| • | | Operators on the CDMA2000 technology path are deploying 1xEV-DO and are preparing to deploy EV-DO Revision A. Many GSM operators are migrating their networks to WCDMA and are preparing to deploy HSDPA (High Speed Downlink Packet Access). The deployment of these 3G networksWCDMA) 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 world. As we look forward to the next several months, the following items are likely to have an impact on our business:The deployment of CDMA2000 networks is expected to continue. | • | | More than 230 operators have launched CDMA2000 1X; (1) | | | | | • | | AsMore than 75 operators have deployed the higher data speeds of October 2005, 871xEV-DO and 10 operators have deployed, and several more are preparing to deploy EV-DO Revision A. (1) |
GSM operators are expected to continue transitioning to WCDMA networks. | • | | More than 180 GSM operators have migrated their networks to WCDMA; (2) | | | • | | More than 140 operators have launched commercial HSDPA networks and manufacturers are beginning to test and deploy the faster uplink speeds of HSUPA. (2) |
| • | | We expect WCDMA device prices will continue to segment into high and low end due to high volumes and vibrant competition in marketplaces around the world. As more operators deploy the higher data speeds of HSPA, we expect consumer demand for advanced 3G devices to accelerate. | | | • | | To meet growing demand for advanced 3G wireless devices 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 2008 will not reach commercialization until several years in the future. | | | • | | We expect demand for low-end wireless devices to continue and have developed a family of Qualcomm Single Chip (QSC) products, which integrate the baseband, radio frequency and power management functions into one chip, lowering component counts and enabling faster time-to-market for our customers. While we continue to invest resources aggressively to expand our QSC product family to address the low-end market more effectively with CDMA-based products, we still face significant competition from GSM-based products, particularly in emerging markets. |
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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: | • | | The continued evolution of CDMA-based technologies, including the long-term roadmaps of 1xEV-DO and High Speed Packet Access (HSPA); | | | • | | OFDM and OFDMA-based technologies; | | | • | | Our BREW applications platform, content delivery services and user interfaces; | | | • | | Our MediaFLO MDS and FLO technology for delivery of multimedia content; and | | | • | | Our IMOD display technology. |
In addition to the foregoing business and market-based matters, the following items are likely to have an impact on our business and results of operations over the next several months: | • | | We expect that we will continue to be involved in litigation, including our ongoing disputes with Broadcom and Nokia, and to appear in front of administrative and regulatory bodies, including the European Commission, the Korea Fair Trade Commission and the Japan Fair Trade Commission to defend our business model and, in some cases, to thwart efforts by companies to gain competitive advantage or negotiating leverage. | | | • | | We have been and continue to consider reasonable ways that we can be of assistance to our customers, including in some cases certain levels of financial support to minimize the impact of the litigation in which we are involved. | | | • | | 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 reasonable 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 to challenge our business model in various forums throughout the world. |
| | | | (1) | | According to public reports made available at www.cdg.org. | | | (2) | | As reported by the Global Mobilemobile Suppliers Association, an international organization of WCDMA and GSM (Global System for Mobile Communications) suppliers. We expect that the WCDMA market will continue to expand as operators transitionsuppliers in their subscribers to WCDMA devices on these WCDMA networks. | | | • | | We expect that volume increases and growing competition among WCDMA phone manufacturers and WCDMA integrated circuit suppliers will help decrease WCDMA phone prices significantly and drive growth of WCDMA phone sales worldwide. | | | • | | We expect that growing demand for advanced 3G phones and devices will continue to drive the need for increased multimedia MSM functionality. To meet this market need, we intend to continue to invest significant resources toward multimedia functionality. | | | • | | We expect growing demand for low end phones to continue and have invested resources for single chip solutions which combine the baseband, radio frequency and power management chips into one package. We believe lower component counts and further integration will drive costs down and enable faster time to market to meet the increasing demand for low end phones. While we are moving aggressively to address the low end market more effectively with CDMA-based products, we still face significant competition from GSM-based products in this market. | | | • | | We also expect growing demand for high end, multimedia phones with added functionality and capability at a high price point. | | | • | | The expiration of royalty-sharing obligations under two agreements, one in fiscal 2005 and the other in fiscal 2006, will contribute to an increase in our royalty revenues in fiscal 2006 and beyond. | | | • | | We will continue our development efforts with respect to our BREW applications development platform, our new MediaFLO Multimedia Distribution System (MDS) and FLO technology for low cost delivery of multimedia content to multiple subscribers simultaneously and our iMoD display technology.October 2007 reports. |
We are dependent upon the commercial deploymentFurther discussion of 3G wireless communications equipment, products and services based onrisks related to 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. Recent reports suggest that inflation could have adverse effects on the global economy and the capital markets. You should also refer tobusiness is presented in the Risk Factors included in this Annual Report for further discussion of these and other risks related to our business.Report. Revenue Concentrations Revenues from customers in South Korea, China, Japan and the United States comprised 37%31%, 21%, 17% and 18%13%, respectively, of total consolidated revenues infor fiscal 20052007, as compared to 43%32%, 18%17%, 21% and 13%, respectively, for fiscal 2006, and 37%, 11%, 21% and 18%, respectively, in fiscal 2004, and 45%, 15% and 23%, respectively, in fiscal 2003.2005. We distinguish revenuerevenues from external customers by geographic areas based on customer location. Revenuesthe location to which our products, software or services are delivered and, for QTL’s licensing and royalty revenues, the domicile of our licensees. The increase in revenues from customers in Japan increased as a percentageChina from 11% and 17% of total revenues from 15% in fiscal 20032005 and 2006, respectively, to 18% in fiscal 2004 and 21% in fiscal 2005, due2007 is primarily attributable to increased royalties reported by licenseesshipments of integrated circuits to CDMA device manufacturers with locations in Japan resultingChina. The increasing trend in revenues from the growth of CDMA2000 and WCDMAcustomers in Japan as well as their success in exporting products worldwide.China is expected to continue. Combined revenues from customers in South Korea, Japan and the United States decreased as a percentage of total revenues, from 68% in fiscal 2003 to 64% in fiscal 2004 and 55%76% in fiscal 2005 to 66% in fiscal 2006 and 61% in fiscal 2007, primarily due primarily to increases in the percentage of revenues from WCDMA manufacturers of CDMAin Western Europe and WDCMA productsincreased activity by manufacturers with locations in other regions such as China, Japan and Western Europe.China. 41
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 46
judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent 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 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. 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, 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 CDMAcertain wireless products, including, without limitation, products implementing cdmaOne, CDMA2000, WCDMA, CDMA TDD and/or the CDMA TDDOFDMA standards and 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 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 the periods preceding the fourth quarter of fiscal 2004, we estimated and recorded theWe recognize 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 inFrom time to time, licensees will not report royalties timely due to legal disputes, and when this occurs, the timing and comparability 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.could be affected.
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 25, 2005,30, 2007, our goodwill and intangible assets, net of accumulated amortization, were $571 million$1.3 billion and $237$664 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. 42
We hold minority investments in publicly-traded companies whose share prices may be highly volatile. We also hold investments in other marketable securities, including non-investment grade debt securities, equity and debt mutual funds, corporate bonds/notes and mortgage/asset-backed securities. These investments, which are recorded at fair value with increases or decreases generally recorded through stockholders’ equity as other comprehensive income or loss, totaled $1.16$9.4 billion at September 25, 2005.30, 2007. We record impairment charges through the statement of 47
operations when we believe an investment has experienced a decline that is other than temporary. The determination that a decline is other than temporary is subjective and influenced by many factors. In addition, the fair values of our strategic investments are subject to substantial quarterly and annual fluctuations and to significant market volatility. 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 investmentthese investments 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.recommendations, as applicable. 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 other-than-temporary declines in value, we may record an impairment loss, which could have an adverse impact on our results of operations. During fiscal 2005, 20042007, 2006 and 2003,2005, we recorded $12$16 million, $12$20 million and $100$13 million, respectively, in other-than-temporary losses on our minority investments in publicly-traded companies.marketable securities. We hold minority strategic investments in private companies whose values are difficult to determine. These investments totaled $122$114 million at September 25, 2005.30, 2007. 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 20052007, 2006 and 2003,2005, we recorded $1$11 million, $4 million and $28$1 million, respectively, in other than temporaryother-than-temporary losses on our investments in private companies. Such lossesDue to financial and competitive challenges facing our investees, we cannot assure you that our investments will generate financial returns or that we will not have to write down our investments. Share-Based Payments.We grant options to purchase our common stock to our employees and directors under our equity compensation 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.” We use the fair value method to apply the provisions of FAS 123R with a modified prospective application. Under the modified prospective application method, prior periods are not revised for comparative purposes. Share-based compensation expense recognized under FAS 123R for fiscal 2007 and 2006 was $493 million and $495 million, respectively. At September 30, 2007, total unrecognized estimated compensation expense related to non-vested stock options granted prior to that date was $1.3 billion, which is expected to be recognized over a weighted-average period of 3.4 years. Net stock options, after forfeitures and cancellations, granted during fiscal 2007 represented 2.0% of outstanding shares as of the beginning of the fiscal period. Total stock options granted during fiscal 2007 represented 2.3% of outstanding shares as of the end of the fiscal period. We estimate the value of stock option awards on the date of grant using a lattice binomial option-pricing model (binomial model). 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. 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 significantcause dilution. Because our share-based payments have characteristics significantly different 48
from those of freely traded options, and because valuation model assumptions are subjective, 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. There is not currently a generally accepted market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models. Although we estimate the fair value of employee share-based awards in accordance with FAS 123R and the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107 (SAB 107), the option-pricing model we use may not produce a value that is indicative of the fair value observed in a willing buyer/willing seller market transaction. For purposes of estimating the fair value of stock options granted during fiscal 2004.2007, we used the implied volatility of market-traded options in our stock for the expected volatility assumption input to the binomial model. We utilized the term structure of volatility up to approximately two years, and we used the implied volatility of the option with the longest time to maturity for the expected volatility estimates for periods beyond two years. The weighted-average volatility assumption was 33.4% for fiscal 2007, which if increased to 37%, would increase the weighted-average estimated fair value of stock options granted during fiscal 2007 by $0.80 per share, or 5%. The volatility percentage assumed for fiscal 2007 and 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 assumption was 4.6% for fiscal 2007, which if increased to 6.5%, would increase the weighted-average estimated fair value of stock options granted during fiscal 2007 by $0.95 per share, or 7%. We do not target a specific dividend yield for our policy on 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 1.3% for fiscal 2007, which if decreased to 0.4%, would increase the weighted-average estimated fair value of stock options granted during fiscal 2007 by $0.96 per share, or 7%. 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 6.5% for fiscal 2007, which if decreased to 1.5%, would increase the weighted-average estimated fair value of stock options granted during fiscal 2007 by $0.73 per share, or 5%. The suboptimal exercise factor is estimated using historical option exercise information. The weighted-average suboptimal exercise factor assumption was 1.8 for fiscal 2007, which if increased to 2.1, would increase the weighted-average estimated fair value of stock options granted during fiscal 2007 by $0.66 per share, or 5%. Income Taxes.Our income tax returns are based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities. While 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. As part of our assessment of potential adjustments to our tax returns, we increase our current tax liability to the extent an adjustment would result in a cash tax payment or decrease our deferred tax assets to the extent an adjustment would not 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 a revision become known. Although we believe that the estimates and assumptions supporting our assessments are reasonable, adjustments could be materially different from those which are reflected in historical income tax provisions and recorded assets and liabilities. For example, during fiscal 2007, we recorded an income tax benefit of $331 million resulting from the completion of audits of our fiscal 2003 and 2004 federal tax returns. 49
We regularly review our deferred tax assets for recoverability and establish 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 25, 2005,30, 2007, gross deferred tax assets were $937 million.$1.08 billion. If we 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, we could be required to increase our valuation allowance against our deferred tax assets which could result in an increase in our effective tax rate and an adverse impact on operating results. 43
As of September 25, 2005,30, 2007, we had gross deferred tax assets of $301$192 million related to realized and unrealized capital loss carry forwards.losses and $14 million related to foreign net operating losses. 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 2005.2007. Therefore, we have provided a $6 million valuation allowance in the amount of $62 million for the portion of capital losses we do not expect to utilize. We can only use foreign net operating losses to offset taxable income of certain legal entities in certain foreign tax jurisdictions. Based upon our assessments of projected future taxable income and losses and historical losses incurred by these entities, we expect that the future taxable income of the entities in these tax jurisdictions will not be sufficient to utilize the foreign net operating losses we have incurred through fiscal 2007. Therefore, we have provided a full valuation allowance for these net operating losses. Significant judgment is required to forecast the timing and amount of future capital gains, the timing of realization of capital losses and the amount of future taxable income in certain foreign jurisdictions. Adjustments to our valuation allowance based on changes to our forecast of capital losses, and capital gains and foreign taxable income are reflected in the period the change is made. We consider the operating earnings of certain non-United States subsidiaries to be invested 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 $1.2$4.7 billion as of September 25, 2005.30, 2007. 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. On October 22, 2004, With the American Jobs Creation Actadoption of 2004 (the Jobs Creation Act) was signed into law. The Jobs Creation Act createdFAS 123R in fiscal 2006, we recognize 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 us upon an employee’s disposition of a temporary incentive for corporations inshare-based award exceeds the United Statesdeferred tax asset, if any, associated with the award that we had recorded. When assessing whether a tax benefit relating to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations. Inshare-based compensation has been realized, we follow the fourth quarter of fiscal 2005, we repatriated approximately $0.5 billion of foreign earnings qualifyingtax law ordering method, under the Jobs Creation Actwhich current year share-based compensation deductions are assumed to be utilized before net operating loss carryforwards and recorded a related expense of approximately $35 million for federal and state incomeother tax liabilities. The distribution does not change our intention to indefinitely reinvest earnings of certain foreign subsidiaries outside the United States.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 our operating results, liquidity or financial position, we believe the claims are without merit and intend to vigorously defend the actions. We estimate the range of liability related to pending litigation where the amount and range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to the claim. As additional information becomes available, we assess the potential liability related to our pending litigation and revise our estimates. WeOther than amounts relating to theBroadcom Corporation v. QUALCOMM IncorporatedandQUALCOMM Incorporated v. Broadcom Corporationmatters, we have not recorded any accrual for contingent liabilityliabilities associated with ourany other legal proceedings based on our belief that a liability,additional liabilities, while possible, isare 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. Acquisitions
In October 2004, we completed the acquisitions of Iridigm Display Corporation (Iridigm), a display technology company, for a total of approximately $160 million in cash and the exchange of stock options with an estimated aggregate fair value of approximately $17 million, and Trigenix Limited (Trigenix), a mobile user interface company for approximately $33 million in cash. 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. Iridigm’s display technology, known as iMoD, enables advanced, high-resolution multimedia capabilities on all tiers of mobile devices, while providing substantial performance, power consumption and cost benefits, as compared to other alternative display technologies. Our acquisition of Iridigm is intended to 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. In addition to having a better display, operators and device manufacturers need a secure and modular approach for customizing their phone user interfaces so they can brand and differentiate their handsets. Our acquisition of Trigenix complements our BREW offering by adding Trigenix’s user interface development tools, enhancing the capabilities of our BREW uiOne user interface and accelerating the time-to-market for new user interface features, such as multi-perspective window display technology.
In August 2005, we completed the acquisition of ELATA, Ltd. (ELATA), a developer of mobile content delivery and device management software systems, for a total of approximately $57 million in cash. Our acquisition of ELATA will enable us to offer a unified mobile content delivery system to operators who desire an enhanced framework for managing, delivering and marketing rich wireless content. The ELATA single service delivery
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framework, which leverages open standards interfaces to ensure interoperability and retain backward compatibility, is platform-agnostic and will allow operators to consolidate the delivery of all of their content services without having to change their device portfolio. This acquisition will also expand our presence in Europe by enabling us to offer European operators a content delivery system that can be easily integrated with their existing core network and business systems. The ELATA single service delivery framework has become part of our family of BREW product offerings and is being marketed under the brand name deliveryOne.
In August 2005, we announced our intention to acquire Flarion Technologies, Inc. (Flarion), a developer of OFDMA technology. Upon completion of the acquisition, which is anticipated in the first half of fiscal 2006, pending regulatory approval and other customary closing conditions, we estimate that we will pay approximately $545 million in consideration, consisting of approximately $272 million in shares of QUALCOMM stock, $235 million in cash, and the exchange of Flarion’s existing vested options and warrants with a fair value of approximately $38 million. Upon achievement of certain agreed upon milestones on or prior to the eighth anniversary of the close of this transaction, we may issue additional aggregate consideration of $205 million, consisting of approximately $173 million payable in cash to Flarion stockholders and $32 million in shares of QUALCOMM stock, which will be issued to Flarion option holders and warrant holders upon or following the exercise of such options and warrants. Our acquisition of Flarion is intended to broaden our ability to effectively support operators who may prefer an OFDMA or a hybrid OFDM/CDMA/WCDMA network alternative for differentiating their services. The addition of Flarion’s intellectual property and engineering resources will also supplement the resources that we have already dedicated over the years towards the development of OFDM/OFDMA technologies.
Strategic Investments in our QSI Segment
Our QSI segment makes strategic investments to promote the worldwide adoption of CDMA products and services. QSI segment assets totaled $442 million at September 25, 2005, compared to $400 million at September 26, 2004. Our MediaFLO USA subsidiary, a wireless multimedia operator, is expected to begin commercial operations in latter 2006. 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 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 investments in marketable equity securities classified as available-for-sale. We strategically invest in companies in the high-technology industry and typically do not attempt to reduce or eliminate our exposure to market risks in these investments. 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. Downward fluctuations and market trends could 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 stage companies and venture funds. These investments are comprised of equity investments, recorded at cost or under the equity method, and 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, we will record a charge to investment income (expense). In some cases, we make strategic investments that require us to consolidate or record our equity in the losses of early stage companies. The consolidation of these losses can adversely affect our financial results until we exit from or reduce our exposure to the investments.
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Key developments in our strategic investments during fiscal 2005 included our ongoing investment in our MediaFLO USA subsidiary, a slow down in the rate of strategic investment, including our investment in Inquam, and realized gains on certain strategic investments.
Investment in Inquam Limited.Since October 2000, we and another investor (the Other Investor) have provided equity and debt funding to Inquam Limited (Inquam). Inquam owns, develops and manages wireless CDMA-based communications systems, either directly or indirectly, primarily in Romania and Portugal. We recorded $33 million, $59 million and $99 million in equity in losses of Inquam during fiscal 2005, 2004 and 2003, respectively. At September 25, 2005, our equity and debt investments in Inquam totaled $26 million, net of equity in losses, and we had no remaining funding commitment under our bridge loan agreement.
During fiscal 2005, Inquam secured new long-term financing (the new facilities). We and the Other Investor each guaranteed 50% of a portion of the amounts owed under certain of the new facilities, up to a combined maximum of $54 million. Amounts outstanding under the new facilities subject to the guarantee totaled $49 million as of September 25, 2005. The guarantee expires and the new facilities mature on December 25, 2011.
In October 2005, we and the Other Investor agreed to restructure Inquam. Upon close of the restructuring, which is expected to occur in the first half of fiscal 2006, the Portugal companies will be spun-off through the exchange of portions of our and the Other Investor’s debt investments for direct equity interests in the Portugal companies. Inquam, which will continue to own the Romania companies, will repurchase certain minority equity interests. Immediately after the restructuring, we will hold an approximate 49.7% equity interest in Inquam and a 23% equity interest in the Portugal companies, which is expected to be reduced over time as the Other Investor makes the further investments in the Portugal companies contemplated by the restructuring agreements. In addition, we and the Other Investor will have a put-call option arrangement. Under this arrangement, the Other Investor will have the right to buy our equity and debt investments in Inquam, subject to certain conditions, by exercising its call option, which will expire no later than May 14, 2008. The minimum purchase price will be approximately $66 million. In the event that the Other Investor’s call option expires, or in certain other circumstances prior to that date, we will have the right to sell our equity and debt investments in Inquam to the Other Investor at a minimum sales price of $66 million. Such right will expire after six months. We do not anticipate providing any further funding to Inquam or to the Portugal companies.
