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EXHIBIT 99.1
SET FORTH BELOW ARE CERTAIN RISK FACTORS INCLUDED IN THE REGISTRATION STATEMENT
ON FORM S-1 (NO. 333-42138) FILED BY QUALCOMM SPINCO, INC. WITH THE SECURITIES
AND EXCHANGE COMMISSION ON JULY 25, 2000, AND PREPARED AS OF SUCH DATE.
REFERENCES IN THIS EXHIBIT 99.1 TO "SPINCO," "WE," "OUR," AND "US" REFER TO
QUALCOMM SPINCO, INC., UNLESS THE CONTEXT OTHERWISE REQUIRES. REFERENCES TO
"QUALCOMM" REFER TO QUALCOMM INCORPORATED AND ITS SUBSIDIARIES.
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER
CAREFULLY THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION
IN THIS PROSPECTUS, INCLUDING THE FINANCIAL STATEMENTS AND RELATED NOTES, BEFORE
DECIDING TO INVEST IN SHARES OF OUR COMMON STOCK. THESE RISKS AND UNCERTAINTIES
ARE NOT THE ONLY ONES FACING US OR THE ONLY ONES THAT MAY ADVERSELY AFFECT OUR
BUSINESS. IF ANY OF THE FOLLOWING RISKS OR UNCERTAINTIES ACTUALLY OCCURS, OUR
BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS WOULD LIKELY SUFFER. IN THAT
EVENT, THE MARKET PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD LOSE
ALL OR PART OF THE MONEY YOU PAID TO BUY OUR COMMON STOCK.
RISKS RELATED TO OUR BUSINESS
WE HAVE NO HISTORY AS AN INDEPENDENT COMPANY, SO THE HISTORICAL INFORMATION
PRESENTED IN THIS PROSPECTUS MAY NOT BE REPRESENTATIVE OF OUR FUTURE FINANCIAL
RESULTS.
We have no history as an independent company. Accordingly, the historical
financial information presented in this prospectus may not necessarily reflect
the results of operations, financial position and cash flows we would have had
if we had operated independently during the periods presented. We may not be
profitable on an ongoing basis as a stand-alone company. In the future our
results of operations may differ from those presented in this prospectus due to
our need to establish our own independent banking relationships, administrative
functions and sources of funding. We may not be able to maintain these
relationships, develop these functions or locate these sources successfully, or
on a cost-effective basis.
THE MARKET FOR OUR PRODUCTS IS CHARACTERIZED BY FREQUENT TECHNOLOGICAL
INNOVATION. IF WE DO NOT SUCCESSFULLY DEVELOP NEW PRODUCTS AND REDUCE PRODUCTION
COSTS, OUR FUTURE OPERATING RESULTS AND COMPETITIVE POSITION WILL BE HARMED.
The wireless telecommunications industry is characterized by frequent
technological innovation. Average selling prices for integrated circuits and
other wireless telecommunications products have tended to decline over time.
Therefore, we must continue to develop new products with enhanced features that
we can sell at prices that permit us to achieve acceptable levels of
profitability. Our ability to develop and introduce new products successfully
will depend on numerous factors, including our ability to:
- anticipate, and adequately develop new products on a timely basis to
meet, evolving customer and market requirements and changes in
technology and industry standards;
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- obtain rights to manufacture and sell products incorporating
technologies developed by third parties;
- market our products by differentiating them from those of our
competitors;
- respond successfully to new product announcements and introductions
by our competitors;
- deliver our products in sufficient volumes and on time; and
- price our products competitively.
Our product development efforts may not be successful, and any new products we
develop may not achieve market acceptance if we do not meet these challenges.
FUTURE SALES OF OUR PRODUCTS DEPEND IN PART ON WIDESPREAD DEPLOYMENT OF CDMA
TECHNOLOGY.
Our current products are based primarily on CDMA technology. Other digital
wireless technologies, particularly Global Systems for Mobile communications, or
GSM, technology, have been more widely adopted to date than CDMA. If CDMA
technology does not become the preferred industry standard in the countries
where we or our customers sell products or if wireless service providers do not
select CDMA for their networks, we may be at a competitive disadvantage, and
competitive pressures may require us to change our product designs at
substantial cost. We may not be able to respond to these pressures or develop
products compatible with the prevailing standard on a timely basis, or at an
acceptable cost, which may limit the future sale of our products.
IF THE WIRELESS INDUSTRY DELAYS OR DOES NOT DEPLOY 3G WIRELESS STANDARDS BASED
ON CDMA TECHNOLOGY, WE MAY LOSE A TIME TO MARKET ADVANTAGE OR EXPERIENCE OTHER
COMPETITIVE DISADVANTAGES.
Industry and government participants of the International
Telecommunications Union and regional standards development organizations are
currently considering a variety of standards that may be used in 3G wireless
networks. 3G CDMA is a single standard with three modes of implementation. We
have strategically focused on developing products for two of these modes. We
have a product for one mode completed and a product for another mode in
development. We are not currently developing products for the third mode. If the
wireless industry delays or does not deploy 3G standards based on CDMA
technology, we may lose a time to market advantage or experience other
competitive disadvantages.
WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUE FROM A LIMITED NUMBER OF
CUSTOMERS. THE LOSS OF ANY ONE OF OUR MAJOR CUSTOMERS WOULD HARM THE RESULTS OF
OUR OPERATIONS.
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We derive a significant portion of our revenue from a limited number of
customers. Sales to Samsung Electronics Ltd. comprised 33%, 31% and 23% of our
combined revenues in fiscal 1997, 1998 and 1999, respectively. Sales to QUALCOMM
Personal Electronics, a 51% owned subsidiary of QUALCOMM, comprised 31%, 28% and
18% of our combined revenues in fiscal 1997, 1998 and 1999, respectively. We
expect revenue from sales to QUALCOMM to continue to decline because of
QUALCOMM's sale of its terrestrial wireless consumer products business to
Kyocera Wireless in February 2000. Sales to LG Information and Communications,
Ltd. comprised 19%, 14% and 15% of our combined revenues in fiscal 1997, 1998
and 1999, respectively. Sales to Hyundai Electronics Industries Co., Ltd.
comprised 10% of our combined revenues in fiscal 1999. Accordingly, unless and
until we diversify and expand our customer base, our future success will
significantly depend upon the timing and size of future purchase orders, if any,
from these customers and, in particular:
- the product requirements of these customers;
- the financial and operational success of these customers; and
- the success of these customers' products that incorporate our
products.
The loss of any one of these customers or the delay, even if only
temporary, or cancellation of significant orders from any of these customers
would harm our results of operations.
WE DEPEND UPON A LIMITED NUMBER OF THIRD PARTY MANUFACTURERS TO PRODUCE AND TEST
OUR PRODUCTS. ANY DISRUPTIONS IN THE OPERATIONS OF, OR THE LOSS OF, ANY OF THESE
THIRD PARTIES COULD HARM OUR BUSINESS.
We subcontract all of our manufacturing and assembly and most of the
testing of our integrated circuits. We depend upon a limited number of third
parties to perform these functions, some of which are only available from single
sources with which we do not have long-term contracts. For example, during
fiscal 1999, IBM was the primary manufacturer of our MSM family of integrated
circuits. Our reliance on sole or limited source vendors involves risks. These
risks include possible shortages of key components, product performance
shortfalls, and reduced controls over delivery schedules, manufacturing
capability, quality assurance, quantity and costs. We have no firm long-term
commitments from our manufacturers to supply products to us for any specific
period, or in any specific quantity, except as may be provided in a particular
purchase order. As a result, these manufacturers may allocate, and in the past
have allocated, capacity to the production of other products while reducing
deliveries to us on short notice.
Our operations also may be harmed by lengthy or recurring disruptions at
any of the facilities of our manufacturers. These disruptions may include labor
strikes, work stoppages, fire, earthquake, flooding or other natural disasters.
These disruptions could cause significant delays in shipments until we are able
to shift the products from an affected manufacturer to another manufacturer. The
loss of a significant third party manufacturer or the inability of a third party
manufacturer to meet performance and quality specifications or delivery
schedules could harm our business.
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In addition, one or more of our manufacturers may obtain licenses from
QUALCOMM to manufacture CDMA integrated circuits that compete with our products.
In this event, the manufacturer could elect to allocate scarce components and
manufacturing capacity to its own products and reduce deliveries to us. In the
event of a loss of or our decision to change a key third party manufacturer,
qualifying a new manufacturer and commencing volume production or testing could
involve delay and expense, resulting in lost revenues, reduced operating margins
and possible loss of customers.
WE DEPEND ON PASS-THROUGH LICENSES FROM THIRD PARTY MANUFACTURERS TO PROVIDE US
WITH PROTECTION AGAINST CLAIMS THAT WE VIOLATE THIRD PARTY MANUFACTURING PATENTS
AND OTHER INTELLECTUAL PROPERTY RIGHTS. THE LOSS OF ONE OR MORE OF OUR
MANUFACTURERS COULD EXPOSE US TO THIS LIABILITY.
Many of our third party manufacturers have cross-licenses with owners of
patents and other intellectual property rights that may be necessary for the
manufacture of our products. By using third party manufacturers to manufacture,
assemble and test our integrated circuits, we may receive the benefit of
cross-licenses extended to products manufactured, assembled or tested by the
manufacturers. If we are forced to or later decide to use different third party
manufacturers, we may lose the benefit of any cross-licenses extended to our
products and therefore may be exposed to additional liability from the assertion
of patents or other intellectual property rights against us.
SHORTAGES OF OR DEFECTS IN COMPONENTS, MATERIALS OR SOFTWARE USED IN OUR
INTEGRATED CIRCUIT PRODUCTS OR SIMILAR PROBLEMS RELATED TO THE PRODUCTS OF OUR
CUSTOMERS WOULD HARM OUR BUSINESS.
Shortages of or defects or impurities in the components, materials or
software used by us or our customers, delays in the delivery of those
components, materials or software, or equipment failures or other difficulties
would adversely affect our ability to ship products on a timely basis or our
customers' demand for our products, which, in turn, would harm our business. We
also may experience component or software failures or defects which could
require significant product recalls, reworks and/or repairs which are not
covered by warranty reserves and which could consume a substantial portion of
the capacity of our third party manufacturers.
