscal 1995. The
dollar increase in selling and marketing was due primarily to the growth in
personnel and other marketing expenses, primarily related to the introduction of
CDMA products in the domestic and international marketplace, and to support
sales growth in the OmniTRACS. The
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Company opened three new international offices in fiscal 1996 and now has
offices in twelve countries to provide a base for operations, sales, marketing
and support of QUALCOMM products worldwide.
General and administrative expenses for fiscal 1996 were $49.0 million or
6% of revenues, compared to $34.9 million or 9% of revenues for fiscal 1995. The
dollar increase was driven primarily by additional personnel and associated
overhead costs necessary to support the overall growth in the Company's
operations. General and administrative costs as a percentage of revenues
declined due to the significantly increased revenue base in fiscal 1996. Also,
during the second quarter of fiscal 1996, the Company and Hughes agreed to
dismiss their respective litigation against each other without penalty by either
party. In fiscal 1995, the Company had accrued $2.9 million for the anticipated
liability for legal fees. As a result of the settlement of this litigation, the
Company reversed this accrual in the second quarter of fiscal 1996, resulting in
a $2.9 million reduction to general and administrative expense.
Interest income was $24.2 million for fiscal 1996, compared to $9.5 million
for fiscal 1995. The increase in fiscal 1996 was primarily due to interest
generated from the public offering proceeds received in August 1995.
Interest expense was $3.4 million for fiscal 1996, compared to $2.2 million
for fiscal 1995. The increase was primarily due to the increased outstanding
debt and capital leases related to the QPE joint venture.
The minority interest primarily consists of SONY's 49% share of the losses
of QPE, a joint venture consolidated in the Company's financial statements.
Income tax expense was $5.6 million for fiscal 1996, compared to $9.7
million for fiscal 1995. The decrease was primarily due to lower pretax earnings
in fiscal 1996 and the incorporation of the additional tax losses from the
guarantee of Globalstar vendor financing obligations. The effective tax rate in
fiscal 1996 was 21% compared to 24% in fiscal 1995.
The Company has not elected early adoption of Statement of Financial
Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based
Compensation." FAS 123 becomes effective beginning in fiscal year 1997, and will
not have a material effect on the Company's financial position or results of
operations. Upon adoption of FAS 123, the Company will continue to measure
compensation expense for its stock-based employee compensation plans using the
intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and will provide pro forma disclosures of net income and
earnings per share as if the fair value based method prescribed by FAS 123 had
been applied in measuring compensation expense.
FISCAL 1995 COMPARED TO FISCAL 1994
Total revenues for fiscal 1995 were $386.6 million, a 42% increase compared
to $271.6 million for fiscal 1994. Revenue growth was primarily due to the
growth in contract services revenues from the Company's development agreement
with Globalstar, increased sales of OmniTRACS products and services, higher
license, royalty and development fees related to additional CDMA licensing and
CDMA component sales.
Communications systems revenues, which consisted primarily of revenues from
the sale of OmniTRACS products and services, sales of CDMA subscriber equipment,
sales of VLSI chips to the telecommunications market, CDMA infrastructure and
ASICs sales were $247.0 million for fiscal 1995, a 27% increase compared to
revenues of $194.0 million for fiscal 1994. The growth in communications systems
revenues for fiscal 1995 was primarily attributable to higher messaging revenues
due to the expansion of the installed OmniTRACS base, growth in OmniTRACS
international shipments, and sales of chips to CDMA licensees (prior to the
fourth quarter of fiscal 1995, CDMA ASICs and infrastructure had been included
in contract services revenues). OmniTRACS international sales increased 43% in
fiscal 1995 due primarily to expansion of unit shipments in the Europe and
Brazil markets. Unit sales of domestic and international OmniTRACS for fiscal
1995, exclusive of Motorola CoveragePLUS conversions, were 38,366, a 26%
increase compared with 30,422 in the same period in fiscal 1994. Conversions of
former CoveragePLUS customers to OmniTRACS were 665 units, essentially
completing the Company's conversion of over 10,900 CoveragePLUS units to the
OmniTRACS system.
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Contract services revenues for fiscal 1995 were $95.2 million, a 97%
increase compared to $48.3 million for fiscal 1994. The increase resulted
primarily from the development agreement with Globalstar which began generating
revenues in the second quarter of fiscal 1994.
License, royalty and development fees for fiscal 1995 were $44.5 million, a
52% increase, compared to $29.3 million for fiscal 1994, primarily as a result
of a number of new CDMA license agreements signed in fiscal 1995.
Costs of communications systems, which consisted primarily of costs of
manufacturing OmniTRACS units, operating the NMF, and leasing Ku-band satellite
transponders, manufacturing subscriber equipment, and beginning in fourth
quarter of fiscal 1995, manufacturing CDMA infrastructure equipment and ASICs
components, were $143.8 million or 58% of communications systems revenues for
fiscal 1995, compared to $118.6 million or 61% of communications systems
revenues for fiscal 1994. The dollar increase in costs primarily reflects
increased manufacturing start up costs of CDMA subscriber equipment, and
incorporation of CDMA infrastructure and ASICs production into communications
systems in the fourth quarter of fiscal 1995. The decrease in communications
systems costs as a percentage of communications systems revenues was primarily
due to manufacturing efficiencies and material cost reductions of the OmniTRACS
units, the decrease in sales of lower margin units to former CoveragePLUS
customers, and the impact of higher messaging service revenues.
Contract services costs for fiscal 1995 were $69.4 million or 73% of
contract services revenues, compared to $38.1 million or 79% of contract
services revenues for fiscal 1994. The $31.3 million increase in costs was
primarily related to the significant growth on the Globalstar development
effort. The percentage decrease in contract services as a percentage of contract
services revenues was primarily related to the significant growth of the
Globalstar development contract.
Research and development costs for fiscal 1995 were $80.2 million or 21% of
revenues, compared to $49.6 million or 18% of revenues for fiscal 1994. This
increase was attributed primarily to increased efforts towards the development
of commercial CDMA subscriber and infrastructure equipment, continued OmniTRACS
product development, and the QuSAT hub and terminal development.
Selling and marketing expenses for fiscal 1995 were $37.8 million or 10% of
revenues, compared to $23.7 million or 9% of revenues for fiscal 1994. The
increase in selling and marketing expense was due to increased CDMA activity
both domestically and internationally and to support sales growth in the
OmniTRACS product line domestically and overseas.
General and administrative expenses for fiscal 1995 were $34.9 million or
9% of revenues, compared to $18.7 million or 7% of revenues for fiscal 1994. The
increase was driven primarily by additional personnel and associated overhead
costs necessary to support the overall growth in the Company's operations. Also
contributing to the growth were higher accrued legal expenses and increased
patent filing expense.
Litigation settlement and related costs in fiscal 1994 of $13.0 million are
related to the InterDigital Technology Corporation settlement and other
associated legal costs.
Interest income for fiscal 1995 was $9.5 million, compared to $6.5 million
for fiscal 1994. The increase in fiscal 1995 was primarily due to the public
offering proceeds received in August 1995.
Interest expense for fiscal 1995 was $2.2 million, compared to $2.0 million
for fiscal 1994. The increase was due to the increased note payable to SONY for
loans made to fund their portion of the joint venture, partially offset by a
decrease in interest expense on capital lease obligations and notes payable
outstanding as these obligation balances decreased from the prior year.
The minority interest reflects SONY's 49% share of the losses of QPE, a
joint venture consolidated in the Company's financial statements.
Income tax expense for fiscal 1995 was $9.7 million, compared to $2.1
million for fiscal 1994. The increase was primarily due to full utilization of
tax loss carryforwards in fiscal 1994 and the increase in
33
36
earnings in fiscal 1995. Also, income taxes for fiscal 1995 and 1994 were
positively impacted by $3.0 million and $4.0 million respectively due to the
recognition of those deferred tax assets that satisfy the "more likely than not"
criteria for realization established by FAS 109. In future periods, the Company
may recognize its remaining deferred tax assets if they meet the "more likely
than not" criteria of realization established by Statement of Financial
Accounting Standard No. 109 (FAS 109).
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that the cash and cash equivalents and investment
balances of $354.3 million at September 29, 1996, including interest earned
thereon, will be used to fund working capital requirements related to the
expansion of its operations, equipment vendor financing, the acquisition of
capital equipment, investment in joint ventures, and continued expansion of
facilities. In addition, the Company may also invest in companies whose products
or services complement or support the Company's manufacturing and supply
capabilities or whose products or services complement or enhance the Company's
current or future product or service offerings.
In fiscal 1996, $69.8 million in cash was used by operations, compared to
$37.7 million provided by operations in fiscal 1995. The increase in cash used
by operations was primarily due to significant increases in net working capital
requirements including inventories and accounts receivable. Receivables and
inventories were higher reflecting the significant CDMA equipment sales increase
in the second half of fiscal 1996. CDMA subscriber, infrastructure and ASIC
requirements have expanded to support the continued volume growth anticipated in
1997. Also contributing to the higher levels of inventory were approximately $17
million of infrastructure products shipped to customer sites prior to commercial
launch of networks.
Cellular, PCS and WLL network operators increasingly have required their
suppliers to arrange or provide long-term financing for them as a condition to
obtaining or bidding on infrastructure projects. These projects may require the
Company to arrange or provide financing of amounts ranging from modest sums to
over a billion dollars on any particular project. Such amount financed may
include "soft costs" (such as software, cell site leases and permits), and thus
the amount financed may exceed 100% of infrastructure equipment costs. Pursuant
to an Equipment Requirements Agreement with QUALCOMM, subject to the
satisfaction of certain conditions, NextWave is obligated to purchase
approximately 50% of its infrastructure equipment requirements from QUALCOMM.
