UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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(Mark One) |
[X]
þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 26, 200424, 2006
OR
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[]
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to . Commission file number 0-19528 QUALCOMM Incorporated
(Exact name of registrant as specified in its charter)
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| Delaware | | 95-3685934 |
| (State or other jurisdiction of | | (I.R.S. Employer |
| incorporation or organization) | | Identification No.) |
| | | |
| 5775 Morehouse Drive | | |
| San Diego, California | | 92121-1714 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (858) 587-1121 Securities registered pursuant to Sectionsection 12(b) of the Act:
None | | |
| Title of Each Class | | Name of Each Exchange on Which Registered |
| | |
| Common stock, $0.0001 par value | | NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act:Common Stock, $0.0001 par value
None
(Title Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of Class)the Securities Act.
YESþ NOo
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YESo NOþ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [X]þ NO [ ]o
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
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filerþ Accelerated Filero Non-Accelerated Filero
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [X]o NO [ ]þ
State the aggregate market value 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.
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of March 26, 200424, 2006 was $48,250,582,026.$79,773,673,077.*
The number of shares outstanding of the registrant’s common stock was
1,639,081,6391,652,553,203 as of
November 1, 2004.October 31, 2006.
DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s Definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A in connection with the registrant’s
20052007 Annual Meeting of Stockholders, to be filed subsequent to the date hereof, are incorporated by reference into Part III of this Report. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the conclusion of the registrant’s fiscal year ended September
26, 2004.
24, 2006. | | |
| * | | Excludes the Common Stock held by executive officers, directors and stockholders whose ownership exceeds 5% of the Common Stock outstanding at March 26, 2004.24, 2006. This calculation does not reflect a determination that such persons are affiliates for any other purposes. |
QUALCOMM INCORPORATED
Form 10-K
For the Fiscal Year Ended September 26, 200424, 2006
Index
TRADEMARKS AND TRADE NAMES
QUALCOMM®
QUALCOMM®, QUALCOMM CDMA
University®University®, QUALCOMM Wireless Business
Solutions®SolutionsÒ,
OmniTRACS®OmniTRACS®,
OmniOne®OmniVision™, OmniOneÒ, GlobalTRACS™,
TrailerTRACS®, SensorTRACSÒ, TruckMAIL™,
OmniExpress®OmniExpress®, QConnect™, T2™,
Eudora®EutelTRACS™,
QCP-®, QCT®QCT-Ò, MSM™,
Secure MSM™, CMX™, CSM™,
MSM5500®, MSM6000®, MSM6025™, MSM6050™, MSM6100™, MSM6150™, MSM6200™, MSM6250™MSM6250Ô, MSM6275™, MSM6280™,
MSM6300™, MSM6500™MSM6500Ô, MSM6550™,
MSM6700™, MSM6800™, MSM7200™
, MSM7500™, MSM7600™, CSM5500™, CSM6700™, CSM6800™
, Wireless Reach™, DMMX™, HMMX™, gpsOne™,
radioOne®SnapTrackÒ,
SnapTrack®, BREW®BREWÒ, BREW
SDK®SDKÒ, BINARY RUNTIME ENVIRONMENT FOR
WIRELESS®WIRELESSÒ, MediaFLO™,
FLO™, QPoint™
, FLASH-OFDM®, RadioRouter®, QConcert™, Qtunes™, Qtv™, Q3Dimension™, Qcamera™, Qcamcorder™, Qvideophone™, deliveryOne™, uiOne™, iMoD™, and
QCHAT®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
Consumer Products, QCP,Government Technologies, QGOV, QUALCOMM MEMS Technologies, QMT, QUALCOMM Technologies & Ventures, QUALCOMM MediaFLO Technologies, QUALCOMM Flarion Technologies, QUALCOMM Global Development, QUALCOMM Global Trading, QGT, QUALCOMM Strategic Initiatives, QSI,
andELATA, Iridigm, MediaFLO USA, Trigenix, Spike, SnapTrack are trade names of QUALCOMM Incorporated.
cdmaOne®
cdmaOne® is a trademark of the CDMA Development Group, Inc.
CDMA2000®CDMA2000® is a registered trademark and certification mark of the Telecommunications Industry Association. Globalstar™
isand Globalstar® are a trademark and service mark,
respectively, of Globalstar,
L.P., and Globalstar®Inc. RentalMan® is a
registered trademark of
Loral Qualcomm Satellite Services,Wynne Systems, Inc.
All other trademarks, service marks and/or trade names appearing in this document are the property of their respective holders.
In this document, the words “we,” “our,” “ours” and “us” refer only to QUALCOMM Incorporated and not any other person or entity.
PART I
This Annual Report (including the following section regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations) contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Annual Report. Additionally, statements concerning future matters such as the development of new products, enhancements or technologies, sales levels, expense levels and other statements regarding matters that are not historical are forward-looking statements.
Although forward-looking statements in this Annual Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include without limitation those discussed under the heading “Risk Factors” below, as well as those discussed elsewhere in this Annual Report. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report. Readers are urged to carefully review and consider the various disclosures made in this Annual Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
We were incorporated in 1985 under the laws of the state of California. In 1991, we reincorporated in the state of Delaware. We operate and report using a 52-53 week fiscal year ending the last Sunday in September. Our 52-week fiscal years consist of four equal quarters of 13 weeks each, and our 53-week fiscal years consist of three 13-week fiscal quarters and one 14-week fiscal quarter. The financial results for our 53-week fiscal years and our 14-week fiscal quarters will not be exactly comparable to our 52-week fiscal years and our 13-week fiscal quarters. Each of the fiscal years ended September 30,24, 2006, September 25, 2005 and September 26, 2004 2003, and 2002 include 52 weeks. For presentation purposes, all fiscal periods presented or discussed in this report have been presented as ending on September 30. For example, our 2004 fiscal year ended on September 26, 2004, but we present our 2004 fiscal year as ending on September 30, 2004.
In 1989, we publicly introduced the concept that a digital communication technique called CDMA could be commercially successful in wireless communication applications. CDMA stands for Code Division Multiple Access and is one of the
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.
Because we led,
and continue to lead, the development and commercialization
of all versions of CDMA technology, we own significant intellectual property, including patents, patent applications and trade secrets, portions of which we license to other companies and implement 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.
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There are currently fourseveral versions of CDMA technology recognized worldwide as public wirelesscellular standards. The first version, known as cdmaOne, is a second generation (2G) cellular technology that was the first commercially deployed CDMA-based phone system and is popularly referred to as a second generation technology.in
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the mid-1990s. The other
threesubsequent versions of CDMA are popularly referred to as third generation (3G) technologies
and known commonly throughout the wireless industry as:
| • | | CDMA2000, including 1X, 1xEV-DO (where DO refers to(EV-DO, or Evolution Data Optimized), EV-DO Revision A and 1xEV-DV (where DV refers to Data and Voice);EV-DO Revision B; |
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| • | | Wideband CDMA (WCDMA) or, also known as Universal Mobile Telecommunications Systems (UMTS), including High Speed Download Packet Access (HSDPA) and High Speed Uplink Packet Access (HSUPA); and |
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| • | | CDMA Time Division Duplex (TDD), of which there are currently two versions, Time Division Duplex CDMA such as(TD-CDMA) and Time Division Synchronous-CDMA (TD-SCDMA) and Time Division Duplexing-CDMA (TDD-CDMA). |
CDMA2000 and WCDMA are deployed today in commercial mobile phone networks
(also known as wireless networks) throughout the world. In addition to increasing voice capacity, these 3G CDMA technologies enable greater data capacity
andat higher data rates.
In the future, a broader range of multiple airlinks will be utilized depending on the spectrum availability and applications that will be offered by each operator. These include WCDMA upgrades beyond HSUPA (called HSPA+), CDMA2000 upgrades beyond 1xEV-DO Revisions A and B (called Ultra Mobile Broadband (UMB)), an Orthogonal Frequency Division Multiplexing Access (OFDMA)/CDMA upgrade path for ultra mobile broadband data rates using up to 20 MHz channels in new spectrum and other OFDMA-based air-interfaces.
Our revenuesRevenues.We generate revenues by licensing portions of our
CDMA technologyintellectual property to other manufacturers of
CDMAwireless products (such as wireless phones and the hardware required to establish and operate a
CDMA wireless network). Revenues are generated through licensing fees and royalties on
CDMA-based products sold by our
licensees.licensees that incorporate our patented technologies. We also sell
and license products and services, which include the following, all of which are described in greater detail below:
| • | | CDMA-based integrated circuits (also known as chips) and the relatedsystem software used in wirelessmobile phones (also known as subscriber units and handsets) and wireless networks; |
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| • | | Radio Frequency and Power Management chips used in wireless phones and sold in conjunction with our CDMA-based integrated circuits; |
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| • | | Messaging and other services and related equipment and software used by transportation and other companies to communicate with and track their equipment fleets; |
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| • | | Software products and services related to BREW (which stands for Binary(Binary Runtime Environment for Wireless), a package of products that enable software developers to create applications, or programs, wireless phone operators and wireless network operators (also known as mobile operators, mobile phone service providers, wireless phone operators or wireless operators) to run ondeliver content to mobile phones. BREW includesalso offers software products and services to increase the functionality and appeal of mobile phones, including uiOne for customized user interfaces for mobile phones, porting tools and technical assistance for device manufacturers, and the deliveryOne/marketOne suite of products which includes the Content Delivery System, the BREW DistributionDelivery System (BDS) that allows for over-the-air distribution of applications to mobile phones, and coordinates billing and payment for wireless operators;the uiOne Delivery System; and |
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| • | | Software and hardware development services. |
We sell network products based on OFDMA technology to mobile phone service providers. We also provide products and services to service providers and other customers of Globalstar, Inc., a company that operates a worldwide, low-Earth-orbit satellite-based telecommunications system. Our wholly-owned wireless multicast operator subsidiary, MediaFLO USA, Inc., expects to offer a nationwide network to deliver multimedia content to multiple wireless subscribers simultaneously. This network is expected to be utilized as a shared resource for wireless operators and their customers in the United States. We make strategic investments to promote the development of new CDMA products as well as the adoption of CDMA
and other technologies by more mobile phone service providers.
We also provide products and services to service providers and other customers of Globalstar LLC, a company that operates a worldwide, low-Earth-orbit satellite-based telecommunications system. Our engineering resources.Engineering Resources.We have significant engineering resources, including engineers with substantial expertise in CDMA technology.and a broad range of other technologies. Using these engineering resources, we expect to continue to develop new versions of CDMA, developand new technologies that use CDMA and other technologies, develop alternative technologies for certain specialized applications (including multicast), participate in the formulation of new wireless telecommunications standards and technologies and assist in deploying wireless voice and data communications networks around the world.
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Our integrated circuits business.Integrated Circuits Business.We develop and supply CDMA-based integrated circuits and system software for
use in wireless voice and data communications, multimedia functions and global
positioning.positioning system products. Our integrated circuit products and
system software are used in wireless devices, particularly
mobile phones,
data cards and infrastructure equipment. The
wireless integrated circuits
for wireless phones include the
baseband Mobile Station Modem (MSM), Radio Frequency (RF) and Power Management (PM)
devices. The wirelessdevices, as well as the system software which enables the other phone
components to interface with the integrated circuit products and is the foundation software enabling phone manufacturers to develop handsets utilizing the functionality within the integrated circuits. These integrated circuits
for wireless phones and
system software perform voice and data communication, multimedia and global positioning functions, radio conversion between
radioRF and baseband signals and power management.
TheOur infrastructure equipment integrated circuits
provideand system software perform the core baseband CDMA modem functionality in the
wireless operator’s equipment.
These software products are the systems that control the phone and the functionality imbedded in our integrated circuit products. Because of our broad and unique experience in designing and developing CDMA-based products, we not only design the
baseband integrated circuit, but
by designingthe supporting system as well, including the RF devices, PM devices and accompanying software
products, we thereby design the entire supporting system.products. This
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approach enables us to optimize the performance of the wireless phone itself with improved product features, as well as the integration and performance of the network system. Our design of the entire system also allows CDMA systems and devices manufactured by our customers to come to market faster. We provide our integrated circuits and related system software, including reference designs and tools, to many of the world’s leading wireless phone and infrastructure equipment manufacturers. We plan to add additional features and capabilities to our future integrated circuit products to help our customers reduce the costs and size of their products and to simplify our customers’ design processes. We also design and create multimode and multiband integrated circuits incorporating other wireless standards for global roaming markets. In addition, we will continue to provide high quality support to enable our customers to reduce the time required to design their products and bring their products to market faster.
Our asset trackingPhone Software and messaging business.Related Services Business.We provide our BREW (Binary Runtime Environment for Wireless) products and services to support the development of over-the-air wireless applications and services. We provide BREW to wireless network operators, handset manufacturers and software developers. The BREW products and services include the BREW software development kit (SDK) for developers; the BREW applications platform (i.e. software programs) and interface tools for device manufacturers; and the uiOne customized user interface product and services and the deliveryOne Content Distribution System to wireless operators to enable the distribution of content and applications to the market, while also providing the settlement of the billing and payment process. The BREW platform is a software application that provides an open, standard platform for wireless devices, which means that BREW can be made to interface with many software applications, including those developed by others. We make the BREW SDK available, free of charge, to any qualified person or company interested in developing a new software application for wireless communications. BREW leverages the capabilities available in integrated circuits and system software, enabling our customers to develop feature-rich applications and content while reducing memory and maximizing system performance of the wireless phone itself. In addition to CDMA2000, BREW can be used on wireless phones and other devices that support other wireless technologies, such as GSM, General Packet Radio System (GPRS), Enhanced Data Rates for GSM Evolution (EDGE) and WCDMA. We also provide QChat, which enables virtually instantaneous push-to-talk functionality on CDMA-based wireless devices, and QPoint, which enables operators to offer enhanced 911 (E-911) wireless emergency and other location-based applications and services.
Subscriber Growth. Based on reports by Wireless Intelligence, an independent source of wireless operator data, the wireless telecommunications industry continued to grow at a rapid pace during fiscal 2006, with worldwide wireless subscribers growing by more than 24% to reach approximately 2.5 billion as of September 2006. CDMA-based subscribers, including both 2G (cdmaOne) and 3G (CDMA2000, 1xEV-DO and WCDMA), represent approximately 17% of total worldwide wireless subscribers. In September 2006, Strategy Analytics, a global research and consulting firm, forecast that there will be approximately 3 billion mobile phone users, also referred to as subscribers, by the end of calendar year 2007 and that the figure will grow to more than 3.8 billion globally by the end of 2011.
The CDMA Development Group (CDG) is an international consortium of companies that joined together to lead the adoption and evolution of cdmaOne and CDMA2000 wireless systems around the world. The CDG reports subscriber information which includes 2G cdmaOne as well as 3G CDMA2000 1X and CDMA2000 1xEV-DO
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(collectively, CDMA2000). The CDG does not report WCDMA. According to the CDG, cdmaOne and CDMA2000 wireless networks have been commercially deployed in 76 countries around the world. As reported by the CDG, worldwide subscribers grew by 24% during the 12-month period ended June 2006, to more than 335 million, including approximately 275 million CDMA2000 1X subscribers, approximately 36 million CDMA2000 1xEV-DO subscribers and approximately 24 million cdmaOne subscribers. As of October 2006, over 1,460 different CDMA2000 devices have been introduced to the market, including over 350 1xEV-DO devices, according to public reports made available at www.cdg.org.
As reported by the CDG, the North America market has nearly 116 million subscribers at June 2006, representing annual growth of 15%. In the Asian Pacific market, the largest and fastest-growing region for CDMA, operators added more than 26 million subscribers during the 12-month period ended June 2006, bringing the total number of cdmaOne and CDMA2000 subscribers in this region to nearly 143 million, an increase of 23% over the prior year. In January 2002, China Unicom launched its nationwide CDMA2000 network, and as of August 2006, China Unicom announced that it had approximately 35 million CDMA2000 subscribers. In Latin America and the Caribbean, the number of subscribers grew by 43% during the year ended June 2006, reaching more than 70 million cdmaOne and CDMA2000 subscribers through 47 commercial operators.
Third Generation Technologies.The primary 3G standards commonly referred to throughout the wireless industry are CDMA2000, WCDMA and TDD, which includes TD-CDMA and TD-SCDMA.
According to Wireless Intelligence as of September 2006:
| • | | 3G subscribers to wireless operators’ services grew to approximately 402 million worldwide; |
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| • | | There are approximately 45 million 1xEV-DO subscribers, including over 14 million in South Korea and more than 16 million in the United States; |
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| • | | There are approximately 85 million WCDMA subscribers, including approximately 34 million in Japan with the remainder primarily located in Western Europe. |
As reported by the CDG as of October 2006:
| • | | CDMA2000 1X has been commercially deployed by more than 170 operators worldwide; |
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| • | | Within the CDMA2000 family, the higher speed CDMA2000 1xEV-DO has been commercially deployed by more than 50 operators worldwide; |
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| • | | In the United States, there are 26 operators that have commercially deployed CDMA2000 1X and 5 operators that have commercially deployed 1xEV-DO, making CDMA2000 the first 3G technology commercially available in North America. |
CDMA2000 1xEV-DO continues to evolve with EV-DO Revision A, Revision B and future enhancements, which will allow operators to introduce Voice over Internet Protocol (VoIP), multi-megabit-per-second speeds, multimedia and broadcast capabilities in the coming years.
The first commercial deployment of WCDMA was in Japan in October 2001. WCDMA has been deployed by more than 122 operators worldwide, as reported by the Global mobile Suppliers Association (GSA), an international organization of WCDMA and GSM (Global System for Mobile Communications) suppliers, in its September 2006 reports. The WCDMA family includes HSDPA, part of 3rd Generation Partnership Project (3GPP) Release 5, which was first deployed commercially in December 2005 in the United States using our chipsets; as well as, HSUPA, part of 3GPP Release 6, which is in trial phase. We expect other future enhancements in future revisions of the 3GPP specifications will further increase performance capacity and data speeds. We expect many WCDMA operators to eventually upgrade their networks to HSDPA. More than 65 operators have launched commercial HSDPA networks, as reported by GSA in October 2006. Another 3G technology, TD-SCDMA, is being considered for launch in China along with WCDMA and CDMA2000.
Our Asset Tracking and Messaging Business.We design, manufacture and sell equipment and provide satellite and terrestrial-based two-way data messaging and position reporting services to transportation companies, private fleets, construction equipment fleets and other enterprise companies throughout parts of the world. These products permit our customers to track the location of their vehicles or other assets and to communicate with them en route. These products and services use commercially available satellite and wireless terrestrial-based networks to permit
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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.
Our phone software and related services business.We provide our BREW (Binary Runtime Environment for Wireless) product and services to network operators, handset manufacturers and application developers. We support the development and delivery of over-the-air wireless applications and services. The BREW product and services include the BREW SDK (software development kit) for developers, the BREW applications platform (i.e. software programs) and interface tools for device manufacturers, and the BREW Distribution System that enables network operators to get applications from developers to market and coordinate the billing and payment process. The BREW platform is a software application that provides an open, standard platform for wireless devices, which means that BREW can be made to interface with many software applications, including those developed by others. We make the BREW SDK available, free of charge, to any qualified person or company interested in developing a new product for wireless communications. BREW leverages the capabilities available in integrated circuits and system software, enabling our customers to develop feature-rich applications and content while reducing memory and maximizing system performance of the wireless phone itself. BREW can be used on wireless phones and other devices that support wireless technologies other than CDMA2000, such as GSM, GPRS (General Packet Radio System), EDGE (Enhanced Data Rates for GSM Evolution) and WCDMA. We also provide QChat, which enables push-to-chat functionality on CDMA-based wireless devices, and QPoint, which enables operators to offer E-911 and location-based applications and services.
Subscriber growth.In September 2004, EMC World Cellular Information Service (EMC), a researcher and publisher of wireless industry market intelligence, forecast that there will be 1.7 billion mobile phone users, also referred to as subscribers, by the end of this calendar year and that the figure will grow to nearly 2.5 billion globally by the end of 2009. Wireless networks based on cdmaOne and CDMA2000 have been commercially deployed in 69 countries around the world. In July 2004, In-Stat/MDR, a provider of research, assessments and market forecasts of semiconductor and advanced communications equipment and services, published a report estimating that CDMA2000 and WCDMA will capture the largest market share in terms of number of subscribers by 2009. The CDMA Development Group (CDG) is an international consortium of companies that joined together to lead the adoption and evolution of CDMA wireless systems around the world. According to the CDG, from 2002 through the first half of 2004, the CDMA subscriber base increased by an average of 30% per year, making it the fastest growing wireless standard of all leading cellular technologies. In June 2004, the CDG reported that there were more than 212 million CDMA subscribers worldwide. CDMA is the leading mobile phone technology in North America with market share of 47% at June 2004 according to the CDG. As reported by the CDG, the North America CDMA market has nearly 86 million subscribers at June 2004, representing annual growth of 24%. In the Asian Pacific market, the largest and fastest-growing region for CDMA, CDMA operators added nearly 26 million subscribers during the year ended June 2004, bringing the total number of CDMA subscribers in this region to over 88 million, an increase of 41% over the prior year. In January 2002, China Unicom
3
launched its nationwide CDMA network, and in September 2004, China Unicom announced that it had nearly 26 million CDMA subscribers. In Latin America and the Caribbean, the number of CDMA subscribers grew by 18% during the year ended June 2004, reaching nearly 35 million through 40 CDMA operators.
Next generation technologies.We have already developed and deployed the next generation of our CDMA technology, or what is being called 3G. Our 3G technology, CDMA2000 1X, was first deployed commercially in October 2000 in South Korea. Another 3G technology, CDMA 1xEV-DO, was first deployed commercially in January 2002 in South Korea. As of September 2004, South Korea has accumulated over 31 million CDMA2000 subscribers according to operator web sites. As of September 2004, there are over nine million 1xEV-DO subscribers, most of which are in South Korea. As of September 2004, there are at least 107 commercial 3G operators located in 48 countries. In the United States there are 14 operators that have commercially deployed CDMA2000 1X, making CDMA2000 1X the first 3G technology to be commercially available in North America. In September 2004, more than 500 different models of CDMA2000 user devices are being sold across all markets, according to public reports made available at www.cdg.org.
Further investments.Investments in New Products, Services and Technologies.We continue to invest heavily in research and development focused on extendingin a variety of ways, to grow our earnings and extend the market for CDMA-basedour products and services.
We continue to develop and commercialize third generation CDMA-based technologies, such as CDMA2000 1X, 1xEV-DO, EV-DO Revision A, EV-DO Revision B, WCDMA, HSDPA, HSUPA and other future standards. These technologies support more efficient voice communications, broadband access to the Internet, multimedia services, delay sensitive applications (including Voice over Internet Protocol, video telephony, push-to-talk and multiplayer gaming) and other revenue-generating services, in turn accelerating the growth of CDMA. At the same time, we are developingworking to fulfill the growing demand for affordable, voice-centric CDMA phones within the emerging entry-level market through various efforts including the introduction of Single Chip (SC) solutions, streamlined test and commercializing CDMAcertification processes and the aggregation of device procurements. With regard to our 1xEV-DO technology, we have improved its value, performance and productseconomics with EV-DO Revision A, which provides a number of enhancements, including greater spectral efficiency, faster reverse-link data rates, lower latency and optimized quality of service.
We also continue to support high-speed wireless Internet accessdevelop and commercialize multimode, multiband and multinetwork products that embody technologies such as GSM, GPRS, EDGE, Bluetooth, Wireless Fidelity (Wi-Fi), Universal Serial Bus (USB), Forward Link Only (FLO), Orthogonal Frequency Division Multiplexing (OFDM), Global System for Mobile Communications-Mobile Application Port (GSM-MAP), American National Standards Institute 41 (ANSI-41) and Internet Protocol-based (IP-based) core networks. We continue to support multiple mobile client software environments in our multimedia and convergence chipsets, such as BREW, Java, Windows Mobile, PalmOS and Linux.
We continue to develop on our own, and with our partners, new innovations that are integrated into our product portfolio to further expand the market and enhance the value of our products and services. These products and features include BREW, uiOne, deliveryOne, OmniOne, gpsOne, QChat, Qtunes, QConcert, Qtv, Q3Dimension, Qcamera, Qcamcorder, Qvideophone, Secure MSM, compact media extension (CMX), mobile display digital interface (MDDI), next-generation voice codec (4GV), Platinum Multicasting and MediaFLO. At the same time, we are very active within many industry bodies, including 3rd Generation Partnership Project (3GPP), 3rd Generation Partnership Project 2 (3GPP2), Institute for Electrical and Electronic Engineers (IEEE) and Open Mobile Alliance (OMA), to ensure these innovations are (1) universally implemented to support economies of scale and (2) interoperable with existing and future mobile communication services to preserve ongoing investments.
In particular, we continue to contribute to 3GPP2 and 3GPP standards to enable the next level of mobile broadband data services. 3GPP2 standards are evolving beyond EV-DO Revision A to offer much higher broadband data rates through Revision B and Revision C. Revision B enables CDMA operators to upgrade their networks through software upgrades to support transmissions to a single handset using multiple carriers to increase the data rates (in a 5 MHz bandwidth, more than three times the data rate). Revision C will enable an OFDMA/CDMA path for delivering ultra mobile broadband data rates using up to 20 MHz channels in new and vacant spectrum. In a system using 20 MHz bandwidths on both the uplink and downlink, uplink rates are greater than 50 Mbps and downlink rates are greater than 100 Mbps with two base station antennas and two handset antennas. With the same bandwidths and with four antennas at both the base station and handset, downlink rates greater than 200 Mpbs can use cdmaOne, CDMA2000 1X/1xEV-DO, GSM/GPRS/EDGE, Wireless Local Area Network (WLAN), WCDMA,be obtained. The data rates will be less with lower bandwidths. 3GPP standards are also evolving beyond current HSDPA and HSUPA through Release 7 and Release 8 to offer Evolved HSPA (High Speed Downlink Packet Access) or HSPA+ technologies to enable much higher broadband data rates. In parallel, 3GPP is also introducing an OFDMA-based air-interface through its Long Term Evolution (LTE) to deliver ultra mobile broadband data rates using channel bandwidths up to 20 MHz. These standards also enable end-to-end IP transport using advanced IP Multimedia Subsystem (IMS) platform to deliver voice (VoIP), FLOmultimedia and all OFDM (Orthogonal Frequency Division Multiplexing) networks. Among theother broadband data services cost
5
effectively. Our patented technologies,
we are developing that will use these networks are BREW, Push-to-Talk over Cellular, the MediaFLO content distribution and GPS position location technologies. We are devoting significantresulting from our strong investment in fundamental system research and development, resourceshave been and are expected to developing high-speed wirelesscontinue to play a significant role in each of these future standards.
These innovations are expected to enable our customers to improve the performance or value of their existing services, offer these services more affordably, and introduce new revenue-generating broadband data
and Internet access products using ourservices well ahead of their competition. CDMA
technology, including efforts to meet and exceed the standards for 3G products set by the International Telecommunications Union (ITU). Many CDMA wireless phone network
operators that have integrated new features, such as Internet access, GPS position location and advanced multimedia capabilities like digital photos and video clips, into their products, made possible by our 3G CDMA2000 1X technology, have experiencedservice providers also benefit from these innovations through increased numbers of subscribers, handset replacements and
average revenueincreased annual revenues per user.
Our 1xEV-DO technology also permits CDMA wireless network providers to separately process voice transmissions and data transmissions, allowing them to optimize each type of transmission. We believe the transfer rate of 1xEV-DO will satisfy the demand for high-speed, cost-effective, fixed and mobile alternatives for Internet access, competing with digital subscriber line, cable and satellite networks. Wireless Local Area Networks (WLAN), such as Wi-Fi, (Wireless Fidelity), are complementary to Wide Area Networks (WAN), such as CDMA2000 and WCDMA. They both provide affordable high-speed wireless access to the World Wide Web.Internet. The high-speed data air link and limited coverage ofoffered by Wi-Fi is well suited for private networks (e.g. enterprises, campuses and homes) and certain public “hot spots” (e.g. airports, conference halls and coffee shops) where data usage is expected to be high in a limited portable and stationary environment,environment; whereas, 3G CDMA networks are ideally suited for geographically diverse voice and data coverage (e.g. cities, highways and neighborhoods) and in environments where public access to the Wi-Fi network is blocked due to a firewall (e.g. a client’s enterprise). Because wireless operators are looking to use Wi-Fi to extend their coverage indoors and include Wi-Fi services in their monthly billing structure, we have begun developing our own core chip for handling Wi-Fi services based on the 802.11We may incorporate this OFDM-based standard and plan to incorporate it into our future multimode 3G CDMA chips. This same customer-focusedchipsets as we continue to identify and business-drivenintegrate other complementary wireless technologies into our chipsets.
We are also developing our MediaFLO Media Distribution System (MDS) and OFDM-based FLO technology to optimize the low cost delivery of multimedia content to multiple wireless subscribers simultaneously, otherwise known as multicasting. As part of the standardization of FLO technology, the FLO Forum (www.floforum.org) was established in fiscal 2005. To date, more than 65 companies have joined the FLO Forum, including leaders from across the mobile content distribution industry. In 2005, the Telecommunications Industry Association (TIA) established a Committee to develop standards for Terrestrial Mobile Multimedia Multicast. In August 2006, TIA published the Standard Forward Link Only Air Interface Specification that was based upon the FLO Forum’s submissions, thus standardizing the lower layers of the FLO air interface.
Our subsidiary, MediaFLO USA, Inc. (MediaFLO USA), plans to deploy and operate a nationwide multicast network based on our MDS and FLO technology. MediaFLO USA will use 700 megahertz (MHz) spectrum for which we hold licenses for a nationwide footprint to deliver high-quality video and audio programming to wireless subscribers in the United States. Additionally, MediaFLO USA plans to procure, aggregate and distribute content in service packages which we will make available on a wholesale basis to our wireless operator customers (whether they operate on CDMA or GSM/WCDMA networks) in the United States. MediaFLO USA will require minimal access to third generation networks (CDMA or WCDMA) operated by our wireless operator customers for activities such as subscription management. We believe that the service provided by MediaFLO USA will serve to complement many of the wireless operators’ third generation network service offerings.
MediaFLO USA continues to prepare for the launch of its commercial service. Its San Diego Broadcast Operation Center and Network Operations Center are currently operating, while construction of the initial phase of its network is nearing completion in several major markets. In addition to Verizon Wireless, which announced its intention to launch the MediaFLO USA service in early calendar 2007, MediaFLO USA is actively engaged in discussions with multiple domestic wireless operators on how they might utilize the MediaFLO USA service.
Outside of the United States, we continue to see interest in FLO technology. In May 2006, we signed a nonbinding letter of intent with British Sky Broadcasting (BSkyB) to conduct the first technical trials of MediaFLO technology in the United Kingdom. The trial features 10 channels of BSkyB content and a small number of non-commercial devices provided by us. The BSkyB technical trial is the first of what we expect will be a number of FLO technology trials in Europe and other parts of the world. In Japan, we formed a joint venture with KDDI to explore the deployment of MediaFLO services, and Softbank (which acquired Vodafone KK) is setting up a new company called Mobile Media Planning Corp. to conduct a technical study of MediaFLO and plan a new service using MediaFLO technology.
Consistent with our strategic approach
is intended to be used to analyze and adopt any other type of wireless technology or service that may exist or is being developed. Weover the past fifteen years, we intend to continue our active support of CDMA-based systemstechnologies, products and the technologies and features CDMA permits in ordernetwork operations to grow our royalty revenues and integrated circuit and software revenues. We also plan to continue to broadly grant royalty-bearing licenses to our technology and patents forpatented technologies (including CDMA and other wireless applications.OFDMA) and software applications under terms and conditions that are fair, reasonable and free from unfair discrimination. From time to time, we may also make acquisitions to meet certain technology needs, to accessobtain development resources or to pursue new business opportunities. In October 2004,For example, in fiscal 2006, we completed the acquisition of allFlarion Technologies, Inc. (Flarion), a developer of the outstanding capital stockOFDMA technology. Our acquisition of Iridigm Display Corporation, a privately held display technology company, and Trigenix Limited, a privately held mobile user interface company, for a total of approximately $193 million in cash and the exchange of stock options with an estimated aggregate fair value of approximately $17 million. The convergence of consumer electronics products, including cameras, MP3 players, camcorders, GPS receivers and game consoles, into wireless devices is driving the increased adoption of 3G CDMA. With the inclusion of color displays in all types of phones,
46
including models at
Flarion is intended to broaden our ability to effectively support operators who may prefer an OFDMA or a hybrid OFDM/CDMA/WCDMA network alternative. The addition of Flarion’s engineering resources also supplements the
low end of the market, the cost of the display has become an even more significant driver in the overall cost of the handset. Iridigm’s patented display technology should cost significantly less to manufacture than a comparable liquid crystal display (LCD) because it requires fewer processing steps to produce, thus enabling advanced multimedia capabilities on all tiers of mobile devices, while providing performance, power consumption and cost benefits as compared to alternative display technologies. Our acquisition of Iridigm will accelerate the time to market for Iridigm’s display technology, which fits our overall strategy of rapidly increasing the capability of wireless devices while driving down cost, size and power consumption. Operators and device manufacturers need a secure modular approach for customizable phone user interfaces for the branding of handsets offered to their subscribers. Our acquisition of Trigenix complements our BREW offering by adding Trigenix’s user interface development tools to enhance our BREW user interface capabilities and time-to-market. We are developing our MediaFLO content distribution system and FLO (Forward Link Only) technology for delivery of low cost multimedia content to multiple subscribers. On November 1, 2004,resources that we announced plans for a subsidiary, MediaFLO USA, Inc. (MediaFLO USA), that will deploy and operate a nationwide mediacast network to deliver high-quality video and audio programming to third generation mobile devices in the 700 MHz spectrum for which we hold licenses. The mediacast network will be based on our FLO technology and will use the MediaFLO media distribution system for content aggregation, delivery and viewing. MediaFLO USA is expected to require approximately $800 million in fundinghave already dedicated over the next fouryears towards the development of OFDM/OFDMA technologies. Flarion’s intellectual property portfolio contributed significantly to five years, some of which may be provided by third parties.
our strong OFDM/OFDMA patent portfolio.
We
plan to continue to make strategic investments
to promote the worldwide adoption of CDMA products and services. Our strategy has been to invest in
CDMA operators (also known as wireless phone operators, wireless network operators, wireless service providers or wireless operators), licensed device manufacturers and start-up companies that we believe open new markets for
CDMAour technology, support the design and introduction of new
CDMA-based products or possess unique capabilities or technology. Most of our strategic investments entail a high degree of risk and 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
our strategic objectives, we
attemptintend to make regular periodic sales of our interests in these investments that are recognized in investment income (expense). In some cases, we make strategic investments in
early stageearly-stage companies, which require us to consolidate or record our equity in losses of those companies. These losses will adversely affect our financial results until we exit from or reduce our exposure to these investments.
We also provide financing to CDMA operators to facilitate the marketing and sale of CDMA equipment by licensed manufacturers. We have a commitment to provide equipment financing to customers of Ericsson on a shared basis with respect to Ericsson’s sale of CDMA infrastructure equipment. In November 2001, we acquired controlling interests in two CDMA operators in Brazil (the Vésper Operating Companies). We sold these two CDMA operators in fiscal 2004. We had a net cash inflow from strategic investments in fiscal 2004 and plan to continue to reduce the level of investment in wireless operators, other than investments in our MediaFLO USA subsidiary, from the levels of fiscal 2003 and before. Giving Back.At QUALCOMM, we are not only committed to being good corporate citizens, but also good neighbors in the communities we call home. We contribute collectively as a corporation, and we participate in ways that touch people’s lives on a personal level. We encourage our employees to give their time and considerable talents to the community, and their significant volunteer efforts are evident in, for example, schools, the arts, feeding the homeless and serving on the advisory boards of not-for-profit organizations. Every year, our goal is to donate approximately one to two percent of our pretax profitsWe make donations to community causes, with a focus on programs that promote education, health and human services, and culture and the arts. Our charitable giving programs include our active and volunteerismongoing employee matching grant program, which matches a certain level of donations made by employees to qualifying organizations, and educational giving, such as engineering partnerships with universities intended to make a sustainable difference in educational systems in the various regions in which we do business. Our charitable giving and volunteer programs are based on respect for community organizations, cooperative leadership development and philanthropic creativity.
In addition, our Wireless Reach initiative empowers underserved communities through the use of 3G wireless technologies. The objective of this initiative is to strengthen economic and social development with a focus on education, governance, healthcare and public safety. Wireless Reach creates sustainable 3G projects through partnerships with non-government organizations, universities, government institutions, development agencies and other private sector companies.
Wireless Telecommunications Industry Overview From an international perspective, the
The International Telecommunications Union (ITU) is
the 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 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
rich multimedia signals. The ITU develops
internationally-agreedinternationally agreed-upon technical and operating standards to foster seamless interconnection of the world’s communication networks and their subsystems. As the world of telecommunications, information technology and media content distribution 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.standards.
The Telecommunications Industry Association (TIA) is
the leading U.S. baseda United States-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 towards
creating 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.
Other
Standards Development Organizations (SDO), including, among others, theTIA and Alliance for Telecommunications Industry Association (TIA)Solutions (ATIS) in the United States, the European Telecommunications Standards Institute (ETSI), the Telecommunications Technology Association (TTA) in South Korea, the Association of Radio Industries and Businesses (ARIB) in Japan, China Communications Standards Association (CCSA), and the Institute for Electrical and Electronic Engineers (IEEE), are non-profit voluntary standards, trade and tradeprofessional associations that also serve the communications and informationtelecommunications technology industry. Through their worldwide activities, these organizations work together, in
7
conjunction with the ITU, to develop common specifications to facilitate global business development opportunities. They each provide a market-focused forum for their member companies, which manufacture or supply
the products and services used in global communications. They also facilitate the
convergenceinteroperability of new communications networks
whilewith a stated objective of working towards
creating a competitive and innovative market environment. Each organization contributes voluntary industry standards that support global trade and commerce in communications products and systems.
5
None of these organizations have the enforcementmission, ability or authority to enforce or the ability to protect intellectual property rights. TheseToday, these organizations merelygenerally 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.
free from unfair discrimination (and, in some instances, whether the patent holder is willing to license royalty free).
Usage of mobile phones and other types of wireless telecommunications equipment has increased dramatically in the past decade.
It is estimated that there will be nearly 2.5 billion mobile subscribers worldwide by 2009, based onAccording to forecasts made in September
20042006 by
EMC.Strategy Analytics, worldwide mobile subscribers are expected to reach approximately 3 billion by the end of 2007 and to exceed 3.8 billion in 2011, including approximately 3.1 billion unique users, equivalent to a penetration rate of 47%. Growth in the market for wireless telecommunications services has traditionally been fueled by demand for voice communications. There have been several factors responsible for
thisthe increasing demand
for wireless voice services, including:
| • | | increased privacy, call clarity and securitylower cost of digital networks based on digital second and third generation wireless technology standards;handsets, joined with an increasing selection of appealing mobile devices; |
| |
| • | | lower cost of service, including flat-rate and bundled long-distance call pricingcalling plans; |
| |
| • | | prepaid services, particularly popular in developing countries; |
|
| • | | 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; |
| |
| • | | increased coverage, roaming, privacy and call clarity of voice transmissions; |
|
| • | | 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 telecommunications. |
In addition to the tremendous demand for wireless voice services, wireless service providers are increasingly focused on providing
wireless data services through mobile phones, includingbroadband wireless access to the Internet,
as well as multimedia entertainment,
messaging, mobile commerce and position location services.
These services have been aided by the development and commercialization of 3G wireless networks and 3G handsets which are capable of supporting higher data rates that incorporate an ever-increasing array of new features and functionality, such as assisted GPS-based position location, digital cameras with flash and zoom capabilities, internet browsers, email, interactive games, music and video downloads and software download capability (e.g. our BREW platform). In
March 2004, International Data Corporation (IDC),June 2006, the Yankee Group, a global market intelligence and advisory firm in the technology and telecommunications industries, estimated that
over onemore than 1.9 billion people will be using
mobile data services by 2010 and the
Internet by 2007. In May 2004, iGillott Research, a market strategy consultancy focused on the wireless and mobile communications industry and collaborative applications, estimated that in 2007 over 450 million wireless subscribersrevenue produced from these services will
use the Internet via handsets.account for 23% of total service revenue worldwide. We believe the growing availability of 3G-enabled handsets capable of performing a wide variety of consumer and enterprise applications will accelerate
consumerthe demand for many wireless data services on a global basis and
thus lead to an increased replacement rate
inof mobile devices
to those using our
technologytechnologies and integrated circuits.
High-speed and low costAffordable wireless broadband data connectivity
areis important to the consumer and
are drivingenterprise, and its demand will continue to drive the evolution of wireless standards.
We expect that the spread of high-speed, cost-effective wireless data access will encourage the development of other remote supervision, position location and telematic automobile applications. However, the demand for such services is at an early stage of development. The adoption of wireless standards for mobile communications bywithin individual countries is generally based on economic criteria and the technology preference ofdetermined by the telecommunication service providers operating in those countries. Approximatelycountries and, in some instances, local government regulations. Such determinations are typically based on economic criteria and the service provider’s evaluation of each technology’s ability to provide the features and functionality required for its business plan. More than a decade and a half ago, the European Community developed regulations requiring the use of a telecommunication standard known as Global System for Mobile Communications, commonly referred to as GSM. TheGSM, a TDMA-based technology. According to Wireless Intelligence, the use of this second generation wireless standard has spread throughout the world and is currently the basis for approximately 73%80% of the digital mobile
8
communications in use according to EMC. The majorityuse. With the deployment of WCDMA, a third generation CDMA-based technology, by GSM operators, many of the more than onecurrent 2 billion GSM subscribers are expected to migratewill upgrade to third generation CDMAwireless services beforeto enjoy the end of this decade.added features and functionality available with 3G systems.
The Evolution of Wireless Standards The significant growth in the use of wireless phones worldwide and demand for enhanced network functionality requires constant innovation to further improve network reliability, expand capacity and introduce new types of services. To meet these requirements, progressive generations of wireless telecommunications technology standards have evolved.
First Generation.The first generation of wireless telecommunications, widely
adopted 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.
Second Generation.As the deployment of mobile phone systems grew, the limitations of analog technology drove the development of second generation, digital-based
technologies, which are the primary technology standards6
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 operators’ licensed spectrum.
Some of the advantages of CDMA technology over both analog and TDMA- and GSM-based technologies include
enhanced call security, increased network capacity, network flexibility, compatibility with Internet protocols,
lower power requirements, higher capacity for data and faster access to data (Internet), higher data throughput rates and easier transition to 3G networks. GSM has the
benefitbenefits of roaming
being readily available as a result ofdue to its wider worldwide deployment, and, for the
GSMA’s mandate. Currently, GSM low end handsets are somewhatnear term, lower priced
than CDMA handsets, although this differential is diminishing. Manylow-end handsets.
A number of GSM operators
are deployingdeployed 2.5G mobile packet data technologies, such as GPRS and EDGE (Enhanced Data Rates for GSM Evolution)
, in areas serviced by GSM, as a bridging technology, while they
waitwaited for 3G WCDMA devices to become
more readily
available. Weavailable and affordable so they can justify the expense of upgrading their GSM system to provide WCDMA service. In some regions of the world, regulatory restrictions prevent deploying WCDMA in the lower frequency bands used by GSM, thus requiring more cell sites for WCDMA to provide coverage. As a result, in less dense areas, some operators have not deployed WCDMA. From a technological perspective, we do not believe that GPRS and EDGE effectively compete with 3G CDMA-based packet data services, either on a cost
per bit or
transmitted performance basis
although these technologies have been deployed in GSM networks..
Third Generation.As
a result of demand for wireless networks that
simultaneously carry both
high speed data and voice traffic,
at faster speeds has increased significantly, several 3G wireless standards were proposed to the ITU by a variety of
companies and alliances.SDOs. These proposals
includeincluded both CDMA- and TDMA-based technologies. A technology standard selected for 3G must efficiently support significantly increased data speeds and
increased voice and data capacity,
over limited spectrum bandwidth, thereby enabling new and enhanced services and applications such as mobile e-commerce, position location and mobile multimedia web browsing, including music and video downloads.
CDMA-Based 3G Technology.In May 2000, the ITU adopted the 3G standard known as IMT-2000, which encompasses five terrestrial operating
modes,radio interfaces, three of them based on our CDMA intellectual property.
The three IMT-2000 CDMA modesradio interfaces are:
| (1) | | CDMA Multicarrier (MC). This is also called MC-CDMA and CDMA2000. It includes CDMA2000 1X, 1xEV-DO (EV-DO), and 1xEV-DV; |
|
| (2) | | CDMA Direct Spread (DS). This is also called WCDMA (Wideband CDMA) and UTRA-FDD (Universal Terrestrial Radio-Access Frequency Division Duplex). |
9
(1) CDMA2000, also known as Multi-Carrier, which includes CDMA2000 1X/1xEV-DO/1xEV-DV;
(2) WCDMA, also known as Direct Spread or UMTS; and
(3) Time Division Duplex, also known as TDD or TD-SCDMA.
The
| (3) | | CDMA TDD. There are two versions of CDMA TDD: TD-CDMA, also known as UTRA-TDD (Time Division Duplex), and TD-SCDMA. Effectively TD-CDMA and TD-SCDMA are different radio interfaces, but are classified as one by the ITU. |
There are two
operating modesIMT-2000 radio interfaces that are not based
on CDMA are DECT+ and UWC-136, also known as Enhanced Data Rates for GSM Evolution (EDGE) for IS-136 TDMA and GSM-based networks.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). |
The two current commercial versions of CDMA2000 are: CDMA2000 1X and 1xEV-DO. These versions use a
pair of 1.25
megahertz (MHz) channel bandwidthMHz channels to provide both voice
communications and high-speed wireless
data.data communications. CDMA2000 1X/1xEV-DO utilizes the same standard channel bandwidth as existing cdmaOne systems and, as a result, is compatible with wireless telecommunications operators’ existing network equipment, making the migration to 3G simple and affordable. We believe CDMA2000 1X provides approximately twice the voice capacity of cdmaOne and six to eight times that of TDMA-based networks.
Additionally,Position location technology, accomplished through a hybrid approach that utilizes signals from both the GPS satellite constellation and CDMA cell sites,
and is also available for non-CDMA networks, has enabledenables CDMA system operators to meet the Federal Communications Commission (FCC) mandate requiring wireless operators to implement enhanced 911 (E911) wireless emergency location
services and offer other commercial location-based services. In the future,
the performanceupdates of CDMA2000 1X and 1xEV-DO
isare expected to
increase.further increase performance. Other enhancements, such as multicast services, higher-resolution displays, longer battery life, push-to-talk services and
voiceVoice over Internet
protocolProtocol are becoming available to improve the user experience and operator profitability.
The price differential between low-end third generation CDMA2000 handsets and GSM handsets is diminishing.
Commercial deployment of CDMA2000 1X began in
October 2000 in South Korea
where more than 31 million, or approximately 85%, of the nation’s total mobile service users were using this technology by the end of September 2004. Commercial deployment of CDMA2000 1X in
North America, Brazil and Romania began in December 2001. KDDI commercially deployed CDMA2000 1X in Japan in April 2002 and reported more than 15 million CDMA2000 1X subscribers as of August 2004. In January 2002, China Unicom launched its nationwide CDMA network and had nearly 26 million CDMA subscribers at the end of September 2004. In May 2003, Reliance Infocomm launched its nationwide CDMA network in India and had over nine million subscribers at the end of September 2004. Commercial deployment ofOctober 2000. CDMA2000 1xEV-DO beganwas first commercially launched in January 2002 in South Korea with the introduction of SKT’s high-speed mobile multimedia and broadcast service called “June.“June,” As of September 2004, SKT and KTF
7
reported more than nine million CDMA2000 also launched 1xEV-DO subscribers in Korea. Today, more than 80% oflater the CDMA market is in various stages of 1xEV-DO deploymentssame year. Other prominent carriers, such as Verizon Wireless and trials. For example, Verizon WirelessSprint Nextel in the United States, and KDDI in Japan, began their nationwide roll-out ofVIVO in Brazil and Telecom New Zealand, have deployed 1xEV-DO services on October 1, 2003network equipment in numerous markets and November 28, 2003, respectively. As of September 2004, KDDI had more than one million 1xEV-DO subscribers. On August 2, 2004, Eurotel, a CDMA450 operator in the Czech Republic, became the first European operator to deploy 1xEV-DO in Europe. Sprint PCS has also announced its plans to begin its nationwide roll-out of 1xEV-DO-based services starting in the autumn of 2004. As of October 2004, ten wireless phone operators have commercially deployed ourare expanding coverage nationwide. CDMA2000 1xEV-DO technology in South Korea,subscribers are expected to continue to grow as more operators begin to offer the United States, Japan, Brazil, Guatemala, Romaniaservice and the Czech Republic. More than a dozen other operatorscost 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. Currently, major laptop computer companies, including Lenovo, Dell, HP, Toshiba and Panasonic, have publicly announced trials and are in the process of rolling outproducts incorporating 1xEV-DO commercially over the next 12 months.
We are seeing greater adoption of 1xEV-DO among operators worldwide. Consequently, commercial deployments of 1xEV-DV are uncertain, yet may possibly occur in the future.
technology.
The European Community
hasand Cingular, a United States carrier, have focused primarily on the
second modeUTRA-FDD radio interface of the IMT-2000 standard, known as WCDMA, which is based on our underlying CDMA
technology. Mosttechnology and incorporates many of our patented inventions (as are all
of the CDMA radio interfaces of the IMT-2000 Standard). The majority of the world’s leading wireless phone and infrastructure manufacturers
(more than 70) have licensed our technology
for use in WCDMA products, enabling them to utilize this WCDMA mode of the 3G technology.
Our 3G CDMA licensees include Siemens, Nokia,This includes the following major wireless equipment suppliers: Agilent, Alcatel, BenQ, Ericsson,
Motorola, Lucent, Samsung,Fujitsu, Hitachi, Kyocera, LG Electronics,
Hitachi,Lucent, Panasonic, Mitsubishi, Motorola, Pantech & Curitel, NEC,
Nokia, Nortel,
Toshiba,Novatel Wireless, Samsung, Sanyo, Sharp,
Fujitsu, Denso, Agilent, Alcatel, Matsushita, Mitsubishi,Siemens, Sierra Wireless and
Kyocera,Toshiba, among others. We expect
a significant growth in the WCDMA subscriber base over the next five years,
mostly indriven by Japan (led by NTT DoCoMo)
, Europe, China and
Europe;the United States (led by Cingular); thus, we have allocated a significant amount of engineering, production and business resources to
adequately support this large growth opportunity.
The
TD-SCDMA mode is the least developed of thethree ITU 3G CDMA
alternatives. Support for the development of this version of the 3G technologies has been provided by the Chinese government. The three 3G CDMA wireless operating modes discussed aboveradio interfaces are all based on the underlying core principles of CDMA technology; however, the CDMA2000 mode enables a direct and relatively more economical conversion for current cdmaOne networks. While the WCDMA wireless air interface does use CDMA technology for communications between the wireless device and the network, the infrastructure network has been specifically designed to operate inbe compatible with the GSM networks. network, which is why it is expected that most GSM operators will migrate to WCDMA rather than to CDMA2000.We will continue to develop integrated circuits for the CDMA2000 and WCDMA modes, and expect to develop integrated circuits for all other modes of the 3G standardversions based on CDMA.CDMA when commercially worthwhile. In addition, our intellectual property rights include core and primarya valuable patent portfolio that includes patents utilized byessential to implementation of each of the 3G CDMA alternatives,alternative standards and patents that are useful for commercially successful product implementations. Generally, we have licensed substantially all of our patents to our CDMA licensees. Under each of our existing license
10
agreements covering multiple CDMA standards, the royalty rate
to be paid to us
by subscriber unit licensees for
sales of licensed 3G CDMA
(regardless of whether it is CDMA2000, WCDMA, TD-CDMA or TD-SCDMA) subscriber products is no less than the rate that
asuch licensee
will paypays for
its licensed second generation cdmaOne
subscriber products.
These three 3G CDMA wireless operating modesversions (CDMA2000, WCDMA, TD-CDMA and TD-SCDMA) from a technological perspective require separate implementations and are not interchangeable from a technological perspective.interchangeable. While the fundamental core technologies are derived from CDMA and, in addition to other features and functionality, are covered by our patents, they each require unique infrastructure products, network design and management. They are however being linkedHowever, subscriber roaming amongst systems using different air interfaces is made possible through multimode wireless devices.
Consolidated revenues from international customers as a percentage of total revenues were
87%, 82% and 79% in fiscal
2006, 2005 and 2004,
77% in fiscal 2003 and 69% in fiscal 2002.respectively. During fiscal
2004, 43%2006, 32%, 21% and
18%17% of our revenue was from customers and licensees based in South Korea,
Japan and
Japan,China, respectively, as compared to
45%37%, 21% and
15%11% during fiscal
2003,2005, respectively, and
39%43%, 18% and
18%7% during fiscal
2002,2004, respectively.
Risks related to our conducting business with customers and licensees outside of the United States are described in Risk Factors – “We,
and our licensees, are subject to the risks of
our and our licensees conducting business outside of the United States.” Additional information regarding our operating segments is provided in the
Notesnotes to our
Consolidated Financialconsolidated financial statements. See “Notes to Consolidated Financial Statements, Note 10 – Segment Information.”
QUALCOMM CDMA Technologies Segment (QCT) QCT 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.
QCT offersQCT’s integrated circuit products and system software
and integrated circuits forare used in wireless
handsetsdevices, particularly mobile phones, data cards and infrastructure equipment. These products provide customers with advanced wireless technology, enhanced component integration and interoperability, and reduced
time to market.time-to-market. QCT
provides integrated circuits and system softwareproducts are sold to many of the world’s leading wireless handset,
data card and infrastructure manufacturers. In fiscal
2004,2006, QCT shipped approximately
137207 million MSM integrated circuits for CDMA wireless devices worldwide. QCT revenues comprised
63% of total consolidated revenues in both fiscal 200458%, 58% and
2003 and8
54%64% of total consolidated revenues in fiscal 2002. Four major2006, 2005 and 2004, respectively. Three customers, Kyocera Wireless, LG Electronics, Motorola Inc. and Samsung Electronics Company, constitute a significant portion of QCT’s revenues, suchrevenues.
QCT utilizes a fabless production business model, which means that
we do not own or operate foundries for the
lossproduction of
any onesilicon wafers from which our integrated circuits are made. Integrated circuits are die, cut from silicon wafers, that have completed the assembly and final test manufacturing processes. Die, cut from silicon wafers, are the essential components of
these customers could potentially reduce our revenues and harm our ability to achieve or sustain acceptable levels of operating results. QCT has subcontracted all of
our integrated circuits and a significant portion of the total integrated circuit cost. We rely on independent third party suppliers to perform the manufacturing and assembly, and most of the testing, of
itsour integrated circuits.
QCT dependsOur suppliers are also responsible for the procurement of most of the raw materials used in the production of our integrated circuits. The majority of our integrated circuits are purchased on a
limited numberturnkey basis, in which our foundry suppliers are responsible for delivering fully assembled and tested integrated circuits. We also employ a two-stage manufacturing business model in which we purchase completed die directly from semiconductor manufacturing foundries and directly manage and contract with third party manufacturers for back-end assembly and test services. We refer to this two-stage manufacturing business model as Integrated Fabless Manufacturing (IFM). IBM, Taiwan Semiconductor Manufacturing Company, Ltd. and United Microelectronics are the primary foundry suppliers for our family of
third parties to perform these functions, somebaseband integrated circuits. Atmel, Freescale (formerly Motorola Semiconductor) and IBM are the primary foundry suppliers for our family of
which are only available from single sources with which QCT does not have long-term contracts. QCT sells products to both wireless phone and infrastructure manufacturers. For wireless phone manufacturers, QCT’s products include baseband and system software,analog, radio frequency, intermediate frequency and power management devices. These highly integrated circuits. We continue to add foundry suppliers and have recently begun volume manufacturing with Chartered Semiconductor Manufacturing Ltd., Samsung Electronics Co., and Semiconductor Manufacturing International Corporation. Our fabless model provides us the flexibility to select suppliers that offer advanced process technologies to manufacture, assemble and test our integrated circuits at a competitive price.
QCT’s integrated circuit products, including the MSM, RF and PM devices and system software enable phone manufacturers to design very small,attractive, slim and feature-rich handsets for cdmaOne and 3G services with longer standby and talk timestimes. These products also enable data card manufacturers to design modems that support existing cdmaOne and 3G services.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
11
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
featureswireless phones 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 operators 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 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 operators in the United States are well under way. Approximately 50 million gpsOne-enabled terminals are in use today, supporting well in excess of 130 high-precision location-based services in Japan, South Korea, Thailand, Brazil and China.
We have developed
The 1xEV-DO technology
is designed to provide reliable, cost-effective and always-on wireless data and Internet access to consumers. It is fully compatible with existing cdmaOne and CDMA2000 1X technologies and has been standardized as part of the CDMA2000 mode of the 3G standard. The
versatility of 1xEV-DO
allows the technology
tocan be embedded in phones, laptop and handheld computers, and other fixed, portable and mobile
devices; 1xEV-DO enablesdevices to enable manufacturers to deliver products with access to services that were previously only available through wired connections to the Internet or
to enterprise networks. The 1xEV-DO technology
also allows operators to leverage their current infrastructure investment and maintain compatibility with existing phone equipment. We designed and developed a complete package of products, including both infrastructure and phone integrated circuits, in support of the industry-wide movement to standardize, develop and deploy 1xEV-DO technology in CDMA2000 networks.
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 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/EDGE networks. RadioOne technology MSMs, combined with accompanying companion RF components, perform the receive and transmit functions for wireless devices without requiring additional intermediate frequency components, thereby enabling manufacturers to reduce total device cost and size. The MSM6000 CDMA2000 1X integrated circuit is an entry-level product optimized for voice and short message service applications. The MSM6025 provides voice and limited data capabilities to support demand by operators worldwide for lower-tier handsets that also support data services. The MSM6050 integrated circuit offers basic data services for entry-level multimedia devices and gpsOne for position location services. The MSM6100 integrated circuit and system software is a highly integrated CDMA2000 1X multimedia product enabling lower system costs for manufacturers developing handsets with advanced multimedia applications. There are in excess of 120 separate handset designs expected to come to market in the next 12 months based on the MSM6000, MSM6025, MSM6050 and MSM6100. Many of these are being sold today.
9
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, a single-baseband 3G product for multimode and multiband CDMA2000 1X and GSM/GPRS, in September 2002. The MSM6300 and accompanying radioOne RF integrated circuits comprise the first world-phone integrated circuit enabling global roaming across wireless networks. In March 2003, Samsung was the first customer to introduce product based on this integrated circuit. In fiscal 2004, the MSM6300 has also been used in products introduced by LG, Motorola and Samsung into the China market. 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 CSM6800 integrated circuit and the MSM6800 integrated circuit and system software for the wireless technology standard CDMA2000 1xEV-DO revision A to provide cost-competitive products for both infrastructure and multimedia-enabled devices. Revision A results in greater data rates on the link from the handset to the network and reduced response times, as well as other improvements.
Leveraging our expertise in CDMA, we have developed integrated circuits for manufacturers and operators deploying the WCDMA version of 3G. We began shipping samples to customers of the MSM6200 integrated circuit in June 2002, and to date several customers including Samsung, LG Electronics, Sanyo, Option and Novatel Wireless, have introduced mobile phones and data cards, which are modem devices that insert into laptop computers to facilitate access to the Internet via wireless networks. The MSM6200 integrated circuit and system software is a highly integrated system for WCDMA/GSM/GPRS and includes Bluetooth connectivity and a host of multimedia features. Our next generation WCDMA product, the MSM6250 integrated circuit, is a cost-effective, feature-rich multimedia and position location product that operates on all GSM/GPRS and WCDMA networks worldwide. Through fiscal 2004, we have signed 25 separate WCDMA licensing agreements withMore than 30 device manufacturers that have selected our MSM6200 and/or MSM6250WCDMA products that support GSM/GPRS, WCDMA and HSDPA for their devices. To support near-term commercial network roll-outs, we have also completed interoperability testing with global infrastructure providers representing wireless network operators worldwide using test devices based on our integrated circuit products.
Our MSM integrated circuit products are offered on four distinct platforms (Value, Multimedia, Enhanced Multimedia and Convergence) in order to address specific market segments and offer products tailored to the needs of users in those various market segments. The Value Platform addresses entry-level markets and enables voice-centric and basic data wireless phones. The Value Platform includes our QUALCOMM Single Chip (QSC) product family, the industry’s first single-chip CDMA2000 1X products targeted at lowering overall handset costs and driving the broader adoption of high-speed data services in emerging markets. The first generation of QSC products, which includes the QSC6020, QSC6030 and QSC6040, are now shipping in volume. The second generation of QSC products, the QSC6055 and QSC6065, are expected to ship samples in the first quarter of fiscal 2007. The QSC1100 product is expected to ship samples in the second half of calendar year 2007.
The Multimedia and Enhanced Multimedia Platforms are designed to facilitate the rapid adoption of high-speed wireless data applications. Features from the Multimedia and Enhanced Multimedia Platforms include support for multi-megapixel cameras, videotelephony, streaming multimedia, audio, 3D graphics and advanced position-location capabilities. Our CDMA2000 Multimedia Platform MSM6500 and Enhanced Multimedia Platform MSM6550 integrated circuits
to support commercial WCDMA network deployments throughout China, Europe, South Korea, Taiwanhave been widely adopted and
the United States. In fiscal 2004, we announced the development of two new products to support advanced data services for High Speed Downlink Packet Access (HSDPA), a next generation feature of the WCDMA standard. The two new products are theused in numerous devices currently commercially available. WCDMA/HSDPA devices based on Multimedia Platform MSM6250 and Enhanced Multimedia Platform MSM6275 and the MSM6280 radioOne integrated circuits and system software which are also commercially available or currently in design. The MSM6275 was our first high performance products that deliver HSDPA, as well as roam on GSM/GPRS/EDGE systems. We expect to provide samples of our first high-performance HSDPA integrated circuit the MSM6275,shipped to customers in the first quarter of fiscal 2005.
In the first quarter of fiscal 2004,2006, we shipped samples of our second generation HSDPA integrated circuit, the MSM6280, which supports data speeds of up to 7.2 megabits per second to enable the deployment of advanced data and multimedia services among wireless subscribers worldwide. The MSM6280 integrated circuit also integrates advanced receiver technologies for increased data throughput and network capacity. In the second quarter of fiscal 2006, we also announcedshipped samples of the Convergence Platform, threeindustry’s first HSUPA chipset products that address all major 3G air interfaces and incorporates popular digital electronics functionalities intofor wireless devices.devices, the MSM7200. In addition to supporting HSUPA networks, the MSM7200 chipset also supports Multimedia Broadcast Multicast Service (MBMS).