OUR OPERATING RESULTS ARE SUBJECT TO SUBSTANTIAL QUARTERLY AND ANNUAL
FLUCTUATIONS AND TO MARKET DOWNTURNS, AND WE MAY NOT BE ABLE TO SUSTAIN OUR
CURRENT RATE OF GROWTH.
Our revenues, earnings and other operating results have fluctuated
significantly in the past and may fluctuate significantly in the future.
Although we have had significant revenues and earnings growth in prior years, we
may not be able to sustain these growth rates. Our future operating results will
depend on many factors, including the following:
- the loss of existing or anticipated customers or orders;
- decreases in average selling prices of our products;
- the availability and cost of integrated circuits from our third
party manufacturers;
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- our ability to develop, introduce and market new products and
services on a timely basis;
- changes in the mix of products produced and sold;
- product defects;
- intellectual property disputes;
- seasonal customer demand;
- the general conditions of the semiconductor industry, including
cyclical downturns; and
- the rate of adoption and acceptance of new industry standards in our
target markets.
As a company focused on integrated circuits and system software solutions,
our revenues may be more volatile than other companies with more diversified
businesses. General economic or other conditions causing a downturn in the
market for our products, affecting the timing of customer orders or causing
cancellations or rescheduling of orders could also adversely affect our
operating results. Moreover, our customers may change delivery schedules or
cancel or reduce orders without incurring significant penalties and generally
are not subject to minimum purchase requirements.
The foregoing factors are difficult to forecast and these, as well as
other factors, could harm our quarterly or annual operating results. If our
operating results fail to meet the expectations of investment analysts or
investors in any period, the market price of our common stock may decline.
WE ARE SUBJECT TO INTENSE COMPETITION.
We currently face significant competition in our markets and expect that
intense competition will continue. We compete primarily based on:
- the benefits of CDMA relative to other wireless technologies, such
as Time Division Multiple Access, or TDMA, and GSM;
- comprehensiveness of product solutions;
- product performance and quality;
- design and engineering capabilities;
- compliance with industry standards;
- time to market;
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- system cost;
- new product innovations; and
- customer support.
This competition has resulted and is expected to continue to result in
declining average selling prices for our products. We anticipate that additional
competitors will enter our markets as a result of growth opportunities in
wireless telecommunications, the trend toward global expansion by foreign and
domestic competitors, technological and public policy changes and relatively low
barriers to entry in selected segments of the industry.
Our current competitors include major semiconductor companies such as
Intel, LSI Logic and Philips, as well as major telecommunication equipment
companies such as Motorola and Lucent. We also face competition from the
in-house development efforts of many of our key customers, including Samsung.
Moreover, some of our customers have rights from QUALCOMM that allow them to
manufacture and sell integrated circuits incorporating CDMA technology and may
compete directly with us.
Many of our current and potential competitors have advantages over us,
including:
- existing royalty-free cross-licenses to competing and emerging
technologies;
- longer operating histories and presence in key markets;
- access to in-house semiconductor manufacturing facilities;
- greater name recognition;
- access to larger customer bases; and
- greater financial, sales and marketing, manufacturing, distribution,
technical and other resources than we have.
As a result of these factors, these competitors may be more successful
than us. In addition, we anticipate additional competitors to enter the market
for products based on 3G standards. These competitors may have more established
relationships and distribution channels in markets not currently deploying
wireless technology. These competitors also have established or may establish
financial or strategic relationships among themselves or with our existing or
potential customers, resellers or other third parties. These relationships may
affect customers' purchasing decisions. Accordingly, new competitors or
alliances among competitors could emerge and rapidly acquire significant market
share to the detriment of our own.
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IF OUR COMPETITORS ACQUIRE RIGHTS TO OUR INTELLECTUAL PROPERTY, OR TO
INTELLECTUAL PROPERTY THAT WE LICENSE FROM QUALCOMM, IT WILL BE EASIER FOR THOSE
COMPETITORS TO OFFER PRODUCTS SIMILAR TO OURS.
QUALCOMM has licensed its CDMA technology to numerous other integrated
circuit manufacturers, and may continue to extend patent licenses relating to
its CDMA technology on terms that may be superior to the terms that we receive.
Although we own an array of proprietary technology that supplements and advances
the technology we license from QUALCOMM, it may be possible for a third party to
copy or otherwise obtain and use our technology or the technology we license
from QUALCOMM without authorization, develop similar technology independently or
design around the patents we own or license. If any of our patents, or the
patents we license from QUALCOMM, fail to protect the relevant technology, it
will be easier for our competitors to offer products similar to ours. In
addition, effective copyright, trademark and trade secret protection may be
unavailable or limited in certain countries. Moreover, we may be required to
license our intellectual property to third parties.
WE DERIVE THE MAJORITY OF OUR REVENUES FROM SALES OUTSIDE THE UNITED STATES, AND
OUR INTERNATIONAL BUSINESS ACTIVITIES SUBJECT US TO RISKS THAT COULD HARM OUR
BUSINESS.