Fiscal 20052007 Compared to Fiscal 20042006 Revenues.Total revenues for fiscal 20052007 were $5.67$8.87 billion, compared to $4.88$7.53 billion for fiscal 2004.2006. Revenues from LG Electronics, Samsungthree customers of our QCT, QTL and Motorola,QWI segments (each of whom accounted for more than 10% of our consolidated revenues for the period) comprised approximately 41% and 39% in aggregate of total consolidated revenues in fiscal 2007 and 2006, respectively. Revenues from sales of equipment and services for fiscal 2007 were $5.77 billion, compared to $4.78 billion for fiscal 2006. Revenues from sales of integrated circuit products increased $922 million, resulting primarily from an increase of $761 million related to higher unit shipments, mostly consisting of MSM and accompanying RF and PM integrated circuits, and an increase of $144 million related to the net effects of changes in product mix and the average sales prices of such products. Revenues from licensing and royalty fees for fiscal 2007 were $3.11 billion, compared to $2.75 billion for fiscal 2006. Revenues from licensing and royalty fees increased primarily as a result of a $306 million increase in royalties reported to QTL by our external licensees resulting from an increase in sales of CDMA-based products by licensees and a $30 million increase in QIS revenues primarily related to our expanded BREW customer base and products and a licensing agreement with Sprint. Worldwide demand for CDMA-based products has increased primarily as a result of the growth in sales of high-end WCDMA products and shifts in the geographic distribution of sales of CDMA2000 products. Cost of Equipment and Services.Cost of equipment and services revenues for fiscal 2007 was $2.68 billion, compared to $2.18 billion for fiscal 2006. Cost of equipment and services revenues as a percentage of equipment and services revenues was 47% for fiscal 2007, compared to 46% for fiscal 2006. Cost of equipment and services revenues in fiscal 2007 included $39 million in share-based compensation, compared to $41 million in fiscal 2006. Research and Development Expenses.For fiscal 2007, research and development expenses were $1.83 billion or 21% of revenues, compared to $1.54 billion or 20% of revenues for fiscal 2006. The dollar increase was primarily attributable to a $283 million increase in costs related to integrated circuit products, next generation CDMA and OFDMA technologies, the expansion of our intellectual property portfolio and other initiatives to support the acceleration of advanced wireless products and services, including lower cost devices, the integration of wireless with consumer electronics and computing, the convergence of multiband, multimode, multinetwork products and technologies, third party operating systems and services platforms. The technologies supporting these initiatives may include CDMA2000 1X, 1xEV-DO, EV-DO Revision A, EV-DO Revision B, WCDMA (including GSM/GPRS/EDGE), HSDPA, HSUPA and OFDMA. The increase in research and development expenses incurred also related to the development of our FLO technology, MediaFLO MDS and IMOD display products using MEMS technology. Research and development expenses in fiscal 2007 included share-based compensation and in-process research and development of $221 million and $10 million, respectively, compared to $216 million and $22 million, respectively, in fiscal 2006. Selling, General and Administrative Expenses.For fiscal 2007, selling, general and administrative expenses were $1.48 billion or 17% of revenues, compared to $1.12 billion or 15% of revenues for fiscal 2006. The dollar and percentage increases were primarily attributable to a $152 million increase in costs related to litigation and other legal matters, a $98 million increase in employee related expenses, a $40 million increase in other professional fees, a $39 million increase in bad debt expense, a $32 million increase in cooperative and other marketing expenses and a $28 million increase in depreciation and amortization, partially offset by a $44 million gain on the sale of a building. Selling, general and administrative expenses in fiscal 2007 included share-based compensation of $233 million, compared to $238 million in fiscal 2006. 51
Net Investment Income.Net investment income was $743 million for fiscal 2007, compared to $466 million for fiscal 2006. The net increase was primarily comprised as follows (in millions): | | | | | | | | | | | | | | | | | Year Ended | | | | | | | | September 30, | | | September 24, | | | | | | | | 2007 | | | 2006 | | | Change | | | Interest and dividend income: | | | | | | | | | | | | | | Corporate and other segments | | $ | 551 | | | $ | 410 | | | $ | 141 | | | QSI | | | 7 | | | | 6 | | | | 1 | | | Interest expense | | | (11 | ) | | | (4 | ) | | | (7 | ) | | Net realized gains on investments: | | | | | | | | | | | | | | Corporate and other segments | | | 201 | | | | 106 | | | | 95 | | | QSI | | | 21 | | | | 30 | | | | (9 | ) | | Other-than-temporary losses on investments | | | (27 | ) | | | (24 | ) | | | (3 | ) | | Gains (losses) on derivative instruments | | | 2 | | | | (29 | ) | | | 31 | | | Equity in losses of investees | | | (1 | ) | | | (29 | ) | | | 28 | | | | | | | | | | | | | | | | $ | 743 | | | $ | 466 | | | $ | 277 | | | | | | | | | | | | |
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 on interest-bearing securities. Net realized gains on corporate investments increased primarily due to strength in the equity markets and reallocation of certain portfolio assets. Losses on derivative instruments in fiscal 2006 related primarily to changes in the fair values of put options sold in connection with our stock repurchase program. Equity in losses of investees in fiscal 2006 resulted primarily from the effect of investment losses recognized by Inquam and a venture fund investee in fiscal 2006, of which our share was $20 million and $11 million, respectively. Income Tax Expense.Income tax expense was $323 million for fiscal 2007, compared to $686 million for fiscal 2006. The annual effective tax rate was 9% for fiscal 2007, compared to 22% for fiscal 2006. The annual effective tax rate for fiscal 2007 is lower than the annual effective tax rate for fiscal 2006 primarily due to the impact of prior year audits completed during fiscal 2007 and additional foreign earnings taxed at less than the United States federal statutory tax rate. The annual effective tax rate for fiscal 2007 is 26% lower than the United States federal statutory rate primarily due to benefits of approximately 20% related to foreign earnings taxed at less than the United States federal rate, 9% related to the impact of the tax audits completed during the year and 2% related to research and development tax credits, partially offset by state taxes of approximately 5%. Fiscal 2006 Compared to Fiscal 2005 Revenues.Total revenues for fiscal 2006 were $7.53 billion, compared to $5.67 billion for fiscal 2005. Revenues from three customers of our QCT, QTL and QWI segments comprised an aggregate of 15%, 13% and 11%39% of total consolidated revenues respectively, in both fiscal 2005, compared to 15%, 15%2006 and 10% of total consolidated revenues, respectively, in fiscal 2004.2005. Revenues from sales of equipment and services for fiscal 20052006 were $3.74$4.78 billion, compared to $3.51$3.74 billion for fiscal 2004.2005. Revenues from sales of integrated circuits increased $165 million,$1.00 billion, resulting primarily from an increase of $396 million$1.34 billion related primarily to higher unit shipments of MSM and accompanying RF integrated circuits, partially offset by a decrease of $241$349 million related to the net effects of reductions in average sales prices and changes in product mix. Revenues from the sale of satellite and terrestrial-based two-way data messaging systems and related messaging services increased $25 million and revenues from the sale of satellite portable phones that operate on the Globalstar low-Earth-orbit satellite communications system increased $19 million. Revenues from licensing and royalty fees for fiscal 20052006 were $1.93$2.75 billion, compared to $1.37$1.93 billion for fiscal 2004. During fiscal 2005, the QTL segment recorded2005. Revenues from licensing and royalty revenues solely based on royalties reported by licensees during the year,fees increased primarily as compared to the method used during the first three quartersa result of fiscal 2004 of recording royalty revenues from certain licensees based on estimates of royalty revenues earned by those licensees during the quarter. Thea $774 million increase in royalty revenue, year to year resultedconsisting primarily from a $350 million increase inof royalties reported to usQTL by our external licensees, and the effect of changing the timing of recognizing royalty revenues in the fourth quarter of fiscal 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 2005 were $1.64 billion, as compared to $1.29 billion in fiscal 2004. The increase in royalties reported to us by external licensees was primarily due toresulting from an increase in sales of CDMACDMA-based products by licensees resulting from higher worldwide demand for CDMA products at higher average selling prices due primarily toand the growth in salesimpact of high-end WCDMA products and shifts in the geographic distributionexpiration of salesone of CDMA products.our royalty sharing obligations. 46
Cost of Equipment and Services.Cost of equipment and services revenues for fiscal 20052006 was $1.65$2.18 billion, compared to $1.48$1.65 billion for fiscal 2004.2005. Cost of equipment and services revenues as a percentage of equipment and services revenues was 46% for fiscal 2006, compared to 44% for fiscal 2005, compared to 42% for fiscal 2004.2005. The decline in margin percentage decline in fiscal 20052006 compared to fiscal 20042005 was primarily due to the effect of $41 million in share-based compensation during fiscal 2006 as a 1.3%result of the adoption of FAS123R during fiscal 2006 and a decrease in QCT margin percentage. Increasespercentage resulting primarily from an increase 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. 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.costs. Research and Development Expenses.For fiscal 2005,2006, research and development expenses were $1.54 billion or 20% of revenues, compared to $1.01 billion or 18% of revenues compared to $720 million or 15% of revenues for fiscal 2004. The dollar2005. Research and percentage increasesdevelopment 52
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 $275percentage 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,devices, multimedia applications, high-speed wireless Internetinternet 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, GSM/GPRS/EDGEHSUPA and OFDMA, and the development of our FLO technology, MediaFLO MDS and iMoD display products using MEMS technology. We expect that research and development costs will increase in fiscal 2006 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 2005,2006, selling, general and administrative expenses were $631 million$1.12 billion or 11%15% of revenues, compared to $547$631 million or 11% of revenues for fiscal 2004.2005. 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 $38$107 million increase in professional fees, primarily patent administration and outside consultants,related to legal activities, a $33$90 million increase in employee-related expenses, a $14 million increase in selling and marketing expenses and a $13$14 million decrease in other income. Net Investment Income.Net investment income was $466 million for fiscal 2006, compared to $423 million for fiscal 2005, compared to $184 million for fiscal 2004.2005. The change was primarily comprised as follows (in millions): | | | | | | | | | | | | | | | | | | Year Ended | | | | | | | | | | | | | | | | | | | September 25, | | September 26, | | | | | Year Ended | | | | | | | 2005 | | 2004 | | Change | | | September 24, 2006 | | September 25, 2005 | | Change | | | Interest and dividend income: | | | | Corporate and other segments | | | $ | 410 | | $ | 252 | | $ | 158 | | | QSI | | $ | 4 | | $ | 14 | | $ | (10 | ) | | 6 | | 4 | | 2 | | | Corporate and other segments | | 252 | | 161 | | 91 | | | | Interest expense | | | (3 | ) | | | (2 | ) | | | (1 | ) | | | (4 | ) | | | (3 | ) | | | (1 | ) | | Net realized gains on investments: | | | | Corporate and other segments | | | 106 | | 78 | | 28 | | | QSI | | 101 | | 56 | | 45 | | | 30 | | 101 | | | (71 | ) | | Corporate | | 78 | | 32 | | 46 | | | | Other-than-temporary losses on investments | | | (14 | ) | | | (12 | ) | | | (2 | ) | | | (24 | ) | | | (14 | ) | | | (10 | ) | | Gains on derivative instruments | | 33 | | 7 | | 26 | | | | (Losses) gains on derivative instruments | | | | (29 | ) | | 33 | | | (62 | ) | | Equity in losses of investees | | | (28 | ) | | | (72 | ) | | 44 | | | | (29 | ) | | | (28 | ) | | | (1 | ) | | | | | | | | | | | | | | | | | | | | $ | 423 | | $ | 184 | | $ | 239 | | | $ | 466 | | $ | 423 | | $ | 43 | | | | | | | | | | | | | | | | | |
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 corporateQSI 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 NextWaveTelecom Inc. Gainsa wireless telecommunications company. Losses and lossesgains on derivative instruments in both fiscal 2006 and 2005, and 2004respectively, 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 $686 million for fiscal 2006, compared to $666 million for fiscal 2005,2005. The annual effective tax rate was approximately 22% for fiscal 2006, compared to $588 million24% for fiscal 2004.2005. 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 20052006 was lower than the annual effective tax rate from continuing operations for fiscal 20042005 primarily due to an increase in foreign earnings taxed at less than the United States federal tax rate. 47
The annual effective tax rate for fiscal 20052006 was 11%13% lower than the United States federal statutory rate primarily due to benefits of approximately 10%15% related to foreign earnings taxed at less than the United States federal rate, 3%2% related to the impact of prior year tax audits completed during the year, 1% related to an increase in tax benefits resulting from our increased ability to use our capital loss carryforwards and 2%1% related to research and development tax credits, partially offset by state 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 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.
Fiscal 2004 Compared to Fiscal 2003
Revenues.Total revenues for fiscal 2004 were $4.88 billion, compared to $3.85 billion for fiscal 2003. Revenues from Samsung, LG Electronics and Motorola, customers of our QCT, QTL and QWI segments, comprised an aggregate of 15%, 15% and 10% of total consolidated revenues, respectively, in fiscal 2004, compared to 17%, 13% and 13% of total consolidated revenues, respectively, in fiscal 2003.
Revenues from sales of equipment and services for fiscal 2004 were $3.51 billion, compared to $2.86 billion for fiscal 2003. Revenues from sales of integrated circuits increased $652 million, resulting primarily from an increase of $994 million related to higher unit shipments of MSM and accompanying RF integrated circuits, partially offset by a decrease of $331 million related to the effects of reductions in average sales prices and changes in product mix.
Revenues from licensing and royalty fees for fiscal 2004 were $1.37 billion, compared to $985 million for fiscal 2003. The increase resulted primarily from higher QTL segment royalties, resulting primarily from an increase in phone and infrastructure equipment sales by our licensees at higher average selling prices, partially offset by the effect of the change in timing 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 reported 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 $1.29 billion as compared to $837 million in fiscal 2003.
Cost of Equipment and Services.Cost of equipment and services revenues for fiscal 2004 was $1.48 billion, compared to $1.27 billion for fiscal 2003. Cost of equipment and services revenues as a percentage of equipment and services revenues was 42% for fiscal 2004, compared to 44% for fiscal 2003. The margin percentage improvement in fiscal 2004 compared to fiscal 2003 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 2004, research and development expenses were $720 million or 15% of revenues, compared to $523 million or 14% of revenues for fiscal 2003. The dollar and percentage increases in research and development expenses primarily resulted from a $187 million increase in costs related to integrated circuit products5% and other initiatives to support multimedia applications, high-speed wireless Internet access and multimode, multiband, multinetwork products and technologies, including CDMA2000 1X/1xEV-DO, WCDMA, HSDPA and GSM/GPRS/EDGE, and the developmentpermanent differences of our FLO technology and MediaFLO MDS.
Selling, General and Administrative Expenses.For fiscal 2004, selling, general and administrative expenses were $547 million or 11% of revenues, compared to $483 million or 13% of revenues for fiscal 2003. The dollar increase was primarily due to a $61 million increase in employee-related expenses, a $21 million increase in professional fees, primarily patent administration and outside consultants, and a $12 million increase related to a charitable grant to an educational institution for the primary purpose of furthering the study of engineering and math, partially offset by the effect of a $34 million impairment loss recorded in fiscal 2003 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.
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Net Investment Income (Expense).Net investment income was $184 million for fiscal 2004, compared to net investment expense of $8 million for fiscal 2003. The change was primarily comprised as follows (in millions):
| | | | | | | | | | | | | | | | | Year Ended | | | | | | | | September 26, | | | September 28, | | | | | | | | 2004 | | | 2003 | | | Change | | | Interest and dividend income: | | | | | | | | | | | | | | QSI | | $ | 14 | | | $ | 45 | | | $ | (31 | ) | | Corporate and other segments | | | 161 | | | | 113 | | | | 48 | | | Interest expense | | | (2 | ) | | | (2 | ) | | | — | | | Net realized gains on investments: | | | | | | | | | | | | | | QSI | | | 56 | | | | 63 | | | | (7 | ) | | Corporate | | | 32 | | | | 17 | | | | 15 | | | Other-than-temporary losses on investments | | | (12 | ) | | | (128 | ) | | | 116 | | | Gains (losses) on derivative instruments | | | 7 | | | | (3 | ) | | | 10 | | | Equity in losses of investees | | | (72 | ) | | | (113 | ) | | | 41 | | | | | | | | | | | | | | | | $ | 184 | | | $ | (8 | ) | | $ | 192 | | | | | | | | | | | | |
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 lower interest rates earned on interest-bearing securities, and $6 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 prepayment on the Pegaso debt facility in the first quarter of fiscal 2004. The other-than-temporary losses on investments 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. Equity in losses of investees decreased primarily due to a decrease in losses incurred by Inquam, of which our share was $59 million for fiscal 2004 as compared to $99 million for fiscal 2003.
Income Tax Expense.Income tax expense from continuing operations was $588 million for fiscal 2004, compared to $536 million for fiscal 2003. The annual effective tax rate for continuing operations was approximately 25% for fiscal 2004, compared to 34% for fiscal 2003. The annual effective tax rate for continuing operations for fiscal 2004 was lower than the 2003 effective tax rate for continuing operations 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 our increased ability to use capital loss carryforwards and the reduction of QTL earnings, which are taxed at a rate that is lower than our effective tax rate, as a percentage of total earnings due to the change in the timing of recognizing QTL royalties. Foreign earnings taxed at less than the United States federal rate were higher in fiscal 2004 primarily due to the adjustment of an intercompany royalty agreement and an increase in foreign earnings. The annual effective tax rate for continuing operations for fiscal 2004 was 10% lower than the United States federal statutory rate due primarily to a benefit of approximately 14% related to foreign earnings taxed at less than the United States federal rate, research and development tax credits and our increased ability to use capital loss carryforwards, partially offset by state taxes of 4%1%.
Our Segment Results for Fiscal 20052007 Compared to Fiscal 20042006 The following should be read in conjunction with the fiscal 2007 and 2006 financial results of fiscal 2005 and 2004 for each reporting segment. See “Notes to Consolidated Financial Statements — Note 10 — Segment Information.” 53
QCT Segment.QCT revenues for fiscal 20052007 were $3.29$5.28 billion, compared to $3.11$4.33 billion for fiscal 2004.2006. Equipment and services revenues, mostly consisting of MSM and accompanying RF and PM integrated circuits, were $5.12 billion for fiscal 2007, compared to $4.20 billion for fiscal 2006. The increase in equipment and services revenue resulted primarily from an increase of $761 million related to higher unit shipments and an increase of $144 million related to the net effects of changes in product mix and the average sales prices of such products. Approximately 253 million MSM integrated circuits were sold during fiscal 2007, compared to approximately 207 million for fiscal 2006. QCT’s earnings before taxes for fiscal 2007 were $1.55 billion, compared to $1.30 billion for fiscal 2006. QCT’s operating income as a percentage of its revenues (operating margin percentage) was 29% in fiscal 2007, compared to 30% in fiscal 2006. The decrease in operating margin percentage was primarily due to increases in research and development and selling, general and administrative expenses, partially offset by an increase in the gross margin percentage. QCT inventories increased by 116% in fiscal 2007 from $179 million to $387 million due to increased purchases of completed die directly from foundry suppliers for use in QCT’s CDMA-based integrated circuit products in connection with the shift in our manufacturing business model from turnkey to IFM. QTL Segment.QTL revenues for fiscal 2007 were $2.77 billion, compared to $2.47 billion for fiscal 2006. QTL’s earnings before taxes for fiscal 2007 were $2.34 billion, compared to $2.23 billion for fiscal 2006. QTL’s operating margin percentage was 84% in fiscal 2007, compared to 90% in fiscal 2006. The increase in revenues primarily resulted from a $306 million increase in royalties reported to us by our external licensees, which were $2.72 billion in fiscal 2007, compared to $2.42 billion in fiscal 2006. Revenues from amortized license fees were $49 million in fiscal 2007, compared to $50 million in fiscal 2006. The increase in earnings before taxes was primarily attributable to the increase in revenues, partially offset by increases in legal and bad debt expenses, which resulted in a corresponding decline in operating margin percentage. QWI Segment.QWI revenues for fiscal 2007 were $828 million, compared to $731 million for fiscal 2006. Revenues increased primarily due to increases of $78 million and $11 million in QIS and QES revenues, respectively. The increase in QIS revenues is primarily attributable to a $61 million increase in QChat revenues resulting from increased development efforts under a licensing agreement with Sprint and an $18 million increase in fees related to our expanded BREW customer base and products. The increase in QES revenues is primarily attributable to a $26 million increase in equipment and messaging revenues, partially offset by a $15 million decrease in amortization of deferred revenues related to historical equipment sales. QES shipped approximately 190,300 terrestrial-based and satellite-based systems during fiscal 2007, compared to approximately 140,300 terrestrial-based and satellite-based systems in fiscal 2006. QWI’s earnings before taxes for fiscal 2007 were $88 million, compared to $78 million for fiscal 2006. QWI’s operating margin percentage was 11% in fiscal 2007, compared to 10% in fiscal 2006. The increase in QWI’s earnings before taxes was primarily due to a $54 million increase in QIS gross margin, largely resulting from our expanded BREW customer base and products and QChat development efforts, partially offset by a $29 million increase in QWI selling, general and administrative expenses and an $18 million decrease in QES gross margin. The increase in QWI’s operating margin percentage was primarily attributable to the increase in QIS gross margin, partially offset by the decrease in QES gross margin. QSI Segment. QSI’s loss before taxes for fiscal 2007 was $240 million, compared to $133 million for fiscal 2006. QSI’s loss before taxes included a $118 million increase in our MediaFLO USA subsidiary’s loss before taxes comprised primarily of $70 million in cost of services revenues related to the commencement of our MediaFLO services in March 2007 and a $42 million increase in selling, general and administrative expenses, including $20 million related to cooperative marketing expenses. During fiscal 2006, QSI recorded $30 million in equity in losses of investees resulting primarily from the effect of investment losses recognized by Inquam and a venture fund investee in fiscal 2006, of which our share was $20 million and $11 million, respectively. Equity in losses of investees was nominal during fiscal 2007. 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.” 54
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, compared to $3.04 billion for fiscal 2004.2005. The increase in integrated circuitsequipment and services revenue was primarily comprised of $396 millionan increase of $1.34 billion related to higher unit shipments, partially offset by a decrease of $241$349 million related to the effects of reductions in average sales prices and changes in product mix. Approximately 151207 million MSM integrated circuits were sold during fiscal 2005,2006, compared to approximately 137151 million for fiscal 2004.2005. 49
QCT’s earnings before taxes for fiscal 20052006 were $852 million,$1.30 billion, compared to $1.05 billion$980 million for fiscal 2004.2005. QCT’s operating income as a percentage of its revenues (operating margin percentage) was 26% in30% during both fiscal 2005, compared to 34% in fiscal 2004.2006 and 2005. The decline in operating margin percentage remained consistent as the gross margin percentage decrease, resulting primarily from an increase in fiscal 2005 as compared to fiscal 2004product support costs, was primarily the result ofoffset by a 45% increasedecrease in research and development expenses for fiscal 2005 as compared to fiscal 2004, mainly related to increased investment in new integrated circuit products and technology research and development initiatives to support lower cost phones, multimedia applications, high-speed wireless Internet access and multiband, multimode, multinetwork products and technologies, including CDMA2000 1X/1xEV-DO, WCDMA, HSDPA and GSM/GPRS/EDGE.a percentage of QCT revenue. QTL Segment.QTL revenues for fiscal 20052006 were $1.84$2.47 billion, compared to $1.33$1.71 billion for fiscal 2004.2005. QTL’s earnings before taxes for fiscal 20052006 were $1.66$2.23 billion, compared to $1.20$1.54 billion for fiscal 2004.2005. QTL’s operating margin percentage was 90% during bothin fiscal 2005 and 2004.2006 as compared to 89% in fiscal 2005. The increase in both revenues and earnings before taxes primarily resulted from a $350$774 million increase in royalties reported to us by our external licensees, and the effect of changing the timing of recognizing royalty revenues in the fourth quarter of fiscal 2004. Royalty revenues recorded in fiscal 2004 excluded $151 million of royalties thatwhich 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 2005 were $1.64 billion, as compared to $1.29$2.42 billion in fiscal 2004.2006, compared to $1.64 billion in fiscal 2005. The increase in royalties reportedroyalty revenue relates to us by external licensees was primarily due to anthe increase in sales of CDMACDMA-based products by licensees resultingand the impact of the expiration of one of our royalty sharing obligations. Revenues from higher worldwide demand for CDMA products at higher average selling prices due primarily to the growth of higher priced WCDMA sales and shifts in the geographic distribution of sales of CDMA products. Revenues fromamortized license fees were $69$50 million in fiscal 2005, as2006, compared to $59$69 million in fiscal 2004. During fiscal 2005, we recognized $4 million in revenue related to equity received as license fees, compared to $5 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 20052006 were $644$731 million, compared to $571$682 million for fiscal 2004.2005. Revenues increased primarily due to a $37increases of $41 million increaseand $11 million in QIS revenue and a $27 million increase in QWBS revenue.QES revenues, respectively. The increase in QIS revenuerevenues was primarily attributable to a $41$28 million increase in fees related to our expanded BREW customer base and products.products and a $17 million increase in QChat revenues resulting from increased development efforts under the licensing agreement with Sprint. The increase in QWBS revenueQES revenues was primarily attributable to a $16 million increase in equipment revenue net ofand a $24$14 million increase in messaging services revenue, partially offset by a $19 million decrease in amortization of deferred revenues related to historical equipment sales, and a $10 million increase in related messaging services revenue. QWBSsales. QES shipped approximately 46,800140,300 satellite-based systems and 62,500 terrestrial-based systems during fiscal 2005,2006, compared to approximately 43,400156,700 satellite-based systems and 10,000 terrestrial-based systems in fiscal 2004.2005. QWI’s earnings before taxes for fiscal 20052006 were $57$78 million, compared to $19$62 million for fiscal 2004.2005. QWI’s operating margin percentage was 10% in fiscal 2006, compared to 9% in fiscal 2005, compared to 3% in fiscal 2004.2005. The increasesincrease in QWI earnings before taxes and operating percentage werewas primarily due to a $39 million increase in QIS gross margin largely resulting from the increase in fees related to our expanded BREW customer base and products. During fiscal 2005, QWBS completed the process of moving high volume, standard product manufacturing to Mexico to reduce manufacturing costs. The low volume, prototype and new product manufacturing activities remains in San Diego. We continue to evaluate other low cost manufacturing opportunities.
