Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
SECURITIES AND EXCHANGE COMMISSION (Mark One)[X]þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 o For the fiscal year ended September 28, 2003OR[]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ________ to ________ . Delaware 95-3685934 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) 95-3685934(I.R.S. Employer
Identification No.) 5775 Morehouse Drive San Diego, California 92121-1714 (Address of principal executive offices) 92121-1714
(Zip Code)
None
Common Stock, $.0001$0.0001 par value
(Title of Class)YES [X] NO [ ] [ ]YES [X] NO [ ]
State Indicate by check mark whether the aggregate market valueregistrant is a shell company (as defined in Rule 12b-2 of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
Exchange Act).þ Yeso No
October 31, 2005.
* | Excludes the Common Stock held by executive officers, directors and stockholders whose ownership exceeds 5% of the Common Stock outstanding at March |
QUALCOMM INCORPORATED
Form 10-K
For the Fiscal Year Ended September 28, 200325, 2005
Index
Page | ||||||||
Item 1. | 1 | |||||||
1 | ||||||||
| 6 | |||||||
| 7 | |||||||
| 9 | |||||||
14 | ||||||||
14 | ||||||||
15 | ||||||||
17 | ||||||||
17 | ||||||||
17 | ||||||||
18 | ||||||||
19 | ||||||||
Item 2. | 33 | |||||||
Item | 34 | |||||||
Item 4. | 35 | |||||||
Item 5. | 36 | |||||||
Item 6. | 38 | |||||||
Item 7. | 39 | |||||||
Item 7A. | 54 | |||||||
Item 8. | 56 | |||||||
Item 9. | 56 | |||||||
Item 9A. | 56 | |||||||
56 | ||||||||
Item 10. | 57 | |||||||
Item 11. | 57 | |||||||
Item 12. | 57 | |||||||
Item 13. | 57 | |||||||
Item 14. | 57 | |||||||
Item 15. | 58 | |||||||
EXHIBIT 21 | ||||||||
EXHIBIT 23.1 | ||||||||
EXHIBIT 31.1 | ||||||||
EXHIBIT 31.2 | ||||||||
EXHIBIT 32.1 | ||||||||
EXHIBIT 32.2 |
L.L.C. Solutions®SolutionsÒ, OmniTRACS®, OmniOne®OmniOneÒ, GlobalTRACS™, TrailerTRACS®, TruckMAIL™, OmniExpress®, QConnect™, T2™, T2Untethered™, EutelTRACS™, Eudora®, QCP-®Ò, QCT®QCT-Ò, MSM™, Secure MSM™, CMX™, CSM™, MSM3000®MSM6250Ô, MSM5000™MSM6275™, MSM5100™MSM6280™, MSM5500™, MSM6000™, MSM6050™, MSM6100™, MSM6150™, MSM6200™, MSM6250™, MSM6300™, MSM6500™MSM6500Ô, MSM6550™, MSM6700™, MSM6800™, CSM5000®, CSM6700™MSM7500™, CSM6800™ gpsOne™, SnapTrack®radioOneÒ, BREW®SnapTrackÒ, BREWÒ, BREW SDK®SDKÒ, BINARY RUNTIME ENVIRONMENT FOR WIRELESS®WIRELESSÒ, Launchpad™MediaFLO™, QCHAT®FLO™, QPoint™, QConcert™, QTunes™, Qtv™, Q3Dimension™, QCamera™, QCamcorder™, Qvideophone™, deliveryOne™, uiOne™, iMoD™, and WIRELESS KNOWLEDGE®QCHAT® are trademarks and/or service marks of QUALCOMM Incorporated. QUALCOMM, QUALCOMM Wireless Business Solutions, QWBS, QUALCOMM CDMA Technologies, QCT, QUALCOMM Technology Licensing, QTL, QUALCOMM Wireless Systems, QWS, QUALCOMM Wireless & Internet, QUALCOMM Wireless & Internet Group, QWI, QUALCOMM Internet Services, QIS, QUALCOMM Government Technologies, QGOV, QUALCOMM MEMS Technologies, QMT, QUALCOMM Technologies and Ventures, QUALCOMM Global Development, QUALCOMM Digital Media, QDM, QUALCOMM Internet Services, QIS, QUALCOMM Consumer Products, QCP,Global Trading, QGT, QUALCOMM Strategic Initiatives, QSI, andELATA, Iridigm, MediaFLO USA, Trigenix, Spike, SnapTrack are trade names of QUALCOMM Incorporated.isand Globalstar® are a trademark and service mark, respectively, of Globalstar, L.P., and Globalstar® is a trademark of Loral Qualcomm Satellite Services, Inc.
1 Our consolidated financial data includes SnapTrack, Inc. (SnapTrack), Vésper Holding Ltd. (Vésper Holding) and other consolidated subsidiaries.52 week52-week fiscal years consist of four equal quarters of 13 weeks each, and our 53 week53-week fiscal years consist of three 13 week13-week fiscal quarters and one 14 week14-week fiscal quarter. The financial results for our 53 week53-week fiscal years and our 14 week14-week fiscal quarters will not be exactly comparable to our 52 week52-week fiscal years and our 13 week13-week fiscal quarters. For presentation purposes, allEach of the fiscal periods presented or discussed in this report have been presented as ending onyears ended September 30. For example, our 2003 fiscal year ended on25, 2005, September 26, 2004 and September 28, 2003 but we present our 2003 fiscal year as ending on September 30, 2003.include 52 weeks.three main technologies currently used in digital wireless communications networks. CDMA and the two other main digital wireless communications technologies, TDMA (which stands for Time Division Multiple Access) and GSM (which is a form of TDMA and stands for Global System for Mobile Communications) are the digital technologies used to transmit a wireless phone user’s voice or data over radio waves using the wireless phone operator’s network. CDMA works by converting speech into digital information, which is then transmitted in the form of a radio signal over the phone network. These digital wireless phone networks are complete phone systems comprised primarily of base stations, or “cells,” which are geographically placed throughout a service or coverage area. Once communication between a wireless phone user and a base station is established, the system detects the movement of the wireless phone user and the communication is handed off to another base station, or cell, as the wireless phone user moves throughout the service area.thatportions of which we license to other companies and integrate intoimplement in our own products. The wireless communications industry generally recognizes that a company seeking to develop, manufacture and/or sell products that use CDMA technology will require a patent license from us.
• | CDMA2000, including 1X and 1xEV-DO (where DO refers to Data Optimized) | ||
• | Wideband CDMA (WCDMA) | ||
• | CDMA Time Division |
• | CDMA-based integrated circuits (also known as chips) and the related software used in wireless phones (also known as subscriber units and handsets) and wireless networks; | ||
• | Radio Frequency and Power Management chips used in wireless phones and sold in conjunction with our CDMA-based integrated circuits; | ||
• | Messaging and other services and related equipment and software used by transportation and other companies to communicate with and track their equipment fleets; | ||
• | Software products and services related to BREW (which stands for Binary Runtime Environment for Wireless), a package of products that enable software developers to create applications, or programs, | ||
• | Software and hardware development services. |
2
2
wireless terrestrial-based networks to permit this communication. Our customers use these products to communicate with drivers, monitor vehicle location and performance and provide automated driver logs, fuel tax reporting, security and enhanced customer service.services. Our products, which collect and transmit this data, are also integrated with our customers’ operations software, such as dispatch, payroll and accounting, so our customers can better manage their information and operations.
Using our asset tracking and messaging infrastructure, we also provide a managed wireless data service, QConnect, to other service providers. For example, we provide the QConnect service to CardioNet, a provider of outpatient cardiac telemetry technology services, where we manage the wireless data service connectivity between CardioNet mobile monitoring devices and the CardioNet Monitoring Center.
We also provide QChat, which enables push-to-chat functionality on CDMA-based wireless devices, and QPoint, which enables operators to offer enhanced 911 (E911) wireless emergency and other location-based applications and services.
3
through 41 CDMA operators.
• | 3G subscribers to wireless operators’ services grew to at least 213 million worldwide; | ||
• | There are at least 159 commercial 3G operators; | ||
• | South Korea has over 35 million CDMA2000 subscribers; | ||
• | There are at least 15 million lxEV-DO subscribers, including over 11 million in South Korea; and | ||
• | In the United States, there are 17 operators that have commercially deployed CDMA2000 1X, making CDMA2000 IX the first 3G technology to be commercially available in North America. |
other future enhancements with increasing capability and data speeds.
We are devoting significant research and development resources to developing high-speed wireless dataUniversal Serial Bus (USB), Forward Link Only (FLO), Orthogonal Frequency Division Multiplexing (OFDM), Global System for Mobile Communications-Mobile Application Port (GSM-MAP), Interim Standard 41 (IS-41) and Internet access products usingProtocol-based (IP-based) core networks. We continue to support multiple mobile client software environments in our CDMA technology, including efforts to meetmultimedia and exceed the standards for 3G
3
products set by the International Telecommunications Union (ITU). CDMA wireless phone network operators that have integrated new features,convergence chipsets, such as Internet access, GPS position locationBREW, Java, Windows Mobile, PalmOS and advanced multimedia capabilities likeLinux.
4
chipsets as we continue to identify and integrate other complementary wireless technologies into our chipsets.
benefits. Our acquisition of Trigenix complements our BREW product offerings by enhancing the capabilities of our BREW uiOne user interface and providing other benefits. In August 2005, we completed the acquisition of ELATA, Ltd. (ELATA), a developer of mobile content delivery and device management software systems, which systems we have integrated into our “deliveryOne” family of BREW product offerings. In August 2005, we announced our intention to acquire Flarion Technologies, Inc. (Flarion), a developer of Orthogonal Frequency Division Multiplexing Access (OFDMA) technology. This acquisition is anticipated to close in the first half of fiscal 2006, pending regulatory approval and other customary closing conditions. Our acquisition of Flarion is intended to broaden our ability to effectively support operators who may prefer an OFDMA or a hybrid OFDM/CDMA/WCDMA network alternative for differentiating their services. The addition of Flarion’s intellectual property and engineering resources will also supplement the resources that we have already dedicated over the years towards the development of OFDM/OFDMA technologies.
5
standards. free from unfair discrimination (and, in some instances, whether the patent holder is willing to license royalty free). 6 From the international perspective, the ITUthe centrala telecommunication standards setting organization. The ITUorganization that is recognized as an impartial, international organization within which governments and the private sector work together to coordinate the operation of telecommunication networks and services to advance the development of international standards for communications technology. The ITU’s standardization activities foster the growth of new technologies, such as mobile telephony, mobile broadcast and themobile Internet, as well as the emerging global information infrastructure which handles a mix of voice, data and multimedia signals. The ITU develops internationally-agreed upon technical and operating standards to foster seamless interconnection of the world’s communication networknetworks and systems.their subsystems. As the world of telecommunications, information technology and media content provisiondistribution rapidly converge, the role of the ITU is to forge new recommendations that promote the interoperability of equipment and facilitate the development of advanced communication networks. The ITU’s objective is to identifyITU identifies sound technical recommendations which are then developedand develops them into internationally recognized ITU recommendations.4the leading U.S. baseda U.S.-based non-profit trade association serving the communications and informationtelecommunications technology industry. Through its worldwide activities, the TIA facilitates business development opportunities and a competitive market environment. The TIA provides a market-focused forum for its member companies, which manufacture or supply the products and services used in global communications. TheThrough its voluntary standards setting committees, the TIA facilitates the convergenceinteroperability of new communications networks whilewith the stated objective of working fortowards a competitive and innovative market environment. The TIA is a major contributor of voluntary industry standards that support global trade and commerce in communications products and systems. Neitherbodiesorganizations have the enforcement authority or the ability to protect intellectual property rights. These bodies merelyToday, these organizations generally ask participating companies to declare whether they believe they hold patents essential for compliance with a particular standard and, if so, whether they are willing to license such patents on a royalty-free basis or on a royalty- basis onterms and conditions that are fair, reasonable and nondiscriminatory terms.thisthe increasing demand for wireless voice services, including:
• | lower cost of service, including flat-rate and bundled long-distance calling plans; | ||
• | an increasingly mobile workforce with increased need for wireless voice communications; | ||
• | a consumer base that desires to be accessible, informed and entertained within a mobile environment; | ||
• | |||
• | wireless networks becoming the primary communications infrastructure in developing countries due to the higher costs of and longer time required for installing wireline networks; and | ||
• | regulatory environments worldwide favoring increased competition in wireless | ||
75adopted indeployed by the late 1980s in most of the developed world, was based on analog technology. While this generation helped increaseintroduce the adoption of cellular wireless telecommunications by some business and consumer users, the technology was characterized by inherent capacity limitations, minimal or no data transfer capabilities, low security,lack of privacy, inconsistent service levels and significant power consumption.technologies, which are the primary technology standards in use today.technologies. Second generation digital technology provided for significantly enhanced efficiency within a broadcastfixed spectrum as well as greatly increased voice capacity compared to analog systems. Second generation technologies also enabled numerous enhanced services, including paging, e-mail, and facsimile, connections to computer networks, greater privacy, lower prices, a greater number of service options and greater fraud protection. However, data services (email, fax, computer connections) were generally limited to low speed transmission rates. The three main second-generation digital cellular technologies are CDMA, called cdmaOne or IS-95A/B, a technology we developed and patented, North American TDMA, PDC (Personal Digital Cellular—a variant of North American TDMA), and GSM, also a form of TDMA.
Our second generation CDMA technology offers 10 to 20 times the capacity of analog systems and more than three times the capacity of TDMA- and GSM-based systems through more efficient utilization of wireless carriers’ licensed spectrum.
the benefits of roaming due to its wider worldwide deployment, and, for the near term, lower priced low-end handsets.
.
(1) | |||
(2) | |||
(3) |
The
upon CDMA:
(4) | TDMA Single Carrier. This is also called Universal Wireless Communication-136 (UWC-136). The main parts are based upon the TIA/EIA-136 standard for TDMA and EDGE. | ||
(5) | FDMA/TDMA. This is also called Digital Enhanced Cordless Telephone (DECT). |
6
experience and operator profitability. The price differential between low-end third generation CDMA2000 handsets and GSM handsets is diminishing.
8
Commercial deploymentsa commercial basis to more than 15 million subscribers. The rapid growth of CDMA2000 1xEV-DV are expected to begin in the year 2005. CDMA2000 1xEV-DV will offer mobile peak data rates equal to a version of 1xEV-DO whichsubscribers is expected to become commercially available aroundcontinue as more operators begin to offer the same time or earlier.
service and the cost of providing the wireless broadband service becomes more affordable and attractive through lower cost handsets, additional network enhancements, the embedding of the technology into laptops and increased competition between operators. Recently, three major laptop computer companies, Lenovo, Dell, and HP, have announced laptop products incorporating 1xEV-DO technology.
Knowing that many GSM operators would not have access to WCDMA spectrum and most of those that do may not be ready to offer WCDMA services until 2004, we developed a soft-switch based technology called GSM1x. GSM1x allows GSM operators to begin offering revenue-generating 3G services (while preserving their existing capital investment in GSM) by overlaying the commercially proven CDMA2000 radio access network on top of their GSM network. GSM1x combines the increased voice and high-speed data capacity offered by the CDMA2000 air interface with the familiar features and services offered by the existing GSM-MAP core network. Commercial deployments of GSM1x are expected to occur within the next year.
The TD-SCDMA mode is the least developed of the 3G CDMA alternatives. Support for the development of this version of the 3G technologies has been provided by the Chinese government, which hopes this technology will provide a path to the development of a stronger wireless industry in China.
The three 3G CDMA wireless operating modes discussed aboveinterfaces are all based on the underlying core principles of CDMA technology; however, each has different features which some technologists believe enable a clearer migration path from the existing second generation technologies. The CDMA2000 mode enables a direct and relatively more economical conversion for current cdmaOne networks. We believeWhile the WCDMA wireless air interface does use CDMA technology, the core network has been specifically designed to be compatible with the GSM core network, which is why it also offers an economical transition from currentis expected that most GSM networks. While we believe that theoperators will migrate to WCDMA rather than to CDMA2000 mode offers a quicker path to third generation services and offers a number of technical advantages, we actively support each of these 3G CDMA modes. .We will continue to develop integrated circuits for CDMA2000 and WCDMA and expect to develop integrated circuits for all modes of the 3G standardversions based on CDMA.CDMA when commercially worthwhile. In addition, our intellectual property rights include core and primary patents utilized byessential to implementation of each of the 3G CDMA alternatives,alternative standards, and the royalty rate to be paid to us by a licenseeeach of our current 3G subscriber unit licensees for sales of its licensed 3G CDMA (regardless of whether it is CDMA2000, WCDMA, TD-CDMA or TD-SCDMA) subscriber products has not differed fromis no less than the rate that asuch licensee will pay for second-generationits licensed second generation cdmaOne subscriber products.
978%82%, 79% and 77% in fiscal 2005, 2004 and 2003, 70% in fiscal 2002 and 65% in fiscal 2001.respectively. During fiscal 2003, 43%2005, 37% and 15%21% of our revenue was from customers and licensees based in South Korea and Japan, respectively, as compared to 37%43% and 18% during fiscal 2002,2004, respectively, and 35%45% and 22%15% during fiscal 2001,2003, respectively.7–— Segment Information.”
QCT sells products to both wirelessrelated software enable phone and infrastructure manufacturers. For wireless phone manufacturers, QCT’s products include baseband and system software, radio frequency, intermediate frequency, and power management devices. These highly integrated products enable manufacturers to design very small, feature-rich handsets with longer standby and talk times that support existing cdmaOne and 3G services.services, and enable data card manufacturers to design modems that insert into laptop computers to facilitate access to the Internet via wireless networks. For wireless infrastructure manufacturers, QCT offers CDMA integrated circuits and system software that provide wireless standards-compliant processing of voice and data signals to and from wireless handsets. In addition to the key components in a wireless system, QCT provides our customers with system reference designs and development tools to assist in customizing features and user interfaces, to integrate our products with components developed by others, and to test interoperability with existing and planned networks. Together, the phone and infrastructure products and services form a complete system for the wireless communications industry. QCT is also closely aligned with manufacturers and carriersoperators in product plans, design specifications and development timelines.
Our gpsOne wireless location feature has enabled a host of new value-added, high-precision location-based services such as friend finder, child safety, personal direction finding and mobile yellow page services, and has enabled CDMA system operators to meet the FCC’s E911 mandate. Using a hybrid approach that utilizes signals from both the GPS satellite constellation and CDMA cell sites, the gpsOne feature enhances location services availability, expands terrain coverage, accelerates the location determination process and provides better accuracy for callers, whether during emergency situations or while using GPS-enabled commercial applications. E911 deployments by CDMA carriers in the United States are well under way. Approximately fifteen million gpsOne-enabled terminals are in use today, supporting well in excess of 130 high-precision location-based services in Japan, South Korea and China.
We have developed
Our MSM series integrated circuits are the primary integrated circuits in a CDMA wireless phone. Our Cell Site Modem (CSM) series integrated circuits are the primary integrated circuits in a wireless service provider’s base station equipment. The MSM5000, CSM5000, MSM5010, MSM5105 and MSM5100 integrated circuits and system software are the world’s first integrated circuits and software implementations of the 3G CDMA2000 standards. The MSM5000 digital baseband product is designed to support CDMA2000 1X for operation in a single 1.25 MHz channel. The CDMA2000 1X standard is fully compatible with current cdmaOne networks, allowing carriers to
8
deploy 3G networks while maintaining existing coverage for all subscribers, eliminating the expense of moving to a new network. The MSM5000 provides up to a 50% increase in handset standby time and is feature- and pin-compatible with our MSM3000 integrated circuit, allowing manufacturers currently producing handsets using the MSM3000 to rapidly implement CDMA2000 1X technology in their handsets. QCT’s CSM5000 base station product is the industry’s first to support the CDMA2000 1X standard, based on IS2000 for CDMA base stations as specified by the ITU. The CSM5000 product provides carriers with up to twice the overall voice user capacity of IS-95A and IS-95B systems. The MSM5010 CDMA2000 1X chipset is an entry-level product offering improved voice capacity for applications where high-speed data rates are not required. The MSM5105 CDMA2000 1X product offers improved voice capacity and the introduction of new 3G data services for mainstream subscribers. The MSM5100 is the first CDMA2000 1X integrated circuit with advanced position location capabilities and has integrated Universal Serial Bus and Bluetooth functionality, as well as other features of the Launchpad suite including multimedia.
The CSM5500 and MSM5500 integrated circuits offer 1xEV-DO handset and infrastructure modems for high-speed data. These products support the 1xEV-DO standard, as well as CDMA2000 1X, and offers compatibility with IS-95 A/B CDMA systems.
QCT’s MSM6xxx family of products, incorporating radioOne technology, enables tiered products for CDMA2000 1X, 1xEV-DO, WCDMA and GSM/GPRS networks. The MSM6000 CDMA2000 1X integrated circuit is an entry-level product optimized for voice applications. The MSM6025 provides voice and limited data capabilities to support demand by carriers worldwide for lower-tier handsets that also support data services. The MSM6050 integrated circuit offers multimedia applications with optimized gpsOne for mainstream users. We currently ship MSM6100 integrated circuit and system software, a highly integrated CDMA2000 1X multimedia product enabling lower system costs for manufacturers developing handsets with advanced multimedia applications. There are in excess of 20 separate handset designs expected to come to market based on this platform in the next 12 months.
Extending the MSM6xxx family of integrated circuits, we have also announced the development of the MSM6150 integrated circuit and system software for CDMA2000 1X and the MSM6550 integrated circuit and system software for CDMA2000 1X, 1xEV-DO and multimode GSM/GPRS. These highly integrated products address global market requirements for higher quality video and graphics performance on wireless devices. We began providing samples to customers of the MSM6300 in September 2002, a single-baseband 3G product for multimode and multiband CDMA2000/GSM/GPRS. The MSM6300 and accompanying radioOne radio frequency integrated circuits comprise the first world-phone integrated circuit enabling global roaming across wireless networks. In March 2003, Samsung was the first customer to announce its adoption of this product. In fiscal 2003, we began providing initial samples to customers of the high-capacity, high-speed MSM6500 integrated circuit and system software that supports CDMA2000 1X, CDMA2000 1xEV-DO and roaming on GSM/GPRS systems. We also announced the CSM6700 integrated circuit and the MSM6700 integrated circuit and system software supporting integrated voice and simultaneous high-speed packet data. These products for infrastructure and handset manufacturers support 1xEV-DV and 1xEV-DO standards. 1xEV-DV enables wireless carriers to provide voice and bi-directional high-speed packet data services simultaneously on a single radio frequency carrier. We also announced the CSM6800 integrated circuit and the MSM6800 integrated circuit and system software for the wireless technology standard CDMA2000 1xEV-DO to provide cost-competitive products for both infrastructure and multimedia-enabled devices.
10
In July 2003, we began providing samplesterrains: Hybrid Mobile Station-Assisted GPS (Global Positioning System) enables a location fix whenever a call can be placed; Mobile Station-Assisted GPS provides extreme sensitivity to customersGPS signals across a broad range of environments; Mobile Station-Based GPS provides repetitive fix capabilities that are ideal for navigation, tracking and games; and Standalone GPS enables positioning in off-network scenarios. Compatible with all major air interfaces, the MSM6250 integrated circuit, for which LG ElectronicsgpsOne technology is the firstindustry’s only fully-integrated wireless baseband and GPS product, and has enabled CDMA system operators to cost-effectively meet the FCC’s E911 mandate.
9
Downlink Packet Access (HSDPA), a next-generation feature of the WCDMA/UMTS standard, as well as roaming on GSM and GPRS systems.
WCDMA networks.
The QIS division provides technology to support and accelerate the convergencegrowth of the wireless data Internet and voice services.market. The BREW (Binary Runtime Environment for Wireless) platform is an application execution environment that provides an open platform for wireless devices, which means that BREW can
11
In November 2001,
China.
We provideThe QWBS division provides satellite and terrestrial-based two-way data messaging and position reporting services to transportation companies, private fleets, and construction equipment fleets.fleets and other enterprise companies. The satellite-based OmniTRACS mobile
10
communications system was first introduced in the United States in 1988. Through September 2003,2005, we have shipped nearly 489,000 OmniTRACS TruckMAIL, OmniExpress, GlobalTRACS and LINQover 566,000 satellite-based mobile communications systems (OmniTRACS, EutelTRACS and TruckMAIL) and over 85,000 terrestrial-based mobile communications systems (OmniExpress, T2 Untethered TrailerTRACS and GlobalTRACS), which currently operate in over 39 countries. Message transmission and position tracking for the OmniTRACS and TruckMAIL systems are provided by use of leased Ku-band and C-band transponders on commercially available geostationary earth orbit satellites. The OmniExpress, T2 Untethered TrailerTRACS, GlobalTRACS and LINQOmniOne systems use wireless digital terrestrial networks for messaging transmission, and the GPS constellation for position tracking. These mobile communications systems help transportation companies, private fleets and construction equipment fleets improve the utilization of assets and increase efficiency and safety by improving communications between drivers, machines and dispatchers. System features include status updates, load and pick-up reports, position reports at regular intervals, and vehicle and driving performance information.
12
Recently
Outside of the United States, Mexico and Europe, we work with telecommunications companies and carriers to establish the OmniTRACS system concept and products in foreign markets. The OmniTRACS system is currently operating throughout Europe and in the Middle East, Argentina, Brazil, Canada, Mexico, China, Japan and South Korea. Internationally,Outside of the United States, Mexico and Europe, we work with distributors or through joint ventures to provide the OmniTRACS service and products in foreign markets. We generate revenues from the OmniTRACS system through license fees, sales of network products and terminals, and messaging and service fees. Service providers that operate network management centers for a region under our granted licenses provide OmniTRACS messaging services. We also run
Government Technologies (QGOV).The QGOV division (formerly known as QUALCOMM Digital Media, (QDM)
The QDM division is comprised of the Government Systems and Digital Cinema businesses.
The Government Systems businessor QDM) provides development, hardware and analytical expertise to United States Governmentgovernment (USG) agencies involving wireless communications technologies. We have developed, aproduced and shipped second generation CDMA Type 1 secure wireless terrestrial phonephones for the USG the QSec-800, that operatesoperate in enhanced security modes (referred to as Type 1) and incorporatesincorporate end-to-end encryption. DuringIn fiscal 2003, QSec-800 phones were2005, QGOV adapted, integrated and shipped CDMA2000 1X deployable base stations to the USG. In fiscal 2003, the next generation Type 1 secure phone development was launched with USG funding. Additionally, OmniTRACS products and services are being marketed and soldused for USG worldwide applications.
We develop technologiesapplications and were sold to support the processing, transmission and managementUSG during fiscal 2005. Based on the percentage of content forQGOV revenues to our total consolidated revenues, the USG is not a variety of media applications, including the delivery of digitized motion pictures. In fiscal 2002, we released an end-to-end Digital Cinema System product which combines our expertise in advanced image compression, electronic security, network management and integrated circuit design to provide the secure delivery of digitized motion pictures to theatres worldwide. In May 2000, we entered into a strategic alliance with Technicolor Digital Cinema, Inc. (Technicolor) and formed a joint venture, Technicolor Digital Cinema, LLC (TDC), in which we owned a 20% interest. The joint venture has marketed the QUALCOMM Digital Cinema System and worked with the motion
11
picture industry as a technology enabler and service provider while supporting open standards for the digital delivery of motion pictures. In August 2003, we jointly announced with Thomson, the parent company of Technicolor, that we sold our equity interest in TDC to Thomson, a move that results in sole Thomson ownership of the venture. As part of the sale, Technicolor has acquired exclusive rights to manufacture, sell and service the multi-screen Theatre Management System, a key component of the Digital Cinema System. This sale arrangement does not preclude us from continuing to develop and market core digital cinema products and technologies, including decoder modules, encoders and conditional access systems that are based on our compression and decryption technology.
major customer.
Other Businesses
QUALCOMM Consumer Products (QCP)
In February 2000,mobile device using the CDMA2000 1X, 1xEV-DO or WCDMA wireless link. Furthermore, the MediaFLO MDS can seamlessly integrate multicasting services provided over 3G operator networks with such services provided over a stand-alone FLO network.
13
spin-off transaction.
Under now-terminated contracts with Globalstar L.P. (Globalstar), we designed, developed and manufactured subscriber. The QWS division sells products and ground communications systems utilizing CDMA technologyprovides services under new commercial agreements to Globalstar LLC (New Globalstar) and provided contract development services.its service providers and other customers. New Globalstar was formed to design, construct and operateoperates a worldwide, low-Earth-orbit satellite-based telecommunications system (thesystem. We received membership interests in New Globalstar System). We currently holdin fiscal 2004 as a result of its emergence from bankruptcy related to our claims as a creditor. On October 5, 2004, we received an approximate 6.3%additional ownership interest in New Globalstar through certain limited partnerships and other indirect interests.
On January 16, 2001, Globalstar announced that, in order to have sufficient funds availableas partial consideration for the continued progress of its marketing and service activities, it had suspended indefinitely principal and interest payments on all of its debt, including its vendor financing obligations. Globalstar also announced its intent to restructure its debt. Globalstar filed for Chapter 11 bankruptcy protection during fiscal 2002. On April 25, 2003, the U.S. Bankruptcy Court in Delaware approved the sale of Globalstar’s assets tomobile phones. At September 25, 2005, we held an approximate 6.7% interest in New Globalstar in our QSI segment.
We continuethin film optics, is expected to provide servicessubstantial performance, power consumption and sell productscost benefits as compared to Globalstar service providerscurrent display technologies. We expect the iMoD product to deliver a vivid and other customers involvedrealistic display image quality that can withstand extreme temperatures and be viewed in virtually any environment, including bright sunlight. Displays have become a key factor in the overall power consumption of wireless devices, with the Globalstar System. In addition, we areincreasing use of vibrant color screens and multimedia applications that generate rapidly changing images. The iMoD product is expected to offer significantly lower power consumption than existing display products, thereby extending the battery life of wireless devices. With the inclusion of color displays in negotiations with potential acquirersall types of wireless phones, including models at the low end of the market, the cost of the display has become an even more significant factor in the overall cost of the handset. An iMoD display should cost less to provide productsmanufacture than a comparable liquid crystal display because it requires fewer components and services to the new operating company.processing steps, thus enabling advanced multimedia capabilities on all tiers of mobile devices.
has a strong and proven track record of innovation in wireless communications technologies. Our research and development expenditures in fiscal 122003, 20022005, 2004 and 20012003 totaled approximately $523 million, $452$1.01 billion, $720 million and $415$523 million, respectively. Research and development expenditures in fiscal 2003, 20022005, 2004 and 20012003 were primarily related to integrated circuit product and other initiatives to support lower cost phones, multimedia applications, high-speed wireless Internet access and multimode, multiband, multinetwork products and technologies, including CDMA2000 1X/1xEV-DO/1xEV-DV,1xEV-DO, WCDMA, HSDPA, GSM/GPRS, WLAN, WCDMAGPRS/EDGE and radioOneOFDMA, and the development of our FLO technology, MediaFLO MDS and iMoD display products using MEMS technology.intendcontinue to use our substantial engineering resources and expertise to develop new technologies, applications and services and make them available to licensees to help grow the wireless telecommunications market and generate new or expanded licensing opportunities. In addition to internally sponsored research and development, we perform contract research and development for various government agencies and commercial contractors.
14
The markets in which our QCT segment operates are intensely competitive. QCT competes worldwide with a number of United States and international 15 in the United States and throughout the world continues to increase at a rapid pace as businesses and foreign governments realize the market potential of telecommunications products and services. ManyWe have facilitated competition in the CDMA market by licensing a large number of thesemanufacturers. Although we have attained a major position in the industry, many of our current and potential competitors may have advantages over us, including: • longer operating histories and presence in key markets; • greater name recognition; • access to larger customer bases; and • greater sales and marketing, manufacturing, distribution, technical and other resources than we have. 13 As a result of these and other factors, our competitors may be more successful than us.us.us or to use alternative technologies. Accordingly, new competitors or alliances among competitors could emerge and rapidly acquire significant market share to our detriment. In addition, many of these companies are licensees of our technology and have established market positions, trade names, trademarks, patents, copyrights, intellectual property rights and substantial technological capabilities. We may face competition throughout the world with new technologies and services introduced in the future as additional competitors enter the market place for products based on 3G standards. Although we intend to employ relativelycontinuously develop improvements to existing technologies, as well as potential new technologies, there willmay be a continuing competitive threat from even newer technologies that may render our technologies obsolete.companies introducing alternative versions of wireless technologies. We also expect that the price we charge for our products and services may continue to decline as competition intensifies.QUALCOMM CDMA Technologies Segment (QCT)QCT Segment.manufacturers.semiconductor designers and manufacturers in the United States and internationally. As a result of the trend toward global expansion by foreign and domestic competitors and technological and public policy changes, we anticipate that additional competitors will enter this market. We believe that the principal competitive factors for CDMA integrated circuit providers to our addressed
.As part of our strategy to generate new and ongoing licensing revenues, significant resources are allocated to develop leading edge technology for the telecommunications industry. In addition to licensing manufacturers of subscriber and network equipment, we have made licenses to our essential CDMA patents available to competitors of our QCT segment. We face competition in the development of intellectual property for next-generationfuture generations of digital wireless communications technology and services. There are no guarantees that our technologies will continue to be adopted or we will be able to secure patents for our technology to subsequently
14
license. Furthermore, there are no guarantees that existing systems and applications cannot or will not be replaced by competitors’ technologies, thereby jeopardizing our existing royalty and licensing revenues.
purchase Flarion, a major developer and patent holder of OFDMA technology.
Existing competitors of our QWBS division offering alternatives to our OmniTRACS, TruckMAIL, OmniExpress, GlobalTRACS, QConnect, EutelTRACS and LINQ system products are aggressively pricing their products and services and could continue to do so in the future. In addition, theseour domestic markets, we face over ten key competitors to our OmniTRACS, TruckMAIL, OmniExpress, T2 Untethered TrailerTRACS, QConnect and OmniOne products and services, as well as over six key competitors to our GlobalTRACS system. Internationally, we face several key competitors each in Europe and Mexico. These competitors are offering new value-added
16
Competitors to
fiscal 2005, and the other sharing obligation will expire in fiscal 2006. 171,0001,540 United States patents and have over 1,7002,500 patent applications pending in the United States. The vast majority of such patents and patent applications relate to our CDMA digital wireless communications technology. We also have and will continue to actively file for patent protection outside the United States and have received numerous CDMA patents with broad coverage throughout most of the world, including China, Japan, South Korea, Europe, Brazil, India and elsewhere.theall 3G standards that are based on CDMA. We have committed to the ITU to license our essential patents for these CDMA standards on a fair and reasonable basis free from unfair discrimination. non-refundable license fee as well as ongoing royalties based on a percentage of the net selling price of CDMA subscriber, infrastructure, test and integrated circuits products. License fees are paid in one or more installments, while royalties generally continue throughout the life of the licensed patents. Our CDMA license agreements generally provide cross-licenses to us rights to use certain of our licensees’ technology and intellectual property rights to manufacture and sell certain CDMA products, (e.g.e.g., CDMA application specific integrated circuits or ASICs,(ASICs) and related software, subscriber units and/or infrastructure equipment).equipment. In most cases, our use of our licensees’ technology and intellectual property is royalty free. However, under some of the licenses, if we incorporate certain of the licensed technology or intellectual property into certain of our products, we are obligated to pay royalties on the sale of such products. For a limited period of time, Motorola isUnder their existing agreements with us, two entities were entitled subject to the terms of their license agreement, to share in a percentage of certain third-party subscriber unit royalties paid by licensees to us. For a limited period of time, the Korean Electronics Telecommunications Research Institute is entitled, subject to the terms of a development agreement with us, to share in a percentage of subscriber and infrastructure royalties paid by certain South Korean licenseesroyalty revenues that we receive from third parties for salestheir sale of certain CDMA products sold solely for useproducts. Our sharing obligation under one of these arrangements expired in South Korea.15technology. The following table lists the majority ofintellectual property. Our current publicly-announced CDMA licensees are listed on our current CDMA licensees:16SubscriberAL Communications Co., Ltd.Alps Electric Co., Ltd.Ambit Microsystems CorporationAppeal Telecom Co., Ltd.Axesstel, Inc.Axio Wireless, Inc.Beijing Telecommunications Equipment FactoryBellwave, Inc.Benq CorporationCasio Computer Co., Ltd.CEC Telecom Co., Ltd.Compal Electronics, Inc.Curitel Communications, Inc.Cyberlane Inc.Dalian Daxian Group Co., Ltd.Dalian Huanyu Mobile Technological Co., Ltd.Datang Telecom Technology Co., Ltd.Denso CorporationeAnywhere Tech, Inc.Eastern Communications Co., Ltd.ERON Technologies CorporationETRONICS CorporationFujitsu LimitedGarmin CorporationGiga Telecom, Inc.Glenayre Electronics, Inc.Growell Telecom Co., Ltd.GTRAN Wireless, Inc.Guangzhou Southern Hi-Tech Co., Ltd.Haier Group CompanyHandspring, Inc.High Tech Computer CorporationHisense Group Co., Ltd.Hitachi Kokusai Electric Inc.Hitachi, Ltd.Huawei Technologies Co., Ltd.Hyundai Syscomm, Inc.INTERCUBE Co., Ltd.Inventec Appliances Corp.Kenwood CorporationKoninklijke Philips Electronics N.VKonka Group Co., Ltd.KTF Technologies Inc.Kyocera CorporationLangchao Electronic Information Industry Group Corp.Legend Mobile Communications Technology Ltd.LG ElectronicsLucent Technologies Inc.Matsushita Electronic Components Co., Ltd.Maxon Telecom Co., Ltd.Mitsubishi Electric CorporationMobile System Technologies, Inc.Modottel Co., Ltd.Motorola, Inc.NEC CorporationNG Industrial Ltd.Ningbo Bird Co., Ltd.NOKIA CorporationNovatel Wireless Inc.Option NV SAPanasonic Mobile Communications Co., Ltd.Pantech Co., Ltd.Research In Motion LimitedSamsung Electronics Co.Sanyo Electric Co., Ltd.Seiko Instruments Inc.Sejin Electron Inc.SHARP CorporationSiemens AktiengesellschaftSierra Wireless, Inc.SK Telecom Co., Ltd.Sony CorporationSynertek, Inc.-Sewon Telecom Ltd.-Telson Electronics Co., Ltd.-Wide Telecom Co., Ltd.TCL CorporationTelefonaktiebolaget LM EricssonTeleion Wireless, Inc.Telular CorporationTellus Technology Inc.Telson Information & Communications Co., Ltd.Toshiba CorporationUniden CorporationUnited Computer & Telecommunication, Inc.Wavecom S.A.Westech Korea, Inc.Wherify Wireless, Inc.Xiamen Overseas Chinese Electronic Co., Ltd.ZTE CorporationInfrastructureAirvana, Inc.AirWalk Communications, Inc.Alcatel SAAlps Electric Co., Ltd.Axio Wireless, Inc.Beijing Telecommunications Equipment FactoryCisco Systems, Inc.Contela, Inc.Dalian Huanyu Mobile Technological Co., Ltd.Datang Telecom Technology Co., Ltd.Eastern Communications Co., Ltd.Fujitsu LimitedGreat Dragon Information Technology Corporation Ltd.Guangzhou Jinpeng Group Co., Ltd.Hitachi Kokusai Electric Inc.Hitachi, Ltd.Huawei Technologies Co., Ltd.Hyundai Syscomm, Inc.interWAVE Advanced Communications, Inc.Kisan Telecom Co., Ltd.LG ElectronicsLucent Technologies Inc.Mitsubishi Electric CorporationMotorola, Inc.NEC CorporationNOKIA CorporationNortel Networks LimitedPanasonic Mobile Communications Co., Ltd.Panasonic Mobile Communications Co., Ltd.Samsung Electronics Co.Siemens AktiengesellschaftTelefonaktiebolaget LM EricssonZTE CorporationASICsAgere Systems Inc.EoNex Technologies, Inc.Infineon Technologies AGKoninklijke Philips Electronics N.VLucent Technologies Inc.Motorola, Inc.NEC CorporationPrairieComm IncorporatedTexas Instruments IncorporatedVIA Telecom, Inc.Test EquipmentActerna CorporationAdvantest CorporationAgilent Technologies, Inc.Allen Telecom Inc.Ando Electric Co., Ltd.Anritsu CorporationComarco Wireless Technologies, Inc.Hewlett-Packard CompanyIFR Systems, Inc.Japan Radio Co., Ltd.LCC International, Inc.Mobens Co., Ltd.Motorola, Inc.Panasonic Mobile Communications Co., Ltd.Racal Instruments LimitedRohde & Schwarz GmbH & Co. KGRotadata LimitedSage InstrumentsSpirent Communications, Inc.Tektronix, Inc.Telefonaktiebolaget LM EricssonUbiNetics Holdings plcWilltek CorporationNon-Standard SystemsSOMA Networks, Inc.Cable and RepeatersEC Telecom Inc.EMS Technologies, Inc.Transcept, Inc.United Computer & Telecommunication, Inc.Research & DevelopmentChunghwa Telecom Laboratories17Employees30, 2003,25, 2005, we employed approximately 7,4009,300 full-time, part-time and temporary employees.Available Information During fiscal 2005, the number of employees increased by approximately 300 from acquisitions and 1,400 primarily from increases in engineering resources.SEC.Securities and Exchange Commission (SEC). Our SEC reports can be accessed through the investor relations section of our Web site. Internet website.