A significant part of our strategy involves our continued pursuit of
growth opportunities in a number of international markets. Our revenues from
international customers as a percentage of total revenues were 60% in fiscal
1997, 62% in fiscal 1998 and 74% in fiscal 1999. In addition, our pursuit of
international growth opportunities may require significant investments for an
extended period before we realize returns, if any, on our investments. Our
business could be adversely affected by:
- unexpected changes in legal or regulatory requirements;
- export controls, tariffs and other barriers;
- fluctuations in currency exchange rates;
- nationalization, expropriation and limitations on repatriation of
cash;
- social, economic, banking and political risks;
- taxation; and
- changes in U.S. laws and policies affecting trade, foreign
investment and loans.
In addition to the general risks associated with our international sales
and operations, we will also be subject to risks specific to the individual
countries in which we do business. Three of our four largest customers during
1999 are based in South Korea. A significant downturn in the economies of Asian
countries where our products are sold, particularly South Korea's economy, would
materially harm our business. We also are subject to risks in certain markets in
which our customers grant subsidies on handsets to their subscribers. For
example, in South Korea the
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government recently limited the ability of handset manufacturers to provide
subsidies on handsets to its subscribers and this, in turn, reduced the volume
of products purchased from us.
FOREIGN CURRENCY FLUCTUATIONS COULD HARM OUR RESULTS OF OPERATIONS.
We are exposed to risk from fluctuations in foreign currencies that could
impact our results of operations, liquidity and financial condition. Declines in
currency values in selected regions may adversely affect future product sales
because our products may become more expensive to purchase in the countries of
the affected currencies. Our trade receivables are generally dollar denominated.
Accordingly, any significant change in the value of the dollar against our
customers' functional currencies could result in an increase in our customers'
cash flow requirements and could consequently affect our ability to collect
receivables. Our exposure to emerging market currencies may increase as we
expand into those markets.
WE INTEND TO PURSUE STRATEGIC TRANSACTIONS, WHICH COULD DISRUPT OUR BUSINESS AND
HARM OUR FINANCIAL RESULTS.
We intend to pursue strategic transactions that provide access to new
technologies, products or markets. These transactions could include
acquisitions, partnerships, joint ventures, business combinations and
investments. Any transaction may require us to incur non-recurring or on-going
charges and may pose significant integration challenges and/or management and
business disruptions, any of which could harm our business and financial
results. In addition, we may not succeed in retaining key employees of any
business that we acquire. We may not consummate these transactions on favorable
terms or at all or obtain the benefits we anticipate from a transaction.
Accordingly, any of these transactions may have an adverse affect on our
business or results of operations.
OUR INTELLECTUAL PROPERTY ARRANGEMENT WITH QUALCOMM MAY HARM OUR COMPETITIVE
POSITION.
Under the terms of our agreements with QUALCOMM, QUALCOMM may require us
to assign to it selected patents, patent applications and invention disclosures
that we develop or acquire and will receive a license to our other patents,
patent applications and invention disclosures. QUALCOMM will have the right to
license to third parties the patents, patent applications and invention
disclosures we assign to it and the right to sublicense to third parties its
license rights relating to those of our patents that are essential to wireless
standards. QUALCOMM's access to our intellectual property may limit the
competitive advantage we can derive from our development programs, and may
interfere with our ability to enter into strategic transactions with third
parties. If we are unable to enter into these types of transactions, our access
to new technologies, products or markets may be limited.
OUR BUSINESS AND RESULTS OF OPERATIONS WILL BE HARMED IF WE ARE UNABLE TO MANAGE
GROWTH IN OUR BUSINESS.
Since 1996, our business has experienced periods of rapid growth that have
placed, and are expected to continue to place, significant demands on our
managerial, operational and financial
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resources. In order to manage this growth, we must continue to improve and
expand our management, operational and financial systems and controls, including
quality control and delivery and service capabilities. We also need to continue
to expand, train and manage our employee base. We must carefully manage
production and inventory levels to meet product demand, new product
introductions and product transitions. We cannot assure you that we will be able
to timely and effectively meet that demand and maintain the quality standards
required by our existing and potential customers.
In addition, inaccuracies in our demand forecasts could quickly result in
either insufficient or excessive inventories and disproportionate overhead
expenses. Our international expansion plans will require us to establish, manage
and control operations in countries where we have limited or no operating
experience. If we ineffectively manage our growth or are unsuccessful in
recruiting and retaining personnel, our business and results of operations will
be harmed.
THE ENFORCEMENT OF OUR INTELLECTUAL PROPERTY RIGHTS MAY BE EXPENSIVE AND COULD
DIVERT VALUABLE COMPANY RESOURCES.