The Convergence Platform includes the MSM7200, which supports WCDMA/HSDPA and GSM/GPRS/EDGE; the MSM7500, which supports CDMA2000 1xEV-DO and GSM/GPRS; and the MSM7600, which supports CDMA2000 1xEV-DO, CDMA2000 1xEV-DV, WCDMA/HSPA and GSM/GPRS/EDGE. The Convergence Platform products will enableenables portable business, high-fidelity entertainment, interactive 3D gaming and other advanced multimedia, connectivity and position location applications which are all easily integrated into communications devices to leverageenable the convenience of wireless.wireless devices and the next generation of wireless capabilities. With a dual-core architecture, the MSM7xxx-series of Convergence Platform chipsets is also capable of supporting third party operating systems, such as Windows Mobile. In the third quarter of fiscal 2006, we announced a collaboration with Microsoft to provide integrated support for Windows Mobile on the MSM7xxx-series products.
Our Cell Site Modem (CSM) integrated circuit products are the primary integrated circuits in a wireless operator’s CDMA2000 base station equipment. EV-DO Revision A networks based on our CSM6800 product are beginning to launch around the world. The CSM6800 provides a seamless migration path to EV-DO Revision A, which enables feature-rich wireless multimedia services such as high-speed transfer of bandwidth-intensive files
12
(including high-quality pictures, video and music) and interactive 3D gaming, as well as multicasting services powered by our FLO technology. The CSM6700 product is compatible with IS-95 and EV-DO Revision A standards. We have not commercially sold a CSM integrated circuit product for WCDMA base station equipment.
Our gpsOne position-location technology is in more than 200 million gpsOne-enabled handsets sold worldwide. Enabling a wide range of consumer and enterprise location-based services around the globe, gpsOne supports four modes of operation across a variety of terrains: 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 GPS 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 gpsOne technology is the industry’s only fully-integrated wireless baseband and GPS product, and has enabled CDMA system operators to cost-effectively meet the FCC’s E911 mandate.
We also offer a broad portfolio of power management integrated circuits to provide optimized system performance for each MSM platform. In fiscal 2006, we announced and began to ship samples of the PM7500, a power management product which supports the advanced capabilities of our Convergence Platform chipsets. Our portfolio of PM integrated circuits delivers enhanced performance, time-to-market advantages and reduced power demands on wireless handsets when combined with MSM integrated circuits.
In addition to our relationship with Phillips Semiconductor, Inc. announced in fiscal 2005, we announced a relationship in fiscal 2006 with Atheros Communications, Inc. to provide support for its wireless local area network (WLAN) module on select MSM integrated circuits. These MSM integrated circuits will offer connectivity to WLAN networks, as well as to existing wireless networks, and will feature compatibility with 802.11b and 802.11g protocols on both CDMA2000 and WCDMA networks.
In fiscal 2006, we also announced the introduction of the Universal Broadcast Modem integrated circuit, which supports our FLO technology, as well as Digital Video Broadcasting-Handheld (DVB-H) and one-segment Integrated Services Digital Broadcasting-Terrestrial (ISDB-T), creating a common platform that handset manufacturers can leverage to address multiple standards. The Universal Broadcast Modem product will interface with integrated circuits from the Enhanced Multimedia and Convergence Platforms for both CDMA2000 and WCDMA networks, and we expect to ship samples in the second quarter of fiscal 2007.
QUALCOMM Technology Licensing Segment (QTL) QTL grants licenses to use portions of our intellectual property portfolio, which includes certain patent rights essential to and/or useful in the manufacture and sale of
CDMA (including,certain wireless products, including, without limitation,
products implementing cdmaOne, CDMA2000,
1X/1xEV-DO/1xEV-DV, TD-SCDMAWCDMA, CDMA TDD and/or OFDMA (including WiMax) standards and
WCDMA) products.their derivatives. QTL receives revenue from license fees as well as ongoing royalties based on worldwide sales by licensees of products incorporating or using our intellectual property.
The licenseLicense fees are
generally nonrefundable and may befixed amounts paid in one or more installments. Ongoing royalties are
nonrefundable and are generally based upon a percentage of the
netwholesale selling price of licensed
products.products, net of certain permissible deductions (e.g. certain shipping costs, packing costs, VAT, etc.). Revenues generated from royalties are subject to quarterly and annual fluctuations. QTL revenues comprised
27%35%,
26%32% and
29%27% of total consolidated revenues in fiscal
2006, 2005 and 2004,
2003 and 2002, respectively.
QUALCOMM Wireless & Internet Segment (QWI) QWI revenues comprised
12%9%,
13%11% and
16%12% of total consolidated revenues in fiscal
2004, 20032006, 2005 and
2002,2004, respectively. The three divisions aggregated into QWI are:
QUALCOMM Internet Services (QIS).The QIS division provides technology to support and accelerate the growth of the wireless data market. The BREW (Binary Runtime Environment for Wireless) platform is an application execution environmentproducts and services facilitate the delivery of data services. BREW customers can benefit from several offerings which include: uiOne for rich, integrated user experiences with fast access to services on mobile phones; deliveryOne for differentiated and integrated, operator-managed support and delivery of advanced wireless data content and services; and marketOne for a quick-to-market, hosted, scalable content delivery service that provides an open platform for wireless devices, which means thatincludes media titles, flexible management and monetization, content provider settlement and business intelligence services. QIS offers this comprehensive set of BREW can be madeofferings to interface with many software applications, including those developed by others.meet the distinct needs of companies delivering mobile products and services around the world. The BREW platform is part of a complete package of products for wireless applications development, device configuration, application distribution and billing and payment. The BREW platform currently leverages the capabilities available in QCT’s integrated circuits and system software, enabling development of feature-rich applications and content while reducing memory overhead and maximizing
1013
system performance. The BREW product and services include the BREW SDK (software development kit) for developers, the BREW applications platform (i.e. software programs) and interface tools for device manufacturers, and the BREW Distribution System that enables network operators to deliver applications and content to market while providing settlement of the billing and payment process. The BREW platform also includes BREW extensions, such as virtual machines, browsers and other interpreters that process executable content, such as JAVA midlets, XHTML, HTML, JavaScript and Flash. Commercial BREW-based services enable consumers to customize their handsets by downloading applications over-the-air from an operator’s application download server.
In November 2001,
KTF, a leading wireless phone operator in South Korea, launched the world’s first commercial BREW-enabled applications service.service in 2001. KTF’s BREW-enabled wireless data service runs on aboth CDMA2000 1X and 1xEV-DO high-speed data network as well as EV-DO. Thirty-six additionalnetworks. Numerous other operators have since commercially launched BREW services, including Verizon Wireless, Alltel, Midwest Cellular, Sprint Nextel, US Cellular and Midwest CellularVerizon Wireless in the US,United States, KDDI in Japan, Telstra in Australia, BellSouthTelefonica in Colombia, VIVO in Brazil, Reliance and Tata in India, and China Unicom in China.
In October 2006, we announced an agreement with Sprint for the continued development and use of our QChat product, a next-generation push-to-talk technology designed to deliver advanced walkie-talkie services optimized for EV-DO Revision A wireless networks, as well as
other operators. Additionally, Reliance,interoperability with the
largest CDMA operator in India, has signed a definitive agreement to launch BREW services in the rapidly growing India wireless market. In January 2002, we announced a multi-year licensing agreement with Nextel forNational Network which uses Integrated Dispatch Enhance Network (iDen) technology. QChat a technology developed to provide a reliable method of instant connection and two-way communication between users via their mobile phones. Using QChat, users may speak with other users virtually instantaneously at the push of a button. It enables one-to-one (private) and one-to-many (group) calls over 3G CDMA networks. The technology also allows over-the-air upgrades of handset software, management of group membership by subscribers and ad-hoc creation of chat groups. ItQChat uses standard voice-overVoice over Internet protocol technologies. This meansProtocol technologies, thereby sending voice information in digital form over Internet protocol-based data networks (including CDMA) in discrete packets rather than the traditional circuit-switched protocols of the public switched telephone network.
QUALCOMM Wireless Business Solutions (QWBS). We provideThe QWBS division provides satellite and terrestrial-based two-way data messaging and position reporting services to transportation companies, private fleets, construction equipment fleets and other enterprise companies. QWBS wirelessly enables businesses to assist in tracking and managing their assets through backend platforms and services which provide information to the businesses and their employees on a real-time basis. The satellite-based OmniTRACS mobile communications system was first introduced in the United States in 1988. Through September 2004,2006, we have shipped over 520,000approximately 609,000 satellite-based mobile communications systems (OmniTRACS, OmniVision, EutelTRACS and TruckMAIL) and over 22,000approximately 125,000 terrestrial-based mobile communications systems (OmniExpress, T2 Untethered TrailerTRACS GlobalTRACS and LINQ)GlobalTRACS), which currently operate in over 3940 countries. Message transmission and position tracking for the OmniTRACS, OmniVision 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 LINQGlobalTRACS systems use wireless digital and analog 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.
In the United States and Mexico, we manufacture
and sell OmniTRACS,
EutelTRACS, TruckMAIL, OmniExpress, T2 Untethered TrailerTRACS and GlobalTRACS mobile communications equipment, sell related software packages and provide ongoing messaging and maintenance services. We have sold OmniTRACS,
OmniVision, TruckMAIL and OmniExpress systems for use by
for-hire and private trucking fleets, service vans, marine vessels, trains, federal emergency vehicles, and for oil and gas pipeline control and monitoring sites. Our GlobalTRACS system is sold to the construction equipment industry, providing wireless access to equipment operating data and location, regardless of equipment type or manufacturer. Message transmissions for operations in the United States are formatted and processed at our Network Management Center in San Diego, California, with a fully-redundant backup Network Management Center located in Las Vegas, Nevada.
We estimate the Network Management Center currently processes over seven million messages and position reports per day. In fiscal 2004,2006, we began shipping T2 Untethered TrailerTRACS for private fleets and for-hire carriers. The T2 Untethered TrailerTRACS product is an advanced, stand-alone wireless system that provides rapid-status visibility into trailer locations and operational events and vehicle position reporting for improved fleet utilization and security. Features include sophisticated on-board hardware, advanced power management, complete network services, cargo and door sensors and data integration capabilities using state-of-the-art, multimode communications. We recently announced the availability of our integration of our GlobalTRACS equipment management system with the next generation of the RentalMan product, a Vehicle Immobilization Devicethird party enterprise resource planning application. The enhanced application further integrates telematics data from the GlobalTRACS platform with RentalMan’s improved business information capabilities. Further integration of GlobalTRACS data into the RentalMan application means that users can more easily access and a Security Integration Packageuse information about equipment hours, operational history, location, maintenance and administrative data provided by GlobalTRACS. Other new or enhanced functionalities of the application include the capacity to help rental companies capture off-rent revenue, provide more accurate and timely overtime billings and help validate rain day, holiday and downtime credits. The Data Visor business intelligence platform and the Critical Event Reporting service were also announced. The Data Visor business intelligence platform, initially designed for theuse with our SensorTRACS/400 services, improves fuel and driver management through pinpointing excess idling and identifying important business trends. The Critical Event Reporting service provides an automatic, accurate critical incident record, initiated by either an automatic or manual trigger helping truckload carriers and private fleets improve driver performance and operational efficiency, and help effectively manage liability exposure.
1114
OmniTRACS satellite mobile communication system. The new security features offer enhanced protection to high-value and hazardous materials cargo and personnel.
In addition to the United States, the OmniTRACS system is currently operating throughout Europe and in the Middle East, Argentina, Brazil, Canada, Mexico, China, Japan and South Korea. 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.
QUALCOMM Government Technologies (QGOV).The QGOV division (formerly known as QUALCOMM Digital Media, or QDM) provides development, hardware and analytical expertise to United States government (USG) agencies involving wireless communications technologies. We have developed, produced and shipped second generation CDMA secure wireless terrestrial phones for the USG that operate in enhanced security modes (referred to as Type 1) and incorporate end-to-end encryption. In fiscal 2006, QGOV adapted, integrated and shipped CDMA2000 1X deployable base stations to the USG. Additionally, OmniTRACS products and services are being marketedused for USG worldwide applications and were sold to the USG during fiscal 2004.2006. Based on the percentage of QGOV revenues to our total consolidated revenues, the USG is not a major customer.
The QGOV division included the former Digital Cinema business prior to June 2004. In June 2004, we were notified that a competing digital cinema compression technology was selected by the motion picture studio consortium tasked with technology selection for digital cinema applications. As such, we are no longer pursuing the Digital Cinema business.
QUALCOMM Strategic Initiatives Segment (QSI) We make strategic investments to promote the worldwide adoption of CDMACDMA-based products and services for wireless voice and Internet data communications, including CDMA operators, licensed device manufacturers and companies that support the design and introduction of new CDMA-based products or possess unique capabilities or technology. We make strategic investments in early stageearly-stage companies and, from time to time, venture funds to support the adoption of CDMA and the use of the wireless Internet.
Our MediaFLO USA subsidiary plans to deploy and operate a nationwide multicast network in the United States based on our MDS and FLO technology. MediaFLO USA will use 700 MHz spectrum for which we hold licenses for a nationwide footprint to deliver high-quality video and audio programming to wireless subscribers. Additionally, MediaFLO USA plans to procure, aggregate and distribute content in service packages which we will make available on a wholesale basis to our wireless operator customers (whether they operate on CDMA or GSM/WCDMA networks) in the United States. The commercial availability of the MediaFLO network and service will be determined by our wireless operator partners.
MediaFLO USA continues to prepare for the launch of its commercial service. Its San Diego based Broadcast Operations Center and Network Operations Center are currently operating, while construction of the initial phase of its network is nearing completion in several major markets. In
November 2001, we acquired controlling interestsaddition to Verizon Wireless, which announced its intention to launch the MediaFLO USA service during early calendar 2007, MediaFLO USA is actively engaged in
two CDMAdiscussions with multiple domestic wireless operators
in Brazil (Vésper Operating Companies). We sold these two operators in fiscal 2004. We have a significant investment in Inquam Limited (Inquam). Inquam owns, develops and manages wireless communications systems, either directly or indirectly, withon how they might utilize the
primary intent of deploying CDMA-based technology.Other Businesses
MediaFLO
USA service.
We are developing theour MediaFLO Content Distribution System (MDS)MDS and FLO technology forto enable MediaFLO USA and potentially other international operators to optimize the low cost delivery of low cost multimedia content to multiple subscribers.wireless subscribers simultaneously. Our efforts to sell this technology internationally will be conducted by a nonreportable segment and not by MediaFLO USA or QSI. The MDS will provide wireless network operators the ability to enhance their multimedia service offering capabilities via efficient scheduling and delivery of content delivery. Networkmultimedia content. Wireless network operators can utilize the MDS with their current unicast networks and with multicast networks, which are soon to be available, operating on CDMA2000 1xEV-DO or WCDMA. The MDS is not air-interfaceair interface specific and thus can be utilized by CDMA2000, WCDMA and FLO technology operators alike. FLO is a multicast air interface technology specifically designed for markets where dedicated spectrum is available and where regulations permit high-power transmission, thereby reducing the number of towers and related infrastructure required to provide market coverage. MediaFLO MDS and FLO technology isare complementary to existing cellularwireless networks because interactive services are supported within the mobile device using the CDMA2000 1X, 1xEV-DO or WCDMA cellular linkwireless 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.
As part of our strategic investment activities, we may consider various corporate structuring and
is intended as an enhancement of other multimedia multicasting technologies. On November 1, 2004, we announced plans for our MediaFLO USA subsidiary, which is expected to begin commercial operations in 2006. MediaFLO USA will offer a nationwide FLO technology based network as a shared resource for wireless operatorsexit strategies at some point in the United States and their customers. The wireless multimedia U.S. operator plans to use our nationwide 700 MHz spectrum and will be responsible for procuring and distributing the common content made available to allfuture, which may include distribution of its wireless operator customers. Distribution, marketing, billing and customer relationships are expected to remain with the wireless operator partners. Effective as of the beginning of fiscal 2005, we expect to present the operating results of MediaFLO USA in the QSI segment. We ultimately intend to spin off our ownership interest in MediaFLO USA to our stockholders.
stockholders in a spin-off transaction. 1215
Other Businesses
QUALCOMM MEMS Technologies (QMT).QMT is developing display technology for the full range of consumer-targeted mobile products. QMT’s interferometric modular display (iMoD) technology, based on a micro-electro-mechanical-systems (MEMS) structure combined with thin film optics, is expected to provide substantial performance, power consumption and cost benefits as compared to current display technologies. We expect the iMoD product to deliver a vivid and realistic 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 increasing 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 all 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 manufacture than a comparable liquid crystal display because it requires fewer components and processing steps, thus enabling advanced multimedia capabilities on all tiers of mobile devices.
QUALCOMM Flarion Technologies (QFT).QFT is the developer and provider of FLASH-OFDM, the wireless industry’s first and only fully mobile OFDM offering. We acquired Flarion Technologies, Inc. in January 2006 to expand our already extensive portfolio of OFDMA intellectual property and enhance our research and development organization with expertise in OFDMA technology and products. FLASH-OFDM is an air interface technology designed for the delivery of advanced Internet services in the mobile environment. The technology is based on the OFDM airlink, a wireless access method that combines the attributes of its two predecessors, TDMA and CDMA, to address the unique demands posed by mobile users of broadband data and packetized voice applications. Through FLASH-OFDM, QFT has created an end-to-end network offering for mobile operators, which includes the RadioRouter base station product line, wireless modems, embedded chipsets and system software. The all-IP wireless network will support both broadband data and packetized voice applications.
QUALCOMM Wireless Systems (QWS) We provide.QWS sells products and provides services and sell products under new commercial agreements to Globalstar, LLC (New Globalstar)Inc. (Globalstar) and its service providers and other customers. New Globalstar operates a worldwide, low-Earth-orbit satellite-based telecommunications system. We received membershipownership interests in New Globalstar in fiscal 2004 as a result of its emergence from bankruptcy related to our claims as a creditor. At September 30, 2004, we held an approximate 3.8% interest in New Globalstar. On October 5, 2004, we received an additional ownership interest in New Globalstar as partial consideration for the sale of mobile phones. As a result,At September 24, 2006, we currently holdheld an approximate 6.7%6.6% interest in New Globalstar.
QUALCOMM Consumer Products (QCP)
In February 2000, we soldGlobalstar in our terrestrial-based CDMA wireless consumer phone business to Kyocera Wireless (Kyocera). As part of the agreement with Kyocera, we formed a subsidiary to provide services to Kyocera on a cost-plus basis to support Kyocera’s phone business. This arrangement expired in February 2003, and Kyocera offered employment to substantially all employees of the subsidiary. During fiscal 2003 and 2002, revenues from this arrangement were $39 million and $105 million, respectively, and earnings before taxes were not significant.QSI segment.
The wireless telecommunications industry is characterized by rapid technological change, requiring a continuous effort to enhance existing products and develop new products and technologies. Our research and development team has a strong and proven track record of innovation in wireless communications technologies. Our research and development expenditures in fiscal
2004, 20032006, 2005 and
20022004 totaled approximately
$720 million, $523 million$1.5 billion, $1.0 billion and
$452$720 million, respectively. Research and development expenditures in fiscal
2004, 20032006, 2005 and
20022004 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/1X, 1xEV-DO,
EV-DO Revision A, EV-DO Revision B, WCDMA
(including GSM/GPRS/EDGE), HSDPA, HSUPA and
HSDPA. In fiscal 2004, we opened three newOFDMA, and the development of our FLO technology, MediaFLO MDS and iMoD display products using MEMS technology.
We have research and development centers in North Carolina, Texas, Germany and India. The centersvarious locations throughout the world that support our global CDMA development activities and ongoing efforts to advance CDMA and a broad range of other technologies. We 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.
QCT markets and sells products in the United States through a sales force based in San Diego, California, and internationally through a direct sales force based in China, Germany, India, Italy, Japan, South Korea, Japan, China, Taiwan Germany and the United Kingdom. QCT’s sales and marketing strategy is to achieve design wins with technology leaders in our targeted markets by, among other things, providing high performance products combined with superior field application and engineering support.
16
The QIS division of QWI develops and sells business-to-business products and services to companies worldwide. The sales and marketing team is headquartered in San Diego with offices worldwide. The QIS sales and marketing strategy is to enter into
contractsagreements with companies in target markets by providing comprehensive technology and services to help them provide next-generation wireless data services that combine wireless Internet, data and voice capabilities.
The QWBS division of QWI markets and sells products through a sales force, partnerships and distributors based in the United States, Europe, the Middle East, Argentina, Brazil, Canada, China, Japan, South Korea and Mexico.
QWBS’sQWBS’ sales and marketing strategy is to enter into contracts with companies in our target markets by providing high-value wireless fleet management products and services to the transportation,
and logistics and construction equipment industries.
Marketing activities include
advertising and public relations, web-marketing, participation in technical conferences
and trade shows, development of business cases, competitive analyses and other marketing collateral
publication of customer deployments, new productprograms. Corporate Marketing provides company information
on products, strategies and
educational articles intechnology to industry
journals, maintenance ofanalysts and publications which are also supported on our
World Wide Web site and direct marketing to prospective customers and prospective licensees.Internet website. We also developed and maintain
a World Wide Web sitean Internet website (www.3Gtoday.com) dedicated to highlighting commercial 3G wireless services and products around the world.
13
Our CDMA DevelopmentTechnology Center in China is a 36,000 square foot facility in Beijing in what isan area popularly known as ‘China’s“China’s Silicon Valley.’” The center provides consultation, training, support and equipment testing services primarily to manufacturers and mobile operators in China, as well as supporting research and development of 3G and future broadband wireless standards based on CDMA.CDMA and OFDMA. The center houses the QUALCOMM CDMA University, which offers classroom and hands-on training programs on CDMA2000 and WCDMA. The center also offers a highly-integratedan integrated test program designed to enable time and cost savings when bringing products to market. The center and its staff are focused on providing China with the resources to enable the most timely development of its mobile communications industry using our technologies and applications, such as cdmaOne, CDMA2000 1X/1X, 1xEV-DO, UMTS/HSDPA multimode solutions, GSM1x and gpsOne. The center also supports the transfer of certain hardware and software technologies for product development and manufacturing to licensed manufacturers, as well as network design and optimization methods to operators and government bodies in China.
Competition in the
wireless telecommunications industry
in the United States and throughout the world continues to increase at a rapid pace as businesses and
foreign governments realize the market potential of
wireless telecommunications
products and services. We have facilitated competition in the CDMA market by licensing a large number of manufacturers. 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. |
These competitors may have more established relationships and greater technical, marketing, sales and distribution capabilities and greater access to channels in markets not currently deploying wireless communications technology or markets primarily deploying 2G wireless communications technology. These competitors also have established or may establish financial or strategic relationships among themselves or with our existing or potential customers, resellers or other third parties. These relationships may affect customers’ decisions to purchase products or license technology from us.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 placemarketplace for products based on 3G standards.standards or other wireless technologies. Although we intend to continuously
17
develop improvements to existing technologies, as well as
potentiallypotential new technologies, there may be a continuing competitive threat from 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.
QCT Segment.The markets in which our QCT segment operates are intensely competitive. QCT competes worldwide with a number of United States and international semiconductor designers and
manufacturers.manufacturers in the United States and internationally. As a result of the trend toward
a larger CDMA wireless market, 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 markets are product performance, level of integration, quality, compliance with industry standards, price,
time to market,time-to-market, system cost, design and engineering capabilities, new product innovation and customer support. The specific bases on which we compete against alternative CDMA integrated circuit providers vary by product platform. We also compete
in both single and dual-mode environments against alternative wireless communications technologies including, but not limited to, GSM/GPRS/EDGE, TDMA,
WiMax and analog.
QCT’s current competitors include major semiconductor companies such as
Freescale, Infineon, NEC, Philips, STMicroelectronics, Texas Instruments
STMicroelectronics, Freescale,and VIA Telecom,
NEC, Infineon and Philips, as well as major telecommunication equipment companies such as
Ericsson, Matsushita, Motorola, Nokia
Ericsson,and Samsung,
and Matsushita, who design their own integrated circuits and software for certain products. QCT also faces competition from some start-up ventures.
Our competitors may devote a significantly greater amount of their financial, technical, marketing and other resources to aggressively market competitive telecommunications systems or to develop and adopt competitive digital cellular technologies, and those efforts may materially and adversely affect QCT. Moreover, competitors may
14
offer more attractive product pricing or financing terms than we do as a means of gaining access to the wireless telecommunications markets.
We have entered into licensing agreements with certain companies, including
Philips,EoNex Technologies, Infineon, Lucent, Motorola,
Lucent,NEC, Philips, Texas Instruments
and VIA
Telecom, PrairieComm, NEC, EoNex Technologies and Infineon.Telecom. These licenses permit the licensees to manufacture CDMA-based integrated circuits using certain of our intellectual property for sale to CDMA-based phone manufacturers. In exchange for granting the licenses, we are entitled to receive license fees, royalties
(payable(determined as a percentage of the selling price of the integrated circuits) and/or royalty-free cross-licenses, which allow us to use these companies’ CDMA and, in some cases, non-CDMA intellectual property for specified purposes. In every case, the phone manufacturers’ sales of CDMA-based phones are subject to the payment of royalties to us on the products into which the integrated circuits are incorporated in accordance with the manufacturers’ separate licensing arrangements with us. We license our CDMA intellectual property to the competitors of our QCT segment to support the deployment of CDMA-based systems and technologies worldwide in order to grow our royalty revenues from customers licensed to sell CDMA phones and equipment. We believe that, if
the use of CDMA
expandsbased systems expand sufficiently, QCT’s business will also grow, even if we lose market share.
Also, our QTL segment will receive royalties from sales of CDMA integrated circuits by certain competitors of QCT. To date, most cdmaOne and CDMA2000 phone manufacturer licensees have elected to purchase their CDMA-based integrated circuits from us.
QTL Segment.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 future generations of digital wireless communications technology and services.
On a worldwide basis, we currently compete primarily with twothe GSM/GPRS/EDGE digital wireless telecommunications technologies, TDMA and GSM/GPRS. TDMA has been deployed primarily in the United States and Latin America. Variations of TDMA have also been deployed in other countries, such as PDC (Personal Digital Cellular) in Japan and PAS (Personal Access System) in China.technologies. GSM has been extensively utilized in Europe, much of Asia other than Japan and South Korea, and certain other markets. To date, GSM has been more widely adopted than CDMA, however, CDMA technologies have been adopted for all third generation wireless systems. WCDMA, a technology designed as an alternative to CDMA2000, is an approved 3G standard and has been adopted by several European, Japanese and United States operators. We expect that, although a considerable number of limited systems have been placed in service (e.g., the largest commercial WCDMA system is that of NTT DoCoMo in Japan with over six million subscribers as of September 30, 2004), widespread WCDMA networks will not begin commercial operation until late 2004 or later. In addition, manymost GSM operators have deployed or are expected to deploy GPRS, a packet data technology, as a 2.5G bridge technology, and somea number of GSM operators planhave deployed or are expected to deploy EDGE, while waiting for third generation WCDMA to become available and/or more cost effective for their system. A limited number of operators have started testing OFDMA (Orthogonal Frequency Division Multiplexing Access) technology, a multi-carrier transmission technique not based on CDMA technology, thatwhich divides the available spectrum into many carriers, with each carrier being modulated at a low data rate relative to the combined rate for all carriers. We have invested in the development of our own OFDMA technology and intellectual property and have acquired Flarion, a major developer and patent holder of OFDMA technology.
18
QWI Segment.Existing competitors of our QWBS division offering alternatives to our
OmniTRACS, TruckMAIL, OmniExpress, T2 Untethered TrailerTRACS, GlobalTRACS, QConnect, EutelTRACS, OmniOne 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 and QConnect 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 products and services similar in many cases to our existing or developing technologies. Emergence of new competitors, particularly those offering low cost terrestrial-based products and current as well as future satellite-based systems, may impact margins and intensify competition in new markets. Similarly, some original equipment manufacturers of trucks and truck components are beginning to
15
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.
Competitors to
We have numerous competitors for each of our BREW platformproducts and services. These competitors are continuing to develop their products with a focus on client, provisioning, user interface, content distribution, and billing products and services. These competitorsCompetitors are attempting to offer value added products and services similar, in many cases, to our existing or developing BREW technologies. In some cases, competitors are continuing to explicitly attempt to displace only certain components or areas of the greater BREW offering, such as only the runtime client/device environment portion of BREW. In addition, certain competitors in the computing industry and device manufacturing spaceindustries are now beginning to more aggressively attempt to replicate the entire BREW system offering that includes both runtime device environments and billing/distribution systems. Similarly, some operators are creating internally developed solutionsdeveloping their own products by piecing together several components or are being pressured by governments to adopt alternatives to our productsboth internal and services.external components. Emergence of these and other new competitors may adversely impact our margins and market share.
Patents, Trademarks and Trade Secrets We rely on a combination of patents, copyrights, trade secrets, trademarks and proprietary information to maintain and enhance our competitive position. We have
been granted more than 1,300filed approximately 5,100 United States
patents and have over 2,000 patent applications,
pending in the United States.of which approximately 1,900 patents have been issued. The vast majority of such patents and patent applications relate to
our CDMA digital wireless communications
technology.technologies, including patents that are essential or useful for CDMA2000, UMTS, TD-SCDMA, TD-CDMA and OFDMA products. We also have and will continue to actively file for
broad patent protection outside the United
States andStates. We have
received numerous CDMAfiled approximately 25,800 foreign patent applications, of which approximately 7,400 patents
have been issued, with broad coverage throughout most of the world, including China, Japan, South Korea, Europe, Brazil, India and elsewhere.
The standards bodies and the ITU have been informed that we hold essential intellectual property rights for
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.
We have also informed the standards bodies that we may hold essential intellectual property rights for certain standards that are based on OFDMA technology, e.g. 802.16e and 802.20.
Under our
CDMA license agreements, licensees are generally required to pay us a
non-refundable license fee as well as ongoing royalties based on a percentage of the
netwholesale selling price,
net of
CDMAcertain permissible deductions (e.g. certain shipping costs, packing costs, VAT, etc.), of subscriber, infrastructure
and test
and integrated circuits products.equipment. 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 us rights to use certain of our licensees’ technology and intellectual property rights to manufacture and sell certain
CDMA products,
(e.g. CDMAe.g. 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. Under their existing agreements with us, two entities
arewere entitled to share in a percentage of the royalty revenues that we receive from third parties for their sale of certain CDMA products. Our sharing
obligationsobligation under one of these arrangements
expireexpired in fiscal 2005, and the other
sharing obligation expired in fiscal 2006.
As part of our strategy to generate licensing revenues and support worldwide adoption of our CDMA technology, we license to other companies, including the competitors of our QCT segment, the rights to design, manufacture and sell products utilizing certain portions of our CDMA intellectual property. The following table lists the majority ofOur current publicly announced CDMA licensees are listed on our current CDMA licensees:Internet website (www.qualcomm.com).
16
Subscriber
AL Communications Co., Ltd.
Alps Electric Co., Ltd.
Amoi Mobile Co., Ltd.
Appeal Telecom Co., Ltd.
Axesstel, Inc.
Axio Wireless, Inc.
Beijing Telecommunications Equipment Factory
Bellwave, Inc.
Benq Corporation
Casio 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 Corporation
eAnywhere Tech, Inc.
Eastern Communications Co., Ltd.
ERON Technologies Corporation
ETRONICS Corporation
Flextronics International Ltd.
Fujitsu Limited
Garmin Corporation
Giga Telecom, Inc.
Glenayre Electronics, Inc.
Growell Telecom Co., Ltd.
Guangzhou Southern Hi-Tech Co., Ltd.
Haier Group Company
High Tech Computer Corporation
Hisense Group Co., Ltd.
Hitachi Kokusai Electric Inc.
Hitachi, Ltd.
Hon Hai Precision Industry Co., Ltd.
Huawei Technologies Co., Ltd.
Hyundai Syscomm, Inc.
Inventec Appliances Corp.
Kenwood Corporation
Koninklijke Philips Electronics N.V.
Konka Group Co., Ltd.
KTF Technologies Inc.
Kyocera Corporation
Langchao Group Co., Ltd.
Legend Mobile Communications Technology Ltd.
LG Electronics, Inc.
Lucent Technologies Inc.
Matsushita Electronic Components Co., Ltd.
Maxon Telecom Co., Ltd.
Mitsubishi Electric Corporation
Mobile System Technologies, Inc.
Motorola, Inc.
NEC Corporation
NG Industrial Ltda.
Ningbo Bird Co., Ltd.
NOKIA Corporation
Novatel Wireless Inc.
Option NV S.A.
palmOne, Inc.
Panasonic Mobile Communications Co., Ltd.
Pantech Co., Ltd.
Research In Motion Limited
Samsung Electronics Co.
Sanyo Electric Co., Ltd.
Seiko Instruments Inc.
Sejin Electron Inc.
Sendum Wireless Corporation
Shanghai Huntel Technologies Co., Ltd.
SHARP Corporation
Siemens Aktiengesellschaft
Sierra Wireless, Inc.
SK Telecom Co., Ltd.
Sony Corporation
Synertek, Inc.
-Sewon Telecom Ltd.
- -Telson Electronics Co., Ltd.
- -Wide Telecom Co., Ltd.
TCL Corporation
Techfaith Wireless Communication Technology Limited
Telefonaktiebolaget LM Ericsson
Teleion Wireless, Inc.
Telular Corporation
Tellus Technology Inc.
Toshiba Corporation
Uniden Corporation
United Computer and Telecommunication, Inc.
UTStarcom, Inc.
Vitelcom Mobile Technology S.A.
VK Corporation
Wavecom S.A.
Westech Korea, Inc.
Wherify Wireless, Inc.
ZTE Corporation
Infrastructure
Airvana, Inc.
AirWalk Communications, Inc.
Alcatel SA
Alps Electric Co., Ltd.
Axio Wireless, Inc.
Beijing Telecommunications Equipment Factory
Cisco Systems, Inc.
Contela, Inc.
Dalian Huanyu Mobile Technological Co., Ltd.
Datang Telecom Technology Co., Ltd.
Eastern Communications Co., Ltd.
Fujitsu Limited
Great 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 Electronics, Inc.
Lucent Technologies Inc.
Mitsubishi Electric Corporation
Motorola, Inc.
NEC Corporation
NOKIA Corporation
Nortel Networks Limited
Panasonic Mobile Communications Co., Ltd.
Samsung Electronics Co.
Siemens Aktiengesellschaft
Telefonaktiebolaget LM Ericsson
UTStarcom, Inc.
ZTE Corporation
Samsung Electronics Co.
Siemens Aktiengesellschaft
Telefonaktiebolaget LM Ericsson
UTStarcom, Inc.
ZTE Corporation
ASICs
Agere Systems Inc.
EoNex Technologies, Inc.
Infineon Technologies AG
Koninklijke Philips Electronics N.V.
Lucent Technologies Inc.
Motorola, Inc.
NEC Corporation
PrairieComm Incorporated
Texas Instruments Incorporated
VIA Telecom, Inc.
Test Equipment
Advantest Corporation
Agilent Technologies, Inc.
Allen Telecom Inc.
Ando Electric Co., Ltd.
Anritsu Corporation
Comarco Wireless Technologies, Inc.
Hewlett-Packard Company
IFR Systems, Inc.
Japan Radio Co., Ltd.
LCC International, Inc.
Motorola, Inc.
Panasonic Mobile Communications Co., Ltd.
Racal Instruments Limited
Rohde & Schwarz GmbH & Co. KG
Rotadata Limited
Sage Instruments
Spirent Communications, Inc.
Tektronix, Inc.
Telefonaktiebolaget LM Ericsson
UbiNetics Holdings plc
Willtek Corporation
Non-Standard Systems
SOMA Networks, Inc.
Cable and Repeaters
EC Telecom Inc.
EMS Technologies, Inc.
United Computer and Telecommunication, Inc.
1719
As of September 30, 2004,24, 2006, we employed approximately 7,60011,200 full-time, part-time and temporary employees. During fiscal 2004,2006, the number of employees increased by approximately 200, despite a reduction of approximately 1,000 employees in Brazil related to discontinued operations,300 from acquisitions and 1,600 primarily due to substantialfrom increases in engineering resources.
Our Internet address is www.qualcomm.com. There we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Our SEC reports can be accessed through the investor relations section of our
Web site.Internet website. The information found on our
Web siteInternet website is not part of this or any other report we file with or furnish to the SEC.
The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room located at 450 Fifth100 F Street, NW,N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.1-202-551-8090. The SEC also maintains electronic versions of our reports on its website at www.sec.gov.
Our executive officers and their ages as of September
30, 200424, 2006 are as follows:
Irwin Mark Jacobs, age
70,72, one of the founders of the Company, has served as Chairman of the Board of Directors
and Chief Executive Officer of the Company since it began operations in July 1985. He
also served as
the Company’s president prior to May 1992. Before joiningChief Executive Officer of the Company
Dr. Jacobs was executive vice president and a director of M/A-COM. From October 1968from July 1985 to
April 1985, Dr. Jacobs held various executive positions at LINKABIT (M/A-COM LINKABIT after August 1980), a company he co-founded. During most of his period of service with LINKABIT, Dr. Jacobs was chairman, president and chief executive officer and was at all times a director.June 2005. Dr. Jacobs received
his B.E.E.a B.S. degree
in Electrical Engineering from Cornell University and
his M.S. and Sc.D. degrees from the Massachusetts Institute of Technology. Dr.
Irwin Jacobs is
a memberthe father of
the National AcademyDr. Paul Jacobs, our Chief Executive Officer, and Jeffrey A. Jacobs, President of
Engineering and the American Academy of Arts and Sciences and was awarded the National Medal of Technology in 1994. Anthony S. Thornley, age 58, 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 has also worked for Coopers and Lybrand. Mr. Thornley is a director of Callaway Golf. Mr. Thornley received his B.S. degree in Chemistry from the University of Manchester, England.
WilliamQUALCOMM Global Development.
Paul E.
Keitel, age 51, was appointed Executive Vice President in December 2003, and has served as Chief Financial Officer since February 2002. He joined the Company in 1996 and has worked in senior management roles within corporate finance, serving as Senior Vice President and Corporate Controller from May 1999 to February 2002, and as Vice President and Corporate Controller from October 1997 to May 1999. Previously, Mr. Keitel served in various senior finance roles for Nortel, a telecommunications equipment manufacturer, from 1983 until 1996. Mr. Keitel received a M.B.A. from Arizona State University and a B.A. degree in Business Administration from the University of Wisconsin. Steven R. Altman,Jacobs, age 43, has served as a director since June 2005 and as our Chief Executive Vice President of the CompanyOfficer since November 1997.July 2005. He also has served as President of the Company’s Technology Licensing division, which is responsible for, among other things, licensing the Company’s intellectual property, since September 1995. 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.
18
Roberto Padovani, age 50, 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 a 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 41, has served as Group President of the QUALCOMM Wireless & Internet Group sincefrom July 2001. He oversees the QUALCOMM Technology Licensing division, the QUALCOMM Internet Services division, the QUALCOMM Wireless Business Solutions division and the QUALCOMM Government Technologies division along with Corporate Marketing, Standards and the QUALCOMM Technology and Ventures division. 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, a 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.
Steven R. Altman, age 45, has served as our President since July 2005. He served as an Executive
OfficerVice President from November 1997 to June 2005 and as President of
QUALCOMM Technology Licensing from September 1995 to April 2005. Mr. Altman currently serves on the
Company.board of Amylin Pharmaceuticals, Inc. He received a B.S. degree from Northern Arizona University and a J.D. from the University of San Diego.
Sanjay K. Jha, age 41, was appointed43, has served as Group President, inQUALCOMM CDMA Technologies (QCT) since February 2004 and as an Executive Vice President insince December 2003. He has served aswas appointed President of QUALCOMM CDMA Technologies sinceQCT in January 2003. He served as Senior Vice President from August 2000 to March 2002 and subsequently, Senior Vice President and General Manager of QUALCOMM Technologies & Ventures from March 2002 to January 2003 of QUALCOMM Technologies & Ventures. From October 1996 to July 2000, Dr. Jha led the integrated circuits engineering group through five generations of baseband and RF chipset development within QUALCOMM CDMA Technologies from October 1996 to July 2000 in various capacities: as Director of Engineering from October 1996 to May 1997, as Vice President of Engineering from May 1997 to June 1998 and finally asa Senior Vice President, of Engineering. He joined QUALCOMM in 1994 as a Senior Engineer working on Globalstar and then on MSM2200, the first commercial CDMA handset baseband chip. PriorEngineering from July 1998 to joining QUALCOMM, Dr. Jha worked in various lead design engineering roles in the semiconductor industry.March 2002. Dr. Jha holds a Ph.D. in EEEElectronic and Electrical Engineering from Strathclyde University, Scotland and a B.S. degree in Engineering from the University of Liverpool, England.
William E. Keitel, age 53, has served as an Executive Vice President since December 2003 and as our Chief Financial Officer since February 2002. He previously served as a Senior Vice President and as our Corporate Controller from May 1999 to February 2002. Mr. Keitel received a M.B.A. from Arizona State University and a B.A. degree in Business Administration from the University of Wisconsin.
Roberto Padovani, age 52, has served as an Executive Vice President and as our Chief Technology Officer since January 2002. He previously served as Senior Vice President from July 1996 to July 2001 and as Executive Vice President from July 2001 to January 2002 of our Corporate Research and Development. 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.
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Marvin Blecker, age 59, has served as President of QUALCOMM Technology Licensing (QTL) since April 2005. From November 2001 to April 2005, he served as General Manager of QTL, as well as Senior Vice President of that division from October 1995 to November 2001. He holds B.S. and M.S. degrees in Mathematics and a M.S. degree in Electrical Engineering-Systems Science from the Polytechnic Institute of Brooklyn, New York (now Polytechnic University).
Jeffrey A. Jacobs, age 38, was appointed40, has served as President of QUALCOMM Global Development an organization responsible for proliferating CDMA throughout the world, insince May 2001. He served as Senior Vice President of Business Development from June 1999 to May 2001 and Vice President of Business Development from November 1997 to June 1999. Mr. Jacobs founded the QUALCOMM Eudora division in 1993 and served as Vice President and General Manager of the division from August 1995 to November 1997. He joined the Company in May 1986 as a market analyst and held other management positions at the Company through August 1995.2001. Mr. Jacobs holds a B.A. degree in International Economics from the University of California, Berkeley. Mr. Jeffrey Jacobs is the son of Dr. Irwin Mark Jacobs, Chairman of theour Board of Directors, and the brother of Dr. Paul E. Jacobs, a member of our Board of Directors and our Chief Executive OfficerOfficer.
Margaret “Peggy” L. Johnson, age 44, has served as President of
the Company. Louis Lupin, age 49, hasQUALCOMM Internet Services (QIS) since July 2001 and as President of QUALCOMM MediaFLO Technologies since December 2005. 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.
Louis M. Lupin, age 51, has served as a Senior Vice President and as our General Counsel since September 2000.
He served as Senior Vice President, Proprietary Rights Counsel from May 1998 to September 2000, Vice President, Proprietary Rights Counsel from April 1996 to May 1998 and Senior Legal Counsel from February 1995 to April 1996. Prior to joining the Company in 1995, he was a partner with Cooley, Godward, Castro, Huddleson and Tatum where he focused on intellectual property litigation in the telecommunications, software and biotechnology industry. Mr. Lupin received
hisa B.A. degree from Swarthmore College and a J.D. from Stanford Law School.
He is a member of the Executive Committee of the Board of Visitors of Stanford Law School. Dr.
Daniel
L. Sullivan, age
53, was appointed55, has served as Executive Vice President of Human Resources
insince August 2001. He served as Senior Vice President of Human Resources from February 1996 to
August 2001, Vice President of Human Resources from February 1994 to February 1996 and Director of Human Resources from April 1992 to February 1994. Prior to joining QUALCOMM, Dr. Sullivan served in senior human resources management roles at leading companies in the technology sector. Dr. Sullivan currently serves as a member of the board of directors for the San Diego State University Foundation, a member of the board of directors for the San Diego Community Foundation, as an advisory board member of the University of California — San Diego School of Engineering’s Corporate Affiliate Board, and as an advisory board member to San Diego State University’s Center for Entrepreneurial Studies (EMC).19
July 2001. Dr. Sullivan holds a Ph.D. in Organization Communication from the University of Nebraska. He also holds B.S.B.S and M.A. degrees in Communication from Illinois State University and West Virginia University, respectively.
RISK FACTORS
Item 1A. Risk Factors
You should consider each of the following factors as well as the other information in this Annual Report in evaluating our business and our prospects. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations. If any of the following risks actually occur, our business and financial results could be harmed. In that case, the trading price of our common stock could decline. You should also refer to the other information set forth in this Annual Report, including our financial statements and the related notes.
Risks Related to Our Businesses If CDMA and CDMA-related technology isdeployment does not widely deployed,expand as anticipated, our revenues may not grow as anticipated. We focus our business primarily on developing, patenting and commercializing CDMA technology for wireless telecommunications applications.
In addition, with the acquisition of Flarion, we expect an increased emphasis on developing, patenting and commercializing OFDMA technology. Other digital wireless communications technologies, particularly GSM technology, have been more widely deployed than CDMA technology.
IfOFDMA has not been widely deployed commercially. Notwithstanding our portfolio of OFDM/OFDMA 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 ifour business and financial results could suffer. If wireless operators do not select CDMA for their networks or update their current networks to any CDMA-based third generation
(3G) technology, our business and financial results could
suffer.suffer since we generally have not generated revenues from GSM product sales, and there is no assurance that our OFDM/OFDMA patent portfolio will be as valuable as our CDMA portfolio or that our OFDMA chipset business will be as successful as our CDMA chipset business. Further, if OFDMA technology is not adopted and deployed commercially, our investment in Flarion and OFDMA technology may not provide us an adequate return on our investment.
To increase our revenues and market share in future periods, we are dependent upon the commercial deployment of third generation (3G)3G wireless communications equipment, products and services based on our CDMA technology. Although wireless network operators have commercially deployed CDMA2000 1X and WCDMA, we cannot predict the timing or success of further commercial deployments or expansions of CDMA2000, 1X, WCDMA or other CDMA systems. If existing deployments are not commercially successful or do not continue to grow their subscriber base, or if new commercial deployments of CDMA2000, 1X, WCDMA or other CDMACDMA-based systems are delayed or unsuccessful, our business and financial
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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
without upgrading to WCDMA or if
wireless network operators introduce new technologies.
For example, aA limited number of operators have started testing OFDMA
(Orthogonal Frequency Division Multiplexing Access) technology,
a multi-carrier transmission technique notbut 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 the acquisition of Flarion brings us an additional and very strong portfolio of issued and pending patents related to OFDMA technology, and, prior to the acquisition, we had 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. Sprint Nextel has indicated that it is planning to deploy WiMax (an OFDMA based
technology) in its 2.5 Ghz spectrum, also known as the Broadband Radio Services band. Other operators are investigating deployment of WiMax. Although we believe that our patented technology is essential and useful to implementation of the WiMax standard, there is no assurance that we will achieve the same royalty revenue on such WiMax deployments as on CDMA
or other technology
deployments or that
divideswe will achieve the
available spectrum into many carriers, with each carrier being modulated atsame chipset market shares within a
low data rate relative to the combined rate for all carriers.WiMax network.
Our business and the deployment of
CDMA technologyour technologies, products and services are dependent on the success of our customers,
licensees and
licensees.CDMA-based wireless operators, as well as the timing of their deployment of new services. Our
customerslicensees and
licenseesCDMA-based wireless operators may incur lower operating margins on
CDMA-based products
or services 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 handsetCDMA-based wireless operators, phone and/or infrastructure manufacturers exit the
CDMA market,CDMA-based markets, the deployment of CDMA technology could be negatively affected, and our business could suffer.
Our three largest customers as of September 30, 2004 accounted for 40%39%, 44%39% and 36%40% of consolidated revenues in fiscal 2004, 20032006, 2005 and 2002,2004, respectively. The loss of any one of our major customers or any reduction in the demand for devices utilizing our CDMA technology could reduce our revenues and harm our ability to achieve or sustain desired levels of operating results. QCT Segment.TheThree customers, LG Electronics, Motorola Inc. and Samsung Electronics Company, constitute a significant portion of QCT’s revenues such that the loss of any one of
our QCT segment’s significantthese 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
desiredacceptable levels of
profitability.operating results. 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;our customers and the network operators; |
| |
| • | | the financial and operational success of theseour customers; |
| |
| • | | the success of theseour customers’ products that incorporate our products; |
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|
| • | | changes in wireless penetration growth rates; |
|
| • | | 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. |
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QTL Segment.Our QTL segment derives royalty revenues primarily from sales of CDMA products by our licensees. WeAlthough we have more than 135 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 volumehigh-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.
Royalties under our license agreements are generally payable to us for the life of the patents that we license under our agreements. The licenses granted to and from us under a number of our license agreements include only patents that are either filed or issued prior to a certain date, and, in a small number of agreements, royalties are payable on those patents for a specified time period. As a result, there are agreements with some licensees where later patents are not licensed by or to us under our license agreements. In order to license any such later patents, we will need to extend or modify our license agreements or enter into new license agreements with such licensees. Although in the past we have amended many of our license agreements to include later patents without affecting the material terms and conditions of our license agreements, there is no assurance that we will be able to modify our license agreements in the future to license any such later patents or extend such date(s) to incorporate later patents without affecting the material terms and conditions of our license agreements with such licensees. We have a license agreement with Nokia Corp., which in part expires on April 9, 2007. While the parties have been in discussions to conclude an extension or a new license agreement beyond that time period, there is no certainty as to when we will be able to conclude an agreement or the terms of any such agreement. There is also a possibility that the parties will not be able to conclude a new or extended agreement by April 2007. In that event after April 9, 2007, unless and until the existing agreement is extended or a new agreement is concluded, Nokia’s right to sell subscriber products under most of our patents (including many that we have declared as essential to the CDMA, WCDMA and other standards) and therefore Nokia’s obligation to pay royalties to us will both cease under the terms of the current agreement, and our rights to sell integrated circuits under Nokia’s patents will likewise cease under the terms of the current agreement. Please refer to our discussion below under the subheadings entitled “The enforcement and protection of our intellectual property rights may be expensive and could divert our valuable resources” and “Claims by other companies that we infringe their intellectual property, that patents on which we rely are invalid, or that our business practices are in some way unlawful, could adversely affect our business” and note that any company that makes or sells products without a license under the applicable patents of another company would be exposed to patent infringement litigation by such other company. The patent holder, whether we or another company, would generally be entitled to seek all available legal remedies including an injunction against making and selling products infringing such patent without a license and damages for past unlicensed sales in the form of lost profits or a reasonable royalty (which damages may be trebled for willful infringement).
Although our patents apply to multiple technologies, such as GPRS, EDGE, OFDM, OFDMA (including WiMax) and MIMO, there can be no assurance that our patent portfolio will generate licensing income or be as valuable in generating licensing income with respect to other technologies, as compared to CDMA-based technologies.
Efforts by some telecommunications equipment manufacturers and component suppliers to avoid paying fair and reasonable royalties for the use of our intellectual property may create uncertainty about our future business prospects, may require the investment of substantial management time and financial resources, and may result in legal decisions and/or political actions by foreign governments that harm our business.
Since our founding in 1985, we have focused heavily on technology development and innovation. These efforts have resulted in a leading intellectual property portfolio related to wireless technology. Because all commercially deployed forms of CDMA and their derivatives require the use of our patents, our patent portfolio is the most widely and extensively licensed portfolio in the industry with over 135 licensees. Over the years a number of companies have challenged our patent position but at this time most, if not all, companies recognize that any company seeking
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to develop, manufacture and/or sell products that use CDMA technologies will require a patent license from us. Notwithstanding the strength of this intellectual property position, we have a policy of, and have succeeded in, licensing our technology to all interested companies on terms that are fair, reasonable and free from unfair discrimination. Unlike some other companies in our industry that hold back certain key technologies, we offer interested companies the opportunity to license essentially our entire patent portfolio. Our broad licensing strategy has been a catalyst for industry growth, helping to enable a wide range of companies offering a broad array of wireless products and features while driving down average and low-end selling prices for 3G handsets and other wireless devices. By licensing a wide range of equipment manufacturers, encouraging innovative applications, supporting equipment manufacturers with a total chipset and software solution, and focusing on improving the efficiency of the airlink for operators, we have helped 3G CDMA evolve, grow, and reduce handset pricing all at a faster pace than the second generation technologies that preceded it (e.g. GSM).
Having failed in their efforts to challenge the strength of our intellectual property position and, in most cases, despite contracts with us that were freely and fairly negotiated and contain fair and reasonable royalty provisions, a small number of companies have now initiated various strategies in an attempt to renegotiate, mitigate and/or eliminate their need to pay royalties to us for the use of our intellectual property in order to negatively affect our business model and that of our other licensees. These strategies have included (i) litigation, often alleging infringement of patents held by such companies or unfair competition of some variety, (ii) taking questionable positions on the interpretation of contracts with us, with royalty reduction as the likely true motive, (iii) appeals to governmental authorities, such as the complaints filed with the European Commission (EC) during the fourth calendar quarter of 2005 and the Korean Fair Trade Commission during June 2006, and (iv) lobbying with governmental regulators and elected officials for the purpose of seeking the imposition of some form of compulsory licensing and/or to weaken a patent holder’s ability to enforce its rights or obtain a fair return for such rights.
We were notified by the Competition Directorate of the EC that six companies (Nokia, Ericsson, Panasonic, Texas Instruments, Broadcom and NEC) submitted separate formal complaints accusing our business practices, with respect to licensing of patents and sales of chipsets, to be in violation of Article 82 of the EC treaty. We received the complaints and have submitted a response. While we believe that none of our business practices violate the legal requirements of Article 82 of the EC treaty, if the EC decides to formally investigate these accusations and determines liability as to any of the alleged violations, it could impose fines and/or require us to modify our practices. Further, such an investigation could be expensive and time consuming to address, divert management attention from our business and harm our reputation. Although such potential adverse findings may be appealed within the EC legal system, an adverse final determination could have a significant negative impact on our revenues and/or earnings. We also understand that two U.S. companies (Texas Instruments and Broadcom) and two South Korean companies (Nextreaming Corp. and THINmultimedia Inc.) have filed complaints with the Korean Fair Trade Commission alleging that our business practices are, in some way, a violation of South Korean anti-trust regulations. While we have not seen these complaints, we believe that none of our business practices violate the legal requirements of South Korean competition law. However, any resulting investigation in South Korea could be expensive and time consuming to address, divert management attention from our business and harm our reputation. An adverse final determination on these charges could have a significant negative impact on our revenues and/or earnings.
Given our substantial investment in technology innovation, the demonstrable benefits provided by our intellectual property, and long-standing license agreements with more than 135 licensees including many of the world’s foremost wireless equipment manufacturers, we believe that our royalty rates are reasonable and fair to the companies that benefit from our intellectual property and provide significant incentives for others to invest in CDMA applications, as evidenced by the significant growth in the CDMA portion of the wireless industry, the integration of new features and functionality into CDMA wireless products, and the rapid reduction in the price of low-end CDMA handsets over recent years. While the distractions caused by challenges to our business model and licensing program are undesirable and the legal and other costs associated with defending our position have been and continue to be significant, we believe that these challenges are without merit, and we will continue to vigorously defend our intellectual property rights and our right to continue to receive a fair return for our innovations. A recent ruling in New Jersey Federal district court granted our motion to dismiss unfounded claims by Broadcom that our business practices have been in violation of anti-trust law in the United States. These business practices are essentially the same as cited in the EC complaints. The court ruled that, assuming all the facts stated by Broadcom are correct (which we believe is not the case), we have not violated any anti-trust laws. This ruling is very important and favorable. Broadcom has appealed it. Regrettably, we assume, as should investors, that challenges of this nature will continue into the foreseeable future and may require the investment of substantial management time and financial resources to explain and defend our position.
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Although there can be no guarantees as to the ultimate outcome of these challenges, we intend to expend appropriate resources to educate governmental authorities, elected officials, courts of law, our licensees, wireless service operators and the general public as to the true nature of these disputes. We believe that when such information is fairly evaluated by such parties, these challenges by the complainants to the EC will be seen for what they truly are, an attempt to avoid paying the agreed upon and fair compensation for the use of our significant intellectual property portfolio, and to extend their domination of the second generation wireless handset market into the third generation.
The enforcement and protection of our intellectual property rights may be expensive and could divert our valuable resources.
We rely primarily on patent, copyright, trademark and trade secret laws, as well as nondisclosure and confidentiality agreements and other methods, to protect our proprietary information, technologies and processes, including our patent portfolio. Policing unauthorized use of our products and technologies is difficult and time consuming. We cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our proprietary information and technologies, particularly in foreign countries where the laws may not protect our proprietary rights as fully or as readily as United States laws. 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. Within the United States Congress, committee work has been initiated to draft a “patent reform law.” The end product of such work could be new patent legislation 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.
The vast majority of our patents and patent applications relate to our wireless communications technology and much of the remainder of our patents and patent applications relate to our other technologies and products. Litigation may be required to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of proprietary rights of others. As a result of any such litigation, we could lose our proprietary rights or incur substantial unexpected operating costs. Any action we take to enforce our intellectual property rights could be costly and could absorb significant management time and attention, which, in turn, could negatively impact our operating results. In addition, failure to protect our trademark rights could impair our brand identity.
Claims by other companies that we infringe their intellectual property, that patents on which we rely are invalid, or that our business practices are in some way unlawful, could adversely affect our business.
From time to time, companies have asserted, and may again assert, patent, copyright and other intellectual proprietary rights against our products or products using our technologies or other technologies used in our industry. These claims have resulted (see Item 3. Legal Proceedings) and may again result in our involvement in litigation. We may not prevail in such litigation given the complex technical issues and inherent uncertainties in intellectual property litigation. If any of our products were found to infringe on another company’s intellectual property rights, we could be required to redesign our products or license such rights and/or pay damages or other compensation to such other company. If we were unable to redesign our products or license such intellectual property rights used in our products, we could be prohibited from making and selling such products.
In addition, as the number of competitors in our market increases and the functionality of our products is enhanced and overlaps with the products of other companies, we may become subject to claims of infringement or misappropriation of the intellectual property rights of others. Any claims, with or without merit, could be time consuming to address, result in costly litigation, divert the efforts of our technical and management personnel or cause product release or shipment delays, any of which could have a material adverse effect upon our operating results. In any potential dispute involving other companies’ patents or other intellectual property, our licensees could also become the targets of litigation. Any such litigation could severely disrupt the business of our licensees, which in turn could hurt our relations with our licensees and cause our revenues to decrease.
A number of other companies have claimed to own patents essential to various CDMA standards, GSM standards and implementations of OFDM and OFDMA systems. If we or other product manufacturers are required to
25
obtain additional licenses and/or pay royalties to one or more patent holders, this could have a material adverse effect on the commercial implementation of our CDMA or multimode products and technologies, demand for our licensees’ products, and our profitability.
Our currently pending or future patent applications for iMoD may not result in issued patents. In addition, our issued iMoD patents may not contain claims sufficiently broad to protect us against third parties with similar technologies or products or from third parties infringing our patents or misappropriating our trade secrets or provide us with any competitive advantage.
Other companies or entities also may commence actions seeking to establish the invalidity of our patents. In the event that one or more of our patents are challenged, a court may invalidate the patent or determine that the patent is not enforceable, which could harm our competitive position. If any of our key patents are invalidated, or if the scope of the claims in any of these patents is limited by court decision, we could be prevented from licensing the invalidated or limited portion of such patents. Even if such a patent challenge is not successful, it could be expensive and time consuming to address, divert management attention from our business and harm our reputation.
Successful attempts by certain companies to amend or modify Standards Development Organizations’ (SDO’s) intellectual property policies could impact our licensing business.
Our technologies, such as CDMA and OFDMA, are generally proposed and incorporated into standards adopted by SDO’s throughout the world (e.g. European Telecommunications Standards Institute (ETSI), Telecommunications Industry Association, Telecommunications Technology Association, IEEE, etc.). These SDO’s have policies with respect to intellectual property contributed by their member companies, which generally require member companies to commit to license their patents essential to the practice of the adopted standard on terms and conditions that are fair, reasonable and free from unfair discrimination (FRAND). We, as a member of these SDO’s and a significant contributor to a number of adopted standards, have made a number of FRAND commitments. Some companies have proposed significant new SDO intellectual property policies, some of which would require a maximum aggregate intellectual property royalty rate for the use of all essential patents owned by its member companies to be applied to the selling price of any product implementing the adopted standard. They have further proposed that the maximum aggregate royalty rate be apportioned to each member company with essential patents based upon the size of its essential patent portfolio. Recently, NGMN Ltd., an industry standards development group organized by several wireless operators, has invited other companies in the industry to participate within NGMN Ltd. subject to IP restrictions substantially similar to these proposals. It is quite early in the process of discussing and evaluating these proposals but we expect that, once all parties analyze and understand the full impact of these proposals, they will come to understand that such proposals are not in the best interests of the industry and would have serious undesirable consequences. For example, these proposals, if adopted, would discourage research and development investment, invention and innovation, incentivize bulk filings of marginal patents, and encourage lobbying for introduction of needless features into standards. Further, they would discriminate against companies that develop new technology and enable other companies to manufacture and use products incorporating those new technologies in favor of such manufacturers and users. We are participating in the process and expect to channel it into useful improvements of the existing processes. Although the ETSI ad hoc IPR group has determined that such proposals should not be adopted as amendments to existing ETSI policies, there can be no assurance that such proposals as described above will not be adopted by other SDO’s or industry groups, such as the recently formed NGMN Ltd., resulting in a disadvantage to our business model either by limiting our return on investment with respect to new technologies or forcing us to work outside of the SDO’s or such other industry groups for promoting our new technologies.
We depend upon a limited number of third party manufacturerssuppliers to providemanufacture component parts, subassemblies and finished goods for our products. AnyIf these third party suppliers do not allocate adequate manufacturing capacity in their facilities to manufacture products on our behalf, or if there are any disruptions in the operations of, or the loss of, any of these third parties, it could harm our ability to meet our delivery obligations to our customers, andreduce our revenue, increase our cost of sales.sales and harm our business. Our ability to meet customer demandsdemand depends, in part, on available manufacturing capacity and our ability to obtain timely and adequate delivery of parts and components from our suppliers and our manufacturing capacity.suppliers. A reduction or interruption in componentour product supply source, an inability of our partnerssuppliers to react to rapid shifts in product demand or a significantan increase in component prices could have a material adverse effect on our business or profitability. Component shortages could adversely affect our ability and that of our customers to ship products on a timely basis and as a result our customers’ demand
26
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.