Executive Officers
Anthony S. Thornley, age 57, was appointed President in February 2002 and Chief Operating Officer of the Company in July 2001. He served as Chief Financial Officer from March 1994 to February 2002 and as Executive Vice President from November 1997 to July 2001. Prior to joining the Company, he was with Nortel, a telecommunications equipment manufacturer, for sixteen years in various financial and information systems management positions, including Vice President Finance and IS, Public Networks, Vice President Finance NT World Trade and Corporate Controller Nortel Limited. He also worked for Coopers & Lybrand from 1970 to 1977. Mr. Thornley received his B.S. degree in Chemistry from the University of Manchester, England.
WilliamQUALCOMM Global Development.
Steven R. Altman,Jacobs, age 42, has served as a director since June 2005 and as our Chief Executive Vice President of the CompanyOfficer since November 1997. He also has served as President of the QUALCOMM Technology Licensing division since September 1995.July 2005. He served as General Counsel of the Company from October 1989 through September 2000. He was named Vice President in December 1992, was promoted to Senior Vice President in February 1996 and was promoted to Executive Vice President in November 1997. Prior to joining the Company in October 1989, he was a business lawyer in the San Diego law firm of Gray, Cary, Ware & Freidenrich, where he specialized in intellectual property, mergers and acquisitions, securities and general corporate matters. Mr. Altman received a B.S. degree from Northern Arizona University and a J.D. from the University of San Diego.
Roberto Padovani, age 49, was appointed Executive Vice President and Chief Technology Officer in January 2002. He joined the Company in 1986 where he has been involved in the design, development and standardization of second and third generation CDMA systems. Prior to joining QUALCOMM, Dr. Padovani was involved in the design and development of satellite communication systems, secure video systems and error-correcting coding equipment at M/A-COM LINKABIT in San Diego. Dr. Padovani received a Laureate degree from the University of Padova, Italy and M.S. and Ph.D. degrees from the University of Massachusetts, Amherst, all in electrical and computer engineering. He is a Fellow of the Institute of Electrical and Electronics Engineers.
Paul E. Jacobs, age 40, was appointed Group President of the QUALCOMM Wireless & Internet Group infrom July 2001. He oversees the QUALCOMM Technology Licensing division, the QUALCOMM Internet Services division,
18
the QUALCOMM Wireless Business Solutions division, and the QUALCOMM Digital Media division along with Corporate Marketing, Standards and the QUALCOMM Technology and Ventures unit. He has2001 to June 2005. In addition, he served as an Executive Vice President of the Company since February 2000. He served as President of the Consumer Products division from February 19972000 to February 2000 and as Senior Vice President of the Company and Vice President and General Manager of the Consumer Products division from April 1995 to February 1997. He joined the Company in September 1990 as Senior Engineer.June 2005. Dr. Jacobs holds a B.S. degree in Electrical Engineering and Computer Science, ana M.S. degree in Electrical Engineering and a 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 theour Board of Directors, and Chiefthe brother of Jeffrey A. Jacobs, President of QUALCOMM Global Development.
University of San Diego.
18
Louis Lupin, age 48, hasQUALCOMM Internet Services (QIS) since July 2001. Prior to that time she served as Senior Vice President and General CounselManager of the CompanyQIS from September 2000 to July 2001. Ms. Johnson holds a B.S. degree in Electrical Engineering from San Diego State University.
Further, if OFDMA technology is not adopted and deployed commercially, our anticipated investment in Flarion and OFDMA technology may not provide us a significant return on investment. wireless network operators have commercially deployed CDMA2000 A limited number of operators have started testing OFDMA technology, but there can be no assurance that OFDMA will be adopted or deployed commercially or that we will be successful in developing and marketing OFDMA products. Although we have hundreds of issued or pending patents relating to applications of GPRS, EDGE, OFDM, OFDMA and multi in, multi out (MIMO), there can be no assurance that our patent portfolio in these areas would be as valuable as our CDMA portfolio. 19isdeployment does not widely deployed,expand as anticipated, our revenues may not grow as anticipated.IfOFDMA has not been widely deployed commercially. Notwithstanding our portfolio of OFDMA/OFDM intellectual property, technology and products, if CDMA technology does not become the preferred wireless communications industry standard in the countries where our products and those of our customers and licensees are sold, or if wireless operators do not deployselect CDMA for their networks that utilize CDMAor update their current networks to any CDMA-based third generation technology, our business and financial results could suffer.3Gthird generation (3G) wireless communications equipment, products and services based on our CDMA technology. Although191X,and WCDMA, we cannot predict the timing or success of further commercial deployments of CDMA2000, 1X, WCDMA or other CDMA systems. If existing deployments are not commercially successful, or if new commercial deployments of CDMA2000, 1X, WCDMA or other CDMA systems are delayed or unsuccessful, our business and financial results may be harmed. In addition, our business could be harmed if wireless network operators deploy competing technologies or switch existing networks from CDMA to GSM or if wireless network operators introduce new technologies.CDMA technologyour technologies are dependent on the success of our customers and licensees. Our customers and licensees may incur lower operating margins on CDMA-based products based on our technologies than on products using alternative technologies due to greater competition in the CDMA-basedrelevant market lack of product improvements or other factors. If CDMA handsetphone and/or infrastructure manufacturers exit the CDMA market, the deployment of CDMA technology could be negatively affected, and our business could suffer.
The loss of any one of our QCT segment’s significant customers or the delay, even if only temporary, or cancellation of significant orders from any of these customers would reduce our revenues in the period of the cancellation or deferral and could harm our ability to achieve or sustain acceptabledesired levels of profitability. Accordingly, unless and until our QCT segment diversifies and expands its customer base, our future success will significantly depend upon the timing and size of future purchase orders, if any, from these customers. Factors that may impact the size and timing of orders from customers of our QCT segment include, among others, the following:
• | the product requirements of these customers; | ||
• | the financial and operational success of these customers; | ||
• | the success of these customers’ products that incorporate our products; | ||
• | value added features which drive replacement rates; | ||
• | shortages of key products and components; | ||
• | fluctuations in channel inventory levels; | ||
• | the success of products sold to our customers by licensed competitors; | ||
• | the rate of deployment of new technology by the wireless network operators and the rate of adoption of new technology by the end consumers; | ||
• | the extent to which certain customers successfully develop and produce CDMA-based integrated circuits and system software to meet their own needs; | ||
• | general economic conditions; | ||
• | changes in governmental regulations in countries where we or our customers currently operate or plan to operate; and | ||
• | widespread illness. |
Our QTL segment derives royalty revenues from sales of CDMA products by our licensees. WeAlthough we have more than 130 licensees, we derive a significant portion of our royalty revenue from a limited number of licensees. Our future success depends upon the ability of our licensees to develop, introduce and deliver high volume products that achieve and sustain market acceptance. We have little or no control over the sales efforts of our licensees, and we cannot assure you that our licensees will be successful or that the demand for wireless communications devices and services offered by our licensees will continue to increase. Any reduction in the demand for or any delay in the development, introduction or delivery of wireless communications devices utilizing our CDMA technology could have a material adverse effect on our business. Reductions in the average selling price of wireless communications devices utilizing our CDMA technology, without a comparable increase in the volumes of such devices sold, could have a material adverse effect on our business. Weakness in the value of foreign currencies in which our customers’ products are sold may reduce the amount of royalties payable to us in U.S. dollars.
20
21 QWI Segment Our QIS division derives revenue primarily from software development and services revenuesChanges in financial accounting standards related to our BREW product and services and a QChat licensing agreement with Nextel. We deriveshare-based payments are expected to have a significant portioneffect on our reported results.QIS revenuereported earnings, although it will not affect our cash flows, and could adversely impact our ability to provide accurate guidance on our future reported financial results due to the variability of the factors used to estimate the values of share-based payments. As a result, our adoption of the new standard in the first quarter of fiscal 2006 could negatively affect our stock price and our stock price volatility.network operators offering BREWfoundries and to contract directly with third party manufacturers for assembly and test services. The future successAny disruptions in the operations of, or the loss of, any of these third parties could harm our QIS divisionability to meet our delivery obligations to our customers and increase our cost of sales.upon theon available manufacturing capacity and our ability to obtain timely and adequate delivery of network operators, wireless device manufacturersparts and developerscomponents from our suppliers. A reduction or interruption in component supply, an inability of our partners to continue the momentumreact to rapid shifts in wireless data and sustain market acceptance for quality wireless applications and services. We cannot assure you that they will be successfuldemand or will not build or buy similar capacity such that they no longer require BREW services. We also cannot assure you that the demand for BREW services will continue to increase. Any reductiona significant increase in the demand for these servicescomponent prices could have a material adverse effect on our business.business or profitability. Component shortages could adversely affect our ability and that of our customers to ship products on a timely basis and our customers’ demand for our products. Any such shipment delays or declines in demand could reduce our revenues and harm our ability to achieve or sustain desired levels of profitability. Additionally, failure to meet customer demand in a timely manner could damage our reputation and harm our customer relationships potentially resulting in reduced market share.
• | |||
• | difficulty in protecting or enforcing our intellectual property rights and/or contracts in a particular foreign | ||
• | our inability to succeed in significant foreign markets, such as China, India or | ||
22
• | cultural differences in the conduct of business; | ||
• | difficulty in attracting qualified personnel and managing foreign activities; | ||
• | recessions in economies outside the United States; | ||
• | longer payment cycles for and greater difficulties collecting accounts receivable; | ||
• | export controls, tariffs and other trade protection measures; | ||
• | fluctuations in currency exchange rates; | ||
• | inflation and deflation; | ||
• | nationalization, expropriation and limitations on repatriation of cash; | ||
• | social, economic and political instability; | ||
• | natural disasters, acts of terrorism, widespread illness and war; | ||
• | taxation; and | ||
• | changes in laws and policies affecting trade, foreign |
21
regions may adversely affect our operating results because our products and those of our customers and licensees may become more expensive to purchase in the countries of the affected currencies. During fiscal 2003, 43%2005, 37% and 15%21% of our revenues were from customers and licensees based in South Korea and Japan, respectively, as compared to 37%43% and 18%, respectively, during fiscal 2002, respectively,2004, and 35%45% and 22%15% during fiscal 2001,2003, respectively. These customers based in South Korea and Japan sell their products to markets worldwide, including Japan, South Korea, North America, South America and Europe. A significant downturn in the economies of Asian countries where many of our customers and licensees are located, particularly the economies of South Korea and Japan, or the economies of the major markets they serve would materially harm our business.
23
• | Assets or liabilities of our consolidated subsidiaries and our foreign investees that are not denominated in the functional currency of those entities are subject to the effects of currency fluctuations, which may affect our reported earnings. Our exposure to foreign currencies may increase as we expand into new markets. | ||
• | Investments in our consolidated foreign subsidiaries and in other foreign entities that use the local currency as the functional currency may decline in value as a result of declines in local currency values. | ||
• | Certain of our revenues, such as royalty revenues, are derived from licensee or customer sales that are denominated in foreign currencies. If these revenues are not subject to foreign exchange hedging transactions, weakening of currency values in selected regions could adversely affect our anticipated revenues and cash flows. | ||
• | We may engage in foreign exchange hedging transactions that could affect our cash flows and earnings because they may require the payment of structuring fees, and they may limit the U.S. dollar value of royalties from licensees’ sales that are denominated in foreign currencies. | ||
• | Our trade receivables are generally | ||
• | Strengthening of currency values in selected regions may adversely affect our operating results because the activities of our foreign subsidiaries may become more expensive in U.S. dollars. | ||
• | Strengthening of currency values in selected regions may adversely affect our cash flows and investment results because strategic investment obligations denominated in foreign currencies may become more expensive, and the U.S. dollar cost of equity in losses of foreign investees may increase. |
22
Because we have made significant investments in and loans to CDMA wireless operators, our financial condition may be harmed if those CDMA wireless operators are not successful.
We have provided significant funding to CDMA wireless operators to promote the worldwide adoption of CDMA products and services. Due to financial and competitive challenges facing CDMA wireless operators, we cannot assure you that our investments will generate financial returns or that they will result in increased adoption or continued use of CDMA technologies. Domestic and international CDMA wireless operators to whom we have provided financing have limited operating histories, are faced with significant capital requirements, are highly leveraged and/or have limited financial resources. If these CDMA wireless operators are not successful, we may have to write down our investments in or loans to these wireless operators. Certain wireless operators to whom we have provided financing have defaulted on their obligations to us, and it is possible that others will default on their obligations to us in the future. Any such write-downs or defaults could have a material adverse effect on our financial condition and operating results. Due to currency fluctuations and international risks, foreign borrowers may become unable to pay their debts to us from revenues generated by their projects that are denominated in local currencies. Further, we may not be permitted to retain a security interest in any spectrum licenses held by foreign wireless operators that we finance. These spectrum licenses initially may constitute the primary asset of the wireless operators. The amount of financing that we have provided and that we could provide in the future is substantial. If we are unable to recover our investments in or loans to these CDMA wireless operators, our financial condition may be harmed. See “Notes to Consolidated Financial Statements, Note 2 – Marketable Securities, Note 3 – Composition of Certain Financial Statement Captions, Finance Receivables and Note 4 – Investments in Other Entities.”
We may engage in strategic transactions that could result in significant charges or management disruption and fail to enhance stockholder value.
We cannot assure you that our strategic investments (either those we currently hold or future investments) will generate financial returns or that they will result in increased adoption or continued use of CDMA technologies.
We depend upon a limited number of third party manufacturers to provide subassemblies and parts for our products. Any disruptions in the operations of, or the loss of, any of these third parties could harm our ability to meet our delivery obligations to our customers and increase our cost of sales.
QCT Segment
We subcontract all of the 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. IBM, Taiwan Semiconductor Manufacturing Co. and United Microelectronics are the primary foundry partners for our family of baseband integrated circuits. IBM, Motorola and Texas Instruments are the primary foundry partners for our family of radio frequency and analog integrated circuits. Our reliance on a sole-source vendor primarily occurs during the start-up phase of a new product. Once a new product reaches a significant volume level, we typically establish alternative suppliers for technologies that we consider critical. Our reliance on sole or limited-source vendors involves risks. These risks include possible shortages of capacity, product performance shortfalls, and reduced controls over delivery schedules, manufacturing capability, quality assurance, quantity and costs. We have no firm long-term commitments from our manufacturers to
23
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 may also be harmed by lengthy or recurring disruptions at any of the facilities of our manufacturers and may be harmed by disruptions in the distribution channels from our suppliers and to our customers. These disruptions may include labor strikes, work stoppages, widespread illness, terrorism, war, fire, earthquake, flooding or other natural disasters. These disruptions could cause significant delays in shipments until we are able to shift the products from an affected manufacturer to another manufacturer. The loss of a significant third-party manufacturer or the inability of a third-party manufacturer to meet performance and quality specifications or delivery schedules could harm our ability to meet our delivery obligations to our customers.
In addition, one or more of our manufacturers may obtain licenses from us to manufacture CDMA integrated circuits that compete with our products. In this event, the manufacturer could elect to allocate scarce components and manufacturing capacity to their own products and reduce deliveries to us. In the event of a loss of or a decision to change a key third-party manufacturer, qualifying a new manufacturer and commencing volume production or testing could involve delay and expense, resulting in lost revenues, reduced operating margins and possible loss of customers.
QWI Segment
Several of the critical subassemblies and parts used in our QWBS division’s existing and proposed products are currently available only from third-party single or limited sources. These include items such as electronic and radio frequency components, and other sophisticated parts and subassemblies which are used in the OmniTRACS, OmniExpress and GlobalTRACS products. These third parties include companies such as Tyco International (M/A Com), Rakon, Mini-Circuits, Cambridge Tool & Mfg., Andrew Corporation, American Design, Deutsch ECD, PCI Limited, KeyTronic EMS, Seavey Engineering Associates, Symbol Technologies, Navman NZ, Thomson-Airpax Mechatronics, Eagle-Picher Industries and Sony/Ericsson. Our reliance on sole or limited source vendors involves risks. These risks include possible shortages of certain key components, product performance shortfalls, and reduced control over delivery schedules, manufacturing capability, quality and costs. In the event of a long-term supply interruption, alternate sources could be developed in a majority of the cases. The inability to obtain adequate quantities of significant compliant materials on a timely basis could have a material adverse effect on our business, operating results, liquidity and financial position.
A reduction or interruption in component supply or a significant increase in component prices could have a material adverse effect on our business or profitability.
Our ability to meet customer demands depends, in part, on our ability to obtain timely and adequate delivery of parts and components from our suppliers and internal manufacturing capacity. We have experienced component shortages in the past, including components for our integrated circuit products, that have adversely affected our operations. Although we work closely with our suppliers to avoid these types of shortages, we may continue to encounter these problems in the future. Component shortages could adversely affect our ability and that of our customers and licensees to ship products on a timely basis and our customers’ or licensees’ demand for our products. Any such shipment delays or declines in demand could reduce our revenues and harm our ability to achieve or sustain acceptable levels of profitability. Additionally, failure to meet customer demand in a timely manner could damage our reputation and harm our customer relationships.
24
24
customers or licensees may also experience component or software failures or defects which could require significant product recalls, reworks and/or repairs which are not covered by warranty reserves and which could consume a substantial portion of the capacity of our third-party manufacturers or those of our customers or licensees. Resolving any defect or failure related issues could consume financial and/or engineering resources that could affect future product release schedules.
Additionally, a defect or failure in our products or the products of our customers or licensees could harm our reputation and/or adversely affect the growth of 3G wireless markets.
• | comprehensiveness of products and technologies; | ||
• | value added features which drive replacement rates; | ||
• | manufacturing capability; | ||
• | scalability and the ability of the system technology to meet customers’ immediate and future network requirements; | ||
• | product performance and quality; | ||
• | design and engineering capabilities; | ||
• | compliance with industry standards; | ||
• | time to market; | ||
• | system cost; and | ||
• | customer support. |
25
Our competitors include companies
25
those offering low cost terrestrial-based products and current as well as future satellite-based systems,which may impact margins, and intensify competition in new markets. Similarly, some original equipment manufacturers of trucks and truck components are beginning to offer built-in, on-board communications and position location reporting systems that may impact our margins and intensify competition in our current and new markets. Some potential competitors of our QWBS business, if they are successful, maymarkets and harm our ability to compete in certain markets.
• | longer operating histories and presence in key markets; | ||
• | greater name recognition; | ||
• | motivation by our customers in certain circumstances to find alternate suppliers; | ||
• | access to larger customer bases; and | ||
• | greater sales and marketing, manufacturing, distribution, technical and other resources than we have. |
Our cash investments represent a significant asset that may be subject to fluctuating or even negative returns depending upon interest rate movements and financial market conditions in fixed income and equity securities.
26
• | announcements concerning us or our competitors, including the selection of wireless communications technology by wireless operators and the timing of the roll-out of those systems; | ||
• | receipt of substantial orders or order cancellations for integrated circuits and system software products; | ||
• | quality deficiencies in services or products; | ||
• | announcements regarding financial developments or technological innovations; | ||
• | international developments, such as technology mandates, political developments or changes in economic policies; |
26
• | lack of capital to invest in 3G networks; | ||
• | new commercial products; | ||
• | changes in recommendations of securities analysts; | ||
• | government regulations, including stock option accounting and tax regulations; | ||
• | energy blackouts; | ||
• | acts of terrorism and war; | ||
• | inflation and deflation; | ||
• | widespread illness; | ||
• | proprietary rights or product or patent | ||
• | strategic transactions, such as acquisitions and divestitures; or | ||
• | rumors or allegations regarding our financial disclosures or practices. |
In addition, stock volatility may be precipitated by failure to meet earnings expectations or other factors, such as the potential uncertainty in future reported earnings created by the adoption of option expensing and the related valuation models used to determine such expense.
27
• | rapid technological advances and evolving industry standards; | ||
• | changes in customer requirements; | ||
• | frequent introductions of new products and enhancements; | ||
• | evolving methods for transmission of | ||
• | intense competition from companies with greater resources, customer relationships and distribution capabilities. |
27
introduction or shipment of our products and technology in commercial quantities, demand for our products and our customers’ and licensees’ products that use our technology could decrease, and our competitive position could be damaged.
We cannot be certain that the laws and policies of any country, including the United States, or the practices of any of the international standards bodies, foreign or domestic, with respect to intellectual property enforcement or licensing, issuance of wireless licenses or the adoption of standards, will not be changed in a way detrimental to our licensing program or to the sale or use of our products or technology. Any action we take to influence such potential changes could absorb significant management time and attention, which, in turn, could negatively impact our operating results.
28
28
business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are regularly under audit by tax authorities. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different than that which is reflected in historical income tax provisions and accruals. Should additional taxes be assessed as a result of an audit or litigation,In such case, a material effect on our income tax provision and net income in the period or periods forin which that determination is made could result.
29
29
manner.2012. A failure to maintain adequate satellite capacity wouldcould harm our business, operating results, liquidity and financial position.
Our OmniExpress, LINQ, GlobalTRACS, QConnect and OmniOne systems are QWBS terrestrial-based products and thus rely on various wireless terrestrial communicationscommunication networks operated by third parties. We believe these terrestrial networks will be available for our products; however, we cannot assure you that these networks will continue to be available to us or that they will perform adequately for our needs. The unavailability or nonperformance of these network systems could harm our business.
30
30
For example, any changes requiring that we record compensation expense in the statement of operations for employee stock options using the fair value method or changes in existing taxation rules related to stock options could have a significant negative effect on our reported results. Several agencies and entities are considering, and the Financial Accounting Standards Board has announced, proposals to change generally accepted accounting principles in the United States that, if implemented, would require us to record charges to earnings for employee stock option grants. This pending requirement would negatively impact our earnings. For example, recording a charge for employee stock options under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” would have reduced our net income by $260 million and $234 million for fiscal 2003 and 2002, respectively, and increased our net loss by $167 million for fiscal 2001.
31
new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.time. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest resources to complyComplying with evolving laws, regulationsinterpretations of new or changed legal requirements may cause us to incur higher costs as we revise current practices, policies and standards,procedures, and this investment may result in increased general and administrative expenses and a diversion ofdivert management time and attention from revenue-generating activitiesrevenue generating to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may also be harmed. In addition, it has become more difficult and more expensive for us to obtain director and officer liability insurance, and we have purchased reduced coverage at substantially higher cost than in the past. Further, our board members, chief executive officer and chief financial officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified board members and executive officers, which could harm our business.
31
32
3330, 2003,25, 2005, we occupied the indicated square footage in the owned or leased facilities described below (in(square footage in thousands): Number Total of Square Buildings Location Status Footage Primary Use 12 United States Owned 1,516 Executive and administrative offices, manufacturing, research and development, sales and marketing, service functions, and network management hub. 27 United States Leased 699 Administrative offices, research and development, sales and marketing, service functions, and network management hub. 9 Brazil Owned 264 Administrative offices, sales and marketing, service functions and network operating centers. 33 Brazil Leased 414 Administrative offices, sales and marketing, service functions and network operating centers. 5 Mexico Leased 31 Administrative offices, sales and marketing, service functions and network operating centers. 2 Korea Leased 31 Administrative offices and sales and marketing. 2 Japan Leased 17 Administrative offices and sales and marketing. 1 Israel Leased 38 Administrative offices and research and development. 1 Netherlands Leased 20 Administrative offices, sales and marketing and research and development. 2 England Leased 21 Administrative offices, sales and marketing and research and development. 4 China Leased 73 Administrative offices, sales and marketing and research and development. 18 Other international Leased 35 Administrative offices and sales and marketing. Total square footage 3,159 Number Total of Square Buildings Location Status Footage Primary Use 15 United States Owned 1,860 Executive and administrative offices, research and development, sales and marketing, service functions, manufacturing and network management hub. 36 United States Leased 1,232 Administrative offices, research and development, sales and marketing, service functions and network management hub. 7 Mexico Leased 125 Administrative offices, sales and marketing, service functions, manufacturing and network operating centers. 3 China Leased 83 Administrative offices, research and development, sales and marketing, service functions and network operating centers. 5 Korea Leased 60 Administrative offices, research and development and sales and marketing. 1 India Owned 56 Administrative offices, research and development and sales and marketing. 4 England Leased 52 Administrative offices, research and development and sales and marketing. 5 India Leased 41 Administrative offices, research and development and sales and marketing. 1 Israel Leased 38 Administrative offices, research and development and sales and marketing. 4 Germany Leased 22 Administrative offices, research and development and sales and marketing. 56 Other International Leased 146 Administrative offices, research and development and sales and marketing. Total square footage 3,715 1,333,884approximate 661,000 square feet of properties that are leased or subleased to third parties. Our leases expire at varying dates through 20122015 not including renewals that would be at our option.
In fiscal 2003, we began
to seek litigation costs against them. district court. 34Schwartz, et al v. QUALCOMM: 87 former QUALCOMM employees filed a lawsuit against us in the District Court for Boulder County, Colorado, alleging claims for intentional misrepresentation, nondisclosure and concealment, violation of C.R.S. Section 8-2-104 (obtaining workers by misrepresentation), breach of contract, breach of the implied covenant of good faith and fair dealing, promissory estoppel, negligent misrepresentation, unjust enrichment, violation of California Labor Code Section 970, violation of California Civil Code Sections 1709-1710, rescission, violation of California Business & Professions Code Section 17200 and violation of California Civil Code Section 1575. The complaint seeks economic, emotional distress and punitive damages and unspecified33amounts of interest. On November 29, 2001, the Court granted our motion to dismiss 17 of the plaintiffs from the lawsuit. Subsequently, the Court dismissed three other plaintiffs from the lawsuit. On November 18, 2002, the Court granted our motion to dismiss 61 of the remaining 67 plaintiffs from the lawsuit. We subsequently resolved the matters with the remaining plaintiffs. Those plaintiffs whose claims were dismissed have appealed. Although there can be no assurance that an unfavorable outcome of the dispute would not have a material adverse effect on our operating results, liquidity or financial position, we believe the claims are without merit and will vigorously defend the action.Hanig et al. v. QUALCOMM, Boesel, et al v. QUALCOMM, Stone et al v. QUALCOMM, Ortiz et al v. QUALCOMM, Shannon et al. v. QUALCOMM, Deshon et al v. QUALCOMM, Earnhart et al. v. QUALCOMM.These cases were filed in San Diego County Superior Court by over 100 former employees, alleging claims for declaratory relief, breach of contract, intentional/negligent fraud, concealment, rescission, specific performance, work, labor and services, breach of the implied covenant of good faith and fair dealing, violation of California Business & Professions Code Section 17200 and unjust enrichment, claiming that they were entitled to full vesting of unvested stock options as a result of the sale of our infrastructure business to Ericsson in 1999. We have answered the complaints, which have been consolidated. Although there can be no assurance that an unfavorable outcome of the dispute would not have a material adverse effect on our operating results, liquidity or financial position, we believe the claims are without merit and will vigorously defend the action.GTE Wireless Incorporated (GTE) v. QUALCOMM:On June 29, 1999, GTE filed an action against us in the United States District Court for the Eastern District of Virginia seeking damages and injunctive relief and asserting that wireless telephones sold by us infringe a single patent allegedly owned by GTE. On September 15, 1999, the Court granted our motion to transfer the action to the United States District Court for the Southern District of California. On February 14, 2002, the District Court granted our motion for summary judgment that our products did not infringe GTE’s asserted patent and denied GTE’s motion seeking summary judgment of infringement. On July 14, 2003, GTE and we entered into a settlement agreement dismissing all claims and counterclaims with prejudice.QUALCOMM:QUALCOMM: On February 2, 2000, three former employees filed a putative class action against us, ostensibly on behalf of themselves and those former employees of ours whose employment was terminated in April 1999. Virtually all of the purported class of plaintiffs received severance packages at the time of the termination of their employment, in exchange for a release of claims, other than federalalleging unlawful age discrimination claims, against us. The complaint was filed in California Superior Courttheir selection for layoff in 1999, and for the County of Los Angeles and purports to state ten causes of action including breach of contract, age discrimination, violation of Labor Code Section 200, violation of Labor Code Section 970, unfair business practices, intentional infliction of emotional distress, unjust enrichment, breach of the covenant of good faith and fair dealing, declaratory relief and undue influence. The complaint seeks an order accelerating all unvested stock options for the members of the class, plus economic and liquidatedseeking monetary damages of an unspecified amount. On June 27, 2000, the case was ordered transferred from Los Angeles County Superior Court to San Diego County Superior Court. On July 3, 2000, we removed the case to the United States District Court for the Southern District of California, and discovery commenced. On May 29, 2001, the Court dismissed all plaintiffs’ claims except for claims arising under the federal Age Discrimination in Employment Act. On July 16, 2001, the Court granted conditional class certification on the remaining claims, to be revisited by the Court at the end of the discovery period. On April 15, 2003, the Court granted our summary judgment motions as to all remaining class members’ disparate impact claims.based thereon. On June 18, 2003, the Court ordered decertification of the class and dismissed theall remaining claims of the opt-in plaintiffs without prejudice. Plaintiffs have filed an appeal.plaintiffs. On August 1, 2005, the Ninth Circuit Court of Appeals upheld the judgment in our favor. On June 20, 2003, 76 of the opt-in plaintiffs filed, anbut did not serve, a new action in Federal District Court for the Southern District of California,same court, alleging violations of the Age Discrimination in Employment Act as a result of their layoffs in 1999. To date, the complaint hasAll plaintiffs have now dismissed all remaining claims in exchange for our agreement not been served. Although there can be no assurance that an unfavorable outcome of these disputes would not have a material adverse effect on our operating results, liquidity or financial position, we believe the claims are without merit and will vigorously defend the actions.SnapTrack:SnapTrack, Inc.: On March 30, 2001, Zoltar Satellite Alarm Systems, Inc. (Zoltar) filed suit against us and SnapTrack, Inc. (Snaptrack), a QUALCOMM wholly-owned subsidiary, in the United States District Court for the Northern District of California seeking monetary damages and injunctive relief and allegingbased on the alleged infringement of three patents. On August 27, 2001,Following a verdict and finding of no infringement of Zoltar’s patent claims, the Court entered a judgment in our and Snaptrack’s favor on Zoltar’s complaint and awarded us and SnapTrack our costs of suit. Zoltar filed an amended complaint adding Sprint Corp. as a named defendantnotice of appeal, and narrowing certain infringement claims againstwe and SnapTrack filed a responsive notice and us. Since then, Zoltar hasmotion to dismiss. Zoltar’s appeal was dismissed Sprint Corp. asand the issue of reaching a defendant. On September 23, 2002,final judgment on issues aside from non-infringement is pending before the court denied Zoltar’s motion for summary judgment that the accused products infringe. Since then, the court has denied a second motion for summary judgment34by Zoltar and denied summary judgment motions by us with leave to renew the motions at trial. The court is also considering further claim construction and will consider further evidence on invalidity prior to trial. Trial is currently set for February 24, 2004. Although there can be no assurance that an unfavorable outcome of this dispute would not have a material adverse effect on our operating results, liquidity or financial position, we believe the claims are without merit and will vigorously defend the action.Texas Instruments:QUALCOMM Incorporated v. Maxim Integrated Products, Inc.:On July 25, 2003,December 2, 2002, we filed an action in Delaware Superiorthe United States District Court for the Southern District of California against Texas Instruments Incorporated for breachMaxim alleging infringement of a patent portfolio license agreement between the parties,three patents and seeking monetary damages and other relief.injunctive relief based thereon. We amended the complaint, bringing the total number of patents at issue to four and adding misappropriation of trade secret and unfair competition claims. Maxim counterclaimed against us, alleging antitrust violations, patent misuse and unfair competition seeking monetary damages and injunctive relief based thereon. On September 23, 2003, Texas InstrumentsMay 5, 2004, the Court granted Maxim’s motion that no indirect infringement arose in connection with defendants’ sales of certain products to certain of our licensees. A motion we made for preliminary injunction regarding the alleged trade secret misappropriations by Maxim was heard on January 4, 2005. The Court found that Maxim had acted unlawfully by misappropriating our trade secrets and issued an injunction order prohibiting further misappropriation and requiring Maxim to notify customers of the order. Maxim has sought appellate review of the injunction order.Delaware Chancerythe United States District Court for the District of New Jersey against us alleging breachviolations of the same agreement,state and federal antitrust and unfair competition laws as well as common law claims, generally relating to licensing and chip sales activities, seeking monetary damages and other relief. Although there can be no assurance thatinjunctive relief based thereon. Discovery has commenced in the actions.unfavorable outcomeaction in the United States District Court for the Southern District of California against Broadcom alleging infringement of seven patents, each of which is essential to the action brought by Texas Instruments would not have a material adverse effect on our operating results, liquiditypractice of either the GSM or financial position, we believe the claims are without merit802.11 standards, and will vigorously defendseeking monetary damages and injunctive relief based thereon. On September 23, 2005, Broadcom answered and counterclaimed, alleging infringement of six patents. Discovery has yet to begin in the action.
We have not recorded any accrual for contingent liability associated with the legal proceedings described above based on our belief that a liability, while possible, is not probable. Further, any possible range of loss cannot be estimated at this time. We are engaged in numerous other legal actions arising in the ordinary course of ourits business and believe that the ultimate outcome of these actions will not have a material adverse effect on our operating results, liquidity or financial position. In addition, some matters that have previously been disclosed may no longer be described because of rulings in the case, settlements, changes in our business or other developments rendering them, in our judgment, no longer material to our operating results, liquidity or financial position.
3530, 2003.25, 2005.