QSI Segment.QSI’s earnings before taxes from continuing operations for fiscal 2005 were $10 million, compared to losses before taxes from continuing operations of $31 million for fiscal 2004. During fiscal 2005, QSI recorded $101 million in realized gains on marketable securities and other investments, compared to $56 million in fiscal 2004. Equity in losses of investees decreased by $43 million primarily due to a decrease in losses incurred by
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Inquam during fiscal 2005 as compared to fiscal 2004, of which our share was $33 million for fiscal 2005 as compared to $59 million for fiscal 2004. These improvements in QSI’s earnings before taxes from continuing operations were partially offset by a $42 million increase in MediaFLO USA operating expenses.
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 $3.11 billion, compared to $2.43 billion for fiscal 2003. Equipment and services revenues, primarily from MSM and accompanying RF integrated circuits, were $3.04 billion for fiscal 2004, compared to $2.39 billion for fiscal 2003. The increase in integrated circuits revenue was comprised of $994 million related to higher unit shipments, partially offset by a decrease of $331 million related to the effects of reductions in average sales prices and changes in product mix. Approximately 137 million MSM integrated circuits were sold during fiscal 2004, compared to approximately 99 million for fiscal 2003.
QCT’s earnings before taxes for fiscal 2004 were $1.05 billion, compared to $805 million for fiscal 2003. QCT’s operating income as a percentage of its revenues (operating margin percentage) was 34% in fiscal 2004, compared to 33% in fiscal 2003. The operating margin percentage in fiscal 2004 as compared to fiscal 2003 increased slightly primarily as a result of the increase in gross margin percentage, partially offset by a 40% increase in research and development and selling, general and administrative expenses. Research and development and selling, general and administrative expenses were $153 million higher and $55 million higher, respectively, for fiscal 2004 as compared to fiscal 2003 primarily associated with increased investment in new integrated circuit products and technology research,QChat development and marketing initiatives to support multimedia applications, high-speed wireless Internet access and multiband, multimode, multinetwork products and technologies, including CDMA2000 1X/1xEV-DO, WCDMA, HSDPA and GSM/GPRS/EDGE.
QTL Segment.QTL revenues for fiscal 2004 were $1.33 billion, compared to $1.00 billion for fiscal 2003. Royalty revenues from external licensees were $1.14 billion in fiscal 2004, compared to $838 million in fiscal 2003. QTL’s earnings before taxes for fiscal 2004 were $1.20 billion, 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 primarily resulted from a $455 million increase in royalties reported to us by our external licensees,efforts, partially offset by the change in our ability to estimate royalties. 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 2004 were $1.29 billion, as compared to $837 million in fiscal 2003. The increase in royalties reported to us by external licensees was primarily due to an increase in sales of CDMA products by licensees, resulting from higher demand for CDMA products across all major regions of CDMA deployment at higher average selling prices. Revenues from license fees were $59 million in both fiscal 2004 and 2003. During each of fiscal 2004 and 2003, we recognized $5 million in revenue related to equity received as license fees. 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.
QWI Segment.QWI revenues for fiscal 2004 were $571 million, compared to $484 million for fiscal 2003. Revenues increased primarily due to a $58 million increase in QWBS revenue and a $37 million increase in QIS revenue. The increase in QWBS revenue was primarily attributable to a $14 million increase in messaging revenue as a result of a larger installed base and a $44 million increase in equipment revenue, net of an $19 million decrease in amortization of deferred revenues related to historical equipment sales. QWBS shipped approximately 43,400
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satellite-based systems and 10,000 terrestrial-based systems during fiscal 2004, compared to approximately 32,200 satellite-based systems and 5,300 terrestrial-based systems in fiscal 2003. The increase in QIS revenue is primarily attributable to a $53 million increase in fees related to our expanded BREW customer base and products, partially offset by a $19 million decrease in QChat revenue resulting from the wind down of development efforts under the licensing agreement with Nextel.
QWI’s earnings before taxes for fiscal 2004 were $19 million, compared to $15 million for fiscal 2003. QWI’s operating margin percentage was 3% in both fiscal 2004 and 2003. The increase in QWI’s earnings before taxes was primarily due to a $31 million increase in QIS gross margin largely resulting from the increase in fees related to our expanded BREW customer base and products, offset by a $29$23 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 was primarily attributable to a decline in the gross margin percentage on equipment sales, which are lower than the margins on messaging services, combined with an increase in equipment sales as a percentage of total QWBS revenue. The improvement in QIS gross margin percentage was primarily attributable to the increase in fees related to our expanded BREW customer base and products.QIS gross margin.
QSI Segment.QSI’s lossesloss before taxes from continuing operations for fiscal 2004 were $312006 was $133 million, compared to $168earnings before taxes of $10 million for fiscal 2003. Equity2005. QSI’s loss before taxes 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 million for 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 and $28$101 million in MediaFLO USA operating expenses.fiscal 2005. 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 $8.7$11.8 billion at September 25, 2005,30, 2007, an increase of $1.0$1.9 billion from September 26, 2004. The increase was24, 2006. Our cash, cash equivalents and marketable securities at September 30, 2007 consisted of $5.5 billion held by foreign subsidiaries with the remaining balance of $6.3 billion held domestically. Due to tax considerations, we derive liquidity for operations primarily the result of $2.7 billion infrom domestic cash flow and investments held domestically. Cash provided by operating activities and $386 million in netwas $3.8 billion during fiscal 2007, compared to $3.3 billion during fiscal 2006. Net proceeds from the issuance of common stock under our stock option and employee stock purchase plans partially offset by $953was $556 million in repurchases of our common stock under our stock repurchase program, $576during fiscal 2007, compared to $692 million in capital expenditures, $524 million in dividends paid and $249 million invested in other entities and acquisitions.during fiscal 2006. 55
On March 8, 2005,May 22, 2007, we announced we had been authorized theto repurchase of up to $2$3.0 billion of our common stock under astock. The $3.0 billion stock repurchase program withreplaced a $2.5 billion stock repurchase program, of which approximately $0.9 billion remained authorized for repurchases. The stock repurchase program has no expiration date. Through November 2, 2005,During fiscal 2007, we repurchased and retired approximately 27,083,00037,263,000 shares of our common stock for $953 million.$1.5 billion. In connection with thisthe stock repurchase program, we have two put options outstanding, with expiration dates ofranging from December 7, 2005 and2007 through March 21, 2006,2008, that may require us to repurchase 11,500,000an aggregate of 5,000,000 shares of our common stock upon exercise for $411$189 million (net of the option premiums received). Any shares repurchased upon exercise of put options will be retired. At November 2, 2005, $636 million remainedSeptember 30, 2007, $1.5 billion remains authorized for repurchases under our stock repurchase program.program, net of put options outstanding. In the period from October 1, 2007 through November 7, 2007 we repurchased and retired 12,720,000 shares of our own common stock for approximately $525 million. We announcedwill continue our active evaluation of repurchases under this program. We declared and paid dividends totaling $862 million, $698 million and $524 million, $307 millionor $0.52, $0.42 and $135 million, or $0.320, $0.190 and $0.085$0.32 per common share, during fiscal 2005, 20042007, 2006 and 2003,2005, respectively. On October 10, 2005,11, 2007, we announced a cash dividend of $0.09$0.14 per share on our common stock, payable on January 4, 20062008 to stockholders of record as of December 7, 2005.2007. We intend to continue to pay quarterly dividends subject to capital availability and periodic determinations that cash dividends are in the best interest of our stockholders. Accounts receivable decreasedincreased by 6%2% during fiscal 2005.2007. Days sales outstanding, on a consolidated basis, were 3027 days at September 25, 2005,30, 2007 compared to 4329 days at September 26, 2004.24, 2006. The increase in accounts receivable was primarily due to the increase in revenue in fiscal 2007 as compared to fiscal 2006 and the contractual timing of cash receipts for royalty receivables, some of which are paid semi-annually. The change in days sales outstanding is consistent withwas a result of the increase in revenue, andpartially offset by the decreaseeffect of the increase in accounts receivable resulting from cash collections. 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 business plan. The remaining cost of these new facilities is expected to be approximately $149 million through fiscal 2007. In fiscal 2005, we announced our plans to expand our backup Network Management Center in Las Vegas, Nevada, which uses satellite and terrestrial-based technologies to track freight transportation and shipping nationwide. We expect the remaining cost of this expansion will be approximately $35 million through fiscal 2008. In fiscal 2005, our MediaFLO USA subsidiary, a
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wireless multimedia operator, began the development of a nationwide mediacast network based on our FLO technology and MediaFLO MDS. As part of this development, MediaFLO USA has executed a number of lease agreements at broadcast tower sites and has begun the installation of equipment and leasehold improvements at some of these sites. The remaining costs for our existing tower sites under lease, including equipment and leasehold improvements as well as the costs of installation, are expected to be approximately $18 million through fiscal 2006.
On August 11, 2005, we announced our intention to acquire Flarion, a developer of OFDMA technology. Upon completion of the acquisition, which is anticipated in the first half of fiscal 2006, pending regulatory approval and other customary closing conditions, we estimate that we will pay approximately $545 million in consideration, including approximately $235 million in cash. Upon achievement of certain agreed upon milestones on or prior to the eighth anniversary of the close of this transaction, we may issue additional aggregate consideration of $205 million, including approximately $173 million payable in cash, to Flarion stockholders.receivable.
We intend to continue our strategic investment activities to promote the worldwide adoption of CDMACDMA-based products and the growth of CDMA-based wireless data and wireless Internetinternet 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 or uses for cash arise, we may raise additional funds from a combination of sources including potential debt and equity issuance. 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 acquisitions, investments in other companies and other assets to support the growth of our business, financing and other commitments, the payment of dividends and possible additional stock repurchases. 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 25, 2005,30, 2007, our outstanding contractual obligations included (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fiscal | | | Fiscal | | | Fiscal | | | Beyond | | | No Expiration | | | | | Total | | | 2006 | | | 2007-2008 | | | 2009-2010 | | | Fiscal 2010 | | | Date | | Long-term financing under Ericsson arrangement(1) | | $ | 118 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 118 | | | Purchase obligations | | | 1,042 | | | | 750 | | | | 286 | | | | 6 | | | | — | | | | — | | | Operating leases | | | 193 | | | | 67 | | | | 75 | | | | 29 | | | | 22 | | | | — | | Equity investments(1) | | | 13 | | | | — | | | | — | | | | — | | | | — | | | | 13 | | | Inquam guarantee | | | 27 | | | | — | | | | — | | | | — | | | | 27 | | | | — | | | Other commitments | | | 1 | | | | 1 | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | Total commitments | | | 1,394 | | | | 818 | | | | 361 | | | | 35 | | | | 49 | | | | 131 | | | | | | | | | | | | | | | | | | | | | | Capital leases(2) | | | 2 | | | | — | | | | — | | | | — | | | | 2 | | | | — | | Other long-term liabilities (3) | | | 40 | | | | — | | | | 40 | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | Total recorded liabilities | | | 42 | | | | — | | | | 40 | | | | — | | | | 2 | | | | — | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 1,436 | | | $ | 818 | | | $ | 401 | | | $ | 35 | | | $ | 51 | | | $ | 131 | | | | | | | | | | | | | | | | | | | | | |
Payments Due By Fiscal Period| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | No Expiration | | | | | Total | | | 2008 | | | 2009-2010 | | | 2011-2012 | | | Beyond 2012 | | | Date | | Purchase obligations(1) | | $ | 1,052 | | | $ | 760 | | | $ | 193 | | | $ | 91 | | | $ | 8 | | | $ | — | | | Operating leases | | | 390 | | | | 75 | | | | 113 | | | | 63 | | | | 139 | | | | — | | Other commitments(2) | | | 50 | | | | — | | | | — | | | | 40 | | | | 3 | | | | 7 | | | | | | | | | | | | | | | | | | | | | | | Total commitments | | | 1,492 | | | | 835 | | | | 306 | | | | 194 | | | | 150 | | | | 7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital leases(3) | | | 200 | | | | 6 | | | | 12 | | | | 12 | | | | 170 | | | | — | | Other long-term liabilities (4) | | | 15 | | | | — | | | | 10 | | | | 1 | | | | 4 | | | | — | | | | | | | | | | | | | | | | | | | | | | | Total recorded liabilities | | | 215 | | | | 6 | | | | 22 | | | | 13 | | | | 174 | | | | — | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 1,707 | | | $ | 841 | | | $ | 328 | | | $ | 207 | | | $ | 324 | | | $ | 7 | | | | | | | | | | | | | | | | | | | | | |
| | | | (1) | | TheseTotal purchase obligations include $615 million in commitments to purchase integrated circuit product inventories. | | | (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 not including interest payments. Capital lease obligations are included in other liabilities in the consolidated balance sheet at September 30, 2007. | | | (3)(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. |
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Additional information regarding our financial commitments at September 25, 200530, 2007 is provided in the Notesnotes to our Consolidated Financial Statements.consolidated financial statements. See “Notes to Consolidated Financial Statements, Note 4 — Investments in Other EntitiesEntities” and Note“Note 9 — Commitments and Contingencies.” 53
Future Accounting Requirements In December 2004,July 2006, the FASB revised Statementissued FASB Interpretation No. 123 (FAS 123R), “Share-Based Payment,”48 (FIN 48) “Accounting for Uncertainty in Income Taxes” which requires companiesprescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to expensebe taken in a tax return. Additionally, FIN 48 provides guidance on the estimated fair value of employee stock optionsderecognition, classification, accounting in interim periods and similar awards. On April 14, 2005, the U.S. Securities and Exchange Commission adopted a new rule amending the compliance datesdisclosure requirements for FAS 123R. In accordance with the new rule, theuncertain tax positions. The accounting provisions of FAS 123R will beFIN 48 are 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 2006. We tentatively expect to adoptadoption and will be presented separately. Only tax positions that meet the provisions of FAS 123R using a modified prospective application. FAS 123R, which provides certain changes to the method for valuing share-based compensation among other changes, will apply to new awards and to awards that are outstanding onmore likely than not recognition threshold at the effective date and are subsequently modified or cancelled. Compensation expense for outstanding awards for which the requisite service had not been rendered as of the effective date willmay be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under FAS 123. At September 25, 2005, unamortized compensation expense related to outstanding unvested options, as determined in accordance with FAS 123, that we expect to record during fiscal 2006 was approximately $394 million before income taxes. We will incur additional expense during fiscal 2006 related to new awards granted during fiscal 2006 that cannot yet be quantified.upon adoption of FIN 48. We are in the process of determining how the guidance regarding valuing share-based compensation as prescribed in FAS 123R will be applied to valuing share-based awards granted after the effective date andfinalizing the impact that the recognitionadoption of compensation expense related to such awardsFIN 48 will have on our consolidated financial statements.statements but expect the adjustment to opening retained earnings to be immaterial. Item 7A. Quantitative and Qualitative Disclosures Aboutabout Market Risk Interest Rate Market Risk.We invest most of our cash in a number of diversified investment and non-investment grade fixed and floating rate securities, consisting of cash equivalents, marketable debt securities and marketable securities.debt mutual funds. Changes in the general level of United States interest rates can affect the principal values and yields of fixed income investments.interest-bearing securities. If interest rates in the general economy were to rise rapidly in a short period of time, our fixed income investmentsinterest-bearing securities could lose value. If the general economy were to weaken significantly, the credit profile, financial strength and growth prospects of issuers of interest-bearing securities held in our investment portfolios could deteriorate, and our investmentsinterest-bearing securities could lose value. We may implement investment strategies of different types with varying duration and risk/return trade-offs that do not perform well. The following table provides information about our financial instrumentsinterest-bearing securities that are sensitive to changes in interest rates. For our interest bearing securities, theThe table presents principal cash flows, weighted average yield at cost and contractual maturity dates. Additionally, we have assumed that these securities are similar enough within the specified categories to aggregate these securities for presentation purposes. 5457
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rates
(Dollars in millions) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | No Single | | | | | | No Single | | Fair | | 2008 | | 2009 | | 2010 | | 2011 | | 2012 | | Thereafter | | Maturity | | Total | | | | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | Thereafter | | Maturity | | Total | | Value | | Fixed interest-bearing securities: | | | | Cash and cash equivalents | | $ | 608 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 608 | | $ | 608 | | | $ | 543 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 543 | | | Interest rate | | | 3.6 | % | | | | Held-to-maturity securities | | $ | 60 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 60 | | $ | 60 | | | | Interest rate | | | 2.1 | % | | | | 5.4 | % | | | Available-for-sale securities: | | | | Investment grade | | $ | 2,266 | | $ | 336 | | $ | 221 | | $ | 9 | | $ | 20 | | $ | 9 | | $ | 213 | | $ | 3,074 | | $ | 3,074 | | | $ | 1,851 | | $ | 289 | | $ | 163 | | $ | 57 | | $ | 20 | | $ | 10 | | $ | 405 | | $ | 2,795 | | | Interest rate | | | 3.4 | % | | | 3.7 | % | | | 4.1 | % | | | 4.4 | % | | | 4.1 | % | | | 6.7 | % | | | 4.5 | % | | | | 5.1 | % | | | 5.2 | % | | | 4.8 | % | | | 5.5 | % | | | 5.4 | % | | | 7.4 | % | | | 5.4 | % | | | Non-investment grade | | $ | 2 | | $ | 5 | | $ | 24 | | $ | 48 | | $ | 38 | | $ | 573 | | $ | — | | $ | 690 | | $ | 690 | | | $ | 12 | | $ | 16 | | $ | 13 | | $ | 44 | | $ | 41 | | $ | 368 | | $ | — | | $ | 494 | | | Interest rate | | | 6.5 | % | | | 7.5 | % | | | 7.3 | % | | | 7.3 | % | | | 8.2 | % | | | 7.9 | % | | | | 5.3 | % | | | 7.0 | % | | | 8.9 | % | | | 8.3 | % | | | 8.0 | % | | | 8.5 | % | | | | | | | Floating interest-bearing securities: | | | | Cash and cash equivalents | | $ | 1,364 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 1,364 | | $ | 1,364 | | | $ | 1,719 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 1,719 | | | Interest rate | | 3.7 | % | | | | | 5.4 | % | | | Held-to-maturity securities | | $ | 70 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 70 | | $ | 70 | | | | Interest rate | | | 1.4 | % | | | | Available-for-sale securities: | | | | Investment grade | | $ | 174 | | $ | 289 | | $ | 131 | | $ | 26 | | $ | 13 | | $ | 49 | | $ | 552 | | $ | 1,234 | | $ | 1,234 | | | $ | 213 | | $ | 214 | | $ | 202 | | $ | 56 | | $ | 78 | | $ | 94 | | $ | 531 | | $ | 1,388 | | | Interest rate | | | 3.6 | % | | | 3.7 | % | | | 3.6 | % | | | 3.5 | % | | | 4.0 | % | | | 4.3 | % | | | 4.1 | % | | | | 5.5 | % | | | 5.7 | % | | | 5.8 | % | | | 5.7 | % | | | 5.9 | % | | | 5.8 | % | | | 5.8 | % | | | Non-investment grade | | $ | — | | $ | 6 | | $ | — | | $ | 3 | | $ | 2 | | $ | 17 | | $ | — | | $ | 28 | | $ | 28 | | | $ | 12 | | $ | 11 | | $ | 28 | | $ | 65 | | $ | 118 | | $ | 391 | | $ | 712 | | $ | 1,337 | | | Interest rate | | | 4.9 | % | | | 6.4 | % | | | 7.1 | % | | | 8.5 | % | | | | 6.7 | % | | | 7.0 | % | | | 7.3 | % | | | 7.4 | % | | | 7.1 | % | | | 7.4 | % | | | 7.1 | % | |
Cash and cash equivalents and available-for-sale securities are recorded at fair value. Mortgage Risk.A small portion of our diversified investment program includes investment-grade mortgage- and asset-backed securities. In fiscal 2007, following a multi-year housing industry expansion, mortgage industry excesses became apparent and caused concern among investors in pools of residential mortgages or other assets securitized by them. We have no direct investments in the lowest credit quality, or subprime, mortgages nor investments collateralized by assets that include subprime mortgages. We have indirect exposure to subprime mortgages to the extent of our investments in large, diversified financial companies, commercial banks, insurance companies and public/private investment funds that participate or invest in subprime mortgage loans, mortgage insurance, or loan servicing, which could impact the fair values of our securities. Equity Price Market Risk.We invest inhave a number of diversified marketable securities andportfolio, including mutual fund and exchange traded fund shares, that is subject to equity price risk. The recorded values of marketable equity securities increased to $1.16$1.52 billion at September 25, 200530, 2007 from $765 million$1.34 billion at September 26, 2004.24, 2006. The recorded valuevalues of equity mutual fund and exchange traded fund shares decreasedincreased to $293 million$1.87 billion at September 25, 200530, 2007 from $296 million$1.52 billion at September 26, 2004. Our diversified24, 2006. We make equity investments in specific companies of varying size, style, industry and industry segments may vary over time,geography, and changes in the concentrations of these investmentsinvestment allocations may affect the price volatility of our investments. A 10% decrease in the market price of our marketable equity securities and equity mutual fund and exchange traded fund shares at September 25, 200530, 2007 would cause a corresponding 10% decrease in the carrying amounts of these securities or $145of $339 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 $121$114 million at September 25, 2005, as30, 2007, compared to $162$93 million at September 26, 2004. We hold warrants to acquire equity interests in certain strategic investees that are subject to equity price risk. Substantially all of these warrants are recorded at fair value in accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The recorded values of warrants held at September 25, 2005 totaled $1 million, as compared to $4 million at September 26, 2004.24, 2006.