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, Freescale (formerly Motorola Semiconductor) and Atmel 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-
21
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. During fiscal 2004, we experienced supply constraints which resulted in our inability to meet certain customer demands. To ensure better delivery of parts and components from our suppliers, we have increased and extended our firm orders to our suppliers. Additionally, we continue to add capacity at existing suppliers, as well as evaluate potential new suppliers to augment our needs. We expect costs of certain integrated circuit products could increase as a result of our efforts to increase the availability of components in short supply. We work closely with customers to expedite their processes for evaluating products from our new foundry suppliers; however, in some instances, transition to new product supply may cause a temporary decline in shipments of specific products to individual customers. To the extent that our firm commitments from our manufacturers are insufficient to meet demand over a specific time period or in any specific quantity, our 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 theour suppliers manufacturing 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, political unrest, 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. If the affected supplier was a sole source supplier, we may not be able to resource the product without significant cost and delay. The loss of a significant third-party manufacturerthird party supplier or the inability of a third-party manufacturerthird party supplier to meet performance and quality specifications or delivery schedules could harm our ability to meet our delivery obligations to our customers.
In addition, onecustomers and negatively impact our revenues and business operations.
QCT Segment.A supplier’s ability to meet our product manufacturing demand is limited mainly by their overall capacity and current capacity availability. Although we have entered into long-term contracts with our suppliers, most of these contracts do not provide for long-term capacity commitments. To the extent that we do not have firm commitments from our suppliers over a specific time period, or morein any specific quantity, our suppliers may allocate, and in the past have allocated, capacity to the production of products for their other customers while reducing capacity to manufacture our products. Accordingly, capacity for our products may not be available when we need it or available at reasonable prices. We have experienced capacity limitations from our suppliers in the past and may experience it in the future. During fiscal 2004 and the first quarter of fiscal 2005, we experienced supply constraints which resulted in our inability to meet certain customer demand. While we were able to alleviate these supply constraints and improve the supply and delivery of integrated circuits by working with our existing suppliers to increase available manufacturing capacity, and by increasing and extending our firm orders to our suppliers, there can be no assurance that we will not experience supply constraints in the future, which could result in our failure to meet customer demand.
While our goal is to establish alternate suppliers for technologies that we consider critical, some of our manufacturers may obtain licenses from us to manufacture CDMA integrated circuits that competeproducts are only available from single sources, with our products. In this event, the manufacturer could elect to allocate scarce components andwhich we do not have long-term contracts. Our reliance on sole or limited-source vendors involves significant risks including possible shortages of manufacturing capacity, to their own productspoor product performance and reduce deliveries to us.reduced control over delivery schedules, manufacturing capability and yields, quality assurance, quantity and costs.
In the event of a loss of, or a decision to change a key third-party manufacturer,third party supplier, qualifying a new manufacturerfoundry supplier and commencing volume production or testing could involve delay and expense, resulting in lost revenues, reduced operating margins and possible loss of customers. We work closely with our customers to expedite their processes for evaluating new integrated circuits from our foundry suppliers; however, in some instances, transition of integrated circuit production to a new foundry supplier may cause a temporary decline in shipments of specific integrated circuits to individual customers.
QMT Division.QMT needs to form and maintain reliable business relationships with flat panel display manufacturers or other targeted partners to support the manufacture of iMoD displays in commercial volumes. All of our current relationships have been for the development and limited production of certain iMoD display panels and/or modules. Some or all of these relationships may not succeed or, even if they are successful, may not result in the display manufacturers’ entering into material supply relationships with us.
We are expanding our manufacturing model to purchase completed die from semiconductor manufacturing foundries and to contract directly with third party manufacturers for assembly and test services. This new production model may increase costs and lower our control over the manufacturing process.
To further enable flexibility of supply and access to potential new foundry suppliers, and in response to the complexity of our product roadmap, starting in fiscal 2005, we expanded our manufacturing model to include purchasing completed die directly from semiconductor manufacturing foundries. Under our IFM model, we directly manage and contract with third party manufacturers for back-end assembly and test services, and we ship the completed integrated circuits to our customers. We expect to increase the volume of our purchases of completed die directly from our foundry suppliers under our IFM model and to continue to purchase the majority of our requirements for integrated circuit products on a turnkey basis. We have a limited history of working with these third party suppliers under this expanded manufacturing model, and their services and volume of activity may not be
27
QWI Segment.Several of
completely reliable during the critical subassemblies and parts usedinitial stages. We cannot guarantee that this change will not cause disruptions in our QWBS division’s existingoperations that could harm our ability to meet our delivery obligations to our customers or increase our cost of sales.
Our suppliers may also be our competitors putting us at a disadvantage for pricing and proposedcapacity allocation.
One or more of our suppliers may obtain licenses from us to manufacture CDMA-based integrated circuits that compete with our products. In this event, the supplier could elect to allocate raw materials and manufacturing capacity to their own products are currently available only from third-party singleand reduce deliveries to us to our detriment. In addition, we may not receive reasonable pricing, manufacturing or limited sources. These include items such as electronicdelivery terms. We cannot guarantee that the actions of our suppliers will not cause disruptions in our operations that could harm our ability to meet our delivery obligations to our customers or increase our cost of sales.
We, and radio frequency components, and other sophisticated parts and subassemblies which are used in the OmniTRACS, TruckMAIL, OmniExpress, T2 Untethered TrailerTRACS, GlobalTRACS and EutelTRACS 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, Danaher Motors, Fujitsu Corporation, Tectrol, uBlox, Navman NZ, Eagle-Picher Industries, Sony/Ericsson and Sharp Corporation. 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.Welicensees, are subject to the risks of our and our licensees conducting business outside the United States.
A significant part of our strategy involves our continued pursuit of growth opportunities in a number of international markets. We market, sell and service our products internationally. We have established sales offices around the world. We expect to 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 expenditures in this effort will not exceed the amount of any resulting revenues. If we are not able to maintain or increase international market demand for our products and technologies, we may not be able to maintain a desired rate of growth in our business.
Our international customers sell their products to markets throughout the world, including China, India, Japan, South Korea, North America, South America and Europe. We distinguish revenues from external customers by geographic areas based on customer location. Consolidated revenues from international customers as a percentage of total revenues were
79%87%,
77%82% and
69%79% in fiscal
2004, 20032006, 2005 and
2002,2004, respectively. Because most of our foreign sales are denominated in U.S. dollars, our products and those of our customers and licensees that are sold in U.S. dollars become less price-competitive in international markets if the value of the U.S. dollar increases relative to foreign currencies.
22
In many international markets, barriers to entry are created by long-standing relationships between our potential customers and their local service providers and protective regulations, including local content and service requirements. In addition, our pursuit of international growth opportunities may require significant investments for an extended period before we realize returns, if any, on our investments. Our business could be adversely affected by a variety of uncontrollable and changing factors, including:
| • | | changes in legal or regulatory requirements, including regulations governing the materials used in our products; |
| |
| • | | legal or regulatory limitations on the spectrum available for the deployment of CDMA-based technologies; |
|
| • | | difficulty in protecting or enforcing our intellectual property rights and/or contracts in a particular foreign jurisdiction;jurisdiction, including challenges to our licensing practices under such jurisdictions’ competition laws; |
| |
| • | | our inability to succeed in significant foreign markets, such as China, India or India;Europe; |
| |
| • | | 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; |
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| |
| • | | 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 investmentinvestments, licensing practices and loans. |
In addition to general risks associated with our international sales, licensing activities and operations, we are also subject to risks specific to the individual countries in which we do business.
We cannot be certain that the laws and policies of any country with respect to intellectual property enforcement or licensing, issuance of wireless licenses or the adoption of standards will not be changed or enforced in a way detrimental to our licensing program or to the sale or use of our products or technology. Declines in currency values in selected 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
2004, 43% and 18%2006, 70% of our revenues were from customers and licensees based in South Korea,
Japan and
Japan, respectively,China, as compared to
45% and 15%, respectively,69% during fiscal
2003,2005 and
39% and 18%68% during fiscal
2002, respectively.2004. These customers sell their products to markets worldwide, including Japan, South Korea, China, India, 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,
Japan and
Japan,China, or the economies of the major markets they serve would materially harm our business.
The wireless markets in
Brazil, China and India,
among others, represent growth opportunities for us.
In January 2002,If wireless operators in Brazil, China
Unicom launched its nationwide CDMA network and had nearly 26 million CDMA subscribers at the end of September 2004. In May 2003, Reliance Infocomm launched its nationwide CDMA network inor India,
and had over nine million subscribers at the end of September��2004. If China Unicom or Reliance Infocomm or the governments of
Brazil, China or India, make technology deployment or other decisions that result in actions that are adverse to the expansion of CDMA technologies,
in China or India, our business could be harmed.
We are subject to risks in certain global markets in which wireless operators provide subsidies on phone sales to their customers. Increases in phone prices that negatively impact phone sales can result from changes in regulatory policies related to phone subsidies. Limitations or changes in policy on phone subsidies in South Korea, Japan, China and other countries may have additional negative impacts on our revenues.
We expect that royalty revenues from international licensees based upon sales of their products outside of the United States will continue to represent a significant portion of our total revenues in the future. Our royalty revenues from international licensees are denominated in U.S. dollars. To the extent that such licensees’ products are sold in foreign currencies, any royalties that we derive as a result of such sales are subject to fluctuations in currency exchange rates. In addition, if the effective price of products sold by our customers were to increase as a result of
23
fluctuations in the exchange rate of the relevant currencies, demand for the products could fall, which in turn would reduce our royalty revenues.
Currency fluctuations could negatively affect future product sales or royalty revenue, harm our ability to collect receivables, or increase the U.S. dollar cost of the activities of our foreign subsidiaries and international strategic investments. We are exposed to risk from fluctuations in currencies, which may change over time as our business practices evolve, that could impact our operating results, liquidity and financial condition. We operate and invest globally. Adverse movements in currency exchange rates may negatively affect our business due to a number of situations, including the following:
| • | | 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. |
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| • | | 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 United StatesU.S. dollar denominated. Any significant increase in the value of the dollar against our customers’ or licensees’ functional currencies could result in an increase in our customers’ or licensees’ cash flow requirements and could consequently affect our ability to sell products and collect receivables. |
| |
• | | Foreign CDMA wireless operators to whom we have provided financing may be unable to pay their debts to us, which are denominated in U.S. dollars, from revenues generated by their projects, which are denominated in local currencies. |
|
| • | | 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. |
|
• | | Foreign exchange hedging transactions 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. |
We may engage in acquisitions or strategic transactions that could result in significant chargeschanges or management disruption and fail to enhance stockholder value. From time to time, we engage in
acquisitions or strategic transactions with the goal of maximizing stockholder value.
In the past weWe have acquired businesses, entered into joint ventures and made strategic investments in or loans to CDMA wireless operators,
early stageearly-stage companies, or venture funds to support
our business, including the global adoption of
CDMACDMA-based technologies and
the use of the wireless Internet.related services. Most of our strategic investments entail a high degree of risk and will not become liquid until more than one year from the date of investment, if at all. We cannot
assure youprovide assurance that our
acquisitions or strategic investments (either those we currently
holdhave completed or
future investments)may undertake in the future) will generate financial returns or that they will result in increased adoption or continued use of
CDMAour technologies.
Achieving the anticipated benefits of acquisitions will depend in part upon our ability to integrate the acquired businesses in an efficient and effective manner. The integration of two companies that have previously operated independently may result in significant challenges, and we may be unable to accomplish the integration smoothly or successfully. The difficulties of integrating two companies include, among others:
| • | | retaining key employees; |
|
| • | | maintenance of important relationships of QUALCOMM and the acquired business; |
|
| • | | minimizing the diversion of management’s attention from ongoing business matters; |
|
| • | | coordinating geographically separate organizations; |
|
| • | | consolidating research and development operations; and |
|
| • | | consolidating corporate and administrative infrastructures. |
We cannot assure you that the integration of the acquired businesses with our business will result in the realization of the full benefits anticipated by us to result from the acquisition. We may not derive any commercial value from the acquired technology, products and intellectual property or from future technologies and products based on the acquired technology and/or intellectual property, and we may be subject to liabilities that are not covered by indemnification protection we may obtain.
We will continue to evaluate potential strategicfuture transactions and alternatives that we believe may enhance stockholder value. These potential future transactions may include a variety of different business arrangements, including acquisitions, spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and equity or debt investments. Although our goal is to maximize stockholder value, such transactions may impair stockholder value or otherwise adversely affect our business and the trading price of our stock. Any such transaction may require us to
30
incur non-recurring or other charges and/or to consolidate or record our equity in losses and may pose significant integration challenges and/or management and business disruptions, any of which could harm our operating results and business.
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Defects or errors in our products and services or in products made by our suppliers could harm our relations with our customers and expose us to liability. Similar problems related to the products of our customers or licensees could harm our business.
Our products are inherently complex and may contain defects and errors that are detected only when the products are in use. Further, because our products and services are responsible for critical functions in our customers’ products and/or networks, such defects or errors could have a serious impact on our customers, which could damage our reputation, harm our customer relationships and expose us to liability. Defects or impurities in our components, materials or software or those used by our customers or licensees, equipment failures or other difficulties could adversely affect our ability and that of our customers and licensees to ship products on a timely basis as well as customer or licensee 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. We and our customers or licensees may also experience component or software failures or defects
whichthat 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-partythird 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.
As our product complexities increase, we are required to migrate to integrated circuit technologies with smaller geometric feature sizes such as 90nm, 65nm, etc. The design process interface issues are more complex as we enter into these new domains of technology, which adds risks on yield and reliability. In addition, the timely readiness of our foundry suppliers to support such technology changes could impact our ability to meet customer demand, revenue, and cost expectations. The timing of acceptance of the smaller technology designs by our customers may subject us to the risk of excess inventories of earlier designs.
Global economic conditions that impact the wireless communications industry could negatively affect our revenues and operating results. Global economic
weaknessconditions can have wide-ranging effects on markets that we serve, particularly wireless communications equipment manufacturers and
wireless 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 any such recovery, or what effects negative events, such as war,
that may have
adverse effects on the economy or on phone inventories at
CDMACDMA-based equipment manufacturers and operators. The continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause
further disruptions to the global economy and to the wireless communications industry and create
further uncertainties.
Further, anRecent reports suggest that inflation could have adverse effects on the global economy and capital markets. Inflation could adversely affect our customers, including their ability to obtain financing, upgrade wireless networks and purchase our products and services, and our end consumers, by lowering their standards of living and diminishing their ability to purchase wireless devices based on our technology. Inflation could also increase our costs of raw materials and operating expenses and harm our business in other ways. Should such negative events occur, subsequent economic recovery
maymight not benefit us in the near term. If it does not, our ability to increase or maintain our revenues and operating results may be impaired. In addition, because we intend to continue to make significant investments in research and development and to maintain extensive ongoing customer service and support capability, any decline in the rate of growth of our revenues will have a significant adverse impact on our operating results.
Our industry is subject to competition that could result in decreased demand for our products and the products of our customers and licensees and/or declining average selling prices for our licensees’ products and our products, negatively affecting our revenues and operating results. We currently face significant competition in our markets and expect that competition will continue. Competition in the telecommunications market is affected by various factors, including:
| • | | comprehensiveness of products and technologies; |
| |
| • | | value added features which drive replacement rates; |
31
| |
| • | | 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;time-to-market; |
| |
| • | | system cost; and |
| |
| • | | customer support. |
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This competition may result in increased development costs and reduced average selling prices for our products and those of our customers and licensees. Reductions in the average selling price of our licensees’ products, unless offset by an increase in volumes, generally result in reduced royalties payable to us. While pricing pressures from competition may, 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 anticipate that additional competitors will enter our markets as a result of growth opportunities in wireless telecommunications, the trend toward global expansion by foreign and domestic competitors, technological and public policy changes and relatively low barriers to entry in selected segments of the industry.
Our competitors include companies
Companies that promote non-CDMA technologies
(e.g. GSM and WiMax) and companies that design competing
CDMACDMA-based integrated circuits
are included amongst our competitors. Examples of such
ascompetitors (some of whom are strategic partners of ours in other areas) include Agere, Broadcom, EoNex Technologies, Ericsson, Freescale, Fujitsu, Intel, NEC, Nokia,
Motorola, Philips, Ericsson,Samsung, Texas Instruments
Intel, NEC, Nortel,and VIA
Telecom, Samsung, Matsushita and Siemens. All of the foregoing are also our licensees, with the exception of Intel.Telecom. With respect to our
OmniTRACS, TruckMAIL, OmniExpress, T2 Untethered TrailerTRACS, GlobalTRACS, QConnect, OmniOne, EutelTRACS and LINQ products and services,QWBS business, our
existing competitors are aggressively pricing
their products and services and
could continue to do so in the future. In addition, these competitors are offering new value-added products and services
similar in many cases to those we have developed or are developing. Emergence of new competitors, particularly those offering low cost terrestrial-based products and current as well as future satellite-based products,which may impact margins,
and intensify competition in current and new
markets. Similarly, some original equipment manufacturers of trucksmarkets and
truck components are beginning to offer built-in, on-board communications and position location reporting products 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, may harm our ability to compete in certain markets.
Many of these current and potential competitors have advantages over us, including:
| • | | 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; |
|
| • | | economies of scale and cost structure advantages; and |
| |
| • | | greater sales and marketing, manufacturing, distribution, technical and other resources than we have. |
As a result of these and other factors, our competitors may be more successful than us. In addition, we anticipate additional competitors will enter the market for products based on 3G standards. These competitors may have more established relationships and distribution channels in markets not currently deploying CDMA-based wireless communications technology. These competitors also may have established or may establish financial or strategic relationships among themselves or with our existing or potential customers, resellers or other third parties. These relationships may affect our customers’ decisions to purchase products or license technology from us. Accordingly, new competitors or alliances among competitors could emerge and rapidly acquire significant market share to our detriment.
While we continue to believe our iMoD displays will offer compelling advantages to the display market, there can be no assurance that other technologies will not continue to improve in ways that reduce the advantages we anticipate from our iMoD displays. The flat panel display market is currently, and we believe will likely continue to be for some time, dominated by displays based on liquid crystal display (LCD) technology. Numerous companies are making substantial investments in, and conducting research to improve characteristics of LCDs. Additionally, several other flat panel display technologies have been, or are being, developed, including technologies for the production of
32
organic light-emitting diode (OLED), field emission, inorganic electroluminescence, gas plasma and vacuum fluorescent displays. In each case, advances in LCD or other flat panel display technologies could result in technologies that are more cost effective, have fewer display limitations, or can be brought to market faster than our iMoD technology. These advances in competing technologies might cause display manufacturers to avoid entering into commercial relationships with us, or not renew planned or existing relationships with us.
Our business and operating results will be harmed if we are unable to manage growth in our business.
Certain of our businesses have experienced periods of rapid growth and/or increased their international activities, placing significant demands on our managerial, operational and financial resources. In order to manage growth and geographic expansion, we must continue to improve and develop our management, operational and financial systems and controls, including quality control and delivery and service capabilities. We also need to continue to expand, train and manage our employee base. We must carefully manage research and development capabilities and production and inventory levels to meet product demand, new product introductions and product and technology transitions. We cannot assure you that we will be able to timely and effectively meet that demand and maintain the quality standards required by our existing and potential customers and licensees.
In addition, inaccuracies in our demand forecasts, or failure of the systems used to develop the forecasts, could quickly result in either insufficient or excessive inventories and disproportionate overhead expenses. If we ineffectively manage our growth or are unsuccessful in recruiting and retaining personnel, our business and operating results will be harmed.
Our operating results are subject to substantial quarterly and annual fluctuations and to market downturns. Our revenues, earnings and other operating results have fluctuated significantly in the past and may fluctuate significantly in the future. General economic or other conditions causing a downturn in the market for our products or technology,
and in turn affecting the timing of customer orders or causing cancellations or rescheduling of orders, could also adversely affect our operating results. Moreover, our customers may change delivery schedules,
or cancel or reduce orders without incurring significant penalties and generally are not subject to minimum purchase requirements.
Our future operating results will be affected by many factors, including, but not limited to: our ability to retain existing or secure anticipated customers or licensees, both domestically and internationally; our ability to develop, introduce and market new technology, products and services on a timely basis; management of inventory by us and our customers and their customers in response to shifts in market demand; changes in the mix of technology and products developed, licensed, produced and sold; seasonal customer demand;
the Flarion acquisition; and other factors described elsewhere in this
reportAnnual Report and in these risk factors. Our
corporate 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.
These factors affecting our future operating results are difficult to forecast and could harm our quarterly
and/or annual operating results. If our operating results fail to meet the financial guidance we provide to investors, or the
26
expectations of investment analysts or investors in any period, securities class action litigation could be brought against us and/or the market price of our common stock could decline.
Our stock price may be volatile. The stock market in general, and the stock prices of technology-based and wireless communications companies in particular, have experienced volatility that often has been unrelated to the operating performance of any specific public company. The market price of our common stock has fluctuated in the past and is likely to fluctuate in the future as well. Factors that may have a significant impact on the market price of our stock include:
| • | | announcements concerning us or our competitors, including the selection of wireless 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; |
33
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; | • | | international developments, such as technology mandates, political developments or changes in economic policies; |
|
| • | | lack of capital to invest in 3G networks; |
|
| • | | new commercial products; |
|
| • | | changes in recommendations of securities analysts; |
|
| • | | general stock market volatility; |
|
| • | | government regulations, including share-based compensation accounting and tax regulations; |
|
| • | | energy blackouts; |
|
| • | | acts of terrorism and war; |
|
| • | | inflation and deflation; |
|
| • | | widespread illness; |
|
| • | | proprietary rights or product or patent litigation against us or against our customers or licensees; |
|
| • | | strategic transactions, such as acquisitions and divestitures; or |
|
| • | | rumors or allegations regarding our financial disclosures or practices. |
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;
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 litigation;
strategic transactions, such as acquisitions and divestitures; or
rumors or allegations regarding our financial disclosures or practices.
Our future earnings and stock price may be subject to volatility, particularly on a quarterly basis. Shortfalls in our revenues or earnings in any given period relative to the levels expected by securities analysts could immediately, significantly and adversely affect the trading price of our common stock.
From time to time, we may repurchase our common stock at prices that may later be higher than the fair market value of the stock. This could result in a loss of value for stockholders if the shares were reissued at lower prices.
In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. Due to changes in the volatility of our stock price, we may be the target of securities litigation in the future. Securities litigation could result in substantial
uninsured costs and divert management’s attention and resources. In addition, stock
price 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 expensingassumptions used for share-based compensation and the related valuation models used to determine such expense.
Our industry is subject to rapid technological change, and we must keep pacemake substantial investments in new products and technologies to successfully compete.compete successfully. New technological innovations generally require a substantial investment before they are commercially viable. We intend to continue to make substantial investments in developing new products and technologies, and it is possible that our development efforts will not be successful and that our new technologies will not result in meaningful revenues. In particular, we intend to continue to invest significant resources in developing integrated circuit products to support high-speed wireless Internet access and multimode, multiband, multinetwork operation
including CDMA2000 1X/1xEV-DO/1xEV-DV, WCDMA, FLO, OFDM and multimedia applications, which
27
encompass development of graphical display, camera and video capabilities, as well as higher computational capability and lower power on-chip computers and signal processors. We will also continueWhile our significantresearch and development efforts with respectactivities have resulted in inventions relating to our BREW applications development platform, providingof GPRS, EDGE, OFDM, OFDMA and MIMO, and hundreds of issued or pending patent applications, developers with an open standard platform for wireless devices on which to develop their products. An open standard platform means that BREWthere can be made to interface with many software applications, including those developed by others.no assurance that our patent portfolio in these areas would be as valuable as our CDMA portfolio. Further, if OFDMA technology is not adopted and deployed commercially, our investment in Flarion and OFDMA technology may not provide us an adequate return on our investment. We also continue to invest in the development of our BREW applications development platform, our MediaFLO content distribution systemMDS and FLO technology for deliveryand our iMoD display technology. All of low cost multimedia content to multiple subscribers. Wethese new products and technologies face significant competition, and we cannot assure you that the revenues generated from these products or the timing of the deployment of these products or technologies, which may be dependent on the actions of others, will meet our expectations. We cannot be certain that we will make the additional advances in development that may be essential to successfully commercialize our iMoD technology.
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The market for our products and technology is characterized by many factors, including:
| • | | rapid technological advances and evolving industry standards; |
|
| • | | changes in customer requirements; |
|
| • | | frequent introductions of new products and enhancements; |
|
| • | | evolving methods for transmission of wireless voice and data communications; and |
|
| • | | intense competition from companies with greater resources, customer relationships and distribution capabilities. |
changes in customer requirements;
frequent introductions of new products and enhancements; and
evolving methods of building and operating telecommunications systems.
Our future success will depend on our ability to continue to develop and introduce new products, technology and enhancements on a timely basis. Our future success will also depend on our ability to keep pace with technological developments, protect our intellectual property, satisfy varying customer requirements, price our products competitively and achieve market acceptance. The introduction of products embodying new technologies and the emergence of new industry standards could render our existing products and technology, and products and technology currently under development, obsolete and unmarketable. If we fail to anticipate or respond adequately to technological developments or customer requirements, or experience any significant delays in development, introduction or shipment of our products and technology in commercial quantities, demand for our products and our customers’ and licensees’ products that use our technology could decrease, and our competitive position could be damaged.
Changes in financial accounting standards related to share-based payments are expected to continue to have a significant effect on our reported results.
On September 26, 2005, we adopted the revised statement of Financial Accounting Standards No. FAS 123 (FAS 123R), “Share-Based Payment,” which requires that we record compensation expense in the statement of operations for share-based payments, such as employee stock options, using the fair value method. The
enforcement and protectionadoption of
this new standard is expected to continue to have a significant effect on our
intellectual property rights may be expensivereported earnings, although it will not affect our cash flows, and could
divertadversely impact our
valuable resources. We rely primarilyability to provide accurate guidance on patent, copyright, trademarkour future reported financial results due to the variability of the factors used to estimate the values of share-based payments. If factors change and trade secret laws, as well as nondisclosure and confidentiality agreements and otherwe employ different assumptions or different valuation methods to protect our proprietary information, technologies and processes, including our patent portfolio. Policing unauthorized usein the application of our products and technologies is difficult and time consuming. We cannot be certainFAS 123R in future periods, the compensation expense that the stepswe record under FAS 123R may differ significantly from what we have taken will preventrecorded in the misappropriation or unauthorized use of our proprietary information and technologies, particularly in foreign countries where the laws may not protect our proprietary rights as fully or as readily as United States laws.
The vast majority of our patents and patent applications relate to our CDMA digital wireless communications technology and much of the remainder of our patents and patent applications relate to our other technologies and products. Litigation may be required to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of proprietary rights of others. As a result of any such litigation, we could lose our proprietary rights or incur substantial unexpected operating costs. Any action we take to enforce our intellectual property rights could be costly and could absorb significant management time and attention,current period, which in turn, could negatively impact our operating results. In addition, failure to protect our trademark rights could impair our brand identity.
Claims by other companies that we infringe their intellectual property or that patents on which we rely are invalid could adversely affect our business.
From time to time, companies may assert patent, copyright and other intellectual proprietary rights against our products or products using our technologies or technologies used in our industry. These claims may result in our involvement in litigation. We may not prevail in such litigation given the complex technical issues and inherent uncertainties in intellectual property litigation. If any of our products were found to infringe on protected technology, we could be required to redesign or license such technology and/or pay damages or other compensation to the infringed party. If we were unable to redesign or license protected technology used in our products, we could be prohibited from making and selling such products.
In addition, as the number of competitors in our market increases and the functionality of our products is enhanced and overlaps with the products of other companies, we may become subject to claims of infringement or
28
misappropriation of the intellectual property rights of others. Any claims, with or without merit, could be time consuming, result in costly litigation, divert the efforts of our technical and management personnel or cause product release or shipment delays, any of which could have a material adverse effect upon our operating results. In any potential dispute involving our patents or other intellectual property, our licensees could also become the targets of litigation. Any such litigation could severely disrupt the business of our licensees, which in turn could hurt our relations with our licensees and cause our revenues to decrease.
A number of other companies have claimed to own patents essential to various 3G CDMA standards. If we or other product manufacturers are required to obtain additional licenses and/or pay royalties to one or more patent holders, this could have a material adverse effect on the commercial implementation of our CDMA products and technologiesstock price and our profitability.
Other companies or entities also may commence actions seeking to establish the invalidity of our patents. In the event that one or more of our patents are challenged, a court may invalidate the patent or determine that the patent is not enforceable, which could harm our competitive position. If any of our key patents are invalidated, or if the scope of the claims in any of these patents is limited by court decision, we could be prevented from licensing the invalidated or limited portion of our technology. Even if such a patent challenge is not successful, it could be expensive and time consuming, divert management attention from our business and harm our reputation.
stock price volatility.
Potential tax liabilities could adversely affect our results. We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgment is required in determining our
worldwide provision for income taxes.
In the ordinary course of our 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. In such case, a material effect on our income tax provision and net income in the period or periods in which that determination is made could result.
The high amount of capital required to obtain radio frequency licenses and deploy and expand wireless networks could slow the growth of the wireless communications industry and adversely affect our business.
Our growth is dependent upon the increased use of wireless communications services that utilize our CDMA technology. In order to provide wireless communications services, wireless operators must obtain rights to use specific radio frequencies. The allocation of frequencies is regulated in the United States and other countries throughout the world and limited spectrum space is allocated to wireless communications services. Industry growth may be affected by the amount of capital required to: obtain licenses to use new frequencies; deploy wireless networks to offer voice and data services; and expand wireless networks to grow voice and data services. Over the last several years, the amount paid for spectrum licenses has increased significantly, particularly for frequencies used in connection with 3G technology. In addition, litigation and disputes involving prior and future spectrum auctions has delayed the expansion of wireless networks in the United States and elsewhere, and it is possible that this delay could continue for a significant amount of time. The significant cost of licenses and wireless networks, and delays associated with disputes over new licenses, may slow the growth of the industry if wireless operators are unable to obtain or service the additional capital necessary to implement 3G wireless networks. Our growth could be adversely affected if this occurs.
If we experience product liability claims or recalls, we may incur significant expenses and experience decreased demand for our products. Testing, manufacturing, marketing and use of our products and those of our licensees and customers entailsentail the risk of product liability. The use of wireless devices containing our products to access un-trusted content creates a risk of exposing the system software in those devices to viral or malicious attacks. We continue to expand our focus on this issue and take measures to safeguard the software from this threat. However, this issue carries the risk of general product liability along with the associated impacts on reputation and demand. Although we believe our product liability insurance will be adequate to protect against product liability claims, we cannot assure you that we will be able to continue to maintain such insurance at a reasonable cost or in sufficient amounts to protect us against losses due to product liability. Our inability to maintain insurance at an acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of our products and those of our licensees and customers and harm our future operating results. Furthermore, not all losses associated with alleged product failure are insurable. In addition, a product liability claim or recall, whether against us, our licensees, customers, or customers,us could harm our reputation and result in decreased demand for our products.
2935
The high amount of capital required to obtain radio frequency licenses, deploy and expand wireless networks and obtain new subscribers could slow the growth of the wireless communications industry and adversely affect our business.
Our growth is dependent upon the increased use of wireless communications services that utilize our technology. In order to provide wireless communications services, wireless operators must obtain rights to use specific radio frequencies. The allocation of frequencies is regulated in the United States and other countries throughout the world, and limited spectrum space is allocated to wireless communications services. Industry growth may be affected by the amount of capital required to: obtain licenses to use new frequencies; deploy wireless networks to offer voice and data services; expand wireless networks to grow voice and data services; and obtain new subscribers. The significant cost of licenses, wireless networks and subscriber additions may slow the growth of the industry if wireless operators are unable to obtain or service the additional capital necessary to implement or expand 3G wireless networks. Our growth could be adversely affected if this occurs.
If wireless phones pose safety risks, we may be subject to new regulations, and demand for our products and those of our licensees and customers may decrease. Concerns over the effects of radio frequency emissions, even if unfounded, may have the effect of discouraging the use of wireless phones, which would decrease demand for our products and those of our licensees and customers. In recent years, the FCC and foreign regulatory agencies have updated the guidelines and methods they use for evaluating radio frequency emissions from radio equipment, including wireless phones. In addition, interest groups have requested that the FCC investigate claims that wireless communications technologies pose health concerns and cause interference with airbags, hearing aids and medical devices. Concerns have also been expressed over the possibility of safety risks due to a lack of attention associated with the use of wireless phones while driving. Any legislation that may be adopted in response to these expressions of concern could reduce demand for our products and those of our licensees and customers in the United States as well as foreign countries.
Our QWBS business depends on the availability of satellite and other networks for our OmniTRACS, EutelTRACS, OmniExpress, LINQ, T2 Untethered TrailerTRACS, GlobalTRACS, QConnect and OmniOne systems and other communications products.networks. Our OmniTRACS
systemand OmniVision systems currently
operatesoperate in the United States market on leased Ku-band satellite transponders. Our primary data satellite transponder and position reporting satellite transponder lease runs through October
20062012 and includes transponder and satellite protection (back-up capacity in the event of a transponder or satellite failure)
. Based on system capacity analysis,, which we believe
that thewill provide sufficient transponder capacity for our United States OmniTRACS
and OmniVision operations
will not require additional transponder capacity through fiscal
2006. We believe that in the event additional transponder capacity would be required in fiscal 2006 or in future years, additional capacity will be available on acceptable terms. However, we cannot assure you that we will be able to acquire additional transponder capacity on acceptable terms in a timely manner.2012. A failure to maintain adequate satellite capacity
wouldcould harm our business, operating results, liquidity and financial position.
Our OmniExpress, LINQ, T2 Untethered TrailerTRACS, 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.
Our business and operations would suffer in the event of system failures. Despite system redundancy, the implementation of security measures and the existence of a Disaster Recovery Plan for our internal information technology networking systems, our systems are vulnerable to damages from computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure, accident or security breach that causes interruptions in our operations or to our customers’ or licensees’ operations could result in a material disruption to our business. To the extent that any disruption or security breach results in a loss or damage to our customers’ data or applications, or inappropriate disclosure of confidential information, we may incur liability as a result. In addition, we may incur additional costs to remedy the damages caused by these disruptions or security breaches.
Message transmissions for
domestic OmniTRACS, T2 Untethered TrailerTRACS, OmniExpress, GlobalTRACS, QConnect and OmniOneQWBS operations are formatted and processed at the Network Management Center in San Diego, California,
which we operate, with a fully redundant backup Network Management Center located in Las Vegas, Nevada.
Our Network Management Center operationsBoth centers, operated by us, are subject to system failures, which could interrupt the services and have
a materialan adverse effect on our operating results.
From time to time, we install new or upgraded business management systems. To the extent such systems fail or are not properly implemented, we may experience material disruptions to our business, delays in our external financial reporting or failures in our system of internal controls, that could have a material adverse effect on our results of operations.
36
Noncompliance with environmental or safety regulations could cause us to incur significant expenses and harm our business.
As part of the development of our iMoD display technology, we are operating a research and development fabrication facility. The development of iMoD display prototypes is a complex and precise process involving hazardous materials subject to environmental and safety regulations. Failure or inability to comply with existing or future environmental and safety regulations could result in significant remediation liabilities, the imposition of fines and/or the suspension or termination of development activities.
We cannot assure stockholders that our stock repurchase program will result in a positive return of capital to stockholders.
At September 24, 2006, we have remaining authority to repurchase up to $0.9 billion of our common stock, net of outstanding put options. There can be no assurance that stock repurchases will create value for stockholders because the market price of the stock may decline significantly below the levels at which we repurchased shares of stock. Our stock purchase program is intended to deliver stockholder value over the long-term, but short-term stock price fluctuations can reduce the program’s effectiveness.
As part of our stock repurchase program, we may sell put options or engage in structured derivative transactions to reduce the cost of repurchasing stock. In the event of a significant and unexpected drop in stock price, these arrangements may require us to repurchase stock at price levels that are significantly above the then-prevailing market price of our stock. Such overpayments may have an adverse effect on the effectiveness of our overall stock repurchase program and may lose value for our stockholders.
We cannot provide assurance that we will continue to declare dividends at all or in any particular amounts. We intend to continue to pay quarterly dividends subject to capital availability and periodic determinations that cash dividends are in the best interest of
theour stockholders.
Our dividend policyFuture dividends may be affected by, among other items, our views on potential future capital requirements, including those related to research and development, creation and expansion of sales distribution channels and investments and acquisitions, legal risks, stock repurchase
30
programs, changes in Federalfederal income tax law and challengeschanges to our business model. Our dividend policypayments may change from time to time, and we cannot provide assurance that we will continue to declare dividends at all or in any particular amounts. A changereduction in our dividend policypayments could have a negative effect on our stock price.
Government regulation may adversely affect our business. Our products and those of our customers and licensees are subject to various regulations, including FCC regulations in the United States and other international regulations, as well as the specifications of national, regional and international standards bodies. Changes in the regulation of our activities, including changes in the allocation of available spectrum by the United States government and other governments or exclusion or limitation of our technology or products by a government or standards body, could have a material adverse effect on our business, operating results, liquidity and financial position.
Our business and operating results will be harmed if we are unable to manage growth in our business.
Certain of our businesses have experienced periods of rapid growth that have placed, and may continue to place, significant demands on our managerial, operational and financial resources. In order to manage this growth, we must continue to improve and expand our management, operational and financial systems and controls, including quality control and delivery and service capabilities. We also need to continue to expand, train and manage our employee base. We must carefully manage research and development capabilities and production and inventory levels to meet product demand, new product introductions and product and technology transitions. We cannot assure you that we will be able to timely and effectively meet that demand and maintain the quality standards required by our existing and potential customers and licensees.
In addition, inaccuracies in our demand forecasts, or failure of the systems used to develop the forecasts, could quickly result in either insufficient or excessive inventories and disproportionate overhead expenses. If we ineffectively manage our growth or are unsuccessful in recruiting and retaining personnel, our business and operating results will be harmed.
We may not be able to attract and retain qualified employees. Our future success depends largely upon the continued service of our
Boardboard members, executive officers and other key management and technical personnel. Our success also depends on our ability to continue to attract, retain and motivate qualified personnel. In addition, implementing our product and business strategy requires specialized engineering and other talent, and our revenues are highly dependent on technological and product innovations.
The market for such specialized engineering and other talented employees in our industry is extremely competitive. In addition, existing immigration laws make it more difficult for us to recruit and retain highly skilled foreign national graduates of U.S. universities, making the pool of available talent even smaller. Key employees represent a significant asset, and the competition for these employees is intense in the wireless communications industry.
In the event of a labor shortage, or in the event of an unfavorable change in prevailing labor and/or immigration laws, we could experience difficulty attracting and retaining qualified employees. We continue to anticipate
significant increases in human resources, particularly in engineering,
resources, through fiscal
2005.2007. If we are unable to attract and retain the qualified employees that we need, our business may be harmed.
We may have particular difficulty attracting and retaining key personnel in periods of poor operating performance given the significant use of incentive compensation by our competitors. We do not have employment agreements with our key management personnel and do not maintain key person life insurance on any of our personnel. The loss
37
of one or more of our key employees or our inability to attract, retain and motivate qualified personnel could negatively impact our ability to design, develop and commercialize our products and technology.
Since our inception, we have used stock options and other long-term equity incentives as a fundamental component of our employee compensation packages. We believe that stock options and other long-term equity incentives directly motivate our employees to maximize long-term stockholder value and,
through the use ofusing long-term vesting, encourage employees to remain with us. To the extent that new regulations make it less attractive to grant options to employees, we may incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, each of which could materially and adversely affect our business.
Future changes in financial accounting standards or practices or existing taxation rules or practices may cause adverse unexpected revenue fluctuations and affect our reported results of operations. A change in accounting standards or practices or a change in existing taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New
and often complex accounting pronouncements,
and taxation rules, and varying interpretations of accounting pronouncements and taxation practice have occurred and may occur in the future. Changes to existing rules or the
31
questioning of current practices may adversely affect our reported financial results or the way we conduct our business.
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 and on our ability to provide accurate guidance on our future reported financial results as a result of the variability of the factors used to establish the value of stock options. Several agencies and entities are considering, and the Financial Accounting Standards Board (FASB) 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 reported earnings.
Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses. Changing laws, regulations and standards relating to corporate governance and public disclosure
including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ National Market rules, are creatingmay create uncertainty
for companies such as ours. These newregarding compliance matters. New or changed laws, regulations and standards are subject to varying interpretations in many
cases due to their lack of specificity, and ascases. As a result, their application in practice may evolve over
time as 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,Complying with evolving interpretations of new or changed legal requirements may cause us to incur higher costs as we revise current practices, policies and procedures, and may divert management time and attention from revenue generating to compliance activities. If our efforts to comply with
evolvingnew or changed laws, regulations and standards
have resulted in, and are likelydiffer from the activities intended by regulatory or governing bodies due to
continueambiguities related to
result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. In particular,practice, our
efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our external auditors’ audit of that assessment has required the commitment of significant financial and managerial resources.reputation might 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.
We expect these efforts to require the continued commitment of significant resources. 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.
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 be harmed.Our stockholder rights plan, certificate of incorporationcharter documents and Delaware law could adversely affect the performance of our stock.limit transactions in which stockholders might obtain a premium over current market prices. Our certificate of incorporation
provides for cumulative voting in the election of directors. In addition, our certificate of incorporation provides for a classified board of directors and includes a provision that requires the approval of holders of at least 66 2/3% of our voting stock as a condition to
a mergercertain mergers or
certain other business transactions with, or proposed by, a holder of 15% or more of our voting stock.
This approval is not required in cases where certain of our directors approve the transaction or where certain minimum price criteria and other procedural requirements are met. Our certificate of incorporation also requires the approval of holders of at least 66 2/3% of our voting stock to amend or change the provisions mentioned relating to the classified board, cumulative voting or the transaction approval. Under our
bylaws,charter documents, stockholders are not permitted to call special meetings of our
stockholders. Finally, our certificate of incorporation provides that any action requiredstockholders or
permitted to
be takenact by
our stockholders must be effected at a duly called annual or special meeting rather than by any consent in writing. The classified board, transaction approval, special meeting and otherwritten consent. These charter provisions may discourage certain types of transactions involving an actual or potential change in our control.control, including those offering stockholders a premium over current market prices. These provisions may also discourage certain types of transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices and may limit our stockholders’ ability to approve transactions that they may deem to be in their best interests.
Further, we have distributed a dividendour Board of one right for each outstanding shareDirectors has the authority under Delaware law to fix the rights and preferences of our commonand issue shares of preferred stock, pursuant to the terms ofand our preferred share purchase rights plan. These rightsagreement will cause substantial dilution to the ownership of a person or group that attempts to acquire us on terms not approved by our Board of Directors and may have the effect of deterring hostile takeover attempts. In addition,Directors. While our Board of Directors hasapproved our preferred share purchase rights agreement to provide the authorityboard with greater ability to fixmaximize shareholder value, these rights could deter takeover attempts that the rightsboard finds inadequate and make it more difficult to bring about a change in our ownership.
Item 1B. Unresolved Staff Comments
None
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preferences of and issue shares of preferred stock. This right may have the effect of delaying or preventing a change in our control without action by our stockholders.
At September 30, 2004,24, 2006, we occupied the indicated square footage in the owned or leased facilities described below (in(square footage in thousands):
| | | | | | | | | | | | | | | | | |
| Number | | Total | | | | Total | | |
| of | | Square | | | | Square | | |
Buildings
| | Location
| | Status
| | Footage
| | Primary Use
| | Location | | Status | | Footage | | Primary Use |
| 13 | | United States | | Owned | | | 1,860 | | | Executive and administrative offices, research and | |
| 18 | | | United States | | Owned | | 2,498 | | Executive and administrative offices, research and development, sales and marketing, service functions, manufacturing and network management hub. |
| | | | | | | | |
| 41 | | | United States | | Leased | | 1,578 | | Administrative offices, research and development, sales and marketing, service functions and network management hub. |
| | | | | | | | |
| 6 | | | India | | Leased | | 154 | | Administrative offices, research and development and sales and marketing. |
| | | | | | | | |
| 8 | | | Mexico | | Leased | | 134 | | Administrative offices, sales and marketing, service functions, manufacturing and network operating centers. |
| | | | | | | | |
| 3 | | | China | | Leased | | 88 | | Administrative offices, research and development, sales and marketing, service functions and network operating centers. |
| | | | | | | | |
| 6 | | | Korea | | Leased | | 71 | | Administrative offices, research and development and sales and marketing. |
| | | | | | | | |
| 4 | | | England | | Leased | | 62 | | Administrative offices, research and development and sales and marketing. |
| | | | | | | | |
| 1 | | | India | | Owned | | 56 | | Administrative offices, research and development and sales and marketing. |
| | | | | | | | |
| 1 | | | Israel | | Leased | | 49 | | Administrative offices, research and development and sales and marketing. |
| | | | | | | | |
| 4 | | | Germany | | Leased | | 31 | | Administrative offices, research and development and sales and marketing. |
| | | | | | | | |
| 23 | | | Other International | | Leased | | 102 | | Administrative offices, research and development and sales and marketing. |
| | | | | | | | | | development, sales and marketing, service functions, | | | | | | | | |
| | | | | | | | | | manufacturing and network management hub. | | | | | | |
| | | | | | | | | | | | | Total square footage | | | | 4,823 | | |
| 30 | | United States | | Leased | | | 839 | | | Administrative offices, research and development, | |
| | | | | | | | | | sales and marketing, service functions and network | | | | | | | | |
| | | | | | | | | | management hub. | |
| | | | | | | | | | | | |
| 6 | | Mexico | | Leased | | | 125 | | | Administrative offices, sales and marketing, service | |
| | | | | | | | | | functions, manufacturing and network operating | |
| | | | | | | | | | centers. | |
| | | | | | | | | | | | |
| 4 | | China | | Leased | | | 86 | | | Administrative offices, sales and marketing, service | |
| | | | | | | | | | functions and network operating centers. | |
| | | | | | | | | | | | |
| 4 | | India | | Leased | | | 60 | | | Administrative offices and sales and marketing. | |
| | | | | | | | | | | | |
| 2 | | Korea | | Leased | | | 51 | | | Administrative offices and research and development. | |
| | | | | | | | | | | | |
| 1 | | Israel | | Leased | | | 38 | | | Administrative offices, research and development, and sales and marketing. | |
| | | | | | | | | | | | |
| 2 | | England | | Leased | | | 33 | | | Administrative offices, research and development, | |
| | | | | | | | | | and sales and marketing. | |
| | | | | | | | | | | | |
| 4 | | Germany | | Leased | | | 22 | | | Administrative offices, research and development, | |
| | | | | | | | | | and sales and marketing. | |
| | | | | | | | | | | | |
| 19 | | Other International | | Leased | | | 75 | | | Administrative offices and sales and marketing. | |
| | | | | | |
| | | | |
| | Total square footage | | | | | 3,189 | | | | |
| | | | | | |
| | | | |
In addition to the facilities above, we
also own or lease
an additional approximate 627,000approximately 311,000 square feet of properties that are leased or subleased to third parties. Our
facility leases expire at varying dates through
20122016 not including renewals that would be at our option.
As of September 24, 2006, we also lease space on base station towers and buildings pursuant to 129 lease arrangements for our MediaFLO USA network. The majority of our cell site leases have an initial term of five to seven years with renewal options of up to five additional five-year periods.
We started construction of twoare constructing several facilities in San Diego, California in fiscal 2003, totaling approximately one million800,000 additional square feet to meet the requirements projected in our long-term business plan. We recently announced our plans to expand our current Network Operations Center in Las Vegas, which uses GPS and other technologies to track freight transportation and shipping nationwide, by approximately one hundred thousand square feet. We expect to place the new and expanded facilities in service starting in fiscal 2005 through fiscal 2007. We believe that our facilities will be suitable and adequate for the present purposes and that
39
the productive capacity in such facilities is substantially
being utilized. In the future, we may need to purchase, build or lease additional facilities to meet the requirements projected in our long-term business plan.
33
Item 3. Legal ProceedingsSchwartz, et al v. QUALCOMM: In fiscal 2001, 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 unspecified amounts 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. Oral argument on the appeal occurred on October 26, 2004, and no decision has been received.
Hanig et al. v. QUALCOMM, Boesel, et al v. QUALCOMM, Stone v. QUALCOMM, Ortiz et al v. QUALCOMM, Shannon et al. v. QUALCOMM, Deshon et al v. QUALCOMM, Earnhart et al. v. QUALCOMM: These cases, the first of which was filed in fiscal 2001, 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, and discovery is ongoing. On July 16, 2004, the Court granted our summary adjudication motion, dismissing plaintiffs’ breach of contract claims.
Durante, et al v. 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 federal age discrimination claims, against us. The complaint was filed in California Superior Court in and for the County of Los Angeles and purports to state 10 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 liquidated 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. On June 18, 2003, the Court ordered decertification of the class and dismissed the remaining claims of the opt-in plaintiffs without prejudice. Plaintiffs have filed an appeal. On June 20, 2003, 76 of the opt-in plaintiffs filed an action in Federal District Court for the Southern District of California, 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.
Zoltar Satellite Alarm Systems, Inc. v. QUALCOMM Inc.Incorporated and 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, Zoltar filed an amended complaint adding Sprint Corp. asFollowing a
named defendantverdict and
narrowing certain infringement claims against us and SnapTrack. Since then, Zoltar has dismissed Sprint Corp. as a defendant. Trial of this matter commenced on February 24, 2004. On March 25, 2004, the jury reached a unanimous verdictfinding of no infringement
in our favor and SnapTrack on six of
the sevenZoltar’s patent claims,
asserted by Zoltar. On July 26, 2004, the Court
found no infringement on the remaining patent claim asserted by Zoltar and entered a judgment in favor of us and SnapTrack on Zoltar’s complaint and awarded us and SnapTrack our costs of suit. Zoltar
filed a notice of appeal that was dismissed as premature. While we have already obtained a verdict of non-infringement of Zoltar’s patents, our additional affirmative claims seeking declarations of the non-enforceability and invalidity of those patents were set to be retried in the same Court on October 10, 2006. However, Zoltar has
noticed an appealinformed the Court that it will covenant not to sue us or SnapTrack on the patents. The final form of dismissal and
wejudgment in favor of us and SnapTrack
have filed a responsive notice.34
remains to be determined.
Texas Instruments IncorporatedWhale Telecom Ltd. v. QUALCOMM Incorporated:On November 15, 2004, Whale Telecom Ltd. sued us in the New York State Supreme Court, County of New York, seeking monetary damages based on the claim that we fraudulently induced it to enter into certain infrastructure services agreements in 1999 and later interfered with their performance of those agreements. On March 15, 2006, the Court dismissed all claims against us. The plaintiff has filed a notice of appeal.
Broadcom Corporation v. QUALCOMM Incorporated:On May 18, 2005, Broadcom filed two actions in the United States District Court for the Central District of California against us alleging infringement of ten patents and seeking monetary damages and injunctive relief based thereon. On the same date, Broadcom also filed a complaint in the United States International Trade Commission (ITC) alleging infringement of five of the same patents at issue in the Central District Court cases seeking a determination and relief under Section 337 of the Tariff Act of 1930. On July
25, 2003, we1, 2005, Broadcom filed an action in
Delaware Superiorthe United States District Court
against Texas Instruments Incorporated for
breachthe District of
a patent portfolio license agreement between the parties, seeking damages and other relief. On September 23, 2003, Texas Instruments filed an action in Delaware Chancery CourtNew Jersey against us alleging
breachviolations of 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 injunctive relief based thereon. On September 1, 2006, the New Jersey District Court dismissed the complaint; Broadcom has filed notice of appeal. Discovery is underway in one of the
same agreement, seeking damages and other relief. We have since dismissed our case in SuperiorCentral District Court
and refiled our claims as partpatent actions, with trial scheduled for May 2007. On December 12, 2005, the Central District Court ordered two of the
actionBroadcom patent claims filed in the
Chancery Court. In a written order dated July 14, 2004,other Central District patent action (which is stayed pending completion of the
Court granted our summary judgment motion, dismissing allITC action) to be transferred to the Southern District of
Texas Instruments’ claims against us. In addition,California to be considered in the
Court ruled that Texas Instruments had breached the patent portfolio license agreement, though the breach was non-material, and therefore Texas Instruments’ license under the agreement would not be forfeited. The Court held a one-day bench trialcase filed by us on August
16, 2004, on our claim that Texas Instruments breached22, 2005. That case now contains additional related claims filed by us and Broadcom. On February 14, 2006, the
agreement between the parties by pursuing the claims previously dismissed by the Court. Although the Court had already found that the claims brought by Texas Instruments were barred by the agreement, the Court declinedITC hearing commenced as to
find that bringing the claims constituted a breachthree of the
agreementpatents alleged. On October 10, 2006, the Administrative Law Judge (ALJ) issued an interim decision in which he recommended against downstream remedies, and found no infringement by
Texas Instruments and, therefore, found against us on
two of the
solethree remaining
claim inpatents and most of the
case. On October 22, 2004, we filed a noticeasserted claims of
appeal.the third patent. The ALJ did find infringement on some claims of one patent. We will petition the Commission for review of at least the limited infringement findings and patent validity findings.
QUALCOMM Incorporated v. Conexant Systems, Inc. and Skyworks Solutions Inc.Broadcom Corporation:: On October 8, 2002,July 11, 2005, we filed an action in the United States District Court for the Southern District of California against Conexant and SkyworksBroadcom alleging infringement of fiveseven patents, and misappropriationeach of trade secretswhich is essential to the practice of either the GSM or 802.11 standards, and seeking monetary damages and injunctive relief.relief based thereon. On December 4, 2003, SkyworksSeptember 23, 2005, Broadcom answered and counterclaimed, against us, alleging infringement of foursix patents. On October 14, 2005, we filed another action in the United States District Court for the Southern District of California against Broadcom alleging infringement of two patents, each of which relates to video encoding and misappropriation of trade secretsdecoding for high-end multimedia processing, and seeking monetary damages and injunctive relief.relief based thereon. That action is scheduled for trial in January 2007. On April 30, 2004,March 24, 2006, we filed another action in the United States District Court for the Southern District of California, alleging that Broadcom, during the period in which it has been attempting to bring to market a WCDMA baseband solution, misappropriated our confidential and trade secret information relating to our WCDMA baseband chips, and relating to our multimedia capabilities for such chips. The complaint also asserts another patent claim against Broadcom’s wireless local area network products, including such capability bundled with Broadcom’s WCDMA product offerings. Broadcom counterclaimed with the assertion of two patents. On October 27, 2006, the Court granted our motion to dismiss defendants’ inequitable conduct affirmative defenses and counterclaims. We filed an amended complaint on June 16, 2004, bringingissued a preliminary injunction against Broadcom, prohibiting the total numberfuture use or solicitation of certain of our patents at issue to eightconfidential business and maintaining the trade secret misappropriation claim. On July 16technical documents and 20, 2004, Conexant and Skyworks answered our amended complaint, reasserted claims based on alleged trade secret misappropriation and patent infringement and Skyworks also asserted counterclaims alleging violations of antitrust laws and unfair business practices. Conexant and Skyworks seek damages and other forms of relief. On September 21, 2004, we moved to stay the Skyworks antitrust and related counterclaims. That motion is pending. We believe the counterclaims are without merit. Claim construction hearings relating to the patents in the case are under way. Discovery in the matter is continuing.information.
40
QUALCOMM Incorporated and SnapTrack, Inc. v. Maxim Integrated Products,Nokia Corporation and Nokia Inc.:On December 2, 2002,November 4, 2005, we, along with our wholly-owned subsidiary, SnapTrack, filed an action in the United States District Court for the Southern District of California against Maxim Integrated Products, Inc. (Maxim)Nokia alleging infringement of threeeleven of our patents and one SnapTrack patent relating to GSM/GPRS/EDGE and position location and seeking monetary damages and injunctive relief. The case is currently stayed pending a decision by the Federal Circuit regarding Nokia’s arbitration demand. On May 24, 2006, we filed an action in the Chancery Division of the High Court of Justice for England and Wales against Nokia alleging infringement of two of our patents relating to GSM/GPRS/EDGE technology seeking monetary damages and injunctive relief. On June 9, 2006, we filed a complaint with the ITC against Nokia alleging importation of products that infringe six of our patents relating to power control, video encoding and decoding, and power conservation mode technologies and seeking an exclusionary order and a cease and desist order. On July 7, 2006, the ITC commenced an investigation. On August 9, 2006, we filed an action in the District Court of Dusseldorf, Federal Republic of Germany, against Nokia alleging infringement of two of our patents relating to GSM/GPRS/EDGE technology seeking monetary damages and injunctive relief. On October 9, 2006, we filed an action in the High Court of Paris, France against Nokia alleging infringement of two patents relating to GSM/GPRS/EDGE technology seeking monetary damages and injunctive relief. On October 9, 2006, we filed an action in the Milan Court, Italy against Nokia alleging infringement of two patents relating to GSM/GPRS/EDGE technology seeking monetary damages and injunctive relief.
Nokia Corporation and Nokia Inc. v. QUALCOMM Incorporated:On August 9, 2006, Nokia Corporation and Nokia, Inc. filed a complaint in Delaware Chancery Court seeking declaratory and injunctive relief relating to alleged commitments made by us to wireless industry standards setting organizations. We have
since amendedmoved to dismiss the
complaint, bringing the total number of patents at issue to four. On May 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 ours. On June 21, 2004, the Court granted our motion to stay all of Maxim’s antitrust counterclaims and its patent misuse defense. On July 9, 2004, Maxim filed an Answer and Counterclaims to our Third Amended Complaint. Maxim’s amended counterclaims allege violation of antitrust laws and unfair business practices and seek damages and other relief. We believe the amended counterclaims are without merit and, if and when the Court’s stay is lifted, we will seek dismissal of those counterclaims as a matter of law. Claim construction hearings relating to the patents in the case are under way. Discovery in the matter is continuing.complaint.
Other:We have been named, along with many other manufacturers of wireless phones, wireless operators and industry-related organizations, as a defendant in
several purported class action lawsuits,
(In re Wireless Telephone Frequency Emissions Products Liability Litigation, United States District Court for the District of Maryland), and
in several individually filed actions
pending in Pennsylvania, Washington D.C., and Louisiana, seeking
personal injury, economic and/or punitivemonetary damages arising out of
ourits sale of cellular phones.
On March 5, 2003, the Court granted the defendants motions to dismiss five of the consolidated cases (Pinney, Gimpleson, Gillian, Farina and Naquin) on the grounds that the claims were preempted by federal law. On April 2, 2003, the plaintiffs filed a notice of appeal of this order and the Court’s order denying remand. All remaining cases filed against us allege personal injury as a result of their use of a wireless telephone. Those cases have been remanded to the Washington, D.C. Superior Court. The courts that have reviewed similar claims against other companies to date have held that there was insufficient scientific basis for the plaintiffs’ claims in those cases.
On October 28, 2005, it was reported that six companies (Broadcom, Nokia, Texas Instruments, NEC, Panasonic and Ericsson) filed complaints with the European Commission, alleging that we violated European Union competition law in its WCDMA licensing practices. We have received the complaints and have submitted a reply.
It has been reported that two U.S. companies (Texas Instruments and Broadcom) and two South Korean companies (Nextreaming Corp. and THINmultimedia Inc.) have filed complaints with the Korean Fair Trade Commission alleging that our business practices are, in some way, a violation of South Korean anti-trust regulations. To date, we have not received the complaints.
Although there can be no assurance that unfavorable outcomes in any of the foregoing matters would not have a material adverse effect on our operating results, liquidity or financial position, we believe the claims
made by other parties are without merit and will vigorously defend the actions. 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
35
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 its operating results, liquidity or financial position. In addition, some matters that have previously been disclosed may no longer be described in this Annual Report 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.
Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the quarter ended September 30, 2004.24, 2006.
3641
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities On July 13, 2004, we announced a two-for-one stock split in the form of a stock dividend. Stock was distributed on August 13, 2004 to stockholders of record as of July 23, 2004. All references in this
Annual Report to number of shares and per share amounts reflect the stock split.
Our common stock is traded on the NASDAQ NationalStock Market LLC under the symbol “QCOM.” The following table sets forth the range of high and low sales prices on the NationalNASDAQ Stock Market of the common stock for the periods indicated, as reported by NASDAQ. Such quotations represent inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions.
| | | | | | | | | | | | | | | | | |
| | | High ($)
| | Low ($)
| | High ($) | | Low ($) |
Fiscal 2003 | | |
Fiscal 2005 | | |
| First quarter | | 21.45 | | 13.67 | | | 44.99 | | 37.71 | |
| Second quarter | | 19.98 | | 16.32 | | | 44.91 | | 33.99 | |
| Third quarter | | 19.09 | | 14.79 | | | 38.52 | | 32.08 | |
| Fourth quarter | | 23.03 | | 17.17 | | | 44.92 | | 32.98 | |
Fiscal 2004 | | |
| | | |
Fiscal 2006 | | |
| First quarter | | 26.82 | | 20.50 | | | 46.60 | | 39.02 | |
| Second quarter | | 32.64 | | 26.40 | | | 51.18 | | 42.91 | |
| Third quarter | | 35.03 | | 30.90 | | | 53.01 | | 38.77 | |
| Fourth quarter | | 41.17 | | 33.66 | | | 40.92 | | 32.76 | |
As of
November 1, 2004,October 31, 2006, there were
10,51910,549 holders of record of our common stock. On
November 1, 2004,October 31, 2006, the last sale price reported on the NASDAQ
NationalStock Market
LLC for our common stock was
$40.56$36.39 per share.