PART II
and Issuer Purchases of Equity Securities 36and Related Stockholder MattersInformation.Information High ($) Low ($) First Quarter 62.49 38.31 Second Quarter 53.34 31.03 Third Quarter 40.35 24.49 Fourth Quarter 31.39 23.21 First Quarter 42.89 27.33 Second Quarter 39.95 32.63 Third Quarter 38.18 29.58 Fourth Quarter 46.05 34.33 High ($) Low ($) First quarter 26.82 20.50 Second quarter 32.64 26.40 Third quarter 35.03 30.90 Fourth quarter 41.17 33.66 First quarter 44.99 37.71 Second quarter 44.91 33.99 Third quarter 38.52 32.08 Fourth quarter 44.92 32.98 November 3, 2003,October 31, 2005, there were 10,32410,595 holders of record of our common stock. On November 3, 2003,October 31, 2005, the last sale price reported on the NASDAQ National Market for our common stock was $48.25$39.76 per share.February 11, 2003, we committed up to $1 billion to repurchase shares of our common stock over a two year period. During fiscal 2003, we bought 4,915,000 shares at a net aggregate cost of $158 million. On February 11, 2003, we announced our first common stock dividend of $0.05 per share. On July 16, 2003,March 2, 2004, we announced an increase in our quarterly dividend from $0.05$0.035 to $0.07$0.050 per share on our common stock. On July 13, 2004, we announced an increase in our quarterly dividend from $0.050 to $0.070 per share on our common stock. On March 8, 2005, we announced an increase in our quarterly dividend from $0.070 to $0.090 per share on our common stock. Cash dividends announced in fiscal 20032004 and 2005 were as follows (in thousands,millions, except per share data): Fiscal 2003 Per Share Total Cumulative First Quarter $ — $ — $ — Second Quarter $ 0.05 39,461 39,461 Third Quarter $ 0.05 39,546 79,007 Fourth Quarter $ 0.07 55,769 134,776 Total $ 0.17 $ 134,776
Cumulative | ||||||||||||
Per Share | Total | by Fiscal Year | ||||||||||
Fiscal 2004 | ||||||||||||
First quarter | $ | 0.07 | (1) | $ | 112 | $ | 112 | |||||
Second quarter | 0.05 | 81 | 193 | |||||||||
Third quarter | — | (2) | — | 193 | ||||||||
Fourth quarter | 0.07 | 114 | $ | 307 | ||||||||
Total | $ | 0.19 | $ | 307 | ||||||||
Fiscal 2005 | ||||||||||||
First quarter | $ | 0.07 | $ | 115 | $ | 115 | ||||||
Second quarter | 0.07 | 115 | 230 | |||||||||
Third quarter | 0.09 | 147 | 377 | |||||||||
Fourth quarter | 0.09 | 147 | $ | 524 | ||||||||
Total | $ | 0.32 | $ | 524 | ||||||||
(1) | In the first quarter of fiscal 2004, we announced two dividends of $0.035 per share which were paid in the first and second quarters of fiscal 2004. | |
(2) | We paid a dividend of $0.05 per share in the third quarter of fiscal 2004 that had been announced in the second quarter of fiscal 2004. |
Employee
36
the grant date. We also may grant options pursuant to our 2001 Non-Employee Directors’ Stock Option Plan (the 2001 Directors’ Plan). This plan provides for non-qualified stock options to be granted to non-employee directors at an exercise price of not less than fair market value of the stock at the date of grant, vesting over periods not exceeding five years and exercisable for up to ten10 years from the grant date. The Board of Directors may terminate the 2001 Plan and/or the 2001 Directors’ Plan at any time though it must, nevertheless, honor any stock options previously granted pursuant to the plans.
Information aboutSecurities
Number of | Weighted | Number of | ||||||||||
Shares to be | Average | Shares | ||||||||||
Issued Upon | Exercise | Remaining | ||||||||||
Exercise of | Price of | Available for | ||||||||||
Outstanding | Outstanding | Future | ||||||||||
Plan Category | Options | Options | Issuance | |||||||||
Equity compensation plans approved by stockholders(a) | 106,150 | $ | 34.66 | 21,744 | ||||||||
Equity compensation plans not approved by stockholders(b) | 336 | $ | 2.03 | 66 | ||||||||
Total | 106,486 | $ | 34.56 | 21,810 | ||||||||
37
Consolidated Financial Data20032001 were derived from our audited consolidated financial statements. Consolidated balance sheets at September 30, 200325, 2005 and 2002September 26, 2004 and the related consolidated statements of operations and of cash flows for each of the three years in the period ended September 30,fiscal 2005, 2004 and 2003 and notes thereto appear elsewhere herein. The data should be read in conjunction with the annual consolidated financial statements, related notes and other financial information appearing elsewhere herein. Years Ended September 30 (1) 2003 2002 2001 2000 1999 (in thousands except per share data) Revenues $ 3,970,636 $ 3,039,560 $ 2,679,786 $ 3,196,780 $ 3,937,299 Operating income 1,310,235 673,268 38,687 722,638 405,140 Income (loss) before accounting change 827,441 359,677 (560,141 ) 622,146 200,879 Accounting changes, net of tax — — (17,937 ) — — Net income (loss) $ 827,441 $ 359,677 $ (578,078 ) $ 622,146 $ 200,879 Basic earnings (loss) per common share (2): Income (loss) before accounting change $ 1.05 $ 0.47 $ (0.74 ) $ 0.87 $ 0.34 Accounting change, net of tax — — (0.02 ) — — Net income (loss) $ 1.05 $ 0.47 $ (0.76 ) $ 0.87 $ 0.34 Diluted earnings (loss) per common share (2): Income (loss) before accounting change $ 1.01 $ 0.44 $ (0.74 ) $ 0.79 $ 0.31 Accounting change, net of tax — — (0.02 ) — — Net income (loss) $ 1.01 $ 0.44 $ (0.76 ) $ 0.79 $ 0.31 Cash dividends per share $ 0.17 $ — $ — $ — $ — Shares used in earnings per share calculations (2): Basic 789,586 770,887 755,969 717,205 594,714 Diluted 817,755 809,329 755,969 800,121 649,889 Pro forma effect of change in accounting principle (3): Net income $ 595,116 $ 209,062 Net earnings per common share - basic $ 0.83 $ 0.35 Net earnings per common share - diluted $ 0.75 $ 0.32 Cash, cash equivalents and marketable securities $ 5,371,751 $ 3,199,512 $ 2,580,512 $ 2,520,914 $ 1,684,926 Total assets 8,822,436 6,506,048 5,669,733 6,014,917 4,534,950 Long-term debt 123,302 94,288 235 266 795 Company-obligated mandatorily redeemable Trust Convertible Preferred Securities of a subsidiary trust holding solely debt securities of the Company — — — — 659,555 Total stockholders’ equity $ 7,598,572 $ 5,391,956 $ 4,812,415 $ 5,468,263 $ 2,871,755 Years Ended (1) September 25, September 26, September 28, September 29, September 30, 2005 2004 (2)(5) 2003 (2) 2002 (2) 2001 (1)(3) (in millions, except per share data) Revenues $ 5,673 $ 4,880 $ 3,847 $ 2,915 $ 2,680 Operating income 2,386 2,129 1,573 840 39 Income (loss) from continuing operations before accounting change 2,143 1,725 1,029 525 (560 ) Discontinued operations, net of tax — (5 ) (202 ) (165 ) — Accounting changes, net of tax — — — — (18 ) Net income (loss) $ 2,143 $ 1,720 $ 827 $ 360 $ (578 ) Basic earnings (loss) per common share (4): Income (loss) from continuing operations before accounting change $ 1.31 $ 1.07 $ 0.65 $ 0.34 $ (0.37 ) Discontinued operations, net of tax — (0.01 ) (0.13 ) (0.11 ) — Accounting change, net of tax — — — — (0.01 ) Net income (loss) $ 1.31 $ 1.06 $ 0.52 $ 0.23 $ (0.38 ) Diluted earnings (loss) per common share (4): Income (loss) from continuing operations before accounting change $ 1.26 $ 1.03 $ 0.63 $ 0.32 $ (0.37 ) Discontinued operations, net of tax — — (0.12 ) (0.10 ) — Accounting change, net of tax — — — — (0.01 ) Net income (loss) $ 1.26 $ 1.03 $ 0.51 $ 0.22 $ (0.38 ) Dividends per share announced $ 0.320 $ 0.190 $ 0.085 — — Shares used in earnings per share calculations (4): Basic 1,638 1,616 1,579 1,542 1,512 Diluted 1,694 1,675 1,636 1,619 1,512 Cash, cash equivalents and marketable securities $ 8,681 $ 7,635 $ 5,372 $ 3,200 $ 2,581 Total assets 12,479 10,820 8,822 6,506 5,670 Long-term debt — — 123 94 — Total stockholders’ equity 11,119 9,664 7,598 5,392 4,812 (1) Our fiscal year ends on the last Sunday in September. As a result, fiscal 2001 includesincluded 53 weeks. (2) (2)During fiscal 2004, we sold our consolidated subsidiaries, the Vésper Operating Companies and TowerCo, and returned personal mobile service (SMP) licenses to Anatel, the telecommunications regulatory agency in Brazil. The results of operations, including gains and losses realized on the sales transactions and the SMP licenses, are presented as discontinued operations. (3) During fiscal 2001, we accounted for our investment in the Vésper Operating Companies under the equity method of accounting and recorded $150 million in equity in losses of those entities in income (loss) from continuing operations before accounting change. (4) We effected a two-for-one stock split in May 1999 and a four-for-one stock split in December 1999.August 2004. All references to number of shares and per share amounts have been restated to reflect thesethis stock splits.split. (3)(5) Prior to the fourth quarter of fiscal 2004, we recorded royalty revenues from certain licensees based on our estimates of royalties during the period they were earned. Starting in the fourth quarter of fiscal 2004, we began recognizing royalty revenues solely based on royalties reported by licensees during the quarter. The pro formachange in the timing of recognizing royalty revenue was made prospectively and had the initial one-time effect of changereducing royalty revenues recorded in accounting principle reflects the impactfourth quarter of SAB 101 on previously reported results assuming it had beenfiscal 2004. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in effect in those periods.this Annual Report for more information.
38
Operating Segments 39• CDMA-based 3G subscribers to wireless operators’ services grew to at least 213 million worldwide through September 2005, including at least 15 million 1xEV-DO subscribers and at least 35 million WCDMA subscribers, according to data from a large portion of the wireless operators around the world. • CDMA-based handset shipments by manufacturers to wireless operators during the period July 2004 through June 2005 totaled approximately 182 million units at an average selling price of approximately $215 based on reports in fiscal 2005 by our licensees. • The ratio of WCDMA reported royalties to total reported royalties grew from approximately 26% reported in the fourth quarter of fiscal 2004 to approximately 41% reported in the fourth quarter of fiscal 2005. • Through October 2005, six manufacturers in China have been added, at our standard worldwide WCDMA royalty rates, to the more than 60 companies that have licensed our WCDMA patent portfolio. • During fiscal 2005, we shipped approximately 151 million Mobile Station Modem (MSM) integrated circuits for CDMA-based phones and data modules (nearly all of which were 3G, including CDMA2000 1X, 1xEV-DO and WCDMA) compared to approximately 137 million MSM integrated circuits in the prior fiscal year. During fiscal 2005, seven new customers selected our WCDMA (UMTS) MSM integrated circuits for their WCDMA phone products bringing the total number of WCDMA customers to 32, 16 of which have been publicly announced. • As of September 2005, 56 wireless operators were offering BREW services in 29 countries, including customers acquired related to the ELATA acquisition. As reported in June 2005, BREW publishers and developers have earned more than $350 million to date from the sale of wireless applications and services developed for the BREW service. Through September 2005, three operators, including ALLTEL, have entered into agreements to license our uiOne user interface technology. • During fiscal 2005, we continued to invest in new emerging technologies through strategic acquisitions and research and development. We completed four acquisitions this year, including Iridigm, Trigenix, Spike and ELATA, and announced our intent to acquire Flarion. Each of these acquisitions provides us complementary or expanded offerings to our existing technologies. • During the fourth quarter of fiscal 2005, MediaFLO conducted the first live, over-the-air demonstration of FLO technology. The demonstration featured over-the-air delivery and viewing of multiple channels of high quality (QVGA) wireless multimedia content, both streaming video and multicast packet data, on a wireless handset. consolidated financial data includes SnapTrack, Inc., Vésper Holding Ltd.Business and other consolidated subsidiaries.Overviewfromfor use of our intellectual property, from services and related hardware sales and from software development and licensing and related services. Operating expenses primarily consist of cost of equipment and services, revenues, research and development and selling, general and administrative amortization of acquisition-related intangible assets, and asset impairment charges.expenses.
Our
Our QUALCOMM Technology Licensing (QTL) segment
Our QUALCOMM Wireless & Internet (QWI) segment,
Our QUALCOMM Strategic Initiatives (QSI) segment
Global economic weakness can have wide-ranging effects on marketsthe Iridigm business, a display technology company that we serve, particularly wireless communications equipment manufacturers and network operators. The wireless communications industry recently appears to be recovering from an industry-wide recession. We cannot predict whether a recovery will continue, the rate of such recovery, or what effects negative events, such as war, may have on the economy. Further, an economic recovery may not benefit usacquired in the near term. If it does not, our ability to increase or maintain our revenuesfirst quarter of fiscal 2005, and operating results may be impaired. To increase our revenues and market share in future periods, we are dependentother product initiatives.
40
39
• | Operators on the CDMA2000 technology path are deploying 1xEV-DO and are preparing to deploy EV-DO Revision A. Many GSM operators are migrating their networks to WCDMA and are preparing to deploy HSDPA (High Speed Downlink Packet Access). The deployment of these 3G networks enables higher voice capacity and data rates, thereby supporting more minutes of use and data intensive applications like multimedia. | ||
• | As of October 2005, 87 WCDMA networks have launched, as reported by the Global Mobile Suppliers Association, an international organization of WCDMA and GSM (Global System for Mobile Communications) suppliers. We expect that the WCDMA market will continue to expand as operators transition their subscribers to WCDMA devices on these WCDMA networks. | ||
• | We expect that volume increases and growing competition among WCDMA phone manufacturers and WCDMA integrated circuit suppliers will help decrease WCDMA phone prices significantly and drive growth of WCDMA phone sales worldwide. | ||
• | We expect that growing demand for advanced 3G phones and devices will continue to drive the need for increased multimedia MSM functionality. To meet this market need, we intend to continue to invest significant resources toward multimedia functionality. | ||
• | We expect growing demand for low end phones to continue and have invested resources for single chip solutions which combine the baseband, radio frequency and power management chips into one package. We believe lower component counts and further integration will drive costs down and enable faster time to market to meet the increasing demand for low end phones. While we are moving aggressively to address the low end market more effectively with CDMA-based products, we still face significant competition from GSM-based products in this market. | ||
• | We also expect growing demand for high end, multimedia phones with added functionality and capability at a high price point. | ||
• | The expiration of royalty-sharing obligations under two agreements, one in fiscal 2005 and the other in fiscal 2006, will contribute to an increase in our royalty revenues in fiscal 2006 and beyond. | ||
• | We will continue our development efforts with respect to our BREW applications development platform, our new MediaFLO Multimedia Distribution System (MDS) and FLO technology for low cost delivery of multimedia content to multiple subscribers simultaneously and our iMoD display technology. |
market share. We currentlycontinue to face significant competition in our marketsfrom non-CDMA technologies, as well as competition from companies offering other CDMA-based products. Recent reports suggest that inflation could have adverse effects on the global economy and expect that competition will continue. This competition may result in reduced average selling prices for our products and those of our customers and licensees. Reductions in the average selling price of our licensees’ products generally result in reduced average royalties. While pricing pressures resulting from competition may,capital markets. You should also refer to a large extent, be mitigated by the introduction of new features and functionality in our licensees’ products, there is no guarantee that such mitigation will occur.
We will continue to expand our international sales operations and enter new international markets. This expansion will require significant management attention and financial resources to successfully develop direct and indirect international sales and support channels, and we cannot assure you that we will be successful or that our expendituresRisk Factors included in this effort will not exceed the amountAnnual Report for further discussion of any resulting revenues. If we are not ablethese and other risks related to maintain or increase international market demand for our products and technologies, then we may not be able to maintain an acceptable rate of growth in our business.
41
We derive revenue principally from sales of integrated circuit products, from royalties and license fees for our intellectual property, from messaging and other services and related hardware sales and from software development and licensing and related services, and from license fees for intellectual property.services. The timing of revenue recognition and the amount of revenue actually recognized in each case depends upon a variety of factors, including the specific terms of each arrangement and the nature of our deliverables and obligations. Determination of the appropriate amount of revenue recognized involves judgments and estimates that we believe are reasonable, but it is possible that actual results may differ from our estimates.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), “Revenue Recognition in Financial Statements” which we adopted in the fourth quarter of fiscal 2001 and applied retroactively to the first quarter of fiscal 2001. We recognized $44 million, $66 million and $95 million during fiscal 2003, 2002 and 2001, respectively, in operating income related to revenue and expense that were recognized in prior years.
40
In November 2002, the Emerging Issues Task Force (EITF) issued Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” which we adopted in the fourth quarter of fiscal 2003. This issue addresses determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how arrangement consideration should be measured and allocated to the separate units of accounting. Beginning with the adoption of SAB 101 until the fourth quarter of fiscal 2003, we recognized revenues and expenses from sales of certain satellite and terrestrial-based two-way data messaging and position reporting hardware and related software products by our QWBS division ratably over the shorter of the estimated useful life of the hardware product or the expected messaging service period, which is typically five years. SAB 101 required the ratable recognition of these sales because the messaging service was considered integral to the functionality of the hardware and software. Because EITF Issue No. 00-21 does not require the deferral of revenue when an undelivered element is considered integral to the functionality of a delivered element and because EITF Issue No. 00-21 otherwise requires separate unit accounting, we began recognizing revenues and expenses from such sales starting in the fourth quarter of fiscal 2003 at the time of shipment, or when title and risk of loss pass to the customer and other criteria for revenue recognition are met, if later. We have elected to adopt EITF Issue No. 00-21 prospectively for revenue arrangements entered into after the third quarter of fiscal 2003, rather than reporting the change in accounting as a cumulative-effect adjustment. As a result, during the fourth quarter of fiscal 2003, we recognized certain revenue and related cost of sales for QWBS equipment sales upon shipment, while continuing to amortize unearned revenue and cost of sales, with an $11 million gross margin effect, for units shipped in prior periods. Deferred revenues and expenses related to the historical QWBS sales that will continue to be amortized in future periods were $183 million and $102 million, respectively, at September 30, 2003. Gross margin related to these prior sales is expected to be recognized as follows: $37 million in fiscal 2004, $24 million in fiscal 2005, $13 million in fiscal 2006, $6 million in fiscal 2007 and $1 million in fiscal 2008.
Revenues from sales of our CDMA-based integrated circuits are recognized at the time of shipment, or when title and risk of loss pass to the customer and other criteria for revenue recognition are met, if later. Revenues from providing services are Not all royalties earned were recorded when earned. Revenues from long-term contracts are generally recognized using the percentage-of-completion method of accounting, based on costs incurred compared with total estimated costs. The percentage-of-completion method relies on estimatesestimates.
Revenues from software license fees are recognized when all of the following criteria are met: the written agreement is executed; the software is delivered; the license fee is fixed and determinable; collectibility of the license fee is probable; and if applicable, when vendor-specific objective evidence exists to allocate the total license fee to elements of multiple-element arrangements, including post-contract customer support. When contracts contain multiple elements wherein vendor-specific objective evidence exists for all undelivered elements, we recognize revenue for the delivered elements and defer revenue for the fair value of the undelivered elements until the remaining obligations have been satisfied. If vendor-specific objective evidence does not exist for all undelivered elements, revenue for the delivered and undelivered elements is deferred until remaining obligations have been satisfied, or if the only undelivered element is post-contract customer support, revenue is recognized ratably over the support period. Significant judgments and estimates are made in connection with the recognition of software license revenue, including assessments of collectibility and the fair values of deliverable elements. The amount or timing of our software licenserecognizing royalty revenue may differ as a resultwas made prospectively and had the initial one-time effect of changesreducing royalty revenues recorded in these judgments or estimates.
41
Unearned revenue consists primarilythe fourth quarter of fees related to software products and license fees for intellectual property for which delivery is not yet complete and to hardware products sales with a continuing service obligation.
Allowances for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We consider the following factors when determining if collection of a fee is reasonably assured: customer credit-worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment terms. If we have no previous experience with the customer, we typically obtain reports from various credit organizations to ensure that the customer has a history of paying its creditors. We may also request financial information, including financial statements or other documents (e.g., bank statements) to ensure that the customer has the means of making payment. If these factors do not indicate collection is reasonably assured, revenue is deferred until collection becomes reasonably assured, which is generally upon receipt of cash. If the financial condition of our customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required.
We also maintain allowances for doubtful accounts for estimated losses resulting from the inability of entities we have financed to make required payments. We evaluate the adequacy of allowances for doubtful finance and note receivables based on analyses of the financed entities’ credit-worthiness, current economic trends or market conditions, review of the entities’ current and projected financial and operational information, and consideration of the fair value of collateral to be received, if applicable. From time to time, we may consider third party evaluations, valuation reports or advice from investment banks. If the financial condition of the financed entities were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required.
fiscal 2004.
Our business acquisitions typically result in the recording of goodwill and other intangible assets, and the recorded values of those assets may become impaired in the future. As of September 25, 2005, our goodwill and intangible assets, net of accumulated amortization, were $571 million and $237 million, respectively. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements. We assess potential impairments to intangible assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. Our judgments regarding the existence of impairment indicators and future cash flows related to intangible assets are based on operational performance of our acquired businesses, market conditions and other factors. Although there are inherent uncertainties in this assessment process, the estimates and assumptions we use are consistent with our internal planning. If these estimates or their related assumptions change in the future, we may be required to record an impairment charge on all or a portion of our goodwill and intangible assets. Furthermore, we cannot predict the occurrence of future impairment-triggering events nor the impact such events might have on our reported asset values. Future events could cause us to conclude that impairment indicators exist and that goodwill or other intangible assets associated with our acquired businesses is impaired. Any resulting impairment loss could have an adverse impact on our results of operations.
42
During fiscal 2005, 2004 and 2003, we recorded $12 million, $12 million and $100 million, respectively, in other-than-temporary losses on our minority investments in publicly-traded companies.
42
investee or the investee’s competitors and/or industry and the outlook of the overall industry in which the investee operates. Any resultingIn the event our judgments change as to other-than temporary declines in value, we may record an impairment loss which could have an adverse impact on our results of operations.
During fiscal 2005 and 2003, we recorded $1 million and $28 million, respectively, in other than temporary losses on our investments in private companies. Such losses were not significant in fiscal 2004.
Our income tax provision isreturns are based on calculations and assumptions that will beare subject to examination by the Internal Revenue Service and other tax authorities. WeWhile we believe we have appropriate support for the positions taken on our tax returns, we regularly assess the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of our provision for income taxes. ShouldAs part of our assessment of potential adjustments to our tax returns, we increase our current tax liability to the actual results differ fromextent an adjustment would result in a cash tax payment or decrease our estimates, wedeferred tax assets to the extent an adjustment would have tonot result in a cash tax payment. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, the current tax liability and deferred taxes in the period in which the facts that give rise to thea revision become known. Tax lawAlthough we believe that the estimates and rate changesassumptions supporting our assessments are reasonable, adjustments could be materially different from those which are reflected in thehistorical income tax provisionprovisions and recorded assets and liabilities.
We reversed approximately $1.1 billion ofthe underlying temporary differences become taxable or deductible, we could be required to increase our valuation allowance on substantially all ofagainst our United States deferred tax assets during fiscal 2003 as a credit to stockholders’ equity. We now believe thatwhich could result in an increase in our effective tax rate and an adverse impact on operating results.
43
capital loss carry forwards. We can only use our capital losses and capital loss carrybacks or carryforwards to offset capital gains. WeBased upon our assessments of projected future capital gains and losses and related tax planning strategies, we expect that our future capital gains will not be sufficient to utilize all the capital losses that we have incurred through fiscal 2002. Beginning in fiscal 2003,2005. Therefore, we have provided a valuation allowance in the amount of $62 million for new deferred tax assets related to capital loss items through our statementthe portion of operations. We expect that any additional capital losses in future years will also require the provision of awe do not expect to utilize. Adjustments to our valuation allowance through the statementbased on changes to our forecast of operations, if we are unable to generate sufficient futurecapital losses and capital gains to utilize these additional capital losses through our tax planning strategies. If capital losses are utilized and any portion ofreflected in the valuation allowanceperiod the change is removed, the release would be accounted for as a reduction of the income tax provision.
made.
On October 22, 2004, the American Jobs Creation Act of 2004 (the Jobs Creation Act) was signed into law. The Jobs Creation Act created a temporary incentive for corporations in the United States to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations. In the fourth quarter of fiscal 2005, we repatriated approximately $0.5 billion of foreign earnings qualifying under the Jobs Creation Act and recorded a related expense of approximately $35 million for federal and state income tax liabilities. The distribution does not change our intention to indefinitely reinvest earnings of certain foreign subsidiaries outside the United States.
We are currently involved in certain legal proceedings. Although there can be no assurance that unfavorable outcomes in any of these matters would not have a material adverse effect on our operating results, liquidity or financial position, we believe the claims are without merit and intend to vigorously defend the actions. We estimate the range of liability related to pending litigation where the amount and range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to the claim. As additional information becomes available, we assess the potential liability related to our pending litigation and revise our estimates. We have not recorded any accrual for contingent liability associated with our legal proceedings based on our belief that a liability, while possible, is not probable. Further, any possible range of loss cannot be estimated at this time. Revisions in our estimates of the potential liability could materially impact our results of operations.
Licensing
We grant licenses
44
43
Estimated Licensees,
The following table summarizes royalty related data for fiscal 2003, 2002 and 2001 (in millions):
Fiscal Year | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
Components of royalty revenues | ||||||||||||
Estimate at end of prior year* | $ | 150 | $ | 122 | $ | 100 | ||||||
Royalties reported in first quarter related to prior year estimate | 167 | 146 | 133 | |||||||||
Variance included in current year revenues | 17 | 24 | 33 | |||||||||
Other royalties reported in current year | 670 | 551 | 506 | |||||||||
Estimate at year end | 151 | 150 | 122 | |||||||||
Total royalty revenues from licensees | $ | 838 | $ | 725 | $ | 661 | ||||||
* This amount is the estimate for the fourth quarterOFDMA technology. Upon completion of the previous fiscal year.
For example, for fiscal 2002, we estimated royalties of $150 million from the Estimated Licensees for the fourth quarter of fiscal 2002. The actual royalties reported to us by the Estimated Licensees, on a one quarter lag basis, during the first quarter of fiscal 2003 were $167 million. The variance of $17 million was recorded in royalty revenuesacquisition, which is anticipated in the first quarterhalf of fiscal 2003. Therefore, total royalty revenues from licensees for fiscal 20032006, pending regulatory approval and other customary closing conditions, we estimate that we will pay approximately $545 million in consideration, consisting of $838approximately $272 million included: 1)in shares of QUALCOMM stock, $235 million in cash, and the varianceexchange of $17Flarion’s existing vested options and warrants with a fair value of approximately $38 million. Upon achievement of certain agreed upon milestones on or prior to the eighth anniversary of the close of this transaction, we may issue additional aggregate consideration of $205 million, 2) other royalties reported during fiscal 2003consisting of $670approximately $173 million payable in cash to Flarion stockholders and 3) the estimate made$32 million in the fourth quartershares of fiscal 2003 of $151 million based upon Estimated Licensees’ estimated sales during the fourth quarter of fiscal 2003,QUALCOMM stock, which we believe will be reported byissued to Flarion option holders and warrant holders upon or following the Estimated Licensees inexercise of such options and warrants. Our acquisition of Flarion is intended to broaden our ability to effectively support operators who may prefer an OFDMA or a hybrid OFDM/CDMA/WCDMA network alternative for differentiating their services. The addition of Flarion’s intellectual property and engineering resources will also supplement the first quarterresources that we have already dedicated over the years towards the development of fiscal 2004.
OFDM/OFDMA technologies.
in our QSI Segment
44
lose all or a portion of our investments in these companies, which could negatively affect our financial position and operating results. Most of these strategic investments will not become liquid until more than one year from the date of investment, if at all. To the extent such investments become liquid and meet strategic and price objectives, we may sell the investments and recognize the realized gain (loss) in investment income (expense).
45
From time to time, we may accept an equity interest
Vésper Holding, Ltd.
In fiscal 1999, we acquired an ownership interest in Vésper São Paulo S.A. and Vésper S.A. (the Vésper Operating Companies or collectively, Vésper). The Vésper Operating Companies were formed by a consortium of investors to provide fixed wireless and wireline telephone servicesslow down in the northern, northeast and eastern regionsrate of Brazil and in the state of São Paulo. In addition, we extended long-term financing to Vésper in fiscal 2000. In November 2001, we consummated a series of transactions resulting in an overall financial restructuring (the Restructuring) of the Vésper Operating Companies, which resulted in our obtaining a controlling financial interest in Vésper.
Pursuant to the Restructuring, we invested $266 million, and VeloCom, Inc. (VeloCom) invested $80 million, in a newly formed holding company called Vésper Holding, Ltd. (Vésper Holding). Vésper Holding acquired certain liabilities of the Vésper Operating Companies from their vendors for $135 million and the issuance of warrants to purchase an approximate 7% interest in Vésper Holding, and the vendors released in full any claims that they might have against us, VeloCom, Vésper, its direct and indirect parent companies and other related parties arising from or related to the acquired liabilities. In a series of related transactions, Vésper Holding agreed to contribute the acquired liabilities to the Vésper Operating Companies in exchange for equity securities and to cancel the contributed liabilities.
On November 29, 2001, we forgave $119 million under our debt facility with VeloCom. We also converted our remaining $56 million convertible promissory note into equity securities of VeloCom in conjunction with our acquisition of Vésper Holding. The conversion increased our equity interest in VeloCom to 49.9%. We used the equity method to account forstrategic investment, including our investment in VeloCom. On July 2, 2003, we transferred to VeloCom all of our equity interestInquam, and realized gains on certain strategic investments.
On November 19, 2002, we won bids to acquire personal mobile service (SMP) licenses in the state of São Paulo (excluding São Paulo metro), the state of Minas Gerais, and in the Northeast region of Brazil. Approximately $8 million of the approximate $82 million purchase price for the SMP licenses was paid in December 2002. The
45
remaining Brazilian real-denominated obligation is financed by the Brazilian government at an interest rate of 12% per annum, plus an adjustment for inflation, payable in six equal annual installments starting in fiscal 2006. At September 30, 2003, the outstanding license fee obligation was approximately $111 million, having increased as a result of accrued interest and the strengthening of the Brazilian real against the U.S. dollar.
Due to a series of adverse regulatory developments that negatively affected Vésper’s prospects, we are pursuing an expedited exit strategy whereby Vésper and/or its assets will be sold or otherwise disposed of. In accordance with this strategy, on September 25, 2003, Embratel Participações S.A. (Embratel) entered into an agreement to acquire from us for nominal consideration the Vésper Operating Companies (the Embratel sale transaction), excluding the tower and rooftop antennae assets and related property leases (Tower Sites). Concurrent with the closing, Vésper will enter into a multi-year arrangement whereby it pays a monthly fee to us to use the Tower Sites. The sum of these fees, net of certain pass through expenses, is expected to exceed $77 million over the life of the arrangement. The SMP licenses also are not included in the Embratel sale transaction, except for a right of first refusal of Embratel to purchase the SMP licenses in the event of a sale to a third party or return of the SMP licenses to Anatel, the telecommunications regulatory agency in Brazil. We are evaluating our options with respect to the SMP licenses, including a possible return of the licenses to Anatel.
The closing of the Embratel sale transaction is contingent upon a number of events being completed prior to or concurrent with closing. The status of certain of these items follows:
Given the uncertainty associated with the closing contingencies, we have not presented the Vésper-related assets and liabilities as “held for sale” in our September 30, 2003 balance sheet. Further, we do not expect to present Vésper’s historical operations as discontinued operations in our consolidated statements of operations in future financial statements because of our expectation of a continuing involvement in the Vésper business by way of an on-going tower usage arrangement. In the near term, prior to the close of the Embratel sale transaction, Vésper will
46
continue to operate its existing fixed wireless and wireline network. Vésper will continue to undertake significant cost cutting measures to preserve the value of its core assets and existing business while reducing cash expenditures.
As a result of adverse regulatory developments, and after an evaluation of the potential acquirers and the valuations that they may ascribe to Vésper given the regulatory situation, we recorded a $160 million impairment loss on our long-lived assets related to Vésper during the second quarter of fiscal 2003. The impairment loss recognized was the difference between the assets’ carrying values and their estimated fair values at that date. At September 30, 2003, the carrying values of assets and liabilities related to Vésper totaled $265 million and $307 million, respectively.
Assuming the requisite government approvals are received and all conditions to close are satisfied, we anticipate providing approximately $40 million to $45 million in aggregate funding (including the $6 million of interim funding) by the closing date to facilitate the Embratel sale transaction. We expect to recognize cumulative foreign currency translation losses, previously included in stockholders’ equity, as part of the gain or loss on a sale or other disposition of Vésper. We expect to record an approximate $35 million to $45 million loss if and when the transaction closes, including the cumulative foreign currency translation losses.
We may incur additional losses related to Vésper if we are not successful in closing the sale transaction with Embratel or, in that event, if we are unable to realize the estimated fair value of Vésper’s assets upon their sale to another party or other disposition or if we are unable to effect such a sale or other disposition of Vésper and/or its assets quickly.
Additional risks and uncertainties specific to Vésper include risks associated with:
Pegaso Telecomunicaciones, S.A. de C.V.
We have had various financing arrangements, including a bridge loan facility, an equipment loan facility and interim and additional interim loan facilities, with Pegaso Comunicaciones y Sistemas S.A. de C.V., a wholly owned subsidiary of Pegaso Telecomunicaciones, S.A. de C.V., a CDMA wireless operator in Mexico (collectively referred to as Pegaso). On September 10, 2002, Telefónica Móviles (Telefónica) acquired a 65% controlling interest in Pegaso. On October 10, 2002, Pegaso paid $82 million in full satisfaction of the interim and additional interim loans. On November 8, 2002, Pegaso paid $435 million in full satisfaction of the bridge loan facility. We used approximately $139 million of the bridge loan proceeds to purchase outstanding vendor debt owed by Pegaso to
47
other lenders. On March 31, 2003, Pegaso paid $4 million on the equipment loan facility. On June 13, 2003, Pegaso prepaid $281 million of the equipment loan facility, including accrued interest, in accordance with certain terms of the equipment loan facility. As a result of these transactions, finance receivables from Pegaso decreased by $663 million.
At September 30, 2003, amounts outstanding, net of deferred interest, under the Pegaso equipment loan facility were $181 million, including the acquired vendor debt, as compared to $821 million outstanding under the various financing arrangements with Pegaso at September 30, 2002. The remaining equipment loan facility outstanding with Pegaso, including the acquired vendor debt, is payable quarterly starting in March 2006 through December 2008 and bears interest at the London Interbank Offered Rate (LIBOR) plus 1% through September 9, 2004, LIBOR plus 3% thereafter through September 9, 2007 and LIBOR plus 6% thereafter. We recognized $41 million, $9 million and $90 million in interest income related to the Pegaso financing arrangements during fiscal 2003, 2002 and 2001, respectively, including $23 million of deferred interest income recorded as a result of the prepayment in fiscal 2003.
Pegaso is an early stage wireless operator facing significant competition in Mexico. Based on current information and available evidence, including the acquisition of Pegaso by Telefónica, we believe that we will ultimately be able to collect the remaining long-term financing due from Pegaso, however Pegaso may not succeed. Failure to collect our finance receivables could have a material adverse effect on our operating results and financial condition.
Inquam LtdLimited.
InSince October 2000, we agreedand another investor (the Other Investor) have provided equity and debt funding to invest $200 million in the convertible preferred shares of Inquam Limited (Inquam) for an approximate 42% ownership interest in Inquam.. Inquam owns, develops and manages wireless CDMA-based communications systems, either directly or indirectly, with the primary intent of deploying CDMA-based technology, primarily in Europe.Romania and Portugal. We provided the final $27recorded $33 million, under this$59 million and $99 million in equity commitmentin losses of Inquam during fiscal 2005, 2004 and 2003, and had no remaining equity funding commitment at September 30, 2003.
On March 26, 2003, we agreed to extend $25 million of bridge loan financing to Inquam. Another investor in Inquam also agreed to provide $25 million in bridge loan financing. We provided the $25 million in funding during fiscal 2003 and had no remaining commitment under the bridge loan at September 30, 2003.
On July 14, 2003, we approved an additional $50 million investment in Inquam, subject to certain conditions, including a matching $50 million investment by another existing investor in Inquam. No commitments related to these potential investments were in place at September 30, 2003. On September 19, 2003, we agreed, along with this other existing investor, to provide an additional $5 million each in bridge financing to enable Inquam to meet its cash flow requirements while the terms of a new equity investment are being negotiated. It is the intention of both parties that this second $10 million bridge loan will be repaid with the proceeds from the anticipated equity investment. We provided $2 million under this second bridge loan during fiscal 2003 and had a remaining funding commitment of $3 million at September 30, 2003.
On September 22, 2003, we agreed, along with another investor in Inquam, to guarantee the payment of amounts due by Inquam under a bank credit agreement. Our maximum liability under the guarantee is limited to an amount equal to 50% of the amounts outstanding under Inquam’s credit agreement, up to a maximum of $10 million. No amounts were outstanding under the bank credit agreement as of September 30, 2003.
We use the equity method to account for our investment in Inquam. During fiscal 2003, we recorded an $11 million other-than-temporary impairment loss related to our investment in Inquam. The impairment loss was the difference between the carrying value of the investment and its estimated fair value.respectively. At September 30, 2003,25, 2005, our equity and debt investmentinvestments in Inquam was $68totaled $26 million, net of equity in losses, and impairment.we had no remaining funding commitment under our bridge loan agreement.
48
Portugal companies.
2004
2004.
circuits, partially offset by a decrease of $241 million related to the effects of reductions in average sales prices and changes in product mix. Revenues from the sale of satellite and terrestrial-based two-way data messaging systems and related messaging services increased $25 million and revenues from the sale of satellite portable phones that operate on the Globalstar low-Earth-orbit satellite communications system increased $19 million.
46
Year Ended | ||||||||||||
September 25, | September 26, | |||||||||||
2005 | 2004 | Change | ||||||||||
Interest and dividend income: | ||||||||||||
QSI | $ | 4 | $ | 14 | $ | (10 | ) | |||||
Corporate and other segments | 252 | 161 | 91 | |||||||||
Interest expense | (3 | ) | (2 | ) | (1 | ) | ||||||
Net realized gains on investments: | ||||||||||||
QSI | 101 | 56 | 45 | |||||||||
Corporate | 78 | 32 | 46 | |||||||||
Other-than-temporary losses on investments | (14 | ) | (12 | ) | (2 | ) | ||||||
Gains on derivative instruments | 33 | 7 | 26 | |||||||||
Equity in losses of investees | (28 | ) | (72 | ) | 44 | |||||||
$ | 423 | $ | 184 | $ | 239 | |||||||
47
Administrative Expenses.For fiscal 2003,2004, selling, general and administrative expenses were $535$547 million or 11% of revenues, compared to $483 million or 13% of revenues compared to $509 million or 17% of revenues for fiscal 2002.2003. The dollar increase was primarily due to a $27$61 million increase in employee-related expenses, a $12 million increase in depreciation and amortization expense, a $6$21 million increase in professional fees, primarily patent administration and outside servicesconsultants, and a $6$12 million increase related to international marketinga charitable grant to an educational institution for the primary purpose of furthering the study of engineering and support efforts,math, partially offset by a $45 million decrease in Vésper expenses, including the effectseffect of foreign currency fluctuations. Selling, general and administrative expenses for fiscal 2003 included $62 million related to the consolidation of Vésper Holding, compared to $107 million in fiscal 2002.