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 25, 2005,30, 2007, we had two outstanding put options, were outstanding, which expire on December 7, 2005 and March 21, 2006, that may require usenabling holders to repurchase 11,500,000sell 5,000,000 shares of our common stock upon exercise for $411approximately $189 million (net of the option premiums received). The put option liabilities, with a fair value of $7$10 million at September 25, 2005,30, 2007, were included in other current liabilities. If the fair value of our common stock at September 25, 200530, 2007 decreased by 10%, the put options would expire unexercised resulting in $7 million in investment income. If the fair value of our common stock at September 25, 2005 decreased by 25%15%, the amount required to physically settle the put options would exceed the fair value of the shares repurchased by approximately $25$9 million, net of the $23$14 million in premiums received. 58
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. 55
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. Such derivative financial instruments are viewed as hedging or risk management tools and are not used for speculative or trading purposes. At September 25, 2005,30, 2007, we had no foreign currency forward contracts outstanding. At September 25, 2005, the recorded values30, 2007, we had a net liability of $1 million related to our foreign currency option contracts that hedge the foreign currency risk on royalties earned from certain international licensees on their sales of CDMA and WCDMA products were $16 million.products. If our forecasted royalty revenues were to decline by 20%30% and foreign exchange rates were to change unfavorably by 20%30% in each of our hedged foreign currencies, we would incur a loss of approximately $6 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 whichthat 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. Our analysis methods used to assess and mitigate riskthe risks discussed above should not be considered projections of future risks. Item 8. Financial Statements and Supplementary Data Our consolidated financial statements at September 25, 200530, 2007 and September 26, 200424, 2006 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-34.F-29. Item 9. Changes in and Disagreements with Accountants 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. 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 Rule 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 inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework inInternal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of September 25, 2005.30, 2007. PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the consolidated financial consolidated 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 25, 2005,30, 2007, as stated in their report which appears on pages F-1page F-1. 59
Inherent Limitations Over Internal Controls Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and F-2.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; | | | 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 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information None. 5660
PART III Item 10. Directors and Executive Officers of the Registrantand Corporate Governance 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 20062008 (the “2006“2008 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 of the Registrant.Officers.” The information regarding our code of ethics is incorporated by reference to our Definitivethe 2008 Proxy Statement filed with the Securities and Exchange Commission on January 14, 2005 under the heading “Code of Ethics.” Item 11. Executive Compensation The information required by this item is incorporated by reference to the 20062008 Proxy Statement under the heading “Executive Compensation and Other Matters.Related Information.” 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 20062008 Proxy Statement under the headings “Equity Compensation Plan Information” and “Security“Stock Ownership of Certain Beneficial Owners and Management.” Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item is incorporated by reference to the 20062008 Proxy Statement under the heading “Certain Relationships and Related Person Transactions.” Item 14. Principal Accounting Fees and Services The information required by this item is incorporated by reference to the 20062008 Proxy Statement under the heading “Fees Paid to PricewaterhouseCoopers LLP.for Professional Services.” 5761
PART IV Item 15. Exhibits and Financial Statement Schedule The following documents are filed as part of this report: | (a) | | Financial Statements: |
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. | | | | | Exhibit | | | | Number | | Description | | | 2.6 | | Agreement and Plan of Reorganization, dated as of July 25, 2005, by and among the Company, Fluorite Acquisition Corporation, Quartz Acquisition Corporation, Flarion Technologies, Inc. and QFREP, LLC. (1) | | | | | 3.1 | | Restated Certificate of Incorporation. (2)(1) | | | | | | 3.2 | | Certificate of Amendment of Certificate of Designation. (3)(2) | | | | | | 3.4 | | Amended and Restated Bylaws. (2)(3) | | | | | | 10.1 | | Form of Indemnity Agreement between the Company, each director and certain officers.(4)(5) | | | | | | 10.2 | | 1991 Stock Option Plan, as amended.(4)(6) | | | | | | 10.4 | | Form of Stock Option Grant under the 1991 Stock Option Plan.(4)(6) | | | | | 10.12 | | DS-CDMA Technology Agreement and related Patent License Agreement, each dated September 26, 1990 between the Company and MOTOROLA, Inc.(5)(7) | | | | 10.16 | | Amendment dated January 21, 1992 to that certain Technology Agreement dated September 26, 1990 with MOTOROLA, Inc.(8)(9) | | | | | 10.21 | | Executive Retirement Matching Contribution Plan, as amended.(4)(6) | | | | | | 10.22 | | 1996 Non-qualified Employee Stock Purchase Plan, as amended.(4)(6) | | | | | | 10.29 | | 1998 Non-Employee Director’s Stock Option Plan, as amended.(4)(10)(9) | | | | | | 10.40 | | Form of Stock Option Grant Notice and Agreement under the 2001 Stock Option Plan.(4)(6) | | | | | | 10.41 | | 2001 Employee Stock Purchase Plan, as amended.(4)(6) | | | | | | 10.43 | | Form of Stock Option Grant Notice and Agreement under the 2001 Non-Employee Directors’ Stock Option Plan.(4)(11)(8) | | | | | | 10.55 | | 2001 Stock Option Plan, as amended.(4)(12)(9) | | | | | | 10.58 | | Form of Annual Grant under the 1998 Non-Employee Directors’ Stock Option Plan.(4)(6) | | | | | 10.5910.63 | | Iridigm Display Corporation 2000Summary of Changes to Non-Employee Director Compensation Program.(4)(10) | | | | | 10.66 | | 2001 Non-Employee Directors’ Stock Option Plan, as amended.(4)(11) | | | | | 10.71 | | Voluntary Executive Retirement Contribution Plan, as amended.(4)(12) | | | | | 10.73 | | 2007 Long-Term Incentive Plan.(1)(4) | | | | | 10.74 | | Forms of Grant Notice and Stock Option Agreement under the 2007 Long-Term Incentive Plan.(1)(4) | | | | | 10.75 | | 2006 Bonuses and 2007 Annual Base Salary for Named Executive Officers. (13) | | | | | 10.6010.76 | | FormsSummary of Stock Option Agreements under the Iridigm Display Corporation 2000 Stock Option Plan.(4)(13)2007 Annual Bonus Program for Named Executive Officers. (14) | | | | | 10.6110.77 | | SummaryAmendment dated December 7, 2006 to the Amended and Restated Rights Agreement between the Company and Computershare Investor Services LLC, as Rights Agent. (15) | | | | | 21 | | Subsidiaries of 2005 Annual Bonus Program (4)(14)the Registrant. |
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| | | | | Exhibit | | | | Number | | Description | 10.62 | | Offer Letter Agreement with Richard Sulpizio dated January 17, 2005.(4)(15) | | | | 10.63 | | Summary of Changes to Non-Employee Director Compensation Program.(4)(16) | | | | 10.64 | | Sulpizio Stock Option Agreement dated March 8, 2005 (18,000 Options).(2)(4) | | | | 10.65 | | Sulpizio Stock Option Agreement dated March 8, 2005 (157,000 Options).(2)(4) | | | | 10.66 | | 2001 Non-Employee Directors’ Stock Option Plan, as amended.(4)(17) | | | | 10.67 | | Description of 2005 Named Executive Officer Salaries.(7)(18) | | | | 10.68 | | Copy of Cruickshank Stock Option Agreement dated June 3, 2005 (40,000 options).(4)(19) | | | | 10.69 | | Description of Adjusted Annual Salaries.(20) | | | | 10.70 | | Amended and Restated Rights Agreement dated September 26, 2005 between the Company and Computershare Investor Services LLC, as Rights Agent.(3) | | | | 10.71 | | Voluntary Executive Retirement Contribution Plan, as amended.(4)(21) | | | | 21 | | Subsidiaries of the Registrant. | | | | | | 23.1 | | Consent of Independent Registered Public Accounting Firm. | | | | | | 31.1 | | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Paul 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 Paul 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 Aan exhibit to the Registrant’s Registration StatementCurrent Report on Form S-4 (No. 333-127725).8-K filed on March 13, 2006. | | | | (2) | | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on March 11,September 30, 2005. | | | | (3) | | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on September 30, 2005.22, 2006. | | | | (4) | | Indicates management or compensatory plan or arrangement required to be identified pursuant to Item 15(a). | | | | (5) | | Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (No. 33-42782). | | | | (6) | | Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 27, 2004. | | | | (7) | | Certain confidential portions deleted pursuant to Order Granting Application or Confidential Treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934 dated December 12, 1991. | | (8) | | Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 27, 1992. | | (9) | | 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. | | (10) | | Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 26, 2000. | | | (11)(8) | | Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 1, 2001. | | | (12)(9) | | Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 28, 2004. | | | (13) | | Filed as an exhibit to the Registrant’s Registration Statement on Form S-8 (No. 333 119904). | | (14) | | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on December 13, 2004. | | (15) | | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on January 19, 2005. | | (16)(10) | | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on February 25, 2005. | | | (17)(11) | | Filed as an exhibit to the Registrant’s Current Report on Form 8-K/A filed on May 6, 2005.
| | | (18) | | Filed under the heading “2005 Named Executive Officer Salaries” in Item 1.01 of the Registrant’s Current Report on Form 8-K filed on March 11, 2005. | | (19) | | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on June 8, 2005. | | (20) | | Filed under the heading “Adjusted Annual Salaries” in Item 1.01 of the Registrant’s Current Report on Form 8-K filed on July 8, 2005. | | (21)(12) | | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on October 26, 2005. | | | (13) | | Filed under item 1.01 of the Registrant’s Current Report on Form 8-K filed on November 13, 2006. | | | (14) | | Filed under item 5.02 of the Registrant’s Current Report on Form 8-K filed on December 1, 2006. | | | (15) | | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on December 12, 2006. |
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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 2, 20058, 2007 | | | | | | | | QUALCOMM Incorporated
| | | | By /s/ | /s/ Paul E. Jacobs | | | | Paul E. Jacobs, | | | | | Chief Executive Officer | |
6064
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/ PAULPaul E. JACOBSJacobsPaul E. Jacobs | | Chief Executive Officer and Director
(Principal Executive Officer) | | November 2, 20058, 2007 | | | | | | | Paul/s/ William E. Jacobs | | (Principal Executive Officer) | | | | | | | | /s/ WILLIAM E. KEITEL
Keitel William E. Keitel | | Chief Financial Officer
(Principal Financial and Accounting Officer) | | November 2, 20058, 2007 | | | | | | | /s/ IRWIN JACOBSIrwin Jacobs Irwin Jacobs | | Chairman of the Board | | November 2, 20058, 2007 | | | | | | | /s/ RICHARD C. ATKINSONBarbara T. Alexander Richard C. AtkinsonBarbara T. Alexander | | Director | | November 2, 20058, 2007 | | | | | | | /s/ ADELIA A. COFFMANDonald Cruickshank Adelia A. CoffmanDonald Cruickshank | | Director | | November 2, 20058, 2007 | | | | | | | /s/ DONALD CRUICKSHANKRaymond V. Dittamore Donald CruickshankRaymond V. Dittamore | | Director | | November 2, 20058, 2007 | | | | | | | /s/ RAYMOND V. DITTAMORERobert E. Kahn Raymond V. DittamoreRobert E. Kahn | | Director | | November 2, 20058, 2007 | | | | | | | /s/ DIANA LADY DOUGANSherry Lansing Diana Lady DouganSherry Lansing | | Director | | November 2, 20058, 2007 | | | | | | | /s/ ROBERT E. KAHNDuane A. Nelles Robert E. KahnDuane A. Nelles | | Director | | November 2, 20058, 2007 | | | | | | | /s/ DUANE A. NELLESPeter M. Sacerdote Duane A. NellesPeter M. Sacerdote | | Director | | November 2, 20058, 2007 | | | | | | | /s/ PETER M. SACERDOTEBrent Scowcroft Peter M. SacerdoteBrent Scowcroft | | Director | | November 2, 20058, 2007 | | | | | | | /s/ BRENT SCOWCROFT | | | | | Brent Scowcroft | | Director | | November 2, 2005 | | | | | | /s/ MARCMarc I. STERN
Stern Marc I. Stern | | Director | | November 2, 2005 | | | | | | /s/ RICHARD SULPIZIO
Richard Sulpizio | | Director | | November 2, 20058, 2007 |
6165
Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of QUALCOMM Incorporated: We have completed integrated audits of QUALCOMM Incorporated’s 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of September 25, 2005 and September 26, 2004 and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions on QUALCOMM Incorporated’s 2005, 2004 and 2003 consolidated financial statements and of its internal control over financial reporting as of September 25, 2005, 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) as ofat September 25, 200530, 2007 and September 26, 2004,24, 2006, and the results of their operations and their cash flows for each of the three years in the period ended September 25, 200530, 2007 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 indexappearing 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. TheseAlso in our opinion, the Company maintained, in all material respects, effective internal control over financial statements and financial statement schedule arereporting as of September 30, 2007, based on criteria established inInternal Control — Integrated Frameworkissued by the responsibilityCommittee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management. Our responsibilitymanagement is to express an opinion onresponsible 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, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated 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 auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditmisstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements includesincluded 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion. Internal control over financial reportingopinions.