On February 11, 2003, we announced our first common stock dividend of $0.025 per share. On July 16, 2003,March 8, 2005, we announced an increase in our quarterly dividend from $0.025$0.07 to $0.035$0.09 per share on our common stock. On March 2, 2004,7, 2006, we announced an increase in our quarterly dividend from $0.035$0.09 to $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$0.12 per share on our common stock. Cash dividends announced in fiscal 20032005 and 20042006 were as follows (in millions, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Per Share
| | Total
| | Cumulative
| | Cumulative | |
Fiscal 2003 | | |
| | | | Per Share | | Total | | by Fiscal Year | |
Fiscal 2005 | | |
| First quarter | | $ | — | | $ | — | | $ | — | | | $ | 0.07 | | $ | 115 | | $ | 115 | |
| Second quarter | | 0.025 | | 39 | | 39 | | | 0.07 | | 115 | | 230 | |
| Third quarter | | 0.025 | | 40 | | 79 | | | 0.09 | | 147 | | 377 | |
| Fourth quarter | | 0.035 | | 56 | | $ | 135 | | | 0.09 | | 147 | | | 524 | |
| | |
| |
| | | | | | |
| Total | | $ | 0.085 | | $ | 135 | | | $ | 0.32 | | $ | 524 | |
| | |
| |
| | | | | | |
Fiscal 2004 | | |
| | | |
Fiscal 2006 | | |
| First quarter | | $ | 0.070 | | $ | 112 | | $ | 112 | | | $ | 0.09 | | $ | 148 | | $ | 148 | |
| Second quarter | | 0.050 | | 81 | | 193 | | | 0.09 | | 150 | | 298 | |
| Third quarter | | — | | — | | 193 | | | 0.12 | | 202 | | 500 | |
| Fourth quarter | | 0.070 | | 114 | | $ | 307 | | | 0.12 | | 198 | | | 698 | |
| | |
| |
| | | | | | |
| Total | | $ | 0.190 | | $ | 307 | | | $ | 0.42 | | $ | 698 | |
| | |
| |
| | | | | | |
37
On October 5, 2006, we announced a cash dividend of $0.12 per share on our common stock, payable on January 4, 2007 to stockholders of record as of December 7, 2006. We intend to continue to pay quarterly dividends subject to continued capital availability and a determinationperiodic determinations that cash dividends continue to beare in the best interests of theour stockholders. Our dividend policyFuture dividends may be affected by, among other items, our views on potential future capital requirements,
42
including those relating to research and development, creation and expansion of sales distribution channels and investments and acquisitions, legal risks, stock repurchase programs,
changes in federal income tax law and
challengeschanges to our business model.
Our stock option plans are part of a broad-based, long-term retention program that is intended to attract and retain talented employees and directors and align stockholder and employee interests.
Pursuant to our
2001 Stock Option2006 Long-Term Incentive Plan
(2001(2006 Plan), we
may grant options to selected employees, directors and consultants to purchase shares of our common stock at a price not less than the fair market value of the stock at the date of grant. The
20012006 Plan provides for the grant of both incentive
stock options and non-qualified stock
options.options as well as stock appreciation rights, restricted stock, restricted stock units, performance units and shares and other stock-based awards. Generally, options outstanding vest over
periods not exceeding sixfive years and are
exercisable for up to 10 years from 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 10 years from the grant date. The Board of Directors may terminate the
2001 Plan and/or the 2001 Directors’2006 Plan at any
time though it must, nevertheless, honor any stock options previously granted pursuant to the plans.time.
Additional information regarding our stock option plans and plan activity for fiscal
2004, 20032006, 2005 and
20022004 is provided in
the notes to our consolidated financial
statements. Seestatements in this Annual Report in “Notes to Consolidated Financial Statements, Note 8
—– Employee Benefit
Plans.”EquityPlans” and in our 2007 Proxy Statement under the heading “Equity Compensation Plans Approved by Stockholders
Information aboutPlan Information.” All of our equity compensation plans at September 30, 2004 that were either approved or nothave been approved by our stockholders was as follows (in thousands, except per share data):stockholders.
| | | | | | | | | | | | | |
| | | Number of | | Weighted | | Number of |
| | | Shares to be | | Average | | Shares |
| | | Issued Upon | | Exercise | | Remaining |
| | | Exercise of | | Price of | | Available |
| | | Outstanding | | Outstanding | | for Future |
Plan Category
| | Options
| | Options
| | Issuance
|
Equity compensation plans approved by stockholders(a) | | | 203,026 | | | $ | 20.30 | | | | 78,370 | |
Equity compensation plans not approved by stockholders(b) | | | 558 | | | $ | 0.99 | | | | 107 | |
| | | |
| | | | | | | |
| |
| Total | | | 203,584 | | | $ | 20.25 | | | | 78,477 | |
| | | |
| | | | | | | |
| |
| (a) | | Consists of six plans: our 1991 Stock Option Plan, 2001 Stock Option Plan, 1998 Non-Employee Directors’ Stock Option Plan, 2001 Non-Employee Directors’ Stock Option Plan, 2001 Employee Stock Purchase Plan and the Executive Retirement Matching Contribution Plan. |
| (b) | | Consists of two plans: our 1996 Non-Qualified Employee Stock Purchase Plan and the SnapTrack, Inc. 1995 Stock Option Plan. |
Issuer Purchases of Equity Securities
On February 10, 2003, we authorized the expenditure
Issuer purchases of up to $1 billion to repurchase shares of our common stock over a two-year period. During fiscal 2003, we bought 9,830,000 shares at a net aggregate cost of $158 million. While we did not repurchase any of our common stock during fiscal 2004, we continue to evaluate repurchases under this program. At September 30, 2004, $834 million remains authorized for repurchases under the program, which expires on February 9, 2005.equity securities (in millions, except share and per share data):
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Total Number of | | |
| | | | | | | | | | | Shares Purchased as | | Approximate Dollar Value |
| | | | | | | | | | | Part of Publicly | | of Shares that May Yet Be |
| | | Total Number of | | Average Price Paid | | Announced Plans or | | Purchased Under the |
| | | Shares Purchased | | Per Share(1) | | Programs(2) | | Plans or Programs(3) |
| June 26, 2006 to July 23, 2006 | | | 5,641,028 | | | $ | 42.11 | | | | 5,641,028 | | | $ | 1,098 | |
| | | | | | | | | | | | | | | | | |
| July 24, 2006 to August 20, 2006 | | | 1,000,000 | | | | 48.50 | | | | 1,000,000 | | | | 1,050 | |
| | | | | | | | | | | | | | | | | |
| August 21, 2006 to September 24, 2006 | | | 1,000,000 | | | | 49.00 | | | | 1,000,000 | | | | 1,001 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total | | | 7,641,028 | | | $ | 43.84 | | | | 7,641,028 | | | $ | 1,001 | |
| | | | | | | | | | | | | | | | | |
| | |
| (1) | | Average price paid per share excludes cash paid for commissions. We repurchased 2,000,000 shares in the fourth quarter of 2006 upon the exercise of two outstanding put options. Premiums totaling $5 million were excluded from the average price paid per share. If the premiums had been included, the average price paid per share for the purchases of shares made during the fourth quarter would have been $43.23. |
|
| (2) | | On November 7, 2005, we announced that we authorized the expenditure of up to $2.5 billion to repurchase shares of our common stock with no expiration date. The $2.5 billion stock repurchase program replaced a $2.0 billion stock repurchase program, of which approximately $1.0 billion remained authorized for repurchases. |
|
| (3) | | The approximate dollar value of shares that may yet be purchased has not been reduced by the net cost of $89 million (net of the premiums received) of 2,000,000 shares that may be repurchased related to put options we sold during fiscal 2006. |
3843
Item 6. Selected Consolidated Financial Data The following balance sheet data and statementsstatement of operations data for the five fiscal years ended September 30,24, 2006, September 25, 2005, September 26, 2004, September 28, 2003 and September 29, 2002 were derived from our audited consolidated financial statements. Consolidated balance sheets at September 30, 200424, 2006 and 2003September 25, 2005 and the related consolidated statements of operations and of cash flows for each of the three years in the period ended September 30,fiscal 2006, 2005 and 2004 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)
|
| | | 2004 (2)(6)
| | 2003 (2)
| | 2002 (2)
| | 2001 (3)
| | 2000 (3)
|
| | | (in millions except per share data) |
Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | |
| Revenues | | $ | 4,880 | | | $ | 3,847 | | | $ | 2,915 | | | $ | 2,680 | | | $ | 3,197 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| |
| Operating income | | | 2,129 | | | | 1,573 | | | | 840 | | | | 39 | | | | 723 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| |
| Income (loss) from continuing operations before accounting change | | | 1,725 | | | | 1,029 | | | | 525 | | | | (560 | ) | | | 622 | |
| Discontinued operations, net of tax | | | (5 | ) | | | (202 | ) | | | (165 | ) | | | — | | | | — | |
| Accounting changes, net of tax | | | — | | | | — | | | | — | | | | (18 | ) | | | — | |
| | | |
| | | |
| | | |
| | | |
| | | |
| |
| Net income (loss) | | $ | 1,720 | | | $ | 827 | | | $ | 360 | | | $ | (578 | ) | | $ | 622 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| |
| Basic earnings (loss) per common share (4): | | | | | | | | | | | | | | | | | | | | |
| Income (loss) from continuing operations before accounting change | | $ | 1.07 | | | $ | 0.65 | | | $ | 0.34 | | | $ | (0.37 | ) | | $ | 0.43 | |
| Discontinued operations, net of tax | | | (0.01 | ) | | | (0.13 | ) | | | (0.11 | ) | | | — | | | | — | |
| Accounting change, net of tax | | | — | | | | — | | | | — | | | | (0.01 | ) | | | — | |
| | | |
| | | |
| | | |
| | | |
| | | |
| |
| Net income (loss) | | $ | 1.06 | | | $ | 0.52 | | | $ | 0.23 | | | $ | (0.38 | ) | | $ | 0.43 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| |
| Diluted earnings (loss) per common share (4): | | | | | | | | | | | | | | | | | | | | |
| Income (loss) from continuing operations before accounting change | | $ | 1.03 | | | $ | 0.63 | | | $ | 0.32 | | | $ | (0.37 | ) | | $ | 0.39 | |
| Discontinued operations, net of tax | | | — | | | | (0.12 | ) | | | (0.10 | ) | | | — | | | | — | |
| Accounting change, net of tax | | | — | | | | — | | | | — | | | | (0.01 | ) | | | — | |
| | | |
| | | |
| | | |
| | | |
| | | |
| |
| Net income (loss) | | $ | 1.03 | | | $ | 0.51 | | | $ | 0.22 | | | $ | (0.38 | ) | | $ | 0.39 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| |
| Dividends per share announced | | $ | 0.190 | | | $ | 0.085 | | | $ | — | | | $ | — | | | $ | — | |
| | | |
| | | |
| | | |
| | | |
| | | |
| |
| Shares used in earnings per share calculations (4): | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 1,616 | | | | 1,579 | | | | 1,542 | | | | 1,512 | | | | 1,434 | |
| Diluted | | | 1,675 | | | | 1,636 | | | | 1,619 | | | | 1,512 | | | | 1,600 | |
| Pro forma effect of change in accounting principle (5): | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | | | | | | | | $ | 595 | |
| Net earnings per common share — basic | | | | | | | | | | | | | | | | | | $ | 0.41 | |
| Net earnings per common share — diluted | | | | | | | | | | | | | | | | | | $ | 0.38 | |
Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | |
| Cash, cash equivalents and marketable securities | | $ | 7,635 | | | $ | 5,372 | | | $ | 3,200 | | | $ | 2,581 | | | $ | 2,521 | |
| Total assets | | | 10,820 | | | | 8,822 | | | | 6,506 | | | | 5,670 | | | | 6,015 | |
| Long-term debt | | | — | | | | 123 | | | | 94 | | | | — | | | | — | |
| Total stockholders’ equity | | | 9,664 | | | | 7,598 | | | | 5,392 | | | | 4,812 | | | | 5,468 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended(1) | |
| | | September 24, | | | September 25, | | | September 26, | | | September 28, | | | September 29, | |
| | | 2006 | | | 2005 | | | 2004(2)(4) | | | 2003(2) | | | 2002(2) | |
| | | (In millions, except per share data) | |
Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Revenues | | $ | 7,526 | | | $ | 5,673 | | | $ | 4,880 | | | $ | 3,847 | | | $ | 2,915 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating income | | | 2,690 | | | | 2,386 | | | | 2,129 | | | | 1,573 | | | | 840 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Income from continuing operations | | | 2,470 | | | | 2,143 | | | | 1,725 | | | | 1,029 | | | | 525 | |
| Discontinued operations, net of tax | | | — | | | | — | | | | (5 | ) | | | (202 | ) | | | (165 | ) |
| | | | | | | | | | | | | | | | |
| Net income | | $ | 2,470 | | | $ | 2,143 | | | $ | 1,720 | | | $ | 827 | | | $ | 360 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Basic earnings per common share: (3) | | | | | | | | | | | | | | | | | | | | |
| Income from continuing operations | | $ | 1.49 | | | $ | 1.31 | | | $ | 1.07 | | | $ | 0.65 | | | $ | 0.34 | |
| Discontinued operations, net of tax | | | — | | | | — | | | | (0.01 | ) | | | (0.13 | ) | | | (0.11 | ) |
| | | | | | | | | | | | | | | | |
| Net income | | $ | 1.49 | | | $ | 1.31 | | | $ | 1.06 | | | $ | 0.52 | | | $ | 0.23 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Diluted earnings per common share:(3) | | | | | | | | | | | | | | | | | | | | |
| Income from continuing operations | | $ | 1.44 | | | $ | 1.26 | | | $ | 1.03 | | | $ | 0.63 | | | $ | 0.32 | |
| Discontinued operations, net of tax | | | — | | | | — | | | | — | | | | (0.12 | ) | | | (0.10 | ) |
| | | | | | | | | | | | | | | | |
| Net income | | $ | 1.44 | | | $ | 1.26 | | | $ | 1.03 | | | $ | 0.51 | | | $ | 0.22 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Dividends per share announced | | $ | 0.420 | | | $ | 0.320 | | | $ | 0.190 | | | $ | 0.085 | | | $ | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Shares used in earnings per share calculations: (3) | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 1,659 | | | | 1,638 | | | | 1,616 | | | | 1,579 | | | | 1,542 | |
| Diluted | | | 1,711 | | | | 1,694 | | | | 1,675 | | | | 1,636 | | | | 1,619 | |
| | | | | | | | | | | | | | | | | | | | | |
Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Cash, cash equivalents and marketable securities | | $ | 9,949 | | | $ | 8,681 | | | $ | 7,635 | | | $ | 5,372 | | | $ | 3,200 | |
| Total assets | | | 15,208 | | | | 12,479 | | | | 10,820 | | | | 8,822 | | | | 6,506 | |
Long-term debt (5) | | | 58 | | | | 3 | | | | — | | | | 123 | | | | 94 | |
| Total stockholders’ equity | | | 13,406 | | | | 11,119 | | | | 9,664 | | | | 7,598 | | | | 5,392 | |
| | |
| (1) | | Our fiscal year ends on the last Sunday in September. As a result,The five fiscal 2001 includes 53years ended September 24, 2006, September 25, 2005, September 26, 2004, September 28, 2003 and September 29, 2002 each included 52 weeks. |
| |
| (2) | | During fiscal 2004, we sold our consolidated subsidiaries, the Vésper Operating Companies and TowerCo,the Vésper Towers 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 and 2000, we accounted for our investment in the Vésper Operating Companies under the equity method of accounting and recorded $150 million and $48 million, respectively, in equity in losses of those entities in income (loss) from continuing operations before accounting change. |
|
(4) | | We effected a four-for-one stock split in December 1999 and a two-for-one stock split in August 2004. All references to number of shares and per share amounts reflect thesethis stock splits.split. |
| |
(5) | | The pro forma effect of change in accounting principle reflects the impact of SAB 101 on previously reported results assuming it had been in effect in those periods. |
|
(6)(4) | | 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 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. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report for more information. |
|
| (5) | | Long-term debt for the years ended September 24, 2006 and September 25, 2005 consisted of capital lease obligations, which are included in other liabilities in the consolidated balance sheets. |
3944
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations In addition to historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to risks described in the section entitled Risk Factors and elsewhere in this Annual Report.
Revenues for fiscal
20042006 were
$4.9$7.53 billion, with net income of
$1.7$2.47 billion. The following recent developments
during fiscal 2004 wereoccurred with respect to key
for our business:Strong CDMA market growth throughout the world drove demand for our products and the productselements of our licensees. Enhanced multimedia functionality, increased growth of 1xEV-DO, local number portability initiatives and improving competitive positioning of CDMA operators drove worldwide growth in CDMA phone sales. Introduction of new CDMA networks in developing regions, as well as continued growth of networks in China and India, also contributed to growth in CDMA sales. Worldwide, 1xEV-DO grew to over nine million subscribers in September 2004. business or our industry:
During fiscal 2004, we shipped approximately 137 million Mobile Station Modem (MSM) integrated circuits for mobile CDMA phones and data modules, nearly all of which were third generation (3G), including CDMA2000 1X, 1xEV-DO and WCDMA.2006:
By calendar year end 2004, operators are expected to have launched 70 WCDMA networks as reported by GSMA (GSM Association). WCDMA subscriber growth in Japan and Europe, and new network launches in Europe and Asia drove growth in WCDMA phone sales during fiscal 2004. Thirteen subscriber licensees and eleven infrastructure licensees reported sales of WCDMA products | • | | Worldwide wireless subscribers grew by more than 24% to reach approximately 2.5 billion.(1) |
|
| • | | CDMA subscribers, including both 2G (cdmaOne) and 3G (CDMA2000 1X, 1xEV-DO and WCDMA), grew to 17% of total worldwide wireless subscribers to date. (1) |
|
| • | | 3G subscribers (all CDMA-based) grew to approximately 402 million worldwide through September 2006, including approximately 272 million CDMA2000 1X subscribers, approximately 85 million WCDMA subscribers and approximately 45 million 1xEV-DO subscribers. (1) |
|
| • | | CDMA-based handset shipments totaled approximately 255 million units, an increase of 40% over the 182 million units shipped in fiscal 2005. (2) |
|
| • | | CDMA-based handset shipments grew faster than total worldwide handsets and represent an estimated 28% of the total (916 million) worldwide handset shipments, compared to 25% of the total (726 million) shipments in fiscal 2005. (3) |
|
| • | | Average selling prices of CDMA-based handsets were approximately $215, same as the prior year. (2) |
|
| • | | We shipped approximately 207 million Mobile Station Modem (MSM) integrated circuits for CDMA-based phones and data modules (all of which were 3G, including CDMA2000 1X, 1xEV-DO and WCDMA), an increase of 37%, compared to approximately 151 million MSM integrated circuits in the prior fiscal year. |
During the fourth quarter of fiscal 2004. WCDMA royalties grew from 12% of royalties reported in the first fiscal quarter of 2004 for licensee sales during the fourth fiscal quarter of 2003 to 26% of royalties reported in the fourth fiscal quarter of fiscal 2004 for licensee sales during the third fiscal quarter of fiscal 2004. Currently, average WCDMA phone prices are significantly higher than worldwide average CDMA2000 phone prices. During fiscal 2004, several leading manufacturers announced the selection of our WCDMA MSM integrated circuits for their WCDMA phone products, including Siemens, Samsung, LG Electronics, Sanyo and Option.2006:
As a result of record demand for CDMA products, our integrated circuits business continued to experience supply constraints which resulted in our inability to meet certain customer demands. To enable better supply of integrated circuit products, we have increased and extended firm orders to our foundry suppliers and are working with them to increase capacity. We are also evaluating potential new suppliers to augment our future needs. | • | | We estimate the ratio of WCDMA reported royalties to total reported royalties was 49%, up from 41% reported in the year ago quarter. |
|
| • | | We estimate that, in Western Europe, WCDMA handset sales represented approximately 41% of all manufacturer handset sales during the period from April 2006 through June 2006, up from 14% in the year ago quarter.(4) |
In the fourth quarter of fiscal 2004, we determined that, due to the global growth of WCDMA networks and the increasing variability of our licensees’ market shares due to greater global competition, we would begin to recognize royalty revenues solely based on royalties reported by licensees during the quarter, rather than continuing to estimate royalty revenues earned from certain licensees in advance of receiving their royalty reports. Accordingly, we did not estimate royalty revenues earned in the fourth quarter of fiscal 2004, and royalties recorded as revenue for fiscal 2004 do not reflect an entire year’s worth of royalties (some royalties reported in the first quarter of fiscal 2004 were recorded based on estimates as revenue in the fourth quarter of fiscal 2003). | | |
| (1) | | According to Wireless Intelligence, an independent source of wireless operator data. |
|
| (2) | | Unit shipments and average selling prices are for the period from July through June based on reports provided during the fiscal year by our licensees/manufacturers. |
|
| (3) | | Based on reports by Strategy Analytics, a global research and consulting firm in their Global Handset Market Share Updates. |
|
| (4) | | Based on estimates derived from our licensee reports and estimates from the Yankee Group, a global market intelligence and advisory firm in the technology and telecommunications industry. |
Our Business and Operating Segments We design, manufacture, have manufactured on our behalf and market digital wireless telecommunications products and services based on our CDMA technology and other technologies. We derive revenue principally from sales of integrated circuit products, from license fees and royalties for 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, research and development and selling, general and administrative amortization of acquisition-related intangible assets, asset impairment charges and other expenses.
4045
We conduct business
primarily through four
operatingreportable segments. These segments are: QUALCOMM CDMA Technologies, or QCT; QUALCOMM Technology Licensing, or QTL; QUALCOMM Wireless & Internet, or QWI; and QUALCOMM Strategic Initiatives, or QSI.
QCT 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.positioning system products. QCT’s integrated circuit products and
system software are used in wireless
devices, particularly mobile phones,
data cards and infrastructure equipment. The
wireless phone integrated circuits
for wireless phones include the Mobile Station Modem (MSM), Radio Frequency (RF) and Power Management (PM) devices.
The wireless phoneThese integrated circuits
for wireless phones and
system software perform voice and data communication, multimedia and global positioning functions, radio conversion between
radioRF and baseband signals and power management. The infrastructure equipment integrated circuits
provideand system software perform the core baseband CDMA modem functionality in the
wireless operator’s
equipment. QCTequipment providing wireless standards-compliant processing of voice and data signals to and from wireless phones. QCT’s system software
enables the other phone components to interface with the integrated circuit products
areand is the
operating systems that control thefoundation software enabling phone
andmanufacturers to develop handsets utilizing the functionality
imbeddedwithin the integrated circuits. In addition to the key components in
a wireless system, QCT provides system reference designs and development tools to assist in customizing wireless phones and user interfaces, to integrate our
integrated circuit products.products with components developed by others, and to test interoperability with existing and planned networks. QCT revenues comprised
63% of total consolidated revenues in both fiscal 200458%, 58% and
2003 and 54%64% of total consolidated revenues in fiscal
2002.2006, 2005 and 2004, respectively.
QCT utilizes a fabless production business model, which means that we do not own or operate foundries for the production of silicon wafers from which our integrated circuits are made. Integrated circuits are die, cut from silicon wafers, that have completed the assembly and final test manufacturing processes. Die, cut from silicon wafers, are the essential components of all of our integrated circuits and a significant portion of the total integrated circuit cost. We rely on independent third party suppliers to perform the manufacturing and assembly, and most of the testing, of our integrated circuits. Our suppliers are also responsible for the procurement of most of the raw materials used in the production of our integrated circuits. The majority of our integrated circuits are purchased on a turnkey basis, in which our foundry suppliers are responsible for delivering fully assembled and tested integrated circuits. We also employ a two-stage manufacturing business model in which we purchase completed die directly from semiconductor manufacturing foundries, and directly manage and contract with third party manufacturers for back-end assembly and test services. We refer to this two-stage manufacturing business model as Integrated Fabless Manufacturing (IFM). IBM, Taiwan Semiconductor Manufacturing Company, Ltd. and United Microelectronics are the primary foundry suppliers for our family of baseband integrated circuits. Atmel, Freescale (formerly Motorola Semiconductor) and IBM are the primary foundry suppliers for our family of analog, radio frequency and power management integrated circuits. Our fabless model provides us the flexibility to select suppliers that offer advanced process technologies to manufacture, assemble and test our integrated circuits at a competitive price.
QTL grants licenses to use portions of our intellectual property portfolio, which includes certain patent rights essential to and/or useful in the manufacture and sale of
CDMA (including,certain wireless products, including, without limitation,
products implementing cdmaOne, CDMA2000,
1X/1xEV-DO/1xEV-DV, TD-SCDMAWCDMA, CDMA TDD and/or OFDMA standards and
WCDMA) products.their derivatives. QTL receives
revenue from license fees as well as ongoing royalties based on worldwide sales by licensees of products incorporating
or using our intellectual property.
License fees are fixed amounts paid in one or more installments. Ongoing royalties are generally based upon a percentage of the wholesale selling price of licensed products, net of certain permissible deductions (e.g. certain shipping costs, packing costs, VAT, etc.). QTL revenues comprised
27%35%,
26%32% and
29%27% of total consolidated revenues in fiscal
2006, 2005 and 2004,
2003respectively. The vast majority of such revenues has been generated primarily through our licensees’ sales of cdmaOne, CDMA2000 and
2002, respectively.WCDMA products.
QWI, which includes QUALCOMM Wireless Business Solutions (QWBS), QUALCOMM Internet Services (QIS) and QUALCOMM Government Technologies (QGOV), generates revenuerevenues primarily through mobile communication products and services, software and software development aimed at support and delivery of wireless applications. QWBS provides satellite and terrestrial-based two-way data messaging, and position reporting and wireless application services to transportation companies, private fleets, construction equipment fleets and other enterprise companies. QIS provides the BREW productBREW-based (Binary Runtime Environment for Wireless) products that include user interface and content delivery and management products and services for the development and over-the-air deployment of data services on wireless devices.industry. QIS also provides QChat and QPoint products and services. QChat enables virtually instantaneous push-to-chatpush-to-talk functionality on CDMA-based wireless devices while QPoint enables operators to offer E-911 and location-based applications and
46
services. The QGOV division provides development, hardware and analytical expertise to United States government agencies involving wireless communications technologies.
The QGOV division included the former Digital Cinema business prior to June 2004. In June 2004, we were notified that a competing digital cinema compression technology was selected by the motion picture studio consortium tasked with technology selection for digital cinema applications. As such, we are no longer pursuing the Digital Cinema business. Revenues from the Digital Cinema business were $1 million, $9 million and $14 million in fiscal 2004, 2003 and 2002, respectively. QWI revenues comprised
12%9%,
13%11% and
16%12% of total consolidated revenues in fiscal
2006, 2005 and 2004,
2003 and 2002, respectively.
QSI
manages the Company’s strategic investment activities, including MediaFLO USA, Inc. (MediaFLO USA), the Company’s wholly-owned wireless multimedia operator subsidiary. QSI also makes strategic investments to promote the worldwide adoption of
CDMACDMA-based products and
services for wireless voice and Internet data communications.services. Our strategy is to invest in
CDMACDMA-based operators, licensed device manufacturers and start-up companies that we believe open new markets for CDMA technology, support the design and introduction of new CDMA-based products or possess unique capabilities or
technologytechnology. Our MediaFLO USA subsidiary expects to
promote Internet data communications. Effectiveoffer a nationwide multicasting network based on our MediaFLO MDS and FLO technology. This network is expected to be utilized as
a shared resource for wireless operators and their customers in the United States. The commercial availability of the
beginning of fiscal 2005,MediaFLO USA network and service will be determined by our wireless operator partners. MediaFLO USA’s network will use the 700 MHz spectrum for which we
expecthold licenses for a nationwide footprint. Additionally, MediaFLO USA plans to
presentprocure, aggregate and distribute content in service packages which we will make available on a wholesale basis to our wireless operator customers (whether they operate on CDMA or GSM/WCDMA networks) in the
operating resultsUnited States. Distribution, marketing, billing and customer relationships are expected to remain services provided by our wireless operator partners. As part of our
wireless multimedia U.S. operatorstrategic investment activities, we may consider various corporate structuring and exit strategies at some point in the
QSI segment.future, which may include distribution of our ownership interest in MediaFLO USA to our stockholders in a spin-off transaction.
Nonreportable segments include: the QUALCOMM Wireless Systems division, which sells products that operate on the Globalstar low-Earth-orbit satellite-based telecommunications system and provides related services; the QUALCOMM MEMS Technologies division, which is developing an iMoD display technology based on micro-electro-mechanical-system (MEMS) structure combined with thin film optics; the QUALCOMM Flarion Technologies division, which is developing OFDM/OFDMA technologies; and other product initiatives.
Looking Forward In fiscal year 2005,
The deployment of 3G networks (CDMA2000 and WCDMA) enables higher voice capacity and data rates, thereby supporting more minutes of use and data intensive applications like multimedia. As a result, we expect continued growth in demand for 3G products and services around the overallworld:
The deployment of CDMA2000 and WCDMA market, with particularly strong growth in WCDMA and emerging CDMA2000 markets. We expect continued growth in 1xEV-DO in South Korea, Japan and Latin America, as well as North America, with expected launches of nationwide service by both Verizon Wireless and Sprint PCS. The global expansion of broadband data servicesnetworks is expected to continue to drive demand for both 1xEV-DO phones and data cards for laptop services. Operator competition in Japan, North America and other regions is also accelerating data strategies and services as one operator responds to the plans of another. As reported by mobilemonday.net, a community of and for mobile professionals,continue.
| o | | More than 170 operators have launched CDMA2000 1X; (1) |
|
| o | | More than 50 operators have deployed the higher data speeds of 1xEV-DO and several are preparing to deploy EV-DO Revision A. (1) |
GSM operators are expected to have launched 70continue transitioning to WCDMA networks by the end of calendar 2004, which is expected to drive meaningful growth in WCDMA phone sales during fiscal year 2005. Cingular Wireless in North America is looking to launch WCDMA/HSDPA later in 2005. We anticipate 3G wireless licenses will be granted in China in calendar 2005. When the licenses are granted, we expect operators in China will be authorized to upgrade and deploy thirdnetworks.
| o | | More than 122 GSM operators have migrated their networks to WCDMA; (2) |
|
| o | | More than 65 operators have launched commercial HSDPA networks and manufacturers are beginning to trial the faster uplink speeds of HSUPA. (2) |
| • | | We expect WCDMA phone prices to segment into high and low end, with low-end prices decreasing significantly as volumes increase and competition intensifies among WCDMA phone manufacturers and integrated circuit suppliers, as happened with CDMA2000. We expect phone market share will change and competition will increase as WCDMA networks grow and expand beyond Japan and Western Europe into the United States and China. |
|
| • | | To meet growing demand for advanced 3G phones and increased multimedia MSM functionality, we intend to continue to invest significant resources toward the development of multimedia products, software and services for the wireless industry. However, we expect that a portion of our research and development initiatives in fiscal 2007 will not reach commercialization until several years in the future. |
4147
generation CDMA-based networks. We also expect additional CDMA450 network launches in fiscal 2005 to contribute to growth. We believe our QCT business will increasingly benefit from strong growth in the WCDMA market as we leverage our high quality products and customer relationships to further a strong and growing list
| • | | We expect demand for low-end phones to continue, and we have invested resources to develop single chip products, which integrate the baseband, radio frequency and power management chips into one package, lowering component counts and enabling faster time-to-market. 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 at the very low end, particularly in Brazil and India. |
|
| • | | We will continue to invest in the evolution of CDMA and a broad range of other technologies as part of our vision to enable a range of technologies, each optimized for specific services, including the following products and technologies: |
| o | | The BREW applications platform, content delivery services and user interfaces; |
|
| o | | The MediaFLO Media Distribution System (MDS) and FLO technology for delivery of multimedia content; |
|
| o | | The DO Multicarrier Multilink eXtensions (DMMX) and HSDPA Multicarrier Multilink eXtensions (HMMX) platforms to support the long-term roadmaps of 1xEV-DO and HSDPA; |
|
| o | | OFDM and OFDMA-based technologies; |
|
| o | | Our iMoD display technology. |
| • | | We will continue to devote resources to working with and educating all participants in the wireless value chain as to the benefits of our business model in promoting a highly competitive and innovative wireless market. However, we expect that certain companies may continue to be dissatisfied with the need to pay fair royalties for the use of our technology and not welcome the success of our business model in enabling new, highly cost-effective competitors to their products. We expect that such companies will continue their attacks on our business model in various forums throughout the world. |
|
| • | | In addition, our license agreement with Nokia Corp. expires in part on April 9, 2007. If we cannot conclude an extension or a new license agreement beyond that time period, Nokia’s rights to sell subscriber products under most of our patents will expire, as will our rights to sell integrated circuits under Nokia’s patents. While we continue to work with Nokia to see if we can reach an agreement, there is no guarantee that we will be able to successfully resolve this matter before April 9, 2007, and little progress has been made to date. If we are unable to reach agreement, we will aggressively pursue all our legal and business remedies and assume that Nokia will do likewise. Nokia has stated publicly that it does not intend to pay us for its use of our patents prior to the resolution of the dispute. As a result, under generally accepted accounting principles, we will be unable to record royalty revenue attributable to Nokia’s sales until a court awards damages or agreement is reached, potentially resulting in a negative impact on future royalty revenues reported by our QTL segment. |
| | |
| (1) | | According to public reports made available at www.cdg.org. |
|
| (2) | | As reported by the Global mobile Suppliers Association, an international organization of WCDMA and GSM (Global System for Mobile Communications) suppliers in their September and October 2006 reports. |
Further discussion of
WCDMA phone manufacturer customers. Growing demand for phones and devices with greater multimedia functionality will continue to drive demand for increasing functionality in our MSM chips. We will continue to invest heavily to position our QCT business for success in the WCDMA market, as well as to continue to maintain our strong position in the CDMA2000 market. In particular, we intend to continue to invest significant resources in developing integrated circuit products to support high-speed wireless Internet access and multimode, multiband, multinetwork operation including CDMA2000 1X and 1xEV-DO, WCDMA, FLO, OFDM and multimedia applications which encompass development of graphical display, camera and video capabilities, as well as higher computational capability and lower power on - chip computers and signal processors. We continue to work on different initiatives for low-cost phones in addition to reducing costs through further integration of multimedia capabilities of mid- to high-end phones. We will also continue our significant development efforts with respectrisks related to our BREW applications development platform and our new MediaFLO content distribution system and FLO technology for delivery of low cost multimedia content to multiple subscribers.
We are working closely with many operators and manufacturers to support rapid and reliable WCDMA deployment and availability of WCDMA phones (with increasing multimedia features and capabilities). We expect thatbusiness is presented in 2005 average WCDMA phone prices will decrease significantly, although we expect them to still be higher than average CDMA2000 phone prices.
BREW is expected to play an increasingly important role in generating consumer demand for wireless phones. BREW offers operators new capabilities for their products and an open platform for delivery of data services that can grow operator’s data revenues. We expect more operators to launch BREW services and greater volumes of BREW software downloads to drive increasing revenues for our BREW business.
Although we have taken action to mitigate shortages of integrated circuits that we supply, the effects of such shortages have caused some customer frustration and could negatively affect our future business. We expect that the costs of certain integrated circuit products could increase as a result of our efforts to increase the availability of products in short supply. While we work closely with customers to expedite their processes for evaluating products from our new foundry suppliers, in some instances, transition to new product supply may cause a temporary decline in shipments of specific products to individual customers. As a result of our efforts to increase capacity at our current suppliers combined with the potential to bring on additional suppliers, we expect our shortages of integrated circuits to be alleviated in the future.
We are dependent upon the adoption and commercial deployment of 3G wireless communications equipment, products and services based on our CDMA technology to increase our revenues and market share. We continue to face significant competition from non-CDMA technologies, as well as competition from companies offering other CDMA based products. You should also refer to the Risk Factors included in this Annual Report for further discussion of these and other risks related to our business.
Report.
Revenues from customers in South Korea,
Japan, China and the United States
and Japan comprised
43%32%, 21%
, 17% and
18%13%, respectively, of total consolidated revenues in fiscal
20042006 as compared to
45%37%,
23% and 15%21%,
respectively, in fiscal 2003, and 39%, 31%11% and 18%, respectively, in fiscal
2002.2005, and 43%, 18%, 7% and 21%, respectively, in fiscal 2004. We distinguish revenue from external customers by geographic areas based on customer location.
The increaseRevenues from customers in
China increased as a percentage of total revenues in fiscal 2006 and in fiscal 2005, as compared to the prior years, primarily due to the maturing of CDMA-based manufacturers in China that are experiencing wider adoption of their products in international markets for low priced CDMA2000 phones and WCDMA phones. Combined revenues from customers in
South Korea, Japan
and the United States decreased as a percentage of
the total
is primarily attributed to higher royalties from licensees in Japan resulting from the growth of CDMA2000 and WCDMA in Japan as well as their success in exporting products worldwide. The decrease in revenues, from
customers82% in fiscal 2004 to 76% in fiscal 2005 and 66% in fiscal 2006, primarily due to increases in the
United States, as a percentage of
the total, is primarily attributed to overall increasesrevenues from WCDMA manufacturers in
revenuesWestern Europe and increased activity by manufacturers in
geographic regions other than the United States.China.
Critical Accounting Policies and Estimates Our discussion and analysis of our results of operations and liquidity and capital resources are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent
42
assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, valuation of intangible assets and investments, share-based payments, income taxes, and litigation. We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results that
48
differ from our estimates could have a significant adverse effect on our operating results and financial position. We believe that the following significant accounting policies and assumptions may involve a higher degree of judgment and complexity than others.
Revenue Recognition.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.
We record reductions to revenue for customer incentive programs, including special pricing agreements and other volume-related rebate programs. Such reductions to revenue are estimates, which are based on a number of factors, including our assumptions related to historical and projected customer sales volumes and the contractual provisions of our customer agreements.
We license rights to use portions of our intellectual property portfolio, which includes certain patent rights essential to and/or useful in the manufacture and sale of CDMA (including,certain wireless products, including, without limitation, products implementing cdmaOne, CDMA2000, 1X/1x EV-DO/1xEV-DV, TD-SCDMAWCDMA, CDMA TDD and/or the OFDMA standards and WCDMA) products.their derivatives. Licensees typically pay a license fee in one or more installments and ongoing royalties based on their sales of products incorporating or using our licensed intellectual property. License fees are recognized over the estimated period of future benefit to the average licensee, typically five to seven years. We recognizedearn royalties on such licensed CDMA products sold worldwide by our licensees at the time that the licensees’ sales occur. Our licensees, however, do not report and pay royalties owed for sales in any given quarter until after the conclusion of that quarter, and, in some instances, although royalties are reported quarterly, payment is on a semi-annual basis. During the periods preceding the fourth quarter of fiscal 2004, we estimated and recorded the royalty revenue asrevenues earned for sales by certain licensees (the Estimated Licensees) in the quarter in which such sales occurred, but only when reasonable estimates of such amounts could be made for certain licensees throughmade. Not all royalties earned were recorded based on estimates.
In the
thirdfourth quarter of fiscal
2004.2004, we determined that, due to escalating and changing business trends, we no longer had the ability to reliably estimate royalty revenues from the Estimated Licensees. These escalating and changing trends included the commercial launches and global expansion of WCDMA networks, changes in market share among licensees due to increased global competition, and increased variability in the integrated circuit and finished product inventories of licensees. Starting in the fourth quarter of fiscal 2004, we
recognizebegan recognizing royalty revenues solely
whenbased on royalties
are reported
to us by
our licensees
as we no longer haveduring the
ability to reliably estimate these amounts.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 due to the fact that no estimated royalty revenues were recorded in that quarter. As a result of this change, we believe that the estimates and assumptions used in applying our revenue recognition policies with respect to the timing and amount of recording our royalty revenues will have a less material impact on our consolidated financial statements.2004.
Valuation of Intangible Assets and Investments.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
30, 2004,24, 2006, our goodwill and intangible assets, net of accumulated amortization, were
$356 million$1.2 billion and
$128$450 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,
including estimates of future cash flows, volumes, market penetration and discount rates, 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.
We hold minority strategic investments in publicly-traded companies whose share prices may be highly volatile. These investments, which are recorded at fair value with increases or decreases generally recorded through stockholders’ equity as other comprehensive income or loss, totaled $150 million$1.3 billion at September 30, 2004.24, 2006. We record impairment charges when we believe an investment has experienced a decline that is other than temporary. The determination
49
that a decline is
other than temporaryother-than-temporary is subjective and influenced by many factors. Future adverse changes in market conditions or poor operating results of investees could result in losses or an inability to recover the carrying value of the investments, thereby possibly requiring impairment charges in the future. When assessing a publicly-traded investment for an other-than-temporary decline in value, we consider such factors as, among other things, how significant the decline in value is as a percentage of the original cost, how long the market value of the investment has been less than its original cost, the performance of the investee’s stock price in relation to the stock price of its competitors within the industry and the market in general and analyst recommendations. We also review the financial statements of the investee to determine if the investee is experiencing financial difficulties. In the event our judgments change as to
43
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 2006, 2005 and 2004, we recorded $15 million, $12 million and $12 million, respectively, in other-than-temporary losses on our minority investments in publicly-traded companies.
We hold minority strategic investments in private companies whose values are difficult to determine. These investments totaled $163$94 million at September 30, 2004.24, 2006. We record impairment charges when we believe an investment has experienced a decline that is other than temporary.other-than-temporary. The determination that a decline is other than temporaryother-than-temporary is subjective and influenced by many factors. Future adverse changes in market conditions or poor operating results of investees could result in losses or an inability to recover the carrying value of the investments, thereby possibly requiring impairment charges in the future. When assessing investments in private companies for an other-than-temporary decline in value, we consider such factors as, among other things, the share price from the investee’s latest financing round, the performance of the investee in relation to its own operating targets and its business plan, the investee’s revenue and cost trends, the investee’s liquidity and cash position, including its cash burn rate, and market acceptance of the investee’s products and services. From time to time, we may consider third party evaluations, valuation reports or advice from investment banks. We also consider new products/services that the investee may have forthcoming, any significant news that has been released specific to the investee or the investee’s competitors and/or industry and the outlook of the overall industry in which the investee operates. In 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 2006 and 2005, we recorded $4 million and $1 million, respectively, in other-than-temporary losses on our investments in private companies. Such losses were not significant in fiscal 2004.
Share-Based Payments.We grant options to purchase our common stock to our employees and directors under our stock option plans. Eligible employees can also purchase shares of our 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 under our employee stock purchase plans. The benefits provided under these plans are share-based payments subject to the provisions of revised Statement of Financial Accounting Standards No. 123 (FAS 123R), “Share-Based Payment.” Effective September 26, 2005, we use the fair value method to apply the provisions of FAS 123R with a modified prospective application which provides for certain changes to the method for estimating the value of share-based compensation. The valuation provisions of FAS 123R apply to new awards and to awards that are outstanding on the effective date, which are subsequently modified or cancelled. Under the modified prospective application method, prior periods are not revised for comparative purposes. Share-based compensation expense recognized under FAS 123R for fiscal 2006 was $495 million. At September 24, 2006, total unrecognized estimated compensation expense related to non-vested stock options granted prior to that date was $1.2 billion, which is expected to be recognized over a weighted-average period of 1.7 years. Net stock options, after forfeitures and cancellations, granted during fiscal 2006 represented 1.9% of outstanding shares as of the beginning of the fiscal period. Total stock options granted during fiscal 2006 represented 2.1% of outstanding shares as of the end of the fiscal period.
Upon adoption of FAS 123R, we began estimating the value of stock option awards on the date of grant using a lattice binomial option-pricing model (binomial model). Prior to the adoption of FAS 123R, the value of all share-based awards was estimated on the date of grant using the Black-Scholes option-pricing model (Black-Scholes model) for the pro forma information required to be disclosed under FAS 123. The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends.
50
If factors change and we employ different assumptions in the application of FAS 123R in future periods, the compensation expense that we record under FAS 123R may differ significantly from what we have recorded in the current period. Therefore, we believe it is important for investors to be aware of the high degree of subjectivity involved when using option-pricing models to estimate share-based compensation under FAS 123R. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions, are fully transferable and do not cause dilution. Because our share-based payments have characteristics significantly different from those of freely traded options, and because changes in the subjective input assumptions can materially affect our estimates of fair values, in our opinion, existing valuation models, including the Black-Scholes and lattice binomial models, may not provide reliable measures of the fair values of our share-based compensation awards. Consequently, there is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those share-based payments in the future. Certain share-based payments, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our consolidated financial statements. Alternatively, value may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant date and reported in our consolidated financial statements. There is not currently a market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values. Although the fair value of employee share-based awards is determined in accordance with FAS 123R and the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107 (SAB 107), using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
Estimates of share-based compensation expenses are significant to our consolidated financial statements, but these expenses are based on option valuation models and will never result in the payment of cash by us. For this reason, and because we do not view share-based compensation as related to our operational performance, we exclude estimated share-based compensation expense when evaluating the business performance of our operating segments.
The guidance in FAS 123R and SAB 107 is relatively new, and best practices are not well established. The application of these principles may be subject to further interpretation and refinement over time. There are significant differences among valuation models, and there is a possibility that we will adopt different valuation models in the future. This may result in a lack of consistency in future periods and materially affect the fair value estimate of share-based payments. It may also result in a lack of comparability with other companies that use different models, methods and assumptions.
Theoretical valuation models and market-based methods are evolving and may result in lower or higher fair value estimates for share-based compensation. The timing, readiness, adoption, general acceptance, reliability and testing of these methods is uncertain. Sophisticated mathematical models may require voluminous historical information, modeling expertise, financial analyses, correlation analyses, integrated software and databases, consulting fees, customization and testing for adequacy of internal controls. Market-based methods are emerging that, if employed by us, may dilute our earnings per share and involve significant transaction fees and ongoing administrative expenses. The uncertainties and costs of these extensive valuation efforts may outweigh the benefits to investors.
For purposes of estimating the fair value of stock options granted during fiscal 2006 using the binomial model, we used the implied volatility of market-traded options in our stock for the expected volatility assumption input to the binomial model, consistent with the guidance in FAS 123R and SAB 107. We utilized the term structure of volatility up to approximately two years, and the implied volatility of the option with the longest time to maturity was used for the expected volatility estimates for periods beyond two years. The weighted-average volatility assumption was 30.7% for fiscal 2006, which if increased to 37%, would increase the weighted-average estimated fair value of stock options granted during fiscal 2006 by $1.66 per share, or 11%. The volatility percentage assumed for fiscal 2006 was based on the implied volatility of traded options, as compared to the blend of implied and historical volatility data used in prior years. FAS 123R includes implied volatility in its list of factors that should be considered in estimating expected volatility. We believe implied volatility is more useful than historical volatility in estimating expected volatility because it is generally reflective of both historical volatility and expectations of how future volatility will differ from historical volatility.
The risk-free interest rate is based on the yield curve of U.S. Treasury strip securities for a period consistent with the contractual life of the option in effect at the time of grant. The weighted-average risk-free interest rate
51
assumption was 4.6% for fiscal 2006, which if increased to 6.5%, would increase the weighted-average estimated fair value of stock options granted during fiscal 2006 by $1.19 per share, or 8%.
We do not target a specific dividend yield for our dividend payments, but we are required to assume a dividend yield as an input to the binomial model. The dividend yield assumption is based on our history and expectation of dividend payouts. The dividend yield assumption was 1.0% for fiscal 2006, which if decreased to 0.4%, would increase the weighted-average estimated fair value of stock options granted during fiscal 2006 by $0.89 per share, or 6%. Dividends and/or increases or decreases in dividend payments are subject to board approval as well as to future cash inflows and outflows resulting from operating performance, stock repurchase programs, mergers and acquisitions, and other sources and uses of cash. While our historical dividend rate is assumed to continue in the future, it may be subject to substantial change, and investors should not depend upon this forecast as a reliable indication of future cash distributions that will be made to investors.
The post-vesting forfeiture rate is estimated using historical option cancellation information. The weighted-average post-vesting forfeiture rate assumption was 6.0% for fiscal 2006, which if decreased to 1.5%, would increase the weighted-average estimated fair value of stock options granted during fiscal 2006 by $0.88 per share, or 6%.
The suboptimal exercise factor is estimated using historical option exercise information. The weighted-average suboptimal exercise factor assumption was 1.7 for fiscal 2006, which if increased to 2.0, would increase the weighted-average estimated fair value of stock options granted during fiscal 2006 by $1.06 per share, or 7%.
Income Taxes.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. Such adjustmentAlthough we believe that the estimates and assumptions supporting our assessments are reasonable, adjustments could have a material impact onbe materially different from those which are reflected in historical income tax provisions and recorded assets and liabilities.
We regularly review our
results of operations. The Company regularly reviews its deferred tax assets for recoverability and establishesestablish a valuation allowance based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and the implementation of tax-planning strategies. As of September 30, 2004,24, 2006, gross deferred tax assets were $1.1 billion.$914 million. If the Company iswe are unable to generate sufficient future taxable income in certain tax jurisdictions, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, the Companywe could be required to increase itsour valuation allowance against itsour deferred tax assets which could result in an increase in itsour effective tax rate and an adverse impact on operating results.
As of September
30, 2004, the Company has recorded24, 2006, we had gross deferred tax assets of
$418$267 million related to capital loss
carry forwards.carryforwards. We can only use capital losses to offset capital gains. Based 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
2004.2006. Therefore, we have provided a
$16 million valuation allowance
in the amount of $139 million for the portion of capital losses we do not expect to utilize.
Significant judgment is required to forecast the timing and amount of future capital gains and the timing of realization of capital losses. Adjustments to our valuation allowance based on changes to our forecast of capital losses and capital gains are reflected in the period the change is made.
We consider the operating earnings of certain non-United States subsidiaries to be indefinitely invested outside the United States.States based on estimates that future domestic cash generation will be sufficient to meet future domestic cash needs. No provision has been made for United States federal and state, or foreign taxes that may result from future remittances of undistributed earnings of foreign subsidiaries, the cumulative amount of which is approximately $1.5$2.7 billion as of September 30, 2004.24, 2006. Should we repatriate foreign earnings, we would have to adjust the income tax provision in the period in which the decision to repatriate earnings of foreign subsidiaries is made. We
52
Beginning September 26, 2005, we recognize windfall tax benefits associated with the exercise of stock options directly to stockholders’ equity only when realized. Accordingly, deferred tax assets are
currently studyingnot recognized for net operating loss carryforwards resulting from windfall tax benefits occurring from September 26, 2005 onward. A windfall tax benefit occurs when the
impactactual tax benefit realized by us upon an employee’s disposition of
a share-based award exceeds the
one-time favorable foreign dividend provisions recently enacted as part ofdeferred tax asset, if any, associated with the
American Jobs Creation Act of 2004,award that we had recorded. When assessing whether a tax benefit relating to share-based compensation has been realized, we follow the tax law ordering method, under which current year share-based compensation deductions are assumed to be utilized before net operating loss carryforwards and
may decide to repatriate future earnings of some of our foreign subsidiaries.other tax attributes.
Litigation.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
the Company’sour operating results, liquidity or financial position,
the Company believeswe believe the claims are without merit and
intendsintend 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
44
liability related to the claim. As additional information becomes available, we assess the potential liability related to our pending litigation and revise our estimates. The Company hasWe have not recorded any accrual for contingent liability associated with the Company’sour legal proceedings based on the Company’sour 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 to use portions
Acquisitions
On January 18, 2006, we completed our acquisition of
our intellectual property portfolio,all of the outstanding capital stock of Flarion Technologies, Inc. (Flarion), a privately held developer of Orthogonal Frequency Division Multiplexing Access (OFDMA) technology for approximately $613 million in consideration, consisting of approximately $349 million in shares of QUALCOMM stock, $229 million in cash, and the exchange of Flarion’s existing vested options and warrants with an estimated aggregate fair value of approximately $35 million. In addition, we assumed Flarion’s existing unvested options with an estimated aggregate fair value of $63 million, which
includes certain patent rights essential to and/or useful in the manufacture, use and sale of CDMA (including, without limitation, cdmaOne, CDMA2000 1X/1xEV-DO/1xEV-DV, TD-SCDMA and WCDMA) products. Licensees typically pay a nonrefundable license fee in one or more installments and ongoing royalties based on their sales of products incorporating or using our licensed intellectual property. License fees are recognizedis recorded as share-based compensation over the
estimatedrequisite service period
pursuant to FAS 123R. Upon achievement of
future benefit tocertain agreed upon milestones during the
average licensee, typically five to seven years. We earn royalties on such licensed CDMA products sold worldwide by our licensees at the time that the licensees’ sales occur. Our licensees, however, do not report and pay royalties owed for sales in any given quarter until after the conclusion of that quarter, and, in some instances, although royalties are reported quarterly, payment is on a semi-annual basis. During periods preceding the fourththird quarter of fiscal
2004,2006, we
estimated and recorded the royalty revenues earned for sales by certain licensees (the Estimated Licensees)incurred additional aggregate consideration of $197 million, consisting of approximately $185 million in
the quartercash (of which $75 million will be payable in
July 2007), $8 million in shares of QUALCOMM stock (of which
such sales occurred, but only when reasonable estimates of such amounts could be made. Not all royalties earned were estimated. Royalties for licensees for which we had minimal reporting history and certain licensees that did not incorporate our integrated circuit products into their own products were recorded one quarter$3 million is issuable in
arrears, i.e. in the quarter in which the royalties were reported to us by those licensees. Estimates of royalty revenues for the Estimated Licensees were based on analyses of our sales of integrated circuits to Estimated Licensees, historical royalty data for Estimated Licensees, an estimate of the time between our sales of integrated circuits to Estimated Licensees and Estimated Licensees’ sales of CDMA products, average sales price forecasts, estimates of inventory levels and current market and economic trends. Once royalty reports were received from the Estimated Licensees, the variance between such reportsMarch 2007), and the
estimate was recordedmodification of Flarion’s existing vested options and warrants with an estimated incremental fair value of approximately $4 million. The additional amounts payable in cash and shares on the milestone date were treated as
royalty revenue in the quarter in which the reports were received, i.e. in most cases, the quarter subsequent to the quarter in which the estimated royalties were recorded as revenue. Starting in the fourth quarter of fiscal 2004, we determined that, due to recent escalating business trends, we no longer have the ability to reliably estimate royalty revenues from certain licensees. These escalating trends include the commercial launches and global expansion of WCDMA networks, changes in market share among licensees due to increased global competition and increased variability in the integrated circuit and finished product inventories of licensees. Accordingly, we did not estimate royalty revenues earned in the fourth quarter of fiscal 2004. Starting in the fourth quarter of fiscal 2004, we began recognizing 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. Royalties reported by our licensees were $151 million higher than royalty revenues from external licensees recorded in fiscal 2004 because $151 million in royalties that were reported in the first quarter of fiscal 2004 had been estimatedadditional consideration and recorded as revenuegoodwill. In addition, the modification of Flarion’s existing unvested options resulted in the fourth quarteran estimated incremental fair value of fiscal 2003. To facilitate an understanding of the impact of the change, the following table compares royalty revenues$7 million, which will be recorded as revenue in fiscal 2004, 2003share-based compensation over the requisite service period pursuant to FAS 123R. The 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. The addition of Flarion’s intellectual property and 2002 to royalties reported by our licensees during those same periods (in millions):
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| | | | | | | | | | | | | |
| | | 2004
| | 2003
| | 2002
|
| Royalty revenues from external licensees, as recorded in our consolidated statements of operations | | $ | 1,141 | | | $ | 838 | | | $ | 725 | |
| Estimate recorded for the fourth quarter of the prior year for Estimated Licensees* | | | 151 | | | | 150 | | | | 122 | |
| Estimate recorded at end of the current year for Estimated Licensees | | | — | | | | (151 | ) | | | (150 | ) |
| | | |
| | | |
| | | |
| |
| Total royalties reported by external licensees during the current year | | $ | 1,292 | | | $ | 837 | | | $ | 697 | |
| | | |
| | | |
| | | |
| |
* Recorded as revenue inengineering resources also supplements the prior year, but reported by licensees duringresources that we have already dedicated over the current year.
The table above illustrates thatyears towards the difference between royalties reported by external licensees and royalty revenues from external licensees recorded in our consolidated statementsdevelopment of operations has equaled the difference between the estimate for Estimated Licensees at the end of the current year and the estimate for Estimated Licensees at the end of the prior year.
OFDM/OFDMA technologies.
Strategic Investments in ourOur QSI Segment Our QSI segment makes strategic investments to promote the worldwide adoption of CDMA products and
services for wireless voice and Internet data communications.services. QSI segment assets totaled
$400$660 million at September
30, 2004,24, 2006, compared to
$839$442 million at September
30, 2003. In general, we25, 2005. Our MediaFLO USA subsidiary, a wireless multimedia operator, is expected to begin commercial operations in 2007. QSI’s assets related to MediaFLO USA totaled $329 million and $98 million at September 24, 2006 and September 25, 2005, respectively. We also enter into strategic relationships with CDMA wireless operators and developers of innovative technologies or products for the wireless communications industry. Due to financial and competitive challenges facing
CDMA wireless operators, we cannot assure you that our investments in or loans to these operators will generate financial returns or that they will result in increased adoption or continued use of CDMA technologies. CDMA wireless operators to whom we have provided funding have limited operating histories, are faced with significant capital requirements and 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 operators.
Our QSI segment maintains strategic holdings of various issuers and types. These securities include available-for-saleinvestments in marketable equity securities and derivative instruments that are recorded on the balance sheet at fair value.classified as available-for-sale. We strategically invest in companies in the high-technology industry and typically do not attempt to reduce or
53
eliminate our exposure to market risks in these investments.
Available-for-sale equity securities and derivative instruments recorded at fair value subject us to equity price risk. The fair values of these strategic investments are subject to substantial quarterly and annual fluctuations and to significant market price volatility. Our strategic investments in specific companies and industry segments may vary over time, and changes in concentrations may affect price volatility.
In general, our investments in available-for-sale equity securities and derivative instruments suffered significant decreases in market value during the last three years. Downward fluctuations and market trends could
further adversely affect our operating results. In addition, the realizable value of these securities and derivative instruments is subject to market and other conditions.
QSI also makes strategic investments in privately held companies, including
early stageearly-stage companies and venture funds. These investments are
comprised of equity investments, recorded at cost or under the equity method,
but theand warrants that are recorded
at fair value or at cost. The recorded values
of these investments may be written down due to changes in the companies’ conditions or prospects. These strategic investments are inherently risky as the market for the technologies or products the investees are developing may never materialize. As a result, we could 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).
We regularly monitor and evaluate the realizable value of our investments in both marketable and private securities. If events and circumstances indicate that a decline in the value of these assets has occurred and is
other than temporary,other-than-temporary, we will record a charge to investment income (expense).
During fiscal 2004, 2003 and 2002, the QSI segment recognized $12 million, $127 million and $221 million, respectively, in charges related to other-than- temporary losses on marketable and private securities. In some cases, we make strategic investments that require us
46
to consolidate or record our equity in the losses of early stageearly-stage companies. The consolidation of these losses can adversely affect our financial results until we exit from or reduce our exposure to the investments.
From time to time, we may accept an equity interest in a licensee as consideration for a portion or all of the license fee payable under our CDMA license agreement. QTL records license fee revenue based on the fair value of the equity instruments received, if determinable. The measurement date for determination of fair value is the earlier of the date at which a performance commitment is made or the date at which the performance is complete. The evaluation procedures used to determine fair value include, but are not limited to, examining the current market price for the shares if the licensee is publicly traded, examining recent rounds of financing and the licensee’s business plan if not publicly traded, and performing other due diligence procedures. This equity program does not affect the licensees’ obligations to pay royalties under their CDMA license agreements. The amount of cash consideration and the timing of revenue recognition vary depending on the terms of each agreement. As of September 30, 2004, ten licensees have participated in this program. We recognized $5 million of revenue in each of fiscal 2004 and 2003 and $6 million of revenue in fiscal 2002 related to equity received as license fees. The equity investments received from this program are assets of QSI.
Key developments in our strategic investments during fiscal
20042006 included
the sale of the Vésper Operating Companies and related assets which are presented as discontinued operations, our
receipt from Pegaso of prepayment of our $193 million loan facility, and ongoing investment in
Inquam.Discontinued Operations in our QSI Segment.In fiscal 1999, we acquired ownership interests in two companies in Brazil, Vésper São Paulo S.A. and Vésper S.A. (the Vésper Operating Companies). In November 2001, we consummatedMediaFLO USA subsidiary, a series of transactions resulting in an overall financial restructuring of the Vésper Operating Companies, which resulted in our holding direct and indirect controlling ownership interestsslow down in the Vésper Operating Companies.
On December 2, 2003 (the Closing Date), Embratel Participações S.A. (Embratel) acquired our direct and indirect ownership interests in the Vésper Operating Companies (the Embratel sale transaction) for no consideration. The Vésper Operating Companies’ existing communication towers and related interests in tower site property leases (Vésper Towers) were not included in the Embratel sale transaction, and as such, we effectively retained, through a new wholly-owned subsidiary (TowerCo), ownership and control of the Vésper Towers. The Vésper Towers had a net book value of approximately $5 million at December 28, 2003. Concurrent with the closing, the Vésper Operating Companies entered into a 10-year agreement (renewable at the Vésper Operating Companies’ option for up to two successive 5-year terms) whereby the Vésper Operating Companies would pay a monthly fee to us for use of aerial and ground space on the tower sites. We provided approximately $6 million to fund operations of the Vésper Operating Companies during the first quarter of fiscal 2004 prior to their sale and additionally provided approximately $39 million in aggregate funding to or for the benefit of the Vésper Operating Companies on or before the Closing Date to facilitate the Embratel sale transaction. Such funding enabled the Vésper Operating Companies to completely extinguish their existing local bank debt (at an agreed discount) to allow us to retain ownership of the Vésper Towers free and clear of any local bank security interest. The major classes of assets and liabilities sold in the Embratel sale transaction included: $25 million in accounts receivable, $5 million in inventory, $24 million in other current assets, $95 million in property, plant and equipment, $6 million in other assets, $52 million in accounts payable, $5 million in payroll and other benefits related liabilities, $6 million in unearned revenue, $1 million in other current liabilities, $14 million in long-term debt and $3 million in other liabilities. We realized a net loss of $52 million on the Embratel sale transaction during the first quarter of fiscal 2004, including a $74 million loss on the net assets sold to Embratel and a $46 million loss related to the recognition of cumulative foreign currency translation losses previously included in stockholders’ equity, partially offset by $68 million in gains related to the extinguishment of local bank debt and the settlement of other liabilities.
On November 19, 2002, we won bids to acquire personal mobile service (SMP) licenses in certain regions of Brazil. Approximately $8 million of the approximate $82 million purchase price for the SMP licenses was paid in December 2002. The remaining Brazilian real-denominated obligation was financed by the Brazilian government at an interest rate of 12% per annum, plus an adjustment for inflation. These SMP licenses were not includedstrategic investment, including our investment in the Embratel sale transaction. In December 2003, we initiated a waiverInquam, and return of the SMP licenses to Anatel, the telecommunications regulatory agency in Brazil. In February 2004, the waiver and return of the SMP licenses was approved by Anatel, and the license debt was extinguished. We realized a net gain of $19 million as a result of the removal of the $104 million SMP licenses and the related $123 million debt and accrued interest during the second quarter of fiscal 2004.