We rely primarily on patent, copyright, trademark and trade secret laws,
as well as nondisclosure and confidentiality agreements and other methods, to
protect our proprietary technologies and processes. Our intellectual property
portfolio is primarily comprised of a select group of essential CDMA patents,
patent applications and product designs transferred to us by QUALCOMM and the
master intellectual property assignment and license agreement that allows us to
use QUALCOMM's CDMA digital wireless technology, which is covered by various
patents and patent applications. We also develop and seek domestic and foreign
patent protection for our own proprietary technologies. We may need to engage in
litigation to enforce our intellectual property rights, protect our trade
secrets or determine the validity and scope of proprietary rights of others. The
attempted enforcement of intellectual property rights by us could result in
significant costs and diversion of resources away from our development and
commercial efforts.
CLAIMS BY THIRD PARTIES THAT WE INFRINGE THEIR INTELLECTUAL PROPERTY OR THAT
PATENTS ON WHICH WE RELY ARE INVALID COULD ADVERSELY AFFECT OUR BUSINESS.
From time to time, companies may assert patent, copyright and other
intellectual proprietary rights to technologies used in our products or in the
industry generally. These claims may result in our involvement in litigation. We
may not prevail in such litigation given the complex technical issues and
inherent uncertainties in intellectual property litigation. If any of our
products were found to infringe on protected technology, we could be required to
redesign such products, license such technology, and/or pay damages or other
compensation to the infringed party. If we are unable to license protected
technology used in our products, we could be prohibited from making and selling
such products.
QUALCOMM has various cross-licenses from parties claiming rights to
wireless technologies. QUALCOMM also may have the benefit of covenants from
third parties not to assert their patents against QUALCOMM. Following the
distribution of Spinco's common stock by QUALCOMM, we will no longer have the
benefit of those cross-license and covenant not to assert arrangements.
Accordingly, we may be subject to claims that we would not have been subject to
as
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part of QUALCOMM. In addition, as the number of competitors in our market
increases and the functionality of our products is enhanced and overlaps with
the products of other companies, we may become subject to claims of infringement
or misappropriation of the intellectual property rights of others. Any claims,
with or without merit, could be time consuming, result in costly litigation,
divert the efforts of our technical and management personnel or cause product
shipment delays, any of which could have a material adverse effect upon our
operating results.
A number of third parties have claimed to own patents essential to various
proposed 3G CDMA standards. If we and other product manufacturers are required
to obtain additional licenses and/or pay royalties to one or more patent
holders, this could have a material adverse effect on the commercial
implementation of our CDMA products and our product margins and profitability.
Prior to QUALCOMM's distribution of our common stock to its stockholders,
we may be subject to litigation that we would not face as a stand-alone company
unrelated to QUALCOMM.
Third parties also may commence actions seeking to establish the
invalidity of our patents or the patents QUALCOMM licenses to us. In the event
that a third party challenges a patent, a court may invalidate the patent or
determine that the patent is not enforceable, which would harm our competitive
position. Even if a third party challenge is not successful, it could be
expensive and time consuming, divert management attention from our business and
harm our reputation.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL NECESSARY FOR THE
DESIGN, DEVELOPMENT, MANUFACTURE AND SALE OF OUR PRODUCTS.
Our future success depends largely upon the continued service of our
executive officers and other key management and technical personnel. Our success
also depends on our ability to continue to attract, retain and motivate
qualified personnel. Our key technical personnel represent a significant asset,
as the source of our technological and product innovations. The competition for
these personnel is intense in the wireless telecommunications industry.
We may have particular difficulty attracting and retaining key personnel
in periods of poor operating performance given the significant use of incentive
compensation both by our competitors and us. In addition, our separation from
QUALCOMM may result in significant disruption of our personnel and may result in
higher than normal turnover rates, including key managerial departures. The loss
of one or more of our key employees or our inability to attract, retain and
motivate qualified personnel could negatively impact our ability to design,
develop, manufacture and sell our products. We do not have employment agreements
with our key management personnel and do not maintain key person life insurance
on any of our personnel.
PRODUCT LIABILITY CLAIMS OR RECALLS COULD HARM OUR BUSINESS.
Testing, manufacturing, marketing and use of our products entails the risk
of product liability. We are currently covered by QUALCOMM's product liability
insurance and will obtain our own product liability insurance after QUALCOMM's
distribution of our common stock to its stockholders. Although we believe this
insurance will be adequate to protect against product liability claims, we
cannot assure you that QUALCOMM or we will be able to continue to
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maintain such insurance at a reasonable cost or in sufficient amounts to protect
us against losses due to product liability. Any inability by QUALCOMM or us to
maintain insurance at an acceptable cost or to otherwise protect against
potential product liability could prevent or inhibit the commercialization of
our products. In addition, a product liability claim or recall could harm our
business or reputation.
THE COMPLEXITY OF OUR PRODUCTS COULD RESULT IN UNFORESEEN DELAYS OR EXPENSES AND
IN UNDETECTED DEFECTS OR BUGS, WHICH COULD ADVERSELY AFFECT THE MARKET
ACCEPTANCE OF NEW PRODUCTS AND DAMAGE OUR REPUTATION WITH CURRENT OR PROSPECTIVE
CUSTOMERS.
Highly complex products such as the integrated circuits and software that
we offer or the products into which our products are incorporated may contain
defects and bugs when they are first introduced or as new versions are released.