Amortization of goodwill and other acquisition-related intangible assets was $9 million for fiscal 2003, compared to $259 million in fiscal 2002. Starting in fiscal 2003, we no longer record goodwill amortization as a result of the adoption of Statement of Financial Accounting Standards No. 142. Amortization charges were primarily related to the acquisition of SnapTrack in March 2000.
For fiscal 2003, asset impairment and related charges were $194 million, compared to less than $1 million of such charges in fiscal 2002. Asset impairment and related charges during fiscal 2003 were comprised of a $160 million impairment loss on long-term assets related to Vésper and a $34 million impairment loss recorded in fiscal 2003 on our wireless licenses in Australia due to recent developments that affected potential strategic alternatives for using the spectrum. The impairment loss recognized was the difference between the assets’ carrying values and their estimated fair values.
48
For fiscal 2003, other operating income was $31 million, compared to other operating expenses of $9 million in fiscal 2002. Other operating income during fiscal 2003 resulted from $47 million of other income related to the
49
transfer of a portion of the Federal Communications Commission (FCC) auction discount voucher’s value to two wireless operators, offset by a $16 million charge related to the write down of notes receivable from an early stage CDMA wireless operator and an early stage media company. Other operating expenses during fiscal 2002 resulted from the write down of a note receivable from an early stage CDMA wireless operator.
Interest expense was $31 million for fiscal 2003, compared to $26 million for fiscal 2002. Interest expense was primarily related to the $226 million and $113 million Vésper-related long-term debt at September 30, 2003 and 2002, respectively.
Inquam, of which our share was $59 million for fiscal 2004 as compared to $99 million for fiscal 2003. 4%. Information.” 49$6$184 million for fiscal 20032004, compared to net investment expense of $186$8 million for fiscal 2002.2003. The change was primarily comprised as follows (in millions): Years Ended September 30, 2003 2002 Change Interest income: Corporate $ 112 $ 102 $ 10 QSI 51 33 18 Net realized gains on investments: Corporate 17 — 17 QSI 56 2 54 Other-than-temporary losses on marketable securities (100 ) (206 ) 106 Other-than-temporary losses on other investments (38 ) (24 ) (14 ) Change in fair values of derivative investments (3 ) (58 ) 55 Minority interest in loss (income) of consolidated subsidiaries 37 52 (15 ) Equity in losses of investees (126 ) (87 ) (39 ) $ 6 $ (186 ) $ 192 Year Ended September 26, September 28, 2004 2003 Change Interest and dividend income: QSI $ 14 $ 45 $ (31 ) Corporate and other segments 161 113 48 Interest expense (2 ) (2 ) — Net realized gains on investments: QSI 56 63 (7 ) Corporate 32 17 15 Other-than-temporary losses on investments (12 ) (128 ) 116 Gains (losses) on derivative instruments 7 (3 ) 10 Equity in losses of investees (72 ) (113 ) 41 $ 184 $ (8 ) $ 192 corporate cash and marketable securities held by corporate and other segments was a result of higher average cash and marketable securities balances, partially offset by the impact of lower interest rates earned on these balances.interest-bearing securities, and $6 million in interest income recorded as a result of a refund from the United States Internal Revenue Service. The increasedecrease in QSI interest income was primarily the result of $23 million of deferred interest income recorded as a result of athe prepayment on the Pegaso debt facilitiesfacility in the first quarter of fiscal 2003.2004. The other-than-temporary losses on marketable securitiesinvestments during fiscal 2003 primarily related to an $81 million impairment of our investment in KTFa wireless operator in South Korea and a $16 million impairment of our investment in a provider of semiconductor packaging, test and distribution services. The increase in other-than-temporary losses on other investments is primarily related to an $11 million impairment of our investment in Inquam and a $9 million impairment of our investment in a development stage CDMA wireless operator. The change in fair values of derivative investments during fiscal 2002 primarily resulted from movements in the price of Leap Wireless stock, which affected the fair values of our warrants to acquire Leap Wireless stock. Equity in losses of investees decreased primarily increased due to a $43 million increase in our equitydecrease in losses incurred by Inquam.$458$588 million for fiscal 2003,2004, compared to $101$536 million for fiscal 2002. The annual effective tax rate was approximately 36% for fiscal 2003, compared to a rate of 22% for fiscal 2002.2003. The annual effective tax rate for continuing operations was approximately 25% for fiscal 20032004, compared to 34% for fiscal 2003. The annual effective tax rate for continuing operations for fiscal 2004 was lower than the combined federal and state statutory2003 effective tax rate of approximately 39%for continuing operations primarily due to the U.S. tax write-off of investmentsan increase in certain foreign subsidiaries that became worthless during the year and foreign earnings that were taxed at less than the United States federal rate.tax rate, an increase in tax benefits recorded arising from our increased ability to use capital loss carryforwards and the reduction of QTL earnings, which are taxed at a rate that is lower than our effective tax rate, as a percentage of total earnings due to the change in the timing of recognizing QTL royalties. Foreign earnings taxed at less than the United States federal rate were higher in fiscal 2004 primarily due to the adjustment of an intercompany royalty agreement and an increase in foreign earnings. The reductions wereannual effective tax rate for continuing operations for fiscal 2004 was 10% lower than the United States federal statutory rate due primarily to a benefit of approximately 14% related to foreign earnings taxed at less than the United States federal rate, research and development tax credits and our increased ability to use capital loss carryforwards, partially offset by foreign and capital losses for which we are not recording a tax benefit. The fiscal 2002 effective tax rate was lower than the fiscal 2003 effective tax rate principally due to the reductionstate taxes of valuation allowances in fiscal 2002 that were previously charged to tax expense, partially offset by the amortization of non-deductible goodwill in fiscal 2002.20032005 Compared to Fiscal 2002QUALCOMM CDMA Technologies2004(QCT)segmentSegment.QCT revenues for fiscal 20032005 were $2,424 million,$3.29 billion, compared to $1,591$3.11 billion for fiscal 2004. Equipment and services revenues, primarily from MSM and accompanying RF integrated circuits, were $3.20 billion for fiscal 2005, compared to $3.04 billion for fiscal 2004. The increase in integrated circuits revenue was comprised of $396 million related to higher unit shipments, partially offset by a decrease of $241 million related to the effects of reductions in average sales prices and changes in product mix. Approximately 151 million MSM integrated circuits were sold during fiscal 2005, compared to approximately 137 million for fiscal 2002. Earnings2004.
50
percentage) was 33%26% in fiscal 2003,2005, compared to 28%34% in fiscal 2002. Revenues2004. The decline in operating margin percentage in fiscal 2005 as compared to fiscal 2004 was primarily the result of a 45% increase in research and development expenses for fiscal 2005 as compared to fiscal 2004, mainly related to increased investment in new integrated circuit products and technology research and development initiatives to support lower cost phones, multimedia applications, high-speed wireless Internet access and multiband, multimode, multinetwork products and technologies, including CDMA2000 1X/1xEV-DO, WCDMA, HSDPA and GSM/GPRS/EDGE.
50
QUALCOMM Technology Licensing Segment (QTL)
GPRS/EDGE.
QUALCOMM Wireless & Internet Segment (QWI)
2004, we began recognizing royalty revenues solely based on royalties reported by licensees during the quarter. The change in the timing of recognizing royalty revenue was made prospectively and had the initial one-time effect of reducing royalty revenues recorded in the fourth quarter of fiscal 2004.
51
QUALCOMM Strategic Initiatives Segment (QSI)
QSI segment revenuescontinuing operations for fiscal 20032004 were $124$31 million, compared to $126 million in fiscal 2002. QSI segment revenues were primarily related to the consolidation of Vésper Holding. QSI segment losses before taxes for fiscal 2003 were $448 million, compared to $507$168 million for fiscal 2002. During fiscal 2003, we recorded a $238 million loss, net of minority interest, due to the consolidation of Vésper Holding and $24 million of equity2003. Equity in losses of VeloCom, as compared with a $130investees decreased by $42 million loss, net of minority interest,primarily due to the consolidation of Vésper Holding and $30 million of equity in losses of VeloCom and the Vésper Operating Companies (pre-acquisition) in fiscal
51
2002. We recorded a $43 million increase in our equitydecrease in losses incurred by Inquam and a $14during fiscal 2004 as compared to fiscal 2003, of which our share was $59 million increase in other-than-temporary losses on other investments, partially offset by a $97for fiscal 2004 as compared to $99 million decreasefor fiscal 2003. During fiscal 2004, we recorded $12 million in other-than-temporary losses on marketable securities and a $56 million decrease in the change in fair values of derivativeother investments during fiscal 2003 as compared to $127 million for fiscal 2002.2003. During fiscal 2003, we also recorded other income of $47 million related to the transfer of portions of the FCC auction discount voucher value to two wireless operators, partially offset by a $34 million impairment loss on our wireless licenses in Australia due to recent developments that affected strategic alternatives for using the spectrum.
For additional financial information relating to our reportable business segments, see Note 10 of the Consolidated Financial Statements.
Fiscal 2002 Compared to Fiscal 2001
Total revenues for fiscal 2002 These improvements in QSI’s losses before taxes were $3,040 million, compared to $2,680 million for fiscal 2001. Revenues from Samsung, Kyocera, and LG Electronics, customers of our QCT, QTL and other nonreportable segments, comprised an aggregate of 15%, 14% and 11% of total consolidated revenues, respectively, in fiscal 2002. In fiscal 2001, revenues from Samsung, Kyocera and LG Electronics, comprised an aggregate of 14%, 12% and 10% of total consolidated revenues, respectively. The percentages for Kyocera included 3% and 4% in fiscal 2002 and 2001, respectively, related to services provided to Kyocera by employees from our terrestrial-based CDMA wireless consumer phone business which was sold to Kyocera in February 2000.
Revenues from sales of equipment and services for fiscal 2002 were $2,205 million, compared to $1,908 million for fiscal 2001. Revenues from sales of equipment and services for fiscal 2002 included $125 million related to the consolidation of Vésper Holding effective in November 2001 and $8 million related to the Globalstar business. Revenues from sales of equipment and services for fiscal 2001 included $54 million related to Globalstar. Revenues from sales of integrated circuits increased by $218 million, primarily due to an increase in unit shipments of MSM integrated circuits, and the effect of the change in product mix toward the higher end devices utilizing our 3G CDMA2000 1X integrated circuits products. Software development services revenues related to the QChat licensing agreement increased $34 million.
Revenues from licensing and royalty fees for fiscal 2002 were $835 million, compared to $772 million for fiscal 2001. QTL segment royalty revenues from licensees increased $64 million.
Cost of equipment and services revenues for fiscal 2002 was $1,137 million, compared to $1,035 million for fiscal 2001. Cost of revenues for fiscal 2002 included $183 million related to the consolidation of Vésper Holding and $11 million related to our on-going obligation to Globalstar. Cost of revenues for fiscal 2001 included $129 million related to Globalstar. Cost of revenues as a percentage of revenues was 52% for fiscal 2002, compared to 54% for fiscal 2001. The margin improvement in fiscal 2002 was primarily due to the change in product mix toward the higher end devices utilizing our CDMA2000 1X integrated circuits products and the increase in revenues from royalties in the QTL segment.
For fiscal 2002, research and development expenses were $452 million or 15% of revenues, compared to $415 million or 15% of revenues for fiscal 2001. The dollar increase in research and development expenses was primarily due to $41 million in increased integrated circuit product initiatives to support high-speed wireless Internet access and multimode, multiband, multinetwork products including cdmaOne, CDMA2000 1X/1xEV-DO, GSM/GPRS, WCDMA and position location technologies and $14 million in increased QWBS research and development initiatives, partially offset by a $29$31 million reduction of development efforts related to the Globalstar business.
For fiscal 2002, selling, general and administrative expenses were $509 million or 17% of revenues, compared to $367 million or 14% of revenues for fiscal 2001. Selling, general and administrative expenses for fiscal 2002 included $107 million related to the consolidation of Vésper Holding. The remaining dollar increase was primarily due to a $33 million increasedecrease in marketing and support efforts related to products and services of our QIS division, including the BREW product, $23 million associated with the expansion of our integrated circuit customer base and international business development activities, particularly in China, and $13 millioninterest income resulting from the consolidation of Wireless Knowledge, Inc. (Wireless Knowledge), partially offset by a $22 million reduction in support efforts related to the Globalstar business and a $14 million reduction in bad debt expense.
Amortization of goodwill and other acquisition-related intangible assets was $259 million for fiscal 2002, compared to $255 million in fiscal 2001. Amortization charges were primarily related to the acquisition of SnapTrack in March 2000.
52
For fiscal 2002, asset impairment and related charges were less than $1 million, compared to $518 million of such charges in fiscal 2001. Asset impairment and related charges during fiscal 2001 were comprised primarily of $519 million in charges resulting from management’s determination that certain assets related to the Globalstar business were impaired.
For fiscal 2002, other operating expenses were $9 million, compared to $51 million in fiscal 2001. Other operating expenses for fiscal 2002 resulted from the write down of a note receivable from a development stage CDMA carrier. Other operating expenses for fiscal 2001 were comprised of a $62 million arbitration decision against us, offset by $11 million in other income related to the irrevocable transfer of a portion of an FCC auction discount voucher to a third party.
Interest expense was $26 million for fiscal 2002, compared to $10 million for fiscal 2001. Interest expense for fiscal 2002 was primarily related to the long-term debt of Vésper Holding. Interest expense for fiscal 2001 was primarily related to interest charges resulting from the arbitration decision made against us.
Net investment expense was $186 million for fiscal 2002 compared to $317 million for fiscal 2001. The change was primarily comprised as follows (in millions):
Years Ended September 30, | |||||||||||||
2002 | 2001 | Change | |||||||||||
Interest income: | |||||||||||||
Corporate | $ | 102 | $ | 135 | $ | (33 | ) | ||||||
QSI | 33 | 108 | (75 | ) | |||||||||
Net realized gains on investments: | |||||||||||||
Corporate | — | 11 | (11 | ) | |||||||||
QSI | 2 | 59 | (57 | ) | |||||||||
Other-than-temporary losses on marketable securities | (206 | ) | (147 | ) | (59 | ) | |||||||
Other-than-temporary losses on other investments | (24 | ) | (51 | ) | 27 | ||||||||
Change in fair values of derivative investments | (58 | ) | (243 | ) | 185 | ||||||||
Minority interest in loss (income) of consolidated subsidiaries | 52 | (4 | ) | 56 | |||||||||
Equity in losses of investees | (87 | ) | (185 | ) | 98 | ||||||||
$ | (186 | ) | $ | (317 | ) | $ | 131 | ||||||
The decline in interest income on corporate cash and marketable debt securities was a result of lower interest rates. The decline in QSI interest income was a resultprepayment of the cessation of interest income recognition on Pegaso debt facilities startingfacility in the fourth fiscalfirst quarter of fiscal 20012004 and on Leap Wireless bonds starting in the third quarter of fiscal 2002. The other-than-temporary losses on marketable securities during fiscal 2002 primarily related to $162 million and $18$28 million in losses on our investments in Leap Wireless bonds and common stock, respectively. We determined that the declines in fair values were other than temporary, as the market values of the bond and common stock had significantly declined during fiscal 2002 as a result of unfavorable developments in Leap Wireless’ business. The other-than-temporary losses on marketable securities during fiscal 2001 primarily related to a $134 million loss on our investment in NetZero, Inc., which subsequently completed a merger with Juno Online Services, Inc. and became United Online, Inc. The change in fair values of derivative instruments primarily resulted from $59 million in losses resulting from declines in the price of Leap Wireless common stock, which reduced the fair values of our warrants to acquire Leap Wireless common stock. The warrants had insignificant value at September 30, 2002. Equity in losses of investees decreased as a result of the consolidation of Vésper Holding effective November 13, 2001, as these losses are now included in operations.
For fiscal 2002 there were no other non-operating charges, compared to $167 million in fiscal 2001. Other non-operating charges in fiscal 2001 were primarily comprised of a $120 million write-down of the note receivable from
53
VeloCom to its fair value and $58 million in write-downs of recorded values of a note receivable from Globalstar and warrants to acquire partnership interests in Globalstar to their estimated fair values.
Income tax expense was $101 million for fiscal 2002, compared to $105 million for fiscal 2001. The annual effective tax rate was 22% for fiscal 2002, compared to a negative 23% rate for fiscal 2001. The annual effective tax rate for fiscal 2002 was lower than the statutory rate due to the reduction of deferred tax assets and the related valuation allowance that was previously charged to tax expense, partially offset by foreign losses for which we are not recording a tax benefit. The fiscal 2001 effective tax rate was the result of pre-tax losses for which no tax benefit was recorded and foreign tax expense. The annual effective tax rate on profits for fiscal 2002 cannot be meaningfully compared to the effective tax rate on losses for the prior fiscal year.
We recorded an $18 million loss, net of taxes, in fiscal 2001 as the net cumulative effect of changes in accounting principles at September 30, 2000. The cumulative effect of the adoption of SAB 101 was a $147 million loss, net of taxes, offset by a $129 million gain, net of taxes, resulting from the cumulative effect of the adoption of FAS 133. The gain resulting from the adoption of FAS 133 related primarily to the unrealized gain on a warrant to purchase 4,500,000 shares of Leap Wireless common stock issued to us in connection with our spin-off of Leap Wireless in September 1998.
Our Segment Results for Fiscal 2002 Compared to Fiscal 2001
QUALCOMM CDMA Technologies Segment (QCT)
QCT segment revenues for fiscal 2002 were $1,591 million, compared to $1,365 million for fiscal 2001. Earnings before taxes for fiscal 2002 were $441 million, compared to $306 million for fiscal 2001. Revenues and earnings before taxes increased primarily due to an increase in unit shipments of MSM integrated circuits and the effect of the change in product mix toward the higher end devices utilizing our CDMA2000 1X products. Approximately 65 million MSM integrated circuits were sold during fiscal 2002, compared to approximately 58 million for fiscal 2001. Approximately 10 million CSM infrastructure integrated circuits equivalent voice channels were sold during fiscal 2002, compared to approximately 9 million for fiscal 2001. Both research and development and selling and marketing expenses were $22 million higher for fiscal 2002 as compared to fiscal 2001 primarily associated with new integrated circuit product and technology initiatives to support high-speed wireless Internet access and multiband, multimode, multinetwork products including cdmaOne, CDMA2000 1X/1xEV-DO, GSM/GPRS, WCDMA and position location technologies. QCT inventories decreased by 27% during fiscal 2002 primarily as a result of strong demand for 1X products across our customer base and improved component availability.
QUALCOMM Technology Licensing Segment (QTL)
QTL segment revenues for fiscal 2002 were $847 million, compared to $782 million for fiscal 2001. Royalty revenues from licensees were $725 million in fiscal 2002, compared to $661 million in fiscal 2001. Revenues from license fees were $55 million in fiscal 2002, compared to $67 million in fiscal 2001. Other revenues were comprised of intersegment royalties. Earnings before taxes for fiscal 2002 were $756 million, compared to $706 million for fiscal 2001. The increase in revenues and earnings before taxes was primarily due to an increase in sales of CDMA products by licensees resulting from higher demand for CDMA products across all major regions of CDMA deployment. During fiscal 2002, we recognized $6 million in revenue related to equity received as consideration for license fees, compared to $7 million in fiscal 2001.
QUALCOMM Wireless & Internet Segment (QWI)
QWI segment revenues for fiscal 2002 were $439 million, compared to $426 million for fiscal 2001. Losses before taxes for fiscal 2002 were $9 million, compared to earnings before taxes of $33 million for fiscal 2001. Revenues increased primarily due to an increase in software development and services revenues related to our BREW products and QChat licensing agreement. Earnings before taxes decreased primarily due to a $35 million increase in our development, support and marketing efforts related to products and services of our QIS division, including the BREW product and a $14 million increase in QWBS research and development expenditures. We shipped approximately 46,000 OmniTRACS and other related communications systems during fiscal 2002, compared to approximately 43,000 in fiscal 2001.
QUALCOMM Strategic Initiatives Segment (QSI)
QSI segment revenues for fiscal 2002 were $126 million, primarily related to the consolidation of Vésper Holding. QSI segment losses before taxes for fiscal 2002 were $507 million, compared to $1,125 million for fiscal 2001. The decrease in losses was primarily due to $568 million in charges incurred in fiscal 2001 related to
54
Globalstar. During fiscal 2002, we recorded a $130 million loss, net of minority interest, due to the consolidation of Vésper Holding and $30 million of equity losses in the Vésper Operating Companies (pre-acquisition) and VeloCom, as compared with $150 million of equity losses for the Vésper Operating Companies in fiscal 2001. During fiscal 2002, we recorded $180 million in other-than-temporary losses on Leap Wireless marketable securities, compared to an $11 million realized gain in fiscal 2001. We also recorded $59 million in losses related to changes in the fair values of Leap Wireless derivative investments in fiscal 2002, compared to $213 million in losses in fiscal 2001. Losses on Leap Wireless derivative investments resulted from declines in the market price of Leap Wireless common stock during those fiscal years. During fiscal 2001, we recorded a $120 million charge to write down a note receivable from VeloCom to its fair value as a result of the reorganization of the Vésper Operating Companies initiated during fiscal 2001.
MediaFLO USA operating expenses.
the best interest of our stockholders.
In February 2003, we committed up to $1 billion to repurchase sharesresulting from cash collections.
We believe our current cash and cash equivalents, marketable securities and cash generated from operations will satisfy our expected working and other capital requirements for the foreseeable future based on current business plans, including investments in other companies and other assets to support the growth of our business, financing for customers of CDMA infrastructure products in accordance with the agreements with Ericsson, financing under agreements with CDMA telecommunications carriers, other commitments, the payment of dividends and possible additional stock buy backs. In fiscal 2003, we began construction on two new facilities in San Diego, California in fiscal 2003, totaling approximately one million additional square feet, to meet the requirements projected in our long-term business plan. The remaining cost of these new facilities is expected to approximate $250 million.be approximately $149 million through fiscal 2007. In fiscal 2005, we announced our plans to expand our backup Network Management Center in Las Vegas, Nevada, which uses satellite and terrestrial-based technologies to track freight transportation and shipping nationwide. We expect the remaining cost of this expansion will be approximately $35 million through fiscal 2008. In fiscal 2005, our MediaFLO USA subsidiary, a
52
On September 25, 2003, Embratel entered into an agreement
55
funding (including the $6 million of interim funding) by the closing date to facilitate the Embratel sale transaction.
On July 14, 2003, we approved anpossible additional $50 million investment in Inquam, subject to certain conditions, including a matching $50 million investment by another existing investor in Inquam. We are currently negotiating the terms and conditions of an investment agreement. No commitments related to these potential investments were in place at September 30, 2003.
stock repurchases.
/ Off-Balance Sheet Arrangements
Contractual Obligations | ||||||||||||||||||||||||||
Payments Due By Period | ||||||||||||||||||||||||||
No | ||||||||||||||||||||||||||
Less than | 1-3 | 3-5 | More than | Expiration | ||||||||||||||||||||||
Total | 1 Year | Years | Years | 5 Years | Date | |||||||||||||||||||||
Long-term financing under Ericsson arrangement(1) | $ | 464 | $ | 346 | $ | — | $ | — | $ | — | $ | 118 | ||||||||||||||
Purchase obligations | 377 | 327 | 50 | — | — | — | ||||||||||||||||||||
Operating leases | 135 | 42 | 57 | 25 | 11 | — | ||||||||||||||||||||
Equity investments(1) | 24 | 1 | 19 | — | 4 | — | ||||||||||||||||||||
Inquam bridge loan and guarantee | 13 | 13 | — | — | — | — | ||||||||||||||||||||
Other commitments | 1 | 1 | — | — | — | — | ||||||||||||||||||||
Total commitments | 1,014 | 730 | 126 | 25 | 15 | 118 | ||||||||||||||||||||
Long-term debt | 179 | 68 | 17 | 34 | 60 | — | ||||||||||||||||||||
Capital leases | 47 | 35 | 5 | — | 7 | — | ||||||||||||||||||||
Other long-term liabilities(2) | 55 | 3 | 1 | 4 | — | 47 | ||||||||||||||||||||
Total recorded liabilities | 281 | 106 | 23 | 38 | 67 | 47 | ||||||||||||||||||||
Total | $ | 1,295 | $ | 836 | $ | 149 | $ | 63 | $ | 82 | $ | 165 | ||||||||||||||
Fiscal | Fiscal | Fiscal | Beyond | No Expiration | ||||||||||||||||||||
Total | 2006 | 2007-2008 | 2009-2010 | Fiscal 2010 | Date | |||||||||||||||||||
Long-term financing under Ericsson arrangement(1) | $ | 118 | $ | — | $ | — | $ | — | $ | — | $ | 118 | ||||||||||||
Purchase obligations | 1,042 | 750 | 286 | 6 | — | — | ||||||||||||||||||
Operating leases | 193 | 67 | 75 | 29 | 22 | — | ||||||||||||||||||
Equity investments(1) | 13 | — | — | — | — | 13 | ||||||||||||||||||
Inquam guarantee | 27 | — | — | — | 27 | — | ||||||||||||||||||
Other commitments | 1 | 1 | — | — | — | — | ||||||||||||||||||
Total commitments | 1,394 | 818 | 361 | 35 | 49 | 131 | ||||||||||||||||||
Capital leases(2) | 2 | — | — | — | 2 | — | ||||||||||||||||||
Other long-term liabilities (3) | 40 | — | 40 | — | — | — | ||||||||||||||||||
Total recorded liabilities | 42 | — | 40 | — | 2 | — | ||||||||||||||||||
Total | $ | 1,436 | $ | 818 | $ | 401 | $ | 35 | $ | 51 | $ | 131 | ||||||||||||
(1) | ||
(2) | Amounts represent future minimum lease payments not including interest payments. | |
(3) | Certain long-term liabilities reflected on our balance sheet, such as unearned revenue, are not presented in this table because they do not require cash settlement in the future. |
The long-term financing commitment under our arrangement with Ericsson included $346 million that expires on November 6, 2003.
56
Certain Financial Statement Captions, Finance Receivables, Note 4 –— Investments in Other Entities and Note 9 –— Commitments and Contingencies and Note 11 – Acquisitions.Contingencies.”
53
Financial Accounting Standards Board (FASB) Interpretation
547a.7A. Quantitative and Qualitative Disclosure aboutDisclosures About Market Riskhaveinvest most of our cash in a number of diversified investment and non-investment grade fixed incomeand floating rate securities, consisting of cash equivalents and investments in marketable debt securities. We also have diversified portfolios of non-investment grade securities managed by institutional portfolio managers, which are subject to a higher degree of default risk than our investment grade fixed income portfolios. Changes in the general level of United States interest rates can affect the principal values and yields of fixed income investments. Our fixed income investments have grown significantly in size and are subject to interest rate risk and credit risk. If interest rates in the general economy were to rise rapidly in a short period of time, our fixed income investments could lose value. If the general economy were to weaken significantly, the credit profile of issuers of securities held in our investment portfolios could deteriorate, and our fixed income investments could lose value. We may implement investment strategies of different types with varying duration and risk/return trade-offs that do not perform well. (See Note 2 to the Consolidated Financial Statements – Marketable Securities for information about investments in marketable debt securities.) We have finance receivables and notes receivable (included in other assets) from third parties that bear interest at both fixed and variable rates (see Note 3 to the Consolidated Financial Statements – Composition of Certain Financial Statement Captions for information about finance receivables). Interest earned on certain finance receivables and notes is at variable interest rates and is affected by changes in the general level of United States interest rates and/or changes in the LIBOR index. Finance receivables and notes that bear interest at fixed rates could lose value if interest rates increase.fixed income investment portfolio,interest bearing securities, the table presents principal cash flows, and related weighted-averageweighted average yield at cost. For our finance receivablescost and notes receivable, the table presents contractual interest rates by expected maturity dates. Additionally, we have assumed that our fixed incomethese securities are similar enough within the specified categories to aggregate thosethese securities for presentation purposes.57
25, 2005, as compared to $162 million at September 26, 2004. 55
Principal Amount by Expected Maturity
Average Interest Rates
(Dollars in millions) No Single Fair 2004 2005 2006 2007 2008 Thereafter Maturity Total Value Fixed income securities: Cash and cash equivalents $ 284 $ — $ — $ — $ — $ — $ — $ 284 $ 284 Interest rate 1.1 % Held-to-maturity securities $ 167 $ 20 $ 180 $ — $ — $ — $ — $ 367 $ 368 Interest rate 3.4 % 1.8 % 2.0 % Available-for-sale securities: Investment grade $ 177 $ 701 $ 602 $ 239 $ 98 $ 20 $ 484 $ 2,321 $ 2,321 Interest rate 3.0 % 2.0 % 2.4 % 2.9 % 3.3 % 7.2 % 3.2 % Non-investment grade $ 11 $ 2 $ 8 $ 11 $ 41 $ 425 $ — $ 498 $ 498 Interest rate 8.7 % 7.7 % 9.2 % 9.6 % 8.9 % 8.3 % Finance receivables: Fixed rate $ 7 $ 1 $ — $ — $ — $ 2 $ — $ 10 $ 6 Interest rate 8.0 % 8.0 % 0.0 % Variable rate (LIBOR) $ — $ — $ 49 $ 65 $ 65 $ 16 $ — $ 195 $ 192 Margin over LIBOR 6.3 % 6.5 % 9.9 % 5.2 % Notes receivable in other assets: Fixed rate $ 37 $ — $ — $ — $ — $ 46 $ — $ 83 $ 64 Interest rate 7.5 % 0.0 % Variable rate (LIBOR) $ — $ — $ — $ — $ — $ 56 $ — $ 56 $ 6 Margin over LIBOR 0.0 % Vésper-related long-term debt: Wireless license Fixed rate $ — $ — $ 17 $ 17 $ 17 $ 60 $ — $ 111 $ 111 Interest rate 12.0 % 12.0 % 12.0 % 12.0 % Bank loans Variable rate (CDI) $ 68 $ — $ — $ — $ — $ — $ — $ 68 $ 65 Margin over CDI 1.5 % Default rate 12.0 % Capital leases Fixed rate $ 33 $ — $ — $ — $ — $ 7 $ — $ 40 $ 39 Interest rate 12.6 % 12.6 % Variable rate (LIBOR) $ — $ — $ 4 $ — $ — $ — $ — $ 4 $ 4 Margin over LIBOR 6.0 % Variable rate (TR) $ 2 $ 1 $ — $ — $ — $ — $ — $ 3 $ 3 Margin over TR 12.0 % 12.0 % The Vésper-related bank loans and $33 million of the capital lease obligations are callable by the bank creditors as a result of the failure of the Vésper Operating Companies to make interest and certain lease payments. The Vésper Operating Companies were charged a 2% default penalty and are being charged an additional 1% interest rate per month on the amount in default until the default is cured. The bank creditors have provided forbearance through December 15, 2003 with respect to the amounts owed under certain agreements that are in payment default. (See Note 11 to the Consolidated Financial Statements – Acquisitions for information about long-term debt.) The fair values of bank loans and capital lease obligations will change as interest rates change. Interest expense will be affected by changes in the Certificate of Deposit InterBank (CDI) rate. No Single Fair 2006 2007 2008 2009 2010 Thereafter Maturity Total Value Fixed interest-bearing securities: Cash and cash equivalents $ 608 $ — $ — $ — $ — $ — $ — $ 608 $ 608 Interest rate 3.6 % Held-to-maturity securities $ 60 $ — $ — $ — $ — $ — $ — $ 60 $ 60 Interest rate 2.1 % Available-for-sale securities: Investment grade $ 2,266 $ 336 $ 221 $ 9 $ 20 $ 9 $ 213 $ 3,074 $ 3,074 Interest rate 3.4 % 3.7 % 4.1 % 4.4 % 4.1 % 6.7 % 4.5 % Non-investment grade $ 2 $ 5 $ 24 $ 48 $ 38 $ 573 $ — $ 690 $ 690 Interest rate 6.5 % 7.5 % 7.3 % 7.3 % 8.2 % 7.9 % Floating interest-bearing securities: Cash and cash equivalents $ 1,364 $ — $ — $ — $ — $ — $ — $ 1,364 $ 1,364 Interest rate 3.7 % Held-to-maturity securities $ 70 $ — $ — $ — $ — $ — $ — $ 70 $ 70 Interest rate 1.4 % Available-for-sale securities: Investment grade $ 174 $ 289 $ 131 $ 26 $ 13 $ 49 $ 552 $ 1,234 $ 1,234 Interest rate 3.6 % 3.7 % 3.6 % 3.5 % 4.0 % 4.3 % 4.1 % Non-investment grade $ — $ 6 $ — $ 3 $ 2 $ 17 $ — $ 28 $ 28 Interest rate 4.9 % 6.4 % 7.1 % 8.5 % holdinvest in a number of diversified marketable securities and derivative instrumentsmutual fund shares subject to equity price risk which are accounted for under FAS 115 and FAS 133.risk. The recorded values of marketable equity securities totaled $140increased to $1.16 billion at September 25, 2005 from $765 million at September 30, 2003. As of September 30, 2003, one equity position constituted approximately 59% of the fair value of the marketable securities portfolio.26, 2004. The recorded value of derivative instruments subjectequity mutual fund shares decreased to FAS 133$293 million at September 30, 2003 was $2 million. We generally invest in technology companies and typically do not attempt to reduce or eliminate our market exposure on these securities. These25, 2005 from $296 million at September 26, 2004. Our diversified investments are held for purposes other58than trading. The portfolio’s concentrations in specific companies and industry segments may vary over time, and changes in the concentrations of these investments may affect the portfolio’s price volatility. During the last three years, many technology stocks experienced significant decreases in value, negatively affecting the fair valuesvolatility of our available-for-sale equity securities and derivative instruments.investments. A 10% decrease in the market price of our marketable equity securities and equity mutual fund shares at September 30, 200325, 2005 would cause a corresponding 10% decrease in the carrying amounts of these securities, or $14$145 million.$153$121 million at September 30, 2003.
We are exposed to foreign exchange risk related to our consolidation of the Vésper Operating Companies. We report our financial statements in U.S. dollars. The Vésper Operating Companies account for the majority of their transactions in Brazilian real, and their results are translated into U.S. dollars during and at the end of the fiscal quarter. In addition, the Vésper Operating Companies capital lease commitments are denominated in U.S. dollars. As a result, a significant change in the value of the U.S. dollar against the Brazilian real could have a material effect on the Vésper Operating Companies and on us. A significant devaluation of the Brazilian real occurred in the past and may occur again in the future. A 10% weakening of the U.S. dollar relative to the Brazilian real during fiscal 2003 would have resulted in a decrease in net income of approximately $25 million for the year ended September 30, 2003.
Finance receivables and notes receivable from international carriers and customers that do not use the United States dollar as their functional currencies subject us to credit risk. Because our financing is U.S. dollar denominated, any significant change in the value of the U.S. dollar against the debtors’ functional currencies could result in an increase in the debtor’s cash flow requirements and could thereby affect our ability to collect our receivables. At September 30, 2003, finance and note receivables from international carriers and customers totaled $214 million, net of allowances.
F-34.30, 200325, 2005 and 2002September 26, 2004 and the Report of PricewaterhouseCoopers LLP, Independent Auditors,Registered Public Accounting Firm, are included in this Annual Report on Form 10-K on pages F-1 through F-37.59
5613a - 15(e)13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)Exchange Act). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.Annual Report.60
PART III
20042006 (the “Proxy“2006 Proxy Statement”) under the headingheadings “Election of Directors.” Information regarding executive officers is set forth in Item 1 of Part I of this Report under the caption “Executive Officers.Officers of the Registrant.” The information regarding our code of ethics is incorporated by reference to our Definitive Proxy Statement filed with the Securities and Exchange Commission on January 14, 2005 under the heading “Code of Ethics.”
Compensation.Compensation and Other Matters.”
and Related Stockholder Mattersheadingheadings “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management.”