47
On March 2, 2004, we sold TowerCo to Embratel in a separately negotiated transaction (the TowerCo sale transaction) for $45 million in cash. TowerCo’s assets were primarily comprised of $5 million in property, plant and equipment. We realized a net gain of $40 milliongains on the TowerCo sale transaction during the second quarter of fiscal 2004. As a result of the disposition of the remaining operations and assets related to the Vésper Operating Companies, we determined that the results of operations and cash flows related to the Vésper Operating Companies, including the results related to TowerCo and the SMP licenses and the gains and losses realized on the Embratel and TowerCo sales transactions, should be presented as discontinued operations in our consolidated statements of operations and cash flows. Our statements of operations and cash flows for all prior periods have been adjusted to present the discontinued operations.
For fiscal 2004, 2003 and 2002, revenues of $36 million, $123 million and $125 million, respectively, were reported in the loss from discontinued operations. At September 30, 2004, we had no remaining assets or liabilities related to the Vésper Operating Companies, TowerCo or the SMP licenses recorded on our consolidated balance sheet.
Prepayment of the Pegaso Telecomunicaciones, S.A. de C.V. Loan Facility. We had various financing arrangements, including a bridge loan facility, an equipment loan facility, 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 other lenders. 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. On December 15, 2003, Pegaso prepaid $193 million, including accrued interest, in full satisfaction of the equipment loan facility. We recognized $12 million, $41 million and $9 million in interest income related to the Pegaso financing arrangements during fiscal 2004, 2003 and 2002, respectively, including $10 million and $23 million of deferred interest income recorded as a result of the prepayments in fiscal 2004 and 2003, respectively.
strategic investments.
Investment in Inquam Limited.We
have invested $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 communications systems, either directly or indirectly, with the intent of deploying CDMA-based technology, primarily in Europe. Starting in the third quarter of fiscal 2003, we and another investor (the Other Investor)
also extended $117 millionown minority interests in
bridge loan financings to Inquam
including $31 millionLimited (Inquam), a wireless CDMA-based operator in
bridge loan funding putRomania, and in
place during fiscal 2004. We funded our approximate $58 million share of these bridge loans and had no remaining funding commitment at September 30, 2004. Inquam is a variable interest entity. We do not consolidate Inquam because we are not the primary beneficiary. We use the equity method to account for our investmentInquam’s former subsidiaries in
Inquam.Portugal (the Portugal Companies). We recorded
$59$20 million,
$99$33 million and
$45$59 million in equity in losses of Inquam during fiscal
2006, 2005 and 2004,
2003 and 2002, respectively.respectively, including a $12 million loss resulting from Inquam’s restructuring during fiscal 2006. At September
30, 2004,24, 2006, our equity and debt investments in Inquam
and the Portugal Companies totaled
$42$5 million, net of equity in losses.
On September 22, 2003, we agreed, along with the Other Investor, to guarantee the payment of amounts due by Inquam under a bank credit agreement. During fiscal 2004, we We and the Other Investor agreed to extend the guarantee and increase the maximum amount subject to the guarantee to $55 million. Our maximum liability under the guarantee is limited to an amount equal tohave each guaranteed 50% of thea portion of amounts outstandingowed under certain of Inquam’s credit agreement,long-term financing arrangements, up to a combined maximum of approximately $28$53 million. Amounts outstanding under the bank credit agreement totaled $53 million as of September 30, 2004. The guarantee expires on November 30, 2004 when the bank credit facility matures. Inquam is currently working with the bank and other potential lenders to secure long-term “take out” financing to repay the existing loan on the maturity date. It is possible that we and the Other Investor may provide additional guarantees in connection with such take out financing.
During the first quarter of fiscal 2005, we and the Other Investor committed to fund an additional $2 million each. While we have no other obligations to provide funding to Inquam, we continue to have active discussions with Inquam and the Other Investor concerning the necessary funding for all or a part of Inquam’s business plan, potential restructuring and investment by other parties. While we may provide some additional funding and/or credit support in furtherance of Inquam’s business plan, the amount and form of such support is unknown, and none will be provided without commensurate support or consideration being provided by the Other Investor. If Inquam or its
48
facilities mature on December 25, 2011.
operating companies cannot raise the funding needed for its business plan, Inquam’s growth potential and the value of our investment in Inquam may be negatively affected.
Fiscal 20042006 Compared to Fiscal 2003
2005
Revenues.Total revenues for fiscal
20042006 were
$4,880 million,$7.53 billion, compared to
$3,847 million$5.67 billion for fiscal
2003.2005. Revenues from
Samsung, LG Electronics and Motorola,three customers of our QCT,
QTL and
QTLQWI segments comprised an aggregate of
15%, 15% and 10%39% of total consolidated revenues
respectively, in fiscal
2004, compared to 17%, 13%2006 and
13% of total consolidated revenues, respectively, in fiscal 2003.2005.
Revenues from sales of equipment and services for fiscal
20042006 were
$3,514 million,$4.78 billion, compared to
$2,862 million$3.74 billion for fiscal
2003.2005. Revenues from sales of integrated circuits increased
$652 million,$1.00 billion, resulting primarily from an increase of
$994 million$1.34 billion related
primarily to higher unit shipments of MSM and accompanying RF integrated circuits, partially offset by a decrease of
$331$349 million related to the
net effects of reductions in average sales prices and changes in product mix.
Revenues from licensing and royalty fees for fiscal
20042006 were
$1,366 million,$2.75 billion, compared to
$985 million$1.93 billion for fiscal
2003. The2005. Revenues from licensing and royalty fees increased primarily as a result of a $774 million increase
resultedin royalty revenue, consisting primarily
from higherof royalties reported to QTL
segment royalties,by our external licensees, resulting
primarily from an increase in
phonesales of CDMA-based products by licensees and
infrastructure equipment sales by our licensees at higher average selling prices, partially offset by the
effectimpact of the
changeexpiration of one of our royalty sharing obligations. Worldwide demand for CDMA-based products has increased primarily as a result of the growth in
timingsales of
recognizing royalties to an “as reported” method during the fourth quarter of fiscal 2004. Royalty revenues recorded in fiscal 2004 excluded $151 million of royalties that were reportedWCDMA products into markets formerly dominated by
licensees in the first quarter of fiscal 2004, but estimated and recorded as revenue in the fourth quarter of fiscal 2003. Royalties reported to us by licensees in fiscal 2004 were $1,292 million as compared to $837 million in fiscal 2003.GSM products.
Cost of Equipment and Services.Cost of equipment and services revenues for fiscal 20042006 was $1,484 million,$2.18 billion, compared to $1,268 million$1.65 billion for fiscal 2003.2005. Cost of equipment and services revenues as a percentage of equipment and services revenues was 42%46% for fiscal 2004,2006, compared to 44% for fiscal 2003.2005. The decline in margin percentage improvement in fiscal 20042006 compared to fiscal 20032005 was primarily due to the effect of $41 million in share-based compensation during fiscal 2006 as a result of the adoption of FAS123R during fiscal 2006 and a decrease in QCT margin
54
percentage resulting primarily from an increase in
QCT revenues as a percentage of total equipment and services revenues, resulting in increased QCT margin relative to the total.product support costs. Cost of equipment and services revenues as a percentage of equipment and services revenues may fluctuate in future quarters depending on the mix of products sold and services provided, competitive pricing, new product introduction costs and other factors.
Research and Development Expenses.For fiscal
2004,2006, research and development expenses were
$720 million$1.54 billion or
15%20% of revenues, compared to
$523 million$1.01 billion or
14%18% of revenues for fiscal
2003. The dollar2005. Research and
percentage increasesdevelopment expenses for fiscal 2006 included share-based compensation of $216 million as a result of the adoption of FAS 123R during fiscal 2006 and in-process research and development of $22 million resulting from acquisitions, both of which caused the increase in research and development expenses
primarily resulted fromas a
$187percentage of revenues. The dollar increase in research and development expenses also included a $272 million increase in costs related to
the development of integrated circuit products 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,
EV-DO Revision A, EV-DO Revision B, WCDMA
(including GSM/GPRS/EDGE), HSDPA, HSUPA and OFDMA, and the development of our FLO technology, MediaFLO
MDS and
HSDPA.iMoD display products using MEMS technology. We expect that research and development costs will increase in fiscal 2007 as we continue our active support of CDMA-based technologies, products and network operations and other product initiatives.
Selling, General and Administrative Expenses.For fiscal
2004,2006, selling, general and administrative expenses were
$568 million$1.12 billion or
12%15% of revenues, compared to
$471$631 million or
12%11% of revenues for fiscal
2003.2005. Selling, general and administrative expenses for fiscal 2006 included share-based compensation of $238 million as a result of the adoption of FAS 123R during fiscal 2006. The percentage increase was primarily attributable to the share-based compensation. The dollar increase was
primarily duealso attributable to a
$61$107 million increase in professional fees, primarily related to legal activities, a $90 million increase in employee-related expenses, a
$21$14 million increase in
professional fees, primarily patent administrationselling and
other legal costs, and outside services,marketing expenses and a
$12$14 million
increase related to a charitable grant to an educational institution for the primary purpose of furthering the study of engineering and math.Asset Impairment and Related Charges.There were no asset impairment chargesdecrease in fiscal 2004. During fiscal 2003, we recorded a $34 million impairment loss on our wireless licenses in Australia due to 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.
Other Operating Income.For fiscal 2004, other operating income was $26 million, compared to $30 million in fiscal 2003. Other operating income during fiscal 2004 resulted primarily from the transfers of portions of the Federal Communications Commission (FCC) auction discount voucher’s value (ADV) to a wireless operator. Other operating income during fiscal 2003 resulted from $47 million of other income related to the transfer of portions of the 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.
49
income.
Net Investment Income (Expense).Income.Net investment income was $184$466 million for fiscal 2004,2006, compared to net investment expense of $8$423 million for fiscal 2003.2005. The change was primarily comprised as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended September 30,
| | | | Year Ended | | | |
| | | 2004
| | 2003*
| | Change
| | September 24, 2006 | | September 25, 2005 | | Change | |
| Interest income: | | |
| Interest and dividend income: | | |
| QSI | | $ | 14 | | $ | 45 | | $ | (31 | ) | | $ | 6 | | $ | 4 | | $ | 2 | |
| Corporate and other segments | | 161 | | 113 | | 48 | | | 410 | | 252 | | 158 | |
| Interest expense | | | (2 | ) | | | (2 | ) | | — | | | | (4 | ) | | | (3 | ) | | | (1 | ) |
| Net realized gains on investments: | | |
| QSI | | 56 | | 63 | | | (7 | ) | | 30 | | 101 | | | (71 | ) |
| Corporate | | 32 | | 17 | | 15 | | | 106 | | 78 | | 28 | |
| Other-than-temporary losses on marketable securities | | | (12 | ) | | | (100 | ) | | 88 | | |
| Other-than-temporary losses on other investments | | — | | | (28 | ) | | 28 | | |
| Gains (losses) on derivative instruments | | 7 | | | (3 | ) | | 10 | | |
| Other-than-temporary losses on investments | | | | (24 | ) | | | (14 | ) | | | (10 | ) |
| (Losses) gains on derivative instruments | | | | (29 | ) | | 33 | | | (62 | ) |
| Equity in losses of investees | | | (72 | ) | | | (113 | ) | | 41 | | | | (29 | ) | | | (28 | ) | | | (1 | ) |
| | |
| |
| |
| | | | | | | | |
| | | $ | 184 | | $ | (8 | ) | | $ | 192 | | | $ | 466 | | $ | 423 | | $ | 43 | |
| | |
| |
| |
| | | | | | | | |
| * | | As adjusted for discontinued operations. |
The increase in interest
and dividend income on 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 lowerand higher interest rates earned on
these balances,interest-bearing securities. Net realized gains on QSI investments in fiscal 2005 resulted primarily from a $48 million gain on our minority investment in a wireless publisher and
$6a $41 million
in interest income recorded as a result of a refund from the United States Internal Revenue Service. The decrease in QSI interest income was primarily the result of the prepaymentgain on the
Pegaso debt facility in the first quarter of fiscal 2004. The other-than-temporary losses on marketable securities during fiscal 2003 primarily related to an $81 million impairmentsale of our investment in a wireless
operatortelecommunications company. Losses and gains on derivative instruments in
South Koreafiscal 2006 and
a $16 million impairment2005, respectively, related primarily to changes in the fair values of
put options sold in connection with our
investmentstock repurchase program. The change in
a provider of semiconductor packaging, test and distribution services. The other-than-temporary losses on other investments during fiscal 2003 related to the impairment of our investments in two development stage CDMA wireless operators. Equityequity in losses of investees
decreasedresulted primarily
due to afrom the decrease in losses
incurredrecognized by Inquam, of which our share was
$59$20 million
forand $33 million in fiscal
2004 as compared to $99 million for fiscal 2003.2006 and 2005, respectively, partially offset by the effect of investment gains recognized by a venture fund investee in 2005, of which our share was $8 million.
Income Tax Expense.Income tax expense from continuing operations was $588$686 million for fiscal 2004,2006, compared to $536$666 million for fiscal 2003.2005. The annual effective tax rate for continuing operations was approximately 25%22% for fiscal 2004,2006, compared to 34%24% for fiscal 2003.2005. The annual effective tax rate forfrom continuing operations for fiscal 20042006 was lower than the 2003annual effective tax rate forfrom continuing operations for fiscal 2005 primarily due to an increase in foreign earnings taxed at less than the United States federal tax rate, an increase in tax benefits recorded arising from the forecast of our 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 are higher in fiscal 2004 primarily due to the adjustment of an intercompany royalty agreement and an increase in foreign earnings.rate.
55
The annual effective tax rate for
continuing operations for fiscal
2004 is 10%2006 was 13% lower than the United States federal statutory rate
primarily due
primarily to
a benefitbenefits of approximately
14%17% related to foreign earnings taxed at less than the United States federal rate,
research and development1% related to an increase in tax
credits and the forecast ofbenefits resulting from our increased ability to use
our capital loss carryforwards
and 1% related to research and development tax credits, partially offset by state taxes of
4%approximately 5% and other permanent differences of 1%.
As of September
30, 2004,24, 2006, we had a valuation allowance of
$139$16 million on previously incurred capital losses due to uncertainty as to our ability to generate sufficient capital gains to utilize all capital losses. We will continue to assess the realizability of capital losses. The amount of the valuation allowance on capital losses may be adjusted in the future as our ability to utilize capital losses changes. A change in the valuation allowance may impact the provision for income taxes in the period the change occurs.
We are currently considering actions that may result in our ability to utilize some of the capital loss currently reserved, which may result in a reduction of our valuation allowance and income tax expense in subsequent periods.50
Fiscal 20032005 Compared to Fiscal 2002
2004
Revenues.Total revenues for fiscal
20032005 were
$3,847 million,$5.67 billion, compared to
$2,915 million$4.88 billion for fiscal
2002.2004. Revenues from
Samsung, LG Electronics, Motorola and Kyocera,three customers of our QCT, QTL and
other nonreportableQWI segments comprised an aggregate of
17%, 13%, 13% and 9%39% of total consolidated revenues
respectively, in fiscal
2003,2005, compared to
16%, 12%, 8% and 14%40% of total consolidated revenues
respectively, in fiscal
2002. The percentages for Kyocera included 1% and 4% in fiscal 2003 and 2002, 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 2000.2004.
Revenues from sales of equipment and services for fiscal
20032005 were
$2,862 million,$3.74 billion, compared to
$2,080 million$3.51 billion for fiscal
2002.2004. Revenues from sales of integrated circuits increased
by $828$165 million,
resulting primarily
due tofrom an increase
inof $396 million related to higher unit shipments of MSM and accompanying RF integrated
circuits. Revenues from licensing and royalty fees for fiscal 2003 were $985 million, compared to $835 million for fiscal 2002. The increase resulted from higher QTL segment royalties, resulting from an increase in phone sales by our licensees.
Cost of Equipment and Services.Cost of equipment and services revenues for fiscal 2003 was $1,268 million, compared to $954 million for fiscal 2002. Cost of equipment and services revenues as a percentage of equipment and services revenues was 44% for fiscal 2003, compared to 46% for fiscal 2002. The margin percentage improvement in fiscal 2003 compared to fiscal 2002 was primarily due to the increase in QCT revenues as a percentage of total equipment and services revenues, resulting in increased QCT margin relative to the total.
Research and Development Expenses.For fiscal 2003, research and development expenses were $523 million or 14% of revenues, compared to $452 million or 16% of revenues for fiscal 2002. The dollar increase in research and development expenses was primarily due to an $84 million increase in costs primarily related to increased engineering resources for integrated circuit products and other initiatives to support multimedia applications, high-speed wireless Internet access and multimode, multiband, multinetwork products, including CDMA2000 1X/1xEV-DO/1xEV-DV, GSM/GPRS/EDGE, WLAN, WCDMA and radioOne technologies,circuits, partially offset by an $11 million reduction in research and development efforts supporting the QGOV division of the QWI segment and a $3 million reduction of support efforts related to the Globalstar business.
Selling, General and Administrative Expenses.For fiscal 2003, selling, general and administrative expenses were $471 million or 12% of revenues, compared to $401 million or 14% of revenues for fiscal 2002. The dollar increase was primarily due to a $27 million increase in employee-related expenses, a $12 million increase in depreciation and amortization expense, a $6 million increase in professional fees, primarily patent administration and outside services, and a $6 million increase related to international marketing and support efforts.
Amortization of Goodwill and Other Acquisition Related Intangible Assets. For fiscal 2003, amortization of goodwill and other acquisition related intangible assets was $8 million, compared to $259 million for 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.
Asset Impairment and Related Charges.For fiscal 2003, asset impairment and related charges were $34 million, compared to less than $1 million of such charges in fiscal 2002. During fiscal 2003, we recorded a $34 million impairment loss on our wireless licenses in Australia due to 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.
Other Operating Income.For fiscal 2003, other operating income was $30 million, compared to other operating expense of $9 million in fiscal 2002. Other operating income during fiscal 2003 resulted from $47 million of other income related to the transfer of portions of the 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.
51
Net Investment Income (Expense).Net investment expense was $8 million for fiscal 2003, compared to $218 million for fiscal 2002. The change was primarily comprised as follows (in millions):
| | | | | | | | | | | | | |
| | | Years Ended September 30,
| | |
| | | 2003*
| | 2002*
| | Change
|
| Interest income: | | | | | | | | | | | | |
| QSI | | $ | 45 | | | $ | 26 | | | $ | 19 | |
| Corporate and other segments | | | 113 | | | | 102 | | | | 11 | |
| Interest expense | | | (2 | ) | | | (1 | ) | | | (1 | ) |
| Net realized gains on investments: | | | | | | | | | | | | |
| QSI | | | 63 | | | | 2 | | | | 61 | |
| Corporate | | | 17 | | | | — | | | | 17 | |
| Other-than-temporary losses on marketable securities | | | (100 | ) | | | (206 | ) | | | 106 | |
| Other-than-temporary losses on other investments | | | (28 | ) | | | (25 | ) | | | (3 | ) |
| Losses on derivative instruments | | | (3 | ) | | | (58 | ) | | | 55 | |
| Minority interest in income of consolidated subsidiaries | | | — | | | | (1 | ) | | | 1 | |
| Equity in losses of investees | | | (113 | ) | | | (57 | ) | | | (56 | ) |
| | | |
| | | |
| | | |
| |
| | | $ | (8 | ) | | $ | (218 | ) | | $ | 210 | |
| | | |
| | | |
| | | |
| |
| * | | As adjusted for discontinued operations. |
The increase in interest income on corporate cash and marketable securities was a result of higher average cash and marketable securities balances, partially offset by the impact of lower interest rates earned on these balances. The increase in QSI interest income was primarily the result of $23 million of deferred interest income recorded as a result of a prepayment on Pegaso debt facilities in fiscal 2003. The net realized gains on investments during fiscal 2003 primarily related to the sale of a portion of our investment in United Online. The other-than-temporary losses on marketable securities during fiscal 2003 primarily related to an $81 million impairment of our investment in a wireless operator in South Korea and a $16 million impairment of our investment in a provider of semiconductor packaging, test and distribution services. The other-than-temporary losses on marketable securities during fiscal 2002 primarily related to $162 million and $18 million in losses on our investments in Leap Wireless bonds and common stock, respectively. The losses on derivative instruments during fiscal 2002 primarily resulted from movements in the price of Leap Wireless common stock, which affected the fair values of our warrants to acquire Leap Wireless stock. Equity in losses of investees primarily increased due to an increase in losses incurred by Inquam, of which our share was $99 million for fiscal 2003 as compared to $45 million for fiscal 2002.
Income Tax Expense.Income tax expense from continuing operations was $536 million for fiscal 2003, compared to $97 million for fiscal 2002. The annual effective tax rate from continuing operations was approximately 34% for fiscal 2003, compared to a rate of 16% for fiscal 2002. The annual effective tax rate for continuing operations for fiscal 2003 was lower than the combined federal and state statutory tax rate of approximately 39%, primarily due to foreign earnings that were taxed at less than the United States federal rate. The reduction was partially offset by capital losses for which we had not recorded a tax benefit. The fiscal 2003 effective tax rate for continuing operations was higher than the fiscal 2002 effective tax rate for continuing operations primarily due to the reduction of valuation allowances in fiscal 2002 that were previously charged to income tax expense, partially offset by the amortization of non-deductible goodwill in fiscal 2002.
Our Segment Results for Fiscal 2004 Compared to Fiscal 2003
The following should be read in conjunction with the financial results of fiscal 2004 and 2003 for each reporting segment. See “Notes to Consolidated Financial Statements — Note 10 — Segment Information.”
QCT Segment.QCT revenues for fiscal 2004 were $3,094 million, compared to $2,406 million for fiscal 2003. Equipment and services revenues, primarily from MSM and accompanying RF integrated circuits, were $3,026 million for fiscal 2004, compared to $2,374 million for fiscal 2003. The increase in MSM and accompanying RF integrated circuits revenue was comprised of $994 million related to higher unit shipments, partially offset by a
52
decrease of $331$241 million related to the effects of reductions in average sales prices and changes in product mix. Approximately 137Revenues from the sale of satellite and terrestrial-based two-way data messaging systems and related messaging services increased $25 million MSM integrated circuitsand revenues from the sale of satellite portable phones that operate on the Globalstar low-Earth-orbit satellite communications system increased $19 million.
Revenues from licensing and royalty fees for fiscal 2005 were
sold during fiscal 2004,$1.93 billion, compared to
approximately 99 million$1.37 billion for fiscal
2003. QCT’s earnings before taxes for2004. During fiscal 2004 were $1,043 million, compared to $797 million for fiscal 2003. QCT’s operating income as a percentage of its2005, the QTL segment recorded royalty revenues (operating margin percentage) was 34% in fiscal 2004, compared to 33% in fiscal 2003. The operating margin percentage in fiscal 2004solely based on royalties reported by licensees during the year, as compared to the method used during the first three quarters of fiscal 2003 increased slightly primarily as a result2004 of recording royalty revenues from certain licensees based on estimates of royalty revenues earned by those licensees during the quarter. The increase in gross margin percentage, partially offset byroyalty revenue year to year resulted primarily from a 40%$350 million increase in research and development and selling, general and administrative expenses. Research and development and selling, general and administrative expenses were $154 million higher and $54 million higher, respectively, for fiscal 2004 as comparedroyalties reported to fiscal 2003 primarily associated with increased investment in new integrated circuit products and technology research, development and marketing initiatives to support multimedia applications, high-speed wireless Internet access and multiband, multimode, multinetwork products including CDMA2000 1xEV-DO, WCDMA and HSDPA.
QTL Segment.QTL revenues for fiscal 2004 were $1,331 million, compared to $1,000 million for fiscal 2003. Royalty revenues fromus by our external licensees were $1,141 millionand the effect of changing the timing of recognizing royalty revenues in the fourth quarter of fiscal 2004, compared to $838 million in fiscal 2003.2004. Royalty revenues recorded in fiscal 2004 excluded $151 million of royalties that were reported by external licensees in the first quarter of fiscal 2004, but estimated and recorded as revenue in the fourth quarter of fiscal 2003. Royalties reported to us by external licensees in fiscal 20042005 were $1,292 million,$1.64 billion, as compared to $837 million$1.29 billion in fiscal 2003. Revenues from license fees were $59 million2004. The increase in both fiscal 2004 and 2003. Other revenues were comprised of intersegment royalties. During each of fiscal 2004 and 2003, we recognized $5 million in revenue related to equity received as license fees.
The following table summarizes royalty related data for external licensees (in millions):
| | | | | | | | | |
| | | Years Ended September 30,
|
| | | 2004
| | 2003
|
| Estimate recorded for the fourth quarter of the prior year (Prior Year Fourth Quarter) for Estimated Licensees | | $ | 151 | | | $ | 150 | |
| Royalties reported in the first quarter of the current year by Estimated Licensees for Prior Year Fourth Quarter | | | 208 | | | | 167 | |
| | | |
| | | |
| |
| Prior Year Fourth Quarter variance included in current year | | | 57 | | | | 17 | |
| Other royalties reported in current year | | | 1,084 | | | | 670 | |
| Estimate recorded for the fourth quarter of the current year for Estimated Licensees | | | — | | | | 151 | |
| | | |
| | | |
| |
| Total current year royalty revenues from external licensees | | $ | 1,141 | | | $ | 838 | |
| | | |
| | | |
| |
For example, for fiscal 2003, we estimated royalties of $151 million from the Estimated Licensees for the fourth quarter of fiscal 2003. The actual royalties reported to us by the Estimated Licensees, on a one quarter lag basis, during the first quarter of fiscal 2004 were $208 million. The variance of $57 million recorded in royalty revenues in the first quarter of fiscal 2004 was primarily attributable to greater phone sales at higher average prices by our Estimated Licensees than we had anticipated. To achieve these phone unit volumes, we believe that our Estimated Licensees reduced their integrated circuit inventories in our fourth quarter of fiscal 2003. Total royalty revenues fromexternal licensees for fiscal 2004 of $1,141 million included: 1) the prior year fourth quarter variance of $57 million and 2) other royalties reported by licensees during fiscal 2004 of $1,084 million. We did not estimate royalty revenues for the fourth quarter of fiscal 2004 as we no longer believe that we have the ability to reliably estimate such amounts.
QTL’s earnings before taxes for fiscal 2004 were $1,195 million, compared to $897 million for fiscal 2003. QTL’s operating margin percentage was 90% in fiscal 2004, compared to 89% in fiscal 2003. The increase in both revenues and earnings before taxes was primarily due to an increase in sales of CDMA products by licensees, resulting from higher worldwide demand for CDMA products across all major regions of CDMA deployment at higher average selling prices due primarily to the growth in sales of high-end WCDMA products and shifts in the geographic distribution of sales of CDMA products.
Cost of Equipment and Services.Cost of equipment and services revenues for fiscal 2005 was $1.65 billion, compared to $1.48 billion for fiscal 2004. Cost of equipment and services revenues as a percentage of equipment and services revenues was 44% for fiscal 2005, compared to 42% for fiscal 2004. The margin percentage decline in fiscal 2005 compared to fiscal 2004 was primarily due to a 1.3% decrease in QCT margin percentage. Increases in product support costs and the reserves for excess and obsolete inventory contributed 1.1% and 0.5%, respectively, to the total decrease in QCT margin percentage.
Research and Development Expenses.For fiscal 2005, research and development expenses were $1.01 billion or 18% of revenues, compared to $720 million or 15% of revenues for fiscal 2004. The dollar and percentage increases in research and development expenses primarily resulted from a $275 million increase in costs related to the development of integrated circuit products 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, WCDMA, HSDPA, GSM/GPRS/EDGE and OFDMA, and the development of our FLO technology, MediaFLO MDS and iMoD display products using MEMS technology.
Selling, General and Administrative Expenses.For fiscal 2005, selling, general and administrative expenses were $631 million or 11% of revenues, compared to $547 million or 11% of revenues for fiscal 2004. The dollar increase was primarily due to a $38 million increase in professional fees, primarily patent administration and outside consultants, a $33 million increase in employee-related expenses, and a $13 million decrease in other income.
56
Net Investment Income.Net investment income was $423 million for fiscal 2005, compared to $184 million for fiscal 2004. The change was primarily comprised as follows (in millions):
| | | | | | | | | | | | | |
| | | Year Ended | | | | |
| | | September 25, 2005 | | | September 26, 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 | |
| | | | | | | | | | |
The increase in interest and dividend income on cash and marketable securities held by corporate and other segments was a result of higher average cash and marketable securities balances and higher interest rates earned on interest-bearing securities. Net realized gains on corporate investments increased primarily as a result of an increase in the positive performance of marketable equity securities as a percentage of total corporate investments in fiscal 2005, as compared to fiscal 2004. The increase in net realized gains on strategic investments in QSI resulted primarily from a $48 million gain on our minority investment in a wireless publisher and a $41 million gain on the sale of our investment in a wireless telecommunications company. Gains on derivative instruments in fiscal 2005 and 2004 related primarily to changes in the fair values of put options sold in connection with our stock repurchase program. Equity in losses of investees decreased primarily due to a decrease in losses incurred by Inquam, of which our share was $33 million for fiscal 2005 as compared to $59 million for fiscal 2004.
Income Tax Expense.Income tax expense from continuing operations was $666 million for fiscal 2005, compared to $588 million for fiscal 2004. The annual effective tax rate for continuing operations was approximately 24% for fiscal 2005, compared to 25% for fiscal 2004. The annual effective tax rate from continuing operations for fiscal 2005 was lower than the annual effective tax rate from continuing operations for fiscal 2004 primarily due to an increase in foreign earnings taxed at less than the United States federal tax rate.
The annual effective tax rate for fiscal 2005 was 11% lower than the United States federal statutory rate primarily due to benefits of approximately 10% related to foreign earnings taxed at less than the United States federal rate, 3% related to an increase in tax benefits resulting from our increased ability to use our capital loss carryforwards and 2% related to research and development tax credits, partially offset by the change instate taxes of approximately 4%.
As of September 25, 2005, we had a valuation allowance of approximately $62 million on previously incurred capital losses due to uncertainty as to our ability to estimategenerate sufficient capital gains to utilize all capital losses.
Our Segment Results for Fiscal 2006 Compared to Fiscal 2005
The following should be read in conjunction with the financial results of fiscal 2006 and 2005 for each reporting segment. See “Notes to Consolidated Financial Statements, Note 10 – Segment Information.”
QCT Segment.QCT revenues for fiscal 2006 were $4.33 billion, compared to $3.29 billion for fiscal 2005. Equipment and services revenues, primarily from MSM and accompanying RF integrated circuits, were $4.20 billion for fiscal 2006, compared to $3.20 billion for fiscal 2005. The increase in equipment and services revenue was primarily comprised of an increase of $1.34 billion related to higher unit shipments, partially offset by a decrease of $349 million related to the effects of reductions in average sales prices and changes in product mix. Approximately 207 million MSM integrated circuits were sold during fiscal 2006, compared to approximately 151 million for fiscal 2005.
QCT’s earnings before taxes for fiscal 2006 were $1.13 billion, compared to $852 million for fiscal 2005. QCT’s operating income as a percentage of its revenues (operating margin percentage) was 26% during both fiscal 2006 and 2005. The operating margin percentage remained consistent as the gross margin percentage decrease, resulting
57
primarily from an increase in product support costs, was offset by a decrease in research and development and selling, general and administrative expenses as a percentage of QCT revenue.
QTL Segment.QTL revenues for fiscal 2006 were $2.63 billion, compared to $1.84 billion for fiscal 2005. QTL’s earnings before taxes for fiscal 2006 were $2.40 billion, compared to $1.66 billion for fiscal 2005. QTL’s operating margin percentage was 91% in fiscal 2006 as compared to 90% in fiscal 2005. The increase in both revenues and earnings before taxes primarily resulted from a $774 million increase in royalties reported to us by our licensees which were $2.42 billion in fiscal 2006, compared to $1.64 billion in fiscal 2005. The increase in royalty revenue relates to the increase in sales of CDMA-based products by licensees and the impact of the expiration of one of our royalty sharing obligations. Revenues from amortized license fees were $50 million in fiscal 2006, compared to $69 million in fiscal 2005. Other revenues were comprised of intersegment royalties.
QWI Segment.QWI revenues for fiscal
20042006 were
$596$670 million, compared to
$511$644 million for fiscal
2003.2005. Revenues increased primarily due to a
$58 million increase in QWBS revenue and a $37$41 million increase in QIS
revenue. Asrevenue, partially offset by a
result of the adoption of EITF No. 00-21 in the fourth quarter of fiscal 2003, QWBS started recording53
revenue for certain equipment sales upon shipment instead of amortizing the related revenue over a future period. The amortization of QWBS equipment revenue that was deferred in the periods prior to the adoption of EITF No. 00-21 will continue with a declining impact through 2008. QWBS amortized $76 million in revenue related to such prior period equipment sales in fiscal 2004, compared to $95 million in fiscal 2003, including $23 million during the fourth quarter of fiscal 2003 after the adoption of EITF No. 00-21. The net increasedecrease in QWBS revenue is primarily attributable to the accounting change for certain equipment sales, with a smaller contribution from a $14 million increase in messaging revenue as a result of a larger installed base. QWBS shipped approximately 53,000 OmniTRACS and other related communications systems during fiscal 2004, compared to approximately 38,000 in fiscal 2003.$12 million. The increase in QIS revenue iswas primarily attributable to a $53$28 million increase in fees related to our expanded BREW customer base and products partially offset byand a $19$17 million decreaseincrease in QChat revenue resulting from the wind down ofincreased development efforts under the licensing agreement with Nextel.
Sprint. The decrease in QWBS revenue was primarily attributable to a $26 million decrease in equipment revenue, which includes a $19 million decrease in amortization of deferred revenues related to historical equipment sales, partially offset by a $14 million increase in messaging services revenue. QWBS shipped approximately 42,100 satellite-based systems and 39,600 terrestrial-based systems during fiscal 2006, compared to approximately 46,800 satellite-based systems and 62,500 terrestrial-based systems in fiscal 2005.
QWI’s earnings before taxes for fiscal
20042006 were
$30$80 million, compared to
$27$57 million for fiscal
2003.2005. QWI’s operating margin percentage was
5%12% in
both fiscal
2004 and 2003.2006, compared to 9% in fiscal 2005. The increase in
QWI’sQWI earnings before taxes was primarily due to a
$31$39 million increase in QIS gross margin largely resulting from the increase in fees related to our expanded BREW customer base and products
and QChat development efforts, partially offset by
the effect of a
$30$13 million increase in QWI research and development and selling, general and administrative expenses.
The increase in QWI’s operating margin percentage
remained flat in fiscal 2004 as compared to fiscal 2003was primarily due
to a decline in QWBS gross margin percentage, offset by an improvement in QIS gross margin percentage. The decline in QWBS gross margin percentage in fiscal 2004 as compared to fiscal 2003 is primarily attributable to an increase in equipment sales, with margins that were lower than the margins on messaging services, as a percentage of total QWBS revenue. The improvement in QIS gross margin percentage is primarily attributable to the increase in
fees related to our expanded BREW customer base and products. During the second quarter of fiscal 2004, QWBS began the process of moving high volume, standard product manufacturing to Mexico to reduce manufacturing costs. The low volume, prototype and new product manufacturing activities will remain in San Diego. The move is anticipated to be completed by the third quarter of fiscal 2005. QWBS may incur additional costs in the near term as a result of this move. In connection with this activity, we continue to evaluate other low cost manufacturing opportunities.
QIS gross margin.
QSI Segment.QSI’s losses before taxes from continuing operations for fiscal
20042006 were
$3$133 million, compared to
$168earnings before taxes from continuing operations of $10 million for fiscal
2003. Equity2005. QSI’s losses before taxes from continuing operations included a $55 million increase in
losses of investees decreased by $42 million primarily due to a decrease in losses incurred by Inquam during fiscal 2004 as compared to fiscal 2003, of which our
share was $59 million for fiscal 2004 as compared to $99 million for fiscal 2003.MediaFLO USA subsidiary’s operating expenses. During fiscal
2004, we2006, QSI recorded
$12$30 million in
other-than-temporary lossesrealized gains on marketable securities and other investments,
as compared to
$127$101 million
forin fiscal
2003. During fiscal 2003, we also recorded a $34 million impairment loss on our wireless licenses in Australia due to developments that affected strategic alternatives for using the spectrum. These improvements in QSI’s losses before taxes were partially offset by a $31 million decrease in interest income resulting from the prepayment of the Pegaso debt facility in the first quarter of fiscal 2004.2005.
Our Segment Results for Fiscal 20032005 Compared to Fiscal 20022004
The following should be read in conjunction with the financial results of fiscal 2005 and 2004 for each reporting segment. See “Notes to Consolidated Financial Statements, Note 10 – Segment Information.”
QCT Segment.QCT revenues for fiscal
20032005 were
$2,406 million,$3.29 billion, compared to
$1,575 million$3.11 billion for fiscal
2002.2004. Equipment and services revenues, primarily from MSM and accompanying RF integrated circuits, were
$2,374 million$3.20 billion for fiscal
2003,2005, compared to
$1,546 million$3.04 billion for fiscal
2002.2004. The increase in
MSMequipment and
accompanying RF integrated circuitsservices revenue was
primarilycomprised of $396 million related to higher unit
shipments.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
99151 million MSM integrated circuits were sold during fiscal
2003,2005, compared to approximately
65137 million for fiscal
2002.2004.
QCT’s earnings before taxes for fiscal
20032005 were
$797$852 million, compared to
$438 million$1.05 billion for fiscal
2002.2004. QCT’s operating income as a percentage of its revenues
(operating margin percentage) was
33%26% in fiscal
2003,2005, compared to
28%34% in fiscal
2002.2004. The
decline in operating margin percentage in fiscal
20032005 as compared to fiscal
2002 increased2004 was primarily
as athe result of
the 53% increase in revenues as compared to the 17%a 45% increase in research and development
and selling, general and administrative expenses. Research and development and selling, general and administrative expenses
were $58 million higher and $17 million higher, respectively, for fiscal
20032005 as compared to fiscal
2002, primarily associated with2004, mainly related to increased investment in new integrated circuit products and technology research
development and
marketingdevelopment initiatives to support
lower cost phones, multimedia applications, high-speed wireless Internet access and multiband, multimode, multinetwork products
and technologies, including CDMA2000
1xEV-DO/1xEV-DV1X, 1xEV-DO, WCDMA, HSDPA and
WCDMA.GSM/GPRS/EDGE.
QTL Segment.QTL revenues for fiscal 20032005 were $1,000 million,$1.84 billion, compared to $847 million$1.33 billion for fiscal 2002. Royalty revenues from external licensees2004. QTL’s earnings before taxes for fiscal 2005 were $838 million in fiscal 2003,$1.66 billion, compared to $725 million$1.20 billion for fiscal 2004. QTL’s operating margin percentage was 90% during both fiscal 2005 and 2004. The increase in fiscal 2002.both revenues and earnings
5458
Revenues
before taxes primarily resulted from
license fees were $59a $350 million
increase in
fiscal 2003, comparedroyalties reported to
$55 million in fiscal 2002. Other revenues were comprised of intersegment royalties. During fiscal 2003, we recognized $5 million in revenue related to equity received as license fees, compared to $6 million in fiscal 2002. The following table summarizes royalty related data forus by our external licensees (in millions):
| | | | | | | | | |
| | | Years Ended September 30,
|
| | | 2003
| | 2002
|
| Estimate recorded for the fourth quarter of the prior year (Prior Year Fourth Quarter) for Estimated Licensees | | $ | 150 | | | $ | 122 | |
| Royalties reported in the first quarter of the current year by Estimated Licensees for Prior Year Fourth Quarter | | | 167 | | | | 146 | |
| | | |
| | | |
| |
| Prior Year Fourth Quarter variance included in current year | | | 17 | | | | 24 | |
| Other royalties reported in current year | | | 670 | | | | 551 | |
| Estimate recorded for the fourth quarter of the current year for Estimated Licensees | | | 151 | | | | 150 | |
| | | |
| | | |
| |
| Total current year royalty revenues from external licensees | | $ | 838 | | | $ | 725 | |
| | | |
| | | |
| |
For example, for fiscal 2002, we estimated royaltiesand the effect of $150 million fromchanging the Estimated Licensees fortiming of recognizing royalty revenues in 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 million2004. Royalty revenues recorded in royalty revenuesfiscal 2004 excluded $151 million of royalties that were reported by external licensees in the first quarter of fiscal 2003 was primarily attributable to greater phone sales at higher average prices by our Estimated Licensees than we had anticipated. Total royalty revenues from licensees for fiscal 2003 of $838 million included: 1) the prior year fourth quarter variance of $17 million, 2) other royalties reported by licensees during fiscal 2003 of $670 million2004, but estimated and 3) the estimate made forrecorded as revenue in the fourth quarter of fiscal 2003 of $151 million based upon Estimated Licensees’ estimated sales during that quarter, which we estimated would be2003. Royalties reported to us by the Estimated Licenseesexternal licensees in the first quarter of fiscal 2004.
QTL’s earnings before taxes for fiscal 20032005 were $897 million,$1.64 billion, compared to $756 million for$1.29 billion in fiscal 2002. QTL’s operating margin percentage was 89% in both fiscal 2003 and 2002.2004. The increase in both revenues and earnings before taxesroyalties reported to us by external licensees was primarily due to an increase in sales of CDMA products by licensees, resulting from higher worldwide demand for CDMA products across all major regionsat higher average selling prices due primarily to the growth of higher priced WCDMA sales and shifts in the geographic distribution of sales of CDMA deployment.
products. Revenues from amortized license fees were $69 million in fiscal 2005, as compared to $59 million in fiscal 2004. Other revenues were comprised of intersegment royalties.
During the periods preceding the fourth quarter of fiscal 2004, we estimated and recorded the royalty revenues earned for sales by certain licensees (the Estimated Licensees) in the quarter in which such sales occurred, but only when reasonable estimates of such amounts could be made. Not all royalties earned were recorded based on estimates. In the fourth quarter of fiscal 2004, we determined that, due to escalating and changing business trends, we no longer had the ability to reliably estimate royalty revenues from the Estimated Licensees. These escalating and changing trends included the commercial launches and global expansion of WCDMA networks, changes in market share among licensees due to increased global competition, and increased variability in the integrated circuit and finished product inventories of licensees. Starting in the fourth quarter of fiscal 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. Accordingly, we did not estimate royalty revenues earned in fiscal 2005.
QWI Segment.QWI revenues for fiscal
20032005 were
$511$644 million, compared to
$460$571 million for fiscal
2002.2004. Revenues increased primarily due to a
$19$37 million increase in QIS revenue and a $27 million increase in QWBS
revenue. The increase in QIS revenue
an $11was primarily attributable to a $41 million increase in
revenuefees related to
the saleour expanded BREW customer base and products. The increase in QWBS revenue was primarily attributable to a $16 million increase in equipment revenue, net of
testa $24 million decrease in amortization of deferred revenues related to historical equipment
used primarily in testing WCDMA networks,sales, and a $10 million increase in
QGOV revenue, primarily as a result of license revenue related
to the sale of the Technicolor Digital Cinema, LLC joint venture, and an $11 million increase in software andmessaging services
revenue related to our QPoint and BREW products. As a result of the adoption of EITF No. 00-21 in the fourth quarter of fiscal 2003, QWBS started recording revenue for certain equipment sales upon shipment instead of amortizing the related revenue over a future period. QWBS amortized $95 million in revenue related to such prior period equipment sales in fiscal 2003, including $23 million during the fourth quarter of fiscal 2003 after the adoption of EITF No. 00-21, compared to $103 million in fiscal 2002. The net increase in QWBS revenue is primarily attributable to the accounting change for certain equipment sales and a $14 million increase in messaging revenue as a result of a larger installed base.revenue. QWBS shipped approximately
38,000 OmniTRACS46,800 satellite-based systems and
other related communications62,500 terrestrial-based systems during fiscal
2003,2005, compared to approximately
46,00043,400 satellite-based systems and 10,000 terrestrial-based systems in fiscal
2002.2004.
QWI’s earnings before taxes for fiscal
20032005 were
$27$57 million, compared to
earnings before losses of $7$19 million for fiscal
2002.2004. QWI’s operating margin percentage was
5%9% in fiscal
2003,2005, compared to
negative 1%3% in fiscal
2002.2004. The
increaseincreases in
QWI’sQWI earnings before taxes
wasand operating margin percentage were primarily due to a
$25$39 million increase in
QWBS gross margin. The increase in QWBSQIS gross margin
was primarily attributable to $11 million in gross margin amortized in the fourth quarter of fiscal 2003 related to equipment sales in prior periods, while equipment sales during the fourth quarter were recognized upon shipment, a $12 million increase in messaging services which have higher gross margins than equipment sales and the effect of a $6 million release of warranty reserveslargely resulting from the
substantial completion of a QWBS warranty program. The improvementincrease in
QWI’s operating margin percentage in fiscal 2003 as55
compared to fiscal 2002 was primarilyfees related to our expanded BREW customer base and products.
During fiscal 2005, QWBS completed the
decreaseprocess of moving high-volume, standard product manufacturing to Mexico to reduce manufacturing costs. The low-volume, prototype and new product manufacturing activities remain in
research and development and selling, general and administrative expenses as a percentage of QWI’s revenues.San Diego.
QSI Segment.QSI’s
lossesearnings before taxes from continuing operations for fiscal
20032005 were
$168$10 million, compared to
$346losses before taxes from continuing operations of $31 million for fiscal
2002.2004. During fiscal
2003, we2005, QSI recorded
a $97$101 million
decrease in
other-than-temporary lossesrealized gains on marketable securities and
a $55other investments, compared to $56 million
decrease in
losses on derivative instruments.fiscal 2004. Equity in losses of investees
increaseddecreased by
$56$43 million primarily due to
an increasea decrease in losses incurred by Inquam
during fiscal 2005 as compared to fiscal 2004, of which our share was
$99$33 million for fiscal
20032005 as compared to
$45$59 million for fiscal
2002. During fiscal 2003, we2004. QSI’s earnings before taxes from continuing operations also
recorded other income of $47included a $42 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 licensesincrease in
Australia due to developments that affected strategic alternatives for using the spectrum.MediaFLO USA operating expenses.
Liquidity and Capital Resources Our principal sources of liquidity are our existing cash, cash equivalents and marketable securities, cash generated from operations and proceeds from the issuance of common stock under our stock option and employee stock purchase plans. Cash and cash equivalents and marketable securities were $7.6$9.9 billion at September 30, 2004,24, 2006, an increase of $2.3$1.3 billion from September 30, 2003. The increase during fiscal 2004 was25, 2005. Our cash and cash equivalents and marketable securities at September 24, 2006 consisted of $3.8 billion held by foreign subsidiaries with the remaining balance of $6.1 billion held domestically. Due to income tax considerations, we derive liquidity for operations primarily the result of $2.5 billion in cashfrom investments held domestically. Cash provided by operating activities $330 millionwas $3.3 billion during fiscal 2006, compared to $2.7 billion during fiscal 2005. The increase was primarily attributable to higher net income (net of non-cash share-based
59
compensation expense) in netfiscal 2006. Net proceeds from the issuance of common stock under our stock option and employee stock purchase plans was $692 million during fiscal 2006, compared to $386 million during fiscal 2005.
On November 7, 2005, we authorized the repurchase of up to $2.5 billion of our common stock under a stock repurchase program with no expiration date. During fiscal 2006, we repurchased and $196retired 34,000,000 shares of common stock for $1.5 billion. At September 24, 2006, approximately $0.9 billion remained authorized for repurchases under our stock repurchase program, net of put options outstanding. We will continue to actively evaluate repurchases under this program.
We declared and paid dividends totaling $698 million,
$524 million and $307 million, or $0.42, $0.32 and $0.19 per share, during fiscal 2006, 2005 and 2004, respectively. On October 5, 2006, we announced a cash dividend of $0.12 per share on our common stock, payable on January 4, 2007 to stockholders of record as of December 7, 2006. We intend to continue to pay quarterly dividends subject to capital availability and periodic determinations that cash dividends are in
net collections on finance receivables, mainly comprisedthe best interest of
the prepayment from Pegaso, partially offset by $332 million in capital expenditures, $308 million in dividend payments and $70 million invested in other entities and acquisitions.our stockholders.
Accounts receivable increased by 20%29% during fiscal 2004.2006. Days sales outstanding, on a consolidated basis, were 29 days at September 24, 2006, compared to 30 days at September 25, 2005. The increase in accounts receivable was primarily due to the increase in sales of integrated circuits, partially offset by the effect of the changerevenue in fiscal 2006 as compared to fiscal 2005 and the timing of recognizing royalties. Days sales outstanding, on a consolidated basis, were 43 days at September 30, 2004, compared to 48 days at September 30, 2003.cash receipts for royalty receivables. The change in days sales outstanding is primarily attributable toconsistent with the effectincreases in revenue and accounts receivable.
On January 18, 2006, we completed our acquisition of
Flarion, a developer of OFDMA technology, for approximately $613 million in consideration, including approximately $229 million in cash. Upon achievement of certain agreed upon milestones during the
changethird quarter of fiscal 2006, we incurred additional aggregate consideration of $197 million, including approximately $185 million in
the timing of recognizing royalties. In February 2003, we authorized the expenditure of up to $1 billion to repurchase shares of our common stock over a two-year period. In fiscal 2003, we bought 9,830,000 shares at a net aggregate cost of $158 million. While we did not repurchase any of our common stock during fiscal 2004, we continue to evaluate repurchases under this program. In connection with our stock repurchase program, we sold put options in March 2004 that could have required us to purchase 3,000,000 shares of our common stock upon exercise. We repurchased all of the put optionscash (of which $75 million will be payable in July 2004. We recorded $5 million in premiums received for the put options as investment income. At September 30, 2004, $834 million remains authorized for repurchases under the program. We announced dividends totaling approximately $307 million and $135 million, or $0.190 and $0.085 per share, during fiscal 2004 and 2003, respectively.
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 operators, other commitments, the payment of dividends and possible additional stock buy backs. We started construction of two 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 be approximately $250 million through fiscal 2007. We recently announced our plans to expand our current Network Operations Center in Las Vegas, Nevada, which uses GPS and other technologies to track freight transportation and shipping nationwide. We expect the cost of this expansion will be approximately $52 million through fiscal 2007. We expect to place the new and expanded facilities in service starting in fiscal 2005 through fiscal 2007.
2007).
We intend to continue our strategic investment activities to promote the worldwide adoption of CDMA products and the growth of CDMA-based wireless data and wireless Internet
products, although to a lesser extent than in prior years.products. As part of these investment activities, we may provide financing
or other support to facilitate the marketing and sale of CDMA equipment by authorized suppliers. In the event additional needs for cash arise, we may raise additional funds from a combination of sources including potential debt and equity issuance.
During
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
first quarterforeseeable future based on current business plans, including acquisitions, investments in other companies and other assets to support the growth of
fiscal 2005, weour business, financing and
other commitments, the
Other Investor in Inquam committed to fund anpayment of dividends and possible additional
$2 million each. While we have no other obligations to provide funding to Inquam, we continue to have active discussions with Inquam and the Other Investor concerning the necessary funding for all or part of Inquam’s business56
stock repurchases.
plan, potential restructuring and investment by other parties. While we may provide some additional funding and/or credit support in furtherance of Inquam’s business plan, the amount and form of such support is unknown, and none will be provided without commensurate support or consideration being provided by the Other Investor.
Contractual Obligations / Off-Balance Sheet Arrangements
We have no significant contractual obligations not fully recorded on our
Consolidated Balance Sheetsconsolidated balance sheets or fully disclosed in the
Notesnotes to our
Consolidated Financial Statements.consolidated financial statements. We have no
material off-balance sheet arrangements as defined in S-K 303(a)(4)(ii).
At September
30, 2004,24, 2006, our outstanding contractual obligations included (in millions):
Contractual Obligations
Payments Due By Period
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | No |
| | | | | | | Fiscal | | Fiscal | | Fiscal | | Beyond Fiscal | | Expiration |
| | | Total
| | 2005
| | 2006 - 2007
| | 2008-2009
| | 2009
| | Date
|
Long-term financing under Ericsson arrangement(1) | | $ | 118 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 118 | |
| Purchase obligations | | | 949 | | | | 885 | | | | 60 | | | | 4 | | | | — | | | | — | |
| Operating leases | | | 111 | | | | 45 | | | | 52 | | | | 11 | | | | 3 | | | | — | |
Equity investments(1) | | | 19 | | | | — | | | | — | | | | — | | | | — | | | | 19 | |
| Inquam guarantee | | | 28 | | | | 28 | | | | — | | | | — | | | | — | | | | — | |
| Other commitments | | | 1 | | | | 1 | | | | — | | | | — | | | | — | | | | — | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| |
| Total commitments | | | 1,226 | | | | 959 | | | | 112 | | | | 15 | | | | 3 | | | | 137 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| |
Other long-term liabilities(2) | | | 90 | | | | — | | | | 8 | | | | 22 | | | | — | | | | 60 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| |
| Total recorded liabilities | | | 90 | | | | — | | | | 8 | | | | 22 | | | | — | | | | 60 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| |
| Total | | $ | 1,316 | | | $ | 959 | | | $ | 120 | | | $ | 37 | | | $ | 3 | | | $ | 197 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | No | |
| | | | | | | Fiscal | | | Fiscal | | | Fiscal | | | Beyond | | | Expiration | |
| | | Total | | | 2007 | | | 2008-2009 | | | 2010-2011 | | | Fiscal 2011 | | | Date | |
Purchase obligations(1) | | $ | 829 | | | $ | 663 | | | $ | 110 | | | $ | 38 | | | $ | 18 | | | $ | — | |
| Operating leases | | | 291 | | | | 71 | | | | 74 | | | | 49 | | | | 97 | | | | — | |
Other commitments(2) | | | 42 | | | | — | | | | — | | | | — | | | | 26 | | | | 16 | |
| | | | | | | | | | | | | | | | | | | |
| Total commitments | | | 1,162 | | | | 734 | | | | 184 | | | | 87 | | | | 141 | | | | 16 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Capital leases(3) | | | 125 | | | | 3 | | | | 6 | | | | 8 | | | | 108 | | | | — | |
Other long-term liabilities (4) | | | 47 | | | | — | | | | 45 | | | | — | | | | 2 | | | | — | |
| | | | | | | | | | | | | | | | | | | |
| Total recorded liabilities | | | 172 | | | | 3 | | | | 51 | | | | 8 | | | | 110 | | | | — | |
| | | | | | | | | | | | | | | | | | | |
| Total | | $ | 1,334 | | | $ | 737 | | | $ | 235 | | | $ | 95 | | | $ | 251 | | | $ | 16 | |
| | | | | | | | | | | | | | | | | | | |
| | |
| (1) | | TheseTotal purchase obligations include $593 million in commitments to purchase integrated circuit product inventories. |
60
| | |
| (2) | | Certain of these commitments do not have fixed funding dates. Amounts are presented based on the expiration of the commitment, but actual funding may occur earlier or not at all as funding is subject to certain conditions. Commitments represent the maximum amounts to be financed or funded under these arrangements; actual financing or funding may be in lesser amounts. |
| |
(2)(3) | | Amounts represent future minimum lease payments including interest payments. Capital lease obligations are included in other liabilities in the consolidated balance sheet at September 24, 2006. |
|
| (4) | | 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. |
Additional information regarding our financial commitments at September
30, 200424, 2006 is provided in the
Notesnotes to our
Consolidated Financial Statements.consolidated financial statements. See “Notes to Consolidated Financial Statements, Note
3 — Composition of Certain Financial Statement Captions, Finance Receivables, Note 4
—– Investments in Other Entities and Note 9
—– Commitments and Contingencies.”
Future Accounting Requirements In
June 2004,July 2006, the FASB issued
EITF IssueFASB Interpretation No.
02-14, “Whether an Investor Should Apply48 (FIN 48) “Accounting for Uncertainty in Income Taxes” which prescribes a recognition threshold and measurement process for recording in the
Equity Method of Accountingfinancial statements uncertain tax positions taken or expected to
Investments Other Than Common Stock.” EITF Issue No. 02-14 addresses whetherbe taken in a tax return. Additionally, FIN 48 provides guidance on the
equity method ofderecognition, classification, accounting
applies when an investor does not have an investment in
voting common stock of an investee but exercises significant influence through other means. EITF Issue No. 02-14 states that an investor should only apply the equity method of accounting when it has investments in either common stock or in-substance common stock of a corporation, provided that the investor has the ability to exercise significant influence over the operatinginterim periods and
financial policies of the investee.disclosure requirements for uncertain tax positions. The accounting provisions of
EITF Issue No. 02-14 areFIN 48 will be effective for
us beginning October 1, 2007. The cumulative effect of initially adopting FIN 48 will be recorded as an adjustment to opening retained earnings in the
first quarteryear of
fiscal 2005.adoption and will be presented separately. Only tax positions that meet the more likely than not recognition threshold at the effective date may be recognized upon adoption of FIN 48. We are in the process of determining the effect, if any, the adoption of
EITF Issue No. 02-14FIN 48 will have on our
consolidated financial statements.
In March 2004, the FASB issued EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” which provides new guidance for assessing impairment losses on debt and equity investments. Additionally, EITF Issue No. 03-1 includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF Issue No. 03-1; however, the disclosure requirements remain effective and have been adopted for our year ended September 30, 2004. We will evaluate the effect, if any, of EITF 03-1 when final guidance is released.
57
Item 7A. Quantitative and Qualitative Disclosure AboutDisclosures about Market Risk Interest Rate Market Risk.We
haveinvest 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 (both included in other assets) that bear interest at fixed rates. See “Note 3 to the Consolidated Financial Statements — Composition of Certain Financial Statement Captions” for information about finance receivables. Finance receivables and notes that bear interest at fixed rates could lose value if interest rates increase.
The following table provides information about our financial instruments that are sensitive to changes in interest rates. For our 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.
61
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rates
(Dollars in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | No Single | | Fair | | No Single | | Fair |
| | | 2005
| | 2006
| | 2007
| | 2008
| | 2009
| | Thereafter
| | Maturity
| | Total
| | Value
| | 2007 | | 2008 | | 2009 | | 2010 | | 2011 | | Thereafter | | Maturity | | Total | | Value |
| Fixed income securities: | | |
| Fixed interest-bearing securities: | | |
| Cash and cash equivalents | | $ | 458 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 458 | | $ | 457 | | | $ | 482 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 482 | | $ | 482 | |
| Interest rate | | | 1.5 | % | | |
| Held-to-maturity securities | | $ | 10 | | $ | 130 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 140 | | $ | 142 | | |
| Interest rate | | | 1.5 | % | | | 1.7 | % | | | | 5.3 | % | |
| Available-for-sale securities: | | |
| Investment grade | | $ | 825 | | $ | 803 | | $ | 805 | | $ | 59 | | $ | 63 | | $ | 39 | | $ | 2,054 | | $ | 4,648 | | $ | 4,648 | | | $ | 2,138 | | $ | 436 | | $ | 238 | | $ | 39 | | $ | 12 | | $ | 10 | | $ | 267 | | $ | 3,140 | | $ | 3,140 | |
| Interest rate | | | 1.9 | % | | | 2.2 | % | | | 2.3 | % | | | 2.7 | % | | | 2.1 | % | | | 2.9 | % | | | 2.0 | % | | | | 4.1 | % | | | 4.6 | % | | | 5.2 | % | | | 5.0 | % | | | 5.2 | % | | | 7.3 | % | | | 4.9 | % | |
| Non-investment grade | | $ | 1 | | $ | 3 | | $ | 6 | | $ | 20 | | $ | 61 | | $ | 481 | | $ | — | | $ | 572 | | $ | 572 | | | $ | 2 | | $ | 13 | | $ | 37 | | $ | 30 | | $ | 61 | | $ | 352 | | $ | — | | $ | 495 | | $ | 495 | |
| Interest rate | | | 1.1 | % | | | 7.0 | % | | | 8.9 | % | | | 9.7 | % | | | 8.7 | % | | | 8.5 | % | | | | 7.2 | % | | | 5.8 | % | | | 6.8 | % | | | 7.7 | % | | | 7.5 | % | | | 8.0 | % | |
| Finance receivables in other assets | | $ | 3 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 3 | | $ | 2 | | |
| Floating interest-bearing securities: | | |
| Cash and cash equivalents | | | $ | 999 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 999 | | $ | 999 | |
| Interest rate | | | 8.0 | % | | | | 5.3 | % | |
| Notes receivable in other assets | | $ | — | | $ | 2 | | $ | — | | $ | — | | $ | — | | $ | 87 | | $ | — | | $ | 89 | | $ | 60 | | |
| Available-for-sale securities: | | |
| Investment grade | | | $ | 157 | | $ | 116 | | $ | 192 | | $ | 52 | | $ | 3 | | $ | 87 | | $ | 348 | | $ | 955 | | $ | 955 | |
| Interest rate | | | 0.0 | % | | | 0.0 | % | | | | 5.0 | % | | | 5.3 | % | | | 5.6 | % | | | 5.6 | % | | | 5.8 | % | | | 5.8 | % | | | 5.5 | % | |
| Non-investment grade | | | $ | 10 | | $ | 14 | | $ | 12 | | $ | 26 | | $ | 65 | | $ | 258 | | $ | 512 | | $ | 897 | | $ | 897 | |
| Interest rate | | | | 6.4 | % | | | 6.7 | % | | | 6.6 | % | | | 6.5 | % | | | 7.1 | % | | | 7.1 | % | | | 7.2 | % | |
Equity Price Market Risk.We
holdinvest in a
number of diversified
portfolio of marketable securities
equityand mutual fund shares
and derivative instruments subject to equity price risk. The recorded values of marketable equity securities increased to
$765 million$1.34 billion at September
30, 200424, 2006 from
$140 million$1.16 billion at September
30, 2003.25, 2005. The recorded value of equity mutual fund shares
was $296increased to $1.52 billion at September 24, 2006 from $293 million at September
30, 2004. The recorded value of derivative instrument assets, mainly comprised of warrants, subject to Statement of Financial Accounting Standards No. 133 (FAS 133) “Accounting for Derivative Instruments and Hedging Activities,” at September 30, 2004 was $4 million. We generally invest25, 2005. Our diversified investments in
companies in the high-technology industry, and typically do not attempt to reduce or eliminate our market exposure on these securities. 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
58
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, 200424, 2006 would cause a corresponding 10% decrease in the carrying amounts of these securities, or $106$285 million.
Our strategic investments in other entities consist substantially of investments in private
early stageearly-stage companies accounted for under the equity and cost methods. Accordingly, we believe that our exposure to market risk from these investments is not material. Additionally, we do not anticipate any near-term changes in the nature of our market risk exposures or in management’s objectives and strategies with respect to managing such exposures. The recorded values of these strategic investments totaled
$162$93 million at September
30, 2004.24, 2006, compared to $121 million at September 25, 2005.
