Qualcomm 1999 Annual Report Download - page 40

QUALCOMM Incorporated
FINANCIAL REVIEW
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. QUALCOMM’s future results could differ materially from
those discussed here. Factors that could cause or contribute to such
differences include, but are not specifically limited to: the ability to
develop and introduce cost effective new products in a timely manner,
avoiding delays in the commercial implementation of the CDMA tech-
nology; risk that the rate of growth in the CDMA subscriber population
will decrease; risks associated with the scale-up, acceptance and
operations of CDMA systems, including HDR technology; risks associat-
ed with component shortages; risks associated with strategic
opportunities or acquisitions, divestitures and investments the Company
may pursue; risks related to the ability to sustain or improve opera-
tional efficiency and profitability; risks relating to the success of
Globalstar; developments in current or future litigation; the Company’s
ability to effectively manage growth and the intense competition in the
wireless communications industry; risks associated with vendor
financing; timing and receipt of license fees and royalties; risks asso-
ciated with international business activities; and risks related to
customer receivables and performance obligations, as well as the
other risks detailed in this annual report and in the Company’s Form 10-K
for fiscal year ended September 26, 1999. The Company’s consolidated
financial data includes QPE and certain other consolidated subsidiaries
of the Company.
RECENT DEVELOPMENTS
On September 14, 1999, QUALCOMM announced it is considering sev-
eral strategic options for its terrestrial-based phone business that
currently holds an industry leading position in CDMA handsets in the
North American market. With increased competition, parts shortages
and industry consolidation reducing margins in consumer products,
QUALCOMM sought to transition the business to a manufacturer that
would support its customer base and employees while providing
economies of scale, a strong purchasing base and other operating effi-
ciencies. On December 22, 1999, QUALCOMM announced an agreement
with Kyocera Corporation (“Kyocera”) which will result in a newly
formed unit of Kyocera acquiring QUALCOMM‘s terrestrial-based wire-
less CDMA consumer phone business, including its phone inventory,
manufacturing equipment and customer commitments. Under this agree-
ment, Kyocera has agreed to purchase a majority of its CDMA chipsets
and system software from QUALCOMM for a period of five years. Kyocera
will continue its existing royalty-bearing CDMA license agreement with
QUALCOMM. The transaction, which is subject to regulatory approval and
other customary closing conditions, is expected to close by the end of
February 2000.
As part of this agreement, QUALCOMM will form a new subsidiary
with a substantial number of employees from QUALCOMM Consumer
Products to provide services to Kyocera on a cost-plus basis to support
Kyocera‘s phone business for up to three years. Selected employees of
QUALCOMM Personal Electronics (“QPE”), a 51% owned consolidated
manufacturing subsidiary of the company, will be transferred to the
newly formed unit of Kyocera. QUALCOMM will take an estimated $30
million charge in the first quarter of fiscal 2000 to reflect the difference
between the carrying value of the net assets and the consideration to
be received from Kyocera, less costs to sell.
Kyocera‘s newly formed unit will be a wholly owned subsidiary of
Kyocera International, Inc. of San Diego, the Kyocera group‘s North
American headquarters and holding company. It will be responsible for
integrating QUALCOMM‘s handset design, development, manufacturing
and marketing expertise with Kyocera's global R&D and technical
resources. The new Kyocera unit will lease selected QUALCOMM facilities.
On July 27, 1999, the Company completed an offering of 6,900,000
shares of common stock at a net price of $156.50 per share. The net pro-
ceeds of the offering were approximately $1 billion.
On May 24, 1999 (the “Closing Date”), QUALCOMM sold certain assets
related to the Company’s terrestrial CDMA wireless infrastructure business
to Ericsson pursuant to the March 24, 1999 Asset Purchase Agreement
(the “Agreement”), as amended. The Company and Ericsson also entered
into various license and settlement agreements in connection there-
with. Under the Agreement, (a) QUALCOMM agreed to sell certain assets
relating to its terrestrial CDMA wireless infrastructure business to
Ericsson in exchange for cash and the assumption of certain liabilities,
(b) QUALCOMM and Ericsson agreed to jointly support a single world-
wide CDMA standard with three optional modes for the next generation
of wireless communications, and (c) all of the existing litigation between
the companies was settled, and the companies entered into royalty-
bearing cross-licenses for their respective CDMA patent portfolios,
including cdmaOne, W-CDMA and cdma2000. The cross-licenses are roy-
alty bearing for CDMA subscriber units sold by Ericsson and QUALCOMM.
QUALCOMM also will receive rights to sublicense certain Ericsson
patents, including the patents asserted in the litigation, to QUALCOMM’s
chipset customers.
As part of the Agreement, QUALCOMM and Ericsson also agreed to
jointly support approval by the ITU and the other standards bodies,
including the U.S. Telecommunications Industry Association (“TIA”) and
the European Telecommunications Standards Institute (“ETSI”), of a
single CDMA third generation standard that encompasses three optional
modes of operation: (1) Direct Spread Frequency Division Duplex (“FDD”),
(2) Multi-Carrier (“FDD”), and (3) Time Division Duplex (“TDD”). Each
mode supports operation with both GSM MAP and ANSI-41 networks. The
Company believes that rapid adoption of the single CDMA standard is in
the best interests of the industry and will allow each operator to select
which mode of operation to deploy based on marketplace needs. As part
of the Agreements, QUALCOMM and Ericsson each committed to the ITU
and to other standards bodies to license their essential patents for the
single CDMA standard or any of its modes to the rest of the industry on a
fair and reasonable basis free from unfair discrimination. On the Closing
Date, each of the companies notified the ITU and other relevant stan-
dards bodies that any intellectual property rights blocking previously in
force have been withdrawn.
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