Also,As discussed in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, thatNote 1 to the consolidated financial statements, the Company maintained effective internal control over financial reporting as of September 25, 2005 based on criteria establishedchanged the manner inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, which it accounts for share-based compensation 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 25, 2005, based on criteria established inInternal Control — Integrated Frameworkissued by the COSO. The Company’s management is responsible 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 management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit 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 audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes 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 consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.fiscal 2006. 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 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. F- 1
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. /s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Diego, California
November 2, 2005
| | | | | | | | | /s/ PricewaterhouseCoopers LLP | | | | PricewaterhouseCoopers LLP | | | | San Diego, California | | | | November 8, 2007 | | | | | | | |
F- 2F-1
QUALCOMM Incorporated
QUALCOMM Incorporated
CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
| | | | | | | | | | | | | | | | | | | | | | September 30, | | September 24, | | | | | September 25, | | September 26, | | | 2007 | | 2006 | | | | | 2005 | | 2004 | | | ASSETS | | | | | | | | Current assets: | | | | Cash and cash equivalents | | $ | 2,070 | | $ | 1,214 | | | $ | 2,411 | | $ | 1,607 | | | Marketable securities | | 4,478 | | 4,768 | | | 4,170 | | 4,114 | | | Accounts receivable, net | | 544 | | 581 | | | 715 | | 700 | | | Inventories | | 177 | | 154 | | | 469 | | 250 | | | Deferred tax assets | | 343 | | 409 | | | 435 | | 235 | | | Collateral held under securities lending | | | 421 | | — | | | Other current assets | | 179 | | 101 | | | 200 | | 143 | | | | | | | | | | | | | | | Total current assets | | 7,791 | | 7,227 | | | 8,821 | | 7,049 | | | Marketable securities | | 2,133 | | 1,653 | | | 5,234 | | 4,228 | | | Property, plant and equipment, net | | 1,022 | | 675 | | | 1,788 | | 1,482 | | | Goodwill | | 571 | | 356 | | | 1,325 | | 1,230 | | | Deferred tax assets | | 444 | | 493 | | | 318 | | 512 | | | Other assets | | 518 | | 416 | | | 1,009 | | 707 | | | | | | | | | | | | | | | Total assets | | $ | 12,479 | | $ | 10,820 | | | $ | 18,495 | | $ | 15,208 | | | | | | | | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | Current liabilities: | | | | Trade accounts payable | | $ | 376 | | $ | 286 | | | $ | 635 | | $ | 420 | | | Payroll and other benefits related liabilities | | 196 | | 194 | | | 311 | | 273 | | | Unearned revenue | | 163 | | 172 | | | 218 | | 197 | | | Income taxes payable | | | 119 | | 137 | | | Obligation under securities lending | | | 421 | | — | | | Other current liabilities | | 335 | | 242 | | | 554 | | 395 | | | | | | | | | | | | | | | Total current liabilities | | 1,070 | | 894 | | | 2,258 | | 1,422 | | | Unearned revenue | | 146 | | 170 | | | 142 | | 141 | | | Other liabilities | | 144 | | 92 | | | 260 | | 239 | | | | | | | | | | | | | | | Total liabilities | | 1,360 | | 1,156 | | | 2,660 | | 1,802 | | | | | | | | | | | | | | | | | | | Commitments and contingencies (Notes 4 and 9) | | | | | | | | Stockholders’ equity: | | | | Preferred stock, $0.0001 par value; issuable in series; 8 shares authorized; none outstanding at September 25, 2005 and September 26, 2004 | | — | | — | | | | Common stock, $0.0001 par value; 6,000 shares authorized; 1,640 and 1,635 shares issued and outstanding at September 25, 2005 and September 26, 2004 | | — | | — | | | | Preferred stock, $0.0001 par value; issuable in series; 8 shares authorized; none outstanding at September 30, 2007 and September 24, 2006 | | | — | | — | | | Common stock, $0.0001 par value; 6,000 shares authorized; 1,646 and 1,652 shares issued and outstanding at September 30, 2007 and September 24, 2006, respectively | | | — | | — | | | Paid-in capital | | 6,753 | | 6,940 | | | 7,057 | | 7,242 | | | Retained earnings | | 4,328 | | 2,709 | | | 8,541 | | 6,100 | | | Accumulated other comprehensive income | | 38 | | 15 | | | 237 | | 64 | | | | | | | | | | | | | | | Total stockholders’ equity | | 11,119 | | 9,664 | | | 15,835 | | 13,406 | | | | | | | | | | | | | | | Total liabilities and stockholders’ equity | | $ | 12,479 | | $ | 10,820 | | | $ | 18,495 | | $ | 15,208 | | | | | | | | | | | | | |
See accompanying notes. F- 3F-2
QUALCOMM Incorporated
QUALCOMM Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended | | | | | Year Ended | | | September 30, | | September 24, | | September 25, | | | | | September 25, | | September 26, | | September 28, | | | 2007 | | 2006 | | 2005 | | | | | 2005 | | 2004 | | 2003 | | | | Revenues: | | | | Equipment and services | | $ | 3,744 | | $ | 3,514 | | $ | 2,862 | | | $ | 5,765 | | $ | 4,776 | | $ | 3,744 | | | Licensing and royalty fees | | 1,929 | | 1,366 | | 985 | | | 3,106 | | 2,750 | | 1,929 | | | | | | | | | | | | | | | | | | | Total revenues | | | 8,871 | | 7,526 | | 5,673 | | | | | 5,673 | | 4,880 | | 3,847 | | | | | | | | | | | | | | | | | | | | Operating expenses: | | | | Cost of equipment and services revenues | | 1,645 | | 1,484 | | 1,268 | | | 2,681 | | 2,182 | | 1,645 | | | Research and development | | 1,011 | | 720 | | 523 | | | 1,829 | | 1,538 | | 1,011 | | | Selling, general and administrative | | 631 | | 547 | | 483 | | | 1,478 | | 1,116 | | 631 | | | | | | | | | | | | | | | | | | | Total operating expenses | | 3,287 | | 2,751 | | 2,274 | | | 5,988 | | 4,836 | | 3,287 | | | | | | | | | | | | | | | | | | | | | | | Operating income | | 2,386 | | 2,129 | | 1,573 | | | 2,883 | | 2,690 | | 2,386 | | | Investment income (expense), net (Note 5) | | 423 | | 184 | | | (8 | ) | | | | | | | | | | | | | Income from continuing operations before income taxes | | 2,809 | | 2,313 | | 1,565 | | | | Investment income, net (Note 5) | | | 743 | | 466 | | 423 | | | | | | | | | | | | | Income before income taxes | | | 3,626 | | 3,156 | | 2,809 | | | Income tax expense | | | (666 | ) | | | (588 | ) | | | (536 | ) | | | (323 | ) | | | (686 | ) | | | (666 | ) | | | | | | | | | | | | Income from continuing operations | | 2,143 | | 1,725 | | 1,029 | | | | | | | | | | | | | | | | | | Discontinued operations (Note 12): | | | | Loss from discontinued operations before income taxes | | — | | | (10 | ) | | | (280 | ) | | | Income tax benefit | | — | | 5 | | 78 | | | | | | | | | | | | | | Loss from discontinued operations | | — | | | (5 | ) | | | (202 | ) | | | | | | | | | | | | | | | | | | | | | | | Net income | | $ | 2,143 | | $ | 1,720 | | $ | 827 | | | $ | 3,303 | | $ | 2,470 | | $ | 2,143 | | | | | | | | | | | | | | | | | | | | | | | Basic earnings per common share from continuing operations | | $ | 1.31 | | $ | 1.07 | | $ | 0.65 | | | | Basic loss per common share from discontinued operations | | — | | | (0.01 | ) | | | (0.13 | ) | | | | | | | | | | | | | Basic earnings per common share | | $ | 1.31 | | $ | 1.06 | | $ | 0.52 | | | $ | 1.99 | | $ | 1.49 | | $ | 1.31 | | | | | | | | | | | | | | | | | Diluted earnings per common share from continuing operations | | $ | 1.26 | | $ | 1.03 | | $ | 0.63 | | | | Diluted loss per common share from discontinued operations | | — | | — | | | (0.12 | ) | | | | | | | | | | | | | | | | | | | Diluted earnings per common share | | $ | 1.26 | | $ | 1.03 | | $ | 0.51 | | | $ | 1.95 | | $ | 1.44 | | $ | 1.26 | | | | | | | | | | | | | | | | | | | | | | | Shares used in per share calculations: | | | | Basic | | 1,638 | | 1,616 | | 1,579 | | | 1,660 | | 1,659 | | 1,638 | | | | | | | | | | | | | | | | | | | Diluted | | 1,694 | | 1,675 | | 1,636 | | | 1,693 | | 1,711 | | 1,694 | | | | | | | | | | | | | | | | | | | | | | | Dividends per share announced | | $ | 0.320 | | $ | 0.190 | | $ | 0.085 | | | $ | 0.52 | | $ | 0.42 | | $ | 0.32 | | | | | | | | | | | | | | | | | |
See accompanying notes. F- 4F-3
QUALCOMM Incorporated
QUALCOMM Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended | | | | | Year Ended | | | September 30, | | September 24, | | September 25, | | | | | September 25, | | September 26, | | September 28, | | | 2007 | | 2006 | | 2005 | | | | | 2005 | | 2004 | | 2003 | | | Operating Activities: | | | | Income from continuing operations | | $ | 2,143 | | $ | 1,725 | | $ | 1,029 | | | | Net income | | | $ | 3,303 | | $ | 2,470 | | $ | 2,143 | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | Depreciation and amortization | | 200 | | 163 | | 146 | | | 383 | | 272 | | 200 | | | Asset impairment and related charges | | — | | — | | 34 | | | | Non-cash portion of share-based compensation expense | | | 488 | | 495 | | — | | | Incremental tax benefits from stock options exercised | | | | (240 | ) | | | (403 | ) | | — | | | Net realized gains on marketable securities and other investments | | | (179 | ) | | | (88 | ) | | | (80 | ) | | | (222 | ) | | | (136 | ) | | | (179 | ) | | (Gains) losses on derivative instruments | | | (33 | ) | | | (7 | ) | | 3 | | | | (2 | ) | | 29 | | | (33 | ) | | Other-than-temporary losses on marketable securities and other investments | | 14 | | 12 | | 128 | | | 27 | | 24 | | 14 | | | Equity in losses of investees | | 28 | | 72 | | 113 | | | 1 | | 29 | | 28 | | | Non-cash income tax expense | | 498 | | 419 | | 411 | | | 91 | | 514 | | 498 | | | Other non-cash charges | | — | | 35 | | 13 | | | | Proceeds from (purchases of) trading securities | | — | | — | | 2 | | | | Increase (decrease) in cash resulting from changes in: | | | | Other items, net | | | | (42 | ) | | | (28 | ) | | — | | | Changes in assets and liabilities, net of effects of acquisitions (Note 11): | | | | Accounts receivable, net | | 35 | | | (93 | ) | | 53 | | | | (16 | ) | | | (133 | ) | | 35 | | | Inventories | | | (23 | ) | | | (50 | ) | | | (23 | ) | | | (234 | ) | | | (71 | ) | | | (23 | ) | | Other assets | | | (74 | ) | | 51 | | | (12 | ) | | | (96 | ) | | 15 | | | (74 | ) | | Trade accounts payable | | 57 | | 151 | | | (24 | ) | | 209 | | 51 | | 57 | | | Payroll, benefits and other liabilities | | 49 | | 148 | | 43 | | | 139 | | 96 | | 49 | | | Unearned revenue | | | (29 | ) | | | (57 | ) | | | (12 | ) | | 22 | | 29 | | | (29 | ) | | | | | | | | | | | | | | | | | | Net cash provided by operating activities | | 2,686 | | 2,481 | | 1,824 | | | 3,811 | | 3,253 | | 2,686 | | | | | | | | | | | | | | | | | | Investing Activities: | | | | Capital expenditures | | | (576 | ) | | | (332 | ) | | | (202 | ) | | | (818 | ) | | | (685 | ) | | | (576 | ) | | Purchases of available-for-sale securities | | | (8,055 | ) | | | (8,372 | ) | | | (4,484 | ) | | | (8,492 | ) | | | (12,517 | ) | | | (8,055 | ) | | Proceeds from sale of available-for-sale securities | | 8,072 | | 5,026 | | 3,183 | | | 7,998 | | 10,853 | | 8,072 | | | Purchases of held-to-maturity securities | | — | | | (184 | ) | | | (355 | ) | | | Maturities of held-to-maturity securities | | 10 | | 401 | | 257 | | | — | | 130 | | 10 | | | Issuance of finance receivables | | — | | | (1 | ) | | | (150 | ) | | | Collection of finance receivables | | 2 | | 196 | | 813 | | | | Other investments and acquisitions, net of cash acquired | | | (249 | ) | | | (70 | ) | | | (37 | ) | | | (249 | ) | | | (407 | ) | | | (249 | ) | | Change in collateral held under securities lending | | | | (421 | ) | | — | | — | | | Other items, net | | 20 | | 10 | | | (17 | ) | | 84 | | 3 | | 22 | | | | | | | | | | | | | | | | | | | Net cash used by investing activities | | | (776 | ) | | | (3,326 | ) | | | (992 | ) | | | (1,898 | ) | | | (2,623 | ) | | | (776 | ) | | | | | | | | | | | | | | | | | Financing Activities: | | | | Proceeds from issuance of common stock | | 386 | | 330 | | 191 | | | 556 | | 692 | | 386 | | | Incremental tax benefits from stock options exercised | | | 240 | | 403 | | — | | | Repurchase and retirement of common stock | | | (953 | ) | | — | | | (166 | ) | | | (1,482 | ) | | | (1,500 | ) | | | (953 | ) | | Proceeds from put options | | 37 | | 5 | | 7 | | | 17 | | 11 | | 37 | | | Dividends paid | | | (524 | ) | | | (308 | ) | | | (135 | ) | | | (862 | ) | | | (698 | ) | | | (524 | ) | | Change in obligation under securities lending | | | 421 | | — | | — | | | Other items, net | | | | (1 | ) | | — | | — | | | | | | | | | | | | | | | | | | | Net cash (used) provided by financing activities | | | (1,054 | ) | | 27 | | | (103 | ) | | | | | | | | | | | | | Net cash used by discontinued operations | | — | | | (13 | ) | | | (89 | ) | | | Net cash used by financing activities | | | | (1,111 | ) | | | (1,092 | ) | | | (1,054 | ) | | | | | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | — | | — | | | (2 | ) | | 2 | | | (1 | ) | | — | | | | | | | | | | | | | | | | | | Net increase (decrease) in cash and cash equivalents | | 856 | | | (831 | ) | | 638 | | | 804 | | | (463 | ) | | 856 | | Cash and cash equivalents at beginning of year | | 1,214 | | 2,045 | | 1,407 | | | 1,607 | | 2,070 | | 1,214 | | | | | | | | | | | | | | | | | | Cash and cash equivalents at end of year | | $ | 2,070 | | $ | 1,214 | | $ | 2,045 | | | $ | 2,411 | | $ | 1,607 | | $ | 2,070 | | | | | | | | | | | | | | | | | |
See accompanying notes. F- 5F-4
QUALCOMM Incorporated
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 29, 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 | | — | | 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 28, 2003 | | 1,597 | | 6,325 | | 1,297 | | | (24 | ) | | 7,598 | | | | | | | | | | Components of comprehensive income: | | | | Net income | | — | | — | | 1,720 | | — | | 1,720 | | | | Foreign currency translation | | — | | — | | — | | 56 | | 56 | | | | Unrealized net gains on securities, net of income taxes of $20 | | — | | — | | — | | 29 | | 29 | | | | Reclassification adjustment for net realized gains included in net income, net of income taxes of $35 | | — | | — | | — | | | (53 | ) | | | (53 | ) | | | Reclassification adjustment for other-than-temporary losses on marketable securities included in net income, net of income taxes of $5 | | — | | — | | — | | 7 | | 7 | | | | | | | | | | Total comprehensive income | | 1,759 | | | | | | | | | | Exercise of stock options | | 36 | | 284 | | — | | — | | 284 | | | | Tax benefit from exercise of stock options | | — | | 285 | | — | | — | | 285 | | | | Issuance for Employee Stock Purchase and Executive Retirement Plans | | 2 | | 46 | | — | | — | | 46 | | | | Dividends | | — | | — | | | (308 | ) | | — | | | (308 | ) | | | | | | | | | | | | | | | | Balance at September 26, 2004 | | 1,635 | | 6,940 | | 2,709 | | 15 | | 9,664 | | | 1,635 | | 6,940 | | 2,709 | | 15 | | 9,664 | | | | | | | | | | | Components of comprehensive income: | | | | Net income | | — | | — | | 2,143 | | — | | 2,143 | | | — | | — | | 2,143 | | — | | 2,143 | | | Foreign currency translation | | — | | — | | — | | 5 | | 5 | | | | Unrealized net gains on securities, net of income taxes of $73 | | — | | — | | — | | 103 | | 103 | | | | Unrealized net gains on derivative instruments, net of income taxes of $6 | | — | | — | | — | | 9 | | 9 | | | | Reclassification adjustment for net realized gains on securities included in net income, net of income taxes of $68 | | — | | — | | — | | | (102 | ) | | | (102 | ) | | | Reclassification adjustment for other-than-temporary losses on marketable securities included in net income, net of income taxes of $5 | | — | | — | | — | | 8 | | 8 | | | | 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 comprehensive income | | | 13 | | 13 | | | | | | | | | | | Total comprehensive income | | 2,166 | | | 2,166 | | | | | | | | | | | Exercise of stock options | | 30 | | 348 | | — | | — | | 348 | | | 30 | | 348 | | — | | — | | 348 | | | Tax benefit from exercise of stock options | | — | | 346 | | — | | — | | 346 | | | — | | 346 | | — | | — | | 346 | | | Issuance for Employee Stock Purchase and Executive Retirement Plans | | 2 | | 56 | | — | | — | | 56 | | | 2 | | 56 | | — | | — | | 56 | | | Repurchase and retirement of common stock | | | (27 | ) | | | (953 | ) | | — | | — | | | (953 | ) | | | (27 | ) | | | (953 | ) | | — | | — | | | (953 | ) | | Dividends | | — | | — | | | (524 | ) | | — | | | (524 | ) | | — | | — | | | (524 | ) | | — | | | (524 | ) | | Value of options exchanged for acquisitions | | — | | 19 | | — | | — | | 19 | | | | Deferred stock-based compensation from acquisitions | | — | | | (3 | ) | | — | | — | | | (3 | ) | | | Other | | | — | | 16 | | — | | — | | 16 | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at September 25, 2005 | | 1,640 | | $ | 6,753 | | $ | 4,328 | | $ | 38 | | $ | 11,119 | | | 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 comprehensive income, net of income taxes of $8 | | | — | | — | | — | | 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 | | | | | | | | | Components of comprehensive income: | | | | Net income | | | — | | — | | 3,303 | | — | | 3,303 | | | Unrealized net gains on securities and derivative instruments, net of income taxes of $198 | | | — | | — | | — | | 274 | | 274 | | | Reclassification adjustment for net realized gains on securities and derivative instruments included in net income, net of income taxes of $87 | | | — | | — | | — | | | (131 | ) | | | (131 | ) | | Other comprehensive income, net of income taxes of $6 | | | — | | — | | — | | 30 | | 30 | | | | | | | | | Total comprehensive income | | | 3,476 | | | | | | | | | Exercise of stock options | | | 28 | | 477 | | — | | — | | 477 | | | Tax benefit from exercise of stock options | | | — | | 229 | | — | | — | | 229 | | | Issuance for Employee Stock Purchase and Executive Retirement Plans | | | 3 | | 88 | | — | | — | | 88 | | | Share-based compensation | | | — | | 485 | | — | | — | | 485 | | | Repurchase and retirement of common stock | | | | (37 | ) | | | (1,459 | ) | | — | | — | | | (1,459 | ) | | Dividends | | | — | | — | | | (862 | ) | | — | | | (862 | ) | | Other | | | — | | | (5 | ) | | — | | — | | | (5 | ) | | | | | | | | | | | | | | | Balance at September 30, 2007 | | | 1,646 | | $ | 7,057 | | 8,541 | | $ | 237 | | $ | 15,835 | | | | | | | | | | | | | | | |
See accompanying notes. F- 6F-5
QUALCOMM Incorporated
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. The Company and itsIts Significant Accounting Policies The Company.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 adoption of CDMA products and services for wireless voice and Internetinternet data communications. Principles of Consolidation.The Company’s consolidated financial statements include the assets, liabilities and operating results of majority-owned 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. Certain of the Company’s foreign subsidiaries and equity method investees are included in the consolidated financial statements one month in arrears to facilitate the timely inclusion of such entities in the Company’s consolidated financial statements. The Company does not have any investments in entities it believes are variable interest entities for which the Company is the primary beneficiary. The Company deconsolidated the Vésper Operating Companies and TowerCo during fiscal 2004 as a result of their sale (Note 12). Results of operations and cash flows related to the Vésper Operating Companies and TowerCo are presented as discontinued operations. Financial Statement Preparation.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. Certain prior year amounts have been reclassified to conform to the current year presentation. Fiscal Year.The Company operates and reports using a 52-53 week fiscal year ending on the last Sunday in September. Fiscal year ended September 30, 2007 included 53 weeks. The fiscal yearsyear ended September 24, 2006 and September 25, 2005 September 26, 2004 and September 28, 2003 each includeincluded 52 weeks. Revenue Recognition.The Company derives revenue principally from sales of integrated circuit products, from royalties for its intellectual property, from messaging and other services and related hardware sales, from software development and licensing and related services, and from license fees for intellectual property. The timing of revenue recognition and the amount of revenue actually recognized in each case depends upon a variety of factors, including the specific terms of each arrangement and the nature of the Company’s deliverables and obligations. The development stage of the Company’s customers’ products does not affect the timing or amount of revenue recognized. 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 CDMAcertain wireless products, including, without limitation, products implementing cdmaOne, CDMA2000, Wideband CDMA (WCDMA) and/or the, CDMA Time Division Duplex (TDD) and/or OFDMA standards and 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 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 F- 7F-6
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS although royalties are reported quarterly, payment is on a semi-annual basis. During the periods preceding the fourth quarter of fiscal 2004, theThe Company estimated and recorded therecognizes 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. Starting in the fourth quarter of fiscal 2004, the Company determined that, due to escalating and changing business trends, the Company 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, the Company began recognizing royalty revenues for a quarter solely based on royalties reported by licensees during suchthe 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. Total royalties reported by external licensees for fiscal 2005 and recorded as revenue for the period were $1.64 billion. Total royalties reported by external licensees for fiscal 2004 and 2003 were $1.29 billion and $837 million, respectively, as compared to $1.14 billion and $838 million, respectively, recorded as royalty revenues from the external licensees for the same periods.
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. 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. The Company recognizedrecognizes revenues and expenses from sales ofallocated to 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, until the fourth quarter of fiscal 2003. The ratable recognition of these sales had been required because the messaging service was considered integral to the functionality of the hardware and software. 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, starting in the fourth quarter of fiscal 2003, the Company began recognizing revenues allocated to the hardware using the residual method and related expensesmethod. 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, if later, instead of amortizing the related revenue over future periods. 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 $52 million, $76 million and $23 million in revenue related to such prior period equipment sales in fiscal 2005 and 2004 and during the fourth quarter of fiscal 2003, respectively. Deferred revenues and expenses related to the historical QWBS sales that will continue to be amortized in future periods were $54 million and $34 million, respectively, at September 25, 2005. Gross margin related to these prior sales is expected to be recognized as follows: $13 million in fiscal 2006, $6 million in fiscal 2007 and $1 million in fiscal 2008.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. F- 8
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 a number of factors, including ourthe contractual provisions of the customer agreements and the Company’s assumptions related to historical and projected customer sales volumes, market share and the contractual provisions of the customer agreements.inventory levels. Unearned revenue consists primarily of fees related to software products, license fees for intellectual property, and hardware products sales with continuing performance obligations.obligations and billings on uncompleted contracts in excess of incurred cost and accrued profit. Concentrations.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. Revenues from LG Electronics, Samsung and Motorola,three customers of the Company’s QCT, QTL and QWI segments each comprised an aggregate of 14%, 14% and 13% of total consolidated revenues in fiscal 2007, compared to 13% of total consolidated revenues in fiscal 2006 and 15%, 13% and 11% of total consolidated revenues respectively, in fiscal 2005, as compared to 15%, 15% and 10% of total consolidated revenues in fiscal 2004, respectively, and 13%, 17% and 13%, respectively, in fiscal 2003.2005. Aggregated accounts receivable from Samsung, LG Electronicsthese three customers comprised 50% and Motorola comprised 45% and 51% of gross accounts receivable at September 25, 200530, 2007 and September 26, 2004,24, 2006, respectively. Revenues from international customers were approximately 82%, 79% and 77%87% of total consolidated revenues in fiscal 2005, 20042007 and 2003, respectively.2006 and 82% of total consolidated revenues in 2005. Cost of Equipment and Services Revenues.Cost of equipment and services revenues is primarily comprised of the cost of equipment revenues, the cost of messaging services revenues and the cost of development and other F-7
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Shipping and Handling Costs.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. Research and Development.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. ShippingMarketing.Certain cooperative marketing programs reimburse customers for marketing activities for certain of the Company’s products and Handling Costs.Costsservices, subject to defined criteria. Cooperative marketing obligations are accrued and the costs are recorded in the period in which the costs are incurred for shippingby the customer and handlingthe Company is obligated to reimburse the customer. Cooperative marketing costs are includedrecorded as selling, general and administrative expenses to the extent that a marketing benefit separate from the revenue transaction can be identified and the cash paid does not exceed the fair value of that marketing benefit received. Any excess of cash paid over the fair value of the marketing benefit received is recorded as a reduction in cost of revenues at the time the related revenue is recognized. Amounts billed to a customer for shipping and handling are reported as revenue. Income Taxes.The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Tax law and rate changes are reflected in income in the period such changes are enacted. The Company records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized. F- 9
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 these examinations and any future examinations for the current or prior yearsby 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. 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. 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. Cash Equivalents.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 Securities.Management determines theThe appropriate classification of marketable securities is determined at the time of purchase, and reevaluates such designation is reevaluated 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. For securities that may not have been actively traded in a given period, fair value is determined using matrix pricing and other valuation techniques. 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. F-8
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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,including: 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, expected market volatility and the market in general, analyst recommendations, the views of external investment managers, any news or financial information 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 Accounts.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. Inventories.Inventories are valued at the lower of cost or market (replacement cost, not to exceed net realizable value) using the first-in, first-out method. Recoverability of inventory is assessed based on review of committed purchase orders from customers, as well as purchase commitment projections provided by customers, among other things. Property, Plant and Equipment.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 2 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. F-10
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Upon the retirement or disposition of property, plant and equipment, the related cost and accumulated depreciation or amortization are removed, and a gain or loss is recorded. Investments in Other Entities.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 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 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 areis 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 F-9
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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). Derivatives.The Company holds warrants to purchase equity interests in certain other companies related to its strategic investment activities. These warrants are not held for trading or hedging purposes. Certain of these warrants are recorded at fair value. Changes in fair value are recorded in investment income (expense) as gains (losses) on derivative instruments. Warrants that do not have contractual net settlement provisions are recorded at cost. The recorded values of the warrants in other current assets were $1 million and $4 million at September 25, 2005 and September 26, 2004, respectively. The Company may 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 as gains (losses) on derivative instruments.instruments, net of tax. The amounts are subsequently reclassified into revenues in the same period in which the underlying transactions affect the Company’s earnings. The Company had no outstanding forward contracts at September 25, 200530, 2007 and the value of the Company’s foreign currency forward contracts was insignificant at September 26, 2004.24, 2006. The value of the Company’s foreign currency option contracts recorded in other current assets was $16$1 million at both September 30, 2007 and September 24, 2006, and the value recorded in other current liabilities was $2 million and $3 million at September 25, 2005,30, 2007 and September 24, 2006, respectively, all of which all were designated as cash-flow hedging instruments. The Company had no foreign currency option contracts outstanding at September 26, 2004. 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. In fiscal 2005 and 2004, theThe premiums received from put options wereare recorded as other current liabilities in accordance with Statement of Financial Standards No. 150 (FAS 150), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”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 put options recorded in other current liabilities was $7$10 million and $19 million at September 25, 2005. The F-11
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company had no put options outstanding at30, 2007 and September 26, 2004. In fiscal 2003, the $7 million in premiums received from put options were recorded as paid-in capital in accordance with EITF Issue No. 00-19, “Accounting for Derivative Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” which was subsequently amended by FAS 150.24, 2006, respectively.