In connection with our stock repurchase program, we sell put options that may require us to repurchase shares of our common stock at fixed prices. These written put options subject us to equity price risk. At September 24, 2006, we had two outstanding put options, enabling holders to purchase 2,000,000 shares of our common stock upon exercise for approximately $89 million (net of the option premiums received). The put option liabilities, with a fair value of $19 million at September 24, 2006, were included in other current liabilities. If the fair value of our common stock at September 24, 2006 decreased by 10%, the amount required to physically settle the put options would exceed the fair value of the shares by $21 million, net of the $6 million in premiums received.
Additional information regarding our strategic investments is provided in Management’s Discussion and Analysis of Financial Condition and
Operating Results
of Operations in this Annual Report.
Foreign Exchange Market Risk.We manage our exposure to foreign exchange market risks, when deemed appropriate, through the use of derivative financial instruments, consisting primarily of foreign currency forward and option contracts. DerivativeSuch derivative financial instruments are viewed as hedging or risk management tools and are not used for speculative or trading purposes. At September 30, 2004,24, 2006, we had no foreign currency forward contracts outstanding. At September 24, 2006, the net recorded value of our foreign currency forwardoption contracts was insignificant, and there were nothat hedge the foreign currency option contracts outstanding.risk on royalties earned from certain international licensees on their sales of CDMA and WCDMA products was a liability of $2 million. If our forecasted royalty revenues were to decline by 20% and foreign exchange rates
62
were to change unfavorably by 20% in each of our hedged foreign currencies, we would incur a loss of approximately $3 million resulting from a decrease in fair value of the portion of our hedges that would be rendered ineffective. See
“Note 1“Notes to
the Consolidated Financial Statements,
—Note 1 – The Company and
itsIts Significant Accounting Policies” for a description of our foreign currency accounting policies.
Financial instruments held by consolidated subsidiaries and equity method investees which are not denominated in the functional currency of those entities are subject to the effects of currency fluctuations and may affect reported earnings. As a global concern, we face exposure to adverse movements in foreign currency exchange rates. We may hedge currency exposures associated with certain assets and liabilities denominated in nonfunctional currencies and certain anticipated nonfunctional currency transactions. As a result, we could experience unanticipated gains or losses on anticipated foreign currency cash flows, as well as economic loss with respect to the recoverability of investments. While we may hedge certain transactions with non-United States customers, declines in currency values in certain regions may, if not reversed, adversely affect future product sales because our products may become more expensive to purchase in the countries of the affected currencies.
Finance receivables and notes receivable from international operators 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, 2004, finance and note receivables from international operators and customers totaled $2 million, net of allowances.
Our analysis methods used to assess and mitigate risk discussed above should not be considered projections of future risks.
Item 8. Financial Statements and Supplementary Data Our consolidated financial statements at September 30, 200424, 2006 and 2003September 25, 2005 and the Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm, are included in this Annual Report on Form 10-K on pages F-1 through F-37.F-33.
Item 9. Changes in and Disagreements with Independent Registered Public Accounting FirmAccountants on Accounting and Financial Disclosure None.
Item 9A. Controls and Procedures Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the 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.59
Annual Report.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act
RulesRule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in
Internal Control -– Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in
Internal Control —– Integrated Framework, our management concluded that our internal control over financial reporting was effective as of September
30, 2004. Our24, 2006.
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this Annual Report on Form 10-K, has also audited management’s assessment of our internal control over financial reporting and the effectiveness of our internal control over financial reporting as of September 30, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm,24, 2006, as stated in their report which appears on pages F-1 and F-2.
Inherent Limitations Over Internal Controls
Our internal control over financial reporting is included herein.designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
| i. | | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; |
63
| ii. | | provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
|
| iii. | | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements. |
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations, including the possibility of human error and circumvention by collusion or overriding of controls. Accordingly, even an effective internal control system may not prevent or detect material misstatements on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during fiscal 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
None.
6064
PART III
Item 10. Directors and Executive Officers of the Registrant The information required by this item regarding directors is incorporated by reference to our Definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Stockholders to be held in 20052007 (the “2005“2007 Proxy Statement”) under the headingsheading “Election of Directors.” Information regarding executive officers is set forth in Item 1 of Part I of this Report under the caption “Executive Officers.” The information regarding our code of ethics is incorporated by reference to our Definitivethe 2007 Proxy Statement filed with the Securities and Exchange Commission on January 9, 2004 under the heading “Code of Ethics.”
Item 11. Executive Compensation The information required by this item is incorporated by reference to the 20052007 Proxy Statement under the heading “Executive Compensation.Compensation and Other Matters.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference to the 20052007 Proxy Statement under the heading “Securityheadings “Equity Compensation Plan Information” and “Stock Ownership of Certain Beneficial Owners and Management.”
Item 13. Certain Relationships and Related Transactions The information required by this item is incorporated by reference to the 20052007 Proxy Statement under the heading “Certain Transactions.”
Item 14. Principal Accounting Fees and Services The information required by this item is incorporated by reference to the 20052007 Proxy Statement under the heading “Fees Paid to PricewaterhouseCoopers LLP.”
6165
PART IV
Item 15. Exhibits and Financial Statement SchedulesSchedule
The following documents are filed as part of this report:
| | | | | |
| | | Page | |
| | | Number | |
| (a) Financial Statements: | | | | |
| | | F-1 | |
| | | F-2 | |
Consolidated Statements of Operations for Fiscal 2004, 2003 and 2002September 25, 2005 | | | F-3 | |
| | | F-4 | |
| | | F-5 | |
| | | F-6 | |
| | | F-6F-7 | |
| (2) Schedule II-Valuation and Qualifying Accounts | | | S-1 | |
Financial statement schedules other than those listed above have been omitted because they are either not required, not applicable or the information is otherwise included in the notes to the
Financial Statements.consolidated financial statements.(b) Exhibits:
| | | | |
| Exhibit | | |
| Number | | Description |
| 2.12.6 | | | Restructuring 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) |
| | | | | |
| 2.5 | | | Share Purchase Agreement dated as of September 25, 2003, by and among Vésper Holding, Ltd., QUALCOMM do Brasil Ltda. and Embratel Particpações S.A.(14) |
| | | | |
| 3.1 | | | Restated Certificate of Incorporation.(13) |
| | | | |
| 3.2 | | | Certificate of Amendment of Restated Certificate of Incorporation.(13)Designation. (3) |
| | | | | |
| 3.33.4 | | | Certificate of Designation of Preferences.(13)Amended and Restated Bylaws. (4) |
| | | | | |
| 3.4 | | | Bylaws.(13) |
| | | | |
| 3.5 | | | Amendment of the Bylaws.(13) |
| | | | |
| 10.1 | | | Form of Indemnity Agreement between the Company, each director and certain officers.(2)(7)(5)(6) |
| | | | | |
| 10.2 | | | 1991 Stock Option Plan, as amended.(5)(7)(16) |
| | | | | |
| 10.4 | | | Form of Stock Option Grant under the 1991 Stock Option Plan.(5)(7)(16) |
| | | | | |
| 10.12 | | | DS-CDMA Technology Agreement and related Patent License Agreement, each dated September 26, 1990 between the Company and MOTOROLA, Inc.(2)(3) |
| | | | |
| 10.16 | | | Amendment dated January 21, 1992 to that certain Technology Agreement dated September 26, 1990 with MOTOROLA, Inc.(4)(5) |
| | | | |
| 10.21 | | | Executive Retirement Matching Contribution Plan, as amended.(5)(7)(16) |
| | | | | |
| 10.22 | | | 1996 Non-qualified Employee Stock Purchase Plan, as amended.(5)(7)(16) |
| | | | | |
| 10.23 | | | Stockholder Rights Plan.(6) |
62
| | | | |
Exhibit | | |
Number | | Description |
| 10.29 | | | 1998 Non-Employee Director’s Stock Option Plan, as amended.(7)(11) |
| | | | |
| 10.32 | | | Multi-Product License Agreement between QUALCOMM Incorporated and Telefonaktiebolaget LM Ericsson dated March 24, 1999.(5)(8) |
| | | | | |
| 10.33 | | | Subscriber Unit License Agreement between QUALCOMM Incorporated and Telefonaktiebolaget LM Ericsson dated March 24, 1999.(8) |
| | | | |
| 10.34 | | | Settlement Agreement and Mutual Release between QUALCOMM Incorporated and Telefonaktiebolaget LM Ericsson dated March 24, 1999.(8) |
| | | | |
| 10.36 | | | Amendment No. 1 dated as of May 24, 1999 to the Asset purchase Agreement dated as of March 24, 1999 between QUALCOMM Incorporated and Telefonaktiebolaget LM Ericsson (publ).(9) |
| | | | |
| 10.37 | | | Amendment to Stockholder Rights Plan dated November 15, 1999.(10) |
| | | | |
| 10.40 | | | Form of Stock Option Grant Notice and Agreement under the 2001 Stock Option Plan.(5)(7)(16) |
| | | | | |
| 10.41 | | | 2001 Employee Stock Purchase Plan, as amended.(16)(5)(7) |
| | | | | |
| 10.42 | | | 2001 Non-Employee Directors’ Stock Option Plan.(7)(12) |
| | | | |
| 10.43 | | | Form of Stock Option Grant Notice and Agreement under the 2001 Non-Employee Directors’ Stock Option Plan.(7)(12)(5)(9) |
| | | | | |
| 10.55 | | | 2001 Stock Option Plan, as amended.(7)(15)(5)(10) |
| | | | | |
| 10.56 | | | Offer of Employment to Richard Sulpizio.(7)(15) |
| | | | |
| 10.57 | | | Voluntary Executive Retirement Contribution Plan, as amended.(7)(16) Form of Annual Grant under the 1998 Non-Employee Directors’ Stock Option Plan.(7)(16) |
| | | | |
| 10.58 | | | Form of Annual Grant under the 1998 Non-Employee Directors’ Stock Option Plan.(5)(7)(16) |
| | | | | |
| 10.5910.63 | | | Iridigm Display Corporation 2000 Stock Option Plan.(7)(17)Summary of Changes to Non-Employee Director Compensation Program.(5)(11) |
| | | | | |
| 10.6010.66 | | | Forms of2001 Non-Employee Directors’ Stock Option Agreements under the Iridigm Display Corporation 2000 Stock Option Plan.(7)(17)Plan, as amended.(5)(12) |
| | | |
| 10.70 | | Amended and Restated Rights Agreement dated September 26, 2005 between the Company and Computershare Investor Services LLC, as Rights Agent.(3) |
| | |
| 2110.71 | | Voluntary Executive Retirement Contribution Plan, as amended.(5)(13) |
| | |
| 10.72 | | 2005 Bonuses and 2006 Annual Base Salary for Named Executive Officers and Summary of 2006 Annual Bonus Program.(5)(14) |
| | |
| 10.73 | | 2006 Long-Term Incentive Plan.(2)(5) |
| | |
| 10.74 | | Forms of Grant Notice and Stock Option Agreement under the 2006 Long-Term Incentive Plan.(2)(5) |
66
| | |
| Exhibit | | |
| Number | | Description |
| 21 | | Subsidiaries of the Registrant. |
| | | | | |
| 23.1 | | | Consent of Independent Registered Public Accounting Firm. |
| | | | | |
| 24.1 | | | Power of Attorney. Reference is made to page 65. |
| | | | |
| 31.1 | | | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Irwin MarkPaul E. Jacobs. |
| | | | | |
| 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 Irwin MarkPaul E. Jacobs. |
| | | | | |
| 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).
|
|
| (2) | | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on November 28, 2001.March 13, 2006. |
| |
(2)(3) | | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on September 30, 2005. |
|
| (4) | | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on September 22, 2006. |
|
| (5) | | Indicates management or compensatory plan or arrangement required to be identified pursuant to Item 15(a). |
|
| (6) | | Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (No. 33-42782). |
| |
(3) | | Certain confidential portions deleted pursuant to Order Granting Application or Confidential Treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934 dated December 12, 1991. |
|
(4) | | Filed as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal year ended September 27, 1992. |
|
(5) | | Certain confidential portions deleted pursuant to Order Granting Application for Confidential Treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934 dated March 19, 1993. |
|
(6)(7) | | Filed as an exhibit to the Registrant’s CurrentQuarterly Report on Form 8-K filed on September 26, 1995. |
|
(7) | | Indicates management or compensatory plan or arrangement required to be identified pursuant to Item 14(c).10-Q for the quarter ended June 27, 2004. |
| |
| (8) | | Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 28, 1999.26, 2000. |
| |
| (9) | | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on May 24, 1999. |
|
(10) | | Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 26, 1999. |
|
(11) | | Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 26, 2000. |
63
(12) | | Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 1, 2001. |
| |
(13) | | Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 30, 2003. |
|
(14) | | Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended September 28, 2003. |
|
(15)(10) | | Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 28, 2004. |
| |
(16)(11) | | Filed as an exhibit to the Registrant’s QuarterlyCurrent Report on Form 10-Q for the quarter ended June 27, 2004.8-K filed on February 25, 2005. |
| |
(17)(12) | | Filed as an exhibit to the Registrant’s Registration StatementCurrent Report on Form S-8 (No. 333 119904).8-K/A filed on May 6, 2005.
|
|
| (13) | | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on October 26, 2005. |
|
| (14) | | Filed under item 1.01 of the Registrant’s Current Report on Form 8-K filed on November 8, 2005. |
67
SIGNATURES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
November 3, 20042, 2006
| | | | | |
| | QUALCOMM Incorporated
| |
| | ByBy: | /s/ Irwin Mark/s/ Paul E. Jacobs | |
| | | Irwin MarkPaul E. Jacobs, | |
| | | Chief Executive Officer and Chairman | |
6468
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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
| | | | | |
Signature
| | Title
| | Date
|
|
/s/ IRWIN MARK JACOBS
Irwin MarkPaul E. Jacobs | | Chief Executive Officer and ChairmanDirector | | November 2, 2006 |
| Paul E. Jacobs | | (Principal Executive Officer) | | November 3, 2004 |
| | | | | |
/s/ WILLIAM E. KEITEL
William E. Keitel | | Chief Financial Officer
(Principal | | November 2, 2006 |
| William E. Keitel | | (Principal Financial and Accounting Officer) | | November 3, 2004 |
| | | | | |
/s/ RICHARD C. ATKINSON
Richard C. AtkinsonIrwin Jacobs | | DirectorChairman of the Board | | November 3, 20042, 2006 |
| Irwin Jacobs | | | | |
| | | | | |
/s/ ADELIA A. COFFMAN
Adelia A. CoffmanBarbara T. Alexander | | Director | | November 3, 20042, 2006 |
| Barbara T. Alexander | | | | |
| | | | | |
/s/ RAYMOND DITTAMORE
Raymond DittamoreRichard C. Atkinson | | Director | | November 3, 20042, 2006 |
| Richard C. Atkinson | | | | |
| | | | | |
/s/ DIANA LADY DOUGAN
Diana Lady DouganAdelia A. Coffman | | Director | | November 3, 20042, 2006 |
| Adelia A. Coffman | | | | |
| | | | | |
/s/ ROBERT E. KAHN
Robert E. KahnDonald Cruickshank | | Director | | November 3, 20042, 2006 |
| Donald Cruickshank | | | | |
| | | | | |
/s/ DUANE A. NELLES
Duane A. NellesRaymond V. Dittamore | | Director | | November 3, 20042, 2006 |
| Raymond V. Dittamore | | | | |
| | | | | |
/s/ PETER M. SACERDOTE
Peter M. SacerdoteDiana Lady Dougan | | Director | | November 3, 20042, 2006 |
| Diana Lady Dougan | | | | |
| | | | | |
/s/ BRENT SCOWCROFT
Brent ScowcroftRobert E. Kahn | | Director | | November 3, 20042, 2006 |
| Robert E. Kahn | | | | |
| | | | | |
/s/ MARC I. STERN
Marc I. SternSherry Lansing | | Director | | November 3, 20042, 2006 |
| Sherry Lansing | | | | |
| | | | | |
/s/ RICHARD SULPIZIO
Richard SulpizioDuane A. Nelles | | Director | | November 3, 20042, 2006 |
| Duane A. Nelles | | | | |
| | | | |
| /s/ Peter M. Sacerdote | | Director | | November 2, 2006 |
| Peter M. Sacerdote | | | | |
| | | | |
| /s/ Brent Scowcroft | | Director | | November 2, 2006 |
| Brent Scowcroft | | | | |
| | | | |
| /s/ Marc I. Stern | | Director | | November 2, 2006 |
| Marc I. Stern | | | | |
| | | | |
| /s/ Richard Sulpizio | | Director | | November 2, 2006 |
| Richard Sulpizio | | | | |
6569
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of QUALCOMM
IncorporatedIncorporated:
We have completed integrated audits of QUALCOMM Incorporated’s consolidated financial statements and of its internal control over financial reporting as of September 24, 2006 in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of QUALCOMM Incorporated and its subsidiaries (the “Company”)Company) at September 30, 200424, 2006 and 2003,September 25, 2005, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 200424, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2)presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in fiscal 2006.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in
the accompanying Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of September
30, 200424, 2006 based on criteria established in
Internal Control -— Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September
30, 2004,24, 2006, based on criteria established in
Internal Control -— Integrated Frameworkissued by the COSO. The Company’s management is responsible
for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on
(i) these financial statementsmanagement’s assessment and
financial statement schedule; (ii) management’s assessment; and (iii)on the effectiveness of the Company’s internal control over financial reporting based on our
audits.audit. We conducted our auditsaudit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. OurAn audit of internal control over financial reporting includedincludes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consideredconsider necessary in the circumstances. We believe that our audits provideaudit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance
F-1
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” during the year ended September 30, 2003.
PRICEWATERHOUSECOOPERS
| | |
| /s/ PricewaterhouseCoopers LLP | | |
| | |
PricewaterhouseCoopers LLP
San Diego, California
November 2, 2004
2006 F- 1F-2
QUALCOMM Incorporated
CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
| | | | | | | | | | | | | | | | | |
| | September 30,
| | | September 24, | | September 25, | |
| | 2004
| | 2003
| | | 2006 | | 2005 | |
ASSETS | | |
| Current assets: | | |
| Cash and cash equivalents | | $ | 1,214 | | $ | 2,045 | | | $ | 1,607 | | $ | 2,070 | |
| Marketable securities | | 4,768 | | 2,516 | | | 4,114 | | 4,478 | |
| Accounts receivable, net | | 581 | | 484 | | | 700 | | 544 | |
| Inventories | | 154 | | 110 | | | 250 | | 177 | |
| Deferred tax assets | | 409 | | 612 | | | 235 | | 343 | |
| Other current assets | | 101 | | 182 | | | 143 | | 179 | |
| | |
| |
| | | | | | |
| Total current assets | | 7,227 | | 5,949 | | | 7,049 | | 7,791 | |
| Marketable securities | | 1,653 | | 811 | | | 4,228 | | 2,133 | |
| Property, plant and equipment, net | | 675 | | 622 | | | 1,482 | | 1,022 | |
| Goodwill | | 356 | | 346 | | | 1,230 | | 571 | |
| Deferred tax assets | | 493 | | 407 | | | 512 | | 444 | |
| Other assets | | 416 | | 687 | | | 707 | | 518 | |
| | |
| |
| | | | | | |
| Total assets | | $ | 10,820 | | $ | 8,822 | | | $ | 15,208 | | $ | 12,479 | |
| | |
| |
| | | | | | |
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | |
| Current liabilities: | | |
| Trade accounts payable | | $ | 286 | | $ | 195 | | | $ | 420 | | $ | 376 | |
| Payroll and other benefits related liabilities | | 194 | | 141 | | | 273 | | 196 | |
| Unearned revenue | | 172 | | 174 | | | 197 | | 163 | |
| Current portion of long-term debt (Note 11) | | — | | 103 | | |
| Other current liabilities | | 242 | | 195 | | | 532 | | 335 | |
| | |
| |
| | | | | | |
| Total current liabilities | | 894 | | 808 | | | 1,422 | | 1,070 | |
| Unearned revenue | | 170 | | 237 | | | 141 | | 146 | |
| Long-term debt (Note 11) | | — | | 123 | | |
| Other liabilities | | 92 | | 56 | | | 239 | | 144 | |
| | |
| |
| | | | | | |
| Total liabilities | | 1,156 | | 1,224 | | | 1,802 | | 1,360 | |
| | |
| |
| | | | | | |
| Commitments and contingencies (Notes 3, 4 and 9) | | |
| | | |
| 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 30, 2004 and 2003 | | — | | — | | |
| Common stock, $0.0001 par value; 3,000 shares authorized; 1,635 and 1,597 shares issued and outstanding at September 30, 2004 and 2003 | | — | | — | | |
| Preferred stock, $0.0001 par value; issuable in series; 8 shares authorized; none outstanding at September 24, 2006 and September 25, 2005 | | | — | | — | |
| Common stock, $0.0001 par value; 6,000 shares authorized; 1,652 and 1,640 shares issued and outstanding at September 24, 2006 and September 25, 2005 | | | — | | — | |
| Paid-in capital | | 6,940 | | 6,325 | | | 7,242 | | 6,753 | |
| Retained earnings | | 2,709 | | 1,297 | | | 6,100 | | 4,328 | |
| Accumulated other comprehensive income (loss) | | 15 | | | (24 | ) | |
| Accumulated other comprehensive income | | | 64 | | 38 | |
| | |
| |
| | | | | | |
| Total stockholders’ equity | | 9,664 | | 7,598 | | | 13,406 | | 11,119 | |
| | |
| |
| | | | | | |
| Total liabilities and stockholders’ equity | | $ | 10,820 | | $ | 8,822 | | | $ | 15,208 | | $ | 12,479 | |
| | |
| |
| | | | | | |
See accompanying notes.
F- 2F-3
QUALCOMM Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Year Ended | |
| | | Years Ended September 30,
| | September 24, | | September 25, | | September 26, | |
| | | 2004
| | 2003*
| | 2002*
| | 2006 | | 2005 | | 2004 | |
| Revenues: | | |
| Equipment and services | | $ | 3,514 | | $ | 2,862 | | $ | 2,080 | | | $ | 4,776 | | $ | 3,744 | | $ | 3,514 | |
| Licensing and royalty fees | | 1,366 | | 985 | | 835 | | | 2,750 | | 1,929 | | 1,366 | |
| | |
| |
| |
| | | | | | | | |
| Total revenues | | | 7,526 | | 5,673 | | 4,880 | |
| | | 4,880 | | 3,847 | | 2,915 | | | | | | | | |
| | |
| |
| |
| | |
| Operating expenses: | | |
| Cost of equipment and services revenues | | 1,484 | | 1,268 | | 954 | | | 2,182 | | 1,645 | | 1,484 | |
| Research and development | | 720 | | 523 | | 452 | | | 1,538 | | 1,011 | | 720 | |
| Selling, general and administrative | | 568 | | 471 | | 401 | | | 1,116 | | 631 | | 547 | |
| Amortization of goodwill and other acquisition-related intangible assets (Note 1) | | 5 | | 8 | | 259 | | |
| Asset impairment charges | | — | | 34 | | — | | |
| Other | | | (26 | ) | | | (30 | ) | | 9 | | |
| | |
| |
| |
| | | | | | | | |
| Total operating expenses | | 2,751 | | 2,274 | | 2,075 | | | 4,836 | | 3,287 | | 2,751 | |
| | |
| |
| |
| | | | | | | | |
| | | |
| Operating income | | 2,129 | | 1,573 | | 840 | | | 2,690 | | 2,386 | | 2,129 | |
| Investment income (expense), net (Note 5) | | 184 | | | (8 | ) | | | (218 | ) | |
| | | |
| Investment income, net (Note 5) | | | 466 | | 423 | | 184 | |
| | |
| |
| |
| | | | | | | | |
| Income from continuing operations before income taxes | | 2,313 | | 1,565 | | 622 | | | 3,156 | | 2,809 | | 2,313 | |
| Income tax expense | | | (588 | ) | | | (536 | ) | | | (97 | ) | | | (686 | ) | | | (666 | ) | | | (588 | ) |
| | |
| |
| |
| | | | | | | | |
| Income from continuing operations | | 1,725 | | 1,029 | | 525 | | | 2,470 | | 2,143 | | 1,725 | |
| | |
| |
| |
| | | | | | | | |
| Discontinued operations (Note 11): | | |
| | | |
| Discontinued operations (Note 12): | | |
| Loss from discontinued operations before income taxes | | | (10 | ) | | | (280 | ) | | | (160 | ) | | — | | — | | | (10 | ) |
| Income tax benefit (expense) | | 5 | | 78 | | | (5 | ) | |
| Income tax benefit | | | — | | — | | 5 | |
| | |
| |
| |
| | | | | | | | |
| Loss from discontinued operations | | | (5 | ) | | | (202 | ) | | | (165 | ) | | — | | — | | | (5 | ) |
| | |
| |
| |
| | | | | | | | |
| Net income | | $ | 1,720 | | $ | 827 | | $ | 360 | | | $ | 2,470 | | $ | 2,143 | | $ | 1,720 | |
| | | | | | | | | |
| | |
| |
| |
| | |
| Basic earnings per common share from continuing operations | | $ | 1.07 | | $ | 0.65 | | $ | 0.34 | | | $ | 1.49 | | $ | 1.31 | | $ | 1.07 | |
| Basic loss per common share from discontinued operations | | | (0.01 | ) | | | (0.13 | ) | | | (0.11 | ) | | — | | — | | | (0.01 | ) |
| | |
| |
| |
| | | | | | | | |
| Basic earnings per common share | | $ | 1.06 | | $ | 0.52 | | $ | 0.23 | | | $ | 1.49 | | $ | 1.31 | | $ | 1.06 | |
| | |
| |
| |
| | | | | | | | |
| | | |
| Diluted earnings per common share from continuing operations | | $ | 1.03 | | $ | 0.63 | | $ | 0.32 | | | $ | 1.44 | | $ | 1.26 | | $ | 1.03 | |
| Diluted loss per common share from discontinued operations | | — | | | (0.12 | ) | | | (0.10 | ) | | — | | — | | — | |
| | |
| |
| |
| | | | | | | | |
| Diluted earnings per common share | | $ | 1.03 | | $ | 0.51 | | $ | 0.22 | | | $ | 1.44 | | $ | 1.26 | | $ | 1.03 | |
| | | | | | | | | |
| | |
| |
| |
| | |
| Shares used in per share calculations: | | |
| Basic | | 1,616 | | 1,579 | | 1,542 | | | 1,659 | | 1,638 | | 1,616 | |
| | |
| |
| |
| | | | | | | | |
| Diluted | | 1,675 | | 1,636 | | 1,619 | | | 1,711 | | 1,694 | | 1,675 | |
| | |
| |
| |
| | | | | | | | |
| Dividends per share announced | | $ | 0.190 | | $ | 0.085 | | $ | — | | | $ | 0.42 | | $ | 0.32 | | $ | 0.19 | |
| | |
| |
| |
| | | | | | | | |
*As adjusted (Note 11).
See accompanying notes.
F- 3F-4
QUALCOMM Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| | | | | | | | | | | | | | |
| | | | | | | | | | Year Ended | |
| | | Years Ended September 30
| | September 24, | | September 25, | | September 26, | |
| | | 2004
| | 2003*
| | 2002*
| | 2006 | | 2005 | | 2004 (revised) | |
Operating Activities: | | |
| Income from continuing operations | | $ | 1,725 | | $ | 1,029 | | $ | 525 | | |
| Net income | | | $ | 2,470 | | $ | 2,143 | | $ | 1,720 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| Depreciation and amortization | | 163 | | 146 | | 349 | | | 272 | | 200 | | 171 | |
| Asset impairment and related charges | | — | | 34 | | — | | |
| Net realized gains on marketable securities and other investments | | | (88 | ) | | | (80 | ) | | | (2 | ) | | | (136 | ) | | | (179 | ) | | | (88 | ) |
| (Gains) losses on derivative instruments | | | (7 | ) | | 3 | | 58 | | |
| Share-based compensation expense | | | 495 | | — | | — | |
| Incremental tax benefits from stock options exercised | | | | (403 | ) | | — | | — | |
| Losses (gains) on derivative instruments | | | 29 | | | (33 | ) | | | (7 | ) |
| Other-than-temporary losses on marketable securities and other investments | | 12 | | 128 | | 231 | | | 24 | | 14 | | 12 | |
| Equity in losses of investees | | 72 | | 113 | | 57 | | | 29 | | 28 | | 72 | |
| Non-cash income tax expense | | 419 | | 411 | | 8 | | | 514 | | 498 | | 419 | |
| Other non-cash charges | | 35 | | 13 | | | (4 | ) | |
| Proceeds from (purchases of) trading securities | | — | | 2 | | | (2 | ) | |
| Increase (decrease) in cash resulting from changes in: | | |
| Gain on disposal of discontinued operations (Note 12) | | | — | | — | | | (7 | ) |
| Other items, net | | | | (28 | ) | | — | | 23 | |
| Changes in assets and liabilities, net of effects of acquisitions (Note 11): | | |
| Accounts receivable, net | | | (93 | ) | | 53 | | | (1 | ) | | | (133 | ) | | 35 | | | (96 | ) |
| Inventories | | | (50 | ) | | | (23 | ) | | 18 | | | | (71 | ) | | | (23 | ) | | | (48 | ) |
| Other assets | | 51 | | | (12 | ) | | | (9 | ) | | 15 | | | (74 | ) | | 56 | |
| Trade accounts payable | | 151 | | | (24 | ) | | 47 | | | 51 | | 57 | | 154 | |
| Payroll, benefits and other liabilities | | 148 | | 43 | | 25 | | | 96 | | 49 | | 146 | |
| Unearned revenue | | | (57 | ) | | | (12 | ) | | | (37 | ) | | 29 | | | (29 | ) | | | (58 | ) |
| | |
| |
| |
| | | | | | | | |
| Net cash provided by operating activities | | 2,481 | | 1,824 | | 1,263 | | | 3,253 | | 2,686 | | 2,469 | |
| | |
| |
| |
| | | | | | | | |
Investing Activities: | | |
| Capital expenditures | | | (332 | ) | | | (202 | ) | | | (127 | ) | | | (685 | ) | | | (576 | ) | | | (333 | ) |
| Purchases of available-for-sale securities | | | (8,372 | ) | | | (4,484 | ) | | | (1,754 | ) | | | (12,517 | ) | | | (8,055 | ) | | | (8,372 | ) |
| Proceeds from sale of available-for-sale securities | | 5,026 | | 3,183 | | 1,050 | | | 10,853 | | 8,072 | | 5,026 | |
| Purchases of held-to-maturity securities | | | (184 | ) | | | (355 | ) | | | (189 | ) | | — | | — | | | (184 | ) |
| Maturities of held-to-maturity securities | | 401 | | 257 | | 257 | | | 130 | | 10 | | 401 | |
| Issuance of finance receivables | | | (1 | ) | | | (150 | ) | | | (141 | ) | |
| Collection of finance receivables | | 196 | | 813 | | 8 | | | — | | 2 | | 196 | |
| Issuance of notes receivable | | | (37 | ) | | | (28 | ) | | | (4 | ) | |
| Collection of notes receivable | | 38 | | 4 | | 16 | | |
| Other investments and acquisitions | | | (70 | ) | | | (37 | ) | | | (199 | ) | |
| Cash paid in connection with sale of Vésper Operating Companies (Note 12) | | | — | | — | | | (48 | ) |
| Proceeds from sale of the Vésper Towers (Note 12) | | | — | | — | | 45 | |
| Other investments and acquisitions, net of cash acquired | | | | (407 | ) | | | (249 | ) | | | (70 | ) |
| Other items, net | | 9 | | 7 | | 10 | | | 3 | | 20 | | 12 | |
| | |
| |
| |
| | | | | | | | |
| Net cash used by investing activities | | | (3,326 | ) | | | (992 | ) | | | (1,073 | ) | | | (2,623 | ) | | | (776 | ) | | | (3,327 | ) |
| | |
| |
| |
| | | | | | | | |
Financing Activities: | | |
| Proceeds from issuance of common stock | | 330 | | 191 | | 119 | | | 692 | | 386 | | 330 | |
| Incremental tax benefits from stock options exercised | | | 403 | | — | | — | |
| Repurchase and retirement of common stock | | — | | | (166 | ) | | | (6 | ) | | | (1,500 | ) | | | (953 | ) | | — | |
| Proceeds from put options | | 5 | | 7 | | — | | | 11 | | 37 | | 5 | |
| Dividends paid | | | (308 | ) | | | (135 | ) | | — | | | | (698 | ) | | | (524 | ) | | | (308 | ) |
| | |
| |
| |
| | | | | | | | |
| Net cash provided (used) by financing activities | | 27 | | | (103 | ) | | 113 | | |
| | |
| |
| |
| | |
| Net cash used by discontinued operations | | | (13 | ) | | | (89 | ) | | | (300 | ) | |
| Net cash (used) provided by financing activities | | | | (1,092 | ) | | | (1,054 | ) | | 27 | |
| | |
| |
| |
| | | | | | | | |
| Effect of exchange rate changes on cash | | — | | | (2 | ) | | 15 | | | | (1 | ) | | — | | — | |
| | |
| |
| |
| | | | | | | | |
Net (decrease) increase in cash and cash equivalents | | | (831 | ) | | 638 | | 18 | | | | (463 | ) | | 856 | | | (831 | ) |
Cash and cash equivalents at beginning of year | | 2,045 | | 1,407 | | 1,389 | | | 2,070 | | 1,214 | | 2,045 | |
| | |
| |
| |
| | | | | | | | |
Cash and cash equivalents at end of year | | $ | 1,214 | | $ | 2,045 | | $ | 1,407 | | | $ | 1,607 | | $ | 2,070 | | $ | 1,214 | |
| | |
| |
| |
| | | | | | | | |
*As adjusted (Note 11).
See accompanying notes.
F- 4F-5
QUALCOMM Incorporated
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Accumulated | | | | Accumulated | | | |
| | | Other | | Total | | Other | | Total | |
| | | Common Stock | | Paid-in | | Retained | | Comprehensive | | Stockholders’ | | Common Stock | | Paid-In | | Retained | | Comprehensive | | Stockholders' | |
| | | Shares
| | Capital
| | Earnings
| | Income (Loss)
| | Equity
| | Shares | | Capital | | Earnings | | Income (Loss) | | Equity | |
Balance at September 30, 2001 | | 1,527 | | $ | 4,792 | | $ | 245 | | $ | (224 | ) | | $ | 4,813 | | |
| | |
| | |
| Components of comprehensive income: | | |
| Net income | | — | | — | | 360 | | — | | 360 | | |
| Foreign currency translation | | — | | — | | — | | | (15 | ) | | | (15 | ) | |
| Unrealized net losses on securities | | — | | — | | — | | | (86 | ) | | | (86 | ) | |
| Reclassification adjustment for net realized gains included in net income, net of income taxes of $1 | | — | | — | | — | | | (12 | ) | | | (12 | ) | |
| Reclassification adjustment for other-than-temporary losses on marketable securities included in net income | | — | | — | | — | | 206 | | 206 | | |
| | |
| | |
| Total comprehensive income | | 453 | | |
| | |
| | |
| Exercise of stock options | | 29 | | 81 | | — | | — | | 81 | | |
| Tax benefit from exercise of stock options | | — | | 11 | | — | | — | | 11 | | |
| Issuance for Employee Stock Purchase and Executive Retirement Plans | | 2 | | 38 | | — | | — | | 38 | | |
| Repurchase and retirement of common stock | | | (1 | ) | | | (6 | ) | | — | | — | | | (6 | ) | |
| Stock-based compensation expense | | — | | 2 | | — | | — | | 2 | | |
| | |
| |
| |
| |
| |
| | |
Balance at September 30, 2002 | | 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 (Note 6) | | — | | 1,106 | | — | | — | | 1,106 | | |
| Repurchase and retirement of common stock | | | (10 | ) | | | (158 | ) | | — | | — | | | (158 | ) | |
| Dividends | | — | | — | | | (135 | ) | | — | | | (135 | ) | |
| Stock-based compensation expense | | — | | 1 | | — | | — | | 1 | | |
| | |
| |
| |
| |
| |
| | |
Balance at September 30, 2003 | | 1,597 | | 6,325 | | 1,297 | | | (24 | ) | | 7,598 | | |
Balance at September 28, 2003 | | | 1,597 | | $ | 6,325 | | $ | 1,297 | | $ | (24 | ) | | $ | 7,598 | |
| | |
| | | | |
| Components of comprehensive income: | | |
| Net income | | — | | — | | 1,720 | | — | | 1,720 | | | — | | — | | 1,720 | | — | | 1,720 | |
| Foreign currency translation | | — | | — | | — | | 56 | | 56 | | | — | | — | | — | | 56 | | 56 | |
| Unrealized net gains on securities, net of income taxes of $20 | | — | | — | | — | | 29 | | 29 | | | — | | — | | — | | 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 | | |
| Reclassification adjustment for net realized gains on securities included in net income, net of income taxes of $35 | | | — | | — | | — | | | (53 | ) | | | (53 | ) |
| Other | | | — | | — | | — | | 7 | | 7 | |
| | |
| | | | |
| Total comprehensive income | | 1,759 | | | 1,759 | |
| | |
| | | | |
| Exercise of stock options | | 36 | | 284 | | — | | — | | 284 | | | 36 | | 284 | | — | | — | | 284 | |
| Tax benefit from exercise of stock options | | — | | 285 | | — | | — | | 285 | | | — | | 285 | | — | | — | | 285 | |
| Issuance for Employee Stock Purchase and Executive Retirement Plans | | 2 | | 46 | | — | | — | | 46 | | | 2 | | 46 | | — | | — | | 46 | |
| Dividends | | — | | — | | | (308 | ) | | — | | | (308 | ) | | — | | — | | | (308 | ) | | — | | | (308 | ) |
| | |
| |
| |
| |
| |
| | | | | | | | | | | | |
Balance at September 30, 2004 | | 1,635 | | $ | 6,940 | | $ | 2,709 | | $ | 15 | | $ | 9,664 | | |
Balance at September 26, 2004 | | | 1,635 | | 6,940 | | 2,709 | | 15 | | 9,664 | |
| | |
| |
| |
| |
| |
| | | | |
| Components of comprehensive income: | | |
| Net income | | | — | | — | | 2,143 | | — | | 2,143 | |
| Unrealized net gains on securities and derivative instruments, net of income taxes of $84 | | | — | | — | | — | | 119 | | 119 | |
| Reclassification adjustment for net realized gains on securities and derivative instruments included in net income, net of income taxes of $73 | | | — | | — | | — | | | (109 | ) | | | (109 | ) |
| Other | | | 13 | | 13 | |
| | | | | |
| 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 | ) |
| | | | | | | | | | | | | |
Balance at September 25, 2005 | | | 1,640 | | 6,753 | | 4,328 | | 38 | | 11,119 | |
| | | | | |
| Components of comprehensive income: | | |
| Net income | | | — | | — | | 2,470 | | — | | 2,470 | |
| Unrealized net gains on securities and derivative instruments, net of income taxes of $65 | | | — | | — | | — | | 104 | | 104 | |
| Reclassification adjustment for net realized gains on securities and derivative instruments included in net income, net of income taxes of $56 | | | — | | — | | — | | | (89 | ) | | | (89 | ) |
| Other | | | — | | — | | — | | 11 | | 11 | |
| | | | | |
| Total comprehensive income | | | 2,496 | |
| | | | | |
| Exercise of stock options | | | 36 | | 608 | | — | | — | | 608 | |
| Tax benefit from exercise of stock options | | | — | | 394 | | — | | — | | 394 | |
| Issuance for Employee Stock Purchase and Executive Retirement Plans | | | 2 | | 71 | | — | | — | | 71 | |
| Share-based compensation | | | — | | 496 | | — | | — | | 496 | |
| Repurchase and retirement of common stock | | | | (34 | ) | | | (1,473 | ) | | — | | — | | | (1,473 | ) |
| Dividends | | | — | | — | | | (698 | ) | | — | | | (698 | ) |
| Value of common stock issued for acquisition | | | 8 | | 353 | | — | | — | | 353 | |
| Value of options exchanged for acquisitions | | | — | | 40 | | — | | — | | 40 | |
| | | | | | | | | | | | | |
Balance at September 24, 2006 | | | 1,652 | | $ | 7,242 | | $ | 6,100 | | $ | 64 | | $ | 13,406 | |
| | | | | | | | | | | | | |
See accompanying notes.
F- 5F-6
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company and itsIts Significant Accounting Policies The CompanyCompany.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.services. The Company is a leading developer and supplier of CDMA-basedCode Division Multiple Access (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 also manufactures and sells products based upon Orthogonal Frequency Division Multiplexing Access (OFDMA) technology, e.g. FLASH-OFDM. 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 CDMAcertain wireless products, and receives license fees as well as ongoing royalties based on sales by licensees of wireless telecommunications equipment products incorporating its patented technologies. Currently, the vast majority of the Company’s license fees and royalty revenue is comprised of fees and royalties from companies selling wireless products incorporating the Company’s CDMA technologies.technologies, but the Company has also licensed its patented OFDMA technology. The Company provides satellitesatellite- and terrestrial-based two-way data messaging and position reporting services for transportation companies, private fleets, construction equipment 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.
Principles of ConsolidationConsolidation.The Company’s consolidated financial statements include the assets, liabilities and operating results of majority-owned subsidiaries and other subsidiaries controlled by the Company.subsidiaries. The ownership of the other interest holders of consolidated subsidiaries is reflected as minority interest and is not significant. All significant intercompany accounts and transactions have been eliminated. TheCertain 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 deconsolidated the Vésper Operating Companies during the first quarter of fiscal 2004 as a result of their sale in December 2003 and TowerCo during the second quarter of fiscal 2004 as a result of its sale in March 2004 (Note 11). Results of operations and cash flows related to the Vésper Operating Companies and TowerCo are presented as discontinued operations. The Company’s statements of operations and cash flows for all prior periods have been adjusted to present the discontinued operations. The balance sheet as of September 28, 2003 was not adjusted to present assets and liabilities related to discontinued operations separately.
Effective as of the beginning of the second quarter of fiscal 2004, the Company adopted the revised interpretation of Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities,” (FIN 46-R). FIN 46-R requires that certain variable interest entities be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics 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. The Company does not have any investments in entities it believes are variable interest entities for which the Company is the primary beneficiary.
The Company deconsolidated the Vésper Operating Companies and the Vésper Towers during fiscal 2004 as a result of their sale (Note 12). Results of operations related to the Vésper Operating Companies and the Vésper Towers are presented as discontinued operations.
Financial Statement PreparationPreparation.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 consolidated financial statements and the accompanying notes. Actual results could differ from those estimates. The Company’s consolidated statement of cash flows for fiscal 2004 has been revised to combine cash flows from discontinued operations with cash flows from continuing operations. Cash flows from discontinued operations were previously aggregated and reported in a separate line item in the statement of cash flows. Certain other prior year amounts have been reclassified to conform to the current year presentation.
Fiscal YearYear.The Company operates and reports using a 52-week52-53 week fiscal year ending on the last Sunday in September. The fiscal years ended September 30,24, 2006, September 25, 2005 and September 26, 2004 2003 and 2002 each includeincluded 52 weeks. For presentation purposes, the Company presents its fiscal years as ending on September 30.
Revenue RecognitionRecognition.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
F- 6
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 dodoes not affect the timing or amount of revenue recognized.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), “Revenue Recognition in Financial Statements” (later revised as Staff Accounting Bulletin No. 104) which the Company adopted in the fourth quarter of fiscal 2001 and applied retroactively to the first quarter of fiscal 2001. The Company recorded a $147 million loss, net of taxes of $98 million, as the cumulative effect of the accounting change as of the beginning of fiscal 2001 to reflect the deferral of revenues and expenses related to future periods. The amortization of revenue that was deferred as of the beginning of fiscal 2001 is expected to continue to be amortized with a declining impact through fiscal 2007. The Company recognized $30 million, $44 million and $66 million during fiscal 2004, 2003 and 2002, respectively, in operating income related to revenues and expenses that were recognized in prior years.
In November 2002, the Emerging Issues Task Force (EITF) issued Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” which the Company 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, the 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 required the ratable recognition of these sales because the messaging service was considered integral to the functionality of the hardware and software. 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 otherwise requires separate unit accounting in multiple element arrangements. Given that the Company meets the criteria stipulated in EITF Issue No. 00-21, the sale of the hardware is accounted for as a unit of accounting separate from the future service to be provided by the Company. Accordingly, the Company began recognizing revenues allocated to the hardware using the residual method, and related 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, instead of amortizing the related revenue over a future period. The Company 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. The 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 declining impact through fiscal 2008. QWBS amortized $76 million and $23 million in revenue related to such prior period equipment sales in fiscal 2004 and during the fourth quarter of fiscal 2003, respectively. Deferred revenues and expenses related to the historical QWBS sales that will continue to be amortized in future periods were $106 million and $62 million, respectively, at September 30, 2004. Gross margin related to these prior sales is expected to be recognized as follows: $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 portions of its intellectual property portfolio, which includes certain patent rights essential to and/or useful in the manufacture and sale of CDMA (including,certain wireless products, including, without limitation, products implementing cdmaOne, CDMA2000, 1X/1xEV-DO/1xEV-DV, TD-SCDMAWideband CDMA (WCDMA), CDMA Time Division
F-7
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Duplex (TDD) and/or OFDMA standards and
WCDMA) products.their derivatives. Licensees typically pay a
nonrefundable license fee in one or more installments and ongoing royalties based on their sales of products incorporating or using the Company’s licensed intellectual property. License fees are recognized over the estimated period of future benefit to the average licensee, typically five to seven years. The Company earns royalties on such licensed CDMA products sold worldwide by its licensees at the time that the licensees’ sales occur. The Company’s licensees, however, do not report and pay royalties owed for sales in any given quarter until after the conclusion of that quarter, and, in some instances, although royalties are reported quarterly, payment is on a semi-annual basis. During the periods preceding the fourth quarter of fiscal 2004, the Company estimated and recorded the royalty revenues earned for sales by certain licensees (the Estimated Licensees) in the quarter in which such sales occurred, but only when reasonable estimates of such amounts could be made. Not all royalties earned were estimated.
F- 7
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Royalties for licensees for which the Company had minimal reporting history and certain licensees that did not incorporate the Company’s integrated circuit products into their own products were recorded one quarter in arrears, i.e. in the quarter in which the royalties were reported to the Company by those licensees. Estimates of royalty revenues for the Estimated Licensees were based on analyses of the Company’s sales of integrated circuits to Estimated Licensees, historical royalty data for Estimated Licensee, an estimate of the time between the Company’s sales of integrated circuits to Estimated Licensees and Estimated Licensees’ sales of CDMA products, average sales price forecasts, estimates of inventory levels and current market and economic trends. Once royalty reports were received from the Estimated Licensees, the variance between such reports and the estimate was recorded as royalty revenue in the quarter in which the reports were received, i.e. in most cases, the quarter subsequent to the quarter in which the estimated royalties were recorded as revenue.
The following table summarizes royalty related data for fiscal 2004, 2003 and 2002 (in millions):
| | | | | | | | | | | | | |
| | | 2004
| | 2003
| | 2002
|
| Estimate recorded for the fourth quarter of the prior year (Prior Year Fourth Quarter) for Estimated Licensees | | $ | 151 | | | $ | 150 | | | $ | 122 | |
| Royalties reported in first quarter of the current year by Estimated Licensees for the Prior Year Fourth Quarter | | | 208 | | | | 167 | | | | 146 | |
| | | |
| | | |
| | | |
| |
| Prior Year Fourth Quarter variance included in current year | | | 57 | | | | 17 | | | | 24 | |
| Other royalties reported in current year | | | 1,084 | | | | 670 | | | | 551 | |
| Estimate recorded for the fourth quarter of the current year for Estimated Licensees | | | — | | | | 151 | | | | 150 | |
| | | |
| | | |
| | | |
| |
| Total current year royalty revenues from external licensees | | $ | 1,141 | | | $ | 838 | | | $ | 725 | |
| | | |
| | | |
| | | |
| |
For example, for fiscal 2003, the Company estimated royalties of $151 million from the Estimated Licensees for the fourth quarter of fiscal 2003. The actual royalties reported to the Company by the Estimated Licensees, on a one quarter lag basis, during the first quarter of fiscal 2004 were $208 million. The variance of $57 million was recorded in royalty revenues in the first quarter of fiscal 2004. Therefore, total royalty revenues from licensees for fiscal 2004 of $1,141 million included: 1) the prior year fourth quarter variance of $57 million and 2) other royalties reported by licensees during fiscal 2004 of $1,084 million. The Company did not estimate royalty revenues for the fourth quarter of fiscal 2004 due to a change in the Company’s ability to estimate royalties.
Starting in the fourth quarter of fiscal 2004, the Company determined that, due to recent escalating and changing business trends, the Company no longer hashad the ability to reliably estimate royalty revenues from certain licensees.the Estimated Licensees. These escalating and changing trends includeincluded the commercial launches and global expansion of WCDMA networks, changes in market share among licensees due to increased global competition, and increased variability in the integrated circuit and finished product inventories of licensees. Accordingly, the Company did not estimate royalty revenues earned in the fourth quarter of fiscal 2004. Starting in the fourth quarter of fiscal 2004, the Company began recognizing royalty revenues for a quarter solely based on royalties reported by licensees during thesuch 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. Royalties reported by the Company’s licensees were $151 million higher than royalty revenues from external licensees recorded in fiscal 2004 because $151 million in royalties that were reported in the first quarter of fiscal 2004 had been estimated and recorded as revenue in the fourth quarter of fiscal 2003. To facilitate an understanding of the impact of the change, the following table compares royalty revenues recorded as revenue in fiscal 2004, 2003 and 2002 to royalties reported by the Company’s licensees during those same periods (in millions):
F- 8
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | |
| | | 2004
| | 2003
| | 2002
|
| Royalty revenues from external licensees, as recorded in the Company’s consolidated statements of operations | | $ | 1,141 | | | $ | 838 | | | $ | 725 | |
| Estimate recorded for the fourth quarter of the prior year for Estimated Licensees* | | | 151 | | | | 150 | | | | 122 | |
| Estimate recorded at end of the current year for Estimated Licensees | | | — | | | | (151 | ) | | | (150 | ) |
| | | |
| | | |
| | | |
| |
| Total royalties reported by external licensees during the current year | | $ | 1,292 | | | $ | 837 | | | $ | 697 | |
| | | |
| | | |
| | | |
| |
*Recorded as revenue in the prior year, but reported by licensees during the current year.
The table above illustrates that the difference between royalties reported by external licensees and royalty revenues from external licensees recorded in the Company’s consolidated statements of operations has equaled the difference between the estimate for Estimated Licensees at the end of the current year and the estimate for Estimated Licensees at the end of the prior year.
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.
The Company recognizes revenues allocated to certain satellite and terrestrial-based two-way data messaging and position reporting hardware using the residual method. Revenues from such sales are recorded at the time of shipment, or when title and risk of loss pass to the customer and other criteria for revenue recognition are met.
Revenues from long-term contracts are generally recognized using the percentage-of-completion
efforts-expended method of accounting, based on costs incurred compared with total estimated costs. The percentage-of-completion method relies on estimates of total contract revenue and costs. Revenue and profit are subject to revisions as the contract progresses to completion. Revisions in profit estimates are charged or credited to income in the period in which the facts that give rise to the revision become known. If actual contract costs are greater than expected, reduction of contract profit would be required. Billings on uncompleted contracts in excess of incurred cost and accrued profit are classified as unearned
revenue.revenue in the Company’s consolidated balance sheets. Estimated contract losses are recognized when determined. If substantive uncertainty related to customer acceptance exists or the contract’s duration is relatively short, the Company uses the completed-contract method.
The Company provides both perpetual and renewable time-based software licenses. 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
of fair value exists for all undelivered elements, the Company recognizes revenue for the delivered elements and defers revenue for the fair value of the undelivered elements until the remaining obligations have been satisfied. If vendor-specific objective evidence
of fair value 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 and vendor specific objective evidence of the fair value of post-contract customer support does not exist, revenue from the entire arrangement is recognized ratably over the support period. Judgments and estimates are made in connection with the recognition of software license revenue, which may include assessments of collectibility, the fair value of deliverable elements and the implied support period. The amount or timing of the Company’s software license revenue may differ as a result of changes in these judgments or estimates.
The Company records reductions to revenue for customer incentive programs, including special pricing agreements and other volume-related rebate programs. Such reductions to revenue are estimates, which are based on
F-8
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
a number of factors, including
ourthe Company’s assumptions related to historical and projected customer sales volumes and the contractual provisions of the customer agreements.
Unearned revenue consists primarily 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.performance obligations.
ConcentrationsConcentrations.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- 9
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenues from Samsung, LG Electronics and Motorola,three customers of the Company’s QCT, QTL and QWI segments, each comprised an aggregate of 13% of total consolidated revenues in fiscal 2006, compared to 15%, 13% and other nonreportable segments, comprised11% of total consolidated revenues in fiscal 2005 and 15%, 15% and 10% of total consolidated revenues respectively, in fiscal 2004, as compared to 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, QWI and other nonreportable segments, comprised 16%, 14% and 12% of total consolidated revenues, respectively, in fiscal 2002.2004. Aggregated accounts receivable from Samsung, LG Electronics and Motorolathese three customers comprised 51% and 48%45% of gross accounts receivable at September 30, 200424, 2006 and 2003, respectively.
September 25, 2005.
Revenues from international customers were approximately
79%87%,
77%82% and
69%79% of total consolidated revenues in fiscal
2006, 2005 and 2004,
2003 and 2002, respectively.
Cost of equipmentEquipment and services revenuesServices 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.
Research and DevelopmentDevelopment.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.
Shipping and Handling CostsCosts.Costs incurred for shipping and handling are included in cost of equipment and services revenues at the time the related revenue is recognized. Amounts billed to a customer for shipping and handling are reported as revenue.
Income TaxesTaxes.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.
The Company’s income tax returns are based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities. While the Company believes it has appropriate support for the positions taken on its tax returns, the Company regularly assesses the potential outcomes of examinations by tax authorities in determining the adequacy of its provision for income taxes. As part of its assessment of potential adjustments to its tax returns, the Company increases its current tax liability to the extent an adjustment would result in a cash tax payment or decreases its deferred tax assets to the extent an adjustment would not result in a cash tax payment. The Company continually assesses the likelihood and amount of potential adjustments and adjusts the income tax provision, the current tax liability and deferred taxes in the period in which the facts that give rise to a revision become known.
Due to the adoption of the revised Statement of Financial Accounting Standards No. 123, “Share-Based Payment” (FAS 123R) beginning September 26, 2005, the Company recognizes windfall tax benefits associated with the exercise of stock options directly to stockholders’ equity only when realized. Accordingly, deferred tax assets are not recognized for net operating loss carryforwards resulting from windfall tax benefits occurring from September 26, 2005 onward. A windfall tax benefit occurs when the actual tax benefit realized by the Company upon an employee’s disposition of a share-based award exceeds the deferred tax asset, if any, associated with the award that the Company had recorded. When assessing whether a tax benefit relating to share-based compensation has been realized, the Company follows the tax law ordering method, under which current year share-based compensation deductions are assumed to be utilized before net operating loss carryforwards and other tax attributes.
F-9
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash EquivalentsEquivalents.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.
Marketable SecuritiesSecurities.Management determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date. Held-to-maturity securities are carried at amortized cost, which approximates fair value. Available-for-sale securities are stated at fair value as determined by the most recently traded price of each security at the balance sheet date. The net unrealized gains or losses on available-for-sale securities are reported as a component of comprehensive income (loss), net of tax. The specific identification method is used to compute the realized gains and losses on debt and equity securities.
The Company regularly monitors and evaluates the realizable value of its marketable securities. When assessing marketable securities for other-than-temporary declines in value, the Company considers such factors as, among other things, how significant the decline in value is as a percentage of the original cost, how long the market value of
F- 10
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the investment has been less than its original cost, the performance of the investee’s stock price in relation to the stock price of its competitors within the industry and the market in general, analyst recommendations, any news that has been released specific to the investee and the outlook for the overall industry in which the investee operates. The Company also reviews the financial statements of the investee to determine if the investee is experiencing financial difficulties and considers new products/services that the investee may have forthcoming that will improve its operating results. If events and circumstances indicate that a decline in the value of these assets has occurred and is other than temporary,other-than-temporary, the Company records a charge to investment income (expense).
Allowances for Doubtful AccountsAccounts.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 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.
InventoriesInventories.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 EquipmentEquipment.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 30 years and 15 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 15 years. Direct external and internal costs of developing software for internal use are capitalized subsequent to the preliminary stage of development. Leased property meeting certain capital lease criteria is capitalized, and the net present value of the related lease payments is recorded as a liability. Amortization of capital leased assets is recorded using the straight-line method over the shorter of the estimated useful lives or the lease terms. Maintenance, repairs, and minor renewals and betterments are charged to expense as incurred.
Upon the retirement or disposition of property, plant and equipment, the related cost and accumulated depreciation or amortization are removed, and
thea gain or loss is recorded.
Other Investments
Investments in Other EntitiesEntities.The Company makes strategic investments in companies that have developed or are developing innovative wireless data applications and wireless operators 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 cost method is also used to account for investments that are not in-substance common stock. The Company uses the equity method to account for investments in common stock or in-substance common
F-10
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
stock of corporate entities, including limited liability corporations that do not maintain specific ownership accounts, in which it has a voting interest of 20% to
F- 11
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
50% and other than minoror in which it otherwise has the ability to 50% ownership interestsexercise significant influence, and in partnerships and limited liability corporations that do maintain specific ownership accounts or in which it otherwise has the abilityother than minor to exercise significant influence.50% ownership interests. 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.
The Company regularly monitors and evaluates the realizable value of its investments. When assessing an investment for an other-than-temporary decline in value, the Company considers such factors as, among other things, the share price from the investee’s latest financing round, the performance of the investee in relation to its own operating targets and its business plan, the investee’s revenue and cost trends, as well as liquidity and cash position, including its cash burn rate, market acceptance of the investee’s products/services as well as any new products or services that may be forthcoming, any significant news that has been released specific to the investee or the 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,other-than-temporary, the Company records a charge to investment income (expense).
DerivativesDerivatives.The Company holds warrants to purchase equity interests in certain other companies related to its strategic investment activities. The Company’s warrants are not held for trading purposes. Certain of the Company’s warrants are recorded at fair value. Changes in fair value are recorded in investment income (expense) as gains (losses) on derivative instruments because the warrants do not meet the requirements for hedge accounting. Warrants that do not have contractual net settlement provisions are recorded at cost.
The Company entersmay enter into foreign currency forward and option contracts to hedge certain foreign currency transactions and probable anticipated foreign currency transactions. Gains and losses arising from changes in the fair values of foreign currency forward and option contracts that are not designated as hedging instruments are recorded in investment income (expense) as gains (losses) on derivative instruments. Gains and losses arising from the effective portion of foreign currency forward and option contracts that are designated as cash-flow hedging instruments are recorded in accumulated other comprehensive income (loss) as gains (losses) on derivative instruments, untilnet of tax. The amounts are subsequently reclassified into revenues in the same period in which the underlying transaction affectstransactions affect the Company’s earnings. The Company had no outstanding forward contracts at September 24, 2006 and September 25, 2005. The value of the Company’s foreign currency forwardoption contracts recorded in other current assets was insignificant$1 million and $16 million at September 30, 2004. The Company had no foreign currency option contracts outstanding24, 2006 and September 25, 2005, respectively, and the value recorded in other current liabilities was $3 million at September 30, 2004.24, 2006, all of which were designated as cash-flow hedging instruments.
In connection with its stock repurchase program, the Company may sell put options that require the Company to repurchase shares of its common stock at fixed prices. The
Company had no foreign currency forward or option contracts outstanding at September 30, 2003. At September 30, 2004 and 2003,premiums received from put options are recorded as other current liabilities. 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 instruments totaled $4put options recorded in other current liabilities was $19 million and $2$7 million respectively,at September 24, 2006 and none of the Company’s derivatives were designated as hedges. The Company’s derivative instruments are included in other assets.
September 25, 2005, respectively.
Goodwill and Other Intangible AssetsAssets.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 requires 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
F- 12
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2004 and 2003 and determined that its recorded goodwill was not impaired.
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. The Company completed its annual testing for fiscal 2006, 2005 and 2004 and determined that its recorded goodwill was not impaired.
Software development costs are capitalized when a product’s technological feasibility has been established through the date a product is available for general release to customers. 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 fourthree years, taking into account such factors as the effects of obsolescence, technological advances and competition. The weighted-average amortization period for capitalized software was three years and one year at both September 30, 200424, 2006 and 2003.September 25, 2005, respectively. Other intangible assets are amortized on a straight-line basis over their useful lives, ranging from threeless than one year to 28 years.
F-11
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted-average amortization periods for finite livedfinite-lived intangible assets, by class, were as follows:
| | | | | | | | |
| | September 30,
|
| | 2004
| | 2003
|
Wireless licenses | | 15 years | | 15 years |
Marketing-related | | 17 years | | 19 years |
Technology-based | | 11 years | | 4 years |
Customer-related | | 8 years | | 10 years |
Other | | 28 years | | 25 years |
Total intangible assets | | 14 years | | 15 years |
| | | | | | | | | |
| | | September 24, | | September 25, |
| | | 2006 | | 2005 |
| Wireless licenses | | 15 years | | 15 years |
| Marketing-related | | 19 years | | 18 years |
| Technology-based | | 15 years | | 9 years |
| Customer-related | | 7 years | | 7 years |
| Other | | 28 years | | 28 years |
| Total intangible assets | | 15 years | | 13 years |
Changes in the weighted-average amortization periods
of technology-based intangible assets from fiscal
20032005 to
20042006 resulted from
changes associated with additions
and dispositions ofto intangible
assets. Dispositions primarily resulted from discontinued operationsassets related to acquisitions (Note 11).
The results of operations and earnings per common share for fiscal 2002, assuming FAS 142 had been adopted at the beginning of fiscal 2002, are as follows (in millions, except per share data):
| | | | | |
| | | 2002
|
| Reported net income | | $ | 360 | |
| Goodwill amortization | | | 249 | |
| | | |
| |
| Adjusted net income | | $ | 609 | |
| | | |
| |
| Earnings per common share: | | | | |
| Basic — as reported | | $ | 0.23 | |
| | | |
| |
| Basic — as adjusted | | $ | 0.40 | |
| | | |
| |
| Diluted — as reported | | $ | 0.22 | |
| | | |
| |
| Diluted — as adjusted | | $ | 0.38 | |
| | | |
| |
Valuation of Long-Lived and Intangible AssetsAssets.
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
F-13
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
LitigationLitigation.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 reasonably 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.