If any of our integrated circuits, software, or the products into which our
integrated circuits and software are incorporated contain defects or bugs, or
have reliability, quality or compatibility problems, our reputation may be
damaged and customers may be reluctant to buy our products or the products into
which our integrated circuits are incorporated.
In addition, these defects or bugs could interrupt or delay sales to
our customers. In order to alleviate these problems, we may have to invest
significant capital and other resources. Although our products are tested by
our suppliers, our customers and ourselves, we cannot assure you that our new
products or the products into which our integrated circuits and software are
incorporated will not contain defects or bugs. If any of these problems are
not found until after the commercial production of such new products, we may
be required to incur additional development costs and product recall, repair
or replacement costs. These problems may also result in claims against us by
our customers or others. In addition, these problems may divert our technical
and other resources from other development efforts. Moreover, we would likely
lose, or experience a delay in, market acceptance of the affected product or
products, and we could lose credibility with our current and prospective
customers.
IF WIRELESS HANDSETS POSE HEALTH AND SAFETY RISKS, WE MAY BE SUBJECT TO NEW
REGULATIONS, AND DEMAND FOR OUR PRODUCTS MAY DECREASE.
Media reports have suggested that radio frequency emissions from wireless
handsets may be linked to various health concerns, including cancer, and may
interfere with various electronic medical devices, including hearing aids and
pacemakers. Concerns over radio frequency emissions may have the effect of
discouraging the use of wireless handsets, which would decrease demand for our
products. In recent years, the FCC and foreign regulatory agencies have updated
the guidelines and methods they use for evaluating radio frequency emissions
from radio equipment, including wireless handsets. In addition, interest groups
have requested that the FCC investigate claims that wireless technologies pose
health concerns and cause interference with airbags, hearing aids and medical
devices. There also are some safety risks associated with the use of wireless
handsets while driving. Concerns over these safety risks and the effect of any
legislation that may
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be adopted in response to these risks could reduce demand for our products in
the U.S. as well as foreign countries.
RISKS RELATED TO OUR SEPARATION FROM QUALCOMM
AFTER OUR SEPARATION FROM QUALCOMM, WE MAY EXPERIENCE INCREASED COSTS RESULTING
FROM DECREASED PURCHASING POWER OR LESS FAVORABLE LICENSE TERMS, EITHER OF WHICH
COULD HARM OUR BUSINESS.
Prior to our separation from QUALCOMM, we were able to take advantage of
QUALCOMM's size and purchasing power in procuring goods, services and
technology. As a separate, stand-alone entity, we may be unable to obtain goods,
services and technology at prices and on terms as favorable as those we obtained
prior to the separation. In addition, our patent cross-license agreement with
QUALCOMM does not permit us to sublicense to third parties that portion of
QUALCOMM's intellectual property portfolio licensed to us. In addition, QUALCOMM
will have the right to acquire a portion of our patents, patent applications and
invention disclosures and restrict our ability to sublicense that intellectual
property to others. As a result, in negotiating patent cross-license agreements
with third parties, we may be unable to obtain agreements on terms as favorable
as we may have been able to obtain if we retained all rights to all of our
inventions, could sublicense all of the intellectual property we develop or
acquire and the QUALCOMM intellectual property that is licensed to us, or had
access to QUALCOMM's entire intellectual property portfolio.
AFTER OUR SEPARATION FROM QUALCOMM, WE WILL NO LONGER BE ABLE TO PASS THROUGH OR
SUBLICENSE SELECTED INTELLECTUAL PROPERTY RIGHTS OF QUALCOMM'S LICENSEES, WHICH
MAY HARM OUR ABILITY TO MARKET OUR PRODUCTS AND SUBJECT US TO LIABILITY.
Prior to our separation from QUALCOMM, we were generally able to pass
through to our customers selected intellectual property rights of some of
QUALCOMM's licensees. Following our separation from QUALCOMM, we will no longer
be able to pass on those benefits to our customers, which may harm our ability
to market our products and may subject us to claims for indemnification by our
customers if they are sued by the holders of the intellectual property licensed
to QUALCOMM.
OUR BUSINESS MAY SUFFER IF QUALCOMM DOES NOT COMPLETE ITS DISTRIBUTION OF OUR
COMMON STOCK.
QUALCOMM currently anticipates that it will complete its divestiture of
Spinco by August 2001 by distributing all of our common stock that it owns to
holders of QUALCOMM common stock. However, QUALCOMM is not obligated to do so,
and it is possible that QUALCOMM may decide not to complete this distribution by
that time or at all. Completion of the distribution is subject to, among other
things, approval by QUALCOMM's board of directors, receipt of a favorable
Internal Revenue Service ruling regarding the tax-free nature of the
distribution, and market conditions. As a result, we may not obtain the benefits
we expect as a result of this distribution, including greater strategic focus,
more effective access to third party technology, elimination of potential
conflicts with our customers, better incentives and greater
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accountability for employees and the other benefits described in "Our Separation
from QUALCOMM." In addition, until this distribution occurs, the risks discussed
below relating to QUALCOMM's control of us and the potential business conflicts
of interest between QUALCOMM and us will continue to be relevant to our
stockholders.