Goodwill and Other Intangible Assets.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. 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 2005, 20042007, 2006 and 20032005 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 one yearthree years at both September 25, 200530, 2007 and September 26, 2004.24, 2006. Other intangible assets are amortized on a straight-line basis over their useful lives, ranging from less than one year to 28 years. Weighted-average amortization periods for finite livedfinite-lived intangible assets, by class, were as follows: | | | | | | | | | | | | | September 25, 200530,
2007 | | September 26, 200424,
2006 | | | | | | | | | | | Wireless licenses | | 15 years | | 15 years | | Marketing-related | | 18 years | | 1719 years | | Technology-based | | 912 years | | 1115 years | | Customer-related | | 75 years | | 87 years | | Other | | 28 years | | 28 years | | Total intangible assets | | 13 years | | 1415 years |
Changes in the weighted-average amortization periods from fiscal 2004 to 2005 resulted from additions to intangible assets related to acquisitions (Note 11).
Valuation of Long-Lived and Intangible Assets.The Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the carrying amount of the long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Any F-10
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Securities Lending.The Company engages in transactions in which certain fixed-income and equity securities are loaned to selected broker-dealers. The loaned securities of $411 million at September 30, 2007 continue to be carried as marketable securities on the balance sheet. Cash collateral, equal to at least 101% of the fair value of the securities loaned plus accrued interest, is held and invested by one or more securities lending agents on behalf of the Company. The Company monitors the fair value of securities loaned and the collateral received and obtains additional collateral as necessary.Collateral of $421 million at September 30, 2007 was recorded as a current asset with a corresponding current liability. The Company did not engage in securities lending during fiscal 2006. Litigation.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. The Company’s policy is to expense legal costs associated with defending itself as incurred. Share-Based Compensation.Payments.The Company recordsadopted the revised statement of Financial Accounting Standards No. 123, “Share-Based Payment” (FAS 123R) in fiscal 2006. Under FAS 123R, share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’s requisite service period. The Company adopted the provisions of FAS 123R using a modified prospective application. Accordingly, fiscal 2005 results were not revised for comparative purposes. The valuation provisions of FAS 123R apply to new awards and to awards that were outstanding on the effective date, which are subsequently modified or cancelled. Estimated compensation expense for awards outstanding at the effective date is recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under FASB Statement No. 123, “Accounting for Stock-Based Compensation” (FAS 123). The Company elected to adopt the alternative transition method for calculating the tax effects of share-based compensation. The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the 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) 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. The weighted-average estimated fair values of employee stock options granted during fiscal 2007 and 2006 were $14.54 and $15.73 per share, respectively, using the binomial model with the following weighted-average assumptions (annualized percentages): | | | | | | | | | | | | | 2007 | | 2006 | | Volatility | | | 33.4 | % | | | 30.7 | % | | Risk-free interest rate | | | 4.6 | % | | | 4.6 | % | | Dividend yield | | | 1.3 | % | | | 1.0 | % | | Post-vesting forfeiture rate | | | 6.5 | % | | | 6.0 | % | | Suboptimal exercise factor | | | 1.8 | | | | 1.7 | |
The Company uses the implied volatility of market-traded options in the Company’s stock for the expected volatility assumption. The term structure of volatility is used up to approximately two years, and the Company used the implied volatility of the option with the longest time to maturity 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 F-11
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 over the exercise price 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, derived from the binomial model, was 6.2 years and 5.8 years during fiscal 2007 and fiscal 2006, respectively. The pre-vesting forfeiture rate represents the rate at which stock options are expected to be forfeited by employees prior to their vesting. Pre-vesting forfeitures were estimated to be approximately 0% in both fiscal 2007 and 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. Total estimated share-based compensation expense, related to all of the Company’s share-based awards, was comprised as follows (in millions, except per share data): | | | | | | | | | | | | | 2007 | | | 2006 | | | | | | | | | | | | | Cost of equipment and services revenues | | $ | 39 | | | $ | 41 | | | Research and development | | | 221 | | | | 216 | | | Selling, general and administrative | | | 233 | | | | 238 | | | | | | | | | | | Share-based compensation expense before taxes | | | 493 | | | | 495 | | | Related income tax benefits | | | (169 | ) | | | (175 | ) | | | | | | | | | | Share-based compensation expense, net of taxes | | $ | 324 | | | $ | 320 | | | | | | | | | | | | | | | | | | | | | Net share-based compensation expense, per common share: | | | | | | | | | | Basic | | $ | 0.20 | | | $ | 0.19 | | | | | | | | | | | Diluted | | $ | 0.19 | | | $ | 0.19 | | | | | | | | | |
The Company recorded $98 million and $86 million in share-based compensation expense during fiscal 2007 and 2006, respectively, related to share-based awards granted during those periods. The remaining share-based compensation expense primarily related to stock option awards granted in earlier periods. In addition, for fiscal 2007 and 2006, $240 million and $403 million, respectively, was presented as financing activities in the consolidated statements of cash flows to reflect the incremental tax benefits from stock options exercised in those periods. Pro Forma Information under FAS 123 for Periods Prior to Fiscal 2006 Prior to adopting the provisions of FAS 123R, the Company recorded 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 F-12
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 share-based paymentsstock 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 their effect iswas anti-dilutive. F-12
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 share-based payments on net income and earnings per common share have been estimated at the date of grant using the Black-Scholes option-pricing model based on the following assumptions:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Stock Option Plans | | Purchase Plans | | | | 2005 | | 2004 | | 2003 | | 2005 | | 2004 | | 2003 | | Risk-free interest rate | | | 3.9 | % | | | 3.8 | % | | | 3.2 | % | | | 2.9 | % | | | 1.1 | % | | | 1.0 | % | | Volatility | | | 36.5 | % | | | 53.2 | % | | | 58.0 | % | | | 29.8 | % | | | 33.3 | % | | | 41.1 | % | | Dividend yield | | | 0.8 | % | | | 0.6 | % | | | 0.2 | % | | | 0.9 | % | | | 0.7 | % | | | 0.3 | % | | Expected life (years) | | | 6.0 | | | | 6.0 | | | | 6.0 | | | | 0.5 | | | | 0.5 | | | | 0.5 | |
The Black-Scholes option-pricing model was developed for use in estimating theweighted-average estimated fair value of traded options that have no restrictions and are fully transferable and negotiable in a free trading market. This model does not consider the employment, transfer or vesting restrictions that are inherent in the Company’s employee stock options or purchase rights granted pursuant to the Employee Stock Purchase Plans. 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 share-based payments have characteristics significantly different from those of freely traded options, and because changes in the subjective input assumptions can materially affect the Company’s estimate of the fair values, in the Company’s opinion, existing valuation models may not be reliable single measures of the fair values of the Company’s share-based payments. The Black-Scholes weighted average estimated fair values of stock options granted during fiscal 2005 2004was $14.80 per share. The fair value was calculated using the Black-Scholes model and 2003 were $14.80, $13.92 and $9.67 per share, respectively. The Black-Scholesassuming a weighted average estimated fair valuesexpected life of purchase rights granted pursuant to6 years and weighted average annualized percentages of 3.9% for the Employee Stock Purchase Plans during fiscal 2005, 2004risk-free interest rate, 36.5% for volatility and 2003 were $8.76, $7.53 and $4.80 per share, respectively. 0.8% for the dividend yield. For purposes of pro forma disclosures under FAS 123, the estimated fair valuevalues of share-based payments isare assumed to be amortized to expense over theirthe 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 year ended September 25, 2005 were as follows (in millions, except for earnings per common share)share data): | | | | | | | | | | | | | | | | | Year Ended | | | | | September 25, | | | September 26, | | | September 28, | | | | | 2005 | | | 2004 | | | 2003 | | | Net income, as reported | | $ | 2,143 | | | $ | 1,720 | | | $ | 827 | | | Add: Share-based employee compensation expense included in reported net income, net of related tax benefits | | | 2 | | | | — | | | | 1 | | | Deduct: Share-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects | | | (305 | ) | | | (281 | ) | | | (260 | ) | | | | | | | | | | | | | Pro forma net income | | $ | 1,840 | | | $ | 1,439 | | | $ | 568 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Earnings per common share: | | | | | | | | | | | | | | Basic — as reported | | $ | 1.31 | | | $ | 1.06 | | | $ | 0.52 | | | | | | | | | | | | | | Basic — pro forma | | $ | 1.12 | | | $ | 0.89 | | | $ | 0.36 | | | | | | | | | | | | | | Diluted — as reported | | $ | 1.26 | | | $ | 1.03 | | | $ | 0.51 | | | | | | | | | | | | | | Diluted — pro forma | | $ | 1.09 | | | $ | 0.86 | | | $ | 0.35 | | | | | | | | | | | | |
F-13
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS| | | | | | | Net income, as reported | | $ | 2,143 | | | 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 | ) | | | | | | | Pro forma net income | | $ | 1,840 | | | | | | | | | | | | | | Earnings per common share: | | | | | | Basic — as reported | | $ | 1.31 | | | | | | | | Basic — pro forma | | $ | 1.12 | | | | | | | | | | | | | | Diluted — as reported | | $ | 1.26 | | | | | | | | Diluted — pro forma | | $ | 1.09 | | | | | | |
Foreign Currency.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. The functional currency of the Company’s foreign investees that do not use local currencies is the United States dollar. Where the United States dollar is the functional currency, the monetary assets and liabilities are translated into United States dollars at the exchange rate in effect at the balance sheet date. Revenues, expenses, gains and losses associated with the monetary assets and liabilities are translated at the rates of exchange that approximate the rates in effect at the transaction date. Non-monetary assets and liabilities and related elements of 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 fiscal 2005, net Net foreign currency transaction gains included in the Company’s statement of operations were $1 million. Duringmillion in fiscal 2004, net foreign currency transaction losses included in the Company’s statements of operations were $1 million. During fiscal 2003, net foreign currency transaction gains2007, 2006 and losses included in the Company’s statements of operations were insignificant.2005.
Comprehensive Income.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. 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 statementstatements of operations when the marketable securities are sold.sold or derivative instruments are settled.
Components of accumulated other comprehensive income consisted of the following (in millions): | | | | | | | | | | | | | September 25 | | | September 26, | | | | | 2005 | | | 2004 | | | Foreign currency translation | | $ | (22 | ) | | $ | (27 | ) | | Unrealized gains on marketable securities, net of income taxes | | | 60 | | | | 42 | | | | | | | | | | | | | $ | 38 | | | $ | 15 | | | | | | | | | |
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.| | | | | | | | | | | | | September 30, 2007 | | | September 24, 2006 | | | | | | | | | | | | | Net unrealized gains on marketable securities and derivative instruments, net of income taxes | | $ | 240 | | | $ | 87 | | | Foreign currency translation | | | (3 | ) | | | (23 | ) | | | | | | | | | | | | $ | 237 | | | $ | 64 | | | | | | | | | |
Earnings Per Common Share.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 share-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 F-13
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS equivalents include the dilutive effect of in-the-money share equivalents, 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 an option, 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 option 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 2007, 2006 and 2005 2004were 32,333,000, 51,835,000 and 2003 were approximately 56,127,000, 58,686,000 and 56,338,000, respectively. Employee stock options to purchase approximately96,278,000, 54,541,000 and 33,660,000 40,221,000 and 86,540,000 shares of common stock during fiscal 2005, 20042007, 2006 and 2003,2005, respectively, were outstanding but not included in the computation of 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 dilutivediluted earnings per common share would be anti-dilutive. The computation of diluted earnings per share during fiscal 2007 excluded 1,615,000 shares of common stock issuable under our employee stock purchase plans because the effect was anti-dilutive. Put options F-14
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
outstanding during fiscal2007 and 2005 and 2004 to purchase a weighted-average of1,000,000 and 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 Requirements.In December 2004,July 2006, the FASB revised Statementissued FASB Interpretation No. 123 (FAS 123R), “Share-Based Payment,”48 (FIN 48) “Accounting for Uncertainty in Income Taxes” which requires companiesprescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to expensebe taken in a tax return. Additionally, FIN 48 provides guidance on the estimated fair value of employee stock optionsderecognition, classification, accounting in interim periods and similar awards. On April 14, 2005, the U.S. Securities and Exchange Commission adopted a new rule amending the compliance datesdisclosure requirements for FAS 123R. In accordance with the new rule, theuncertain tax positions. The accounting provisions of FAS 123RFIN 48 will be effective for the Company 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 2006. The Company tentatively expects to adoptadoption and will be presented separately. Only tax positions that meet the provisions of FAS 123R using a modified prospective application. FAS 123R, which provides certain changes to the method for valuing share-based compensation among other changes, will apply to new awards and to awards that are outstanding onmore likely than not recognition threshold at the effective date and are subsequently modified or cancelled. Compensation expense for outstanding awards for which the requisite service had not been rendered as of the effective date willmay be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under FAS 123. At September 25, 2005, unamortized compensation expense related to outstanding unvested options, as determined in accordance with FAS 123, that the Company expects to record during fiscal 2006 was approximately $394 million before income taxes. The Company will incur additional expense during fiscal 2006 related to new awards granted during 2006 that cannot yet be quantified.upon adoption of FIN 48. The Company is in the process of determining how the guidance regarding valuing share-based compensation as prescribed in FAS 123R will be applied to valuing share-based awards granted after the effective date andfinalizing the impact that the recognitionadoption of compensation expense related to such awardsFIN 48 will have on its consolidated financial statements.statements but expects the adjustment to opening retained earnings to be immaterial. Note 2. Marketable Securities Marketable securities were comprised as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | Current | | Noncurrent | | | | | | September 25, | | September 26, | | September 25, | | September 26, | | | | | | 2005 | | 2004 | | 2005 | | 2004 | | | | Held-to-maturity: | | | | Government-sponsored enterprise securities | | $ | 60 | | $ | — | | $ | — | | $ | 70 | | | | Corporate bonds and notes | | 70 | | 10 | | — | | 60 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 130 | | 10 | | — | | 130 | | | Current | | Noncurrent | | | | | | | | | | | | | | September 30, 2007 | | September 24, 2006 | | September 30, 2007 | | September 24, 2006 | | | Available-for-sale: | | | | U.S. Treasury securities | | 151 | | 267 | | — | | — | | | $ | 58 | | $ | 73 | | $ | — | | $ | — | | | Government-sponsored enterprise securities | | 704 | | 542 | | — | | — | | | 219 | | 667 | | — | | — | | | Municipal bonds | | 10 | | — | | — | | — | | | — | | 5 | | — | | — | | | Foreign government bonds | | 17 | | 8 | | — | | — | | | 8 | | 17 | | — | | — | | | Corporate bonds and notes | | 2,645 | | 2,603 | | 14 | | 3 | | | 2,939 | | 2,693 | | 21 | | 23 | | | Mortgage and asset-backed securities | | 767 | | 1,226 | | — | | — | | | | Mortgage- and asset-backed securities | | | 573 | | 617 | | — | | — | | | Non-investment grade debt securities | | 24 | | — | | 694 | | 571 | | | 19 | | 24 | | 1,812 | | 1,368 | | | Equity mutual funds | | — | | — | | 293 | | 296 | | | | Equity securities | | 30 | | 112 | | 1,132 | | 653 | | | 203 | | 18 | | 1,316 | | 1,318 | | | Equity mutual funds and exchange traded funds | | | — | | — | | 1,871 | | 1,519 | | | Debt mutual funds | | | 151 | | — | | 214 | | — | | | | | | | | | | | | | | | | | | | | | | | | | 4,348 | | 4,758 | | 2,133 | | 1,523 | | | $ | 4,170 | | $ | 4,114 | | $ | 5,234 | | $ | 4,228 | | | | | | | | | | | | | | | | | | | | | | | | | $ | 4,478 | | $ | 4,768 | | $ | 2,133 | | $ | 1,653 | | | | | | | | | | | | | | |
Marketable securities in the amount of $411 million at September 30, 2007 have been loaned under the Company’s securities lending program (Note 1). As of September 25, 2005,30, 2007, 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 | | | | | | | | | | | | | | | | | | | | $ | 2,195 | | $ | 1,401 | | | $ | 825 | | | $ | 42 | | | $ | 1,551 | | | $ | 6,014 | | | | | | | | | | | | | | | | | | |
F-15F-14
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Years to Maturity | | | No Single | | | | | | | | Less than | | | One to | | | Five to | | | Greater than | | | Maturity | | | | | | | | One Year | | | Five Years | | | Ten Years | | | Ten Years | | | Date | | | Total | | | Held-to-maturity | | $ | 130 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 130 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Available-for-sale | | | 2,439 | | | | 1,173 | | | | 626 | | | | 21 | | | | 767 | | | | 5,026 | | | | | | | | | | | | | | | | | | | | | | | | | $ | 2,569 | | | $ | 1,173 | | | $ | 626 | | | $ | 21 | | | $ | 767 | | | $ | 5,156 | | | | | | | | | | | | | | | | | | | | | |
Securities with no single maturity date includeincluded mortgage- and asset-backed securities. Available-for-sale securities were comprised as follows at (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | Unrealized | | | Unrealized | | | | | | | | Cost | | | Gains | | | Losses | | | Fair Value | | September 25, 2005 | | | | | | | | | | | | | | | | | | Equity securities | | $ | 1,353 | | | $ | 131 | | | $ | (29 | ) | | $ | 1,455 | | | Debt securities | | | 5,039 | | | | 14 | | | | (27 | ) | | | 5,026 | | | | | | | | | | | | | | | | | Total | | $ | 6,392 | | | $ | 145 | | | $ | (56 | ) | | $ | 6,481 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | September 26, 2004 | | | | | | | | | | | | | | | | | | Equity securities | | $ | 1,003 | | | $ | 77 | | | $ | (19 | ) | | $ | 1,061 | | | Debt securities | | | 5,208 | | | | 27 | | | | (15 | ) | | | 5,220 | | | | | | | | | | | | | | | | | Total | | $ | 6,211 | | | $ | 104 | | | $ | (34 | ) | | $ | 6,281 | | | | | | | | | | | | | | | |
The fair values of held-to-maturity debt securities at September 25, 2005 and September 26, 2004 approximate cost.| | | | | | | | | | | | | | | | | | | | | Cost | | | Unrealized Gains | | | Unrealized Losses | | | Fair Value | | September 30, 2007 | | | | | | | | | | | | | | | | | | Equity securities | | $ | 2,941 | | | $ | 492 | | | $ | (43 | ) | | $ | 3,390 | | | Debt securities | | | 6,042 | | | | 18 | | | | (46 | ) | | | 6,014 | | | | | | | | | | | | | | | | | | $ | 8,983 | | | $ | 510 | | | $ | (89 | ) | | $ | 9,404 | | | | | | | | | | | | | | | | | | | | | | | | | | �� | | | | | | | | September 24, 2006 | | | | | | | | | | | | | | | | | | Equity securities | | $ | 2,693 | | | $ | 194 | | | $ | (32 | ) | | $ | 2,855 | | | Debt securities | | | 5,500 | | | | 11 | | | | (24 | ) | | | 5,487 | | | | | | | | | | | | | | | | | | $ | 8,193 | | | $ | 205 | | | $ | (56 | ) | | $ | 8,342 | | | | | | | | | | | | | | | |
The Company recorded realized gains and losses on sales of available-for-sale marketable securities as follows (in millions): | | | | | | | | | | | | | | | | | | Gross | | Gross | | Net | | | | | | | | | | | | | | | | | Realized | | Realized | | Realized | | | Gross Realized | | | | Fiscal Year | | Gains | | Losses | | Gains | | | Gross Realized Gains | | Losses | | Net Realized Gains | | 2007 | | | $ | 244 | | $ | (26 | ) | | $ | 218 | | | 2006 | | | 176 | | | (47 | ) | | | 129 | | | 2005 | | $ | 198 | | $ | (31 | ) | | $ | 167 | | | 198 | | | (31 | ) | | | 167 | | | 2004 | | 105 | | | (17 | ) | | 88 | | | | 2003 | | 82 | | | (13 | ) | | 69 | | |
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 25, 200530, 2007 (in millions): F-16
QUALCOMM Incorporated| | | | | | | | | | | | | | | | | | | | | Less than 12 months | | | More than 12 months | | | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Corporate bonds and notes | | $ | 634 | | | $ | (6 | ) | | $ | 277 | | | $ | (1 | ) | | Mortgage- and asset-backed securities | | | 123 | | | | (2 | ) | | | 22 | | | | — | | | Non-investment grade debt securities | | | 1,101 | | | | (35 | ) | | | 49 | | | | (2 | ) | | Equity securities | | | 506 | | | | (41 | ) | | | — | | | | — | | | Equity mutual funds and exchange traded funds | | | 58 | | | | (2 | ) | | | — | | | | — | | | | | | | | | | | | | | | | | | | $ | 2,422 | | | $ | (86 | ) | | $ | 348 | | | $ | (3 | ) | | | | | | | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | Less than 12 months | | | More than 12 months | | | | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | | | Value | | | Losses | | | Value | | | Losses | | | U.S. Treasury securities | | $ | — | | | $ | — | | | $ | 64 | | | $ | (1 | ) | | Government-sponsored enterprise securities | | | 159 | | | | (1 | ) | | | — | | | | — | | | Corporate bonds and notes | | | 821 | | | | (6 | ) | | | 182 | | | | (3 | ) | | Mortgage and asset-backed securities | | | 304 | | | | (2 | ) | | | 90 | | | | (1 | ) | | Non-investment grade debt securities | | | 337 | | | | (12 | ) | | | 17 | | | | (1 | ) | | Equity securities | | | 384 | | | | (29 | ) | | | — | | | | — | | | | | | | | | | | | | | | | | | | $ | 2,005 | | | $ | (50 | ) | | $ | 353 | | | $ | (6 | ) | | | | | | | | | | | | | | |
Investment Grade Debt Securities.The Company’s investments in investment grade debt securities consist primarily of investments in certificates of deposit, U.S. Treasury securities, government-sponsored enterprise securities, foreign government bonds, mortgage- and asset-backed securities and corporate bonds and notes. The unrealized losses on the Company’s investments in investment grade debtmarketable securities were caused primarily 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 durationa combination of the unrealized losses were not significant, the Company considered these unrealized losses to be temporary at September 25, 2005.