Guarantees and Product WarrantiesShare-Based Payments. In the normal course of business,On September 26, 2005, the Company may provide guarantees to other parties. Upon issuance of a guarantee,adopted FAS 123R. Under FAS 123R, share-based compensation cost is measured at the Company recognizes a liability forgrant date, based on the estimated fair value of the obligation it assumesaward, and is recognized as expense over the employee’s requisite service period. The Company has no awards with market or performance conditions. The Company adopted the provisions of FAS 123R using a modified prospective application. Accordingly, prior periods have not been revised for comparative purposes. The valuation provisions of FAS 123R apply to new awards and to awards that are outstanding on the effective date, which are subsequently modified or cancelled. Estimated compensation expense for awards outstanding at the effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under that guarantee, as required. At September 30, 2004, liabilitiesFASB Statement No. 123, “Accounting for Stock-Based Compensation” (FAS 123).
On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” The Company has elected to adopt the alternative transition method provided in this FASB Staff Position for calculating the tax effects of share-based compensation pursuant to FAS 123R. The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to guaranteesthe tax effects of employee share-based compensation, which is available to absorb tax deficiencies which could be recognized subsequent to the adoption of FAS 123R.
Share-Based Compensation Information under FAS 123R
Upon adoption of FAS 123R, the Company also changed its method of valuation for stock options granted beginning in fiscal 2006 to a lattice binomial option-pricing model (binomial model) from the Black-Scholes option-pricing model (Black-Scholes model) which was previously used for the Company’s pro forma information required under FAS 123. The Company’s employee stock options have various restrictions that reduce option value, including vesting provisions and restrictions on transfer and hedging, among others, and are often exercised prior to their contractual maturity. Binomial models have evolved such that the currently available models are more capable of incorporating the features of the Company’s employee stock options than closed-form models such as the Black-Scholes model.
F-12
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted-average estimated fair value of employee stock options granted during fiscal 2006 was $15.73 per share using the binomial model with the following weighted-average assumptions (annualized percentages) for fiscal 2006:
| | | | |
| Volatility | | | 30.7 | % |
| Risk-free interest rate | | | 4.6 | % |
| Dividend yield | | | 1.0 | % |
| Post-vesting forfeiture rate | | | 6.0 | % |
| Suboptimal exercise factor | | | 1.7 | |
The Company used the implied volatility of market-traded options in the Company’s stock for the expected volatility assumption, consistent with the guidance in FAS 123R and the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107. The Company utilized the term structure of volatility up to approximately two years, and the implied volatility of the option with the longest time to maturity was used for the expected volatility estimates for periods beyond two years. Prior to fiscal 2006, the Company had used a combination of its historical stock price and implied volatility in accordance with FAS 123 for purposes of its pro forma information. The selection of implied volatility data to estimate expected volatility was based upon the availability of actively traded options on the Company’s stock and the Company’s assessment that implied volatility is more representative of future stock price trends than historical volatility.
The risk-free interest rate assumption is based upon observed interest rates appropriate for the terms of the Company’s employee stock options. The Company does not target a specific dividend yield for its dividend payments but is required to assume a dividend yield as an input to the binomial model. The dividend yield assumption is based on the Company’s history and expectation of future dividend payouts and may be subject to substantial change in the future. The post-vesting forfeiture rate and suboptimal exercise factor are based on the Company’s historical option cancellation and employee exercise information, respectively. The suboptimal exercise factor is the ratio by which the stock price must increase before employees are expected to exercise their stock options.
The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding and is a derived output of the binomial model. The expected life of employee stock options is impacted by all of the underlying assumptions used in the Company’s model. The binomial model assumes that employees’ exercise behavior is a function of the options’ remaining contractual life and the extent to which the option is in-the-money (i.e. the average stock price during the period is above the strike price of the stock option). The binomial model estimates the probability of exercise as a function of these two variables based on the history of exercises and cancellations of past grants made by the Company. The expected life of employee stock options granted during fiscal 2006 derived from the binomial model was 5.8 years.
As share-based compensation expense recognized in the consolidated statement of operations for fiscal 2006 is based on awards ultimately expected to vest, it should be reduced for estimated forfeitures. FAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre-vesting forfeitures were estimated to be approximately $1 million. At0% in the year ended September 30, 2003, liabilities24, 2006 based on historical experience. The effect of pre-vesting forfeitures on the Company’s recorded expense has historically been negligible due to the predominantly monthly vesting of option grants. If pre-vesting forfeitures occur in the future, the Company will record the effect of such forfeitures as the forfeitures occur. The Company will continue to evaluate the appropriateness of this assumption. In the Company’s pro forma information required under FAS 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred.
F-13
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total estimated share-based compensation expense, related to
guarantees were not significant. Estimated future warranty obligationsall of the Company’s share-based awards, recognized for fiscal 2006 was comprised as follows (in millions, except per share data):
| | | | | |
| | | Year Ended | |
| | | September 24, | |
| | | 2006 | |
| Cost of equipment and services revenues | | $ | 41 | |
| Research and development | | | 216 | |
| Selling, general and administrative | | | 238 | |
| | | | |
| Share-based compensation expense before taxes | | | 495 | |
| Related income tax benefits | | | (175 | ) |
| | | | |
| Share-based compensation expense, net of taxes | | $ | 320 | |
| | | | |
| | | | | |
| Net share-based compensation expense, per common share: | | | | |
| Basic | | $ | 0.19 | |
| | | | |
| Diluted | | $ | 0.19 | |
| | | | |
The Company recorded $86 million in share-based compensation expense during fiscal 2006 related to certain products areshare-based awards granted during fiscal 2006. In addition, for fiscal 2006, the adoption of FAS 123R resulted in a reclassification to reduce net cash provided by chargesoperating activities by $403 million, with an offsetting increase in net cash provided by financing activities, related to operationsincremental tax benefits from stock options exercised in the period in whichperiod.
Pro Forma Information under FAS 123 for Periods Prior to Fiscal 2006
Prior to adopting the
related revenue is recognized. Theprovisions of FAS 123R, the Company
establishes a reserve for warranty obligations based on its historical warranty experience. Warranty obligations were $2 million and $4 million at September 30, 2004 and 2003, respectively, and changes in the obligations were not significant during fiscal 2004, 2003 or 2002.Stock-Based Compensation
The Company recordsrecorded estimated 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.”Employees” and provided the required pro forma disclosures of FAS 123. Because the Company establishesestablished the exercise price based on the fair market value of the Company’s stock at the date of grant, the stock options havehad no intrinsic value upon grant, and therefore no estimated expense is recorded.was recorded prior to adopting FAS 123R. Each quarter,accounting period, the Company reportsreported the potential dilutive impact of stock options 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 iswas below the strike price of the stock option) arewere not included in diluted earnings per common share.
As required under Financial Accounting Standards Board Statement No. 123 (FAS 123), “Accounting for Stock-Based Compensation,” and Statement of Financial Accounting Standards No. 148 (FAS 148), “Accounting for Stock-Based Compensation – Transition and Disclosure,” the pro forma effects of stock-based compensation on net income and earnings per common share have beenas their effect was anti-dilutive.
The weighted-average estimated
at the date of grant using the Black-Scholes option-pricing model based on the following assumptions:| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Stock Option Plans
| | Purchase Plans
|
| | | 2004
| | 2003
| | 2002
| | 2004
| | 2003
| | 2002
|
| Risk-free interest rate | | | 3.8 | % | | | 3.2 | % | | | 4.4 | % | | | 1.1 | % | | | 1.0 | % | | | 2.3 | % |
| Volatility | | | 53.2 | % | | | 58.0 | % | | | 58.0 | % | | | 33.3 | % | | | 41.1 | % | | | 69.0 | % |
| Dividend yield | | | 0.6 | % | | | 0.2 | % | | | 0.0 | % | | | 0.7 | % | | | 0.3 | % | | | 0.0 | % |
| Expected life (years) | | | 6.0 | | | | 6.0 | | | | 6.0 | | | | 0.5 | | | | 0.5 | | | | 0.5 | |
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no restrictions and are fully transferable and negotiable in a free trading market. The Black-Scholes model does not consider the employment, transfer or vesting restrictions that are inherent in the Company’s employee stock options. Use of an option valuation model, as required by FAS 123, includes highly subjective assumptions based on long-term predictions, including the expected stock price volatility and average life of each stock option grant. Because the Company’s employee stock options have characteristics significantly different from those of freely traded options, and because changes in the subjective input assumptions can materially affect the Company’s
F-14
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
estimate of the fair value of those stock options, in the Company’s opinion, existing valuation models, including Black-Scholes, are not reliable single measures and may misstate the fair value of the Company’s employee stock options. The Black-Scholes weighted average estimated fair values of stock options granted during fiscal 2005 and 2004 2003was $14.80 and 2002 were $13.82, $9.67 and $14.10$13.92 per share, respectively. Therespectively, using the Black-Scholes weighted average estimated fair values of purchase rights granted pursuant tomodel with the Employee Stock Purchase Plans during fiscal 2004, 2003 and 2002 were $6.24, $4.80 and $7.28 per share, respectively.
following weighted-average assumptions (annualized percentages) for the same periods:
| | | | | | | | | |
| | | 2005 | | 2004 |
| Risk-free interest rate | | | 3.9 | % | | | 3.8 | % |
| Volatility | | | 36.5 | % | | | 53.2 | % |
| Dividend yield | | | 0.8 | % | | | 0.6 | % |
| Expected life (years) | | | 6.0 | | | | 6.0 | |
For purposes of pro forma disclosures
under FAS 123, the estimated fair value of
stock optionsshare-based payments is assumed to be amortized to expense over the
stock options’ vesting periods. The pro forma effects of recognizing
estimated compensation expense under the fair value method on net income and
net earnings per common share
for the years ended September 30 were as follows (in millions, except per share data):
| | | | | | | | | | | | | |
| | | 2004
| | 2003
| | 2002
|
| Net income, as reported | | $ | 1,720 | | | $ | 827 | | | $ | 360 | |
| Add: Stock-based employee compensation expense included in reported net income, net of related tax benefits | | | — | | | | 1 | | | | 1 | |
| Deduct: Stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects | | | (281 | ) | | | (260 | ) | | | (235 | ) |
| | | |
| | | |
| | | |
| |
| Pro forma net income | | $ | 1,439 | | | $ | 568 | | | $ | 126 | |
| | | |
| | | |
| | | |
| |
| Earnings per common share: | | | | | | | | | | | | |
| Basic — as reported | | $ | 1.06 | | | $ | 0.52 | | | $ | 0.23 | |
| | | |
| | | |
| | | |
| |
| Basic — pro forma | | $ | 0.89 | | | $ | 0.36 | | | $ | 0.08 | |
| | | |
| | | |
| | | |
| |
| Diluted — as reported | | $ | 1.03 | | | $ | 0.51 | | | $ | 0.22 | |
| | | |
| | | |
| | | |
| |
| Diluted — pro forma | | $ | 0.86 | | | $ | 0.35 | | | $ | 0.08 | |
| | | |
| | | |
| | | |
| |
F-14
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | |
| | | Year Ended | |
| | | September 25, | | | September 26, | |
| | | 2005 | | | 2004 | |
| Net income, as reported | | $ | 2,143 | | | $ | 1,720 | |
| Add: Share-based employee compensation expense included in reported net income, net of related tax benefits | | | 2 | | | | — | |
| Deduct: Share-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects | | | (305 | ) | | | (281 | ) |
| | | | | | | |
| Pro forma net income | | $ | 1,840 | | | $ | 1,439 | |
| | | | | | | |
| | | | | | | | | |
| Earnings per common share: | | | | | | | | |
| Basic — as reported | | $ | 1.31 | | | $ | 1.06 | |
| | | | | | | |
| Basic — pro forma | | $ | 1.12 | | | $ | 0.89 | |
| | | | | | | |
| | | | | | | | | |
| Diluted — as reported | | $ | 1.26 | | | $ | 1.03 | |
| | | | | | | |
| Diluted — pro forma | | $ | 1.09 | | | $ | 0.86 | |
| | | | | | | |
Foreign CurrencyCurrency.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 the exchange 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 (loss). The functional currency of the Company’s foreign investees that do not use local currencies is the United States dollar.income. 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 revenues, expenses, gains and losses are translated at historical rates. Resultingresulting translation gains or losses of these foreign investees are recognized in the statements of operations.
During both fiscal 2004,2006 and 2005, net foreign currency transaction gains included in the Company’s statement of operations were $1 million. During fiscal 2003 and 2002,2004, net foreign currency transaction gains and losses included in the Company’s consolidated statements of operations were insignificant.
$1 million.
Comprehensive IncomeIncome.Comprehensive income 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 comprehensive income in its consolidated statements of stockholders’ equity.
F-15
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The reclassification adjustment for other-than-temporary losses on marketable securities results from the recognition of unrealized losses in the statement of operations due to declines in the market prices of those securities deemed to be other than temporary. The reclassification adjustment for net realized gains results from the recognition of the net realized gains in the statement of operations when the marketable securities are sold.
sold or derivative instruments are settled.
Components of accumulated other comprehensive income (loss) consisted of the following (in millions):
| | | | | | | | | | | | | | | | | |
| | | September 30,
| | September 24, | | September 25, | |
| | | 2004
| | 2003
| | 2006 | | 2005 | |
| Unrealized gains on marketable securities and derivative instruments, net of income taxes | | | $ | 87 | | $ | 60 | |
| Foreign currency translation | | $ | (27 | ) | | $ | (83 | ) | | | (23 | ) | | | (22 | ) |
| Unrealized gains on marketable securities, net of income taxes | | 42 | | 59 | | |
| | |
| |
| | | | | | |
| | | $ | 15 | | $ | (24 | ) | | $ | 64 | | $ | 38 | |
| | |
| |
| | | | | | |
Stock Split
On July 13, 2004, the Company announced a two-for-one stock split in the form of a stock dividend. Stock was distributed on August 13, 2004 to stockholders of record as of July 23, 2004. Stockholders’ equity has been restated to give retroactive recognition to the stock split for all periods presented by reclassifying the par value of the additional shares arising from the split from paid-in-capital to common stock. All references in the financial statements and notes to number of shares and per share amounts reflect the stock split.
Earnings Per Common ShareShare.Basic earnings per common share is computed by dividing net income by the weighted averageweighted-average number of common shares outstanding during the reporting period. Diluted earnings per common share is computed by dividing net income 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 averageweighted-average number of common shares outstanding during the reporting period. Dilutive common share equivalents include the dilutive effect of in-the-money shares, which is calculated based on the average share price for each period using the treasury stock method. Under the treasury stock method, the exercise price of a share, the amount of compensation cost, if any, for future service that the Company has not yet recognized, and the amount of estimated tax benefits that would be recorded in paid-in capital, if any, when the share is exercised are assumed to be used to repurchase shares in the current period. The incremental dilutive common share equivalents, calculated using the treasury stock method, for fiscal 2004, 20032006, 2005 and 20022004 were approximately 51,835,000, 56,127,000 and 58,686,000, 56,338,000 and 76,883,000, respectively.
Employee stock options to purchase approximately 40,221,000, 86,540,00054,541,000, 33,660,000 and 81,690,00040,221,000 shares of common stock during fiscal 2004, 20032006, 2005 and 2002,2004, respectively, were outstanding but not included in the computation of
F-15
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
diluted earnings per common share because the
option exercise price was greater than the average market price of the common stock, and therefore, the effect on dilutive earnings per
common share would
have beenbe anti-dilutive. Put options outstanding during
fiscal2005 and 2004 to purchase
a weighted-average 13,000,000 and 3,000,000 shares of common stock,
respectively, were not included in the earnings per common share computation for fiscal
2005 and 2004 because the put options’ exercise prices were less than the average market price of the common stock while they were outstanding, and therefore, the effect on diluted earnings per common share would be anti-dilutive (Note 7).
Future Accounting RequirementsRequirements.In June 2004,July 2006, the FASB issued EITF IssueFASB Interpretation No. 02-14, “Whether an Investor Should Apply48 (FIN 48) “Accounting for Uncertainty in Income Taxes” which prescribes a recognition threshold and measurement process for recording in the Equity Method of Accountingfinancial statements uncertain tax positions taken or expected to Investments Other Than Common Stock.” EITF Issue No. 02-14 addresses whetherbe taken in a tax return. Additionally, FIN 48 provides guidance on the equity method ofderecognition, classification, accounting applies when an investor does not have an investment in voting common stock of an investee but exercises significant influence through other means. EITF Issue No. 02-14 states that an investor should only apply the equity method of accounting when it has investments in either common stock or in-substance common stock of a corporation, provided that the investor has the ability to exercise significant influence over the operatinginterim periods and financial policies of the investee.disclosure requirements for uncertain tax positions. The accounting provisions of EITF Issue No. 02-14 areFIN 48 will be effective for the first quarterCompany beginning October 1, 2007. The cumulative effect of fiscal 2005.initially adopting FIN 48 will be recorded as an adjustment to opening retained earnings in the year of adoption and will be presented separately. Only tax positions that meet the more likely than not recognition threshold at the effective date may be recognized upon adoption of FIN 48. The Company is in the process of determining the effect, if any, the adoption of EITF Issue No. 02-14FIN 48 will have on its consolidated financial statements.
In March 2004, the FASB issued EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” which provides new guidance for assessing impairment losses on debt and equity investments. Additionally, EITF Issue No. 03-1 includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF Issue
F-16
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
No. 03-1; however, the disclosure requirements remain effective and have been adopted for the Company’s year ended September 30, 2004. The Company will evaluate the effect, if any, of EITF Issue No. 03-1 when final guidance is released.
Note 2. Marketable Securities Marketable securities were comprised as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Current
| | Noncurrent
| | Current | | Noncurrent | |
| | | September 30,
| | September 30,
| | September 24, | | September 25, | | September 24, | | September 25, | |
| | | 2004
| | 2003
| | 2004
| | 2003
| | 2006 | | 2005 | | 2006 | | 2005 | |
| Held-to-maturity: | | |
| Certificates of deposit | | $ | — | | $ | 5 | | $ | — | | $ | — | | |
| U.S. Treasury and federal agency securities | | — | | 1 | | 70 | | 130 | | |
| Government-sponsored enterprise securities | | | $ | — | | $ | 60 | | $ | — | | $ | — | |
| Corporate bonds and notes | | 10 | | 161 | | 60 | | 70 | | | — | | 70 | | — | | — | |
| | |
| |
| |
| |
| | | | | | | | | | |
| | | 10 | | 167 | | 130 | | 200 | | | — | | 130 | | — | | — | |
| | |
| |
| |
| |
| | | | | | | | | | |
| Available-for-sale: | | |
| U.S. Treasury and federal agency securities | | 520 | | 696 | | — | | — | | |
| U.S. Treasury securities | | | 73 | | 151 | | — | | — | |
| Government-sponsored enterprise securities | | | 667 | | 704 | | — | | — | |
| Municipal bonds | | | 5 | | 10 | | — | | — | |
| Foreign government bonds | | 8 | | — | | — | | — | | | 17 | | 17 | | — | | — | |
| Corporate bonds and notes | | 2,062 | | 1,118 | | 3 | | 22 | | | 2,693 | | 2,645 | | 23 | | 14 | |
| Mortgage and asset-backed securities | | 2,056 | | 486 | | — | | — | | |
| Mortgage- and asset-backed securities | | | 617 | | 767 | | — | | — | |
| Non-investment grade debt securities | | — | | 39 | | 571 | | 459 | | | 24 | | 24 | | 1,368 | | 694 | |
| Equity mutual funds | | — | | — | | 296 | | — | | | — | | — | | 1,519 | | 293 | |
| Equity securities | | 112 | | 10 | | 653 | | 130 | | | 18 | | 30 | | 1,318 | | 1,132 | |
| | |
| |
| |
| |
| | | | | | | | | | |
| | | 4,758 | | 2,349 | | 1,523 | | 611 | | | 4,114 | | 4,348 | | 4,228 | | 2,133 | |
| | |
| |
| |
| |
| | | | | | | | | | |
| | | $ | 4,768 | | $ | 2,516 | | $ | 1,653 | | $ | 811 | | | $ | 4,114 | | $ | 4,478 | | $ | 4,228 | | $ | 2,133 | |
| | |
| |
| |
| |
| | | | | | | | | | |
As of September 30, 2004,24, 2006, the contractual maturities of available-for-sale debt securities were as follows (in 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 | | $ | 10 | | | $ | 130 | | | $ | — | | | $ | — | | | $ | — | | | $ | 140 | |
| Available-for-sale | | | 826 | | | | 1,820 | | | | 495 | | | | 25 | | | | 2,054 | | | | 5,220 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| |
| | | $ | 836 | | | $ | 1,950 | | | $ | 495 | | | $ | 25 | | | $ | 2,054 | | | $ | 5,360 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years to Maturity | | | No Single | | | | |
| | | Less than | | | One to | | | Five to | | | Greater than | | | Maturity | | | | |
| | | One Year | | | Five Years | | | Ten Years | | | Ten Years | | | Date | | | Total | |
| | | $ | 2,294 | | | $ | 1,358 | | | $ | 679 | | | $ | 27 | | | $ | 1,129 | | | $ | 5,487 | |
| | | | | | | | | | | | | | | | | | | |
Securities with no single maturity date include mortgage- and asset-backed securities.
F-16
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Available-for-sale securities were comprised as follows (in millions):
| | | | | | | | | | | | | | | | | |
| | | | | | | Unrealized | | | Unrealized | | | | |
| | | Cost | | | Gains | | | Losses | | | Fair Value | |
September 24, 2006 | | | | | | | | | | | | | | | | |
| Equity securities | | $ | 2,693 | | | $ | 194 | | | $ | (32 | ) | | $ | 2,855 | |
| Debt securities | | | 5,500 | | | | 11 | | | | (24 | ) | | | 5,487 | |
| | | | | | | | | | | | | |
| Total | | $ | 8,193 | | | $ | 205 | | | $ | (56 | ) | | $ | 8,342 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | |
The Company had no held-to-maturity debt securities at September
30 (in millions):| | | | | | | | | | | | | | | | | |
| | | | | | | Unrealized | | Unrealized | | |
| | | Cost
| | Gains
| | Losses
| | Fair Value
|
2004 | | | | | | | | | | | | | | | | |
| Equity securities | | $ | 1,003 | | | $ | 77 | | | $ | (19 | ) | | $ | 1,061 | |
| Debt securities | | | 5,208 | | | | 27 | | | | (15 | ) | | | 5,220 | |
| | | |
| | | |
| | | |
| | | |
| |
| Total | | $ | 6,211 | | | $ | 104 | | | $ | (34 | ) | | $ | 6,281 | |
| | | |
| | | |
| | | |
| | | |
| |
2003 | | | | | | | | | | | | | | | | |
| Equity securities | | $ | 104 | | | $ | 37 | | | $ | (1 | ) | | $ | 140 | |
| Debt securities | | | 2,758 | | | | 69 | | | | (7 | ) | | | 2,820 | |
| | | |
| | | |
| | | |
| | | |
| |
| Total | | $ | 2,862 | | | $ | 106 | | | $ | (8 | ) | | $ | 2,960 | |
| | | |
| | | |
| | | |
| | | |
| |
24, 2006. The fair values of held-to-maturity debt securities at September 30, 2004 and 200325, 2005 approximate cost.
F-17
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended September 30, 2004, 2003 and 2002, the The Company recorded realized gains and losses on sales of available-for-sale marketable securities as follows (in millions):
| | | | | | | | | | | | | |
| | | Gross | | Gross | | |
| | | Realized | | Realized | | Net Realized |
| | | Gains
| | Losses
| | Gains
|
| 2004 | | $ | 105 | | | $ | (17 | ) | | $ | 88 | |
| 2003 | | | 82 | | | | (13 | ) | | | 69 | |
| 2002 | | | 23 | | | | (11 | ) | | | 12 | |
| | | | | | | | | | | | | |
| | | Gross | | Gross | | Net |
| | | Realized | | Realized | | Realized |
| Fiscal Year | | Gains | | Losses | | Gains |
| 2006 | | $ | 176 | | | $ | (47 | ) | | $ | 129 | |
| 2005 | | | 198 | | | | (31 | ) | | | 167 | |
| 2004 | | | 105 | | | | (17 | ) | | | 88 | |
The following table shows the gross unrealized losses and fair values of the Company’s investments in individual securities that have been in a continuous unrealized loss position deemed to be temporary for less than 12 months and for more than 12 months, aggregated by investment category, at September 30, 200424, 2006 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair | | Unrealized | | Less than 12 months | | More than 12 months | |
| | | Value
| | Losses
| | Unrealized | | Unrealized | |
| U.S. Treasury and federal agency securities | | $ | 309 | | $ | (1 | ) | |
| | | | Fair Value | | Losses | | Fair Value | | Losses | |
| U.S. Treasury securities | | | $ | — | | $ | — | | $ | 19 | | $ | — | |
| Government-sponsored enterprise securities | | | 82 | | — | | 80 | | | (1 | ) |
| Foreign government bonds | | | — | | — | | 10 | | — | |
| Corporate bonds and notes | | 1,261 | | | (4 | ) | | 515 | | | (1 | ) | | 407 | | | (4 | ) |
| Mortgage and asset-backed securities | | 559 | | | (2 | ) | |
| Mortgage- and asset-backed securities | | | 132 | | | (1 | ) | | 150 | | | (3 | ) |
| Non-investment grade debt securities | | 108 | | | (7 | ) | | 952 | | | (10 | ) | | 61 | | | (3 | ) |
| Equity mutual funds | | 296 | | | (7 | ) | | 382 | | | (13 | ) | | — | | — | |
| Equity securities | | 196 | | | (13 | ) | | 288 | | | (15 | ) | | 5 | | | (1 | ) |
| | |
| |
| | | | | | | | | | |
| | | $ | 2,729 | | $ | (34 | ) | | $ | 2,351 | | $ | (40 | ) | | $ | 732 | | $ | (12 | ) |
| | |
| |
| | | | | | | | | | |
At September 30, 2004, the Company did not have any investments in individual securities that have been in a continuous unrealized loss position deemed to be temporary for more than 12 months.
Investment Grade Debt Securities.The Company’s investments in investment grade debt securities consist primarily of investments in certificates of deposit, U.S. Treasury
and federal agency securities,
government-sponsored enterprise securities, municipal bonds, foreign government bonds,
mortgagemortgage- and asset-backed securities and corporate bonds and notes. The unrealized losses on the Company’s investments in investment grade debt securities were caused by interest rate increases. Due to the fact that the decline in market value is attributable to changes in interest rates and not credit quality, and because the severity and duration of the unrealized losses were not significant, the Company considered these unrealized losses to be temporary at September
30, 2004.24, 2006.
Non-Investment Grade Debt Securities.The Company’s investments in non-investment grade debt securities consist primarily of investments in corporate bonds.bonds and secured bank loans. The unrealized losses on the Company’s investment in non-investment grade debt securities were caused by credit quality and industryindustry- or company specificcompany-specific events. Because the severity and duration of the unrealized losses were not significant, the Company considered these unrealized losses to be temporary at September 30, 2004.24, 2006.
F-17
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marketable Equity Securities.The Company’s investments in marketable equity securities consist primarily of investments in common stock of large companies and equity mutual funds. The unrealized losses on the Company’s investment in marketable equity securities were caused by overall equity market volatility and
industry specificindustry-specific events. The duration and severity of the unrealized losses in relation to the carrying amounts of the individual investments were consistent with typical equity market volatility. Current market forecasts support a recovery of fair value up to (or beyond) the cost of the investment within a reasonable period of time. Accordingly, the Company considered these unrealized losses to be temporary at September
30, 2004.F-18
24, 2006.
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Composition of Certain Financial Statement Captions Accounts ReceivableReceivable.
| | | | | | | | | |
| | | September 30,
|
| | | 2004
| | 2003
|
| | | (In millions) |
| Trade, net of allowance for doubtful accounts of $5 and $12, respectively | | $ | 529 | | | $ | 461 | |
| Long-term contracts: | | | | | | | | |
| Billed | | | 11 | | | | 10 | |
| Unbilled | | | 3 | | | | 7 | |
| Other | | | 38 | | | | 6 | |
| | | |
| | | |
| |
| | | $ | 581 | | | $ | 484 | |
| | | |
| | | |
| |
| | | | | | | | | |
| | | September 24, | | | September 25, | |
| | | 2006 | | | 2005 | |
| | | (In millions) | |
| Trade, net of allowances for doubtful accounts of $1 and $2, respectively | | $ | 632 | | | $ | 506 | |
| Long-term contracts | | | 44 | | | | 26 | |
| Other | | | 24 | | | | 12 | |
| | | | | | | |
| | | $ | 700 | | | $ | 544 | |
| | | | | | | |
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.
Net accounts receivable were reduced by $22 million from September 30, 2003 as a result of discontinued operations (Note 11).
Finance ReceivablesInventories. Finance receivables, which are included in other assets, 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,
|
| | | 2004
| | 2003
|
| | | (In millions) |
| Finance receivables | | $ | 3 | | | $ | 205 | |
| Allowances | | | (1 | ) | | | (18 | ) |
| | | |
| | | |
| |
| | | | 2 | | | | 187 | |
| Current maturities, net | | | 2 | | | | 5 | |
| | | |
| | | |
| |
| Noncurrent finance receivables, net | | $ | — | | | $ | 182 | |
| | | |
| | | |
| |
| | | | | | | | | |
| | | September 24, | | | September 25, | |
| | | 2006 | | | 2005 | |
| | | (In millions) | |
| Raw materials | | $ | 30 | | | $ | 23 | |
| Work-in-process | | | 13 | | | | 6 | |
| Finished goods | | | 207 | | | | 148 | |
| | | | | | | |
| | | $ | 250 | | | $ | 177 | |
| | | | | | | |
At September 30, 2004 and 2003, the fair value of finance receivables approximated $2 million and $198 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.
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 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. The Company used approximately $139 million of the bridge loan proceeds to purchase outstanding vendor debt owed by Pegaso to other lenders. 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. On December 15, 2003, Pegaso prepaid $193 million, including accrued interest, in full satisfaction of the equipment loan facility. The Company recognized $12 million, $41 million and $9 million in interest income related to the Pegaso financing arrangements during fiscal
F-19
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2004, 2003 and 2002, respectively, including $10 million and $23 million of deferred interest income recorded as a result of the prepayments in fiscal 2004 and 2003, respectively.
A long-term financing commitment for $346 million under an arrangement with Ericsson expired on November 6, 2003. At September 30, 2004, the Company has a remaining commitment to extend up to $118 million in long-term financing to certain CDMA customers of Ericsson. The funding of this commitment, if it occurs, is not subject to a fixed expiration date and is subject to the CDMA customers meeting conditions prescribed in the financing arrangement and, in certain cases, to Ericsson also financing a portion of such sales and services. Financing under this arrangement is generally collateralized by the related equipment. The commitment represents the maximum amount to be financed; actual financing may be in lesser amounts.
Inventories
| | | | | | | | | |
| | | September 30,
|
| | | 2004
| | 2003
|
| | | (In millions) |
| Raw materials | | $ | 20 | | | $ | 18 | |
| Work-in-process | | | 3 | | | | 3 | |
| Finished goods | | | 131 | | | | 89 | |
| | | |
| | | |
| |
| | | $ | 154 | | | $ | 110 | |
| | | |
| | | |
| |
Inventories were reduced by $8 million from September 30, 2003 as a result of discontinued operations (Note 11).
Property, Plant and EquipmentEquipment.
| | | | | | | | | | | | | | | | |
| | | September 30,
| | September 24, | | September 25, | |
| | | 2004
| | 2003
| | 2006 | | 2005 | |
| | | (In millions) | | (In millions) | |
| Land | | $ | 47 | | $ | 47 | | | $ | 76 | | $ | 65 | |
| Buildings and improvements | | 413 | | 338 | | | 853 | | 616 | |
| Computer equipment | | 430 | | 379 | | | 659 | | 520 | |
| Machinery and equipment | | 413 | | 449 | | | 764 | | 544 | |
| Furniture and office equipment | | 24 | | 22 | | | 43 | | 33 | |
| Leasehold improvements | | 54 | | 43 | | | 171 | | 107 | |
| | |
| |
| | | | | | |
| | | 1,381 | | 1,278 | | | 2,566 | | 1,885 | |
| | | |
| Less accumulated depreciation and amortization | | | (706 | ) | | | (656 | ) | | | (1,084 | ) | | | (863 | ) |
| | |
| |
| | | | | | |
| | | $ | 675 | | $ | 622 | | | $ | 1,482 | | $ | 1,022 | |
| | |
| |
| | | | | | |
Depreciation and amortization expense
from continuing operations related to property, plant and equipment for fiscal
2006, 2005 and 2004
2003 and 2002 was
$133$239 million,
$117$177 million and
$93$140 million, respectively. The
gross and net
carryingbook values of property
plantunder capital leases included in buildings and
equipmentimprovements were
reduced by $170$58 million and
$103$2 million
respectively, fromat September
30, 2003 as a result24, 2006 and September 25, 2005, respectively. These capital leases principally related to base station towers and buildings. Amortization of
discontinued operations (Note 11).assets recorded under capital leases is included in depreciation expense. Capital lease additions for the years ended September 24, 2006 and September 25, 2005 were $56 million and $3 million, respectively. There were no capital lease additions in the year ended September 26, 2004.
At September 30, 200424, 2006 and 2003,September 25, 2005, buildings and improvements and leasehold improvements with a net book value of $38$19 million and $66$36 million, respectively, including accumulated depreciation and amortization of $27
F-18
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$15 million and
$52$30 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
fivethree years from fiscal
20052007 to 2009 are
$10$5 million,
$9 million, $9 million, $7$4 million and $1 million, respectively.
F-20
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill and Other Intangible AssetsAssets.
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 allocates goodwill to its reporting units for annual impairment testing purposes. Goodwill was allocable to reporting units included in the Company’s reportable segments at September 30, 200424, 2006 as follows: $268$339 million in QUALCOMM CDMA Technologies, $73$687 million in QUALCOMM Technology Licensing, and $15$76 million in QUALCOMM Wireless & Internet.
Internet, and $128 million in QUALCOMM MEMS Technology (a nonreportable segment included in reconciling items in Note 10). The increase in goodwill from September 25, 2005 to September 24, 2006 was the result of the Company’s business acquisitions (Note 11), partially offset by currency translation adjustments.
The components of purchased intangible assets, which are included in other assets, were as follows (in millions):
| | | | | | | | | | | | | | | | | | |
| | | September 30,
| | | | | | | | | | | | | | | | |
| | | 2004
| | 2003
| | September 24, 2006 | | September 25, 2005 | |
| | | Gross | | Gross | | | | Gross | | Gross | | | |
| | | Carrying | | Accumulated | | Carrying | | Accumulated | | Carrying | | Accumulated | | Carrying | | Accumulated | |
| | | Amount
| | Amortization
| | Amount
| | Amortization
| | Amount | | Amortization | | Amount | | Amortization | |
| Wireless licenses | | $ | 77 | | $ | (11 | ) | | $ | 174 | | $ | (8 | ) | | $ | 238 | | $ | (22 | ) | | $ | 164 | | $ | (17 | ) |
| Marketing-related | | 21 | | | (8 | ) | | 21 | | | (7 | ) | | 21 | | | (11 | ) | | 21 | | | (9 | ) |
| Technology-based | | 77 | | | (37 | ) | | 36 | | | (27 | ) | | 257 | | | (43 | ) | | 116 | | | (48 | ) |
| Customer-related | | 15 | | | (12 | ) | | 17 | | | (16 | ) | | 6 | | | (2 | ) | | 17 | | | (13 | ) |
| Other | | 7 | | | (1 | ) | | 8 | | | (1 | ) | | 7 | | | (1 | ) | | 7 | | | (1 | ) |
| | |
| |
| |
| |
| | | | | | | | | | |
| Total intangible assets | | $ | 197 | | $ | (69 | ) | | $ | 256 | | $ | (59 | ) | |
| | |
| |
| |
| |
| | | $ | 529 | | $ | (79 | ) | | $ | 325 | | $ | (88 | ) |
| | | | | | | | | | | |
The gross carrying values of wireless licenses, customer-related intangible assets and marketing-related intangible assets were reduced by $105 million, $5 million and $1 million, respectively, from September 30, 2003 as a result of discontinued operations (Note 11). During fiscal 2003, the Company recorded a $34 million impairment loss in its QUALCOMM Strategic Initiatives segment on its wireless licenses in Australia due to 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.
All of the Company’s purchased intangible assets other than
certain wireless licenses in the amount of $157 million and goodwill are subject to amortization. Amortization expense
from continuing operations for fiscal 2004, 2003 and 2002 was $17 million, $18 million and $14 million, respectively. Amortization expense related to these intangible assets
for fiscal 2006, 2005 and 2004 was $32 million, $19 million and $18 million, respectively, and is expected to be
$14 million in fiscal 2005, $14 million in fiscal 2006, $13$31 million in fiscal 2007,
$9$27 million in fiscal 2008,
and $8$26 million in fiscal
2009.2009, $24 million in fiscal 2010, $23 million in fiscal 2011 and $162 million thereafter.
Capitalized software development costs, which are included in other assets, were $44$27 million and $36$43 million at September 30, 200424, 2006 and 2003,September 25, 2005, respectively. Accumulated amortization on capitalized software was $39$27 million and $26$42 million at September 30, 200424, 2006 and 2003,September 25, 2005, respectively. Amortization expense from continuing operations related to capitalized software for fiscal 2006, 2005 and 2004 2003was $1 million, $4 million and 2002 was $13 million, $12 million and $10 million, respectively.
Note 4. Investments in Other EntitiesInquam Limited
The
Company has invested $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 communications systems, either directly or indirectly, with the intent of deploying CDMA-based technology, primarily in Europe. Starting in the third quarter of fiscal 2003, the Company and another investor (the Other Investor)
also extended $117 millionown minority interests in
bridge loan financings to Inquam
including $31 millionLimited (Inquam), the owner of a wireless CDMA-based operator in
bridge loan funding putRomania, and in
place during fiscal 2004. The Company funded its approximate $58 million share of these bridge loans and had no remaining funding commitment at September 30, 2004. Inquam is a variable interest entity. The Company does not consolidate Inquam because it is not the primary beneficiary. The Company uses the equity method to account for its investmentInquam’s former subsidiaries in
Inquam.Portugal (the Portugal Companies). The Company recorded
$59$20 million,
$99$33 million and
$45$59 million in equity in losses of Inquam during fiscal
2006, 2005 and 2004,
2003 and 2002, respectively.respectively, including a $12 million loss resulting from Inquam’s restructuring during fiscal 2006. At September
30, 200424, 2006 and
2003,September 25, 2005, the Company’s equity and debt investments in Inquam
and the Portugal Companies totaled
$42$5 million and
$68$26 million,
respectively, net of equity in
losses, respectively.losses. The
carrying amount of the Company’s investment in Inquam exceeded its underlying equity in the net assets of Inquam by $8 million and $9 million, at September 30, 2004 and 2003, respectively.F-21
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On September 22, 2003, the Company agreed, along with the Other Investor, to guarantee the payment of amounts due by Inquam under a bank credit agreement. During fiscal 2004, the Company and the Other Investor agreed to extend the guarantee and increase the maximum amount subject to the guarantee to $55 million. The Company’s maximum liability under the guarantee is limited to an amount equal tohave each guaranteed 50% of thea portion of amounts outstandingowed under certain of Inquam’s credit agreement,long-term financing arrangements, up to a combined maximum of approximately $28$53 million. Amounts outstanding underThe fair value of this obligation, which is insignificant, has been recorded in the bank credit agreement totaled $53 million as of September 30, 2004.financial statements. The guarantee expires on November 30, 2004 when the bank credit facility matures. Inquam is currently working with the bank and other potential lenders to secure long-term “take out” financing to repay the existing loan on the maturity date. It is possible that the Company and the Other Investor may provide additional guarantees in connection with such take out financing.
During the first quarter of fiscal 2005, the Company and the Other Investor committed to fund an additional $2 million each. While the Company has no other obligations to provide funding to Inquam, the Company continues to have active discussions with Inquam and the Other Investor concerning the necessary funding for all or a part of Inquam’s business plan, potential restructuring and investment by other parties. While the Company may provide some additional funding and/or credit support in furtherance of Inquam’s business plan, the amount and form of such support is unknown, and none will be provided without commensurate support or consideration being provided by the Other Investor.
Inquam’s summarized financial information, derived from its unaudited financial statements, is as follows (in millions):
| | | | | | | | | |
| | | September 30,
|
| | | 2004
| | 2003
|
| Balance sheet: | | | | | | | | |
| Current assets | | $ | 40 | | | $ | 45 | |
| Noncurrent assets | | | 152 | | | | 173 | |
| | | |
| | | |
| |
| Total assets | | $ | 192 | | | $ | 218 | |
| | | |
| | | |
| |
| Current liabilities | | $ | 123 | | | $ | 98 | |
| Noncurrent liabilities | | | 132 | | | | 47 | |
| | | |
| | | |
| |
| Total liabilities | | $ | 255 | | | $ | 145 | |
| | | |
| | | |
| |
| | | | | | | | | | | | | |
| | | Years Ended September 30,
|
| | | 2004
| | 2003
| | 2002
|
| Income statement: | | | | | | | | | | | | |
| Net revenues | | $ | 88 | | | $ | 50 | | | $ | 18 | |
| | | |
| | | |
| | | |
| |
| Gross profit (loss) | | | 35 | | | | (2 | ) | | | (9 | ) |
| | | |
| | | |
| | | |
| |
| Net loss | | $ | (136 | ) | | $ | (205 | ) | | $ | (104 | ) |
| | | |
| | | |
| | | |
| |
OtherOther.
Other strategic equity investments as of September 30, 200424, 2006 and 2003September 25, 2005 totaled $123$89 million and $87$96 million, respectively, including $50$73 million and $33$59 million, respectively, accounted for using the cost method. Differences between the carrying amounts of certain other strategic equity method investments and the Company’s underlying equity in the net assets of those investees consisting of acquisition related goodwill and intangible assets accounted for in accordance with FAS 142, were not significant at September 30, 200424, 2006 and 2003.September 25, 2005. At September 30, 2004,24, 2006, effective ownership interests in these investees ranged from less than 1%approximately 19% to 50%.
Summarized financial information regarding the Company’s principal equity method Funding commitments related to these investments excluding Inquam, derived from their unaudited financial statements, follows. These investments are primarily noncontrolling interests in early stage companies and venture funds. Information is presented in the aggregate, and net loss is generally presented from the acquisition date (in millions):
totaled $16 million at September 24,F-22F-19
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS| | | | | | | | | |
| | | September 30,
|
| | | 2004
| | 2003
|
| Current assets | | $ | 100 | | | $ | 82 | |
| Noncurrent assets | | | 236 | | | | 41 | |
| | | |
| | | |
| |
| Total assets | | $ | 336 | | | $ | 123 | |
| | | |
| | | |
| |
| Current liabilities | | $ | 21 | | | $ | — | |
| Noncurrent liabilities | | | 86 | | | | 1 | |
| | | |
| | | |
| |
| Total liabilities | | $ | 107 | | | $ | 1 | |
| | | |
| | | |
| |
| | | | | | | | | | | | | |
| | | Years Ended September 30,
|
| | | 2004
| | 2003
| | 2002
|
| Income statement: | | | | | | | | | | | | |
| Net revenues | | $ | 5 | | | $ | — | | | $ | — | |
| | | |
| | | |
| | | |
| |
| Gross loss | | | (16 | ) | | | — | | | | — | |
| | | |
| | | |
| | | |
| |
| Net loss | | $ | (38 | ) | | $ | (41 | ) | | $ | (64 | ) |
| | | |
| | | |
| | | |
| |
Funding commitments related to these investments total $19 million at September 30, 2004,2006, which the Company expects to fund through fiscal 2009. Such commitments are subject to the investees meeting certain conditions;conditions. As such, 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.
Note 5. Investment Income (Expense) Investment income (expense) for the years ended September 30 was comprised as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | |
| | | 2004
| | 2003*
| | 2002*
| | Year Ended | |
| Interest income | | $ | 175 | | $ | 158 | | $ | 128 | | |
| | | | September 24, | | September 25, | | September 26, | |
| | | | 2006 | | 2005 | | 2004 | |
| Interest and dividend income | | | $ | 416 | | $ | 256 | | $ | 175 | |
| Interest expense | | | (2 | ) | | | (2 | ) | | | (1 | ) | | | (4 | ) | | | (3 | ) | | | (2 | ) |
| Net realized gains on marketable securities | | 88 | | 73 | | 12 | | | 129 | | 167 | | 88 | |
| Net realized gains (losses) on other investments | | — | | 7 | | | (10 | ) | |
| Net realized gains on other investments | | | 7 | | 12 | | — | |
| Other-than-temporary losses on marketable securities | | | (12 | ) | | | (100 | ) | | | (206 | ) | | | (20 | ) | | | (13 | ) | | | (12 | ) |
| Other-than-temporary losses on other investments | | — | | | (28 | ) | | | (25 | ) | | | (4 | ) | | | (1 | ) | | — | |
| Gains (losses) on derivative instruments | | 7 | | | (3 | ) | | | (58 | ) | |
| Minority interest in income of consolidated subsidiaries | | — | | — | | | (1 | ) | |
| (Losses) gains on derivative instruments | | | | (29 | ) | | 33 | | 7 | |
| Equity in losses of investees | | | (72 | ) | | | (113 | ) | | | (57 | ) | | | (29 | ) | | | (28 | ) | | | (72 | ) |
| | |
| |
| |
| | | | | | | | |
| | | $ | 184 | | $ | (8 | ) | | $ | (218 | ) | | $ | 466 | | $ | 423 | | $ | 184 | |
| | |
| |
| |
| | | | | | | | |
* As adjusted (Note 11).
During fiscal 2004 and 2003, management determined that declines in the market value
Note 6. Income Taxes
The components of the Company’s investment in Korea Telecom Freetel Co., Ltd. (KTF), a wireless operator in South Korea,income tax provision were other than temporary. In reaching this conclusion, the decline in stock value as a percentagefollows (in millions):
| | | | | | | | | | | | | |
| | | Year Ended | |
| | | September 24, | | | September 25, | | | September 26, | |
| | | 2006 | | | 2005 | | | 2004 | |
| Current provision: | | | | | | | | | | | | |
| Federal | | $ | 299 | | | $ | 77 | | | $ | 115 | |
| State | | | 88 | | | | 42 | | | | 60 | |
| Foreign | | | 156 | | | | 140 | | | | 157 | |
| | | | | | | | | | |
| | | | 543 | | | | 259 | | | | 332 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Deferred provision: | | | | | | | | | | | | |
| Federal | | | 165 | | | | 398 | | | | 227 | |
| State | | | (23 | ) | | | 9 | | | | 29 | |
| Foreign | | | 1 | | | | — | | | | — | |
| | | | | | | | | | |
| | | | 143 | | | | 407 | | | | 256 | |
| | | | | | | | | | |
| | | $ | 686 | | | $ | 666 | | | $ | 588 | |
| | | | | | | | | | |
The foreign component of the original costincome tax provision consists primarily of foreign withholding taxes on royalty income included in United States earnings.
The components of income from continuing operations before income taxes by United States and the length of time in which the market value of the investment had been below its original costforeign jurisdictions were considered. As a result, the Company recorded $10 million and $81 million in other-than-temporary losses on marketable securities in fiscal 2004 and 2003, respectively. The Company holds 4,416,000 common shares of KTF as of September 30, 2004. The fair value of the common shares was $72 million at September 30, 2004.follows (in millions):
| | | | | | | | | | | | | |
| | | Year Ended | |
| | | September 24, | | | September 25, | | | September 26, | |
| | | 2006 | | | 2005 | | | 2004 | |
| United States | | $ | 1,445 | | | $ | 1,570 | | | $ | 1,571 | |
| Foreign | | | 1,711 | | | | 1,239 | | | | 742 | |
| | | | | | | | | | |
| | | $ | 3,156 | | | $ | 2,809 | | | $ | 2,313 | |
| | | | | | | | | | |
F-23F-20
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During fiscal 2002, management determined that declines in the market values of the Company’s investments in Leap Wireless International, Inc. (Leap Wireless) 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 $180 million in other-than-temporary losses on marketable securities related to its debt and equity investments in Leap Wireless during fiscal 2002. The Company also recorded $59 million in losses related to changes in the fair values of Leap Wireless derivative instruments for fiscal 2002. In fiscal 2004, Leap Wireless emerged from bankruptcy. As a result, the Company received a distribution comprised of $19 million in cash and $16 million in equity in Leap Wireless in exchange for its debt investments, and the Company recorded $34 million in net realized gains on marketable securities in fiscal 2004. The Company’s equity and derivative instruments in Leap Wireless were cancelled without consideration. The fair value of the Company’s new equity investment in Leap Wireless was $14 million at September 30, 2004.
Note 6. Income Taxes
The components of the income tax provision for the years ended September 30 were as follows (in millions):
| | | | | | | | | | | | | |
| | | 2004
| | 2003
| | 2002
|
| Current provision: | | | | | | | | | | | | |
| Federal | | $ | 115 | | | $ | 299 | | | $ | 5 | |
| State | | | 60 | | | | 57 | | | | 7 | |
| Foreign | | | 157 | | | | 119 | | | | 86 | |
| | | |
| | | |
| | | |
| |
| | | | 332 | | | | 475 | | | | 98 | |
| | | |
| | | |
| | | |
| |
| Deferred provision: | | | | | | | | | | | | |
| Federal | | | 227 | | | | 45 | | | | (3 | ) |
| State | | | 29 | | | | 16 | | | | 2 | |
| | | |
| | | |
| | | |
| |
| | | | 256 | | | | 61 | | | | (1 | ) |
| | | |
| | | |
| | | |
| |
| | | $ | 588 | | | $ | 536 | | | $ | 97 | |
| | | |
| | | |
| | | |
| |
The components of earnings from continuing operations before income taxes for the years ended September 30 were as follows (in millions):
| | | | | | | | | | | | | |
| | | 2004
| | 2003
| | 2002
|
| United States | | $ | 1,571 | | | $ | 1,163 | | | $ | 453 | |
| Foreign | | | 742 | | | | 402 | | | | 169 | |
| | | |
| | | |
| | | |
| |
| Earnings from continuing operations before income taxes | | $ | 2,313 | | | $ | 1,565 | | | $ | 622 | |
| | | |
| | | |
| | | |
| |
The following is a reconciliation of the expected statutory federal income tax provision to the Company’s actual income tax provision for the years ended September 30 (in millions):
| | | | | | | | | | | | | | |
| | | | Year Ended | |
| | | | | | | | | | | | | September 24, | | September 25, | | September 26, | |
| | | 2004
| | 2003
| | 2002
| | 2006 | | 2005 | | 2004 | |
| Expected income tax provision at federal statutory tax rate | | $ | 809 | | $ | 548 | | $ | 218 | | | $ | 1,105 | | $ | 983 | | $ | 809 | |
| State income tax provision, net of federal benefit | | 91 | | 61 | | 32 | | | 168 | | 109 | | 91 | |
| Goodwill amortization | | — | | — | | 97 | | |
| Other permanent differences | | — | | 8 | | 5 | | |
| One-time dividend | | | — | | 35 | | — | |
| Foreign income taxed at other than U.S. rates | | | (215 | ) | | | (59 | ) | | | (37 | ) | | | (525 | ) | | | (290 | ) | | | (215 | ) |
| Valuation allowance | | | (44 | ) | | — | | | (189 | ) | | | (46 | ) | | | (78 | ) | | | (44 | ) |
| Tax credits | | | (49 | ) | | | (32 | ) | | | (26 | ) | | | (46 | ) | | | (66 | ) | | | (49 | ) |
| Other | | | (4 | ) | | 10 | | | (3 | ) | | 30 | | | (27 | ) | | | (4 | ) |
| | |
| |
| |
| | | | | | | | |
| Actual income tax provision | | $ | 588 | | $ | 536 | | $ | 97 | | |
| Income tax expense | | | $ | 686 | | $ | 666 | | $ | 588 | |
| | |
| |
| |
| | | | | | | | |
F-24
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company didhas not provideprovided for United States income taxes and foreign withholding taxes on a cumulative total of approximately $1.5$2.7 billion of undistributed earnings from certain non-United States subsidiaries permanentlyindefinitely invested outside the United States. Should the Company repatriate foreign earnings, the Company would have to adjust the income tax provision in the period management determined that the Company would repatriate the earnings. The Company is currently studying the impact of the one-time favorable foreign dividend provisions enacted onOn October 22, 2004, as part of the American Jobs Creation Act of 2004 and may decide(the Jobs Creation Act) was signed into law. The Jobs Creation Act created a temporary incentive for corporations in the United States to repatriate futureaccumulated 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, the Company repatriated approximately $0.5 billion of foreign earnings qualifying for the special incentive under the Jobs Creation Act and 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 somecertain of its foreign subsidiaries. However,subsidiaries in operations outside the decisionUnited States.
During fiscal 2006, the Internal Revenue Service and the California Franchise Tax Board completed audits of the Company’s tax returns for fiscal 2001 and 2002, resulting in adjustments to repatriate would relate solelythe Company’s net operating loss and credit carryover amounts for those years. The tax provision was reduced by $73 million during fiscal 2006 to future earnings to be generated afterreflect the date such decision was made.expected impacts of the audits on both the reviewed and open tax years.
F-21
At September 30, 2004 and 2003, the
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company had net deferred tax assets and deferred tax liabilities as follows (in millions):
| | | | | | | | | | |
| | | | | | | | | | | September 24, | | September 25, | |
| | | 2004
| | 2003
| | 2006 | | 2005 | |
| Accrued liabilities, reserves and other | | $ | 139 | | $ | 599 | | | $ | 169 | | $ | 191 | |
| Deferred revenues | | 133 | | 172 | | |
| Share-based compensation | | | 164 | | — | |
| Capitalized start-up and organizational costs | | | 46 | | — | |
| Deferred revenue | | | 55 | | 76 | |
| Unrealized losses on marketable securities | | 5 | | — | | | 43 | | 5 | |
| Unused net operating losses | | — | | 309 | | | 59 | | 13 | |
| Capital loss carryover | | 249 | | 150 | | | 82 | | 161 | |
| Tax credits | | 454 | | 345 | | | 129 | | 346 | |
| Unrealized losses on investments | | 169 | | 228 | | | 145 | | 137 | |
| Property, plant and equipment | | | — | | 8 | |
| Other basis differences | | | 22 | | — | |
| | |
| |
| | | | | | |
| Total gross deferred assets | | 1,149 | | 1,803 | | | 914 | | 937 | |
| Valuation allowance | | | (139 | ) | | | (660 | ) | | | (22 | ) | | | (69 | ) |
| | |
| |
| | | | | | |
| Total net deferred assets | | 1,010 | | 1,143 | | | $ | 892 | | $ | 868 | |
| | |
| |
| | | | | | |
| Purchased intangible assets | | | (8 | ) | | | (2 | ) | | | (79 | ) | | | (17 | ) |
| Deferred contract costs | | | (26 | ) | | | (43 | ) | | | (6 | ) | | | (18 | ) |
| Unrealized gains on marketable securities | | | (33 | ) | | | (39 | ) | | | (67 | ) | | | (50 | ) |
| Property, plant and equipment | | | | (10 | ) | | — | |
| Other basis differences | | | (43 | ) | | | (41 | ) | | — | | | (1 | ) |
| | |
| |
| | | | | | |
| Total deferred liabilities | | $ | (110 | ) | | $ | (125 | ) | | $ | (162 | ) | | $ | (86 | ) |
| | |
| |
| | | | | | |
Gross deferred tax assets and valuation allowance each decreased by $495 million from September 30, 2003, primarily as a result of discontinued operations (Note 11), with no net effect on net deferred tax assets.
The Company reversed approximately $1.1 billion of its valuation allowance on substantially all of its United States deferred tax assets during fiscal 2003 as a credit to stockholders’ equity.
The Company believes,
it, more likely than not,
that it will have sufficient taxable income after stock option related deductions to utilize
the majority of its
net deferred tax assets. As of September
30, 2004,24, 2006, the Company has provided a valuation allowance on net capital losses
in the amount of
$139$16 million.
ThisThe valuation allowance
related to capital losses reflects the uncertainty surrounding the Company’s ability to generate sufficient capital gains to utilize all capital losses.
At September 30, 2004,24, 2006 and September 25, 2005, the Company had federal, state and foreign taxes payable of approximately $137 million and $69 million, respectively, included in other current liabilities.
At September 24, 2006, the Company had unused federal
income tax credits of $534 million, with $522 million expiring from 2012 through 2026, and state income tax credits of
$658$96 million,
and $78 million, respectively, generally expiring from 2005 through 2024.which do not expire. The Company does not expect
theseits federal income tax credits to expire unused.
Cash amounts paid for income taxes, net of refunds received, were
$127$172 million,
$125$168 million and
$89$127 million for fiscal
2004, 20032006, 2005 and
2002,2004, respectively. The income taxes paid primarily relate to foreign withholding taxes.
Preferred StockStock.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, 1,500,0004,000,000 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. At September 30, 200424, 2006 and 2003,September 25, 2005, no shares of preferred stock were outstanding.
F-25
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Preferred Share Purchase Rights PlanAgreement.
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 suchtwice-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.
F-22
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Repurchase ProgramProgram.On February 10, 2003,November 7, 2005, the Company authorized the expenditurerepurchase of up to $1$2.5 billion to repurchase shares of the Company’s common stock overunder a two-year period.program with no expiration date. The $2.5 billion stock repurchase program replaced a $2.0 billion stock repurchase program, of which approximately $1.0 billion remained authorized for repurchases. During fiscal 2003,2006 and 2005, the Company bought 9,830,000repurchased and retired 34,000,000 shares at a net aggregate costand 27,083,000 of $158 million. While thecommon stock for $1.5 billion and $953 million, respectively, excluding $5 million of premiums received related to put options that were exercised in fiscal 2006. The Company did not repurchase any of the Company’s common stock under this program during fiscal 2004, the Company continues to evaluate repurchases under this program.2004. At September 30, 2004, $834 million remains24, 2006, approximately $0.9 billion remained authorized for repurchases under the program. Repurchased shares are retired upon repurchase.
stock repurchase program, net of put options outstanding.
In connection with the Company’s stock repurchase program, the Company sold put options
under three separate contracts with independent third partieson its own stock during fiscal
2004 that may have required2006, 2005 and 2004. At September 24, 2006, the Company
had two outstanding put options enabling holders to
purchase 3,000,000sell 2,000,000 shares of the Company’s common stock to the Company for approximately $89 million (net of the put option premiums received), and the recorded values of the put option liabilities totaled $19 million. In October 2006, one of the put options was exercised, and the Company repurchased and retired 1,000,000 shares of its common stock
upon exercise. The Company accounted for
the written put options in accordance with Statementapproximately $45 million (net of
Financial Standards No. 150 (FAS 150), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” In the event the put
optionsoption premium received). Upon repurchase, the shares were
exercised,retired. The remaining put option, with an expiration date in November 2006, may require the
contracts required that the options be physically settled in cash. The Company
determined thatto repurchase 1,000,000 shares of its common stock for approximately $45 million (net of the put
options shouldoption premium received). Any shares purchased upon the exercise of the put option will be
classified as liabilities in accordance with FAS 150. As such,retired. During fiscal 2006, the Company
recorded the $5recognized $29 million in
premiums received as additionsinvestment losses due to
other current liabilities, and changesnet increases in the fair values of
the put options,
werenet of premiums received of $11 million. During fiscal 2005 and 2004, the Company recognized
in the Company’s statementgains of
operations. The Company repurchased all of the put options during fiscal 2004. The net gain recorded$31 million and $5 million, respectively, in investment income
relateddue to
decreases in the
fair values of put options, including premiums received
during fiscal 2004 wasof $15 million and $5
million. During fiscal 2003, the Company sold put options under three separate contracts with independent third parties that required the Company to purchase 3,000,000 shares of its common stock upon exercise. All of these put options expired unexercised. million, respectively.
Dividends.The Company
classified the put options as permanent equity in accordance with Emerging Issues Task Force Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” which was subsequently amended by FAS 150. As such, the Company recorded the $7 million in premiums received as paid-in capital.Dividends
On February 11, 2003, the Company announced its first common stock dividend of $0.025 per share. On July 16, 2003, the Company announced an increaseincreases in its quarterly dividend from $0.025 to $0.035 per share onof common stock. Onstock from $0.035 to $0.05 on March 2, 2004, the Company announced an increase in its quarterly dividend from $0.035$0.05 to $0.050 per share$0.07 on common stock. On July 13, 2004, the Company announced an increase in its quarterly dividend from $0.050$0.07 to $0.070 per share$0.09 on common stock.March 8, 2005, and from $0.09 to $0.12 on March 7, 2006. Cash dividends announced in fiscal 20042006, 2005 and 20032004 were as follows (in millions, except per share data):
F-26
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | | 2005 | | | 2004 | |
| | | Per Share | | | Total | | | Per Share | | | Total | | | Per Share | | | Total | |
| First quarter | | $ | 0.09 | | | $ | 148 | | | $ | 0.07 | | | $ | 115 | | | $ | 0.07 | (a) | | $ | 112 | |
| Second quarter | | | 0.09 | | | | 150 | | | | 0.07 | | | | 115 | | | | 0.05 | | | | 81 | |
| Third quarter | | | 0.12 | | | | 202 | | | | 0.09 | | | | 147 | | | | — | (b) | | | — | |
| Fourth quarter | | | 0.12 | | | | 198 | | | | 0.09 | | | | 147 | | | | 0.07 | | | | 114 | |
| | | | | | | | | | | | | | | | | | | |
| Total | | $ | 0.42 | | | $ | 698 | | | $ | 0.32 | | | $ | 524 | | | $ | 0.19 | | | $ | 307 | |
| | | | | | | | | | | | | | | | | | | |
| | |
| (a) | | 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. |
|
| (b) | | 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. |
On October 5, 2006, the Company announced a cash dividend of $0.12 per share on the Company’s common stock, payable on January 4, 2007 to stockholders of record as of December 7, 2006, which will be reflected in the consolidated financial statements in the first quarter of fiscal 2007.
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS| | | | | | | | | | | | | | | | | |
| | | 2004
| | 2003
|
| | | Per Share
| | Total
| | Per Share
| | Total
|
| First quarter | | $ | 0.070 | | | $ | 112 | | | $ | — | | | $ | — | |
| Second quarter | | | 0.050 | | | | 81 | | | | 0.025 | | | | 39 | |
| Third quarter | | | — | | | | — | | | | 0.025 | | | | 40 | |
| Fourth quarter | | | 0.070 | | | | 114 | | | | 0.035 | | | | 56 | |
| | | |
| | | |
| | | |
| | | |
| |
| Total | | $ | 0.190 | | | $ | 307 | | | $ | 0.085 | | | $ | 135 | |
| | | |
| | | |
| | | |
| | | |
| |
Note 8. Employee Stock Benefit Plans
Employee Savings and Retirement PlanPlan.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 2006, 2005 and 2004 2003was $33 million, $27 million and 2002 was $21 million, $20 million and $20 million, respectively.