5761
PART IV
Schedule included in the notes to the Financial Statements. 58Schedules and Reports on Form 8-K Page Number (a) Financial Statements: Financial Statements: (1) Report of Independent AuditorsRegistered Public Accounting Firm F-1 Consolidated Balance Sheets at September 30, 200325, 2005 and 2002September 26, 2004 F-2F-3 Consolidated Statements of Operations for Fiscal 2003, 20022005, 2004 and 20012003 F-3F-4 Consolidated Statements of Cash Flows for Fiscal 2003, 20022005, 2004 and 20012003 F-4F-5 Consolidated Statements of Stockholders’ Equity for Fiscal 2003, 20022005, 2004 and 20012003 F-5F-6 Notes to Consolidated Financial Statements F-7 F-6(2) (2) Schedule II-Valuation and Qualifying Accounts S-1 included. See Exhibit 99.3 for financial statements required under Article 3-09 of Regulation S-X. Exhibit NumberDescription2.1 Restructuring NumberDescription 2.6 Agreement and Plan of Reorganization, dated as of November 9, 2001,July 25, 2005, by and among the Company, Vésper São Paulo S.A., Vésper S.A., Vésper Holding São Paulo S.A., Vésper Holding S.A., VeloCom Cayman Brasil Holdings, QUALCOMM do Brasil Ltda., Bell Canada International (Brazil Telecom I) Limited, Bell Canada International (Megatel) Limited, VeloCom Inc., Nortel Networks Limited, LucentFluorite Acquisition Corporation, Quartz Acquisition Corporation, Flarion Technologies, Inc., Telefonaktiebolaget LM Ericsson (Publ.), Harris Corporation, VeloCom do Brasil Ltda., Vésper São Paulo Cayman and Vésper Holding, Ltd.QFREP, LLC. (1) 2.23.1 The Subscription and Shareholders Agreement, dated asRestated Certificate of November 9, 2001, by and among the Company, VeloCom Inc., Bell Canada International (Brazil Telecom I) Limited, Bell Canada International (Megatel) Limited, Bell Canada International (Espelho Sul) Limited, Nortel Networks Limited, Lucent Technologies Inc., Telefonaktiebolaget LM Ericsson (Publ.), Harris Corporation and Vésper Holding, Ltd.(1)Incorporation. (2) 2.4Agreement and Plan of Merger and Reorganization dated as of January 25, 2000 among the Company, Falcon Acquisition Corporation and SnapTrack, Inc.(16)2.5Embratel Share Purchase Agreement dated as of September 25, 2003, by and among Vésper Holding, Ltd., QUALCOMM do Brasil Ltda. and Embratel Particpações S.A.3.1Restated Certificate of Incorporation.(24)3.2 Certificate of Amendment of Restated Certificate of Incorporation.(24)Designation. (3) 3.33.4 Certificate of Designation of Preferences.(24)Amended and Restated Bylaws. (2) 3.4Bylaws.(24)3.5Amendment of the Bylaws.(24)10.1 Form of Indemnity Agreement between the Company, each director and certain officers. (2)(9)(4)(5) 10.2 1991 Stock Option Plan, as amended. (9)(11)(4)(6) 10.4 Form of Supplemental Stock Option Grant under the 1991 Stock Option Plan.(2)(9)(4)(6) 10.51991 Employee Stock Purchase Plan.(9)(11)10.6Form of Employee Stock Purchase Plan Offering under the 1991 Employee Stock Purchase Plan.(2)(9)62ExhibitNumberDescription10.12 DS-CDMA Technology Agreement and related Patent License Agreement, each dated September 26, 1990 between the Company and MOTOROLA, Inc. (2)(3)(5)(7) 10.14401(k) Plan.(2)10.16 Amendment dated January 21, 1992 to that certain Technology Agreement dated September 26, 1990 with MOTOROLA, Inc. (4)(5)10.17Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”).(9)(10)10.18Form of Stock Option Grant under the Directors’ Plan, with related schedule.(6)(8)(9) 10.21 Executive Retirement Matching Contribution Plan, as amended. (9)(15)(4)(6) 10.22 1996 Non-qualified Employee Stock Purchase Plan.(8)(9)Plan, as amended.(4)(6) 10.23Stockholder Rights Plan.(7)10.29 1998 Non-Employee Director’s Stock Option Plan.(9)(11)Plan, as amended.(4)(10) 10.32Multi-Product License Agreement between QUALCOMM Incorporated and Telefonaktiebolaget LM Ericsson dated March 24, 1999.(12)10.33Subscriber Unit License Agreement between QUALCOMM Incorporated and Telefonaktiebolaget LM Ericsson dated March 24, 1999.(12)10.34Settlement Agreement and Mutual Release between QUALCOMM Incorporated and Telefonaktiebolaget LM Ericsson dated March 24, 1999.(12)10.36Amendment No. 1 dated as of May 24, 1999 to the Asset purchase Agreement dated as of March 24, 1999 between QUALCOMM Incorporated and Telefonaktiebolaget LM Ericsson (publ).(13)10.37Amendment to Stockholder Rights Plan dated November 15, 1999.(14)10.38Credit Agreement dated as of May 5, 2000 between Globalstar, L.P. and the Company.(17)10.392001 Stock Option Plan.(18)10.40 Form of Stock Option Grant Notice and Agreement under the 2001 Stock Option Plan. (18)(4)(6) 10.41 2001 Employee Stock Purchase Plan.(18)Plan, as amended.(4)(6) 10.422001 Non-Employee Directors’ Stock Option Plan.(18)10.43 Form of Stock Option Grant Notice and Agreement under the 2001 Non-Employee Directors’ Stock Option Plan.(4)(11) 10.55 2001 Stock Option Plan, as amended.(4)(12) 10.58 Form of Annual Grant under the 1998 Non-Employee Directors’ Stock Option Plan.(4)(6) 10.59 Iridigm Display Corporation 2000 Stock Option Plan.(4)(13) 10.60 Forms of Stock Option Agreements under the Iridigm Display Corporation 2000 Stock Option Plan.(4)(13) 10.61 Summary of 2005 Annual Bonus Program (4)(14)
Exhibit | ||||
Number | Description | |||
10.62 | Offer Letter Agreement with Richard Sulpizio dated January 17, 2005.(4)(15) | |||
10.63 | Summary of Changes to Non-Employee Director Compensation Program.(4)(16) | |||
10.64 | Sulpizio Stock Option Agreement dated March 8, 2005 (18,000 Options).(2)(4) | |||
10.65 | Sulpizio Stock Option Agreement dated March 8, 2005 (157,000 Options).(2)(4) | |||
10.66 | 2001 Non-Employee Directors’ Stock Option Plan, as amended.(4)(17) | |||
10.67 | Description of 2005 Named Executive Officer Salaries.(7)(18) | |||
63
21 | Subsidiaries of the Registrant. | |||
23.1 | Consent of | |||
31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for | |||
31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for William E. Keitel. | |||
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for | |||
32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for William E. Keitel. |
(1) | Filed as Annex A to the Registrant’s Registration Statement on Form S-4 (No. 333-127725). | |||
Filed as an exhibit to the Registrant’s | ||
(3) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on September 30, 2005. | |
(4) | Indicates management or compensatory plan or arrangement required to be identified pursuant to Item 15(a). | |
Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (No. 33-42782). | ||
Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 27, 2004. | ||
(7) | Certain confidential portions deleted pursuant to Order Granting Application or Confidential Treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934 dated December 12, 1991. | |
Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 27, 1992. | ||
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. |
64
(10) | Filed as an exhibit to the Registrant’s | |
(11) | Filed as an exhibit to the Registrant’s | |
(12) | Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 28, | |
(13) | Filed as an exhibit to the Registrant’s Registration Statement on Form S-8 (No. 333 119904). | |
(14) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on | |
(15) | Filed as an exhibit to the Registrant’s | |
(16) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on | |
(17) | Filed as an exhibit to the | |
(18) | Filed | |
(19) | Filed as an exhibit to the Registrant’s | |
(20) | Filed | |
(21) | Filed as an exhibit to the Registrant’s | |
59
Reports on Form 8-K
On July 23, 2003, we furnished to the SEC a report on Form 8-K containing the July 23, 2003 press release by QUALCOMM Incorporated related to our announcement of third quarter fiscal 2003 results.
SIGNATURES
QUALCOMM Incorporated | |||||||
By /s/ Paul E. Jacobs | |||||||
Paul E. Jacobs, | |||||||
Chief Executive Officer |
60
65
POWER OF ATTORNEY
Know all persons by these presents, that each person whose signature appears below constitutes and appoints Irwin Mark Jacobs and William E. Keitel, 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.
61 Signature Title Date /s/ IRWIN MARKPAUL E. JACOBSIrwin Mark Jacobs Chief Executive Officer and Chairman(Principal Executive Officer) November 5, 20032, 2005 Paul E. Jacobs (Principal Executive Officer) /s/ WILLIAM E. KEITEL
William E. Keitel Chief Financial Officer
(Principal Financial and Accounting Officer) November 5, 20032, 2005 /s/ RICHARD C. ATKINSONIRWIN JACOBSRichard C. AtkinsonIrwin Jacobs DirectorChairman of the Board November 5, 20032, 2005 /s/ ADELIA A. COFFMANRICHARD C. ATKINSONAdelia A. CoffmanRichard C. Atkinson Director November 5, 20032, 2005 /s/ RAYMOND DITTAMOREADELIA A. COFFMANRaymond DittamoreAdelia A. Coffman Director November 5, 20032, 2005 /s/ DIANA LADY DOUGANDONALD CRUICKSHANKDiana Lady DouganDonald Cruickshank Director November 5, 20032, 2005 /s/ ROBERT E. KAHNRAYMOND V. DITTAMORERobert E. KahnRaymond V. Dittamore Director November 5, 20032, 2005 /s/ DUANE A. NELLESDIANA LADY DOUGANDuane A. NellesDiana Lady Dougan Director November 5, 20032, 2005 /s/ PETER M. SACERDOTEROBERT E. KAHNPeter M. SacerdoteRobert E. Kahn Director November 5, 20032, 2005 /s/ FRANK SAVAGEDUANE A. NELLESFrank SavageDuane A. Nelles Director November 5, 20032, 2005 /s/ BRENT SCOWCROFTPETER M. SACERDOTEBrent ScowcroftPeter M. Sacerdote Director November 5, 20032, 2005 /s/ MARC I. STERNMarc I. SternBRENT SCOWCROFTBrent Scowcroft Director November 5, 20032, 2005 /s/ MARC I. STERN
Marc I. SternDirector November 2, 2005 /s/ RICHARD SULPIZIO
Richard Sulpizio Director November 5, 20032, 200566
REPORT OF INDEPENDENT AUDITORS
Incorporated:
As discussed
F- 1
PRICEWATERHOUSECOOPERSrisk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
F- 12
F- 3thousands, except per share data) September 30, 2003 2002 Current assets: Cash and cash equivalents $ 2,045,094 $ 1,406,704 Marketable securities 2,516,003 1,411,178 Accounts receivable, net 483,793 536,950 Finance receivables, net 5,795 388,396 Inventories, net 110,351 88,094 Deferred tax assets 611,536 122 Other current assets 176,192 109,322 Total current assets 5,948,764 3,940,766 Marketable securities 810,654 381,630 Finance receivables, net 181,622 442,934 Other investments 128,651 276,414 Property, plant and equipment, net 622,265 686,283 Goodwill, net 346,464 344,803 Deferred tax assets 406,746 7,493 Other assets 377,270 425,725 Total assets $ 8,822,436 $ 6,506,048 Current liabilities: Trade accounts payable $ 195,065 $ 209,418 Payroll and other benefits related liabilities 141,000 126,005 Unearned revenue 174,271 183,482 Current portion of long-term debt (Note 11) 102,625 19,355 Other current liabilities 195,241 136,726 Total current liabilities 808,202 674,986 Unearned revenue 236,732 259,995 Long-term debt (Note 11) 123,302 94,288 Other liabilities 55,578 40,283 Total liabilities 1,223,814 1,069,552 Commitments and contingencies (Notes 3, 4 and 9) Minority interest in consolidated subsidiaries 50 44,540 Stockholders’ equity: Preferred stock, $0.0001 par value; issuable in series; 8,000 shares authorized; none outstanding at September 30, 2003 and 2002 — — Common stock, $0.0001 par value; 3,000,000 shares authorized; 798,353 and 778,549 shares issued and outstanding at September 30, 2003 and 2002 81 79 Paid-in capital 6,324,971 4,918,202 Retained earnings 1,297,289 604,624 Accumulated other comprehensive loss (23,769 ) (130,949 ) Total stockholders’ equity 7,598,572 5,391,956 Total liabilities and stockholders’ equity $ 8,822,436 $ 6,506,048 See accompanying notes.F- 2QUALCOMM IncorporatedCONSOLIDATED STATEMENTS OF OPERATIONS(In thousands,millions, except per share data) Years Ended September 30, 2003 2002 2001 Revenues: Equipment and services $ 2,985,760 $ 2,204,835 $ 1,907,856 Licensing and royalty fees 984,876 834,725 771,930 3,970,636 3,039,560 2,679,786 Operating expenses: Cost of equipment and services revenues 1,430,047 1,137,360 1,035,103 Research and development 523,267 451,678 414,760 Selling, general and administrative 534,915 508,644 367,155 Amortization of goodwill and other acquisition-related intangible assets (Note 1) 8,589 259,196 255,230 Asset impairment and related charges (Notes 4 and 11) 194,258 459 518,026 Other (30,675 ) 8,955 50,825 Total operating expenses 2,660,401 2,366,292 2,641,099 Operating income 1,310,235 673,268 38,687 Interest expense (30,709 ) (25,731 ) (10,235 ) Investment income (expense), net (Note 5) 5,621 (186,412 ) (317,091 ) Other — — (167,001 ) Income (loss) before income taxes and accounting changes 1,285,147 461,125 (455,640 ) Income tax expense (457,706 ) (101,448 ) (104,501 ) Income (loss) before accounting changes 827,441 359,677 (560,141 ) Accounting changes, net of tax (Note 1) — — (17,937 ) Net income (loss) $ 827,441 $ 359,677 $ (578,078 ) Basic earnings (loss) per common share: Income (loss) before accounting changes $ 1.05 $ 0.47 $ (0.74 ) Accounting changes, net of tax — — (0.02 ) Net income (loss) $ 1.05 $ 0.47 $ (0.76 ) Diluted earnings (loss) per common share: Income (loss) before accounting changes $ 1.01 $ 0.44 $ (0.74 ) Accounting changes, net of tax — — (0.02 ) Net income (loss) $ 1.01 $ 0.44 $ (0.76 ) Shares used in per share calculations: Basic 789,586 770,887 755,969 Diluted 817,755 809,329 755,969 September 25, September 26, 2005 2004 Current assets: Cash and cash equivalents $ 2,070 $ 1,214 Marketable securities 4,478 4,768 Accounts receivable, net 544 581 Inventories 177 154 Deferred tax assets 343 409 Other current assets 179 101 Total current assets 7,791 7,227 Marketable securities 2,133 1,653 Property, plant and equipment, net 1,022 675 Goodwill 571 356 Deferred tax assets 444 493 Other assets 518 416 Total assets $ 12,479 $ 10,820 Current liabilities: Trade accounts payable $ 376 $ 286 Payroll and other benefits related liabilities 196 194 Unearned revenue 163 172 Other current liabilities 335 242 Total current liabilities 1,070 894 Unearned revenue 146 170 Other liabilities 144 92 Total liabilities 1,360 1,156 Commitments and contingencies (Notes 4 and 9) Stockholders’ equity: Preferred stock, $0.0001 par value; issuable in series; 8 shares authorized; none outstanding at September 25, 2005 and September 26, 2004 — — Common stock, $0.0001 par value; 6,000 shares authorized; 1,640 and 1,635 shares issued and outstanding at September 25, 2005 and September 26, 2004 — — Paid-in capital 6,753 6,940 Retained earnings 4,328 2,709 Accumulated other comprehensive income 38 15 Total stockholders’ equity 11,119 9,664 Total liabilities and stockholders’ equity $ 12,479 $ 10,820 F-3
F- 4 Year Ended September 25, September 26, September 28, 2005 2004 2003 Revenues: Equipment and services $ 3,744 $ 3,514 $ 2,862 Licensing and royalty fees 1,929 1,366 985 5,673 4,880 3,847 Operating expenses: Cost of equipment and services revenues 1,645 1,484 1,268 Research and development 1,011 720 523 Selling, general and administrative 631 547 483 Total operating expenses 3,287 2,751 2,274 Operating income 2,386 2,129 1,573 Investment income (expense), net (Note 5) 423 184 (8 ) Income from continuing operations before income taxes 2,809 2,313 1,565 Income tax expense (666 ) (588 ) (536 ) Income from continuing operations 2,143 1,725 1,029 Discontinued operations (Note 12): Loss from discontinued operations before income taxes — (10 ) (280 ) Income tax benefit — 5 78 Loss from discontinued operations — (5 ) (202 ) Net income $ 2,143 $ 1,720 $ 827 Basic earnings per common share from continuing operations $ 1.31 $ 1.07 $ 0.65 Basic loss per common share from discontinued operations — (0.01 ) (0.13 ) Basic earnings per common share $ 1.31 $ 1.06 $ 0.52 Diluted earnings per common share from continuing operations $ 1.26 $ 1.03 $ 0.63 Diluted loss per common share from discontinued operations — — (0.12 ) Diluted earnings per common share $ 1.26 $ 1.03 $ 0.51 Shares used in per share calculations: Basic 1,638 1,616 1,579 Diluted 1,694 1,675 1,636 Dividends per share announced $ 0.320 $ 0.190 $ 0.085
Years Ended September 30 | ||||||||||||||
2003 | 2002 | 2001 | ||||||||||||
Operating Activities: | ||||||||||||||
Net income (loss) | $ | 827,441 | $ | 359,677 | $ | (578,078 | ) | |||||||
Depreciation and amortization | 179,694 | 394,257 | 319,811 | |||||||||||
Asset impairment and related charges and credits | 194,258 | 459 | 746,330 | |||||||||||
Net realized gains on marketable securities and other investments | (72,818 | ) | (2,476 | ) | (69,687 | ) | ||||||||
Change in fair values of derivative investments | 3,201 | 58,874 | 242,849 | |||||||||||
Other-than-temporary losses on marketable securities and other investments | 138,456 | 230,491 | 198,398 | |||||||||||
Minority interest in (loss) income of consolidated subsidiaries | (36,949 | ) | (52,498 | ) | 3,769 | |||||||||
Equity in losses of investees | 126,015 | 86,958 | 185,060 | |||||||||||
Non-cash income tax expense | 332,964 | 12,394 | 29,948 | |||||||||||
Accounting changes, net of tax | — | — | 17,937 | |||||||||||
Other non-cash charges and credits | 26,900 | 9,965 | (31,068 | ) | ||||||||||
Increase (decrease) in cash resulting from changes in: | ||||||||||||||
Proceeds from (purchases of) trading securities | 2,085 | (2,036 | ) | — | ||||||||||
Accounts receivable, net | 60,318 | (4,544 | ) | 69,541 | ||||||||||
Inventories, net | (21,303 | ) | 11,187 | (40,735 | ) | |||||||||
Other assets | 7,302 | 12,472 | 19,762 | |||||||||||
Trade accounts payable | (12,811 | ) | 411 | (13,838 | ) | |||||||||
Payroll, benefits, and other liabilities | 40,605 | 31,565 | (67,440 | ) | ||||||||||
Unearned revenue | (13,474 | ) | (38,457 | ) | 18,858 | |||||||||
Net cash provided by operating activities | 1,781,884 | 1,108,699 | 1,051,417 | |||||||||||
Investing Activities: | ||||||||||||||
Capital expenditures | (230,622 | ) | (141,578 | ) | (114,191 | ) | ||||||||
Purchases of wireless licenses | (8,247 | ) | — | (83,774 | ) | |||||||||
Purchases of available-for-sale securities | (4,484,457 | ) | (1,754,055 | ) | (1,182,698 | ) | ||||||||
Proceeds from sale of available-for-sale securities | 3,183,445 | 1,049,404 | 977,285 | |||||||||||
Purchases of held-to-maturity securities | (355,382 | ) | (188,846 | ) | (301,870 | ) | ||||||||
Maturities of held-to-maturity securities | 257,025 | 257,371 | 973,879 | |||||||||||
Issuance of finance receivables | (150,046 | ) | (141,099 | ) | (498,196 | ) | ||||||||
Collection of finance receivables | 813,122 | 7,374 | 139,052 | |||||||||||
Issuance of notes receivable | (28,233 | ) | (3,914 | ) | (225,747 | ) | ||||||||
Collection of notes receivable | 4,181 | 16,202 | 15,581 | |||||||||||
Proceeds from sale of other investments | 4,131 | 9,374 | 26,730 | |||||||||||
Other investments and acquisitions | (37,456 | ) | (320,655 | ) | (246,538 | ) | ||||||||
Other items, net | 3,606 | 267 | 11,139 | |||||||||||
Net cash used by investing activities | (1,028,933 | ) | (1,210,155 | ) | (509,348 | ) | ||||||||
Financing Activities: | ||||||||||||||
Net proceeds from issuance of common stock | 191,473 | 119,671 | 132,690 | |||||||||||
Repurchase and retirement of common stock | (158,488 | ) | (5,773 | ) | — | |||||||||
Dividends paid | (134,776 | ) | — | — | ||||||||||
Proceeds from minority shareholders in consolidated subsidiary | — | 10,000 | — | |||||||||||
Proceeds from the issuance of long-term debt | 7,887 | 16,896 | 501 | |||||||||||
Payments on long-term debt | (19,937 | ) | (20,187 | ) | (620 | ) | ||||||||
Other items, net | — | — | 1,014 | |||||||||||
Net cash (used) provided by financing activities | (113,841 | ) | 120,607 | 133,585 | ||||||||||
Effect of exchange rate changes on cash | (720 | ) | (1,049 | ) | (3,923 | ) | ||||||||
Net increase in cash and cash equivalents | 638,390 | 18,102 | 671,731 | |||||||||||
Cash and cash equivalents at beginning of year | 1,406,704 | 1,388,602 | 716,871 | |||||||||||
Cash and cash equivalents at end of year | $ | 2,045,094 | $ | 1,406,704 | $ | 1,388,602 | ||||||||
Year Ended | ||||||||||||
September 25, | September 26, | September 28, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
Operating Activities: | ||||||||||||
Income from continuing operations | $ | 2,143 | $ | 1,725 | $ | 1,029 | ||||||
Depreciation and amortization | 200 | 163 | 146 | |||||||||
Asset impairment and related charges | — | — | 34 | |||||||||
Net realized gains on marketable securities and other investments | (179 | ) | (88 | ) | (80 | ) | ||||||
(Gains) losses on derivative instruments | (33 | ) | (7 | ) | 3 | |||||||
Other-than-temporary losses on marketable securities and other investments | 14 | 12 | 128 | |||||||||
Equity in losses of investees | 28 | 72 | 113 | |||||||||
Non-cash income tax expense | 498 | 419 | 411 | |||||||||
Other non-cash charges | — | 35 | 13 | |||||||||
Proceeds from (purchases of) trading securities | — | — | 2 | |||||||||
Increase (decrease) in cash resulting from changes in: | ||||||||||||
Accounts receivable, net | 35 | (93 | ) | 53 | ||||||||
Inventories | (23 | ) | (50 | ) | (23 | ) | ||||||
Other assets | (74 | ) | 51 | (12 | ) | |||||||
Trade accounts payable | 57 | 151 | (24 | ) | ||||||||
Payroll, benefits and other liabilities | 49 | 148 | 43 | |||||||||
Unearned revenue | (29 | ) | (57 | ) | (12 | ) | ||||||
Net cash provided by operating activities | 2,686 | 2,481 | 1,824 | |||||||||
Investing Activities: | ||||||||||||
Capital expenditures | (576 | ) | (332 | ) | (202 | ) | ||||||
Purchases of available-for-sale securities | (8,055 | ) | (8,372 | ) | (4,484 | ) | ||||||
Proceeds from sale of available-for-sale securities | 8,072 | 5,026 | 3,183 | |||||||||
Purchases of held-to-maturity securities | — | (184 | ) | (355 | ) | |||||||
Maturities of held-to-maturity securities | 10 | 401 | 257 | |||||||||
Issuance of finance receivables | — | (1 | ) | (150 | ) | |||||||
Collection of finance receivables | 2 | 196 | 813 | |||||||||
Other investments and acquisitions, net of cash acquired | (249 | ) | (70 | ) | (37 | ) | ||||||
Other items, net | 20 | 10 | (17 | ) | ||||||||
Net cash used by investing activities | (776 | ) | (3,326 | ) | (992 | ) | ||||||
Financing Activities: | ||||||||||||
Proceeds from issuance of common stock | 386 | 330 | 191 | |||||||||
Repurchase and retirement of common stock | (953 | ) | — | (166 | ) | |||||||
Proceeds from put options | 37 | 5 | 7 | |||||||||
Dividends paid | (524 | ) | (308 | ) | (135 | ) | ||||||
Net cash (used) provided by financing activities | (1,054 | ) | 27 | (103 | ) | |||||||
Net cash used by discontinued operations | — | (13 | ) | (89 | ) | |||||||
Effect of exchange rate changes on cash | — | — | (2 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents | 856 | (831 | ) | 638 | ||||||||
Cash and cash equivalents at beginning of year | 1,214 | 2,045 | 1,407 | |||||||||
Cash and cash equivalents at end of year | $ | 2,070 | $ | 1,214 | $ | 2,045 | ||||||
F- 5
F-4
F- 6thousands)millions) Accumulated Common Stock Other Total Paid-in Retained Comprehensive Stockholders’ Shares Amount Capital Earnings Income (Loss) Equity 747,651 $ 75 $ 4,653,818 $ 823,025 $ (8,655 ) $ 5,468,263 Components of comprehensive loss: Net loss — — — (578,078 ) — (578,078 ) Foreign currency translation — — — — (39,515 ) (39,515 ) Change in unrealized loss on securities, net of income taxes of $42,551 — — — — (222,931 ) (222,931 ) Reclassification adjustment for net realized gains included in net loss, net of income taxes of $18,181 — — — — (27,044 ) (27,044 ) Reclassification adjustment for other-than-temporary losses on marketable securities included in net loss, net of income taxes of $47,092 — — — — 70,053 70,053 Reclassification adjustment for losses included in accounting change, net of income taxes of $2,638 — — — — 3,925 3,925 Total comprehensive loss �� (793,590 ) Exercise of stock options 14,831 1 92,051 — — 92,052 Issuance for Employee Stock Purchase and Executive Retirement Plans 758 — 40,639 — — 40,639 Stock-based compensation expense — — 2,661 — — 2,661 Shares issued for business acquisitions 49 — — — — — Adjustment to spin-off of Leap Wireless — — 2,390 — — 2,390 763,289 76 4,791,559 244,947 (224,167 ) 4,812,415 Components of comprehensive income: Net income — — — 359,677 — 359,677 Foreign currency translation — — — — (15,225 ) (15,225 ) Change in unrealized loss on securities — — — — (85,714 ) (85,714 ) Reclassification adjustment for net realized gains included in net income, net of income taxes of $524 — — — — (11,620 ) (11,620 ) Reclassification adjustment for other-than-temporary losses on marketable securities included in net income — — — — 205,777 205,777 Total comprehensive income 452,895 Exercise of stock options 14,325 2 81,369 — — 81,371 Tax benefit from exercise of stock options — — 10,606 — — 10,606 Issuance for Employee Stock Purchase and Executive Retirement Plans 1,145 1 38,302 — — 38,303 Repurchase and retirement of common stock (210 ) — (5,773 ) — — (5,773 ) Stock-based compensation expense — — 2,139 — — 2,139 778,549 79 4,918,202 604,624 (130,949 ) 5,391,956 Components of comprehensive income: Net income — — — 827,441 — 827,441 Foreign currency translation — — — — (3,225 ) (3,225 ) Change in unrealized gain/loss on securities, net of income taxes of $47,340 — — — — 69,543 69,543 Reclassification adjustment for net realized gains included in net income, net of income taxes of $26,641 — — — — (41,292 ) (41,292 ) Reclassification adjustment for other-than-temporary losses on marketable securities included in net income, net of income taxes of $18,045 — — — — 82,154 82,154 Total comprehensive income 934,621 Exercise of stock options 23,347 2 153,257 — — 153,259 Tax benefit from exercise of stock options — — 267,087 — — 267,087 Issuance for Employee Stock Purchase and Executive Retirement Plans 1,372 — 38,214 — — 38,214 Reversal of the valuation allowance on certain deferred tax assets (Note 6) — — 1,105,640 — — 1,105,640 Repurchase and retirement of common stock (4,915 ) — (158,488 ) — — (158,488 ) Dividends — — — (134,776 ) — (134,776 ) Stock-based compensation expense — — 1,059 — — 1,059 798,353 $ 81 $ 6,324,971 $ 1,297,289 $ (23,769 ) $ 7,598,572 Accumulated Other Total Common Stock Paid-in Retained Comprehensive Stockholders’ Shares Capital Earnings Income (Loss) Equity 1,557 $ 4,918 $ 605 $ (131 ) $ 5,392 Components of comprehensive income: Net income — — 827 — 827 Foreign currency translation — — — (3 ) (3 ) Unrealized net gains on securities, net of income taxes of $45 — — — 69 69 Reclassification adjustment for net realized gains included in net income, net of income taxes of $27 — — — (41 ) (41 ) Reclassification adjustment for other-than-temporary losses on marketable securities included in net income, net of income taxes of $18 — — — 82 82 Total comprehensive income 934 Exercise of stock options 47 153 — — 153 Tax benefit from exercise of stock options — 267 — — 267 Issuance for Employee Stock Purchase and Executive Retirement Plans 3 38 — — 38 Reversal of the valuation allowance on certain deferred tax assets — 1,106 — — 1,106 Repurchase and retirement of common stock (10 ) (158 ) — — (158 ) Dividends — — (135 ) — (135 ) Stock-based compensation expense — 1 — — 1 1,597 6,325 1,297 (24 ) 7,598 Components of comprehensive income: Net income — — 1,720 — 1,720 Foreign currency translation — — — 56 56 Unrealized net gains on securities, net of income taxes of $20 — — — 29 29 Reclassification adjustment for net realized gains included in net income, net of income taxes of $35 — — — (53 ) (53 ) Reclassification adjustment for other-than-temporary losses on marketable securities included in net income, net of income taxes of $5 — — — 7 7 Total comprehensive income 1,759 Exercise of stock options 36 284 — — 284 Tax benefit from exercise of stock options — 285 — — 285 Issuance for Employee Stock Purchase and Executive Retirement Plans 2 46 — — 46 Dividends — — (308 ) — (308 ) 1,635 6,940 2,709 15 9,664 Components of comprehensive income: Net income — — 2,143 — 2,143 Foreign currency translation — — — 5 5 Unrealized net gains on securities, net of income taxes of $73 — — — 103 103 Unrealized net gains on derivative instruments, net of income taxes of $6 — — — 9 9 Reclassification adjustment for net realized gains on securities included in net income, net of income taxes of $68 — — — (102 ) (102 ) Reclassification adjustment for other-than-temporary losses on marketable securities included in net income, net of income taxes of $5 — — — 8 8 Total comprehensive income 2,166 Exercise of stock options 30 348 — — 348 Tax benefit from exercise of stock options — 346 — — 346 Issuance for Employee Stock Purchase and Executive Retirement Plans 2 56 — — 56 Repurchase and retirement of common stock (27 ) (953 ) — — (953 ) Dividends — — (524 ) — (524 ) Value of options exchanged for acquisitions — 19 — — 19 Deferred stock-based compensation from acquisitions — (3 ) — — (3 ) 1,640 $ 6,753 $ 4,328 $ 38 $ 11,119 F-5
QUALCOMM Incorporated (the Company or QUALCOMM), a Delaware corporation, develops, designs, manufactures and markets digital wireless telecommunications products and services based on its Code Division Multiple Access (CDMA) technology. The Company is a leading developer and supplier of CDMA-based integrated circuits and system software for wireless voice and data communications, multimedia functions and global positioning system products to wireless device and infrastructure manufacturers. The Company grants licenses to use portions of its intellectual property portfolio, which includes certain patent rights essential to and/or useful in the manufacture and sale of CDMA products, and receives license fees as well as ongoing royalties based on sales by licensees of wireless telecommunications equipment products incorporating its CDMA technologies. The Company provides satellite and terrestrial-based two-way data messaging and position reporting services for transportation companies, private fleets, The Company’s consolidated financial statements include the assets, liabilities and operating results of majority-owned Certain of the Company’s foreign subsidiaries are included in the consolidated financial statements one month in arrears to facilitate the timely inclusion of such entities in the Company’s consolidated financial statements. The Company does not have any investments in entities it believes are variable interest entities for which the Company is the primary beneficiary. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in the Company’s financial statements and the accompanying notes. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform to the current year presentation. The Company operates and reports using a 52-53 week fiscal year ending on the last Sunday in September. weeks. The Company derives revenue principally from sales of integrated circuit products, from royalties for its intellectual property, from messaging and other services and related hardware sales, from software development and licensing and related services, and from license fees for intellectual property. The timing of revenue recognition and the amount of revenue actually recognized in each case depends upon a variety of factors, including the specific terms of each arrangement and the nature of the Company’s deliverables and obligations. The development stage of the Company’s customers’ products does not affect the timing or amount of revenue recognized. F- 7CompanyCompany.and construction equipment fleets.fleets and other enterprise companies. The Company provides the BREW (Binary Runtime Environment for Wireless) product and services to wireless network operators, handset manufacturers and application developers and support for developing and delivering over-the-air wireless applications and services. The Company also makes strategic investments to promote the worldwide adoptionsadoption of CDMA products and services for wireless voice and Internet data communications.ConsolidationConsolidation.subsidiaries and other subsidiaries controlled by the Company.subsidiaries. The ownership of the other interest holders of consolidated subsidiaries is reflected as minority interest.interest and is not significant. All significant intercompany accounts and transactions have been eliminated.PreparationPreparation.YearYear.As a result, theThe fiscal years ended September 30,25, 2005, September 26, 2004 and September 28, 2003 2002, and 2001each include 52 weeks, 52 weeks, and 53 weeks, respectively. For presentation purposes, the Company presents its fiscal years as ending on September 30.RecognitionRecognition.
In December 1999,
recognition are met, if later. Revenues from providing services are recorded when earned.
F-6
QUALCOMM IncorporatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accounting. Beginning with the adoption of SAB 101 until the fourth quarter of fiscal 2003, theThe Company recognized revenues and expenses from sales of certain satellite and terrestrial-based two-way data messaging and position reporting hardware and related software products by its QWBS division (Note 10) ratably over the shorter of the estimated useful life of the hardware product or the expected messaging service period, which is typically five years. SAB 101 requiredyears, until the fourth quarter of fiscal 2003. The ratable recognition of these sales had been required because the messaging service was considered integral to the functionality of the hardware and software. Because EITF Issue No. 00-21 does not require the deferral of revenue when an undelivered element is considered integral to the functionality of a delivered element and because EITF Issue No. 00-21 otherwise requires separate unit accounting in multiple element arrangements. Given that the Company began recognizing revenues and expensesmeets the criteria stipulated in EITF Issue No. 00-21, the sale of the hardware is accounted for as a unit of accounting separate from such salesthe future service to be provided by the Company. Accordingly, starting in the fourth quarter of fiscal 2003, the Company began recognizing revenues allocated to the hardware using the residual method and related expenses from such sales at the time of shipment, or when title and risk of loss pass to the customer and other criteria for revenue recognition are met, if later.later, instead of amortizing the related revenue over future periods. The Company has elected to adopt EITF Issue No. 00-21 prospectively for revenue arrangements entered into after the third quarter of fiscal 2003, rather than reporting the change in accounting as a cumulative-effect adjustment. AsThe amortization of QWBS equipment revenue that was deferred in the periods prior to the adoption of EITF Issue No. 00-21 will continue with a result,declining impact through fiscal 2008. QWBS amortized $52 million, $76 million and $23 million in revenue related to such prior period equipment sales in fiscal 2005 and 2004 and during the fourth quarter of fiscal 2003, the Company recognized certain revenue and related cost of sales for QWBS equipment sales upon shipment, while continuing to amortize unearned revenue and cost of sales, with an $11 million gross margin effect, for units shipped in prior periods.respectively. Deferred revenues and expenses related to the historical QWBS sales that will continue to be amortized in future periods were $183$54 million and $102$34 million, respectively, at September 30, 2003.25, 2005. Gross margin related to these prior sales is expected to be recognized as follows: $37 million in fiscal 2004, $24 million in fiscal 2005, $13 million in fiscal 2006, $6 million in fiscal 2007 and $1 million in fiscal 2008.
The Company licenses rights to use its intellectual property portfolio, which includes patent rights to use cdmaOne, CDMA2000 1X/1xEV-DO/1xEV-DV, TD-SCDMA and WCDMA technologies. Licensees typically pay a non-refundable license fee in one or more installments and on-going royalties based on their sales of products incorporating the Company’s intellectual property. License fees are generally recognized over the estimated period of future benefit to the average licensee, typically five to seven years. The Company earns royalties on CDMA products sold worldwide by its licensees in the period that the licensees’ sales occur. The Company’s licensees, however, do not report and pay royalties owed until the subsequent quarter and, in some instances, payment is on a semi-annual basis. Therefore, the Company estimates royalty revenues from certain licensees (the Estimated Licensees) in the current quarter when reasonable estimates of such amounts can be made. Not all royalties earned are estimated. Royalties for licensees for which the Company has minimal history and certain licensees that do not buy its integrated circuit products are recorded one quarter in arrears when they are reported to the Company by those licensees. Estimates of royalty revenues for the Estimated Licensees are based on analyses of the Company’s sales of integrated circuits to its Estimated Licensees, historical royalty data by Estimated Licensee, the relationship between the timing of the Company’s sales of integrated circuits to its Estimated Licensees and its Estimated Licensees’ sales of CDMA products, average sales price forecasts, and current market and economic trends. Once royalty reports are received from the Estimated Licensees, the variance between such reports and the estimate is recorded in royalty revenue in the period the reports are received. The recognition of this variance in most cases lags the royalty estimate by one quarter.
The following table summarizes royalty related data for fiscal 2003, 2002 and 2001 (in millions):
F-7
QUALCOMM IncorporatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Year | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
Components of royalty revenues | ||||||||||||
Estimate at end of prior year* | $ | 150 | $ | 122 | $ | 100 | ||||||
Royalties reported in first quarter related to prior year estimate | 167 | 146 | 133 | |||||||||
Variance included in current year revenues | 17 | 24 | 33 | |||||||||
Other royalties reported in current year | 670 | 551 | 506 | |||||||||
Estimate at year end | 151 | 150 | 122 | |||||||||
Total royalty revenues from licensees | $ | 838 | $ | 725 | $ | 661 | ||||||
For example, for fiscal 2002, the Company estimated royalties of $150 million from the Estimated Licensees for the fourth quarter of fiscal 2002. The actual royalties reported to the Company by the Estimated Licensees, on a one quarter lag basis, during the first quarter of fiscal 2003 were $167 million. The variance of $17 million was recorded in royalty revenues in the first quarter of fiscal 2003. Therefore, total royalty revenues from licensees for fiscal 2003 of $838 million included: 1) the variance of $17 million, 2) other royalties reported during fiscal 2003 of $670 million, and 3) the estimate made in the fourth quarter of fiscal 2003 of $151 million based upon Estimated Licensees’ estimated sales during the fourth quarter of fiscal 2003, which the Company believes will be reported by the Estimated Licensees in the first quarter of fiscal 2004.