The agreement also provides that QUALCOMM will offer 100% financing for
equipment purchased under such agreement, on commercial terms. The terms of the
equipment purchases, including financing terms, will be established in a further
agreement to be negotiated in good faith between the parties. There can be no
assurance that such an agreement will be concluded. The Company's ability to
arrange or provide and be competitive with such financing will depend on a
number of factors, including the Company's capital structure, level of available
credit and ability to provide financing in conjunction with third-party lenders.
There can be no assurance that the Company will be able to arrange or provide
such financing on terms and conditions, and in amounts, that will be
satisfactory to such network operators. The Company may be required to hold any
loans, or remain obligated under guarantees, until maturity, which could have a
material adverse effect on the Company's credit rating. A number of the
Company's competitors have substantially greater resources than the Company,
which may enable them to offer more favorable financing terms and successfully
compete against the Company for infrastructure projects. The inability to
arrange or provide such financing or to successfully compete for infrastructure
projects could have a material adverse effect on the Company and its business
and prospects.
In order to arrange or provide for financing for cellular, PCS and WLL
projects, the Company will be required to expose itself to significant project,
market, political and credit risks. The Company may be required to provide such
financing directly, and/or guaranty such financing through third party lenders.
The amount of such financing could become significant and, if not repaid by the
carrier, could have a material adverse effect on the Company's operating results
and liquidity. Many WLL and PCS network operators, including a number of C-Block
licensees, have limited or no operating histories, are faced with significant
capital requirements and are high credit risks. Pursuant to FCC regulations
applicable to C-Block licensees, the Company will not be permitted to retain a
security interest in any C-Block licenses, which initially will
34
37
constitute the primary asset of many C-Block licensees. C-Block licensees, in
particular, are faced with strict regulatory requirements under applicable FCC
regulations. Compliance with those regulations is outside of the control of the
Company. The failure of a C-Block licensee to comply with any of those
regulations could result in the revocation of that licensee's FCC licenses. The
Company has limited experience evaluating the credit worthiness or commercial
viability of potential purchasers of CDMA equipment, and there can be no
assurances that such customers will not default on any financing arranged or
provided by the Company for the purchase of its CDMA equipment. In addition, the
Company may be required to provide vendor financing for a portion of the
Globalstar system prior to its full scale implementation.
The Company, either directly or through QPE, has entered into agreements
with Sprint Spectrum, PrimeCo and Nortel pursuant to which the Company (or QPE)
has agreed to provide approximately $500 million, $350 million and $200 million,
respectively, in CDMA equipment and services. In September 1996, the Company and
Hughes entered into an agreement whereby Hughes has agreed to purchase a minimum
percentage of CDMA infrastructure equipment from QUALCOMM for resale to Hughes
customers.
Investments in capital expenditures, intangible assets and other entities
totaled $226.9 million in fiscal 1996, compared to $116.4 million in fiscal
1995. Significant components in fiscal 1996 consisted of the purchase of $216.6
million of capital assets, the purchase of intangible assets of $3.8 million and
the investment of $6.5 million in entities in which the Company holds less than
a 50% interest. In fiscal 1996, the Company purchased a manufacturing and
research facility for approximately $31.5 million. In addition, capital
expenditures were higher due to the construction of a new engineering facility,
increased building improvements relating primarily to the new manufacturing and
research facility, and higher computer, machinery and equipment expenditures
driven by overall Company growth. Also, in fiscal 1996 the Company commenced
construction of a 177,000 square foot manufacturing facility in San Diego which
will be dedicated to the production of infrastructure equipment.
In fiscal 1996 the Company provided $30 million in financing to NextWave in
connection with its plans to bid on PCS licenses in the recently completed
C-block auctions conducted by the FCC. The financing originally consisted of $5
million of equity and $25 million in a convertible loan. In connection with this
investment, subject to the satisfaction of certain conditions, NextWave has
committed to purchase approximately 50% of its PCS infrastructure equipment
requirements from the Company. In March 1996, the Company increased its equity
investment to $20 million by converting $15 million of the convertible loan
balance to equity. Of the remaining $10 million loan, $9.6 million was repaid in
the fiscal third quarter and $0.4 million was converted into a three-year note
with an equity conversion option. The Company currently holds less than 5% of
NextWave's outstanding shares and is accounting for its investment under the
cost method. The Company expects its ownership percentage to decrease in the
future as NextWave raises additional equity. See Note 8 of Consolidated
Financial Statements.
In July 1996, QPE completed negotiations on two bank credit facilities
totaling, in the aggregate, $200 million. With this credit facility, QPE repaid
all of its loan balances outstanding to QUALCOMM and SONY and at fiscal year end
maintained a loan balance of approximately $80 million. The secured revolving
credit facilities are non-recourse to the Company and the minority interest
holder in QPE.
In fiscal 1996, the Company's financing activities provided net cash of
$87.4 million compared to $520.2 million in fiscal 1995. Fiscal 1996 included
proceeds from the QPE bank lines of credit, the sale and lease back of
manufacturing equipment to QPE, and additional contributions received from SONY
related to the QPE joint venture, which were partially offset by the retirement
of the $20 million note on the San Diego Design Center. Net cash provided in
fiscal 1995 was primarily related to proceeds received from a public offering of
the Company's Common Stock, additional contributions received from SONY related
to the QPE joint venture and the issuance of common stock under the Company's
stock option and employee stock purchase plan.
The actual amount and timing of working capital and capital equipment
expenditures that the Company may incur in future periods may vary
significantly. This will depend upon numerous factors, including the extent and
timing of the commercial deployment of the Company's CDMA technology in the U.S.
and
35
38
worldwide, investments in joint ventures or other forms of strategic alliances,
the requirement to provide CDMA vendor financing and the growth in personnel and
related facility expansion and the increase in manufacturing capacity. In
addition, expenses related to any patent infringement, or other litigation, may
require additional cash resources and may have an adverse impact on the
Company's results of operations.
The Company expects it will require additional capital to fund its growth
and the increasing requirement for vendor financing which may be derived through
additional debt, equity financing, or other sources. The Company is evaluating
these alternatives, and is considering multiple sources of funding including
unsecured bank facilities, preferred securities and/or convertible debt. There
can be no assurances such capital will be available or, if available, that it
will be on acceptable terms.
ITEM 8. FINANCIAL STATEMENTS
The Company's consolidated financial statements at September 30, 1996 and
1995, and for each of the three years in the period ended September 30, 1996 and
the Report of Price Waterhouse LLP, Independent Accountants, are included in
this report on Form 10-K on pages F-1 through F-20.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding Directors is incorporated by reference to the section
entitled "Election of Directors" in the QUALCOMM Incorporated definitive Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Annual Meeting of Stockholders to be held on February 11, 1997 (the
"Proxy Statement"). Information regarding Executive Officers is set forth in
Item 1 of Part I of this Report under the caption "Executive Officers of the
Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Certain Transactions."
36
39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE
NUMBER
------
(a) Documents filed as part of the report:
(1) Report of Independent Accountants...................................... F-1
Consolidated Balance Sheets at September 30, 1996 and 1995............ F-2
Consolidated Statements of Income for Fiscal 1996, 1995 and 1994...... F-3
Consolidated Statements of Cash Flows for Fiscal 1996, 1995 and
1994.................................................................. F-4
Consolidated Statements of Stockholders' Equity for Fiscal 1996, 1995
and 1994.............................................................. F-5
Notes to Consolidated Financial Statements............................ F-6
(2) Consolidated Financial Statement Schedule..............................
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.
(3) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------ ------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation.(1)
3.2 Certificate of Amendment of Restated Certificate of Incorporation. (7)
3.3 Certificate of Designation of Preferences.
3.4 Bylaws.(2)
10.1 Form of Indemnity Agreement between the Company, each director and certain
officers.(2)(14)
10.2 1991 Stock Option Plan, as amended.(10)(14)
10.3 Form of Incentive Stock Option Grant under the 1991 Stock Option Plan.(2)(14)
10.4 Form of Supplemental Stock Option Grant under the 1991 Stock Option
Plan.(2)(14)
10.5 1991 Employee Stock Purchase Plan.(11)(14)
10.6 Form of Employee Stock Purchase Plan Offering under the 1991 Employee Stock
Purchase Plan.(2)(14)
10.7 Registration Rights Agreement dated September 11, 1991 between the Company and
various Stockholders.(2)
10.8 Satellite Service Agreement dated March 5, 1991 between the Company and GTE
Spacenet Corporation.(2)(3)
10.9 Joint Venture Agreement dated January 24, 1990 between the Company and Alcatel
Transmission par Faisceaux Hertziens.(2)(3)
10.10 Agreement dated April 17, 1989 between the Company and PACTEL
Corporation.(2)(3)
10.11 CDMA Technology Agreement and related Patent License Agreement, each dated
July 3, 1990 between the Company and American Telephone & Telegraph
Company.(2)(3)
10.12 DS-CDMA Technology Agreement and related Patent License Agreement, each dated
September 26, 1990 between the Company and MOTOROLA, Inc.(2)(3)
10.13 JSM Shareholders Agreement dated May 24, 1991 between the Company, C. Itoh,
Ltd. and Nippon Steel Corporation.(2)(3)
10.14 401(k) Plan.(2)
37
40
EXHIBIT
NUMBER DESCRIPTION
------ ------------------------------------------------------------------------------
10.15 Amendments dated January 15, 1992 and February 7, 1992 to that certain
Technology Agreement dated July 3, 1990 with American Telephone & Telegraph
Company.(4)
10.16 Amendment dated January 21, 1992 to that certain Technology Agreement dated
September 26, 1990 with MOTOROLA, Inc.(4)(5)
10.17 Non-Employee Directors' Stock Option Plan (the "Directors' Plan").(14)
10.18 Form of Stock Option Grant under the Directors' Plan, with related
schedule.(6)(14)
10.19 Joint Venture and Partnership Agreement dated February 25, 1994 between
QUALCOMM Investment Company and SONY Electronics CDMA Investment, Inc.(7)(8)
10.20 Contract dated March 18, 1994 between the Company and Globalstar, L.P.(7)(8)
10.21 Executive Retirement Matching Contribution Plan(12)(14)
10.22 1996 Non-qualified Employee Stock Purchase Plan(13)(14)