THE TRANSITIONAL SERVICES BEING PROVIDED TO US BY QUALCOMM MAY NOT BE SUFFICIENT
TO MEET OUR NEEDS, AND WE MAY NOT BE ABLE TO REPLACE THESE SERVICES AFTER OUR
AGREEMENTS WITH QUALCOMM EXPIRE.
QUALCOMM has agreed to provide certain transitional services to us,
including services related to:
- engineering;
- information technology systems;
- buildings and facilities;
- finance and accounting; and
- other administrative functions.
Although QUALCOMM is contractually obligated to provide us with these services,
these services may not be provided at the same level of quality as when we were
part of QUALCOMM, and we may not be able to obtain the same benefits. We will
also lease and sublease certain office and manufacturing facilities from
QUALCOMM.
These transitional service arrangements generally have a term of less than
two years following the separation. These agreements were made in the context of
a parent-subsidiary relationship and were negotiated in the overall context of
our separation from QUALCOMM. The final terms of these agreements may be more or
less favorable to us than if they had been negotiated with unaffiliated third
parties. The prices charged to us under these agreements may be lower than the
prices that we may be required to pay third parties for similar services or the
costs of similar services if we undertake them ourselves. Accordingly, upon the
expiration of these various arrangements, we may not be able to replace the
transitional services or enter into appropriate leases in a timely manner or on
terms and conditions, including cost, as favorable as those we will receive from
QUALCOMM.
WE CURRENTLY USE QUALCOMM'S INFORMATION TECHNOLOGY SYSTEMS, AND ALTHOUGH WE PLAN
TO CREATE AND IMPLEMENT OUR OWN INFORMATION TECHNOLOGY SYSTEMS, WE MAY NOT BE
SUCCESSFUL IN DOING SO.
We currently use QUALCOMM's information technology systems to support our
operations, including systems to manage inventory, order processing, human
resources, shipping and accounting. Many of these systems are proprietary to
QUALCOMM and are very complex. These systems have been modified, and are in the
process of being further modified, to enable
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QUALCOMM to separately track items related to our business. These modifications,
however, may result in unexpected system failures or the loss or corruption of
data. We are in the process of creating our own information systems to
eventually replace QUALCOMM's systems. However, we may not be successful in
implementing these systems and transitioning data from QUALCOMM's systems to
ours. Any failure or significant downtime in QUALCOMM's or our own information
systems could prevent us from taking customer orders, shipping products or
billing customers and could harm our business.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE, AND WE WILL NOT BE ABLE TO RELY ON
QUALCOMM TO FUND THESE CAPITAL REQUIREMENTS.
The design, development, manufacture and marketing of digital wireless
communications products and services require significant amounts of capital. In
the past, our capital needs have been satisfied by QUALCOMM. However, following
the separation, QUALCOMM will no longer provide funds to finance our working
capital or other cash or banking requirements. We cannot assure you that
financing, if needed, will be available to us on favorable terms or at all.
We believe our capital requirements will vary greatly from quarter to
quarter, depending on, among other things, capital expenditures, fluctuations in
our operating results, financing activities and build-up of inventories. We
believe that the proceeds to us of this offering, along with our future cash
flow from operations, will be sufficient to satisfy our working capital, capital
expenditure and research and development requirements for the foreseeable
future. However, we may require or choose to obtain additional debt or equity
financing in the future. Future equity financings would be dilutive to the
existing holders of our common stock. Future debt financings could involve
restrictive covenants. We may not be able to obtain debt financing with interest
rates as favorable as those historically enjoyed by QUALCOMM.
RISKS RELATED TO OUR RELATIONSHIP WITH QUALCOMM
WE MAY HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST WITH QUALCOMM WITH RESPECT
TO OUR PAST AND ONGOING RELATIONSHIPS THAT COULD HARM OUR BUSINESS OPERATIONS.
Conflicts of interest may arise between QUALCOMM and us in a number of
areas relating to our past and ongoing relationships, including:
- labor, tax, employee benefit, indemnification and other matters
arising from our separation from QUALCOMM;
- intellectual property matters;
- employee retention and recruiting;
- major business combinations involving us;
- sales or distributions by QUALCOMM of all or any portion of its
ownership interest in us;
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- the nature, quality and pricing of transitional services QUALCOMM
has agreed to provide to us; and
- business opportunities that may be attractive to both QUALCOMM and
us.
In addition, although QUALCOMM will agree not to compete with us in the
CDMA semiconductor industry for a period of three years, QUALCOMM may decide to
compete with us in the future, creating an additional conflict of interest.
We cannot guarantee that all conflicts will be resolved in a manner that
is favorable to us or that conflicts will not result in harmful consequences to
our business or prospects. Even if we do resolve any conflicts, the resolution
may be less favorable than if we were dealing with an unaffiliated party.
Furthermore, the agreements we will enter into with QUALCOMM may be amended upon
agreement between the parties. While we are controlled by QUALCOMM, QUALCOMM may
be able to require us to agree to amendments to these agreements that may be
less favorable to us than the current terms of the agreement.