Revenues from sales of the Company’s CDMA-based integrated circuits are recognized at the time of shipment, or when title and risk of loss pass to the customer and other criteria for revenue recognition are met, if later. Revenues from providing services are recorded when earned.
F- 8
performance obligations.
A significant portion of the Company’s revenues is concentrated with a limited number of customers as the worldwide market for wireless telecommunications products is dominated by a small number of large corporations.
F-8
QUALCOMM IncorporatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenues from Samsung, LG Electronics, Samsung and Motorola, customers of the Company’s QCT, QTL and other nonreportable segments, comprised 17%, 13% and 13% of total consolidated revenues, respectively, in fiscal 2003. Revenues from Samsung, Kyocera and LG Electronics, customers of the Company’s QCT, QTL and other nonreportableQWI segments, comprised 15%, 14%13% and 11% of total consolidated revenues, respectively, in fiscal 2002,2005, as compared to 14%15%, 12%15% and 10% of total consolidated revenues in fiscal 2004, respectively, and 13%, 17% and 13%, respectively, in fiscal 2001.2003. Aggregated accounts receivable from Samsung, and LG Electronics and Motorola comprised 25%45% and 23%51% of net receivablesgross accounts receivable at September 30, 200325, 2005 and 2002,September 26, 2004, respectively.
Services Revenues.Cost of equipment and services revenues is primarily comprised of the cost of equipment revenues, the cost of messaging services revenues and the cost of development and other services revenues. Cost of equipment revenues consists of the cost of equipment sold and sustaining engineering costs, including personnel and related costs. Cost of messaging services revenues consists principally of satellite transponder costs, network operations expenses, including personnel and related costs, depreciation, and airtime charges by telecommunications operators. Cost of development and other services revenues primarily includes personnel costs and related expenses.
Costs incurred in research and development activities are expensed as incurred, except certain software development costs capitalized after technological feasibility of the software is established.
Costs incurred for shipping and handling are included in cost of revenues at the time the related revenue is recognized. Amounts billed to a customer for shipping and handling are reported as revenue.
The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Tax law and rate changes are reflected in income in the period such changes are enacted. The Company records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized.
F- 9
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are comprised of money market funds, certificates of deposit, commercial paper and government agencies’ securities. The carrying amounts approximate fair value due to the short maturities of these instruments.
Management determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date. Held-to-maturity securities are carried at amortized cost, which approximates fair value. Available-for-sale securities and trading securities are stated at fair value as determined by the most recently traded price of each security at the balance sheet date. The net unrealized gains or losses on available-for-sale securities are reported as a component of comprehensive income (loss), net of tax. Unrealized gains or losses on trading securities are reported in investment income (expense). The specific identification method is used to compute the realized gains and losses on debt and equity securities.
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments. The Company considers the following factors when determining
F-9
QUALCOMM IncorporatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
if collection of a fee is reasonably assured: customer credit-worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment terms. If the Company has no previous experience with the customer, the Company typically obtains reports from various credit organizations to ensure that the customer has a history of paying its creditors. The Company may also request financial information, including financial statements or other documents (e.g., bank statements) to ensure that the customer has the means of making payment. If these factors do not indicate collection is reasonably assured, revenue is deferred until collection becomes reasonably assured, which is generally upon receipt of cash. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required.
The Company also maintains allowances for doubtful accounts for estimated losses resulting from the inability of entities it has financed to make required payments. The Company evaluates the adequacy of allowances for doubtful finance and note receivables based on analyses of the financed entities’ credit-worthiness, current economic trends or market conditions, review of the entities’ current and projected financial and operational information, and consideration of the fair value of collateral to be received, if applicable. From time to time, the Company may consider third party evaluations, valuation reports or advice from investment banks. If the financial condition of the financed entities were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required.
Inventories are valued at the lower of cost or market (replacement cost, not to exceed net realizable value) using the first-in, first-out method. Recoverability of inventory is assessed based on review of committed purchase orders from customers, as well as purchase commitment projections provided by customers, among other things.
Property, plant and equipment are recorded at cost and depreciated or amortized using the straight-line method over their estimated useful lives. Buildings and building improvements are depreciated over thirty30 years and fifteen15 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 two2 to eighteen15 years. Direct external and internal costs of developing software for internal use are capitalized subsequent to the preliminary stage of development. Maintenance, repairs, and minor renewals and betterments are charged to expense as incurred.
F-10
Other Investments
The Company makes strategic investments in companies that have developed or are developing innovative wireless data applications and wireless carriersoperators that promote the worldwide deployment of CDMA systems. Investments in corporate entities with less than a 20% voting interest are generally accounted for under the cost method. The Company uses the equity method to account for investments in corporate entities, including limited liability corporations that do not maintain specific ownership accounts, in which it has a voting interest of 20% to 50% and other than minor to 50% ownership interests in partnerships and limited liability corporations that do maintain specific ownership accounts, or in which it otherwise has the ability to exercise 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 and advances to the investee and financial guarantees on behalf of the investee that create additional basis.
The Company’s equity in net earnings or losses of its investees are recorded one month in arrears to facilitate the timely inclusion of such equity in net earnings or losses in the Company’s consolidated financial statements.
F-10
QUALCOMM IncorporatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
investee’s competitors and/or industry, and the outlook for the overall industry in which the investee operates. From time to time, the Company may consider third party evaluations, valuation reports or advice from investment banks. If events and circumstances indicate that a decline in the value of these assets has occurred and is other than temporary, the Company records a charge to investment income (expense).
The Company adopted Statement of Financial Accounting Standards No. 133 (FAS 133), “Accounting for Derivative Instruments and Hedging Activities,” as of the beginning of fiscal 2001. FAS 133 requires that certain derivative instruments be recorded at fair value. Derivative instruments held by the Company are comprised of warrants and other rights to purchase equity interests in certain other companies acquired as a result of strategic investment and financing activities. The Company recorded a $129 million gain, net of taxes of $87 million, as the cumulative effect of the change in accounting principle as of the beginning of fiscal 2001. The cumulative effect of the accounting change related primarily to the recognition of the unrealized gain on a warrant to purchase 4,500,000 shares of Leap Wireless International, Inc. (Leap Wireless) common stock issued to the Company in connection with its spin-off of Leap Wireless in September 1998 (Leap Wireless Spin-off). At September 30, 2003 and 2002, the Company had the right to purchase 3,375,000 shares of Leap Wireless common stock under the warrant. The warrant’s value was insignificant at September 30, 2003 and 2002.
The Company holds warrants to purchase equity interests in certain other publicly-traded and private companies related to its strategic investment activities. The Company’sThese warrants are not held for trading or hedging purposes. The Company’sCertain of these warrants are recorded at fair value. Changes in fair value are recorded in investment income (expense) as a change in fair values ofgains (losses) on derivative instruments because the warrants do not meet the requirements for hedge accounting.instruments. Warrants that do not have contractual net settlement provisions are recorded at cost.
The recorded values of the warrants in other current assets were $1 million and $4 million at September 25, 2005 and September 26, 2004, respectively.
At September 30, 2003 and 2002,Equity.” Changes in the fair value of put options are recorded in investment income (expense) as gains (losses) on derivative instruments. The value of the Company’s derivative investments totaled $2 million and $1 million, respectively, and none of the Company’s derivatives were designated as hedges. The Company’s derivative investments are includedput options recorded in other investments.current liabilities was $7 million at September 25, 2005. The
F-11
Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Effective as of the beginning of fiscal 2003, the Company fully adopted Statement of Financial Accounting Standards No. 141 (FAS 141), “Business Combinations,” and Statement of Financial Accounting Standards No. 142 (FAS 142), “Goodwill and Other Intangible Assets.” The provisions of FAS 141 (1) require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, (2) provide specific criteria for the initial recognition and measurement of intangible assets apart from goodwill, and (3) require that unamortized negative goodwill be written off immediately as an extraordinary gain instead of being deferred and amortized. FAS 141 also required that, upon adoption of FAS 142, the Company reclassify the carrying amounts of certain intangible assets into or out of goodwill, based on certain criteria. Upon the adoption of FAS 142, the Company reclassified approximately $2 million of certain intangible assets into goodwill.
FAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their initial recognition. The provisions of FAS 142 (1) prohibit the amortization of goodwill and indefinite-lived intangible assets, (2) require that goodwill and indefinite-lived intangible assets be tested annually for impairment (and in interim periods if certain events occur indicating that the carrying value of goodwill and/or indefinite-lived intangible assets may be impaired), (3) require that reporting units be identified for the purpose of assessing potential impairments of goodwill, and (4) remove the forty-year limitation on the amortization period of intangible assets that have finite lives. The Company completed its transitional testing for goodwill impairment upon adoption of FAS 142 and its annual testing for fiscal 2003 and determined that its recorded goodwill was not impaired.
F-11
QUALCOMM IncorporatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Starting in fiscal 2003, the Company no longer records goodwill amortization. Goodwill is tested annually for impairment and in interim periods if certain events occur indicating that the carrying value of goodwill may be impaired. Other intangible assets are amortized on a straight-line basis over their useful lives, ranging from three to twenty-eight years.The Company completed its annual testing for fiscal 2005, 2004 and 2003 and determined that its recorded goodwill was not impaired.
Software development costs are amortized on a straight-line basis over the estimated economic life of the software, ranging from less than one year to four years, taking into account such factors as the effects of obsolescence, technological advances and competition. The results of operationsweighted-average amortization period for capitalized software was one year at both September 25, 2005 and earnings per share, assuming FAS 142 had been adopted atSeptember 26, 2004. Other intangible assets are amortized on a straight-line basis over their useful lives, ranging from less than one year to 28 years.
September 25, 2005 | September 26, 2004 | |||||||
Wireless licenses | 15 years | 15 years | ||||||
Marketing-related | 18 years | 17 years | ||||||
Technology-based | 9 years | 11 years | ||||||
Customer-related | 7 years | 8 years | ||||||
Other | 28 years | 28 years | ||||||
Total intangible assets | 13 years | 14 years |
September 30, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
Reported income (loss) before accounting changes | $ | 827,441 | $ | 359,677 | $ | (560,141 | ) | |||||
Goodwill amortization | — | 249,536 | 245,678 | |||||||||
Adjusted income (loss) before accounting changes | $ | 827,441 | $ | 609,213 | $ | (314,463 | ) | |||||
Adjusted basic earnings (loss) before accounting changes per share | $ | 1.05 | $ | 0.79 | $ | (0.42 | ) | |||||
Adjusted diluted earnings (loss) before accounting changes per share | $ | 1.01 | $ | 0.75 | $ | (0.42 | ) | |||||
Reported net income (loss) | $ | 827,441 | $ | 359,677 | $ | (578,078 | ) | |||||
Goodwill amortization | — | 249,536 | 245,678 | |||||||||
Adjusted net income (loss) | $ | 827,441 | $ | 609,213 | $ | (332,400 | ) | |||||
Adjusted basic earnings (loss) per share | $ | 1.05 | $ | 0.79 | $ | (0.44 | ) | |||||
Adjusted diluted earnings (loss) per share | $ | 1.01 | $ | 0.75 | $ | (0.44 | ) | |||||
2004 to 2005 resulted from additions to intangible assets related to acquisitions (Note 11).
The Company adopted Statement of Financial Accounting Standards No. 144 (FAS 144), “Accounting for the Impairment or Disposal of Long-Lived Assets” as of the beginning of fiscal 2003. The adoption of this accounting standard did not have a material impact on the Company’s operating results and financial position. The Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the carrying amount of the long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Any required impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value and is recorded as a reduction in the carrying value of the related asset and a charge to operating results.
The Company is currently involved in certain legal proceedings. The Company estimates the range of liability related to pending litigation where the amount and range of loss can be estimated. The Company records its best estimate of a loss when the loss is considered probable. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, the Company records the minimum estimated liability related to the claim. As additional information becomes available, the Company assesses the potential liability related to the Company’s pending litigation and revises its estimates.
Estimated future warranty obligations related to certain products are provided by charges to operations in the period in which the related revenue is recognized. The Company establishes a reserve for warranty obligations based on its historical warranty experience.
F-12
QUALCOMM IncorporatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in the Company’s warranty liability were as follows (in thousands):
September 30, | ||||||||
2003 | 2002 | |||||||
Balance at beginning of the year | $ | 15,670 | $ | 19,748 | ||||
Charges to expense | 3,022 | 8,874 | ||||||
Release of warranty reserves | (6,669 | ) | (5,018 | ) | ||||
Usage | (8,476 | ) | (7,934 | ) | ||||
Balance at end of the year | $ | 3,547 | $ | 15,670 | ||||
In the normal course of business, the Company may provide guarantees to other parties. Upon issuance of a guarantee, the Company recognizes a liability for the fair value of the obligation it assumes under that guarantee, as required. At September 30, 2003, liabilities related to guarantees were not significant.
Stock-Based Compensation
The Company records compensation expense for employee stock options based upon their intrinsic value on the date of grant pursuant to Accounting Principles Board Opinion 25 (APB 25), “Accounting for Stock Issued to Employees.” Because the Company establishes the exercise price based on the fair market value of the Company’s stock at the date of grant, the stock options have no intrinsic value upon grant, and therefore no expense is recorded. Each quarter, the Company reports the potential dilutive impact of stock optionsshare-based payments in its diluted earnings per common share using the treasury-stock method. Out-of-the-money stock options (i.e., the average stock price during the period is below the strike price of the stock option) are not included in diluted earnings per share.common share as their effect is anti-dilutive.
F-12
Equity instruments issued to non-employees for goods or services are accounted for at fair value and are marked to market until service is complete or a performance commitment date is reached.
Stock Option Plans | Purchase Plans | |||||||||||||||||||||||
2003 | 2002 | 2001 | 2003 | 2002 | 2001 | |||||||||||||||||||
Risk-free interest rate | 3.2 | % | 4.4 | % | 5.0 | % | 1.0 | % | 2.3 | % | 4.4 | % | ||||||||||||
Volatility | 58.0 | % | 58.0 | % | 63.0 | % | 41.1 | % | 69.0 | % | 78.0 | % | ||||||||||||
Dividend yield | 0.2 | % | 0.0 | % | 0.0 | % | 0.3 | % | 0.0 | % | 0.0 | % | ||||||||||||
Expected life (years) | 6.0 | 6.0 | 6.0 | 0.5 | 0.5 | 0.5 |
Stock Option Plans | Purchase Plans | |||||||||||||||||||||||
2005 | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||||||||||||||
Risk-free interest rate | 3.9 | % | 3.8 | % | 3.2 | % | 2.9 | % | 1.1 | % | 1.0 | % | ||||||||||||
Volatility | 36.5 | % | 53.2 | % | 58.0 | % | 29.8 | % | 33.3 | % | 41.1 | % | ||||||||||||
Dividend yield | 0.8 | % | 0.6 | % | 0.2 | % | 0.9 | % | 0.7 | % | 0.3 | % | ||||||||||||
Expected life (years) | 6.0 | 6.0 | 6.0 | 0.5 | 0.5 | 0.5 |
F-13
QUALCOMM IncorporatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
rights granted pursuant to the Employee Stock Purchase Plans during fiscal 2005, 2004 and 2003 2002were $8.76, $7.53 and 2001 were $9.60, $14.57 and $24.20, respectively,$4.80 per share.
share, respectively.
2003 | 2002 | 2001 | |||||||||||
Net income (loss), as reported | $ | 827,441 | $ | 359,677 | $ | (578,078 | ) | ||||||
Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax benefits | 639 | 1,279 | 1,591 | ||||||||||
Deduct: Stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects | (260,350 | ) | (235,193 | ) | (168,715 | ) | |||||||
Pro forma net income (loss) | $ | 567,730 | $ | 125,763 | $ | (745,202 | ) | ||||||
Earnings (loss) per share: | |||||||||||||
Basic - as reported | $ | 1.05 | $ | 0.47 | $ | (0.76 | ) | ||||||
Basic - pro forma | $ | 0.72 | $ | 0.16 | $ | (0.99 | ) | ||||||
Diluted - as reported | $ | 1.01 | $ | 0.44 | $ | (0.76 | ) | ||||||
Diluted - pro forma | $ | 0.69 | $ | 0.16 | $ | (0.99 | ) | ||||||
Year Ended | ||||||||||||
September 25, | September 26, | September 28, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
Net income, as reported | $ | 2,143 | $ | 1,720 | $ | 827 | ||||||
Add: Share-based employee compensation expense included in reported net income, net of related tax benefits | 2 | — | 1 | |||||||||
Deduct: Share-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects | (305 | ) | (281 | ) | (260 | ) | ||||||
Pro forma net income | $ | 1,840 | $ | 1,439 | $ | 568 | ||||||
Earnings per common share: | ||||||||||||
Basic — as reported | $ | 1.31 | $ | 1.06 | $ | 0.52 | ||||||
Basic — pro forma | $ | 1.12 | $ | 0.89 | $ | 0.36 | ||||||
Diluted — as reported | $ | 1.26 | $ | 1.03 | $ | 0.51 | ||||||
Diluted — pro forma | $ | 1.09 | $ | 0.86 | $ | 0.35 | ||||||
F-13
Foreign subsidiaries operating in a local currency environment use the local currency as the functional currency. Assets and liabilities are translated to United States dollars at year-endthe exchange rates;rate in effect at the balance sheet date; revenues, expenses, gains and losses are translated at rates of exchange that approximate the rates in effect at the transaction date. Resulting translation gains or losses are recognized as a component of other comprehensive income. The functional currency of the Company’s foreign investees that do not use local currencies is the United States dollar. Where the United States dollar is the functional currency, the monetary assets and liabilities are translated into United States dollars at the exchange rate in effect at the balance sheet date. Revenues, expenses, gains and losses associated with the monetary assets and liabilities are translated at the rates of exchange that approximate the rates in effect at the transaction date. Non-monetary assets and liabilities and related elements of expense,revenues, expenses, gains and losses are translated at historical rates. Resulting translation gains or losses of these foreign investees are recognized in the statements of operations.
Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, including foreign currency translation adjustments and unrealized gains and losses on marketable securities. The Company presents other comprehensive income (loss)��in its consolidated statements of stockholders’ equity.
F-14
QUALCOMM IncorporatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
operations as a result of the implementation of FAS 133. Unrealized losses on certain derivative instruments subject to FAS 133 were previously recorded as a component of other comprehensive income (loss).
September 30, | ||||||||
2003 | 2002 | |||||||
Foreign currency translation | $ | (82,987 | ) | $ | (79,762 | ) | ||
Unrealized gain (loss) on marketable securities, net of income taxes | 59,218 | (51,187 | ) | |||||
$ | (23,769 | ) | $ | (130,949 | ) | |||
September 25 | September 26, | |||||||
2005 | 2004 | |||||||
Foreign currency translation | $ | (22 | ) | $ | (27 | ) | ||
Unrealized gains on marketable securities, net of income taxes | 60 | 42 | ||||||
$ | 38 | $ | 15 | |||||
Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the reporting period. Diluted earnings (loss) per common share is computed by dividing net income (loss) by the combination of dilutive common share equivalents, comprised of shares issuable under the Company’s stock-basedshare-based compensation plans and shares subject to written put options, and the weighted average number of common shares outstanding during the reporting period.
The incremental dilutive common share equivalents, calculated using the treasury stock method, for fiscal 2005, 2004 and 2003 were approximately 56,127,000, 58,686,000 and 2002 were 28,169,000 and 38,442,000,56,338,000, respectively. The diluted loss per common share for fiscal 2001 is based only on the weighted average number of common shares outstanding during the period, as the inclusion of 51,188,000 common share equivalents would have been anti-dilutive.
Stock
F-14
Financial Accounting Standards Board (FASB) InterpretationIn December 2004, the FASB revised Statement No. 46 (FIN 46)123 (FAS 123R), “Consolidation“Share-Based Payment,” which requires companies to expense the estimated fair value of Variable Interest Entities,” was issued in January 2003. FIN 46 requires certain variable interest entities toemployee stock options and similar awards. On April 14, 2005, the U.S. Securities and Exchange Commission adopted a new rule amending the compliance dates for FAS 123R. In accordance with the new rule, the accounting provisions of FAS 123R will be consolidated byeffective for the primary beneficiary of the entity if the equity investorsCompany beginning in the entity do not have the characteristicsfirst quarter of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.fiscal 2006. The provisions of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003. Since January 31, 2003, the Company has not invested in any entities it believes are variable interest entities. For those arrangements entered into prior to February 1, 2003, the Company is requiredtentatively expects to adopt the provisions of FIN 46 atFAS 123R using a modified prospective application. FAS 123R, which provides certain changes to the endmethod for valuing share-based compensation among other changes, will apply to new awards and to awards that are outstanding on the effective date and are subsequently modified or cancelled. Compensation expense for outstanding awards for which the requisite service had not been rendered as of the first quarter of fiscal 2004,effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under FAS 123. At September 25, 2005, unamortized compensation expense related to outstanding unvested options, as determined in accordance with FAS 123, that the FASB Staff Position 46-6 which delayed the effective date of FIN 46 for those arrangements.Company expects to record during fiscal 2006 was approximately $394 million before income taxes. The Company will incur additional expense during fiscal 2006 related to new awards granted during 2006 that cannot yet be quantified. The Company is in the process of determining how the effect, if any,guidance regarding valuing share-based compensation as prescribed in FAS 123R will be applied to valuing share-based awards granted after the adoptioneffective date and the impact that the recognition of FIN 46compensation expense related to such awards will have on its financial statements.
F-15thousands)millions):F-15QUALCOMM IncorporatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Current Noncurrent September 30, September 30, 2003 2002 2003 2002 Held-to-maturity: Certificates of deposit $ 5,073 $ 76,153 $ — $ — Commercial paper — — — 6,200 Federal agencies 489 — 129,988 — Corporate medium-term notes 161,416 97,669 70,111 89,418 166,978 173,822 200,099 95,618 Available-for-sale: Federal agencies 346,056 270,896 — — U.S. government securities 349,398 238,286 — — Corporate medium-term notes 1,117,968 300,648 22,099 14,121 Mortgage and asset-backed securities 485,859 290,702 — — Non-investment grade debt securities 39,316 6,558 458,768 245,075 Equity securities 10,428 130,266 129,688 24,956 2,349,025 1,237,356 610,555 284,152 Trading: Corporate convertible bonds — — — 1,860 — — — 1,860 $ 2,516,003 $ 1,411,178 $ 810,654 $ 381,630 Current Noncurrent September 25, September 26, September 25, September 26, 2005 2004 2005 2004 Held-to-maturity: Government-sponsored enterprise securities $ 60 $ — $ — $ 70 Corporate bonds and notes 70 10 — 60 130 10 — 130 Available-for-sale: U.S. Treasury securities 151 267 — — Government-sponsored enterprise securities 704 542 — — Municipal bonds 10 — — — Foreign government bonds 17 8 — — Corporate bonds and notes 2,645 2,603 14 3 Mortgage and asset-backed securities 767 1,226 — — Non-investment grade debt securities 24 — 694 571 Equity mutual funds — — 293 296 Equity securities 30 112 1,132 653 4,348 4,758 2,133 1,523 $ 4,478 $ 4,768 $ 2,133 $ 1,653 30, 2003,25, 2005, the contractual maturities of debt securities were as follows (in thousands)millions): Years to Maturity No Single Less than One to Five to Greater than Maturity One Year Five Years Ten Years Ten Years Date Total Held-to-maturity $ 166,978 $ 200,099 $ — $ — $ — $ 367,077 Available-for-sale 187,571 1,702,214 428,331 16,816 484,532 2,819,464 $ 354,549 $ 1,902,313 $ 428,331 $ 16,816 $ 484,532 $ 3,186,541
Years to Maturity | No Single | |||||||||||||||||||||||
Less than | One to | Five to | Greater than | Maturity | ||||||||||||||||||||
One Year | Five Years | Ten Years | Ten Years | Date | Total | |||||||||||||||||||
Held-to-maturity | $ | 130 | $ | — | $ | — | $ | — | $ | — | $ | 130 | ||||||||||||
Available-for-sale | 2,439 | 1,173 | 626 | 21 | 767 | 5,026 | ||||||||||||||||||
$ | 2,569 | $ | 1,173 | $ | 626 | $ | 21 | $ | 767 | $ | 5,156 | |||||||||||||
Unrealized | Unrealized | |||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
2003 | ||||||||||||||||
Equity securities | $ | 103,735 | $ | 36,973 | $ | (592 | ) | $ | 140,116 | |||||||
Debt securities | 2,757,882 | 69,069 | (7,487 | ) | 2,819,464 | |||||||||||
Total | $ | 2,861,617 | $ | 106,042 | $ | (8,079 | ) | $ | 2,959,580 | |||||||
2002 | ||||||||||||||||
Equity securities | $ | 210,769 | $ | 18,520 | $ | (74,067 | ) | $ | 155,222 | |||||||
Debt securities | 1,361,926 | 21,535 | (17,175 | ) | 1,366,286 | |||||||||||
Total | $ | 1,572,695 | $ | 40,055 | $ | (91,242 | ) | $ | 1,521,508 | |||||||
Unrealized | Unrealized | |||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
September 25, 2005 | ||||||||||||||||
Equity securities | $ | 1,353 | $ | 131 | $ | (29 | ) | $ | 1,455 | |||||||
Debt securities | 5,039 | 14 | (27 | ) | 5,026 | |||||||||||
Total | $ | 6,392 | $ | 145 | $ | (56 | ) | $ | 6,481 | |||||||
September 26, 2004 | ||||||||||||||||
Equity securities | $ | 1,003 | $ | 77 | $ | (19 | ) | $ | 1,061 | |||||||
Debt securities | 5,208 | 27 | (15 | ) | 5,220 | |||||||||||
Total | $ | 6,211 | $ | 104 | $ | (34 | ) | $ | 6,281 | |||||||
Gross | Gross | Net | ||||||||||
Realized | Realized | Realized | ||||||||||
Fiscal Year | Gains | Losses | Gains | |||||||||
2005 | $ | 198 | $ | (31 | ) | $ | 167 | |||||
2004 | 105 | (17 | ) | 88 | ||||||||
2003 | 82 | (13 | ) | 69 |
F-16
F-17 Less than 12 months More than 12 months Fair Unrealized Fair Unrealized Value Losses Value Losses U.S. Treasury securities $ — $ — $ 64 $ (1 ) Government-sponsored enterprise securities 159 (1 ) — — Corporate bonds and notes 821 (6 ) 182 (3 ) Mortgage and asset-backed securities 304 (2 ) 90 (1 ) Non-investment grade debt securities 337 (12 ) 17 (1 ) Equity securities 384 (29 ) — — $ 2,005 $ (50 ) $ 353 $ (6 ) September 30, 2003 2002 (In thousands) Trade, net of allowance for doubtful accounts of $12,352 and $21,647, respectively $ 460,477 $ 521,371 Long-term contracts: Billed 10,047 4,576 Unbilled 6,898 985 Other 6,371 10,018 $ 483,793 $ 536,950 Unbilled receivables represent costs and profits recorded in excess of amounts billable pursuant to contract provisions and are expected to be realized within one year.Finance Receivables Finance receivables result from arrangements in which the Company has agreed to provide its customers or certain CDMA customers of Telefonaktiebolaget LM Ericsson (Ericsson) with long-term interest bearing debt financing for the purchase of equipment and/or services. Finance receivables were comprised as follows: September 30, 2003 2002 (In thousands) Finance receivables $ 205,464 $ 881,859 Allowances (18,047 ) (50,529 ) 187,417 831,330 Current maturities, net 5,795 388,396 Noncurrent finance receivables, net $ 181,622 $ 442,934 At September 30, 2003 and 2002, the fair value of finance receivables approximated $198 million and $826 million, respectively. The fair value of finance receivables is estimated by discounting the future cash flows using current interest rates at which similar financing would be provided to similar customers for the same remaining maturities. Maturities of finance receivables at September 30, 2003 were as follows (in thousands): Fiscal Year Ending September 30, Amount 2004 $ 7,107 2005 560 2006 49,103 2007 65,311 2008 65,311 Thereafter 18,072 $ 205,464 Maturities after 2008 include finance receivables which have been fully reserved. The Company had various financing arrangements, including a bridge loan facility, an equipment loan facility and interim and additional interim loan facilities, with Pegaso Comunicaciones y Sistemas S.A. de C.V., a wholly owned subsidiary of Pegaso Telecomunicaciones, S.A. de C.V., a CDMA wireless operator in Mexico (collectively September 25, September 26, 2005 2004 (In millions) Trade, net of allowance for doubtful accounts of $2 and $5, respectively $ 506 $ 529 Long-term contracts 26 14 Other 12 38 $ 544 $ 581
F-18referred to as Pegaso). On September 10, 2002, Telefónica Móviles (Telefónica) acquired a 65% controlling interest in Pegaso. On October 10, 2002, Pegaso paid $82 million in full satisfaction of the interim and additional interim loans. On November 8, 2002, Pegaso paid $435 million in full satisfaction of the bridge loan facility. The Company used approximately $139 million of the bridge loan proceeds to purchase outstanding vendor debt owed by Pegaso to other lenders. On March 31, 2003, Pegaso paid $4 million on the equipment loan facility. On June 13, 2003, Pegaso prepaid $281 million of the equipment loan facility, including accrued interest, in accordance with certain terms of the equipment loan facility. As a result of these transactions, finance receivables from Pegaso decreased by $663 million. At September 30, 2003, amounts outstanding, net of deferred interest, under the Pegaso equipment loan facility were $181 million, including the acquired vendor debt, as compared to $821 million outstanding under the various financing arrangements with Pegaso at September 30, 2002. The remaining equipment loan facility outstanding with Pegaso, including the acquired vendor debt, is payable quarterly starting in March 2006 through December 2008 and bears interest at the London Interbank Offered Rate (LIBOR) plus 1% through September 9, 2004, LIBOR plus 3% thereafter through September 9, 2007 and LIBOR plus 6% thereafter. The Company recognized $41 million, $9 million and $90 million in interest income related to the Pegaso financing arrangements during fiscal 2003, 2002 and 2001, respectively, including $23 million of deferred interest income recorded as a result of the prepayment in fiscal 2003. At September 30, 2003, commitments to extend long-term financing by the Company to certain CDMA customers of Ericsson totaled approximately $464 million. The commitment to fund $346 million of this amount expires on November 6, 2003. The funding of the remaining $118 million, if it occurs, is not subject to a fixed expiration date. The financing commitments are subject to the CDMA customers meeting conditions prescribed in the financing arrangements and, in certain cases, to Ericsson also financing a portion of such sales and services. This financing is generally collateralized by the related equipment. Commitments represent the maximum amounts to be financed under these arrangements; actual financing may be in lesser amounts. September 30, 2003 2002 (In thousands) Raw materials $ 18,512 $ 19,583 Work-in-process 3,000 4,315 Finished goods 88,839 64,196 $ 110,351 $ 88,094 September 25, September 26, 2005 2004 (In millions) Raw materials $ 23 $ 20 Work-in-process 6 3 Finished goods 148 131 $ 177 $ 154 September 30, 2003 2002 (In thousands) Land $ 47,214 $ 41,668 Buildings and improvements 338,424 294,186 Computer equipment 378,983 348,208 Machinery and equipment 449,181 442,098 Furniture and office equipment 22,152 29,841 Leasehold improvements 42,750 53,769 1,278,704 1,209,770 Less accumulated depreciation and amortization (656,439 ) (523,487 ) $ 622,265 $ 686,283 F-18QUALCOMM IncorporatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 25, September 26, 2005 2004 (In millions) Land $ 65 $ 47 Buildings and improvements 614 413 Computer equipment 520 430 Machinery and equipment 544 413 Furniture and office equipment 33 24 Leasehold improvements 107 54 Property under capital leases 2 — 1,885 1,381 Less accumulated depreciation and amortization (863 ) (706 ) $ 1,022 $ 675 2002 and 2001 was $148$177 million, $133 million and $91$117 million, respectively.30, 200325, 2005 and 2002,September 26, 2004, buildings and improvements and leasehold improvements with a net book value of $66$36 million and $86$38 million, respectively, including accumulated depreciation and amortization of $52$30 million and $43$27 million, respectively, were leased to third parties or held for lease to third parties. Future minimum rental income on facilities leased to others in each of the next fivefour years from fiscal 20042006 to 20082009 are $14$9 million, $7 million, $7$9 million, $7 million and $6$1 million, respectively.
Starting in fiscal 2003, the Company no longer records goodwill amortization (Note 1). The Company’s reportable segment assets do not include goodwill (Note 10). The Company allocatedallocates goodwill to its reporting units for transitionannual testing purposes as of the date of its adoption of FAS 142.purposes. Goodwill was allocatedallocable to reporting units included in the Company’s reportable segments at September 25, 2005 as follows: $268$298 million in QUALCOMM CDMA Technologies, $73 million in QUALCOMM Technology Licensing, $4$72 million in QUALCOMM Wireless & Internet, and $2$128 million in QUALCOMM Strategic Initiatives.
AllMEMS Technology (a nonreportable segment included in reconciling items in Note 10). The increase in goodwill from September 26, 2004 to September 25, 2005 was the result of the Company’s acquired intangible assets other than goodwill are subject to amortization. During fiscal 2003, the Company acquired $82 million in personal mobile services (SMP) licenses in Brazil. During fiscal 2003, the Company recorded a $160 million impairment loss on its long-lived assets in its QUALCOMM Strategic Initiatives (QSI) segment related to Vésperbusiness acquisitions (Note 11), including impairment of $34 million in wireless licenses, $12 million in marketing-related intangible assets and $5 million in customer-related intangible assets. The impairment loss recognized was the difference between the assets’ carrying values and their estimated fair values.
During fiscal 2001, the Company acquired licenses in the third generation wireless spectrum auctions in Australia for $84 million. During fiscal 2003, the Company recorded a $34 million impairment loss in its QSI segment on its wireless licenses in Australia due to recent developments that affected potential strategic alternatives for using the spectrum. The impairment loss recognized was the difference between the assets’ carrying values and their estimated fair values.
partially offset by currency translation adjustments.
September 30, 2003 | September 30, 2002 | ||||||||||||||||
Gross Carrying | Accumulated | Gross Carrying | Accumulated | ||||||||||||||
Amount | Amortization | Amount | Amortization | ||||||||||||||
Wireless licenses | $ | 174,480 | $ | (7,858 | ) | $ | 118,705 | $ | (1,429 | ) | |||||||
Marketing-related | 20,683 | (7,411 | ) | 34,673 | (5,786 | ) | |||||||||||
Technology-based | 35,558 | (27,341 | ) | 31,846 | (19,659 | ) | |||||||||||
Customer-related | 16,652 | (15,563 | ) | 22,806 | (11,028 | ) | |||||||||||
Other | 8,502 | (1,089 | ) | 13,751 | (4,881 | ) | |||||||||||
Total intangible assets | $ | 255,875 | $ | (59,262 | ) | $ | 221,781 | $ | (42,783 | ) | |||||||
September 25, 2005 | September 26, 2004 | ||||||||||||||||
Gross | Gross | ||||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | ||||||||||||||
Amount | Amortization | Amount | Amortization | ||||||||||||||
Wireless licenses | $ | 164 | $ | (17 | ) | $ | 77 | $ | (11 | ) | |||||||
Marketing-related | 21 | (9 | ) | 21 | (8 | ) | |||||||||||
Technology-based | 116 | (48 | ) | 77 | (37 | ) | |||||||||||
Customer-related | 17 | (13 | ) | 15 | (12 | ) | |||||||||||
Other | 7 | (1 | ) | 7 | (1 | ) | |||||||||||
Total intangible assets | $ | 325 | $ | (88 | ) | $ | 197 | $ | (69 | ) | |||||||
2010.