10.23 Stockholder Rights Plan(9)
11.1 Calculation of earnings per share.
23.1 Consent of Price Waterhouse LLP.
24.1 Power of Attorney. Reference is made to page 40.
27 Financial Data Schedule.
- ---------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-3
(No. 33-62724) or amendments thereto and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 33-42782) or amendments thereto and incorporated herein by reference.
(3) Certain confidential portions deleted pursuant to Order Granting
Application or Confidential Treatment issued in connection with
Registration Statement on Form S-1 (No. 33-42782) effective December 12,
1991.
(4) Filed as exhibit to Registrant's Annual Report on Form 10-K for the fiscal
year ended September 27, 1992.
(5) Certain confidential portions deleted pursuant to order Granting
Application for Confidential Treatment pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934 dated March 19, 1993.
(6) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended September 26, 1993.
(7) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 27, 1994, as amended.
(8) Certain confidential portions deleted pursuant to Order Granting
Application for Confidential Treatment pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934 dated July 7, 1994.
(9) Filed as an exhibit to the Company's Form 8-K current report dated as of
September 26, 1995.
(10) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(File No. 333-2754) filed on March 25, 1996.
(11) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(File No. 333-2756) filed on March 25, 1996.
(12) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(File No. 333-2752) filed on March 25, 1996.
(13) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(File No. 333-2750) file on March 25, 1996.
(14) Indicates management or compensatory plan or arrangement required to be
identified pursuant to Item 14(c).
38
41
(B) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the Registrant during the fourth
quarter of the fiscal year ended September 29, 1996.
(C) EXHIBITS
The exhibits required by this Item are listed under Item 14(a)(3).
(D) FINANCIAL STATEMENTS SCHEDULES
The consolidated financial statement schedules required by this Item are
listed under Item 14 (a)(2).
39
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
December 2, 1996
QUALCOMM Incorporated
By /s/ IRWIN MARK JACOBS
Irwin Mark Jacobs,
Chief Executive Officer and
Chairman
POWER OF ATTORNEY
Know all persons by these presents, that each person whose signature
appears below constitutes and appoints Irwin Mark Jacobs and Harvey P. White,
and each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all amendments to this Report,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming that all said
attorneys-in-fact and agents, or any of them or their or his substitute or
substituted, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of Registrant in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------------------------------- --------------------------- -----------------
/s/ IRWIN MARK JACOBS Chief Executive Officer and December 2, 1996
Irwin Mark Jacobs Chairman (Principal
Executive Officer)
/s/ ANDREW J. VITERBI Vice-Chairman December 2, 1996
Andrew J. Viterbi
/s/ HARVEY P. WHITE President and Director December 2, 1996
Harvey P. White
/s/ ANTHONY S. THORNLEY Senior Vice President, December 2, 1996
Anthony S. Thornley Chief Financial Officer,
(Principal Financial and
Accounting Officer)
/s/ RICHARD C. ATKINSON Director December 2, 1996
Richard C.Atkinson
/s/ ADELIA A. COFFMAN Director December 2, 1996
Adelia A. Coffman
40
43
SIGNATURE TITLE DATE
- ----------------------------------------------- --------------------------- -----------------
/s/ JEROME S. KATZIN Director December 2, 1996
Jerome S. Katzin
/s/ NEIL Director December 2, 1996
KADISHA
Neil Kadisha
/s/ DUANE A. NELLES Director December 2, 1996
Duane A. Nelles
/s/ PETER M. SACERDOTE Director December 2, 1996
Peter M. Sacerdote
/s/ MARC I. Director December 2, 1996
STERN
Marc I. Stern
/s/ BRENT SCOWCROFT Director December 2, 1996
Brent Scowcroft
/s/ FRANK SAVAGE Director December 2, 1996
Frank Savage
41
44
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the
Stockholders of QUALCOMM Incorporated
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 37 present fairly, in all material
respects, the financial position of QUALCOMM Incorporated and its subsidiaries
at September 30, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 1996,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Diego, California
November 8, 1996
F-1
45
QUALCOMM INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30,
------------------------
1996 1995
---------- --------
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 110,143 $500,629
Investments..................................................... 236,129 66,335
Accounts receivable, net........................................ 217,433 82,733
Inventories..................................................... 171,511 44,010
Other current assets............................................ 15,974 10,923
---------- --------
Total current assets............................................ 751,190 704,630
Property, plant and equipment, net................................ 352,699 185,513
Investments....................................................... 8,009 12,032
Other assets...................................................... 73,432 38,542
---------- --------
Total assets...................................................... $1,185,330 $940,717
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities........................ $ 229,799 $ 95,769
Unearned revenue................................................ 13,226 8,213
Bank lines of credit............................................ 80,700 --
Current portion of long-term debt............................... 2,234 1,015
---------- --------
Total current liabilities....................................... 325,959 104,997
Long-term debt.................................................... 10,908 33,479
Other liabilities................................................. 3,550 2,624
---------- --------
Total liabilities............................................... 340,417 141,100
---------- --------
Commitments and contingencies (Note 9)
Minority interest in consolidated subsidiary (Notes 1 & 8)........ -- --
Stockholders' equity:
Preferred stock, $0.0001 par value 8,000 shares authorized; none -- --
outstanding in 1996 and 1995.................................
Common stock, $0.0001 par value; 150,000 shares authorized; 7 6
66,535 and 64,693 shares issued and outstanding in 1996 and
1995.........................................................
Paid-in capital................................................. 819,042 794,774
Retained earnings............................................... 25,864 4,837
---------- --------
Total stockholders' equity...................................... 844,913 799,617
---------- --------
Total liabilities and stockholders' equity........................ $1,185,330 $940,717
========== ========
See accompanying notes.
F-2
46
QUALCOMM INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED SEPTEMBER 30,
----------------------------------
1996 1995 1994
-------- -------- --------
Revenues:
Communications systems................................... $582,953 $246,997 $194,037
Contract services........................................ 131,022 95,150 48,310
License, royalty and development fees.................... 99,875 44,465 29,276
-------- -------- --------
Total revenues................................... 813,850 386,612 271,623
-------- -------- --------
Operating expenses:
Communications systems................................... 445,481 143,774 118,636
Contract services........................................ 90,380 69,396 38,051
Research and development................................. 162,340 80,171 49,586
Selling and marketing.................................... 74,114 37,754 23,687
General and administrative............................... 48,971 34,918 18,696
Litigation settlement and related costs.................. -- -- 13,017
-------- -------- --------
Total operating expenses......................... 821,286 366,013 261,673
-------- -------- --------
Operating (loss) income.................................... (7,436) 20,599 9,950
Interest income............................................ 24,239 9,529 6,495
Interest expense........................................... (3,354) (2,264) (2,025)
Minority interest in losses of consolidated subsidiary..... 13,178 12,016 2,893
-------- -------- --------
Income before income taxes................................. 26,627 39,880 17,313
Income tax expense......................................... (5,600) (9,700) (2,120)
-------- -------- --------
Net income................................................. $ 21,027 $ 30,180 $ 15,193
======== ======== ========
Net earnings per common share
Primary.................................................. $ 0.30 $ 0.53 $ 0.28
======== ======== ========
Fully diluted............................................ $ 0.30 $ 0.52 $ 0.28
======== ======== ========
Shares used in per share calculation
Primary.................................................. 70,214 57,420 53,514
======== ======== ========
Fully diluted............................................ 70,468 58,194 53,562
======== ======== ========
See accompanying notes.