Non-Investment Grade Debt Securities.The Company’s investments in non-investment grade debt securities consist primarily of investments in corporate bonds. The unrealized losses on the Company’s investment in non-investment grade debt securities were caused by credit quality and industry or company 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 25, 2005.
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 specificshort-term industry-and market-specific events. The duration and severity of the unrealized losses in relation to the carrying amounts of the individual investments were largely consistent with typical equitythe expected volatility of each asset category. The Company’s analysis of market volatility. Current marketresearch, industry reports, economic forecasts supportand the specific circumstances of the issuer indicate that it is reasonable to expect a recovery ofin fair value up to (or beyond) the Company’s cost of the investmentbasis within a reasonable period of time. Accordingly, the Company considered these unrealized losses to be temporary at September 25, 2005.30, 2007.
F-15
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3. Composition of Certain Financial Statement Captions Accounts ReceivableReceivable. | | | | | | | | | | | | | September 25, | | | September 26, | | | | | 2005 | | | 2004 | | | | | (In millions) | | | Trade, net of allowance for doubtful accounts of $2 and $5, respectively | | $ | 506 | | | $ | 529 | | | Long-term contracts | | | 26 | | | | 14 | | | Other | | | 12 | | | | 38 | | | | | | | | | | | | | $ | 544 | | | $ | 581 | | | | | | | | | |
F-17
QUALCOMM Incorporated| | | | | | | | | | | | | September 30, 2007 | | | September 24, 2006 | | | | | (In millions) | | | | | | | | | | | | | Trade, net of allowances for doubtful accounts of $36 and $1, respectively | | $ | 657 | | | $ | 632 | | | Long-term contracts | | | 39 | | | | 44 | | | Other | | | 19 | | | | 24 | | | | | | | | | | | | | $ | 715 | | | $ | 700 | | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
InventoriesInventories.
| | | | | | | | | | | | | | | | | | | | | September 25, | | September 26, | | | September 30, 2007 | | September 24, 2006 | | | | | 2005 | | 2004 | | | (In millions) | | | | | (In millions) | | | | Raw materials | | $ | 23 | | $ | 20 | | | $ | 27 | | $ | 30 | | | Work-in-process | | 6 | | 3 | | | 161 | | 13 | | | Finished goods | | 148 | | 131 | | | 281 | | 207 | | | | | | | | | | | | | | | | | $ | 177 | | $ | 154 | | | $ | 469 | | $ | 250 | | | | | | | | | | | | | |
Property, Plant and EquipmentEquipment. | | | | | | | | | | | | | | | | | | | | | September 25, | | September 26, | | | September 30, 2007 | | September 24, 2006 | | | | | 2005 | | 2004 | | | (In millions) | | | | | (In millions) | | | | Land | | $ | 65 | | $ | 47 | | | $ | 124 | | $ | 76 | | | Buildings and improvements | | 614 | | 413 | | | 954 | | 853 | | | Computer equipment | | 520 | | 430 | | | 800 | | 659 | | | Machinery and equipment | | 544 | | 413 | | | 999 | | 764 | | | Furniture and office equipment | | 33 | | 24 | | | 48 | | 43 | | | Leasehold improvements | | 107 | | 54 | | | 205 | | 171 | | | Property under capital leases | | 2 | | — | | | | | | | | | | | | | | | | | | 1,885 | | 1,381 | | | 3,130 | | 2,566 | | | | | | | Less accumulated depreciation and amortization | | | (863 | ) | | | (706 | ) | | | (1,342 | ) | | | (1,084 | ) | | | | | | | | | | | | | | | | $ | 1,022 | | $ | 675 | | | $ | 1,788 | | $ | 1,482 | | | | | | | | | | | | | |
Depreciation and amortization expense from continuing operations related to property, plant and equipment for fiscal 2007, 2006 and 2005 2004was $317 million, $239 million and 2003 was $177 million, $133respectively. The net book values of property under capital leases included in buildings and improvements were $91 million and $117$58 million at September 30, 2007 and September 24, 2006, respectively. These capital leases principally related to base station towers and buildings. Amortization of assets recorded under capital leases is included in depreciation expense. Capital lease additions during fiscal 2007, 2006 and 2005 were $33 million, $56 million and $3 million, respectively. At September 25, 200530, 2007 and September 26, 2004,24, 2006, buildings and improvements and leasehold improvements with a net book valuevalues of $36$7 million and $38$19 million, respectively, including accumulated depreciation and amortization of $30$3 million and $27$15 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 four years from fiscal 2006is expected to 2009 are $9 million, $9 million, $7 million andbe $1 million respectively. F-18
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSin both fiscal 2008 and 2009 and negligible in fiscal 2010.
Goodwill and Other Intangible Assets.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 25, 200530, 2007 as follows: $298$422 million in QUALCOMMQualcomm CDMA Technologies, $73$684 million in QUALCOMMQualcomm Technology Licensing, $72$91 million in QUALCOMMQualcomm Wireless & Internet, and $128 million in QUALCOMMQualcomm MEMS Technology (a nonreportable segment F-16
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS included in reconciling items in Note 10). The increase in goodwill from September 26, 200424, 2006 to September 25, 200530, 2007 was the result of the Company’s business acquisitions (Note 11), partially offset by currency translation adjustments.adjustments and tax deductions resulting from the exercise of stock options that were vested as of the business acquisition date. The components of purchased intangible assets, which are included in other assets, were as follows (in millions): | | | | | | | | | | | | | | | | | | | | | September 25, 2005 | | | September 26, 2004 | | | | | Gross | | | | | | Gross | | | | | | | | Carrying | | | Accumulated | | | Carrying | | | Accumulated | | | | | Amount | | | Amortization | | | Amount | | | Amortization | | | | Wireless licenses | | $ | 164 | | | $ | (17 | ) | | $ | 77 | | | $ | (11 | ) | | Marketing-related | | | 21 | | | | (9 | ) | | | 21 | | | | (8 | ) | | Technology-based | | | 116 | | | | (48 | ) | | | 77 | | | | (37 | ) | | Customer-related | | | 17 | | | | (13 | ) | | | 15 | | | | (12 | ) | | Other | | | 7 | | | | (1 | ) | | | 7 | | | | (1 | ) | | | | | | | | | | | | | | | | Total intangible assets | | $ | 325 | | | $ | (88 | ) | | $ | 197 | | | $ | (69 | ) | | | | | | | | | | | | | | |
Wireless licenses increased as a result of the Company’s acquisition of additional 700MHz spectrum in the United States during fiscal 2005 for its MediaFLO USA business (Note 10). Increases in other intangible asset categories primarily resulted from acquisitions during fiscal 2005 (Note 11).| | | | | | | | | | | | | | | | | | | | | September 30, 2007 | | | September 24, 2006 | | | | | Gross Carrying | | | Accumulated | | | Gross Carrying | | | Accumulated | | | | | Amount | | | Amortization | | | Amount | | | Amortization | | | | | | | | | | | | | | | | | | | | | Wireless licenses | | $ | 262 | | | $ | (30 | ) | | $ | 238 | | | $ | (22 | ) | | Marketing-related | | | 23 | | | | (13 | ) | | | 21 | | | | (11 | ) | | Technology-based | | | 502 | | | | (97 | ) | | | 257 | | | | (43 | ) | | Customer-related | | | 16 | | | | (5 | ) | | | 6 | | | | (2 | ) | | Other | | | 7 | | | | (1 | ) | | | 7 | | | | (1 | ) | | | | | | | | | | | | | | | | | | $ | 810 | | | $ | (146 | ) | | $ | 529 | | | $ | (79 | ) | | | | | | | | | | | | | | |
All of the Company’s purchased intangible assets other than certain wireless licenses in the amount of $84$174 million and goodwill are subject to amortization. Amortization expense from continuing operations for fiscal 2005, 2004 and 2003 was $19 million, $17 million and $18 million, respectively. Amortization expense related to these purchased intangible assets for fiscal 2007, 2006 and 2005 was $68 million, $32 million and $19 million, respectively, and is expected to be $22 million in fiscal 2006, $19 million in fiscal 2007, $16$67 million in fiscal 2008, $15$58 million in fiscal 2009, and $14$52 million in fiscal 2010.2010, $49 million in fiscal 2011, $41 million in fiscal 2012, and $223 million thereafter. Capitalized software development costs, which are included in other assets, were $43$14 million and $44$27 million at September 25, 200530, 2007 and September 26, 2004,24, 2006, respectively. Accumulated amortization on capitalized software was $42$14 million and $39$27 million at September 25, 200530, 2007 and September 26, 2004,24, 2006, respectively. Amortization expense from continuing operations related to capitalized software forwas negligible in fiscal 2005, 20042007 and 2003 was $1 million and $4 million $13 millionin fiscal 2006 and $12 million,2005, respectively. Note 4. Investments in Other Entities Inquam Limited.Since October 2000, the Company and another investor (the Other Investor) have provided equity and debt funding to Inquam Limited (Inquam). Inquam owns, develops and manages wireless CDMA-based communications systems, either directly or indirectly, primarily in Romania and Portugal. The Company recorded $33 million in equity in losses of Inquam during fiscal 2005, as compared to $59 million and $99 million for fiscal 2004 and 2003, respectively. At September 25, 2005 and September 26, 2004, the Company’s equity and debt investments in Inquam totaled $26 million and $42 million, respectively, net of equity in losses. The Company had no remaining funding commitment under its bridge loan agreement at September 25, 2005. During fiscal 2005, Inquam secured new long-term financing (the new facilities). The Company and the Other Investor each guaranteed 50% of a portion of the amounts owed under certain of the new facilities, up to a combined maximum of $54 million. Amounts outstanding under the new facilities subject to the guarantee totaled $49 million as of September 25, 2005. The guarantee expires and the new facilities mature on December 25, 2011.
F-19
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October 2005, the Company and the Other Investor agreed to restructure Inquam. Upon close of the restructuring, which is expected to occur in the first half of fiscal 2006, the Portugal companies will be spun-off through the exchange of portions of the Company’s and the Other Investor’s debt investments for direct equity interests in the Portugal companies. Inquam, which will continue to own the Romania companies, will repurchase certain minority equity interests. Immediately after the restructuring, the Company will hold an approximate 49.7% equity interest in Inquam and a 23% equity interest in the Portugal companies, which is expected to be reduced over time as the Other Investor makes the further investments in the Portugal companies contemplated by the restructuring agreements. In addition, the Company and the Other Investor will have a put-call option arrangement. Under this arrangement, the Other Investor will have the right to buy the Company’s equity and debt investments in Inquam, subject to certain conditions, by exercising its call option, which will expire no later than May 14, 2008. The minimum purchase price will be approximately $66 million. In the event that the Other Investor’s call option expires, or in certain other circumstances prior to that date, the Company will have the right to sell our equity and debt investments in Inquam to the Other Investor at a minimum sales price of $66 million. Such right will expire after six months. The Company does not anticipate providing any further funding to Inquam or to the Portugal companies.
Inquam’s summarized financial information, derived from its unaudited financial statements, is as follows (in millions):
| | | | | | | | | | | | | September 25, | | | September 26, | | | | | 2005 | | | 2004 | | | Balance sheet: | | | | | | | | | | Current assets | | $ | 41 | | | $ | 40 | | | Noncurrent assets | | | 156 | | | | 152 | | | | | | | | | | | Total assets | | $ | 197 | | | $ | 192 | | | | | | | | | | | Current liabilities | | $ | 60 | | | $ | 123 | | | Noncurrent liabilities | | | 273 | | | | 132 | | | | | | | | | | | Total liabilities | | $ | 333 | | | $ | 255 | | | | | | | | | |
| | | | | | | | | | | | | | | | | Year Ended | | | | | September 25, | | | September 26, | | | September 28, | | | | | 2005 | | | 2004 | | | 2003 | | | Income statement: | | | | | | | | | | | | | | Net revenues | | $ | 111 | | | $ | 88 | | | $ | 50 | | | | | | | | | | | | | | Gross profit (loss) | | | 53 | | | | 35 | | | | (2 | ) | | | | | | | | | | | | | Net loss | | $ | (73 | ) | | $ | (136 | ) | | $ | (205 | ) | | | | | | | | | | | |
Other.Other strategicStrategic equity investments as of September 25, 200530, 2007 and September 26, 200424, 2006 totaled $96$114 million and $123$94 million, respectively, including $40$86 million and $50$73 million, respectively, accounted for using the cost method. Differences between the carrying amounts of certain other strategic equity investments accounted for using the equity method investments and the Company’s underlying equity in the net assets of those investees were not significant at September 25, 200530, 2007 and September 26, 2004.24, 2006. At September 25, 2005,30, 2007, effective ownership interests in theseequity method investees ranged from approximately 7%19% to 50%.
Funding commitments related to these investments totaled $13$7 million at September 25, 2005,30, 2007, 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)net was comprised as follows (in millions): | | | | | | | | | | | | | | | | | 2007 | | | 2006 | | | 2005 | | | | | | | | | | | | | | | | | Interest and dividend income | | $ | 558 | | | $ | 416 | | | $ | 256 | | | Interest expense | | | (11 | ) | | | (4 | ) | | | (3 | ) | | Net realized gains on marketable securities | | | 218 | | | | 129 | | | | 167 | | | Net realized gains on other investments | | | 4 | | | | 7 | | | | 12 | | | Other-than-temporary losses on marketable securities | | | (16 | ) | | | (20 | ) | | | (13 | ) | | Other-than-temporary losses on other investments | | | (11 | ) | | | (4 | ) | | | (1 | ) | | Gains (losses) on derivative instruments | | | 2 | | | | (29 | ) | | | 33 | | | Equity in losses of investees | | | (1 | ) | | | (29 | ) | | | (28 | ) | | | | | | | | | | | | | | | $ | 743 | | | $ | 466 | | | $ | 423 | | | | | | | | | | | | |
F-20F-17
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | Year Ended | | | | | September 25, | | | September 26, | | | September 28, | | | | | 2005 | | | 2004 | | | 2003 | | | Interest and dividend income | | $ | 256 | | | $ | 175 | | | $ | 158 | | | Interest expense | | | (3 | ) | | | (2 | ) | | | (2 | ) | | Net realized gains on marketable securities | | | 167 | | | | 88 | | | | 73 | | | Net realized gains on other investments | | | 12 | | | | — | | | | 7 | | | Other-than-temporary losses on marketable securities | | | (13 | ) | | | (12 | ) | | | (100 | ) | | Other-than-temporary losses on other investments | | | (1 | ) | | | — | | | | (28 | ) | | Gains on derivative instruments | | | 33 | | | | 7 | | | | (3 | ) | | Equity in losses of investees | | | (28 | ) | | | (72 | ) | | | (113 | ) | | | | | | | | | | | | | | | $ | 423 | | | $ | 184 | | | $ | (8 | ) | | | | | | | | | | | |
The Company had various financing arrangements, including a bridge loan facility, an equipment loan facility, and interim and additional loan facilities with a wholly owned subsidiary of Pegaso Telecomunicaciones, S.A. de C.V., a CDMA wireless operator in Mexico (Pegaso). Pegaso paid the loan facilities in full, including accrued interest, during fiscal 2003 and 2004. The Company recognized $12 million and $41 million in interest income related to the Pegaso financing arrangements during fiscal 2004 and 2003, respectively.