F-19LimitedLimited. InSince October 2000, the Company agreedand another investor (the Other Investor) have provided equity and debt funding to invest $200 million in the convertible preferred shares of Inquam Limited (Inquam) for an approximate 42% ownership interest in Inquam.. Inquam owns, develops and manages wireless CDMA-based communications systems, either directly or indirectly, withprimarily in Romania and Portugal. The Company recorded $33 million in equity in losses of Inquam during fiscal 2005, as compared to $59 million and $99 million for fiscal 2004 and 2003, respectively. At September 25, 2005 and September 26, 2004, the primary intentCompany’s equity and debt investments in Inquam totaled $26 million and $42 million, respectively, net of deploying CDMA-based
Portugal companies. Other strategic equity investments as of September F-20technology, primarily in Europe. The Company provided the final $27 million under this equity commitment during fiscal 2003 and had no remaining equity funding commitment at September 30, 2003. On March 26, 2003,extend $25 millionrestructure Inquam. Upon close of bridge loan financingthe restructuring, which is expected to Inquam. Another investoroccur in the first half of fiscal 2006, the Portugal companies will be spun-off through the exchange of portions of the Company’s and the Other Investor’s debt investments for direct equity interests in the Portugal companies. Inquam, which will continue to own the Romania companies, will repurchase certain minority equity interests. Immediately after the restructuring, the Company will hold an approximate 49.7% equity interest in Inquam also agreedand a 23% equity interest in the Portugal companies, which is expected to provide $25 millionbe reduced over time as the Other Investor makes the further investments in bridge loan financing. The Company provided the $25 million in funding during fiscal 2003 and had no remaining commitment underPortugal companies contemplated by the bridge loan at September 30, 2003. On July 14, 2003,restructuring agreements. In addition, the Company approved an additional $50 million investmentand the Other Investor will have a put-call option arrangement. Under this arrangement, the Other Investor will have the right to buy the Company’s equity and debt investments in Inquam, subject to certain conditions, including a matching $50 million investment by another existing investorexercising its call option, which will expire no later than May 14, 2008. The minimum purchase price will be approximately $66 million. In the event that the Other Investor’s call option expires, or in Inquam. No commitments relatedcertain other circumstances prior to these potential investments were in place at September 30, 2003. On September 19, 2003,that date, the Company and this other existing investor each agreedwill have the right to provide an additional $5 million bridge financing to enable Inquam to meet its cash flow requirements while the terms of a new equity investment are being negotiated. It is the intention of both parties that this second $10 million bridge loan will be repaid with the proceeds from the anticipated equity investment. The Company provided $2 million under this second bridge loan during fiscal 2003 and had a remaining funding commitment of $3 million at September 30, 2003. On September 22, 2003, the Company and another investor in Inquam agreed to guarantee the payment of amounts due by Inquam under a bank credit agreement. The Company’s maximum liability under the guarantee is limited to an amount equal to 50% of the amounts outstanding under Inquam’s credit agreement, up to a maximum of $10 million. No amounts were outstanding under the bank credit agreement as of September 30, 2003. The Company uses the equity method to account for its investment in Inquam. During fiscal 2003, the Company recorded an $11 million other-than-temporary impairment loss related to its investment in Inquam. The impairment loss was the difference between the carrying value of the investment and its estimated fair value. At September 30, 2003, the Company’ssell our equity and debt investmentinvestments in Inquam was $68 million, netto the Other Investor at a minimum sales price of equity in losses and impairment.$66 million. Such right will expire after six months. The Company expects that Inquam will focus its resources on the development of CDMA properties in the 450MHz frequency band in Romania and western Europe and will transfer its non-CDMA operations to one or more of Inquam’s other shareholders. Inquam is expected to use approximately $70 million to $80 million in cash through the first half of calendar 2004. Inquam’s management does not expectanticipate providing any further funding to Inquam or to be cash flow positive until calendar 2007 with its current business plan. If the Inquam operating companies cannot raise debt financing as expected or new investors cannot be found, Inquam’s growth potential and the value of the Company’s investment in Inquam may be negatively affected.thousands)millions): September 30, 2003 2002 Balance sheet: Current assets $ 45,356 $ 60,083 Noncurrent assets 172,398 265,631 Total assets $ 217,754 $ 325,714 Current liabilities $ 97,836 $ 98,496 Noncurrent liabilities 46,762 36,812 Total liabilities $ 144,598 $ 135,308 Years Ended September 30, 2003 2002 2001 Income statement: Net revenues $ 49,959 $ 17,648 $ 6,162 Gross (loss) profit (2,141 ) (9,344 ) 1,056 Net loss $ (204,525 ) $ (104,366 ) $ (28,676 ) F-20 September 25, September 26, 2005 2004 Balance sheet: Current assets $ 41 $ 40 Noncurrent assets 156 152 Total assets $ 197 $ 192 Current liabilities $ 60 $ 123 Noncurrent liabilities 273 132 Total liabilities $ 333 $ 255 Year Ended September 25, September 26, September 28, 2005 2004 2003 Income statement: Net revenues $ 111 $ 88 $ 50 Gross profit (loss) 53 35 (2 ) Net loss $ (73 ) $ (136 ) $ (205 ) QUALCOMM IncorporatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTSOther.Globalstar L.P. Under now-terminated contracts with Globalstar L.P. (Globalstar), the Company designed, developed and manufactured subscriber products and ground communications systems utilizing CDMA technology and provided contract development services. Globalstar was formed to design, construct, and operate a worldwide, low-Earth-orbit satellite-based telecommunications system (the Globalstar System). Through partnership interests held in certain intermediate limited partnerships and other indirect interests, the Company owns an approximate 6.3% interest in Globalstar. On January 16, 2001, Globalstar announced that, in order to have sufficient funds available for the continued progress of its marketing and service activities, it had suspended indefinitely principal and interest payments on all of its debt, including its vendor financing obligations. As a result, Globalstar did not make an approximately $22 million payment for principal and interest due to the Company on January 15, 2001. Globalstar also announced its intent to restructure its debt. As a result, the Company recorded total net charges of $49 million in cost of revenues, $519 million in asset impairment and related charges, $10 million in investment expense and $58 million in other non-operating charges during fiscal 2001 related primarily to the impairment of certain assets related to its business with Globalstar. Globalstar filed for Chapter 11 bankruptcy protection during fiscal 2002. On April 25, 2003, the U.S. Bankruptcy Court approved the sale of Globalstar’s assets to a new company to be controlled by ICO Global Communications (Holdings) Limited (ICO), however ICO has indicated as of October 2003 that it does not believe it will complete the acquisition. Globalstar has opened negotiations with other parties with respect to an acquisition of Globalstar’s assets. The Company continues to provide services and sell products to Globalstar service providers and other customers involved with the Globalstar System. In addition, the Company is in negotiations with potential acquirers to provide products and services to the new operating company. Revenues resulting from agreements with Globalstar and its consolidated subsidiaries for fiscal 2003, 2002 and 2001 were $12 million, $4 million and $35 million, respectively. The Company recorded net credits of $11 million and $4 million during fiscal 2003 and 2002, respectively, related to sales of previously impaired assets. The Company did not recognize any interest income related to Globalstar during fiscal 2003, 2002 and 2001. All receivables from, loans to and investments in Globalstar have no remaining recorded values at September 30, 2003.Other30, 200325, 2005 and 2002 amounted to $87September 26, 2004 totaled $96 million and $130$123 million, respectively, including $33$40 million and $73$50 million, respectively, accounted for using the cost method. The fair valuesDifferences between the carrying amounts of costcertain other strategic equity method investments approximate their recorded values.and the Company’s underlying equity in the net assets of those investees were not significant at September 25, 2005 and September 26, 2004. At September 30, 2003,25, 2005, effective ownership interests in thethese investees ranged from less than 1%approximately 7% to 50%. Summarized financial information regarding our principal equity method investments, excluding Inquam and Vésper (Note 11), derived from their unaudited financial statements, follows. These investments are noncontrolling interests in venture capital funds. Information is presented in the aggregate, and net (loss) income is generally presented from the acquisition date (in thousands):F-21QUALCOMM IncorporatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 2002 Current assets $ 82,343 $ 59,625 Noncurrent assets 41,064 65,742 Total assets $ 123,407 $ 125,367 Current liabilities $ 347 $ 257 Noncurrent liabilities 513 — Total liabilities $ 860 $ 257 Years Ended September 30, 2003 2002 2001 Net (loss) income $ (41,156 ) $ (15,259 ) $ 14,555 total $24totaled $13 million at September 30, 2003,25, 2005, which the Company expects to fund through fiscal 2009. Such commitments are subject to the investees meeting certain conditions; actual equity funding may be in lesser amounts. An investee’s failure to successfully develop and provide competitive products and services due to lack of financing, market demand or an unfavorable economic environment could adversely affect the value of the Company’s investment in the investee. There can be no assurance that the investees will be successful in their efforts. for the years ended September 30 was comprised as follows (in thousands)millions): 2003 2002 2001 Interest income $ 163,526 $ 134,937 $ 243,298 Net realized gains on marketable securities 72,987 11,956 63,420 Net realized (losses) gains on other investments (169 ) (9,480 ) 6,267 Other-than-temporary losses on marketable securities (100,199 ) (205,811 ) (147,649 ) Other-than-temporary losses on other investments (38,257 ) (24,680 ) (50,749 ) Change in fair values of derivative instruments (3,201 ) (58,874 ) (242,849 ) Minority interest in loss (income) of consolidated subsidiaries 36,949 52,498 (3,769 ) Equity in losses of investees (126,015 ) (86,958 ) (185,060 ) $ 5,621 $ (186,412 ) $ (317,091 ) During fiscal 2003, management determined that declines in the market value of the Company’s investment in Korea Telecom Freetel Co., Ltd. (KTF), a wireless operator in South Korea, were other than temporary. In reaching this conclusion, the decline in stock value as a percentage of the original cost and the length of time in which the market value of the investment had been below its original cost were considered. As a result, the Company recorded $81 million in other-than-temporary losses on marketable securities. The Company holds 4,416,000 common shares of KTF as of September 30, 2003. The fair value of the common shares was $82 million at September 30, 2003. During fiscal 2002, management determined that declines in the market values of the Company’s investments in Leap Wireless (Note 1) were other than temporary when those values declined significantly due to unfavorable business developments. Subsequently, Leap Wireless filed for Chapter 11 bankruptcy protection in April, 2003. The Company recorded $162 million and $18 million in other-than-temporary losses on marketable securities for the notes and stock, respectively, during fiscal 2002. The Company also recorded $59 million and $213 million in losses related to changes in the fair values of Leap Wireless derivative investments for fiscal 2002 and 2001, respectively. The Company holds 308,000 units of Leap Wireless’ senior discount notes with detachable warrants for $150 million. The warrants entitle each holder to purchase 2.503 common shares per each senior discount note unit held atF-22
respectively. F-21$96.80 per common share. In addition, Year Ended September 25, September 26, September 28, 2005 2004 2003 Interest and dividend income $ 256 $ 175 $ 158 Interest expense (3 ) (2 ) (2 ) Net realized gains on marketable securities 167 88 73 Net realized gains on other investments 12 — 7 Other-than-temporary losses on marketable securities (13 ) (12 ) (100 ) Other-than-temporary losses on other investments (1 ) — (28 ) Gains on derivative instruments 33 7 (3 ) Equity in losses of investees (28 ) (72 ) (113 ) $ 423 $ 184 $ (8 ) Company holds 489,000 shares of Leap Wireless’ common stock at September 30,loan facilities in full, including accrued interest, during fiscal 2003 and a warrant to purchase common stock issued2004. The Company recognized $12 million and $41 million in interest income related to the Company in connection with its spin-off of Leap Wireless. The fair values of the senior discount notesPegaso financing arrangements during fiscal 2004 and the common stock totaled $29 million, and the warrants had insignificant value at September 30, 2003. During fiscal 2001, the Company recorded an other-than-temporary impairment charge of $134 million in investment income (expense) related to its investment in NetZero, Inc. (NetZero). NetZero was a publicly-traded company that provided Internet access and services to consumers and on-line direct marketing services to advertisers. Effective September 26, 2001, NetZero and Juno Online Services, Inc. completed a merger and became United Online, Inc. (United Online). The Company received 2,300,000 shares of United Online for its 11,500,000 shares of NetZero, representing an approximate 5.7% interest in United Online. During fiscal 2003, the Company sold its shares in United Online, resulting in realized gains of $53 million. At September 30, 2003, the Company no longer holds shares in United Online. for the years ended September 30 were as follows (in thousands)millions): 2003 2002 2001 Current provision: Federal $ 228,099 $ 5,377 $ 274,316 State 49,909 7,989 69,640 Foreign 119,295 85,903 77,276 397,303 99,269 421,232 Deferred provision (benefit): Federal 44,936 (22 ) (279,730 ) State 15,467 2,201 (37,001 ) 60,403 2,179 (316,731 ) $ 457,706 $ 101,448 $ 104,501 Year Ended September 25, September 26, September 28, 2005 2004 2003 Current provision: Federal $ 77 $ 115 $ 299 State 42 60 57 Foreign 140 157 119 259 332 475 Deferred provision (benefit): Federal 398 227 45 State 9 29 16 407 256 61 $ 666 $ 588 $ 536 for the years ended September 30 were as follows (in thousands)millions): 2003 2002 2001 United States $ 1,167,668 $ 487,615 $ (435,237 ) Foreign 117,479 (26,490 ) (20,403 ) Earnings before income taxes $ 1,285,147 $ 461,125 $ (455,640 ) Year Ended September 25, September 26, September 28, 2005 2004 2003 United States $ 1,570 $ 1,571 $ 1,163 Foreign 1,239 742 402 Earnings from continuing operations before income taxes $ 2,809 $ 2,313 $ 1,565
F-23
QUALCOMM IncorporatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2003 | 2002 | 2001 | ||||||||||
Expected income tax provision (benefit) at federal statutory tax rate | $ | 449,801 | $ | 161,394 | $ | (159,474 | ) | |||||
State income tax provision (benefit), net of federal benefit | 50,121 | 23,978 | (23,693 | ) | ||||||||
Goodwill amortization | — | 96,642 | 95,728 | |||||||||
Other permanent differences | 454 | 7,649 | 6,567 | |||||||||
Foreign income taxed at other than U.S. rates | (71,636 | ) | (42,717 | ) | (27,428 | ) | ||||||
U.S. deduction for foreign losses | (93,026 | ) | — | — | ||||||||
Valuation allowance | 143,682 | (116,697 | ) | 231,883 | ||||||||
Tax credits | (31,561 | ) | (25,788 | ) | (28,549 | ) | ||||||
Alternative Minimum Tax | — | — | 4,165 | |||||||||
Other | 9,871 | (3,013 | ) | 5,302 | ||||||||
Actual income tax provision | $ | 457,706 | $ | 101,448 | $ | 104,501 | ||||||
Year Ended | ||||||||||||
September 25, | September 26, | September 28, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
Expected income tax provision at federal statutory tax rate | $ | 983 | $ | 809 | $ | 548 | ||||||
State income tax provision, net of federal benefit | 109 | 91 | 61 | |||||||||
One-time dividend | 35 | — | — | |||||||||
Foreign income taxed at other than U.S. rates | (290 | ) | (215 | ) | (59 | ) | ||||||
Valuation allowance | (78 | ) | (44 | ) | — | |||||||
Tax credits | (66 | ) | (49 | ) | (32 | ) | ||||||
Other | (27 | ) | (4 | ) | 18 | |||||||
Income tax expense | $ | 666 | $ | 588 | $ | 536 | ||||||
At September 30, 2003fourth quarter of fiscal 2005, the Company repatriated approximately $0.5 billion of foreign earnings qualifying for the special incentive under the Jobs Creation Act and 2002,recorded a related expense of approximately $35 million for federal and state income tax liabilities. This distribution does not change the Company’s intention to indefinitely reinvest undistributed earnings of certain of its foreign subsidiaries in operations outside the United States.
2003 | 2002 | ||||||||
Accrued liabilities, reserves and other | $ | 599,103 | $ | 280,706 | |||||
Deferred revenue | 171,904 | 170,608 | |||||||
Unrealized loss on marketable securities | 236 | 35,600 | |||||||
Unused net operating losses | 308,476 | 458,742 | |||||||
Tax credits | 345,198 | 431,413 | |||||||
Unrealized loss on investments | 377,958 | 247,930 | |||||||
Total gross assets | 1,802,875 | 1,624,999 | |||||||
Valuation allowance | (660,276 | ) | (1,523,044 | ) | |||||
Total net deferred assets | 1,142,599 | 101,955 | |||||||
Purchased intangible assets | (1,680 | ) | (4,022 | ) | |||||
Deferred contract costs | (43,551 | ) | (42,173 | ) | |||||
Unrealized gain on marketable securities | (39,331 | ) | (15,022 | ) | |||||
Other basis differences | (40,567 | ) | (33,889 | ) | |||||
Total deferred liabilities | $ | (125,129 | ) | $ | (95,106 | ) | |||
September 25, | September 26, | |||||||
2005 | 2004 | |||||||
Accrued liabilities, reserves and other | $ | 199 | $ | 139 | ||||
Deferred revenues | 76 | 133 | ||||||
Unrealized losses on marketable securities | 5 | 5 | ||||||
Unused net operating losses | 13 | — | ||||||
Capital loss carryover | 161 | 249 | ||||||
Tax credits | 346 | 454 | ||||||
Unrealized losses on investments | 137 | 169 | ||||||
Total gross deferred assets | 937 | 1,149 | ||||||
Valuation allowance | (69 | ) | (139 | ) | ||||
Total net deferred assets | $ | 868 | $ | 1,010 | ||||
Purchased intangible assets | (17 | ) | (8 | ) | ||||
Deferred contract costs | (18 | ) | (26 | ) | ||||
Unrealized gains on marketable securities | (50 | ) | (33 | ) | ||||
Other basis differences | (1 | ) | (43 | ) | ||||
Total deferred liabilities | $ | (86 | ) | $ | (110 | ) | ||
F-22
related to capital loss carryover.
F-24
QUALCOMM IncorporatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has 8,000,000 shares of preferred stock authorized for issuance in one or more series, at a par value of $0.0001 per share. In conjunction with the distribution of Preferred Share Purchase Rights, 1,500,000preferred share purchase rights, 4,000,000 shares of preferred stock are designated as Series A Junior Participating Preferred Stock and reserved such shares are reserved for issuance upon exercise of the Preferred Share Purchase Rights.preferred share purchase rights. At September 30, 200325, 2005 and 2002,September 26, 2004, no shares of preferred stock were outstanding.
The Company has a Preferred Share Purchase Rights PlanAgreement (Rights Plan)Agreement) to protect stockholders’ rightsinterests in the event of a proposed takeover of the Company. Under the original Rights Plan,Agreement, adopted on September 26, 1995, the Company declared a dividend of one preferred share purchase right (a Right) for each share of the Company’s common stock outstanding. Pursuant to the Rights Plan,Agreement, as amended and restated on September 26, 2005, each Right entitles the registered holder to purchase from the Company a one one-hundredthone-thousandth share of Series A Junior Participating Preferred Stock, $0.0001 par value per share, subject to adjustment for subsequent stock splits, at a purchase price of $250. In November 1999, the Rights Plan was amended to provide that the purchase price be set at $400.$180. The Rights are exercisable only if a person or group (an Acquiring Person) acquires beneficial ownership of 15% or more of the Company’s outstanding shares of common stock.stock without Board approval. Upon exercise, holders, other than an Acquiring Person, will have the right, subject to termination, to receive the Company’s common stock or other securities, cash or other assets having a market value, as defined, equal to twice such purchase price. The Rights, which expire on September 25, 2005,2015, are redeemable in whole, but not in part, at the Company’s option at anyprior to the time such rights are triggered for a price of $0.005$0.001 per Right.
On February 11, 2003,March 8, 2005, the Company authorized the expenditurerepurchase of up to $2 billion of the Company’s common stock under a program with no expiration date. During fiscal 2005, the Company repurchased and retired 27,083,000 shares of common stock for $953 million and sold put options under this program. At September 25, 2005, the Company had two outstanding put options, with expiration dates of December 7, 2005 and March 21, 2006, that may require the Company to purchase 11,500,000 shares of its common stock upon exercise for $411 million (net of the option premiums received). Any shares repurchased upon exercise of the put options will be retired. The recorded values of the put option liabilities totaled $7 million at September 25, 2005. During fiscal 2005, the Company recognized $16 million in investment income due to decreases in the fair values of the put options and $15 million in investment income from premiums received on a put option that expired unexercised. At September 25, 2005, $636 million remained authorized for repurchases under this program.
F-23
Dividends
$0.050 per share on common stock. On July 13, 2004, the Company announced an increase in its quarterly dividend from $0.050 to $0.070 per share on common stock. On March 8, 2005, the Company announced an increase in its quarterly dividend from $0.070 to $0.090 per share on common stock. Cash dividends announced in fiscal 20032005 and 2004 were as follows (in thousands,millions, except per share data):
Fiscal 2003 | |||||||||
Per Share | Total | ||||||||
First quarter | $ | — | $ | — | |||||
Second quarter | $ | 0.05 | 39,461 | ||||||
Third quarter | $ | 0.05 | 39,546 | ||||||
Fourth quarter | $ | 0.07 | 55,769 | ||||||
Total | $ | 0.17 | $ | 134,776 | |||||
2005 | 2004 | |||||||||||||||
Per Share | Total | Per Share | Total | |||||||||||||
First quarter | $ | 0.070 | $ | 115 | $ | 0.070 | (1) | $ | 112 | |||||||
Second quarter | 0.070 | 115 | 0.050 | 81 | ||||||||||||
Third quarter | 0.090 | 147 | — | (2) | — | |||||||||||
Fourth quarter | 0.090 | 147 | 0.070 | 114 | ||||||||||||
Total | $ | 0.320 | $ | 524 | $ | 0.190 | $ | 307 | ||||||||
(1) In the first quarter of fiscal 2004, the Company announced two dividends of $0.035 per share which were paid in the first and second quarters of fiscal 2004. | ||
(2) The Company paid a dividend of $0.05 per share in the third quarter of fiscal 2004 that had been announced in the second quarter of fiscal 2004. |
The Company has a 401(k) plan that allows eligible employees to contribute up to 50% of their eligible compensation, 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 2005, 2004 and 2003 The Company may grant options to selected employees, directors and consultants to the Company to purchase shares of the Company’s common stock at a price not less than the fair market value of the stock at the date of grant. The 2001 Stock Option Plan (the 2001 Plan) was adopted and replaced the 1991 Stock Option Plan (the 1991 Plan), which expired in August 2001. Options granted under the 1991 Plan remain outstanding until exercised or cancelled. The shares reserved under the 2001 Plan F-24PlanPlan.2002was $27 million, $21 million and 2001 was $20 million, $20 million and $19 million, respectively.PlansPlans.F-25QUALCOMM IncorporatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTSarewere equal to the number of shares available for future grant under the 1991 Plan on the date the 2001 Plan was approved by the Company’s stockholders. At that date, 50,541,570approximately 101,083,000 shares were available for future grants under the 2001 Plan. In fiscal 2004, the Company reserved another 64,000,000 shares for future grants under the 2001 Plan. The Company may terminate the 2001 Plan at any time. The 2001 Plan provides for the grant of both incentive stock options and non-qualified stock options. Generally, options outstanding vest over periods not exceeding sixfive years and are exercisable for up to ten10 years from the grant date. At September 30, 2003,25, 2005, options for 62,972,000approximately 120,298,000 shares under both plans were exercisable at prices ranging from $2.19$1.93 to $172.38$86.19 per share for an aggregate exercise price of $1.7$2.6 billion. Company has adopted the 2001 Non-Employee Directors’ Stock Option Plan (the 2001 Directors’ Plan), which replaces was adopted and replaced the 1998 Non-Employee Directors’ Stock Option Plan (the 1998 Directors’ Plan). Options granted under the 1998 Directors’ Plan remain outstanding until exercised or cancelled. The shares reserved under the 2001 Directors’ Plan are equal to the number of shares available for future grant under the 1998 Directors’ Plan on the date the 2001 Directors’ Plan was approved by the Company’s stockholders. At that date, 2,050,0004,100,000 shares were available for future grants under the 2001 Directors’ Plan. The Company may terminate the 2001 Directors’ Plan at any time. This plan provides for non-qualified stock options to be granted to non-employee directors at fair market value, vesting over periods not exceeding five years and are exercisable for up to ten10 years from the grant date. At September 30, 2003,25, 2005, options for 1,700,000approximately 3,393,000 shares under both plans were exercisable at prices ranging from $3.15$2.91 to $133.00$66.50 per share for an aggregate exercise price of $25$35 million.
F-26
QUALCOMM IncorporatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options Outstanding | |||||||||||||||||
Options | Exercise Price Per Share | ||||||||||||||||
Shares | |||||||||||||||||
Available | Number | Weighted | |||||||||||||||
for Grant | of Shares | Range | Average | ||||||||||||||
Balance at September 30, 2000 | 60,979 | 109,968 | $0.02 to $172.38 | $ | 13.25 | ||||||||||||
Additional shares reserved (a) | 6 | — | — | — | |||||||||||||
Options assumed (a) | (6 | ) | 6 | 0.02 to 5.30 | 1.32 | ||||||||||||
Plan shares expired (b) | (58 | ) | — | — | — | ||||||||||||
Options granted | (15,589 | ) | 15,589 | 45.54 to 100.50 | 71.17 | ||||||||||||
Options cancelled | 2,557 | (2,557 | ) | 1.02 to 140.00 | 27.83 | ||||||||||||
Options exercised | — | (14,831 | ) | 0.13 to 83.50 | 6.28 | ||||||||||||
Balance at September 30, 2001 | 47,889 | 108,175 | $0.02 to $172.38 | $ | 22.20 | ||||||||||||
Plan shares expired (b) | (31 | ) | — | — | — | ||||||||||||
Options granted | (26,525 | ) | 26,525 | 25.61 to 60.04 | 48.70 | ||||||||||||
Options cancelled | 3,101 | (3,101 | ) | 1.02 to 141.62 | 50.80 | ||||||||||||
Options exercised | — | (14,325 | ) | 0.02 to 51.82 | 5.68 | ||||||||||||
Balance at September 30, 2002 | 24,434 | 117,274 | $0.13 to $172.38 | $ | 29.45 | ||||||||||||
Plan shares expired (b) | (2 | ) | — | — | — | ||||||||||||
Options granted | (16,832 | ) | 16,832 | 29.10 to 45.73 | 34.83 | ||||||||||||
Options cancelled | 4,273 | (4,273 | ) | 1.58 to 147.87 | 48.30 | ||||||||||||
Options exercised | — | (23,347 | ) | 0.29 to 39.13 | 6.56 | ||||||||||||
Balance at September 30, 2003 | 11,873 | 106,486 | $0.13 to $172.38 | $ | 34.56 | ||||||||||||
Options | Options Outstanding | |||||||||||||||
Shares | Exercise Price Per Share | |||||||||||||||
Available | Number | Weighted | ||||||||||||||
for Grant | of Shares | Range | Average | |||||||||||||
Balance at September 29, 2002 | 48,868 | 234,548 | $0.07 to $86.19 | $ | 14.73 | |||||||||||
Plan shares expired | (4 | ) | — | — | — | |||||||||||
Options granted | (33,664 | ) | 33,664 | 14.55 to 22.87 | 17.42 | |||||||||||
Options cancelled | 8,546 | (8,546 | ) | 0.79 to 73.94 | 24.15 | |||||||||||
Options exercised | — | (46,694 | ) | 0.15 to 19.57 | 3.28 | |||||||||||
Balance at September 28, 2003 | 23,746 | 212,972 | $0.07 to $86.19 | $ | 17.28 | |||||||||||
Additional shares reserved | 64,000 | — | — | — | ||||||||||||
Options granted | (31,252 | ) | 31,252 | 21.50 to 40.40 | 27.19 | |||||||||||
Options cancelled | 4,420 | (4,420 | ) | 2.30 to 70.00 | 28.15 | |||||||||||
Options exercised | — | (36,220 | ) | 0.14 to 37.34 | 7.85 | |||||||||||
Balance at September 26, 2004 | 60,914 | 203,584 | $0.07 to $86.19 | $ | 20.25 | |||||||||||
Additional shares reserved (a) | 765 | — | — | — | ||||||||||||
Options assumed (a) | (765 | ) | 765 | 0.09 to 38.48 | 24.32 | |||||||||||
Plan shares expired (b) | (57 | ) | — | — | — | |||||||||||
Options granted | (34,434 | ) | 34,434 | 33.01 to 44.55 | 38.51 | |||||||||||
Options cancelled | 5,821 | (5,821 | ) | 1.60 to 70.00 | 31.16 | |||||||||||
Options exercised | — | (30,168 | ) | 0.07 to 43.00 | 11.52 | |||||||||||
Balance at September 25, 2005 | 32,244 | 202,794 | $0.09 to $86.19 | $ | 24.35 | |||||||||||
(a) | Represents activity related to options that were assumed as a result of the | |
(b) | Represents shares available for future grant cancelled pursuant to the |
F-2530, 200325, 2005 follows (number of shares in thousands): Options Outstanding Weighted Options Exercisable Average Remaining Weighted Weighted Contractual Average Average Range of Number Life Exercise Number Exercise Exercise Prices of Shares (In Years) Price of Shares Price $0.13 to $5.72 17,153 2.38 $ 4.48 17,091 $ 4.48 $5.75 to $7.02 15,561 4.46 6.65 14,534 6.65 $7.03 to $19.25 11,029 4.55 10.51 10,247 10.25 $23.83 to $34.94 15,819 8.97 32.63 2,487 31.63 $34.96 to $49.68 16,164 8.48 42.61 4,621 44.90 $50.75 to $66.33 16,961 7.74 59.18 7,331 58.92 $66.35 to $172.38 13,799 6.80 85.19 8,684 86.12 106,486 6.24 $ 34.56 64,995 $ 26.83
Options Outstanding | ||||||||||||||||||||
Weighted | ||||||||||||||||||||
Average | Options Exercisable | |||||||||||||||||||
Remaining | Weighted | Weighted | ||||||||||||||||||
Contractual | Average | Average | ||||||||||||||||||
Range of | Number | Life | Exercise | Number | Exercise | |||||||||||||||
Exercise Prices | of Shares | (In Years) | Price | of Shares | Price | |||||||||||||||
$0.09 to $3.51 | 28,805 | 2.16 | $ | 3.08 | 28,792 | $ | 3.08 | |||||||||||||
$3.52 to $16.47 | 34,168 | 5.27 | 11.88 | 24,165 | 10.07 | |||||||||||||||
$16.63 to $22.44 | 31,515 | 7.53 | 20.11 | 13,500 | 19.72 | |||||||||||||||
$22.77 to $29.21 | 31,604 | 5.99 | 27.20 | 23,334 | 27.14 | |||||||||||||||
$29.31 to $33.57 | 29,899 | 8.35 | 33.05 | 8,412 | 32.64 | |||||||||||||||
$33.69 to $42.16 | 31,137 | 7.31 | 39.19 | 15,392 | 38.31 | |||||||||||||||
$42.25 to $44.55 | 11,585 | 6.95 | 43.27 | 6,823 | 43.07 | |||||||||||||||
$45.56 to $86.19 | 4,081 | 4.51 | 58.65 | 4,073 | 58.66 | |||||||||||||||
202,794 | 6.14 | $ | 24.35 | 124,491 | $ | 21.11 | ||||||||||||||
F-27
QUALCOMM IncorporatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
28, 2003.
Exercisable | Unexercisable | Total | ||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||
Average | Average | Average | ||||||||||||||||||||||
Number | Exercise | Number | Exercise | Number | Exercise | |||||||||||||||||||
Stock Options | of Shares | Price | of Shares | Price | of Shares | Price | ||||||||||||||||||
Less than $41.65 | 45,890 | $ | 9.00 | 21,929 | $ | 31.98 | 67,819 | $ | 16.43 | |||||||||||||||
Above $41.65 | 19,105 | 69.68 | 19,562 | 63.13 | 38,667 | 66.37 | ||||||||||||||||||
Total outstanding | 64,995 | $ | 26.83 | 41,491 | $ | 46.67 | 106,486 | $ | 34.56 | |||||||||||||||
Exercisable | Unexercisable | Total | ||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||
Average | Average | Average | ||||||||||||||||||||||
Number | Exercise | Number | Exercise | Number | Exercise | |||||||||||||||||||
Stock Options | of Shares | Price | of Shares | Price | of Shares | Price | ||||||||||||||||||
Less than $44.76 | 120,418 | $ | 19.84 | 78,295 | $ | 29.48 | 198,713 | $ | 23.64 | |||||||||||||||
Above $44.76 | 4,073 | 58.66 | 8 | 54.32 | 4,081 | 58.65 | ||||||||||||||||||
Total outstanding | 124,491 | $ | 21.11 | 78,303 | $ | 29.48 | 202,794 | $ | 24.35 | |||||||||||||||
The Company has two 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 2001 Employee Stock Purchase Plan (the 2001 Purchase Plan) was adopted and replaces the 1991 Employee Stock Purchase Plan, which expired in August 2001. The 2001 Purchase Plan authorizes up to 12,155,000approximately 24,309,000 shares to be granted until the Company terminates the 2001 Purchase Plan.granted. The 1996 Non-Qualified Employee Stock Purchase Plan authorizes up to 200,000400,000 shares to be granted at anytime.granted. During fiscal 2005, 2004 and 2003, 2002approximately 1,786,000, 2,205,000 and 2001,2,744,000 shares totaling 1,372,000, 1,150,000 and 758,000 were issued under the plans at an average price of $26.39, $31.45$29.63, $18.60 and $50.16$13.20 per share, respectively. At September 30, 2003, 9,718,00025, 2005, approximately 15,446,000 shares were reserved for future issuance.
The Company has voluntary retirement plans that allow eligible executives to defer up to 100% of their income on a pre-tax basis. On a quarterly basis, the Company matches up to 10% of the participants’ deferral in Company common stock based on the then-current market price, to be distributed to the participant upon eligible retirement. The income deferred and the Company match held in trust are unsecured and subject to the claims of general creditors of the Company. Company contributions begin vesting based on certain minimum participation or service requirements and are fully vested at age 65. Participants who terminate employment forfeit their unvested shares. All shares forfeited are used to reduce the Company’s future matching contributions. The plans authorize up to 800,0001,600,000 shares to be allocated to participants at anytime.any time. During fiscal 2005, 2004 and 2003, 2002approximately 92,000, 108,000 and 2001, 45,000, 44,000 and 33,00089,000 shares, respectively, were allocated under the plans. The Company’s matching contribution net of amounts forfeitedCompany recorded $3 million, $5 million and $2 million in compensation expense during fiscal 2005, 2004 and 2003, 2002 and 2001 amountedrespectively, related to approximately $2 million, $2 million and $3 million, respectively.its net matching contributions to the plans. At September 30, 2003, 219,000 shares, including 40,000 issued and unallocated forfeited25, 2005, approximately 238,000 shares were reserved for future allocation.
F-26
agreement not to seek litigation costs against them. district court. F-27Schwartz, et al v. QUALCOMM: 87 former QUALCOMM employees filed a lawsuit against the Company in the District Court for Boulder County, Colorado, alleging claims for intentional misrepresentation, nondisclosure and concealment, violation of C.R.S. Section 8-2-104 (obtaining workers by misrepresentation), breach of contract, breach of the implied covenant of good faith and fair dealing, promissory estoppel, negligent misrepresentation, unjust enrichment, violation of California Labor Code Section 970, violation of California Civil Code Sections 1709-1710, rescission, violation of California Business & Professions Code Section 17200 and violation of California Civil Code Section 1575. The complaint seeks economic, emotional distress and punitive damages and unspecified amounts of interest. On November 29, 2001, the Court granted the Company’s motion to dismiss 17 of the plaintiffs from the lawsuit. Subsequently, the Court dismissed three other plaintiffs from the lawsuit. On November 18, 2002,F-28QUALCOMM IncorporatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTSthe Court granted the Company’s motion to dismiss 61 of the remaining 67 plaintiffs from the lawsuit. The Company subsequently resolved the matters with the remaining plaintiffs. Those plaintiffs whose claims were dismissed have appealed. Although there can be no assurance that an unfavorable outcome of the dispute would not have a material adverse effect on the Company’s operating results, liquidity or financial position, the Company believes the claims are without merit and will vigorously defend the action.Hanig et al. v. QUALCOMM, Boesel, et al v. QUALCOMM, Stone et al v. QUALCOMM, Ortiz et al v. QUALCOMM, Shannon et al. v. QUALCOMM, Deshon et al v. QUALCOMM, Earnhart et al. v. QUALCOMM.These cases were filed in San Diego County Superior Court by over 100 former employees, alleging claims for declaratory relief, breach of contract, intentional/negligent fraud, concealment, rescission, specific performance, work, labor and services, breach of the implied covenant of good faith and fair dealing, violation of California Business & Professions Code Section 17200 and unjust enrichment, claiming that they were entitled to full vesting of unvested stock options as a result of the sale of the Company’s infrastructure business to Ericsson in 1999. The Company has answered the complaints, which have been consolidated. Although there can be no assurance that an unfavorable outcome of the dispute would not have a material adverse effect on the Company’s operating results, liquidity or financial position, the Company believes the claims are without merit and will vigorously defend the action.GTE Wireless Incorporated (GTE) v. QUALCOMM:On June 29, 1999, GTE filed an action against the Company in the United States District Court for the Eastern District of Virginia seeking damages and injunctive relief and asserting that wireless telephones sold by the Company infringe a single patent allegedly owned by GTE. On September 15, 1999, the Court granted the Company’s motion to transfer the action to the United States District Court for the Southern District of California. On February 14, 2002, the District Court granted QUALCOMM’s motion for summary judgment that QUALCOMM’s products did not infringe GTE’s asserted patent and denied GTE’s motion seeking summary judgment of infringement. On July 14, 2003, the parties entered into a settlement agreement dismissing all claims and counterclaims with prejudice.QUALCOMM:QUALCOMM: On February 2, 2000, three former QUALCOMM employees filed a putative class action against the Company, ostensibly on behalf of themselves and those former employees of the Company whose employment was terminated in April 1999. Virtually all of the purported class of plaintiffs received severance packages at the time of the termination of their employment, in exchange for a release of claims, other than federalalleging unlawful age discrimination claims, against the Company. The complaint was filed in California Superior Courttheir selection for layoff in 1999, and for the County of Los Angeles and purports to state ten causes of action including breach of contract, age discrimination, violation of Labor Code Section 200, violation of Labor Code Section 970, unfair business practices, intentional infliction of emotional distress, unjust enrichment, breach of the covenant of good faith and fair dealing, declaratory relief and undue influence. The complaint seeks an order accelerating all unvested stock options for the members of the class, plus economic and liquidatedseeking monetary damages of an unspecified amount. On June 27, 2000, the case was ordered transferred from Los Angeles County Superior Court to San Diego County Superior Court. On July 3, 2000, the Company removed the case to the United States District Court for the Southern District of California, and discovery commenced. On May 29, 2001, the Court dismissed all plaintiffs’ claims except for claims arising under the federal Age Discrimination in Employment Act. On July 16, 2001, the Court granted conditional class certification on the remaining claims, to be revisited by the Court at the end of the discovery period. On April 15, 2003, the Court granted the Company’s summary judgment motions as to all remaining class members’ disparate impact claims.based thereon. On June 18, 2003, the Court ordered decertification of the class and dismissed theall remaining claims of the opt-in plaintiffs without prejudice. Plaintiffs have filed an appeal.plaintiffs. On August 1, 2005, the Ninth Circuit Court of Appeals upheld the judgment in favor of the Company. On June 20, 2003, 76 of the opt-in plaintiffs filed, anbut did not serve, a new action in Federal District Court for the Southern District of California,same court, alleging violations of the Age Discrimination in Employment Act as a result of their layoffs in 1999. To date, the complaint has not been served. Although there can be no assurance that an unfavorable outcome of these disputes would notAll plaintiffs have a material adverse effect onnow dismissed all remaining claims in exchange for the Company’s operating results, liquidity or financial position, the Company believes the claims are without merit and will vigorously defend the actions.SnapTrack:SnapTrack, Inc.: On March 30, 2001, Zoltar Satellite Alarm Systems, Inc. (Zoltar) filed suit against QUALCOMM and its subsidiary SnapTrack, a QUALCOMM wholly-owned subsidiary,Inc. in the United States District Court for the Northern District of California seeking monetary damages and injunctive relief and allegingbased on the alleged infringement of three patents. On August 27, 2001,Following a verdict and finding of no infringement of Zoltar’s patent claims, the Court entered a judgment in favor of the Company and SnapTrack on Zoltar’s complaint and awarded the Company and SnapTrack their costs of suit. Zoltar filed an amended complaint adding Sprint Corp.F-29QUALCOMM IncorporatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTSas a named defendantnotice of appeal, and narrowing certain infringement claims against QUALCOMM and SnapTrack. Since then, Zoltar has dismissed Sprint Corp. as a defendant. On September 23, 2002, the court denied Zoltar’s motion for summary judgment that the accused products infringe. Since then, the court has denied a second motion for summary judgment by Zoltar and denied summary judgment motions by QUALCOMM with leave to renew the motions at trial. The court is also considering further claim construction and will consider further evidence on invalidity prior to trial. Trial is currently set for February 24, 2004. Although there can be no assurance that an unfavorable outcome of this dispute would not have a material adverse effect on QUALCOMM’s operating results, liquidity or financial position, the Company believesand SnapTrack filed a responsive notice and motion to dismiss. Zoltar’s appeal was dismissed and the claims are without merit and will vigorously defendissue of reaching a final judgment on issues aside from non-infringement is pending before the action.Texas Instruments:QUALCOMM Incorporated v. Maxim Integrated Products, Inc.:On July 25, 2003,December 2, 2002, the Company filed an action in Delaware Superiorthe United States District Court for the Southern District of California against Texas Instruments Incorporated for breachMaxim alleging infringement of a patent portfolio license agreement between the parties,three patents and seeking monetary damages and other relief.injunctive relief based thereon. The Company amended the complaint, bringing the total number of patents at issue to four and adding misappropriation of trade secret and unfair competition claims. Maxim counterclaimed against the Company, alleging antitrust violations, patent misuse and unfair competition seeking monetary damages and injunctive relief based thereon. On September 23, 2003, Texas InstrumentsMay 5, 2004, the Court granted Maxim’s motion that no indirect infringement arose in connection with defendants’ sales of certain products to certain licensees of the Company. A motion by the Company for preliminary injunction regarding the alleged trade secret misappropriations by Maxim was heard on January 4, 2005. The Court found that Maxim had acted unlawfully by misappropriating the Company’s trade secrets and issued an injunction order prohibiting further misappropriation and requiring Maxim to notify customers of the order. Maxim has sought appellate review of the injunction order.Delaware Chancerythe United States District Court for the District of New Jersey against the companyCompany alleging breachviolations of the same agreement,state and federal antitrust and unfair competition laws as well as common law claims, generally relating to licensing and chip sales activities, seeking monetary damages and other relief. Although there can be no assurance that an unfavorable outcome ofinjunctive relief based thereon. Discovery has commenced in the action brought by Texas Instruments would not have a material adverse effect on QUALCOMM’s operating results, liquidity or financial position,actions.believesfiled an action in the claims are without meritUnited States District Court for the Southern District of California against Broadcom alleging infringement of seven patents, each of which is essential to the practice of either the GSM or 802.11 standards, and will vigorously defendseeking monetary damages and injunctive relief based thereon. On September 23, 2005, Broadcom answered and counterclaimed, alleging infringement of six patents. Discovery has yet to begin in the action.