F-3
47
QUALCOMM INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED SEPTEMBER 30,
----------------------------------
1996 1995 1994
-------- -------- --------
Operating activities:
Net income............................................... $ 21,027 $ 30,180 $ 15,193
Depreciation and amortization............................ 56,817 30,919 18,809
Recognition of deferred tax asset........................ -- (3,000) (4,000)
Minority interest in losses of consolidated subsidiary... (13,178) (12,016) (2,893)
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net.............................. (134,700) (19,806) (28,791)
Inventories........................................... (127,501) (28,379) (1,554)
Other assets.......................................... (12,204) 1,507 775
Accounts payable and accrued liabilities.............. 134,030 36,790 29,597
Unearned revenue...................................... 5,013 1,774 588
Other liabilities..................................... 926 (227) (1,264)
-------- -------- --------
Net cash (used in) provided by operating activities........ (69,770) 37,742 26,460
-------- -------- --------
Investing activities:
Issuance of note receivable (Note 8)..................... (25,000) -- --
Collection of note receivable (Note 8)................... 9,602 -- --
Capital expenditures..................................... (216,554) (99,455) (68,692)
Purchases of intangible assets........................... (3,843) (5,054) (10,293)
Purchases of investments................................. (587,898) (84,343) (192,726)
Maturities of investments................................ 422,127 98,423 194,901
Investment in other entities............................. (6,500) (11,925) (8,239)
-------- -------- --------
Net cash used in investing activities...................... (408,066) (102,354) (85,049)
-------- -------- --------
Financing activities:
Sale/leaseback transaction............................... 10,248 -- --
Proceeds from bank lines of credit....................... 80,700 -- --
Principal payments under long-term debt.................. (46,036) (3,749) (5,718)
Proceeds from issuance of notes payable.................. 11,772 10,757 2,659
Minority interest investment in consolidated 6,397 5,917 (1,035)
subsidiary............................................
Tax benefit from exercise of stock options............... 654 8,102 3,750
Net proceeds from issuance of common stock............... 23,615 499,165 6,529
-------- -------- --------
Net cash provided by financing activities.................. 87,350 520,192 6,185
-------- -------- --------
Net (decrease) increase in cash and cash equivalents....... (390,486) 455,580 (52,404)
Cash and cash equivalents at beginning of year............. 500,629 45,049 97,453
-------- -------- --------
Cash and cash equivalents at end of year................... $110,143 $500,629 $ 45,049
======== ======== ========
See accompanying notes.
F-4
48
QUALCOMM INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
RETAINED
COMMON STOCK EARNINGS
----------------- PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
------ ------ -------- ------------ --------
Balance at September 30, 1993......... 50,268 $ 5 $277,227 $(40,536) $236,696
Exercise of stock options............. 650 -- 2,772 -- 2,772
Tax benefit from exercise of stock
options............................. -- -- 3,750 -- 3,750
Exercise of stock warrants............ 385 -- 660 -- 660
Issuance for Employee Stock
Purchase Plan....................... 183 -- 3,099 -- 3,099
Net income............................ -- -- -- 15,193 15,193
------ --- -------- -------- --------
Balance at September 30, 1994......... 51,486 5 287,508 (25,343) 262,170
Exercise of stock options............. 1,458 -- 9,318 -- 9,318
Tax benefit from exercise of stock
options............................. -- -- 8,102 -- 8,102
Issuance of common stock, net of
issuance costs of $17,364........... 11,500 1 485,761 -- 485,762
Issuance for Employee Stock
Purchase Plan....................... 249 -- 4,085 -- 4,085
Net income............................ -- -- -- 30,180 30,180
------ --- -------- -------- --------
Balance at September 30, 1995......... 64,693 6 794,774 4,837 799,617
Exercise of stock options............. 1,510 1 14,277 -- 14,278
Tax benefit from exercise of stock
options............................. -- -- 654 -- 654
Issuance for Employee Stock Purchase
Plan and Executive Retirement
Plans............................... 332 -- 9,337 -- 9,337
Net income............................ -- -- -- 21,027 21,027
------ --- -------- -------- --------
Balance at September 30, 1996......... 66,535 $ 7 $819,042 $ 25,864 $844,913
====== === ======== ======== ========
See accompanying notes.
F-5
49
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
QUALCOMM Incorporated (the "Company"), a Delaware corporation, develops,
manufactures, markets, licenses and operates advanced communications systems and
products based on digital wireless technology, including mobile and fixed
satellite communications systems and products and digital wireless telephone
systems and products using the Company's proprietary Code Division Multiple
Access ("CDMA") technology. Other products include secure communications
equipment and subsystems and a range of Very Large Scale Integrated circuit
components for use in commercial and government applications.
Principles of Consolidation
The Company's consolidated financial statements include the assets,
liabilities and results of operations of majority-owned subsidiaries. The
ownership of the other interest holders is reflected as minority interest. All
significant intercompany accounts and transactions have been eliminated.
Fiscal Year
The Company operates and reports using a fiscal year ending on the last
Sunday in September. As a result of this practice, fiscal 1996 includes 53
weeks. The additional week of activity occurred in the first quarter of fiscal
1996. For presentation purposes, the Company has indicated its fiscal year as
ending on September 30.
Revenues
Revenue from communications systems and products is generally recognized at
the time the units are shipped and over the period during which message and
warranty services are provided, except for shipments under arrangements
involving significant acceptance requirements. Under such arrangements, revenue
is recognized when the Company has substantially met its performance
obligations. Revenue from long-term contracts and revenue earned under license
and development agreements with continuing performance obligations is recognized
using the percentage-of-completion method, primarily based on costs incurred to
date compared with total estimated costs at completion. Estimated contract
losses are recognized when determined. Non-refundable license fees are
recognized when there is no material continuing performance obligation under the
agreement and collection is probable. Royalty revenue is recorded as earned in
accordance with the specific terms of each license agreement.
A significant portion of the Company's revenues are derived from the North
American trucking industry, particularly providers of long haul transportation
of goods and equipment, and, because the worldwide market for wireless telephone
systems and products is dominated by a small number of large corporations and
government agencies, a significant portion of the Company's CDMA revenues are
concentrated with a limited number of customers.
During fiscal 1996 and 1995, revenues from Globalstar (Note 8) accounted
for 15% and 19% of revenues, respectively. No one customer accounted for more
than 10% of fiscal 1994 revenues. Revenues from international customers,
exclusive of revenues from the ALCATEL QUALCOMM joint venture (Note 8), were
approximately 34%, 17% and 20% of total revenues in fiscal 1996, 1995 and 1994,
respectively. The 1996, 1995 and 1994 revenues included $221,000,000,
$43,000,000 and $33,300,000 from Asia, respectively; $36,000,000, $12,700,000
and $13,600,000 from Canada, respectively; and $13,000,000, $10,000,000 and
$7,300,000 from Latin America, respectively.
F-6
50
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents include money market funds, commercial paper and loan
participations. The carrying amount approximates the fair value due to the short
maturity of these instruments.
The Company's policy is to place its cash, cash equivalents and investments
with high credit quality financial institutions, government agencies and
corporate entities and to limit the amount of credit exposure.
Investments
In the first quarter of fiscal 1995, the Company adopted Statement of
Financial Accounting Standards No. 115 ("FAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities." Management determines the
appropriate classification of debt securities at the time of purchase and
re-evaluates such designation as of each balance sheet date. At September 30,
1996 and 1995, the Company's investment portfolio consisted of debt securities
classified as held-to-maturity and is presented at its amortized cost. There was
no cumulative effect as a result of adopting FAS 115 in fiscal 1995.
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 is recorded at cost and depreciated or
amortized using the straight-line method over estimated useful lives. Buildings
and building improvements are depreciated over thirty years and fifteen years,
respectively. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the remaining term of the related lease. Other
property, plant and equipment have useful lives ranging from two to five years.
Maintenance, repairs and minor renewals and betterments are charged to expense.
Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121
("FAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", the Company reviews for the impairment of
long-lived assets and certain identifiable intangibles whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Under FAS 121, an impairment loss would be recognized when
estimated future cash flows expected to result from the use of the asset and its
eventual disposition is less than its carrying amount. No such impairment losses
have been identified by the Company.
Other Assets
Other assets include investments in other entities and intangibles.
Investments in corporate entities with less than 20% voting interest are
accounted for under the cost method. The Company uses the equity method to
account for ownership interests in partnerships and for investments in corporate
entities in which it has voting interest of 20% to 50% or in which it otherwise
exercises significant influence. Under the equity method, the investment is
originally recorded at cost and adjusted to recognize the Company's share of net
earnings or losses of the investee, limited to the extent of the Company's
investment in, advances to and financial guarantees for the investee.
Intangible assets are recorded at cost and amortized over their estimated
useful lives, which currently range from three to five years.
F-7
51
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Options
The Company has not elected early adoption of Statement of Financial
Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based
Compensation." FAS 123 becomes effective beginning in fiscal year 1997, and will
not have a material effect on the Company's financial position or results of
operations. Upon adoption of FAS 123, the Company will continue to measure
compensation expense for its stock-based employee compensation plans using the
intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and will provide pro forma disclosures of net income and
earnings per share as if the fair value based method prescribed by FAS 123 had
been applied in measuring compensation expense.
Foreign Currency
Local currencies are generally considered to be the functional currency for
operations outside the United States, except in countries treated as highly
inflationary. Assets and liabilities are translated at year-end exchange rates,
income and expenses are translated at average rates of exchange prevailing
during the year. For operations in countries treated as highly inflationary,
certain financial statement amounts are translated at historical exchange rates,
with all other assets and liabilities translated at year-end exchange rates. The
effects of translating the financial position and results of operations of local
currency operations have not been significant to the Company's consolidated
financial statements.
The effects of foreign currency transactions are included in the Company's
statement of income. During fiscal 1996, the Company had a net foreign currency
transaction gain of approximately $1,400,000. During fiscal 1995 and 1994,
foreign currency transaction gains and losses were not significant.
Income Taxes
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred tax asset and/or liability is computed
for both the expected future impact of differences between the financial
statement and tax basis of assets and liabilities and for the expected future
tax benefit to be derived from tax loss and tax credit carryforwards. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be "more likely than not" realized in future tax returns. Tax
rate changes are reflected in income in the period such changes are enacted.