Stock Option PlansEquity Compensation Plans.The CompanyBoard of Directors may grant options to selected employees, directors and consultants to the Company to purchase shares of the Company’s common stock at a price not less than the fair market value of the stock at the date of grant. The 2006 Long-Term Incentive Plan (the 2006 Plan) was adopted
F-23
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
during the second quarter of fiscal 2006 and replaced the 2001 Stock Option Plan (theand the 2001 Plan) was adopted and replaced the 1991Non-Employee Director Stock Option Plan and their predecessor plans (the 1991 Plan), which expired in August 2001. Options grantedPrior Plans). The 2006 Plan provides for the grant of incentive and nonstatutory stock options as well as stock appreciation rights, restricted stock, restricted stock units, performance units and shares and other stock-based awards and will be the source of shares issued under the 1991Executive Retirement Matching Contribution Plan remain outstanding until exercised or cancelled.(ERMCP). The shares reservedshare reserve under the 20012006 Plan wereis equal to the number of shares available for future grant under the 1991 Plancombined plans on the date the 20012006 Plan was approved by the Company’s stockholders, plus an additional 65,000,000 shares for a total of approximately 280,192,000 shares reserved. This share amount is automatically increased by the amount equal to the number of shares subject to any outstanding option under a Prior Plan that is terminated or cancelled (but not an option under a Prior Plan that expires) following the date that the 2006 Plan was approved by stockholders. AtShares that date, approximately 101,083,000 shares wereare subject to an award under the ERMCP and are returned to the Company because they fail to vest will again become available for future grantsgrant under the 20012006 Plan. In fiscal 2004,The Board of Directors of the Company reserved another 64,000,000 shares for future grants under the 2001 Plan. The Company may amend or terminate the 20012006 Plan at any time. Generally, options outstanding vest over periods not exceeding five years and are exercisable for up to ten years from the grant date.
During fiscal 2006, the Company assumed a total of approximately 3,530,000 outstanding stock options under the Flarion Technologies, Inc. 2000 Stock Option and Restricted Stock Purchase Plan, the Berkana Wireless Inc. 2002 Stock Plan and 2002 Executive Stock Plan and under the Qualphone Inc. 2004 Equity Incentive Plan (the Assumed Plans), as amended, as a result of the acquisitions (Note 11). The 2001 Plan providesAssumed Plans were suspended on the dates of acquisition, and no additional shares may be granted under those plans. The Assumed Plans provided for the grant of both incentive stock options and non-qualified stock options. Generally, options outstanding vest over periods not exceeding sixfour years and are exercisable for up to 10ten years from the grant date. At September 30,
Information under FAS 123R for Fiscal 2006
A summary of stock option transactions for all stock option plans follows:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Average | | | | |
| | | | | | | Weighted | | | Remaining | | | Aggregate | |
| | | Number of | | | Average | | | Contractual | | | Intrinsic | |
| | | Shares | | | Exercise | | | Term | | | Value | |
| | | (In thousands) | | | Price | | | (Years) | | | (In billions) | |
| Outstanding at September 25, 2005 | | | 202,794 | | | $ | 24.35 | | | | | | | | | |
| Options granted | | | 34,977 | | | | 45.69 | | | | | | | | | |
Options assumed(1) | | | 3,530 | | | | 21.15 | | | | | | | | | |
| Options cancelled/forfeited/expired | | | (3,057 | ) | | | 35.08 | | | | | | | | | |
| Options exercised | | | (36,389 | ) | | | 16.71 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Outstanding at September 24, 2006 | | | 201,855 | | | $ | 29.20 | | | | 6.15 | | | $ | 2.2 | |
| | | | | | | | | | | | | |
| Exercisable at September 24, 2006 | | | 121,872 | | | $ | 24.42 | | | | 4.76 | | | $ | 1.8 | |
| | | | | | | | | | | | | |
| | |
| (1) | | Represents activity related to options that were assumed as a result of acquisitions (Note 11). |
Net stock options, after forfeitures and cancellations, granted during fiscal 2006, 2005 and 2004
represented 1.9%, 1.8% and 1.7% of outstanding shares as of the beginning of each fiscal year, respectively. Total stock options
for approximately 120,860,000granted during fiscal 2006, 2005 and 2004 represented 2.1%, 2.1% and 1.9%, respectively, of outstanding shares
under both plans were exercisable at prices ranging from $1.40 to $86.19 per share for an aggregate exercise priceas of
$2.1 billion.the end of each fiscal year.
The Company has adopted the 2001 Non-Employee Directors’ Stock Option Plan (the 2001 Directors’ Plan), which 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 numberCompany’s determination of shares available for future grant under the 1998 Directors’ Planfair value of share-based payment awards on the date the 2001 Directors’ Plan was approvedof grant using an option-pricing model is affected by the Company’s stockholders.stock price as well as assumptions regarding a number of highly complex and subjective variables. At September 24, 2006, total unrecognized estimated compensation cost related to non-vested stock options granted prior to that date 4,100,000 shares were available for future grants under the 2001 Directors’ Plan.was $1.2 billion, which is expected to be recognized over a weighted-average period of 1.7 years. Total share-based compensation cost capitalized as part of inventory and fixed assets was $1 million during fiscal 2006. The total intrinsic value of stock options exercised during fiscal 2006 was $1.1 billion. The Company may terminaterecorded cash received from the 2001 Directors’ Plan at any time. This plan provides for non-qualifiedexercise of stock options to be granted to non-employee directors at fair market value, vesting over periods not exceeding five yearsof $608 million and are exercisable for up to 10 years fromrelated tax benefits of $421 million during fiscal 2006. Upon option exercise, the grant date. At September 30, 2004, options for approximately 3,232,000Company issues new shares under both plans were exercisable at prices ranging from $2.91 to $66.50 per share for an aggregate exercise price of $30 million.stock.
F-27F-24
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Additional information about stock options outstanding at September 24, 2006 with exercise prices less than or above $37.86 per share, the closing price at September 24, 2006, follows (number of shares in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 $37.86 | | | 98,804 | | | $ | 19.59 | | | | 37,751 | | | $ | 26.57 | | | | 136,555 | | | $ | 21.52 | |
| Above $37.86 | | | 23,068 | | | | 45.10 | | | | 42,232 | | | | 45.36 | | | | 65,300 | | | | 45.27 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Total outstanding | | | 121,872 | | | $ | 24.42 | | | | 79,983 | | | $ | 36.49 | | | | 201,855 | | | $ | 29.20 | |
| | | | | | | | | | | | | | | | | | | | | | |
Information under FAS 123 for Periods Prior to Fiscal 2006
A summary of stock option transactions for theall stock option plans follows (number of shares in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Options Outstanding
| | Options Outstanding | |
| | | Options
Shares | | Exercise Price Per Share
| | Shares | | Exercise Price Per Share | |
| | | Available | | Number | | Weighted | | Available | | Number | | Weighted | |
| | | for Grant
| | of Shares
| | Range
| | Average
| | for Grant | | of Shares | | Range | | Average | |
Balance at September 30, 2001 | | 95,778 | | 216,350 | | $0.01 to $86.19 | | $ | 11.10 | | |
| Plan shares expired | | | (62 | ) | | — | | — | | — | | |
| Options granted | | | (53,050 | ) | | 53,050 | | 12.81 to 30.02 | | 24.35 | | |
| Options cancelled | | 6,202 | | | (6,202 | ) | | 0.51 to 70.81 | | 25.40 | | |
| Options exercised | | — | | | (28,650 | ) | | 0.01 to 25.91 | | 2.84 | | |
| | |
| |
| | |
Balance at September 30, 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 30, 2003 | | 23,746 | | 212,972 | | $0.07 to $86.19 | | $ | 17.28 | | |
Balance at September 28, 2003 | | | 23,746 | | 212,972 | | $0.07 to $86.19 | | $ | 17.28 | |
| Additional shares reserved | | 64,000 | | — | | — | | — | | | 64,000 | | — | | — | | — | |
| Options granted | | | (31,252 | ) | | 31,252 | | 21.50 to 40.40 | | 27.19 | | | | (31,252 | ) | | 31,252 | | 21.50 to 40.40 | | 27.19 | |
| Options cancelled | | 4,420 | | | (4,420 | ) | | 2.30 to 70.00 | | 28.15 | | | 4,420 | | | (4,420 | ) | | 2.30 to 70.00 | | 28.15 | |
| Options exercised | | — | | | (36,220 | ) | | 0.14 to 37.34 | | 7.85 | | | — | | | (36,220 | ) | | 0.14 to 37.34 | | �� | 7.85 | |
| | |
| |
| | | | | | |
Balance at September 30, 2004 | | 60,914 | | 203,584 | | $0.07 to $86.19 | | $ | 20.25 | | |
Balance at September 26, 2004 | | | 60,914 | | 203,584 | | $0.07 to $86.19 | | $ | 20.25 | |
Additional shares reserved(1) | | | 765 | | — | | — | | — | |
Options assumed(1) | | | | (765 | ) | | 765 | | 0.09 to 38.48 | | 24.32 | |
Plan shares expired(2) | | | | (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 | |
| | | | | | | |
Information about fixed stock options outstanding at September 30, 2004 follows (number of shares in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding
| | |
| | | | | | | Weighted
Average | | | | | | Options Exercisable
|
| | | | | | | Remaining | | Weighted | | | | | | Weighted |
| | | | | | | Contractual | | Average | | | | | | Average |
| Range of | | Number | | Life | | Exercise | | Number | | Exercise |
Exercise Prices
| | of Shares
| | (In Years)
| | Price
| | of Shares
| | Price
|
| $0.07 to $3.37 | | | 28,449 | | | | 2.11 | | | $ | 2.59 | | | | 28,424 | | | $ | 2.59 | |
| $3.38 to $9.63 | | | 31,466 | | | | 3.71 | | | | 4.43 | | | | 31,454 | | | | 4.43 | |
| $11.92 to $17.47 | | | 28,412 | | | | 7.99 | | | | 16.33 | | | | 9,952 | | | | 16.13 | |
| $17.48 to $22.44 | | | 31,812 | | | | 8.54 | | | | 20.44 | | | | 8,056 | | | | 19.70 | |
| $22.77 to $29.21 | | | 36,792 | | | | 6.97 | | | | 27.18 | | | | 20,331 | | | | 27.05 | |
| $29.31 to $34.80 | | | 27,319 | | | | 7.75 | | | | 33.36 | | | | 10,887 | | | | 33.77 | |
| $34.88 to $86.19 | | | 19,334 | | | | 5.88 | | | | 45.64 | | | | 15,546 | | | | 46.32 | |
| | | |
| | | | | | | | | | | |
| | | | | |
| | | | 203,584 | | | | 6.18 | | | $ | 20.25 | | | | 124,650 | | | $ | 17.41 | |
| | | |
| | | | | | | | | | | |
| | | | | |
| | |
| (1) | | Represents activity related to options that were assumed as a result of acquisitions (Note 11). |
|
| (2) | | Represents shares available for future grant cancelled pursuant to the Iridigm and Spike acquisitions. |
There were approximately
129,990,000124,491,000 options exercisable with a weighted average exercise price of
$13.42$21.11 per share at September
30, 2003.25, 2005. There were approximately
137,876,000124,650,000 options exercisable with a weighted average exercise price of
$8.97$17.41 per share at September
30, 2002.F-28
26, 2004.
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information about stock options outstanding at September 30, 2004 with exercise prices less than or above $38.25 per share, the closing price at September 30, 2004, follows (number of shares in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 $38.25 | | | 109,448 | | | $ | 13.36 | | | | 75,967 | | | $ | 23.94 | | | | 185,415 | | | $ | 17.70 | |
| Above $38.25 | | | 15,202 | | | | 46.53 | | | | 2,967 | | | | 44.81 | | | | 18,169 | | | | 46.25 | |
| | | |
| | | | | | | |
| | | | | | | |
| | | | | |
| Total outstanding | | | 124,650 | | | $ | 17.41 | | | | 78,934 | | | $ | 24.73 | | | | 203,584 | | | $ | 20.25 | |
| | | |
| | | | | | | |
| | | | | | | |
| | | | | |
Employee Stock Purchase PlansPlans.
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 authorizes up to approximately 24,309,000 shares to be granted. The 1996 Non-Qualified Employee Stock Purchase Plan authorizes up to 400,000 shares to be granted. During fiscal 2006, 2005 and 2004, 2003approximately 2,220,000, 1,786,000 and 2002,2,205,000 shares totaling approximately 2,205,000, 2,744,000 and 2,300,000 were issued under the plans at an average price of $18.60, $13.20$31.10, $29.63 and $15.73$18.60 per share, respectively. At September 30, 2004,24, 2006, approximately 17,232,00013,226,000 shares were reserved for future issuance.
At September 24, 2006, total unrecognized estimated compensation cost related to non-vested purchase rights granted prior to that date was $7 million. The Company recorded cash received from the exercise of purchase rights of $69 million during fiscal 2006.
Executive Retirement PlansPlans.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
F-25
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1,600,000 shares to be allocated to participants at any time. During fiscal 2006, 2005 and 2004, 2003approximately 47,000, 92,000 and 2002, approximately 108,000 89,000 and 88,000 shares, respectively, were allocated under the plans. The Company recorded $5 million, $2 million, $3 million and $2$5 million in compensation expense during fiscal 2004, 20032006, 2005 and 2002,2004, respectively, related to its net matching contributions to the plans. At September 30, 2004, approximately 331,000 shares were reserved for future allocation.
Note 9. Commitments and Contingencies LitigationLitigation.Schwartz, et al v. QUALCOMM: In fiscal 2001, 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, the 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.
F-29
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Those plaintiffs whose claims were dismissed have appealed. Oral argument on the appeal occurred on October 26, 2004, and no decision has been received.
Hanig et al. v. QUALCOMM, Boesel, et al v. QUALCOMM, Stone v. QUALCOMM, Ortiz et al v. QUALCOMM, Shannon et al. v. QUALCOMM, Deshon et al v. QUALCOMM, Earnhart et al. v. QUALCOMM: These cases, the first of which was filed in fiscal 2001, 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, and discovery is ongoing. On July 16, 2004, the Court granted the Company’s summary adjudication motion, dismissing plaintiffs’ breach of contract claims.
Durante, et al v. 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 federal age discrimination claims, against the Company. The complaint was filed in California Superior Court in and for the County of Los Angeles and purports to state 10 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 liquidated 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. On June 18, 2003, the Court ordered decertification of the class and dismissed the remaining claims of the opt-in plaintiffs without prejudice. Plaintiffs have filed an appeal. On June 20, 2003, 76 of the opt-in plaintiffs filed an action in Federal District Court for the Southern District of California, 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.
Zoltar Satellite Alarm Systems, Inc. v. QUALCOMM Inc.Incorporated and SnapTrack, Inc.:: On March 30, 2001, Zoltar Satellite Alarm Systems, Inc. (Zoltar) filed suit against QUALCOMM and its subsidiary 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, Zoltar filed an amended complaint adding Sprint Corp. asFollowing a named defendantverdict and narrowing certain infringement claims against QUALCOMM and SnapTrack. Since then, Zoltar has dismissed Sprint Corp. as a defendant. Trial of this matter commenced on February 24, 2004. On March 25, 2004, the jury reached a unanimous verdictfinding of no infringement in favor of the Company and SnapTrack on six of the sevenZoltar’s patent claims, asserted by Zoltar. On July 26, 2004, the Court found no infringement on the remaining patent claim asserted by Zoltar and 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 a notice of appeal that was dismissed as premature. While the Company has noticed an appealalready obtained a verdict of non-infringement of Zoltar’s patents, the Company’s additional affirmative claims seeking declarations of the non-enforceability and invalidity of those patents were set to be retried in the same Court on October 10, 2006. However, Zoltar has informed the Court that it will covenant not to sue the Company or SnapTrack on the patents. The final form of dismissal and judgment in favor of the Company and SnapTrack have filed a responsive notice.
remains to be determined.
Texas Instruments IncorporatedWhale Telecom Ltd. v. QUALCOMM Incorporated:On July 25, 2003,November 15, 2004, Whale Telecom Ltd. sued the Company in the New York State Supreme Court, County of New York, seeking monetary damages based on the claim that the Company fraudulently induced it to enter into certain infrastructure services agreements in 1999 and later interfered with their performance of those agreements. On March 15, 2006, the Court dismissed all claims against the Company. The plaintiff has filed a notice of appeal.
Broadcom Corporation v. QUALCOMM Incorporated:On May 18, 2005, Broadcom filed two actions in the United States District Court for the Central District of California against the Company alleging infringement of ten patents and seeking monetary damages and injunctive relief based thereon. On the same date, Broadcom also filed a complaint in the United States International Trade Commission (ITC) alleging infringement of five of the same patents at issue in the Central District Court cases seeking a determination and relief under Section 337 of the Tariff Act of 1930. On July 1, 2005, Broadcom filed an action in
Delaware Superiorthe United States District Court
against Texas Instruments Incorporated for
breachthe District of
a patent portfolio license agreement between the parties, seeking damages and other relief. On September 23, 2003, Texas Instruments filed an action in Delaware Chancery CourtNew Jersey against the Company alleging
breachviolations of 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 injunctive relief based thereon. On September 1, 2006, the New Jersey District Court dismissed the complaint; Broadcom has filed notice of appeal. Discovery is underway in one of the
same agreement, seeking damages and other relief. The Company has since dismissed its case in SuperiorCentral District Court
and refiled its claims as partpatent actions, with trial scheduled for May 2007. On December 12, 2005, the Central District Court ordered two of the
actionBroadcom patent claims filed in the
Chancery Court. In a written order dated July 14, 2004, the Court granted QUALCOMM’s summary judgment motion, dismissing all of Texas Instruments’ claims against QUALCOMM. In addition, the Court ruled that Texas Instruments had breached theother Central District patent
portfolio license agreement, though the breach was non-material, andF-30
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
therefore Texas Instruments’ license under the agreement would not be forfeited. The Court held a one-day bench trial on August 16, 2004, on the Company’s claim that Texas Instruments breached the agreement between the parties by pursuing the claims previously dismissed by the Court. Although the Court had already found that the claims brought by Texas Instruments were barred by the agreement, the Court declined to find that bringing the claims constituted a breachaction (which is stayed pending completion of the agreementITC action) to be transferred to the Southern District of California to be considered in the case filed by Texas Instruments and, therefore, found against the Company on August 22, 2005. That case now contains additional related claims filed by the sole remaining claim inCompany and Broadcom. On February 14, 2006, the case.ITC hearing commenced as to three of the patents alleged. On October 22, 2004,10, 2006, the Administrative Law Judge (ALJ) issued an interim decision in which he recommended against any downstream remedies, and found no infringement by the Company filed a noticeon two of appeal.
the three remaining patents and most of the asserted claims of the third patent. The ALJ did find infringement on some claims of one patent. The Company will petition the Commission for review of at least the limited infringement findings and patent validity findings.
QUALCOMM Incorporated v. Conexant Systems, Inc. and Skyworks Solutions Inc.Broadcom Corporation:: On October 8, 2002,July 11, 2005, the Company filed an action in the United States District Court for the Southern District of California against Conexant and SkyworksBroadcom alleging infringement of fiveseven patents, and misappropriationeach of trade secretswhich is essential to the practice of either the GSM or 802.11 standards, and seeking monetary damages and injunctive relief.relief based thereon. On December 4, 2003, SkyworksSeptember 23, 2005, Broadcom answered and counterclaimed, against QUALCOMM, alleging infringement of foursix patents. On October 14, 2005, the Company filed another action in the United States District Court for the Southern District of California against Broadcom alleging infringement of two patents, each of which relates to video encoding and misappropriation of trade secretsdecoding for high-end multimedia processing, and seeking monetary damages and injunctive relief.relief based thereon. That action is scheduled for trial in January 2007. On April 30, 2004,March 24, 2006, the Company filed another action in the United States District Court for the Southern District of California, alleging that Broadcom, during the period in which it has been attempting to bring to market a WCDMA baseband solution, misappropriated QUALCOMM confidential and trade secret information relating to QUALCOMM’s WCDMA
F-26
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
baseband chips, and relating to the Company’s multimedia capabilities for such chips. The complaint also asserts another patent claim against Broadcom’s wireless local area network products, including such capability bundled with Broadcom’s WCDMA product offerings. Broadcom counterclaimed with the assertion of two patents. On October 27, 2006, the Court grantedissued a preliminary injunction against Broadcom, prohibiting the Company’s motion to dismiss defendants’ inequitable conduct affirmative defenses and counterclaims. The Company filed an amended complaint on June 16, 2004, bringing the total numberfuture use or solicitation of certain of the Company’s patents at issue to eightconfidential business and maintaining the trade secret misappropriation claim. technical documents and information.
QUALCOMM Incorporated and SnapTrack, Inc. v. Nokia Corporation and Nokia Inc.:On
July 16 and 20, 2004, Conexant and Skyworks answered the Company’s amended complaint, reasserted claims based on alleged trade secret misappropriation and patent infringement and Skyworks also asserted counterclaims alleging violations of antitrust laws and unfair business practices. Conexant and Skyworks seek damages and other forms of relief. On September 21, 2004,November 4, 2005, the Company,
moved to stay the Skyworks antitrust and related counterclaims. That motion is pending. The Company believes the counterclaims are without merit. Claim construction hearings relating to the patents in the case are under way. Discovery in the matter is continuing.QUALCOMM Incorporated v. Maxim Integrated Products, Inc.:On December 2, 2002, the Companyalong with its wholly-owned subsidiary, SnapTrack, filed an action in the United States District Court for the Southern District of California against Maxim Integrated Products, Inc. (Maxim)Nokia alleging infringement of threeeleven QUALCOMM patents and one SnapTrack patent relating to GSM/GPRS/EDGE and position location and seeking monetary damages and injunctive relief. The case is currently stayed pending a decision by the Federal Circuit regarding Nokia’s arbitration demand. On May 24, 2006, the Company filed an action in the Chancery Division of the High Court of Justice for England and Wales against Nokia alleging infringement of two QUALCOMM patents relating to GSM/GPRS/EDGE technology seeking monetary damages and injunctive relief. On June 9, 2006, the Company filed a complaint with the ITC against Nokia alleging importation of products that infringe six QUALCOMM patents relating to power control, video encoding and decoding, and power conservation mode technologies and seeking an exclusionary order and a cease and desist order. On July 7, 2006, the ITC commenced an investigation. On August 9, 2006, the Company filed an action in the District Court of Dusseldorf, Federal Republic of Germany, against Nokia alleging infringement of two QUALCOMM patents relating to GSM/GPRS/EDGE technology seeking monetary damages and injunctive relief. On October 9, 2006, the Company filed an action in the High Court of Paris, France against Nokia alleging infringement of two patents relating to GSM/GPRS/EDGE technology seeking monetary damages and injunctive relief. On October 9, 2006, the Company filed an action in the Milan Court, Italy against Nokia alleging infringement of two patents relating to GSM/GPRS/EDGE technology seeking monetary damages and injunctive relief.
Nokia Corporation and Nokia Inc. v. QUALCOMM Incorporated:On August 9, 2006, Nokia Corporation and Nokia, Inc. filed a complaint in Delaware Chancery Court seeking declaratory and injunctive relief relating to alleged commitments made by the Company to wireless industry standards setting organizations. The Company has
since amendedmoved to dismiss the
complaint, bringing the total number of patents at issue to four. On May 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. On June 21, 2004, the Court granted the Company’s motion to stay all of Maxim’s antitrust counterclaims and its patent misuse defense. On July 9, 2004, Maxim filed an Answer and Counterclaims to the Company’s Third Amended Complaint. Maxim’s amended counterclaims allege violation of antitrust laws and unfair business practices and seek damages and other relief. The Company believes the amended counterclaims are without merit and, if and when the Court’s stay is lifted, the Company will seek dismissal of those counterclaims as a matter of law. Claim construction hearings relating to the patents in the case are under way. Discovery in the matter is continuing.complaint.
Other:The Company has been named, along with many other manufacturers of wireless phones, wireless operators and industry-related organizations, as a defendant in
several purported class action lawsuits,
(In re Wireless Telephone Frequency Emissions Products Liability Litigation, United States District Court for the District of Maryland), and
in several individually filed actions
pending in Pennsylvania, Washington D.C., and Louisiana, seeking
personal injury, economic and/or punitivemonetary damages arising out of its sale of cellular phones.
On March 5, 2003, the Court granted the defendants motions to dismiss five of the consolidated cases (Pinney, Gimpleson, Gillian, Farina and Naquin) on the grounds that the claims were preempted by federal law. On April 2, 2003, the plaintiffs filed a notice of appeal of this order and the Court’s order denying remand. All remaining cases filed against the Company allege personal injury as a result of their use of a wireless telephone. Those cases have been remanded to the Washington, D.C. Superior Court. The courts that have reviewed similar claims against other companies to date have held that there was insufficient scientific basis for the plaintiffs’ claims in those cases.
On October 28, 2005, it was reported that six companies (Broadcom, Nokia, Texas Instruments, NEC, Panasonic and Ericsson) filed complaints with the European Commission, alleging that the Company violated European Union competition law in its WCDMA licensing practices. The Company has received the complaints and has submitted a reply.
It has been reported that two U.S. companies (Texas Instruments and Broadcom) and two South Korean companies (Nextreaming Corp. and THINmultimedia Inc.) have filed complaints with the Korean Fair Trade Commission alleging that the Company’s business practices are, in some way, a violation of South Korean anti-trust regulations. To date, the Company has not received the complaints.
Although there can be no assurance that unfavorable outcomes in any of the foregoing matters would not have a material adverse effect on the Company’s operating results, liquidity or financial position, the Company believes the claims made by other parties are without merit and will vigorously defend the actions. 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.
F-31F-27
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSOperating Leases
The Company leases certain of its facilities and equipment under noncancelable operating leases, with terms ranging from 2 to 10 years and with provisions for cost-of-living increases. Rental expense for fiscal 2004, 2003 and 2002 was $31 million, $34 million and $42 million, respectively. Future minimum lease payments in each of the next five years from fiscal 2005 through 2009 are $45 million, $32 million, $20 million, $7 million and $4 million, respectively, and $3 million thereafter.
Purchase ObligationsObligations.The Company has agreements with suppliers and other parties to purchase inventory, other goods and services and long-lived assets and estimates its noncancelable obligations under these agreements for fiscal 2007 to 2011 to be approximately $885$663 million, in fiscal 2005, $58$79 million, in fiscal 2006, $2$31 million, in fiscal 2007, $2$20 million in fiscal 2008 and $2$18 million, in fiscal 2009.respectively, and $18 million thereafter. Of these amounts, commitments to purchase integrated circuit product inventories for fiscal 2007 to 2009 comprised $717$540 million, in$48 million and $5 million, respectively.
Leases.The Company leases certain of its facilities and equipment under noncancelable operating leases, with terms ranging from less than one year to 28 years and with provisions for cost-of-living increases with certain leases. Rental expense for fiscal
2006, 2005 and
2004 was $47 million, $39 million
and $31 million, respectively. The Company leases certain property under capital lease agreements which expire at various dates through 2036. Capital lease obligations are included in
fiscal 2006.Letters of Creditother liabilities. The future minimum lease payments for all capital leases and Other Financial Commitments
In addition to the financing commitments to Ericsson (Note 3) and the Inquam guarantee commitment (Note 4), the Company had $1 million of letters of credit outstandingoperating leases as of September 30, 2004, none of which were collateralized.
24, 2006 are as follows (in millions): | | | | | | | | | | | | | |
| | | Capital | | | Operating | | | | |
| | | Leases | | | Leases | | | Total | |
| 2007 | | $ | 3 | | | $ | 71 | | | $ | 74 | |
| 2008 | | | 3 | | | | 42 | | | | 45 | |
| 2009 | | | 3 | | | | 32 | | | | 35 | |
| 2010 | | | 4 | | | | 28 | | | | 32 | |
| 2011 | | | 4 | | | | 21 | | | | 25 | |
| Thereafter | | | 108 | | | | 97 | | | | 205 | |
| | | | | | | | | | | | |
| Total minimum lease payments | | $ | 125 | | | $ | 291 | | | $ | 416 | |
| | | | | | | | | | | |
| Deduct: Amounts representing interest | | | (67 | ) | | | | | | | | |
| | | | | | | | | | | | |
| Present value of minimum lease payments | | | 58 | | | | | | | | | |
| Deduct: Current portion of capital lease obligations | | | — | | | | | | | | | |
| | | | | | | | | | | | |
| Long-term portion of capital lease obligations | | $ | 58 | | | | | | | | | |
| | | | | | | | | | | | |
Note 10. Segment Information The Company is organized on the basis of products and services. The Company aggregates three of its divisions into the QUALCOMM Wireless & Internet segment. Reportable segments are as follows:
| • | | QUALCOMM CDMA Technologies (QCT) – develops and supplies CDMA-based integrated circuits and system software for wireless voice and data communications, multimedia functions and global positioning systemssystem 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 certain wireless products, including, without limitation, products implementing cdmaOne, CDMA2000, WCDMA, CDMA products,TDD and/or OFDMA 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 market, including its BREW, product and services, QChat and QPoint;QPoint products and services; |
| |
| o | | QUALCOMM Government Technologies (QGOV) – formerly QUALCOMM Digital Media, provides development, hardware and analytical expertise to United States government agencies involving wireless communications technologies. Through June 2004, the QGOV division also provided services for the Digital Cinema business, which the Company is no longer pursuing;technologies; and |
| |
| o | | QUALCOMM Wireless Business Solutions (QWBS) -– provides satellite and terrestrial-based two-way data messaging, and position reporting and wireless application services to transportation companies, private fleets, construction equipment fleets and other enterprise companies. |
QUALCOMM Strategic Initiatives (QSI) —– manages the Company’s strategic investment activities.activities, including MediaFLO USA, Inc. (MediaFLO USA), the Company’s wholly-owned wireless multimedia operator subsidiary. QSI makes strategic investments to promote the worldwide adoption of CDMACDMA-based products and services for wireless voice and Internet data communications.services.
As a result of the disposition of the remaining operations and assets related to the Vésper Operating Companies and TowerCo (Note 11), consolidated investees of QSI, the Company determined that the results of operations related to the Vésper Operating Companies and TowerCo should be presented as discontinued operations. QSI
F-32F-28
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSrevenues and EBT for all prior periods have been adjusted to reflect the reclassification of revenues and EBT related to these consolidated investees to discontinued operations.
During the second quarter of fiscal 2004, the Company reorganized its wholly-owned subsidiary SnapTrack, a developer of wireless position location technology. The Company previously presented all of the revenues and operating results of SnapTrack in the QCT segment. As a result of the reorganization of SnapTrack, revenues and operating results related to SnapTrack’s server software business (software for computer servers that allows operators to offer location-based services and applications) became part of the QIS division in the QWI segment. Revenues and operating results related to SnapTrack’s client business (the gpsOne hybrid assisted global positioning system wireless location technology that is embedded with the integrated circuit products) remain with the QCT segment. Prior period segment information has been adjusted to conform to the new segment presentation.
Effective as of the beginning of fiscal 2005, the Company expects to present the operating results of its wireless multimedia operator subsidiary, MediaFLO USA, Inc., in the QSI segment. The development expenses related to the wireless multimedia operator business were included in reconciling items through the end of fiscal 2004. Also effective as of the beginning of fiscal 2005, the Company expects to present the revenues and operating results of a QWI division that develops and sells test tools to support the design, development, testing and deployment of infrastructure and subscriber products in the QCT segment. Prior periods will be restated to conform to the fiscal 2005 segment presentation in future reports when the expected changes to the internal reporting structure become effective.
The Company evaluates the performance of its segments based on earnings (loss) before income taxes (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.Certain income and charges are not allocated to segments in the Company’s management reports because they are not considered in evaluating the segments’ operating performance. Unallocated income and charges include certain investment income, share-based compensation and certain research and development expenses and marketing expenses that were not deemed to be directly related to the businesses of the segments. The table below presents revenues, EBT and total assets for reportable segments (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Reconciling | | | | Reconciling | | |
| | | QCT*
| | QTL
| | QWI*
| | QSI*
| | Items*
| | Total*
| | QCT | | QTL | | QWI | | QSI | | Items | | Total |
2006 | | |
| Revenues | | | $ | 4,332 | | $ | 2,631 | | $ | 670 | | $ | — | | $ | (107 | ) | | $ | 7,526 | |
| EBT | | | 1,134 | | 2,397 | | 80 | | | (133 | ) | | | (322 | ) | | 3,156 | |
| Total assets | | | 651 | | 60 | | 196 | | 660 | | 13,641 | | 15,208 | |
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 | | $ | 3,094 | | $ | 1,331 | | $ | 596 | | $ | — | | $ | (141 | ) | | $ | 4,880 | | | $ | 3,111 | | $ | 1,331 | | $ | 571 | | $ | — | | $ | (133 | ) | | $ | 4,880 | |
| EBT | | 1,043 | | 1,195 | | 30 | | | (3 | ) | | 48 | | 2,313 | | | 1,048 | | 1,195 | | 19 | | | (31 | ) | | 82 | | 2,313 | |
| Total assets | | 560 | | 8 | | 121 | | 400 | | 9,731 | | 10,820 | | | 564 | | 8 | | 117 | | 400 | | 9,731 | | 10,820 | |
2003 | | |
| Revenues | | $ | 2,406 | | $ | 1,000 | | $ | 511 | | $ | 1 | | $ | (71 | ) | | $ | 3,847 | | |
| EBT | | 797 | | 897 | | 27 | | | (168 | ) | | 12 | | 1,565 | | |
| Total assets | | 309 | | 155 | | 94 | | 839 | | 7,425 | | 8,822 | | |
2002 | | |
| Revenues | | $ | 1,575 | | $ | 847 | | $ | 460 | | $ | 2 | | $ | 31 | | $ | 2,915 | | |
| EBT | | 438 | | 756 | | | (7 | ) | | | (346 | ) | | | (219 | ) | | 622 | | |
| Total assets | | 288 | | 169 | | 110 | | 1,755 | | 4,184 | | 6,506 | | |
*As adjusted.
Segment assets are comprised of accounts receivable and inventories for QCT, QTL and QWI. The QSI
segment assets
included $106 million, $116include certain marketable securities, notes receivable, wireless licenses, other investments and all assets of QSI’s consolidated subsidiary, MediaFLO USA, including property, plant and equipment. QSI’s assets related to the MediaFLO USA business totaled $329 million and
$203$98 million at September 24, 2006 and September 25, 2005, respectively. QSI’s assets also included $19 million, $61 million and $106 million related to investments in equity method investees at September
30,24, 2006, September 25, 2005 and September 26, 2004,
2003 and 2002, respectively.
Revenues from each of the Company’s divisions aggregated into the QWI reportable segment for the years ended September 30 were as follows (in millions):
F-33
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | |
| | | QWBS
| | QGOV
| | QIS*
| | Other
|
| 2004 | | $ | 414 | | | $ | 41 | | | $ | 116 | | | $ | 25 | |
| 2003 | | $ | 356 | | | $ | 49 | | | $ | 79 | | | $ | 27 | |
| 2002 | | $ | 338 | | | $ | 39 | | | $ | 68 | | | $ | 15 | |
*As adjusted.
Other reconciling items for the years ended September 30 were comprised as follows (in millions):
| | | | | | | | | | | | | |
| | | 2004
| | 2003*
| | 2002*
|
Revenues | | | | | | | | | | | | |
| Elimination of intersegment revenue | | $ | (161 | ) | | $ | (127 | ) | | $ | (86 | ) |
| Other products | | | 20 | | | | 56 | | | | 117 | |
| | | |
| | | |
| | | |
| |
| Reconciling items | | $ | (141 | ) | | $ | (71 | ) | | $ | 31 | |
| | | |
| | | |
| | | |
| |
Earnings (loss) before income taxes | | | | | | | | | | | | |
| Unallocated amortization of goodwill and other acquisition-related intangible assets | | $ | (3 | ) | | $ | (7 | ) | | $ | (258 | ) |
| Unallocated research and development expenses | | | (48 | ) | | | (36 | ) | | | (23 | ) |
| Unallocated selling, general, and administrative expenses | | | (41 | ) | | | (38 | ) | | | (13 | ) |
| EBT from other products | | | (39 | ) | | | (20 | ) | | | (7 | ) |
| Unallocated investment income, net | | | 192 | | | | 125 | | | | 89 | |
| Intracompany eliminations | | | (13 | ) | | | (12 | ) | | | (7 | ) |
| | | |
| | | |
| | | |
| |
| Reconciling items | | $ | 48 | | | $ | 12 | | | $ | (219 | ) |
| | | |
| | | |
| | | |
| |
*As adjusted.
Generally, revenues between segments are based on prevailing market rates for substantially similar products and services or an approximation thereof. Certain charges are allocated to the corporate functional department in the Company’s management reports based on the decision that those charges should not be used to evaluate the segments’ operating performance. Unallocated charges include amortization of acquisition-related intangible assets, research and development expenses and marketing expenses related to the development of the CDMA market that were not deemed to be directly related to the businesses of the segments.
Specified items included in segment EBT for years ended September 30 were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| | | QCT*
| | QTL
| | QWI*
| | QSI*
|
2004 | | | | | | | | | | | | | | | | |
| Revenues from external customers | | $ | 3,091 | | | $ | 1,200 | | | $ | 569 | | | $ | — | |
| Intersegment revenues | | | 3 | | | | 131 | | | | 27 | | | | — | |
| Interest income | | | — | | | | 3 | | | | 1 | | | | 14 | |
2003 | | | | | | | | | | | | | | | | |
| Revenues from external customers | | $ | 2,404 | | | $ | 898 | | | $ | 489 | | | $ | 1 | |
| Intersegment revenues | | | 2 | | | | 102 | | | | 22 | | | | — | |
| Interest income | | | — | | | | 2 | | | | 1 | | | | 45 | |
2002 | | | | | | | | | | | | | | | | |
| Revenues from external customers | | $ | 1,571 | | | $ | 780 | | | $ | 445 | | | $ | 2 | |
| Intersegment revenues | | | 4 | | | | 67 | | | | 15 | | | | — | |
| Interest income | | | 2 | | | | 2 | | | | 1 | | | | 26 | |
*As adjusted.
F-34
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effectively all equity in losses of investees (Note 5) were recorded in QSI in fiscal 2004, 2003 and 2002. Effectively all interest expense (Note 5) was recorded as corporate expense in reconciling items in fiscal 2004, 2003 and 2002.
The Company distinguishes revenues from external customers by geographic areas based on customer location. Sales information by geographic area for the years ended September 30 was as follows (in millions):
| | | | | | | | | | | | | |
| | | 2004
| | 2003*
| | 2002*
|
| United States | | $ | 1,016 | | | $ | 875 | | | $ | 914 | |
| South Korea | | | 2,091 | | | | 1,724 | | | | 1,134 | |
| Japan | | | 877 | | | | 586 | | | | 534 | |
| China | | | 260 | | | | 311 | | | | 74 | |
| Brazil | | | 31 | | | | 36 | | | | 22 | |
| Other foreign | | | 605 | | | | 315 | | | | 237 | |
| | | |
| | | |
| | | |
| |
| | | $ | 4,880 | | | $ | 3,847 | | | $ | 2,915 | |
| | | |
| | | |
| | | |
| |
*As adjusted (Note 11).
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 assets of consolidated investees. The QSI segment assets at September 30, 2003 and 2002 included $265 million and $391 million, respectively, in assets related to discontinued operations (Note 11). Total segment assets differ from total assets on a consolidated basis as a result of unallocated corporate assets primarily comprised of cash, cash equivalents, certain marketable securities, property, plant and equipment, deferred tax assets, goodwill, certain other intangible assets of nonreportable segments and goodwill.capitalized share-based compensation. The net book value of long-lived assets located outside of the United States was $21$69 million, $117$44 million and $251$21 million at September 30,24, 2006, September 25, 2005 and September 26, 2004, 2003 and 2002, respectively. Long-livedThe net book value of long-lived assets located outside ofin the United States was $1.4 billion, $978 million and $654 million at September 24, 2006, September 25, 2005 and September 26, 2004, respectively. Reconciling items included $228 million and $188 million at September 24, 2006 and September 25, 2005, respectively, of goodwill and other assets related to the QUALCOMM MEMS Technologies division (QMT), a nonreportable segment developing display technology for mobile devices and other applications.
Revenues from each of the Company’s divisions aggregated into the QWI reportable segment were as follows (in millions):
| | | | | | | | | | | | | |
| Fiscal Year | | QWBS | | QGOV | | QIS |
| 2006 | | $ | 429 | | | $ | 47 | | | $ | 194 | |
| 2005 | | | 441 | | | | 50 | | | | 153 | |
| 2004 | | | 414 | | | | 41 | | | | 116 | |
F-29
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other reconciling items were comprised as follows (in millions):
| | | | | | | | | | | | | |
| | | Year Ended | |
| | | September 24, | | | September 25, | | | September 26, | |
| | | 2006 | | | 2005 | | | 2004 | |
| Revenues: | | | | | | | | | | | | |
| Elimination of intersegment revenue | | $ | (222 | ) | | $ | (148 | ) | | $ | (153 | ) |
| Other nonreportable segments | | | 115 | | | | 48 | | | | 20 | |
| | | | | | | | | | |
| Reconciling items | | $ | (107 | ) | | $ | (100 | ) | | $ | (133 | ) |
| | | | | | | | | | |
| Earnings (loss) before income taxes: | | | | | | | | | | | | |
| Unallocated research and development expenses | | $ | (305 | ) | | $ | (45 | ) | | $ | (23 | ) |
| Unallocated selling, general, and administrative expenses | | | (290 | ) | | | (17 | ) | | | (41 | ) |
| Unallocated cost of equipment and services revenues | | | (41 | ) | | | — | | | | — | |
| Unallocated investment income, net | | | 455 | | | | 339 | | | | 192 | |
| Other nonreportable segments | | | (98 | ) | | | (45 | ) | | | (39 | ) |
| Intracompany eliminations | | | (43 | ) | | | (5 | ) | | | (7 | ) |
| | | | | | | | | | |
| Reconciling items | | $ | (322 | ) | | $ | 227 | | | $ | 82 | |
| | | | | | | | | | |
During fiscal 2006, share-based compensation expense included in unallocated research and development expenses and unallocated selling, general and administrative expenses totaled $216 million and $238 million, respectively. Unallocated cost of equipment and services revenues was comprised entirely of share-based compensation expense.
Segment data includes intersegment revenues. Generally, revenues between segments are based on prevailing market rates for substantially similar products and services or an approximation thereof. Specified items included in segment EBT were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| | | QCT | | QTL | | QWI | | QSI |
Fiscal 2006 | | | | | | | | | | | | | | | | |
| Revenues from external customers | | $ | 4,314 | | | $ | 2,465 | | | $ | 662 | | | $ | — | |
| Intersegment revenues | | | 18 | | | | 166 | | | | 8 | | | | — | |
| Interest income | | | 1 | | | | 5 | | | | 3 | | | | 6 | |
| Interest expense | | | 1 | | | | — | | | | 1 | | | | 2 | |
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 | |
Effectively all equity in losses of investees (Note 5) was recorded in QSI in fiscal 2006, 2005 and 2004.
F-30
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company distinguishes revenues from external customers by geographic areas based on customer location. Sales information by geographic area was as follows (in millions):
| | | | | | | | | | | | | |
| | | Year Ended | |
| | | September 24, | | | September 25, | | | September 26, | |
| | | 2006 | | | 2005 | | | 2004 | |
| United States | | $ | 984 | | | $ | 1,015 | | | $ | 1,016 | |
| South Korea | | | 2,398 | | | | 2,083 | | | | 2,091 | |
| Japan | | | 1,573 | | | | 1,210 | | | | 877 | |
| China | | | 1,266 | | | | 596 | | | | 366 | |
| Other foreign | | | 1,305 | | | | 769 | | | | 530 | |
| | | | | | | | | | |
| | | $ | 7,526 | | | $ | 5,673 | | | $ | 4,880 | |
| | | | | | | | | | |
Note 11. Acquisitions
On January 18, 2006, the Company completed its acquisition of all of the outstanding capital stock of Flarion Technologies, Inc. (Flarion), a privately held developer of OFDMA technology for approximately $613 million in consideration, consisting of approximately $349 million in shares of QUALCOMM stock, $229 million in cash, and the exchange of Flarion’s existing vested options and warrants with an estimated aggregate fair value of approximately $35 million. In addition, the Company assumed Flarion’s existing unvested options with an estimated aggregate fair value of $63 million, which is recorded as share-based compensation over the requisite service period pursuant to FAS 123R. Upon achievement of certain agreed upon milestones during the third quarter of fiscal 2006, the Company incurred additional aggregate consideration of $197 million, consisting of approximately $185 million in cash (of which $75 million will be payable in July 2007), $8 million in shares of QUALCOMM stock (of which $3 million is issuable in March 2007), and the modification of Flarion’s existing vested options and warrants with an estimated incremental fair value of approximately $4 million. The additional amounts payable in cash and shares on the milestone date were treated as additional consideration and recorded as goodwill. In addition, the modification of Flarion’s existing unvested options resulted in an estimated incremental fair value of $7 million, which will be recorded as share-based compensation over the requisite service period pursuant to FAS 123R. The acquisition of Flarion is intended to broaden the Company’s ability to effectively support operators who may prefer an OFDMA or a hybrid OFDM/CDMA/WCDMA network alternative. The addition of Flarion’s intellectual property and engineering resources will also supplement the resources that the Company has already dedicated over the years towards the development of OFDM/OFDMA technologies.
During fiscal 2006, the Company also acquired the following two entities for a total cost of $69 million, which was paid primarily in Brazil at September 20, 2003cash:
| • | | Berkana Wireless Inc., a California-based developer of complementary metal oxide semiconductor (CMOS) radio frequency integrated circuits (RFICs). |
|
| • | | Qualphone Inc., a provider of IP-based multimedia subsystems embedded client software products for mobile devices and interoperability testing services based primarily in India and Italy. |
An additional $4 million in consideration is payable in cash through August 2007 if certain performance and 2002 relatedother milestones are reached. The Company is in the final stages of accounting for the acquisitions and does not anticipate material adjustments to discontinuedthe preliminary purchase price allocations. Goodwill recognized in these transactions, no amount of which is expected to be deductible for tax purposes, was assigned to the QTL and QCT segments in the amounts of $619 million and $38 million, respectively. Technology-based intangible assets recognized in the amount of $165 million are being amortized on a straight-line basis over a weighted-average amortization period of seventeen years. Purchased in-process technology in the amount of $22 million was charged to research and development expense upon acquisition because technological feasibility had not been established and no future alternative uses existed. The consolidated financial statements include the operating results of these businesses from their respective dates of acquisition. Pro forma results of operations (Note 11).have not been presented because the effects of the acquisitions were not material.
During fiscal 2005, the Company acquired the following four entities for a total cost of $297 million, including $2 million paid in fiscal 2006 upon the achievement of certain milestones, which was paid primarily in cash:
Iridigm Display Corporation (Iridigm), a California-based display technology company.
F-31
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| • | | 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. |
An additional $2 million in consideration is payable in cash through November 2006 if certain performance and other milestones are reached. Goodwill recognized in these transactions amounted to $218 million, of which $81 million is expected to be deductible for tax purposes. Goodwill was assigned to the QMT, QIS and QCT segments in the amounts of $128 million, $81 million and $9 million, respectively. Technology-based intangible assets recognized in the amount of $36 million have a weighted-average useful life of seven years.
Note 11.12. Discontinued Operations in the QSI Segment In fiscal 1999,
On December 2, 2003, the Company
acquiredsold its direct and indirect ownership interests in Vésper São Paulo S.A. and Vésper S.A. (the Vésper Operating Companies)
. The Vésper Operating Companies were formed by a consortium, consolidated subsidiaries of
investors to provide fixed wirelessthe Company’s QSI segment, and
wireline telephone services in the northern, northeast and eastern regions of Brazil and in the state of São Paulo. In November 2001, the Company consummated a series of transactions resulting in an overall financial restructuring of the Vésper Operating
Companies, which resulted in its holding direct and indirect controlling ownership interests in the Vésper Operating Companies. As a result, the Vésper Operating Companies were consolidated in the Company’s QSI segment. On December 2, 2003 (the Closing Date), Embratel Participações S.A. (Embratel) acquired the Company’s direct and indirect ownership interests in the Vésper Operating Companies (the Embratel sale transaction) for no consideration. The Vésper Operating Companies’ existing communication towers and related interests in tower site property leases (Vésper Towers) were not included in the Embratel sale transaction, and as such, the Company effectively retained, through a new wholly-owned subsidiary (TowerCo), ownership and control of the Vésper Towers. The Vésper Towers had a net book value of approximately $5 million on the Closing Date. Concurrent with the closing, the Vésper Operating Companies entered into a 10-year agreement (renewable at the Vésper Operating Companies’ option for up to two successive 5-year terms) whereby the Vésper Operating Companies would pay a monthly fee to the Company for use of aerial and ground space on the tower sites. The Company provided approximately $6 million to fund operations of the Vésper Operating Companies during the first quarter of fiscal 2004 prior to their sale and additionally provided approximately $39 million in aggregate funding to or for the benefit of the Vésper Operating Companies on or before the Closing Date to facilitate the Embratel sale transaction. Such funding enabled the Vésper Operating Companies to completely extinguish their existing local bank debt (at an agreed discount) to allow the Company to retain ownership of the Vésper Towers free and clear of any local bank security interest. The major classes of assets and liabilities sold in the Embratel sale transaction included: $25 million in accounts receivable, $5 million in inventory, $24 million in other current assets, $95 million in property, plant and equipment, $6 million in other assets, $52 million in accounts payable, $5 million in payroll and other
F-35
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
benefits related liabilities, $6 million in unearned revenue, $1 million in other current liabilities, $14 million in long-term debt and $3 million in other liabilities.separate transactions. The Company realized a net loss of $52 million on the Embratel sale transactionof the Vésper Operating Companies during the first quarter of fiscal 2004, including a $74 million loss on the net assets sold to Embratel and a $46 million loss related to the recognition of cumulative foreign currency translation losses previously included in stockholders’ equity, partially offset by $68a $40 million in gainsnet gain from the subsequent sale of the Vésper Towers. The Company also recognized a $19 million net gain resulting from the extinguishment of debt related to the extinguishment of local bank debt and the settlement of other liabilities.
On November 19, 2002, the Company won bids to acquire personal mobile service (SMP) licenses in certain regions of Brazil. Approximately $8 million of the approximate $82 million purchase price for the SMP licenses was paid in December 2002. The remaining Brazilian real-denominated obligation was financed by the Brazilian government at an interest rate of 12% per annum, plus an adjustment for inflation. These SMP licenses were not included in the Embratel sale transaction. In December 2003, the Company initiated a waiver and return of the SMPpersonal mobile service licenses to Anatel, the telecommunications regulatory agency in Brazil. In February 2004, the waiver and return of the SMP licenses was approved by Anatel, and the license debt was extinguished. The Company realized a net gain of $19 million as a result of the removal of the $104 million SMP licenses and the related $123 million debt and accrued interest during the second quarter of fiscal 2004.
On March 2, 2004, the Company sold TowerCo to Embratel in a separately negotiated transaction (the TowerCo sale transaction) for $45 million in cash. TowerCo’s assets were primarily comprised of $5 million in property, plant and equipment. The Company realized a net gain of $40 million on the TowerCo sale transaction during the second quarter of fiscal 2004. As a result of the disposition of the remaining operations and assets related to the Vésper Operating Companies, the Company determined that the results of operations and cash flows related to the Vésper Operating Companies, including the results related to TowerCo and the SMP licensesVésper Towers and the gains and losses realized on the Embratel and TowerCo sales transactions, should be presented as discontinued operations in its consolidated statements of operations and cash flows. The Company’s statements of operations and cash flows for all prior periods have been adjusted to present the discontinued operations. At September 30, 2004,24, 2006 and September 25, 2005, the Company had no remaining assets or liabilities related to the Vésper Operating Companies TowerCo or the SMP licensesVésper Towers recorded on its consolidated balance sheet.
Revenues of $36 million, $123 million and $125 million were reported in the loss from discontinued operations during fiscal 2004, 2003 and 2002, respectively. Pro forma results for fiscal 2002, assuming the acquisition of the Vésper Operating Companies had been made at the beginning of fiscal 2002, are not presented because they would not differ materially from reported results.
2004.Note 12. Auction Discount Voucher
The Company was awarded a $125 million Auction Discount Voucher (ADV) by the Federal Communications Commission (FCC) in June 2000 as the result of a legal ruling. The ADV is fully transferable and may, subject to certain conditions, 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 the Company is not a participant. During November 2002, the FCC amended the terms of the ADV to allow the Company to use the ADV to satisfy existing FCC debt of other companies. The FCC agreed to extend the ADV twice, most recently in June 2004. The ADV was scheduled to expire in September 2004, but the Company used the remaining ADV prior to its expiration.
The Company used approximately $77 million of the ADV’s value prior to fiscal 2004. During fiscal 2004, the Company recorded $4 million in other operating income and $4 million in selling, general and administrative expenses in the QSI segment for cooperative marketing expenses incurred, with no effect on net income, related to an arrangement under which a portion of the ADV was transferred to a wireless operator prior to fiscal 2004.
During fiscal 2004, the Company transferred approximately $18 million of the ADV’s value to a wireless operator for approximately $17 million in cash. As a result of this transfer, the Company recorded an additional $17 million in other operating income in the QSI segment during 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.
The Company also used approximately $30 million of the ADV during fiscal 2004 as final payment for wireless licenses granted in fiscal 2004 in which the Company was the highest bidder in a FCC auction held during fiscal 2003. On a cumulative basis, the Company used $38 million of the ADV as payment for these wireless licenses, for
F-36F-32
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSwhich the Company had no cost basis at September 30, 2004. The ADV had no remaining value at September 30, 2004.
Note 13. Subsequent Events In October 2004, the Company completed the acquisition of the approximate 86% of the outstanding capital stock of Iridigm Display Corporation, a privately held display technology company, that it did not already own for approximately $160 million in cash and the exchange of stock options with an aggregate estimated fair value of approximately $17 million. Also in October 2004, the Company completed the acquisition of Trigenix Limited, a privately held mobile user interface company, for approximately $33 million in cash.
F-37
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. Summarized Quarterly Data (Unaudited)
The following financial information reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of the results of the interim periods.
The table below presents quarterly data for the years ended September 30, 200424, 2006 and 2003September 25, 2005 (in millions, except per share data):
| | | | | | | | | | | | | | | | | |
| | | 1st Quarter*
| | 2nd Quarter
| | 3rd Quarter
| | 4th Quarter (3)
|
2004 | | | | | | | | | | | | | | | | |
| 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 net 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 net earnings per common share (2) | | $ | 0.21 | | | $ | 0.29 | | | $ | 0.29 | | | $ | 0.23 | |
2003* | | | | | | | | | | | | | | | | |
| Revenues (1) | | $ | 1,068 | | | $ | 1,017 | | | $ | 892 | | | $ | 871 | |
| Operating income (1) | | | 485 | | | | 421 | | | | 348 | | | | 319 | |
| Income from continuing operations (1) | | | 276 | | | | 258 | | | | 241 | | | | 255 | |
| Net income (1) | | | 241 | | | | 103 | | | | 192 | | | | 291 | |
| Basic earnings per common share from continuing operations (2) | | $ | 0.18 | | | $ | 0.16 | | | $ | 0.15 | | | $ | 0.16 | |
| Basic net earnings per common share (2) | | $ | 0.15 | | | $ | 0.07 | | | $ | 0.12 | | | $ | 0.18 | |
| Diluted earnings per common share from continuing operations (2) | | $ | 0.17 | | | $ | 0.16 | | | $ | 0.15 | | | $ | 0.15 | |
| Diluted net earnings per common share (2) | | $ | 0.15 | | | $ | 0.06 | | | $ | 0.12 | | | $ | 0.18 | |
| | | | | | | | | | | | | | | | | |
| | | 1st Quarter | | 2nd Quarter | | 3rd Quarter | | 4th Quarter |
2006 | | | | | | | | | | | | | | | | |
Revenues(1) | | $ | 1,741 | | | $ | 1,834 | | | $ | 1,951 | | | $ | 1,999 | |
Operating income(1) | | | 645 | | | | 660 | | | | 704 | | | | 681 | |
Net income (1) | | | 620 | | | | 593 | | | | 643 | | | | 614 | |
| | | | | | | | | | | | | | | | | |
Basic earnings per common share(2) | | $ | 0.38 | | | $ | 0.36 | | | $ | 0.38 | | | $ | 0.37 | |
Diluted earnings per common share (2) | | $ | 0.36 | | | $ | 0.34 | | | $ | 0.37 | | | $ | 0.36 | |
| | | | | | | | | | | | | | | | | |
2005 | | | | | | | | | | | | | | | | |
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 | |
*As adjusted (Note 11).
| | |
| (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 per share are computed independently for each quarter and the full year based upon respective average shares outstanding. Therefore, the sum of the quarterly earnings 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-38F-33
QUALCOMM INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (Charged) | | | | (Charged) | | | |
| | | Balance at | | Credited to | | Balance at | | Balance at | | Credited to | | Balance at | |
| | | Beginning of | | Costs and | | End of | | Beginning of | | Costs and | | End of | |
| | | Period(A)
| | Expenses
| | Deductions
| | Other
| | Period(A)
| | Period | | Expenses | | Deductions | | Other | | Period | |
| Year ended September 30, 2002 | | |
| Year ended September 26, 2004 | | |
| Allowances: | | |
| — trade receivables | | $ | (16 | ) | | $ | (42 | ) | | $ | 82 | | $ | (46 | ) (B) | | $ | (22 | ) | | $ | (12 | ) | | $ | (3 | ) | | $ | 8 | | $ | 2 | (a) | | $ | (5 | ) |
| — finance receivables | | | (704 | ) | | | (190 | ) | | 843 | | — | | | (51 | ) | | | (18 | ) | | 10 | | 7 | | — | | | (1 | ) |
| — notes receivable | | | (155 | ) | | | (19 | ) | | 133 | | — | | | (41 | ) | | | (69 | ) | | | (30 | ) | | 53 | | — | | | (46 | ) |
| Inventory reserves | | | (77 | ) | | | (10 | ) | | 9 | | — | | | (78 | ) | | | (70 | ) | | 7 | | 13 | | — | | | (50 | ) |
| Valuation allowance on deferred tax assets | | | (1,228 | ) | | 145 | | — | | | (440 | ) (C) | | | (1,523 | ) | | | (660 | ) | | 27 | | 20 | | | 474 | (a) | | | (139 | ) |
| | |
| |
| |
| |
| |
| | | | | | | | | | | | |
| | | $ | (2,180 | ) | | $ | (116 | ) | | $ | 1,067 | | $ | (486 | ) | | $ | (1,715 | ) | | $ | (829 | ) | | $ | 11 | | $ | 101 | | $ | 476 | | $ | (241 | ) |
| | |
| |
| |
| |
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| Year ended September 30, 2003 | | |
| Year ended September 25, 2005 | | |
| Allowances: | | |
| — trade receivables | | $ | (22 | ) | | $ | (14 | ) | | $ | 24 | | — | | $ | (12 | ) | | $ | (5 | ) | | $ | (2 | ) | | $ | 5 | | $ | — | | $ | (2 | ) |
| — finance receivables | | | (51 | ) | | 32 | | 1 | | — | | | (18 | ) | | | (1 | ) | | 1 | | — | | — | | — | |
| — notes receivable | | | (41 | ) | | | (28 | ) | | — | | — | | | (69 | ) | | | (46 | ) | | | (41 | ) | | 24 | | — | | | (63 | ) |
| Inventory reserves | | | (78 | ) | | | (4 | ) | | 12 | | — | | | (70 | ) | | | (50 | ) | | | (10 | ) | | 14 | | — | | | (46 | ) |
| Valuation allowance on deferred tax assets | | | (1,523 | ) | | | (253 | ) | | 10 | | | 1,106 | (D) | | | (660 | ) | | | (139 | ) | | 76 | | — | | | (6 | )(b) | | | (69 | ) |
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| | | $ | (1,715 | ) | | $ | (267 | ) | | $ | 47 | | $ | 1,106 | | �� | $ | (829 | ) | | $ | (241 | ) | | $ | 24 | | $ | 43 | | $ | (6 | ) | | $ | (180 | ) |
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| Year ended September 30, 2004 | | |
| Year ended September 24, 2006 | | |
| Allowances: | | |
| — trade receivables | | $ | (12 | ) | | $ | (3 | ) | | $ | 8 | | $ | 2 | (E) | | $ | (5 | ) | | $ | (2 | ) | | $ | — | | $ | 1 | | $ | — | | $ | (1 | ) |
| — finance receivables | | | (18 | ) | | 10 | | 7 | | — | | | (1 | ) | |
| — notes receivable | | | (69 | ) | | | (30 | ) | | 53 | | — | | | (46 | ) | | | (63 | ) | | | (15 | ) | | — | | — | | | (78 | ) |
| Inventory reserves | | | (70 | ) | | 7 | | 13 | | — | | | (50 | ) | | | (46 | ) | | | (38 | ) | | 15 | | — | | | (69 | ) |
| Valuation allowance on deferred tax assets | | | (660 | ) | | 27 | | 20 | | | 474 | (E) | | | (139 | ) | | | (69 | ) | | 46 | | 14 | | | (13 | )(c) | | | (22 | ) |
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| | | $ | (829 | ) | | $ | 11 | | $ | 101 | | $ | 476 | | $ | (241 | ) | | $ | (180 | ) | | $ | (7 | ) | | $ | 30 | | $ | (13 | ) | | $ | (170 | ) |
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(A) | | The Company’s fiscal year ends on the last Sunday of September. |
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(B) | | Of this amount, $55 million related to the acquisition of the Vésper Operating Companies (see Note 11 of the Consolidated Financial Statements), offset by an increase of $9 million related to translation adjustments due to changes in foreign currency rates primarily attributable to the Vésper Operating Companies. |
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(C) | | Of this amount, $330 million related to acquisition of the Vésper Operating Companies (see Note 11 of the Consolidated Financial Statements) and $154 million was charged to paid-in capital, offset by a $44 million reduction recorded as a component of comprehensive loss related to the Company’s temporary losses on marketable securities. |
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(D)(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. |
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(E) | | This amountis related to the disposition of the Vésper Operating Companies (See Note 11 of12 to the Consolidated Financial Statements). |
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| (b) | | This amount is related to the acquisitions of Trigenix and ELATA (See Note 11 to the Consolidated Financial Statements). |
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| (c) | | This amount was charged to paid-in capital. |
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S-1