The Company has not recorded any accrual for contingent liability associated with the legal proceedings described above based on the Company’s belief that a liability, while possible, is not probable. Further, any possible range of loss cannot be estimated at this time. The Company is engaged in numerous other legal actions arising in the ordinary course of its business and believes that the ultimate outcome of these actions will not have a material adverse effect on its operating results, liquidity or financial position.
In addition, some matters that have previously been disclosed may no longer be described in this Note because of rulings in the case, settlements, changes in the Company’s business or other developments rendering them, in the Company’s judgment, no longer material to the Company’s operating results, liquidity or financial position.
The Company leases certain of its facilities and equipment under noncancelable operating leases, with terms ranging from twoless than 1 year to ten26 years and with provisions for cost-of-living increases.increases for certain leases. Rental expense for fiscal 2005, 2004 and 2003 2002 and 2001 was $48$39 million, $61$31 million and $28$34 million, respectively. Rental expense includes $14 million and $19 million in fiscal 2003 and 2002, respectively, as a result of the consolidation of Vésper Holding (Note 11). Future minimum lease payments in each of the next five years from fiscal 20042006 through 20082010 are $42$67 million, $32$51 million, $25 million, $17$24 million and $8$16 million, and $13 million respectively, and $11$22 million thereafter.
The Company has agreements with suppliers and other parties to purchase inventory, and other goods and services and long-lived assets and estimates its noncancelable obligations under these agreements for fiscal 2006 to 2009 to be approximately $307$750 million, $200 million, $86 million and $6 million, respectively. The Company’s noncancelable obligations are insignificant in fiscal 2004 and $13 million in fiscal 2005. The Company also has2010. Of these amounts, commitments to purchase telecommunications servicesintegrated circuit product inventories for approximately $20fiscal 2006 to 2009 comprised $634 million, in fiscal 2004, $20$177 million, in fiscal 2005$82 million and $17$5 million, in fiscal 2006.respectively.
F-28
Letters of Credit and Other Financial Commitments
F-30
presentation. F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In addition to the financing commitments to Ericsson (Note 3) and the Inquam bridge loan and guarantee commitments (Note 4), the Company had $1 million of letters of credit outstanding as of September 30, 2003, which was not collateralized. • QUALCOMM CDMA Technologies (QCT) – develops and supplies CDMA-basedCDMA and WCDMA-based integrated circuits and system software for wireless voice and data communications, multimedia functions and global positioning systems products; • QUALCOMM Technology Licensing (QTL) – grants licenses to use portions of the Company’s intellectual property portfolio, which includes certain patent rights essential to and/or useful in the manufacture and sale of CDMA products;products, including, without limitation, products implementing cdmaOne, CDMA2000, WCDMA and/or the CDMA TDD standards and their derivatives, and collects license fees and royalties in partial consideration for such licenses; • QUALCOMM Wireless & Internet (QWI) – comprised of: o •QUALCOMM Internet Services (QIS) -— provides technology to support and accelerate the convergence of the wireless data Internet and voice services,market, including its BREW product and services;services, QChat and QPoint; o •QUALCOMM Government Technologies (QGOV) – formerly QUALCOMM Digital Media, (QDM) - provides development, hardware and analytical expertise to United States government agencies involving wireless communications technologies and develops technologies to support the processing, transmission and management of content for a variety of media applications, including the delivery of digitized motion pictures (Digital Cinema);technologies; and o •QUALCOMM Wireless Business Solutions (QWBS) -— provides satellite and terrestrial-based two-way data messaging, applicationposition reporting and position reportingwireless application services to transportation companies, private fleets, and construction equipment fleets.•QUALCOMM Strategic Initiatives (QSI) - manages the Company’s strategic investment activities. QSI makes strategic investments to promote the worldwide adoption of CDMA productsfleets and services for wireless voice and Internet data communications.other enterprise companies. Effective asbeginningfirst quarter of fiscal 2004,2005, the Company expectsreorganized its MediaFLO USA business into the QSI segment. The operating expenses related to present the revenues and operating resultsMediaFLO USA business were included in reconciling items through the end of its wholly-owned subsidiary, SnapTrack, Inc.,fiscal 2004. During the first quarter of fiscal 2005, the Company also reorganized a developer of wireless position location technology,division in the QWI operating segment. The revenuessegment that develops and operating resultssells test tools to support the design, development, testing and deployment of SnapTrack, Inc. are currently presented ininfrastructure and subscriber products into the QCT operating segment. Prior periods will be restatedperiod segment information has been adjusted to conform to the fiscal 2004new segment presentation in future reports.and accounting changes (EBT), from continuing operations, excluding certain impairment and other charges that are not allocated to the segments for management reporting purposes. EBT includes the allocation of certain corporate expenses to the segments, including depreciation and amortization expense related to unallocated corporate assets. Segment data includes intersegment revenues.
F-31
QUALCOMM IncorporatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reconciling | ||||||||||||||||||||||||
QCT | QTL | QWI | QSI | Items | Total | |||||||||||||||||||
2003 | ||||||||||||||||||||||||
Revenues | $ | 2,424,194 | $ | 1,000,196 | $ | 485,466 | $ | 124,260 | $ | (63,480 | ) | $ | 3,970,636 | |||||||||||
EBT | 796,724 | 896,621 | 27,176 | (448,234 | ) | 12,860 | 1,285,147 | |||||||||||||||||
Total assets | 310,796 | 154,887 | 92,598 | 839,156 | 7,424,999 | 8,822,436 | ||||||||||||||||||
2002 | ||||||||||||||||||||||||
Revenues | $ | 1,590,829 | $ | 847,092 | $ | 438,682 | $ | 126,477 | $ | 36,480 | $ | 3,039,560 | ||||||||||||
EBT | 440,523 | 756,173 | (9,467 | ) | (506,978 | ) | (219,126 | ) | 461,125 | |||||||||||||||
Total assets | 290,598 | 168,777 | 107,453 | 1,754,957 | 4,184,263 | 6,506,048 | ||||||||||||||||||
2001 | ||||||||||||||||||||||||
Revenues | $ | 1,364,687 | $ | 781,939 | $ | 426,066 | $ | — | $ | 107,094 | $ | 2,679,786 | ||||||||||||
EBT | 305,546 | 705,794 | 33,484 | (1,125,206 | ) | (375,258 | ) | (455,640 | ) | |||||||||||||||
Total assets | 296,638 | 180,276 | 109,443 | 1,294,278 | 3,789,098 | 5,669,733 |
Reconciling | ||||||||||||||||||||||||
QCT* | QTL | QWI* | QSI* | Items* | Total* | |||||||||||||||||||
2005 | ||||||||||||||||||||||||
Revenues | $ | 3,290 | $ | 1,839 | $ | 644 | $ | — | $ | (100 | ) | $ | 5,673 | |||||||||||
EBT | 852 | 1,663 | 57 | 10 | 227 | 2,809 | ||||||||||||||||||
Total assets | 518 | 16 | 153 | 442 | 11,350 | 12,479 | ||||||||||||||||||
2004 | ||||||||||||||||||||||||
Revenues | $ | 3,111 | $ | 1,331 | $ | 571 | $ | — | $ | (133 | ) | $ | 4,880 | |||||||||||
EBT | 1,048 | 1,195 | 19 | (31 | ) | 82 | 2,313 | |||||||||||||||||
Total assets | 564 | 8 | 117 | 400 | 9,731 | 10,820 | ||||||||||||||||||
2003 | ||||||||||||||||||||||||
Revenues | $ | 2,428 | $ | 1,000 | $ | 484 | $ | 1 | $ | (66 | ) | $ | 3,847 | |||||||||||
EBT | 805 | 897 | 15 | (168 | ) | 16 | 1,565 | |||||||||||||||||
Total assets | 311 | 155 | 92 | 839 | 7,425 | 8,822 |
* | As adjusted |
QWBS | QDM | QIS | Other | |||||||||||||
2003 | $ | 356,067 | $ | 48,625 | $ | 54,318 | $ | 26,456 | ||||||||
2002 | $ | 337,454 | $ | 38,777 | $ | 47,287 | $ | 15,164 | ||||||||
2001 | $ | 345,560 | $ | 61,796 | $ | 6,256 | $ | 12,454 |
Fiscal Year | QWBS | QGOV | QIS* | |||||||||
2005 | $ | 441 | $ | 50 | $ | 153 | ||||||
2004 | $ | 414 | $ | 41 | $ | 116 | ||||||
2003 | $ | 356 | $ | 49 | $ | 79 |
* | As adjusted. |
F-30
2003 | 2002 | 2001 | |||||||||||
Revenues | |||||||||||||
Elimination of intersegment revenue | $ | (119,066 | ) | $ | (80,409 | ) | $ | (62,114 | ) | ||||
Other products | 55,586 | 116,889 | 169,208 | ||||||||||
Reconciling items | $ | (63,480 | ) | $ | 36,480 | $ | 107,094 | ||||||
Earnings before income taxes | |||||||||||||
Unallocated goodwill amortization | $ | — | $ | (245,278 | ) | $ | (245,409 | ) | |||||
Unallocated amortization of other acquisition-related intangible assets | (7,210 | ) | (13,295 | ) | (10,965 | ) | |||||||
Unallocated research and development expenses | (35,864 | ) | (22,865 | ) | — | ||||||||
Other unallocated selling, general, and administrative expenses | (37,726 | ) | (13,128 | ) | (36,734 | ) | |||||||
Other unallocated corporate expenses | — | — | (125,044 | ) | |||||||||
EBT from other products | (19,545 | ) | (6,410 | ) | (91,319 | ) | |||||||
Unallocated interest expense | (1,751 | ) | (377 | ) | (9,557 | ) | |||||||
Unallocated investment income, net | 126,738 | 89,138 | 139,226 | ||||||||||
Intracompany eliminations | (11,782 | ) | (6,911 | ) | 4,544 | ||||||||
Reconciling items | $ | 12,860 | $ | (219,126 | ) | $ | (375,258 | ) | |||||
Year Ended | ||||||||||||
September 25, | September 26, | September 28, | ||||||||||
2005 | 2004 | 2003* | ||||||||||
Revenues | ||||||||||||
Elimination of intersegment revenue | $ | (148 | ) | $ | (153 | ) | $ | (122 | ) | |||
Other products | 48 | 20 | 56 | |||||||||
Reconciling items | $ | (100 | ) | $ | (133 | ) | $ | (66 | ) | |||
Earnings (loss) before income taxes | ||||||||||||
Unallocated research and development expenses | $ | (42 | ) | $ | (23 | ) | $ | (36 | ) | |||
Unallocated selling, general, and administrative expenses | (15 | ) | (41 | ) | (45 | ) | ||||||
EBT from other products | (56 | ) | (39 | ) | (20 | ) | ||||||
Unallocated investment income, net | 339 | 192 | 125 | |||||||||
Intracompany eliminations | 1 | (7 | ) | (8 | ) | |||||||
Reconciling items | $ | 227 | $ | 82 | $ | 16 | ||||||
* | As adjusted. |
F-32
QUALCOMM IncorporatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
evaluate the segments’ operating performance. Unallocated charges include amortization of acquisition-related intangible assets,certain investment income and research and development expenseexpenses and marketing expenses related to the development of the CDMA market that were not deemed to be directly related to the businesses of the operating segments. During fiscal 2003, the Company pursued numerous potential new business opportunities that contributed to the growth of unallocated research and development and marketing expenses as compared to fiscal 2002 and 2001. Beginning in fiscal 2004, the Company will begin allocating certain of these unallocated research and development and marketing expenses to the reportable segments.
Other unallocated corporate expenses for fiscal 2001 primarily included $62 million related to an arbitration decision against the Company and $57 million related to Globalstar (Note 4).
QCT | QTL | QWI | QSI | |||||||||||||
2003 | ||||||||||||||||
Revenues from external customers | $ | 2,422,413 | $ | 897,506 | $ | 470,871 | $ | 124,260 | ||||||||
Intersegment revenues | 1,781 | 102,690 | 14,595 | — | ||||||||||||
Interest income | 166 | 1,770 | 984 | 50,701 | ||||||||||||
Interest expense | 156 | 45 | 256 | 28,473 | ||||||||||||
Equity in losses of investees | — | — | 148 | 125,867 | ||||||||||||
2002 | ||||||||||||||||
Revenues from external customers | $ | 1,586,864 | $ | 780,410 | $ | 428,920 | $ | 126,477 | ||||||||
Intersegment revenues | 3,965 | 66,682 | 9,762 | — | ||||||||||||
Interest income | 1,724 | 1,672 | 1,013 | 32,793 | ||||||||||||
Interest expense | 41 | 214 | 108 | 24,939 | ||||||||||||
2001 | ||||||||||||||||
Revenues from external customers | $ | 1,360,427 | $ | 727,564 | $ | 422,587 | $ | — | ||||||||
Intersegment revenues | 4,260 | 54,375 | 3,479 | — | ||||||||||||
Interest income | 2,366 | 122 | 888 | 108,183 | ||||||||||||
Interest expense | 38 | 6 | 27 | 74 |
All
QCT* | QTL | QWI* | QSI* | |||||||||||||
Fiscal 2005 | ||||||||||||||||
Revenues from external customers | $ | 3,281 | $ | 1,710 | $ | 634 | $ | — | ||||||||
Intersegment revenues | 9 | 129 | 10 | — | ||||||||||||
Interest income | — | 5 | 2 | 4 | ||||||||||||
Interest expense | — | 1 | 1 | — | ||||||||||||
Fiscal 2004 | ||||||||||||||||
Revenues from external customers | $ | 3,107 | $ | 1,200 | $ | 553 | $ | — | ||||||||
Intersegment revenues | 4 | 131 | 18 | — | ||||||||||||
Interest income | — | 3 | 1 | 14 | ||||||||||||
Fiscal 2003 | ||||||||||||||||
Revenues from external customers | $ | 2,423 | $ | 898 | $ | 469 | $ | 1 | ||||||||
Intersegment revenues | 5 | 102 | 15 | — | ||||||||||||
Interest income | — | 2 | 1 | 45 |
* | As adjusted. |
F-31
2003 | 2002 | 2001 | ||||||||||
United States | $ | 874,564 | $ | 913,776 | $ | 942,579 | ||||||
South Korea | 1,723,772 | 1,133,481 | 937,504 | |||||||||
Japan | 586,324 | 534,312 | 576,958 | |||||||||
China | 310,976 | 73,592 | 8,902 | |||||||||
Brazil | 158,823 | 146,943 | 24,575 | |||||||||
Other foreign | 316,177 | 237,456 | 189,268 | |||||||||
$ | 3,970,636 | $ | 3,039,560 | $ | 2,679,786 | |||||||
Segment assets are comprised of accounts receivable, finance receivables and inventory for QCT, QTL and QWI. The QSI segment assets include marketable securities, accounts receivable, finance receivables, notes receivable, other investments and all assets of consolidated investees, including Vésper Holding (Note 11). Total segment assets
F-33
Year Ended | ||||||||||||
September 25, | September 26, | September 28, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
United States | $ | 1,015 | $ | 1,016 | $ | 875 | ||||||
South Korea | 2,083 | 2,091 | 1,724 | |||||||||
Japan | 1,210 | 877 | 586 | |||||||||
China | 394 | 260 | 311 | |||||||||
Brazil | 40 | 31 | 36 | |||||||||
Other foreign | 931 | 605 | 315 | |||||||||
$ | 5,673 | $ | 4,880 | $ | 3,847 | |||||||
differ from total assets on a consolidated basis as a result of unallocated corporate assets primarily comprised of cash, cash equivalents, marketable debt securities, property, plant and equipment, and goodwill. The net book value of long-lived assets located outside of the United States, primarily in Brazil, was $117 million, $251 million and $10 million at September 30, 2003, 2002 and 2001, respectively.
Note 11. Acquisitions
Vésper Holding, Ltd.
In
• | Iridigm Display Corporation (Iridigm), a California-based display technology company. | ||
• | Trigenix Limited, a United Kingdom-based developer of user interfaces for mobile phones. | ||
• | Spike Technologies, Inc., a semiconductor design services company based primarily in India. | ||
• | ELATA, Ltd., a United Kingdom-based developer of mobile content delivery and device management software systems. |
Pursuant to the Restructuring, the Company and VeloCom, Inc. (VeloCom) invested $266 million and $80 million, respectively, in a newly formed holding company called Vésper Holding, Ltd. (Vésper Holding). Vésper Holding acquired certain liabilities of the Vésper Operating Companies from their vendors for $135 million and the issuance of warrants to purchase an approximate 7% interest in Vésper Holding, and the vendors released in full any claims that they might have against the Company, VeloCom, Vésper, its direct and indirect parent companies and other related parties arising from or related to the acquired liabilities. In a series of related transactions, Vésper Holding agreed to contribute the acquired liabilities to the Vésper Operating Companies in exchange for equity securities and to cancel the contributed liabilities. The purchase price allocation, based on the estimated fair values of acquired assets and liabilities assumed, included $308 million for property, plant and equipment, $39 million for licenses and $31 million for other intangible assets. Property, plant and equipment are depreciated over useful lives ranging from 2 to 18 years. Licenses and other intangible assets are amortized over their useful lives of 15 to 18 years and 3 to 18 years, respectively.
On November 29, 2001, the Company forgave $119 million under a debt facility with VeloCom and converted its remaining $56 million convertible promissory note into equity securities of VeloCom in conjunction with its acquisition of Vésper Holding. The conversion increased the Company’s equity interest in VeloCom to 49.9%. The Company used the equity method to account for its investment in VeloCom. On July 2, 2003, the Company transferred to VeloCom all of its equity interest in VeloCom in exchange for (a) 49.9% of the shares of Vésper Holding held by VeloCom, which represented approximately 11.9% of the issued and outstanding shares of Vésper Holding, and (b) elimination of VeloCom’s minority consent rights with respect to Vésper Holding. The Company recorded a net loss of $7 million on the exchange resulting primarily from the recognition of cumulative translation losses, previously included in stockholders’ equity, in the statement of operations during the fourth quarter of fiscal 2003. After giving effect to the exchange, the Company owns an approximate 83.9% direct interest in Vésper Holding and holds no continuing interest in VeloCom at September 30, 2003.
Due to a series of adverse regulatory developments that negatively affected Vésper’s prospects, the Company is pursuing an expedited exit strategy whereby Vésper and/or its assets will be sold or otherwise disposed of. In accordance with this strategy, on September 25, 2003, Embratel Participações S.A. (Embratel) entered into an agreement to acquire for nominal consideration the Vésper Operating CompaniesQSI segment, (the Embratel sale transaction), excluding the tower and rooftop antennae assets for no consideration. The Vésper
F-32
F-34
QUALCOMM IncorporatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The closing of$52 million on the Embratel sale transaction is contingent uponduring fiscal 2004, partially offset by a number$40 million net gain which resulted from the subsequent sale of events being completed priorTowerCo. As a result of the disposition of the remaining operations and assets related to or concurrent with closing, including regulatory approval by Anatel. Given the uncertainty regarding the closing contingencies,Vésper Operating Companies, the Company has not presenteddetermined that the results of operations and cash flows related to the Vésper-related assetssper Operating Companies, including the results related to TowerCo and liabilities as “held for sale” in its September 30, 2003 balance sheet. Further, the Company does not expect to present Vésper’s historical operationsgains and losses realized on the Embratel and TowerCo sales transactions, should be presented as discontinued operations in its consolidated statements of operations in future financial statements because of its expectation of continuing involvement in the Vésper business by way of an on-going tower usage arrangement.
As a result of adverse regulatory developments, and after an evaluation of the potential acquirers and the valuations that they may ascribe Vésper given the regulatory situation,cash flows. At September 25, 2005, the Company recorded a $160 million impairment loss on its long-livedhad no remaining assets related to Vésper during the second quarter of fiscal 2003. The impairment loss recognized was the difference between the assets’ carrying values and their estimated fair values at that date. At September 30, 2003, the carrying values of assets andor liabilities related to Vésper totaled $265 million and $307 million, respectively.
Assuming the requisite government approvals are received and all conditions to close are satisfied, the Company anticipates providing approximately $40 million to $45 million in aggregate funding by the closing date to facilitate the Embratel sale transaction. The Company expects to recognize cumulative foreign currency translation losses, previously included in stockholders’ equity, as part of the gain or loss on a sale or other disposition of Vésper. The Company expects to record an approximate $35 million to $45 million loss if and when the transaction closes, including the cumulative foreign currency translation losses.
The Company consolidates all assets and liabilities of Vésper Holding, including bank loans and capital lease obligations. The balances of the bank loans and capital lease obligations, including accrued interest, at September 30, 2003 were $68 million and $47 million, respectively. The bank loans, which are denominated in Brazilian real, bear interest at the Certificate of Deposit Inter Bank (CDI) rate (the LIBOR rate equivalent in Brazil) plus 1.5% (approximately 21.21% at September 30, 2003). The lease obligations bear interest at fixed and variable rates ranging from 6.0% to 21.56% at September 30, 2003. These debt facilities are collateralized by certain assets of Vésper. During May 2003, the Vésper Operating Companies failed to make interestor TowerCo recorded on its consolidated balance sheet. Revenues of $36 million and certain lease payments owed to six of their local bank creditors. As a result of these defaults, certain provisions$123 million were reported in the bank loans and leases were triggered making all of the bank loans and certain leases callable. Those bank loans and leases are presented on the Company’s balance sheet as current liabilities at September 30, 2003. The Company is working, in conjunction with Vésper, with the banks to structure arrangements which would, if implemented, provide for forbearance by the banks on payments under the loans and leases until a contemplated sale of Vésper could be effected. There is no certainty that such arrangements with the banks, or any such sale transaction, will be implemented. The Vésper Operating Companies were charged a 2% default penalty and are being charged an additional 1% interest rate per month on the amount in default until the default is cured. The aggregate amounts of debt maturities and minimum capital lease payments for each of the three yearsloss from discontinued operations during fiscal 2004 through 2006 are $103 million, $1 million and $4 million, respectively, and $7 million thereafter.
During the first quarter of fiscal 2003, the Company acquired wireless licenses in Brazil for approximately $82 million. Approximately $8 million of the purchase price was paid in December 2002. The remaining Brazilian real-denominated wireless license obligation is financed by the Brazilian government at an interest rate of 12% per annum, plus an adjustment for inflation. At September 30, 2003, the outstanding license fee obligation was approximately $111 million, having increased as a result of interest and the strengthening of the Brazilian real against the U.S. dollar. The license fee obligation is payable annually in $17 million installments starting in fiscal 2006, until the obligation is fully repaid.
Cash amounts paid for interest were $12 million, $22 million and $11 million in fiscal 2003, 2002 and 2001, respectively. Cash paid for interest in fiscal 2003 and 2002 is primarily related to the Vésper Holding bank loans and capital leases. Cash paid for interest in fiscal 2001 included $8 million related to an arbitration decision against the Company.
Due to the Company’s practice of consolidating foreign subsidiaries one month in arrears, the consolidated financial statements for fiscal 2003 and 2002 included $238 million and $130 million in losses, net of minority interest, respectively, of Vésper Holding from September 1, 2002 through August 31, 2003 and from November 13, 2001 (the acquisition date) through August 31, 2002, respectively. The consolidated financial statements for fiscal
F-35
QUALCOMM IncorporatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2003 and 2002 also included $24 million and $30 million of equity in losses of the Vésper Operating Companies (pre-acquisition) and VeloCom. Pro forma operating results for the Company, assuming the acquisition of Vésper Holding had been made at the beginning of the periods presented, are as follows (in thousands, except per share data):
2002 | 2001 | |||||||
(Unaudited) | ||||||||
Revenues | $ | 3,059,398 | $ | 2,805,266 | ||||
Net income | $ | 335,746 | $ | (974,221 | ) | |||
Basic earnings (loss) per common share | $ | 0.44 | $ | (1.29 | ) | |||
Diluted earnings (loss) per common share | $ | 0.41 | $ | (1.29 | ) | |||
These pro forma results have been prepared for comparative purposes only and may not be indicative of the results of operations that actually would have occurred had the combination been in effect at the beginning of the respective periods or of future results of operations of the consolidated entities.
The Vésper Operating Companies’ summarized financial information, derived from its unaudited financial statements for the periods prior to the Company obtaining its controlling interest in Vésper Holding, is as follows (in thousands):
2001 | ||||
Revenues | $ | 125,480 | ||
Gross loss | (187,898 | ) | ||
Net loss | $ | (877,017 | ) | |
Alcatel Mobicom
In September 2003, a European subsidiary of the Company acquired certain assets and assumed certain liabilities of Alcatel Mobicom. Due to the Company’s practice of consolidating foreign subsidiaries one month in arrears, the acquisition will be reflected in the Company’s consolidated financial statements during the first quarter of fiscal 2004. The preliminary allocation of purchase price, based on the estimated fair values of acquired assets and liabilities assumed, reflects acquired goodwill and intangible assets of $8 million and $5 million, respectively. The Company is in the process of finalizing the purchase price allocation and does not anticipate material adjustments to the preliminary allocation. In accordance with FAS 142, amounts allocated to goodwill are not amortized. Amounts allocated to intangible assets will be amortized over their expected useful lives. Pro forma results have not been presented because the effect of this acquisition is not material.
income, related to an arrangement under which a portion of the ADV was transferred to a wireless operator prior to fiscal 2004. The Company recorded $47 million in other income in the QSI segment during fiscal 2003 related to transfers of the ADV’s value to wireless operators. F-3312.13. Auction Discount Voucheriswas fully transferable and, may, subject to certain conditions, could be used in whole or in part by any entity in any FCC spectrum auction over a period of three years, including those in which QUALCOMMthe Company is not a participant.November 2002,fiscal 2004, the FCC amended the terms of the ADV to allow the Company to use the ADV to satisfy existing FCC debt of other companies. During April 2003, the FCC granted the Company’s request for a one-year extension of the ADV. As a result, the ADV expires in June 2004. The Company transferred approximately $58 million of the ADV’s value to three wireless operators during fiscal 2003 for $57 million in cash and approximately $11$18 million of the ADV’s value to a wireless operator during fiscal 2001for approximately $17 million in exchange for a note receivable.cash. As a result of the transfers during fiscal 2003,this transfer, the Company recorded $47an additional $17 million in other operating income in the QSI segment; an additional $10segment during fiscal 2004. During fiscal 2004, the Company also recorded $4 million will be recognized as earned asin other operating income and $4 million in selling, general and administrative expenses in theF-36QUALCOMM IncorporatedNOTES TO CONSOLIDATED FINANCIAL STATEMENTSCompany incurs QSI segment for cooperative marketing expenses pursuant to a concurrent agreement with one of the wireless operators through December 2003incurred, with no effect on net income.$8$30 million of the ADV during fiscal 2004 as a downfinal payment for wireless licenses granted in fiscal 2004 in which the Company was the highest bidder in a FCC auction held during fiscal 2003 and expects to use another $302003. On a cumulative basis, the Company used $38 million of the ADV’s value to makeADV as payment for these wireless licenses, for which the final payment when the licenses are granted in fiscal 2004. The remaining value of the ADV at September 30, 2003 was approximately $48 million. The Company had no cost basis in the ADV at September 30, 2003.26, 2004. The ADV had no remaining value at September 25, 2005.F-37
F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS13.14. Summarized Quarterly Data (Unaudited)30, 200325, 2005 and 2002September 26, 2004 (in thousands,millions, except per share data): 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Revenues $ 1,097,169 $ 1,043,043 $ 921,608 $ 908,816 Operating income 446,718 231,480 335,822 296,215 Net income 241,334 103,016 191,689 291,402 Basic net earnings per common share (1) $ 0.31 $ 0.13 $ 0.24 $ 0.37 Diluted net earnings per common share (1) $ 0.30 $ 0.13 $ 0.23 $ 0.35 Revenues $ 698,642 $ 696,115 $ 770,917 $ 873,886 Operating income 182,081 99,804 138,618 252,765 Net income (loss) 139,233 43,930 (13,768 ) 190,282 Basic net earnings (loss) per common share (1) $ 0.18 $ 0.06 $ (0.02 ) $ 0.24 Diluted net earnings (loss) per common share (1) $ 0.17 $ 0.05 $ (0.02 ) $ 0.23 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter (3) Revenues (1) $ 1,390 $ 1,365 $ 1,358 $ 1,560 Operating income (1) 584 572 560 670 Net income (1) 513 532 560 538 Basic earnings per common share (2) $ 0.31 $ 0.32 $ 0.34 $ 0.33 Diluted earnings per common share (2) $ 0.30 $ 0.31 $ 0.33 $ 0.32 Revenues (1) $ 1,207 $ 1,216 $ 1,341 $ 1,118 Operating income (1) 568 577 622 362 Income from continuing operations (1) 411 441 486 387 Net income (1) 352 488 486 393 Basic earnings per common share from continuing operations (2) $ 0.26 $ 0.27 $ 0.30 $ 0.24 Basic earnings per common share (2) $ 0.22 $ 0.30 $ 0.30 $ 0.24 Diluted earnings per common share from continuing operations (2) $ 0.25 $ 0.26 $ 0.29 $ 0.23 Diluted earnings per common share (2) $ 0.21 $ 0.29 $ 0.29 $ 0.23 (1) Revenues, operating income, income from continuing operations and net income are rounded to millions each quarter. Therefore, the sum of the quarterly amounts may not equal the annual amounts reported. (2) Earnings (loss) per share are computed independently for each quarter and the full year based upon respective average shares outstanding. Therefore, the sum of the quarterly net earnings (loss) per share amounts may not equal the annual amounts reported.(3) Prior to the fourth quarter of fiscal 2004, the Company recorded royalty revenues from certain licensees based on estimates of royalties during the period they were earned. Starting in the fourth quarter of fiscal 2004, the Company began recognizing royalty revenues solely based on royalties reported by licensees during the quarter (Note 1). The change in the timing of recognizing royalty revenue was made prospectively and had the initial one-time effect of reducing royalty revenues recorded in the fourth quarter of fiscal 2004. F-38
millions) S-1
VALUATION AND QUALIFYING ACCOUNTS
(In thousands) (Charged) Balance at Credited to Balance at Beginning of Costs and End of Period(A) Expenses Deductions Other Period(A) Year ended September 30, 2001 Allowances: — trade receivables $ (9,610 ) $ (10,412 ) $ 4,266 $ — $ (15,756 ) — finance receivables (11,144 ) (601,986 ) 39 (90,857 ) (B) (703,948 ) — notes receivable — (155,107 ) — — (155,107 ) Inventory reserves (20,834 ) (65,268 ) 8,817 — (77,285 ) Valuation allowance on deferred tax assets (596,017 ) (192,551 ) — (438,889 ) (C) (1,227,457 ) $ (637,605 ) $ (1,025,324 ) $ 13,122 $ (529,746 ) $ (2,179,553 ) Year ended September 30, 2002 Allowances: — trade receivables $ (15,756 ) $ (42,160 ) $ 82,133 $ (45,864 ) (D) $ (21,647 ) — finance receivables (703,948 ) (189,674 ) 843,093 (50,529 ) — notes receivable (155,107 ) (19,263 ) 132,898 (41,472 ) Inventory reserves (77,285 ) (9,649 ) 8,856 — (78,078 ) Valuation allowance on deferred tax assets (1,227,457 ) 144,519 — (440,106 ) (E) (1,523,044 ) $ (2,179,553 ) $ (116,227 ) $ 1,066,980 $ (485,970 ) $ (1,714,770 ) Year ended September 30, 2003 Allowances: — trade receivables $ (21,647 ) $ (14,253 ) $ 23,772 $ (224 )(F) $ (12,352 ) — finance receivables (50,529 ) 31,093 1,389 — (18,047 ) — notes receivable (41,472 ) (27,387 ) 33 — (68,826 ) Inventory reserves (78,078 ) (3,798 ) 12,164 — (69,712 ) Valuation allowance on deferred tax assets (1,523,044 ) (252,986 ) 10,114 1,105,640 (G) (660,276 ) $ (1,714,770 ) $ (267,331 ) $ 47,472 $ 1,105,416 $ (829,213 ) (Charged) Balance at Credited to Balance at Beginning of Costs and End of Period Expenses Deductions Other Period Year ended September 28, 2003 Allowances: — trade receivables $ (22 ) $ (14 ) $ 24 $ — $ (12 ) — finance receivables (51 ) 32 1 — (18 ) — notes receivable (41 ) (28 ) — — (69 ) Inventory reserves (78 ) (4 ) 12 — (70 ) Valuation allowance on deferred tax assets (1,523 ) (253 ) 10 1,106 (A ) (660 ) $ (1,715 ) $ (267 ) $ 47 $ 1,106 $ (829 ) Year ended September 26, 2004 Allowances: — trade receivables $ (12 ) $ (3 ) $ 8 $ 2 (B ) $ (5 ) — finance receivables (18 ) 10 7 — (1 ) — notes receivable (69 ) (30 ) 53 — (46 ) Inventory reserves (70 ) 7 13 — (50 ) Valuation allowance on deferred tax assets (660 ) 27 20 474 (B ) (139 ) $ (829 ) $ 11 $ 101 $ 476 $ (241 ) Year ended September 25, 2005 Allowances: — trade receivables $ (5 ) $ (2 ) $ 5 $ — $ (2 ) — finance receivables (1 ) 1 — — — — notes receivable (46 ) (41 ) 24 — (63 ) Inventory reserves (50 ) (10 ) 14 — (46 ) Valuation allowance on deferred tax assets (139 ) 76 — (6 ) (C ) (69 ) $ (241 ) $ 24 $ 43 $ (6 ) $ (180 ) (A)The Company’s fiscal year ends on the last Sunday of September.(B)The reduction in finance receivables related to equity in losses related to the Company’s original 16% ownership interest in the Vésper Operating Companies (see Note 11 to the Consolidated Financial Statements.) This amount includes $31,757 previously disclosed as a charge to costs and expenses.(C)Of this amount, $64,171 was charged against the tax benefit as a component of comprehensive loss related to the Company’s temporary losses on marketable securities and $374,718 was charged to paid-in-capital (see Note 6 to the Consolidated Financial Statements).(D)Of this amount, $54,708 related to acquisitions (see Note 11 of the Consolidated Financial Statements), offset by an increase of $8,844 related to translation adjustments due to changes in foreign currency rates primarily attributable to the Vésper Operating Companies.(E)Of this amount, $329,742 related to acquisitions and $153,957 was charged to paid-in capital (see Note 7 of the Consolidated Financial Statements), offset by a $43,593 reduction recorded as a component of comprehensive loss related to the Company’s temporary losses on marketable securities.(F)This amount related to foreign currency translation adjustments attributable to the Vésper Operating Companies.(G)(A) This amount related to the reversal of the Company’s valuation allowance on substantially all of its United States deferred tax assets during fiscal 2003 as a credit to stockholders’ equity. (B) This amount related to the disposition of the Vésper Operating Companies (See Note 12 of the Consolidated Financial Statements). (C) This amount related to the acquisitions of Trigenix and ELATA (See Note 11 of the Consolidated Financial Statements).