Investment tax credits are reflected as a reduction of income tax expense using
the flow through method in the year in which they are realized.
Net Earnings Per Common Share
Primary earnings per common share are calculated by dividing net income by
the weighted average number of common shares and dilutive common stock
equivalents using the treasury stock method. Fully diluted earnings per share
reflect the dilutive effect of common stock equivalents at the higher of the
average or the ending market price during the reporting period.
Financial Statement Preparation
The preparation of financial statements in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
F-8
52
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
SEPTEMBER 30,
--------------------
1996 1995
-------- -------
(IN THOUSANDS)
Accounts Receivable:
Trade, net of allowance for doubtful accounts of $8,223 and
$2,853, respectively....................................... $181,732 $58,651
Long-term contracts:
Billed..................................................... 12,363 7,882
Unbilled, net of progress payments of $1,572
and $1,780, respectively................................. 20,052 13,602
Other......................................................... 3,286 2,598
-------- -------
$217,433 $82,733
======== =======
The Company's trade receivables at September 30, 1996 and 1995 included 31%
and 57%, respectively, from customers in the trucking industry and 66% and 37%,
respectively, from customers of the Company's CDMA technology including license,
royalty, development fees and telephone systems and products.
Unbilled receivables represent costs and profits recorded in excess of
amounts billable pursuant to contract provisions and are expected to be realized
within one year.
Progress payments on contract receivables decreased $208,000, $1,994,000
and $3,609,000 during fiscal 1996, 1995 and 1994, respectively.
F-9
53
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30,
----------------------
1996 1995
--------- ---------
(IN THOUSANDS)
Inventories:
Raw materials................................................ $ 97,779 $ 27,090
Work-in-progress............................................. 35,686 7,922
Finished goods............................................... 38,046 8,998
-------- -------
$ 171,511 $ 44,010
======== =======
Property, Plant and Equipment:
Land......................................................... $ 29,955 $ 18,237
Buildings and improvements................................... 135,239 71,594
Computer equipment........................................... 158,165 86,566
Machinery and equipment...................................... 131,485 64,096
Furniture and office equipment............................... 10,314 8,801
Leasehold improvements....................................... 4,877 2,601
-------- -------
470,035 251,895
Less accumulated depreciation and amortization............... 117,336 66,382
-------- -------
$ 352,699 $ 185,513
======== =======
Other Assets:
Intangible assets, net of accumulated amortization of $9,975
and $4,914, respectively.................................. $ 10,690 $ 11,494
Investment in other entities (Note 8)........................ 41,939 16,011
Due from minority partner in QPE (Note 8).................... 16,808 10,027
Other........................................................ 3,995 1,010
-------- -------
$ 73,432 $ 38,542
======== =======
Accounts Payable and Accrued Liabilities:
Trade payables............................................... $ 163,599 $ 54,311
Accrued payroll and related benefits......................... 33,591 24,065
Accrued warranty............................................. 9,286 2,366
Other accrued liabilities.................................... 23,323 15,027
-------- -------
$ 229,799 $ 95,769
======== =======
F-10
54
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. INVESTMENTS
At September 30, 1996 and 1995, all marketable debt securities were
classified as held-to-maturity and carried at amortized cost. Investments
consisted of the following (in thousands):
CURRENT LONG-TERM
-------- ---------
1996
U.S. government securities................................... $ -- $ 5,000
Commercial paper............................................. 157,070 --
Corporate medium-term notes.................................. 9,000 3,000
Other debt securities........................................ 70,059 9
-------- -------
$236,129 $ 8,009
======== =======
1995
U.S. government securities................................... $ 1,000 $ 5,000
Commercial paper............................................. 55,361 --
Corporate medium-term notes.................................. -- 7,000
Other debt securities........................................ 9,974 32
-------- -------
$ 66,335 $12,032
======== =======
At September 30, 1996, maturities for long-term securities were between one
and two years. At September 30, 1996 and 1995, the estimated fair value of each
investment approximated the amortized cost and, therefore, there were no
significant unrealized gains or losses.
NOTE 4. INCOME TAXES
The components of income tax expense for the years ended September 30 are
as follows (in thousands):
1996 1995 1994
------ ------- -------
Current provision
Federal.............................................. $1,301 $ 8,946 $ 4,376
State................................................ 695 1,459 1,436
Foreign.............................................. 3,604 2,295 308
------ ------- -------
5,600 12,700 6,120
Recognition of deferred tax asset...................... -- (3,000) (4,000)
------ ------- -------
$5,600 $ 9,700 $ 2,120
====== ======= =======
During fiscal 1995 and 1994, the Company recognized deferred tax assets of
$3,000,000 and $4,000,000, respectively, based on management's assessment that
certain existing tax benefits will "more likely than not" be realized in future
tax returns based on the criteria of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes."
Management's assessment concerning the realizability of existing tax
benefits is based on various assumptions including estimates of future operating
results and the extent of the commercial deployment of the Company's CDMA
telephone systems and products under certain existing contractual arrangements.
A significant portion of the Company's performance obligations under such
arrangements are scheduled to occur in fiscal 1997 and, upon such occurrence,
may have a significant impact on the Company's assessment of the realizability
of tax benefits during future periods.
F-11
55
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation from the expected statutory federal
income tax expense to the Company's actual income tax expense for the years
ended September 30 (in thousands):
1996 1995 1994
------- ------- -------
Expected income tax expense at federal statutory tax
rate................................................ $ 9,316 $13,958 $ 6,060
State income tax expense.............................. 695 1,459 1,436
Foreign taxes......................................... 3,604 2,295 308
Income recognition differences........................ (4,866) 1,039 6,261
Utilization of NOL carryforwards...................... -- -- (3,905)
Deferred tax asset recognized......................... -- (3,000) (4,000)
Tax credit utilization................................ (3,575) (7,040) (4,432)
Other................................................. 426 989 392
------- ------- -------
Actual income tax expense............................. $ 5,600 $ 9,700 $ 2,120
======= ======= =======
At September 30, 1996 and 1995, the Company had total deferred tax assets
as follows (in thousands):
1996 1995
------- -------
Income recognition differences................................... $17,705 $22,571
Stock option tax deduction....................................... 37,973 16,901
Tax credits...................................................... 7,628 --
------- -------
Subtotal......................................................... 63,306 39,472
Less valuation allowance......................................... 56,306 32,472
------- -------
Net.............................................................. $ 7,000 $ 7,000
======= =======
The benefit for the stock option tax deduction is credited directly to
paid-in capital for financial reporting purposes, as utilized.
Cash amounts paid for income taxes were $4,752,000, $6,675,000 and
$1,574,000 for fiscal 1996, 1995 and 1994, respectively and exclusive of a
$2,190,000 refund received in fiscal 1996. At September 30, 1996, the Company
had unused research and development credits of approximately $6,200,000 expiring
in 2010, manufacturing investment credits of approximately $1,100,000 expiring
in 2004, and other unused tax credits of approximately $300,000.
F-12
56
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. DEBT AND CREDIT FACILITIES
The principal balance of long-term debt at September 30, 1996 and 1995
consisted of the following (in thousands):
1996 1995
------- -------
Note payable, interest at the bank's base rate, original maturity
of April 2008, collateralized by land and buildings, retired
during fiscal 1996 with no gain or loss resulting from the
prepayment. ................................................... $ -- $20,000
Unsecured revolving loan payable to SONY Electronics subordinate
to all non-affiliated QUALCOMM Personal Electronics debt (Note
8); bearing interest at prime plus 1%; original maturity of
March 2004, retired during fiscal 1996 with no gain or loss
resulting from the prepayment. ................................ -- 13,416
Capital lease obligations; future minimum lease payments in each
of the next five years from fiscal 1997 through 2001 of $2,955,
$3,672, $3,672, $3,672 and $917, respectively. ................ 12,912 535
Other............................................................ 230 543
------- -------
13,142 34,494
Less current portion............................................. 2,234 1,015
------- -------
$10,908 $33,479
======= =======
The annual principal installments for long-term notes payable, capital
leases and other obligations in each of the next five years from fiscal 1997
through 2001 are $2,276,000, $3,210,000, $3,270,000, $3,478,000 and $908,000,
respectively.
During fiscal 1996, QPE (Note 8) entered into an agreement for the sale and
leaseback of certain manufacturing equipment with a net book value of
approximately $10,248,000. There was no gain or loss realized as a result of the
sale. QPE also entered into additional leases for manufacturing equipment with a
fair value of $2,664,000. All of these leases are for approximately five year
terms and are non-recourse to the Company and the minority interest holder in
QPE. They are classified as capital leases in accordance with Statement of
Financial Accounting Standards No. 13, "Accounting for Leases."
As of September 30, 1996, QPE had outstanding bank borrowings of
$80,700,000 under two separate $100,000,000 revolving credit facilities. The two
credit facilities have identical terms and borrowings from the credit facilities
are drawn in equal amounts. Both credit facilities expire in July 1997. The
interest rate under the facilities is at the prime rate, or, at the Company's
option, at a mutually acceptable market rate. The weighted average interest rate
on outstanding borrowings was 6.1% during fiscal 1996 and 6.5% at September 30,
1996. The credit facilities are non-recourse to the Company and the minority
interest holder in QPE and are collateralized by QPE's accounts receivable and
inventories, which at September 30, 1996, on a consolidated basis, amounted to
$38,365,000 and $65,997,000, respectively. However, in the event that QPE cannot
repay the bank borrowings, both the Company and the minority interest holder in
QPE have agreed to provide subordinated loans to QPE in proportion to their
respective ownership interests, to the extent that the sum of QPE's tangible net
worth and the total loan commitments are not less than zero. Under the terms of
the credit facilities, amounts that QPE may borrow outside of the credit
facilities are limited.