OUR DIRECTORS, EXECUTIVE OFFICERS AND EMPLOYEES MAY HAVE CONFLICTS OF INTEREST
BECAUSE OF THEIR POSITIONS WITH QUALCOMM AND THEIR OWNERSHIP OF QUALCOMM COMMON
STOCK.
Many of our directors, executive officers and employees have a substantial
amount of their personal financial portfolios in QUALCOMM common stock and
options to purchase QUALCOMM common stock. Ownership of QUALCOMM common stock by
our directors, officers and employees after our separation from QUALCOMM could
create, or appear to create, potential conflicts of interest when directors and
officers are faced with decisions that could have different implications for
QUALCOMM and us. In addition, Dr. Irwin M. Jacobs and Anthony S. Thornley will
serve as Chairman of the Board and Chief Financial Officer, respectively, of
both companies, which also could create, or appear to create, conflicts of
interest.
Our financial results will be included in QUALCOMM's consolidated
financial statements prior to the distribution of our common stock by QUALCOMM.
Our directors and executive officers who will hold positions with QUALCOMM, and
who may also be holders of QUALCOMM common stock or options to purchase QUALCOMM
common stock, may therefore consider not only the short-term and long-term
impact of financial and operating decisions on us, but also the impact of these
decisions on QUALCOMM's consolidated financial results and its stockholders. In
some instances, the impact of these decisions could be disadvantageous to us
while advantageous to QUALCOMM.
OUR CLOSE RELATIONSHIP WITH QUALCOMM COULD LIMIT OUR POTENTIAL TO DO BUSINESS
WITH QUALCOMM'S COMPETITORS.
We will continue to have a variety of contractual relationships with
QUALCOMM. Whether or not QUALCOMM completes its distribution of our common
stock, our close relationship with QUALCOMM will continue for a significant
period of time. We cannot predict whether existing and potential customers will
be deterred from purchasing our products or using
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our services by the existence of these relationships or the historical ties
between QUALCOMM and us. If they are deterred, our future growth could be
hindered.
WE WILL BE CONTROLLED BY QUALCOMM AS LONG AS IT OWNS A MAJORITY OF OUR COMMON
STOCK, AND OUR OTHER STOCKHOLDERS WILL BE UNABLE TO AFFECT THE OUTCOME OF
STOCKHOLDER VOTING DURING THAT TIME.
After the completion of this offering, QUALCOMM will own approximately %
of our outstanding common stock, or approximately % if the underwriters exercise
in full their option to purchase additional shares. As long as QUALCOMM owns a
majority of our outstanding common stock, QUALCOMM will continue to be able to
elect our entire board of directors and to remove any director, with or without
cause. Investors in this offering will not be able to affect the outcome of any
stockholder vote prior to the planned distribution of our stock to the QUALCOMM
stockholders. As a result, QUALCOMM will control all matters affecting us,
including:
- the composition of our board of directors and, through it, any
determination with respect to our business direction and policies,
including the appointment and removal of officers;
- the allocation of business opportunities that may be suitable for us
and QUALCOMM;
- any determinations with respect to mergers or other business
combinations;
- our acquisition or disposition of assets;
- our financing;
- changes to the agreements providing for our separation from
QUALCOMM;
- the payment of dividends on our common stock; and
- determinations with respect to our tax returns.
QUALCOMM is not prohibited from selling a controlling interest in us to a third
party. However, QUALCOMM has agreed not to offer, sell or otherwise transfer any
shares of our common stock for a period of 180 days after the date of this
prospectus without the prior written consent of Lehman Brothers Inc. on behalf
of the underwriters.
BECAUSE QUALCOMM WILL OWN MORE THAN NINETY PERCENT OF OUR OUTSTANDING CAPITAL
STOCK, IT MAY MERGE US INTO QUALCOMM AT ANY TIME.
Although QUALCOMM currently anticipates that by August 2001 it will
distribute all of our common stock that it owns to the holders of QUALCOMM
common stock, it is not obligated to do so, and it is possible that QUALCOMM may
decide not to complete the distribution. Under
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Delaware law, a parent corporation that owns at least ninety percent of the
outstanding capital of a subsidiary corporation may merge the subsidiary into
the parent without the vote of the subsidiary's stockholders. Therefore, in the
event QUALCOMM elects not to complete the distribution, it may merge us into
itself without the vote of our stockholders. In such event, our outstanding
shares of common stock would be converted into shares of common stock of
QUALCOMM. Our stockholders would be entitled to appraisal rights under Delaware
law, but these rights may not entitle our stockholders to receive consideration
equivalent to the price they paid for our common stock.
WE MAY BE UNABLE TO RAISE CAPITAL OR ISSUE COMMON STOCK IN CONNECTION WITH
ACQUISITIONS IN THE FUTURE BECAUSE OF OUR RELATIONSHIP WITH QUALCOMM.
Prior to QUALCOMM's distribution of our common stock to its stockholders,
QUALCOMM may seek to maintain a significant percentage of our common stock for
tax planning purposes or otherwise. As a result, we may be constrained in our
ability to raise equity capital in the future or to issue common stock or other
equity securities in connection with future acquisitions.
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