The fair values of the Company's debt and credit facilities are estimated
based on comparison with similar issues or current rates offered to the Company
for debt of the same remaining maturities. At September 30, 1996 and 1995, the
estimated fair values of the Company's debt and credit facilities approximated
their carrying values.
F-13
57
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash amounts paid for interest were $3,869,000, $2,058,000 and $1,879,000
for fiscal 1996, 1995 and 1994, respectively.
NOTE 6. CAPITAL STOCK
Common Stock
In August 1995, the Company completed its third public offering consisting
of 11,500,000 common shares with net proceeds of approximately $485,762,000.
Common Stock Warrants
In connection with certain notes payable issued in fiscal 1988 and 1989,
the Company issued Series A warrants to purchase 3,076,000 shares of common
stock at $4 per share. During fiscal 1994, warrants for 256,000 shares of common
stock were exchanged for 220,000 shares of common stock. In addition, during
fiscal 1994 warrants for 165,000 shares of common stock were exercised with cash
payments and/or the cancellation of certain notes payable. As of September 30,
1994, all Series A warrants had been exercised.
In November 1991, the Company issued seven-year warrants to purchase
782,000 shares of common stock at $5.50 per share to a company for the
relinquishment of all its claims to participation in certain future royalties,
license fees and profits. A total of 782,000 shares of common stock is reserved
for issuance upon exercise of these warrants. As of September 30, 1996, none of
these warrants had been exercised.
Preferred Share Purchase Rights Plan
During fiscal 1996, the Board of Directors implemented a Preferred Share
Purchase Rights Plan ("Rights Plan") to protect stockholders' rights in the
event of a proposed takeover of the Company. Under the Rights Plan, the Company
declared a dividend of one preferred share purchase right (a "Right") for each
share of the Company's common stock outstanding as of October 16, 1995. Similar
Rights will generally be issued in respect to common stock subsequently issued.
Each Right becomes exercisable, upon the occurrence of certain events, for one
one-hundredth of a share of Series A Junior Participating Preferred Stock,
$0.0001 par value per share, at a purchase price of $250 per share (subject to
adjustment) of the Company's common stock or other securities, cash or other
assets having a market value (as defined) equal to twice such purchase price.
The Rights are exercisable only if a person or group acquires beneficial
ownership of 15% or more of the Company's outstanding shares of common stock.
The Rights, which expire on September 25, 2005, are redeemable in whole, but not
in part, at the Company's option at any time for a price of $0.01 per Right.
NOTE 7. 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 1996, 1995 and 1994 was $3,535,000, $1,904,000 and $757,000,
respectively.
Stock Option Plans
The Board of Directors may grant options to selected key employees,
directors and consultants to the Company to purchase shares of the Company's
common stock, at a price not less than 85% of the fair market value of the stock
at the date of grant. The 1991 Stock Option Plan (the "Plan"), as amended,
authorizes up to 23,000,000 shares to be granted no later than August 2001. The
Plan provides for the grant of both incentive stock options and non-qualified
stock options. Generally, options outstanding vest over a one to six year period
F-14
58
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and are exercisable for up to ten years from the grant date. At September 30,
1996, 1,854,000 shares were exercisable at prices ranging from $5.00 to $38.78
for an aggregate exercise price of $35,434,000.
The Company has a Non-Employee Directors' Stock Option Plan which
authorizes 600,000 shares to be granted no later than July 2003. This plan
provides for non-qualified stock options to be granted to non-employee directors
at fair market value, exercisable at varying rates and fully exercisable within
ten years from the grant date. At September 30, 1996, 108,000 shares were
exercisable at price ranging from $22.75 to $34.56 per share for an aggregate
exercise price of $3,166,000.
A summary of stock option transactions for the plans follows (in thousands,
except per share data):
OPTIONS OUTSTANDING
OPTIONS -----------------------------------------
AVAILABLE NUMBER PRICE PER SHARE
FOR GRANT OF SHARES RANGE AVERAGE
--------- --------- ---------------- -------
September 30, 1993................. 4,228 7,568 $ 0.50 - $40.06 $ 16.39
Options granted.................. (5,081) 5,081 15.50 - 42.44 23.94
Options canceled................. 2,015 (2,015) 4.00 - 42.44 32.78
Options exercised................ -- (650) 1.00 - 12.13 4.26
------ -------
September 30, 1994................. 1,162 9,984 $ 0.50 - $38.78 $ 17.72
Additional shares reserved....... 4,000
Options granted.................. (4,317) 4,317 22.87 - 52.43 31.01
Options canceled................. 506 (506) 4.00 - 46.50 24.76
Options exercised................ -- (1,458) 4.00 - 29.81 6.25
------ -------
September 30, 1995................. 1,351 12,337 $ 0.50 - $52.43 $ 23.44
Additional shares reserved....... 6,000
Options granted.................. (5,929) 5,929 31.56 - 52.25 42.69
Options canceled................. 683 (683) 5.00 - 52.43 30.98
Options exercised................ -- (1,510) 1.00 - 29.75 9.21
------ -------
September 30, 1996................. 2,105 16,073 $ 0.50 - $52.43 $ 31.55
====== =======
During February 1994, the Company canceled 1,657,000 employee stock
options, exclusive of those held by officers and directors, with option prices
in excess of the then current market price of the Company's stock. The Company
then reissued an equivalent number of options with extended vesting periods at
the current market price.
Employee Stock Purchase Plans
The Company has employee stock purchase plans for all eligible employees to
purchase shares of common stock at 85% of the lower of the fair market value on
the first or the last day of each six-month offering period. Employees may
authorize the Company to withhold up to 15% of their compensation during any
offering period, subject to certain limitations. The 1991 Employee Stock
Purchase Plan, as amended, authorizes up to 2,000,000 shares to be granted no
later than August 2001. The 1996 Non-Qualified Employee Stock Purchase Plan
authorizes up to 25,000 shares to be granted at anytime. During fiscal 1996,
1995 and 1994, shares totaling 326,000, 249,000 and 182,000 were issued under
the plans at an average price of $28.55, $16.40 and $16.98 per share,
respectively. At September 30, 1996, 924,000 shares were reserved for future
issuance.
F-15
59
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Executive Retirement Plans
The Company has voluntary retirement plans that allow eligible executives
to defer up to 100% of their income on a pretax basis. On a quarterly basis,
participants receive up to a 7.5% match of their deferral in the Company's
common stock based on the then current market price, to be issued to the
participant upon eligible retirement. The income deferred and the Company match
are unsecured and subject to the claims of general creditors of the Company. At
September 30, 1996, approximately 6,000 shares had been allocated under the
plans and the Company's matching contribution during fiscal 1996 amounted to
$276,000.
NOTE 8. INVESTMENTS IN OTHER ENTITIES
ALCATEL QUALCOMM, S.A.
The Company currently has a 34% interest in a French joint venture for the
sale, marketing and service of its OmniTRACS products, services and
communications hub equipment in Europe. The Company originally contributed a
license to use certain technology for its ownership interest. The Company is not
required to record equity allocations in the joint venture until its share of
cumulative equity income exceeds cumulative losses or unless it increases its
investment basis. As a result, the Company did not record any equity allocations
during fiscal years 1996, 1995 and 1994. The Company has no continuing
obligation to fund or guarantee the liabilities of the joint venture.
Sales to the joint venture included in communications systems and license,
royalty and development fees were $14,545,000, $12,449,000 and $8,393,000 for
fiscal 1996, 1995 and 1994, respectively. Accounts receivable from the joint
venture at September 30, 1996 and 1995 were $1,224,000 and $1,847,000,
respectively.
Globalstar, L.P.
Through partnership interests held in certain intermediate limited
partnerships, the Company owns a 7.2% partnership interest in Globalstar, L.P.
("Globalstar"), a limited partnership formed to develop, own and operate the
Globalstar low-earth orbiting satellite-based wireless communications system.
The Company accounts for its investment under the equity method. The Company's
partnership interest in Globalstar was reduced from 7.9% during fiscal 1996
resulting from purchases of Globalstar partnership interests by non-affiliated
entities.
As a result of the intermediate limited partnership agreements, Globalstar
profits and losses are allocated to the Company in accordance with its
percentage ownership interest, provided that no loss shall be allocated to the
Company if such allocation would create negative balances in the Company's
intermediate partnership adjusted capital accounts. For financial reporting
purposes, the Company's investment in the intermediate partnerships had no basis
during each of fiscal 1996, 1995 and 1994, and, as a result, the Company has not
recorded any equity losses during those respective fiscal years.
Subject to certain conditions, the Company, through an intermediate
partnership, may be required to purchase approximately 97,000 additional shares
from another investor in Globalstar for up to $4,600,000, a price discounted
from the price paid by such investor. The Company is unable to predict the
likelihood of the occurrence of any of the conditions which would require the
additional investment.
During the second quarter of fiscal 1996, the Company guaranteed
$17,000,000 of certain vendor financing obligations of Globalstar ("Vendor
Financing Guarantee"). The Vendor Financing Guarantee will expire no later than
March 1997. The Company also agreed to guarantee $25,500,000 of borrowings under
an existing bank financing agreement, which will expire in December 2000. The
amount of the Vendor Financing Guarantee will decrease, dollar for dollar, if
Globalstar borrows funds under the existing bank financing
F-16
60
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreement. Globalstar had no outstanding borrowings under the bank financing
agreement as of September 30, 1996.
As a result of providing the guarantee under the bank financing agreement,
the Company received approximately 367,000 warrants to purchase stock in
Globalstar Telecommunications Limited at an exercise price of $26.50 per share.
The warrants vest and are exercisable under certain conditions, as specified
under the term, of the bank guarantee agreement.
The Company and Globalstar have entered into a development agreement under
which Globalstar is funding the Company to design and develop, by 1998,
subscriber equipment and ground communications segments of the Globalstar
system. Total receivables due from Globalstar at September 30, 1996 and 1995
were $10,391,000 and $15,166,000, respectively. Contract services revenues
included in the Company's 1996, 1995 and 1994 Consolidated Statements of Income
include $120,307,000, $72,636,000 and $20,631,000 from Globalstar, respectively.
QUALCOMM Personal Electronics
In fiscal 1994, a subsidiary of the Company and a subsidiary of SONY
Electronics Inc. ("SONY Electronics") entered into a joint venture general
partnership, QUALCOMM Personal Electronics ("QPE"), to develop and manufacture
CDMA subscriber equipment for cellular, PCS and other wireless applications. The
Company owns 51% of the joint venture and consolidates QPE in its financial
statements. SONY Electronics' 49% general partnership share in QPE is presented
as a minority interest in the Company's financial statements.
Under the terms of bank lines of credit (Note 5), the minority interest
holder in QPE is obligated to provide subordinated loans to QPE to the extent of
its negative partnership capital balance in the event that QPE cannot repay the
bank credit facilities. At September 30, 1996, the minority interest holder had
a $24,500,000 outstanding subordinated loan commitment to QPE which exceeded the
commitment then required under the bank credit facilities. As a result of the
minority interest holder's commitments to fund QPE, the Company has included in
other assets accumulated minority interest losses in excess of equity
contributions of $16,808,000 and $10,027,000, as of September 30, 1996 and 1995,
respectively.
During fiscal 1996 and 1995, QPE sales to SONY Electronics amounted to
$50,169,000 and $1,365,000, respectively. Purchases from SONY Electronics and
other SONY affiliates for inventory and capital equipment amounted to
$23,933,000 and $914,000, respectively during fiscal 1996, and $1,617,000 and
$9,893,000, respectively during fiscal 1995. At September 30, 1996 and 1995,
outstanding accounts receivable from SONY Electronics amounted to $10,163,000
and $1,557,000, respectively, and accounts payable to all SONY affiliated
companies amounted to $6,730,000 and $11,229,000, respectively. Interest expense
on notes payable to SONY Electronics (Note 5) amounted to $1,517,000 and
$588,000 during fiscal 1996 and 1995, respectively. Related party activity to
SONY Electronics and other SONY affiliated companies during fiscal 1994 was not
significant.
NextWave Telecom Inc.
In November 1995, the Company paid $5,000,000 to purchase 1,666,666 shares
of Series B Common Stock and provided a $25,000,000 short-term note receivable
to NextWave Telecom Inc. ("NextWave"), a privately held company. As part of the
share purchase, the Company also received warrants to buy 1,111,111 additional
shares of Series B Common Stock at $3 per share. During March 1996, the Company
converted $15,000,000 of the note receivable into 5,000,000 shares of Series B
Common Stock. The conversion was treated as a non cash transaction for the
Consolidated Statement of Cash Flows. During June 1996, the Company collected
$9,602,000 of the short-term note receivable and converted the remaining
principal balance of $398,000 into a 3 year promissory note convertible into
1,019,444 shares of Series C Common
F-17
61
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock. At September 30, 1996, the $20,000,000 investment is included in other
long-term assets and, as the Company estimates that it holds less than 5% of
NextWave's outstanding voting shares, it is accounting for its investment under
the cost method. It is not practicable to estimate the fair value of the
investment as NextWave is a closely held corporation and is not publicly traded.
Other Joint Ventures
The Company has entered into other agreements for domestic and
international joint ventures to provide advanced communications systems and
products based on wireless technology. The Company's combined investment in
these joint ventures as of September 30, 1996 and 1995, amounted to $21,939,000
and $16,011,000, respectively. At September 30, 1996, effective ownership
interests in the joint ventures ranged from 2% to 15% and unfunded equity
contributions amounted to approximately $1,600,000 to be funded upon request of
investees.
Predominately all of these investments are treated under the cost method of
accounting. It is not practicable to estimate the total fair value of the
Company's investment in these other joint ventures as the investments are
predominantly closely held and not publicly traded.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Operating Leases
During fiscal 1996, QPE entered into an operating lease agreement under
which manufacturing equipment may be leased under separate schedules, each with
approximately five year terms. The lease agreement is non-recourse to the
Company and the minority interest holder in QPE. Equipment under lease has both
early and end of term purchase options. If the purchase options have not been
exercised by the end of the lease term, QPE will be required to pay certain
deficiency payments if proceeds from the sale of the equipment fall below
specified amounts. The maximum amount of deficiency payments for equipment
leased as of September 30, 1996 is approximately $16,748,000. Rental expense
under this lease, including an accrual for deficiency payments, amounted to
$2,021,000 during fiscal 1996.
As of September 30, 1996, future rental payments under the lease, excluding
deficiency payments, in each of the next five years from fiscal 1997 through
2001 are $1,433,000, $1,433,000, $1,433,000, $1,433,000 and $358,000,
respectively.
The Company leases certain of its other facilities and equipment under
non-cancelable operating leases, with terms ranging from two to six years and
with provisions for cost-of-living increases. Rental expense for these
facilities and equipment for fiscal 1996, 1995 and 1994 was $5,417,000,
$3,292,000 and $3,288,000, respectively. Future minimum lease payments in each
of the next five years from fiscal 1997 through 2001 and thereafter are
$6,514,000, $6,129,000, $4,333,000, $3,476,000, $2,598,000 and $5,748,000,
respectively.
Purchase Obligations
The Company has agreements with certain suppliers to provide certain
components and estimates its non-cancelable obligations under these agreements
to be approximately $207,793,000 through fiscal 1998. The Company also has a
commitment to purchase communications services for approximately $11,880,000
annually through June 2001.
Litigation
In April 1992, the Company filed in the Superior Court of the State of
California, County of San Diego, a complaint for breach of contract and other
grievances against Hughes Aircraft Company ("Hughes Aircraft"), a former
subcontractor, seeking recovery of monetary damages for the subcontractor's
failure to
F-18
62
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
perform certain contractual obligations. The subcontractor filed a
cross-complaint for the alleged value of services it alleged to have rendered to
the Company in the sum of $4,300,000, plus damages and related costs. The trial
commenced in November 1994. On February 14, 1995, Hughes Aircraft's motion for
nonsuit was granted by the Court, and the Company's claims were dismissed. A
judgment was entered in the Court on March 22, 1995 in favor of Hughes Aircraft
on the nonsuit and the Company accrued $2,900,000 for an anticipated liability
for Hughes Aircraft's legal fees. During the second quarter of fiscal 1996, the
Company and Hughes Aircraft agreed to dismiss their respective litigation
against each other without payment by either party. As a result of the
settlement of this litigation, the Company reversed its accrual, resulting in a
$2,900,000 reduction to general and administrative expense.
In November, 1994, the Company entered into a settlement with InterDigital
Communications Corporation ("IDC") and InterDigital Technology Corporation
("ITC"), resulting in the dismissal of their respective CDMA patent litigation.
ITC had filed a lawsuit against the Company in April 1993 alleging that certain
CDMA products built by the Company in compliance with IS-95, a North American
CDMA digital cellular standard, infringed three of ITC's patents. The Company
had filed a lawsuit against IDC alleging that IDC's broadband-CDMA development
activities infringed one of the Company's patents. Both lawsuits have been
dismissed.
Under the terms of the settlement agreement, the Company paid ITC a
one-time settlement payment of $5,500,000 in exchange for a worldwide,
royalty-free license to the Company to use and sublicense certain existing and
future ITC patents. The Company has also granted to ITC a royalty-bearing
license to use certain CDMA patents and royalty-free license to use one CDMA
patent in certain ITC non-IS-95 products. The Company charged the settlement
payment of $5,500,000 and related costs of approximately $7,500,000 to
operations in fiscal 1994.
On September 26, 1996, Ericsson Inc., and Telefonaktiebolaget LM Ericsson
("Ericsson") filed suit in the United States District Court for Eastern District
of Texas. The complaint alleges that various elements of the Company's CDMA
equipment system and components products infringe one or more patents owned by
Ericsson. The Company has not yet filed a formal response to Ericssons'
complaint. Although there can be no assurance that an unfavorable outcome would
not have a material adverse affect on the Company's liquidity, financial
position or result of operations, the Company believes that the complaint has no
merit and will vigorously defend the action.
On November 8, 1996 the Company was served with a complaint in connection
with a lawsuit filed in the U.S. District Court for the Eastern District of
Pennsylvania by BTG USA Inc. The complaint alleges that the Company's Global
Positioning System, CDMA telecommunications products and the OmniTRACS system
components thereof infringe United States Patent No. Re. 34,004. The patent
expired in November 1996. Although there can be no assurances that an
unfavorable outcome would not have a material adverse effect on the Company's
liquidity, financial position or results of operations, the Company believes the
complaint has no merit and will vigorously defend the action.
The Company is engaged in other legal actions arising in the ordinary
course of its business and believes that the ultimate outcomes will not have a
material adverse effect on its liquidity, financial position or results of
operations.
Financing Commitment
Under an OEM agreement and a financing arrangement with Northern Telecom,
Inc. ("Nortel"), the Company has an off balance sheet financing commitment to
accept as payment for product sales the assignment of loan receivables due to
Nortel as a result of a vendor credit facility with Sprint Spectrum. Upon
assignment of the loan receivables, the Company will have all the rights and
obligations under the vendor credit facility. The Company's financing commitment
requires Nortel to meet certain conditions established in
F-19
63
QUALCOMM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the financing arrangement. The Company's initial commitment under the financing
arrangement has been designated at $200,000,000, representing an estimated
amount which may result in actual loan receivable assignments of a lesser or
greater amount.
Performance Guarantees
During fiscal 1996, the Company entered into agreements to supply CDMA
equipment and equipment designs, certain of which provide for substantial
performance guarantees. These guarantees are triggered by delivery dates and
equipment performance criteria specified in the respective agreements.
Additionally, the Company's ability to meet its performance obligations under
certain agreements is dependent upon the ability of certain suppliers to deliver
necessary quantities of components to support the Company's production
schedules. As of September 30, 1996, the Company has included an assessment of
its ability to meet its performance obligations in estimates of margins under
such agreements. However, significant remaining portions of the Company's
performance obligations under the agreements are scheduled to occur during
fiscal 1997. If the Company is unable to meet its performance obligations, the
financial impact of non performance could amount to a significant portion of the
respective agreements' contract value and could materially adversely affect
margins and the Company's results of operations.
NOTE 10. SUMMARIZED QUARTERLY DATA (UNAUDITED)
The following financial information reflects all normal recurring
adjustments which are, in the opinion of management, necessary for a fair
statement of the results of the interim periods. Summarized quarterly data for
fiscal 1996 and 1995 is as follows (in thousands, except per share data):
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
1996
Revenues............................. $ 146,603 $ 149,263 $ 234,880 $ 283,104
Gross profit(1)...................... 61,548 51,747 74,317 90,377
Operating income..................... 2,697 (8,580) (5,619) 4,066
Net income........................... 10,114 1,465 1,506 7,942
Primary earnings per share(2)........ $ 0.15 $ 0.02 $ 0.02 $ 0.11
Fully diluted earnings per
share(2)........................... $ 0.15 $ 0.02 $ 0.02 $ 0.11
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
1995
Revenues............................. $75,885 $89,753 $99,468 $ 121,506
Gross profit(1)...................... 35,812 39,760 45,653 52,217
Operating income..................... 4,014 4,257 3,355 8,973
Net income........................... 5,947 6,047 7,263 10,923
Primary earnings per share(2)........ $ 0.11 $ 0.11 $ 0.13 $ 0.17
Fully diluted earnings per
share(2)........................... $ 0.11 $ 0.11 $ 0.13 $ 0.17
- ---------------
(1) Gross profit is calculated by subtracting operating expenses for
communications systems and contract services from total revenues.
(2) Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly net earnings per share will
not necessarily equal the total for the year.
F-20
64
SCHEDULE II
QUALCOMM INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COST AND END OF
PERIOD EXPENSES DEDUCTIONS OTHER PERIOD
------------ ---------- ---------- ------- ----------
Year ended September 30, 1994(1)
Allowance for doubtful accounts
-- trade receivables................... $ 1,111 $ 1,089 $ 170 $ -- $ 2,030
Inventory reserves........................ 2,401 4,253 -- -- $ 6,654
------- ------- ------- ------- -------
$ 3,512 $ 5,342 $ 170 $ -- $ 8,684
======= ======= ======= ======= =======
Year ended September 30, 1995(1)
Allowance for doubtful accounts
-- trade receivables................... $ 2,030 $ 1,503 $ 100 ($ 580) $ 2,853
-- notes receivables(2)................ -- 1,520 -- 580 2,100
Inventory reserves........................ 6,654 10,221 -- -- $ 16,875
------- ------- ------- ------- -------
$ 8,684 $ 13,244 $ 100 $ -- $ 21,828
======= ======= ======= ======= =======
Year ended September 30, 1996(1)
Allowance for doubtful accounts
-- trade receivables................... $ 2,853 $ 7,681 $ 2,311 $ -- $ 8,223
-- notes receivables(2)................ 2,100 -- 2,100 --
Inventory reserves........................ 16,875 11,090 8,933 -- $ 19,032
------- ------- ------- ------- -------
$ 21,828 $ 18,771 $ 13,344 $ -- $ 27,255
======= ======= ======= ======= =======
- ---------------
(1) The Company's fiscal year ends on the last Sunday of September.
(2) Included in other long-term assets.
S-1
65
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ------------------------------------------------------------------------ ------------
3.1 Restated Certificate of Incorporation.(1)...............................
3.2 Certificate of Amendment of Restated Certificate of Incorporation.(7)...
3.3 Certificate of Designation of Preferences...............................
3.4 Bylaws.(2)..............................................................
10.1 Form of Indemnity Agreement between the Company, each director and
certain officers.(2)(14)................................................
10.2 1991 Stock Option Plan, as amended.(10)(14).............................
10.3 Form of Incentive Stock Option Grant under the 1991 Stock Option
Plan.(2)(14)............................................................
10.4 Form of Supplemental Stock Option Grant under the 1991 Stock Option
Plan.(2)(14)............................................................
10.5 1991 Employee Stock Purchase Plan.(11)(14)..............................
10.6 Form of Employee Stock Purchase Plan Offering under the 1991 Employee
Stock Purchase Plan.(2)(14).............................................
10.7 Registration Rights Agreement dated September 11, 1991 between the
Company and various Stockholders.(2)....................................
10.8 Satellite Service Agreement dated March 5, 1991 between the Company and
GTE Spacenet Corporation.(2)(3).........................................
10.9 Joint Venture Agreement dated January 24, 1990 between the Company and
Alcatel Transmission par Faisceaux Hertziens.(2)(3).....................
10.10 Agreement dated April 17, 1989 between the Company and PACTEL
Corporation.(2)(3)......................................................
10.11 CDMA Technology Agreement and related Patent License Agreement, each
dated July 3, 1990 between the Company and American Telephone &
Telegraph Company.(2)(3)................................................
10.12 DS-CDMA Technology Agreement and related Patent License Agreement, each
dated September 26, 1990 between the Company and MOTOROLA, Inc.(2)(3)...
10.13 JSM Shareholders Agreement dated May 24, 1991 between the Company, C.
Itoh, Ltd. and Nippon Steel Corporation.(2)(3)..........................
10.14 401(k) Plan.(2).........................................................
10.15 Amendments dated January 15, 1992 and February 7, 1992 to that certain
Technology Agreement dated July 3, 1990 with American Telephone &
Telegraph Company.(4)...................................................
10.16 Amendment dated January 21, 1992 to that certain Technology Agreement
dated September 26, 1990 with MOTOROLA, Inc.(4)(5)......................
10.17 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan").(14).............................................................
10.18 Form of Stock Option Grant under the Directors' Plan, with related
schedule.(6)(14)........................................................
10.19 Joint Venture and Partnership Agreement dated February 25, 1994 between
QUALCOMM Investment Company and SONY Electronics CDMA Investment,
Inc.(7)(8)..............................................................
10.20 Contract dated March 18, 1994 between the Company and Globalstar,
L.P.(7)(8)..............................................................
10.21 Executive Retirement Matching Contribution Plan(12)(14).................
66
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ------------------------------------------------------------------------ ------------
10.22 1996 Non-qualified Employee Stock Purchase Plan(13)(14).................
10.23 Stockholder Rights Plan(9)..............................................
11.1 Calculation of earnings per share.......................................
23.1 Consent of Price Waterhouse LLP.........................................
24.1 Power of Attorney. Reference is made to page 40.........................
27 Financial Data Schedule.................................................
- ---------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-3
(No. 33-62724) or amendments thereto and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 33-42782) or amendments thereto and incorporated herein by reference.
(3) Certain confidential portions deleted pursuant to Order Granting
Application or Confidential Treatment issued in connection with
Registration Statement on Form S-1 (No. 33-42782) effective December 12,
1991.
(4) Filed as exhibit to Registrant's Annual Report on Form 10-K for the fiscal
year ended September 27, 1992.
(5) Certain confidential portions deleted pursuant to order Granting
Application for Confidential Treatment pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934 dated March 19, 1993.
(6) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended September 26, 1993.
(7) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 27, 1994, as amended.
(8) Certain confidential portions deleted pursuant to Order Granting
Application for Confidential Treatment pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934 dated July 7, 1994.
(9) Filed as an exhibit to the Company's Form 8-K current report dated as of
September 26, 1995.
(10) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(File No. 333-2754) filed on March 25, 1996.
(11) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(File No. 333-2756) filed on March 25, 1996.
(12) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(File No. 333-2752) filed on March 25, 1996.
(13) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(File No. 333-2750) file on March 25, 1996.
(14) Indicates management or compensatory plan or arrangement required to be
identified pursuant to Item 14(c)(4).