Note 6. Income Taxes The components of the income tax provision were as follows (in millions): | | | | | | | | | | | | | | | | | | Year Ended | | | | | | September 25, | | September 26, | | September 28, | | | | | | | | | | | | | | | | | 2005 | | 2004 | | 2003 | | | 2007 | | 2006 | | 2005 | | | Current provision: | | | | Federal | | $ | 77 | | $ | 115 | | $ | 299 | | | $ | 192 | | $ | 299 | | $ | 77 | | | State | | 42 | | 60 | | 57 | | | 37 | | 88 | | 42 | | | Foreign | | 140 | | 157 | | 119 | | | 185 | | 156 | | 140 | | | | | | | | | | | | | | | | | | | | | 259 | | 332 | | 475 | | | 414 | | 543 | | 259 | | | | | | | | | | | | | | | | | | | | | | | Deferred provision (benefit): | | | | Deferred provision: | | | | Federal | | 398 | | 227 | | 45 | | | | (75 | ) | | 165 | | 398 | | | State | | 9 | | 29 | | 16 | | | | (15 | ) | | | (23 | ) | | 9 | | | Foreign | | | | (1 | ) | | 1 | | — | | | | | 407 | | 256 | | 61 | | | | | | | | | | | | | | | | | | | | (91 | ) | | 143 | | 407 | | | | | $ | 666 | | $ | 588 | | $ | 536 | | | | | | | | | | | | | | | | | | | $ | 323 | | $ | 686 | | $ | 666 | | | | | | | | | | | |
The foreign component of the income tax provision consists primarily of foreign withholding taxes on royalty income included in United States earnings. The components of earnings from continuing operationsincome before income taxes by United States and foreign jurisdictions were as follows (in millions): | | | | | | | | | | | | | | | | | Year Ended | | | | | September 25, | | | September 26, | | | September 28, | | | | | 2005 | | | 2004 | | | 2003 | | | United States | | $ | 1,570 | | | $ | 1,571 | | | $ | 1,163 | | | Foreign | | | 1,239 | | | | 742 | | | | 402 | | | | | | | | | | | | | | Earnings from continuing operations before income taxes | | $ | 2,809 | | | $ | 2,313 | | | $ | 1,565 | | | | | | | | | | | | |
F-21
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS| | | | | | | | | | | | | | | | | 2007 | | | 2006 | | | 2005 | | | United States | | $ | 1,681 | | | $ | 1,445 | | | $ | 1,570 | | | Foreign | | | 1,945 | | | | 1,711 | | | | 1,239 | | | | | | | | | | | | | | | | $ | 3,626 | | | $ | 3,156 | | | $ | 2,809 | | | | | | | | | | | | |
The following is a reconciliation of the expected statutory federal income tax provision to the Company’s actual income tax provision (in millions): | | | | | | | | | | | | | | | | | | Year Ended | | | | | | September 25, | | September 26, | | September 28, | | | | | | | | | | | | | | | | | 2005 | | 2004 | | 2003 | | | 2007 | | 2006 | | 2005 | | | Expected income tax provision at federal statutory tax rate | | $ | 983 | | $ | 809 | | $ | 548 | | | $ | 1,269 | | $ | 1,105 | | $ | 983 | | | State income tax provision, net of federal benefit | | 109 | | 91 | | 61 | | | 180 | | 176 | | 109 | | | Foreign income taxed at other than U.S. rates | | | | (710 | ) | | | (474 | ) | | | (290 | ) | | Tax audit settlements | | | | (331 | ) | | | (73 | ) | | — | | | Tax credits | | | | (91 | ) | | | (36 | ) | | | (66 | ) | | Valuation allowance | | | | (7 | ) | | | (46 | ) | | | (78 | ) | | One-time dividend | | 35 | | — | | — | | | — | | — | | 35 | | | Foreign income taxed at other than U.S. rates | | | (290 | ) | | | (215 | ) | | | (59 | ) | | | Valuation allowance | | | (78 | ) | | | (44 | ) | | — | | | | Tax credits | | | (66 | ) | | | (49 | ) | | | (32 | ) | | | Other | | | (27 | ) | | | (4 | ) | | 18 | | | 13 | | 34 | | | (27 | ) | | | | | | | | | | | | | | | | | | Income tax expense | | $ | 666 | | $ | 588 | | $ | 536 | | | $ | 323 | | $ | 686 | | $ | 666 | | | | | | | | | | | | | | | | | |
The Company has not provided for United States income taxes and foreign withholding taxes on a cumulative total of approximately $1.2$4.7 billion of undistributed earnings from certain non-United States subsidiaries indefinitely 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. On October 22, 2004, theThe American Jobs Creation Act of 2004 (the Jobs Creation Act) was signed into law. The Jobs Creation Act created a temporary incentive for corporations in the United States to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations. In the fourth quarter of fiscal 2005, 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 reinvest indefinitely reinvestthe undistributed earnings of certain of its foreign subsidiaries in operations outside the United States. The Company had net deferredDuring fiscal 2007, the Internal Revenue Service completed audits of the Company’s tax assets as follows (in millions): | | | | | | | | | | | | | September 25, | | | September 26, | | | | | 2005 | | | 2004 | | | Accrued liabilities, reserves and other | | $ | 199 | | | $ | 139 | | | Deferred revenues | | | 76 | | | | 133 | | | Unrealized losses on marketable securities | | | 5 | | | | 5 | | | Unused net operating losses | | | 13 | | | | — | | | Capital loss carryover | | | 161 | | | | 249 | | | Tax credits | | | 346 | | | | 454 | | | Unrealized losses on investments | | | 137 | | | | 169 | | | | | | | | | | | Total gross deferred assets | | | 937 | | | | 1,149 | | | Valuation allowance | | | (69 | ) | | | (139 | ) | | | | | | | | | | Total net deferred assets | | $ | 868 | | | $ | 1,010 | | | | | | | | | | | | | | | | | | | | | Purchased intangible assets | | | (17 | ) | | | (8 | ) | | Deferred contract costs | | | (18 | ) | | | (26 | ) | | Unrealized gains on marketable securities | | | (50 | ) | | | (33 | ) | | Other basis differences | | | (1 | ) | | | (43 | ) | | | | | | | | | | Total deferred liabilities | | $ | (86 | ) | | $ | (110 | ) | | | | | | | | |
F-22F-18
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
audits of the Company’s tax returns for fiscal 2001 and 2002, resulting in adjustments to the Company’s net operating loss and credit carryover amounts for those years. The tax provision was reduced by $331 million and $73 million during fiscal 2007 and 2006, respectively, to reflect the known and expected impacts of the audits on the reviewed and open tax years. The Company had net deferred tax assets and deferred tax liabilities as follows (in millions): | | | | | | | | | | | | | September 30, 2007 | | | September 24, 2006 | | | | | | | | | | | | | Accrued liabilities, reserves and other | | $ | 246 | | | $ | 169 | | | Share-based compensation | | | 295 | | | | 164 | | | Capitalized start-up and organizational costs | | | 86 | | | | 46 | | | Deferred revenue | | | 70 | | | | 55 | | | Unrealized losses on marketable securities | | | 59 | | | | 43 | | | Unrealized losses on other investments | | | 124 | | | | 145 | | | Capital loss carryover | | | 9 | | | | 82 | | | Tax credits | | | 91 | | | | 129 | | | Unused net operating losses | | | 80 | | | | 59 | | | Other basis differences | | | 18 | | | | 22 | | | | | | | | | | | Total gross deferred assets | | | 1,078 | | | | 914 | | | Valuation allowance | | | (20 | ) | | | (22 | ) | | | | | | | | | | Total net deferred assets | | | 1,058 | | | | 892 | | | | | | | | | | | | | | | | | | | | | Purchased intangible assets | | | (99 | ) | | | (79 | ) | | Deferred contract costs | | | (6 | ) | | | (6 | ) | | Unrealized gains on marketable securities | | | (179 | ) | | | (67 | ) | | Property, plant and equipment | | | (26 | ) | | | (10 | ) | | | | | | | | | | Total deferred liabilities | | | (310 | ) | | | (162 | ) | | | | | | | | | | Net deferred assets | | $ | 748 | | | $ | 730 | | | | | | | | | | | | | | | | | | | | | Reported as: | | | | | | | | | | Current deferred tax assets | | $ | 435 | | | $ | 235 | | Current deferred tax liabilities(1) | | | — | | | | (1 | ) | | Non-current deferred tax assets | | | 318 | | | | 512 | | Non-current deferred tax liabilities(2) | | | (5 | ) | | | (16 | ) | | | | | | | | | | | | $ | 748 | | | $ | 730 | | | | | | | | | |
| | | | (1) | | Included in other current liabilities in the consolidated balance sheets. | | | (2) | | Included in other liabilities in the consolidated balance sheets. |
At September 30, 2007, the Company had unused federal net operating loss carryforwards of $206 million expiring from 2019 through 2026, unused state net operating loss carryforwards of $98 million expiring from 2008 through 2016, and unused foreign net operating loss carryforwards of $75 million, with $57 million expiring from 2008 through 2016. At September 30, 2007, the Company had unused federal income tax credits of $195 million, with $185 million expiring from 2022 through 2027, and state income tax credits of $9 million, which do not expire. The Company does not expect its federal and state net operating loss carryforwards and its federal income tax credits to expire unused. The Company believes, more likely than not, that it will have sufficient taxable income after stock option related deductions to utilize the majority of its deferred tax assets. As of September 25, 2005,30, 2007, the Company has provided a valuation allowance on foreign net operating losses and net capital losses of $62 million.$14 million and $6 million, respectively. The valuation allowance related to capital losses reflectsallowances reflect the uncertainty surrounding the Company’s ability to generate sufficient future taxable income in certain foreign tax jurisdictions to utilize its foreign net operating losses and the Company’s ability to generate sufficient capital gains to utilize all capital losses. Deferred tax assets, net of valuation allowance, decreased by approximately $142 million from September 26, 2004 to September 25, 2005 primarily due to the use of tax credits as a result of continued profitable operations in excess of tax benefits from stock option expense, partially offset by a decrease in the valuation allowance related to capital loss carryover. At September 25, 2005 and September 26, 2004, the Company had federal, state and foreign taxes payable of approximately $69 million and $27 million, respectively, included in other current liabilities.
At September 25, 2005, the Company had unused federal and state income tax credits of $670 million and $93 million, respectively, generally expiring from 2006 through 2024. The Company does not expect these credits to expire unused.
Cash amounts paid for income taxes, net of refunds received, were $168$233 million, $127$172 million and $125$168 million for fiscal 2005, 20042007, 2006 and 2003,2005, respectively. The income taxes paid primarily relate to foreign withholding taxes. F-19
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7. Capital Stock Preferred Stock.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, 4,000,000 shares of preferred stock are designated as Series A Junior Participating Preferred Stock and such shares are reserved for issuance upon exercise of the preferred share purchase rights. At September 25, 200530, 2007 and September 26, 2004,24, 2006, no shares of preferred stock were outstanding. Preferred Share Purchase Rights Agreement.The Company has a Preferred Share Purchase Rights Agreement (Rights Agreement) to protect stockholders’ interests in the event of a proposed takeover of the Company. Under the original Rights 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 Agreement, as amended and restated on September 26, 2005,December 7, 2006, each Right entitles the registered holder to purchase from the Company a one one-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 $180. The Rights are exercisable only if a person or group (an Acquiring Person) acquires beneficial ownership of 15%20% or more of the Company’s outstanding shares of common stock without Board approval. Upon exercise, holders, other than an Acquiring Person, will have the right, subject to termination, to receive the Company’s common stock or other securities, cash or other assets having a market value, as defined, equal to twice such purchase price. The Rights, which expire on September 25, 2015, are redeemable in whole, but not in part, at the Company’s option prior to the time such rightsRights are triggered for a price of $0.001 per Right. Stock Repurchase Program.On March 8, 2005,May 22, 2007, the Company announced that it had been authorized theto repurchase of up to $2$3.0 billion of the Company’s common stock. The $3.0 billion stock underrepurchase program replaced a $2.5 billion stock repurchase program, withof which approximately $0.9 billion remained authorized for repurchases. The stock repurchase program has no expiration date. When stock is repurchased and retired, the amount paid in excess of par value is recorded to paid-in capital. During fiscal 2007, 2006 and 2005, the Company repurchased and retired 37,263,000, 34,000,000 and 27,083,000 shares of common stock for $1.5 billion, $1.5 billion and $953 million, respectively, excluding $9 million and $5 million of premiums received related to put options that were exercised in fiscal 2007 and 2006, respectively. At September 30, 2007, approximately $1.5 billion remained authorized for repurchases under the stock repurchase program, net of put options outstanding. In the period from October 1, 2007 through November 7, 2007, we repurchased and retired 12,720,000 shares of the Company’s common stock for approximately $525 million. In connection with the Company’s stock repurchase program, the Company sold put options under this program.on its own stock during fiscal 2007, 2006 and 2005. At September 25, 2005,30, 2007, the Company had two outstanding put options with expiration datesenabling holders to sell 5,000,000 shares of December 7, 2005 and March 21, 2006, that may requirethe Company’s common stock to the Company to purchase 11,500,000 shares of its common stock upon exercise for $411approximately $189 million (net of the put option premiums received)., and the recorded values of the put option liabilities totaled $10 million. Any shares repurchasedpurchased upon the exercise of the put options will be retired. The recordedDuring fiscal 2007 and 2006, the Company recognized $3 million and $29 million, respectively, in investment losses due to net increases in the fair values of the put option liabilities totaled $7options, net of premiums received of $17 million at September 25, 2005.and $11 million, respectively. During fiscal 2005, the Company recognized $16gains of $31 million in investment income due to decreases in the fair values of the put options and $15 million in investment income from premiums received on a put option that expired unexercised. At September 25, 2005, $636 million remained authorized for repurchases under this program. On February 10, 2003, the Company had authorized the repurchase of up to $1 billion of the Company’s common stock over a two-year period. The Company did not repurchase any of the Company’s common stock under this program during fiscal 2004; however, the Company did sell put options. The Company repurchased all of the put options during fiscal 2004. The net gain recorded in investment income during fiscal 2004 related to the put options, including premiums received was $5of $15 million.
F-23
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During fiscal 2003, the Company repurchased and retired 9,831,000 shares of common stock for $166 million and sold put options. The put options expired worthless during fiscal 2003. The $7 million in premiums received from the put options were recorded as paid-in capital.
Dividends.On March 2, 2004, theThe Company announced an increaseincreases in its quarterly dividend from $0.035 to $0.050 per share onof common stock. On July 13, 2004, the Company announced an increase in its quarterly dividendstock from $0.050$0.07 to $0.070 per share$0.09 on common stock. On March 8, 2005, the Company announced an increase in its quarterly dividend from $0.070$0.09 to $0.090 per share$0.12 on common stock.March 7, 2006 and from $0.12 to $0.14 on March 13, 2007. Cash dividends announced in fiscal 20052007, 2006 and 20042005 were as follows (in millions, except per share data): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2005 | | 2004 | | | 2007 | | 2006 | | 2005 | | | | | Per Share | | Total | | Per Share | | Total | | | Per Share | | Total | | Per Share | | Total | | Per Share | | Total | | | First quarter | | $ | 0.070 | | $ | 115 | | $ | 0.070 | (1) | | $ | 112 | | | $ | 0.12 | | $ | 198 | | $ | 0.09 | | $ | 148 | | $ | 0.07 | | $ | 115 | | | Second quarter | | 0.070 | | 115 | | 0.050 | | 81 | | | 0.12 | | 200 | | 0.09 | | 150 | | 0.07 | | 115 | | | Third quarter | | 0.090 | | 147 | | | — | (2) | | — | | | 0.14 | | 234 | | 0.12 | | 202 | | 0.09 | | 147 | | | Fourth quarter | | 0.090 | | 147 | | 0.070 | | 114 | | | 0.14 | | 230 | | 0.12 | | 198 | | 0.09 | | 147 | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 0.320 | | $ | 524 | | $ | 0.190 | | $ | 307 | | | | | | | | | | | | | | | $ | 0.52 | | $ | 862 | | $ | 0.42 | | $ | 698 | | $ | 0.32 | | $ | 524 | | | | | | | | | | | | | | | | | |
F-20
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | | | | | (1) In the first quarter of fiscal 2004, the Company announced two dividends of $0.035 per share which were paid in the first and second quarters of fiscal 2004. | | | | (2) The Company paid a dividend of $0.05 per share in the third quarter of fiscal 2004 that had been announced in the second quarter of fiscal 2004. |
On October 10, 2005,11, 2007, the Company announced a cash dividend of $0.09$0.14 per share on the Company’s common stock, payable on January 4, 20062008 to stockholders of record as of December 7, 2005,2007, which will be reflected in the consolidated financial statements in the first quarter of fiscal 2006.2008. Note 8. Employee Benefit Plans Employee Savings and Retirement Plan.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 2007, 2006 and 2005 2004 and 2003 was $27$39 million, $21$33 million and $20$27 million, respectively. Stock OptionEquity 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 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 fiveperiods not exceeding four years and are exercisable for up to 10ten years from the grant date. At September 25, 2005, options for approximately 120,298,000 shares under both plans were exercisable at prices ranging from $1.93 to $86.19 per share for an aggregate exercise price of $2.6 billion. The 2001 Non-Employee Directors’ Stock Option Plan (the 2001 Directors’ Plan) was adopted and replaced the 1998 Non-Employee Directors’ Stock Option Plan (the 1998 Directors’ Plan). Options granted under the 1998 Directors’ Plan remain outstanding until exercised or cancelled. The shares reserved under the 2001 Directors’ Plan are equal to the number of shares available for future grant under the 1998 Directors’ Plan on the date the 2001 Directors’ Plan was approved by the Company’s stockholders. At that date, 4,100,000 shares were available for future grants under the 2001 Directors’ Plan. The Company may terminate the 2001 Directors’ Plan at any time. This plan provides for non-qualified stock options to be granted to non-employee directors at fair market value, vesting over periods not exceeding five years and are exercisable for up to 10 years from the grant date. At September 25, 2005, options for approximately 3,393,000 shares under both plans were exercisable at prices ranging from $2.91 to $66.50 per share for an aggregate exercise price of $35 million.
F-24
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In fiscal 2005, the Company assumed 723,000 and 42,000 of the outstanding stock options under the Iridigm Display Corporation 2000 Stock Plan and the Spike Technologies, Inc. 1998 Stock Option Plan, respectively, related to those acquisitions (Note 11). Both plans expired on the dates of the acquisitions, and no additional shares may be granted under those plans. Both incentive stock options and non-qualified stock options are outstanding under both plans. Generally, options outstanding vest over periods not exceeding five years and are exercisable for up to 10 years from the grant date. At September 25, 2005, options for approximately 559,000 shares under both plans were exercisable at prices ranging from $0.09 to $38.48 per share for an aggregate purchase price of $16 million.
A summary of stock option transactions for theall stock option plans follows (number of shares in thousands):follows: | | | | | | | | | | | | | | | | | | | | | Options | | Options Outstanding | | | | Shares | | | | | | Exercise Price Per Share | | | | Available | | Number | | | | | | Weighted | | | | for Grant | | of Shares | | Range | | Average | Balance at September 29, 2002 | | | 48,868 | | | | 234,548 | | | $0.07 to $86.19 | | $ | 14.73 | | | Plan shares expired | | | (4 | ) | | | — | | | | — | | | | — | | | Options granted | | | (33,664 | ) | | | 33,664 | | | | 14.55 to 22.87 | | | | 17.42 | | | Options cancelled | | | 8,546 | | | | (8,546 | ) | | | 0.79 to 73.94 | | | | 24.15 | | | Options exercised | | | — | | | | (46,694 | ) | | | 0.15 to 19.57 | | | | 3.28 | | | | | | | | | | | | | | | | | | | | Balance at September 28, 2003 | | | 23,746 | | | | 212,972 | | | $0.07 to $86.19 | | $ | 17.28 | | | Additional shares reserved | | | 64,000 | | | | — | | | | — | | | | — | | | Options granted | | | (31,252 | ) | | | 31,252 | | | | 21.50 to 40.40 | | | | 27.19 | | | Options cancelled | | | 4,420 | | | | (4,420 | ) | | | 2.30 to 70.00 | | | | 28.15 | | | Options exercised | | | — | | | | (36,220 | ) | | | 0.14 to 37.34 | | | | 7.85 | | | | | | | | | | | | | | | | | | | | Balance at September 26, 2004 | | | 60,914 | | | | 203,584 | | | $0.07 to $86.19 | | $ | 20.25 | | | Additional shares reserved (a) | | | 765 | | | | — | | | | — | | | | — | | | Options assumed (a) | | | (765 | ) | | | 765 | | | | 0.09 to 38.48 | | | | 24.32 | | | Plan shares expired (b) | | | (57 | ) | | | — | | | | — | | | | — | | | Options granted | | | (34,434 | ) | | | 34,434 | | | | 33.01 to 44.55 | | | | 38.51 | | | Options cancelled | | | 5,821 | | | | (5,821 | ) | | | 1.60 to 70.00 | | | | 31.16 | | | Options exercised | | | — | | | | (30,168 | ) | | | 0.07 to 43.00 | | | | 11.52 | | | | | | | | | | | | | | | | | | | | Balance at September 25, 2005 | | | 32,244 | | | | 202,794 | | | $0.09 to $86.19 | | $ | 24.35 | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | Weighted Average | | Average Remaining | | Aggregate Intrinsic | | | | Number of Shares | | Exercise | | Contractual Term | | Value | | | | (In thousands) | | Price | | (Years) | | (In billions) | Outstanding at September 24, 2006 | | | 201,855 | | | $ | 29.20 | | | | | | | | | | | Options granted | | | 38,933 | | | | 40.28 | | | | | | | | | | | Options cancelled/forfeited/expired | | | (5,855 | ) | | | 39.83 | | | | | | | | | | | Options exercised | | | (28,479 | ) | | | 16.83 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Options outstanding at September 30, 2007 | | | 206,454 | | | $ | 32.69 | | | | 6.14 | | | $ | 2.2 | | | | | | | | | | | | | | | | | | | | Exercisable at September 30, 2007 | | | 124,219 | | | $ | 28.15 | | | | 4.70 | | | $ | 1.9 | | | | | | | | | | | | | | | | | | | |
| | | (a) | | Represents activity related to options that were assumed as a result of the acquisitions of Iridigm in October 2004 and Spike in November 2004 (Note 11). | | (b) | | Represents shares available for future grant cancelled pursuant to the Iridigm and Spike acquisitions. |
Net stock options, after forfeitures and cancellations, granted during fiscal 2007, 2006 and 2005 2004represented 2.0%, 1.9% and 2003 represented 1.8%, 1.7% and 1.6% of outstanding shares as of the beginning of each fiscal year, respectively. Total stock options granted during fiscal 2007, 2006 and 2005 2004represented 2.3%, 2.1% and 2003 represented 2.1%, 1.9% and 2.1%respectively, of outstanding shares as of the end of each fiscal year, respectively.year. Information about fixedThe Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock options outstanding at September 25, 2005 follows (numberprice as well as assumptions regarding a number of shares in thousands):highly F-25F-21
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | | | Options Outstanding | | | | | | | | | | Weighted | | | | | | | | | | | | | | Average | | | | | | Options Exercisable | | | | | | | | Remaining | | Weighted | | | | | | Weighted | | | | | | | | Contractual | | Average | | | | | | Average | | Range of | | Number | | Life | | Exercise | | Number | | Exercise | | Exercise Prices | | of Shares | | (In Years) | | Price | | of Shares | | Price | | $0.09 to $3.51 | | | 28,805 | | | | 2.16 | | | $ | 3.08 | | | | 28,792 | | | $ | 3.08 | | | $3.52 to $16.47 | | | 34,168 | | | | 5.27 | | | | 11.88 | | | | 24,165 | | | | 10.07 | | | $16.63 to $22.44 | | | 31,515 | | | | 7.53 | | | | 20.11 | | | | 13,500 | | | | 19.72 | | | $22.77 to $29.21 | | | 31,604 | | | | 5.99 | | | | 27.20 | | | | 23,334 | | | | 27.14 | | | $29.31 to $33.57 | | | 29,899 | | | | 8.35 | | | | 33.05 | | | | 8,412 | | | | 32.64 | | | $33.69 to $42.16 | | | 31,137 | | | | 7.31 | | | | 39.19 | | | | 15,392 | | | | 38.31 | | | $42.25 to $44.55 | | | 11,585 | | | | 6.95 | | | | 43.27 | | | | 6,823 | | | | 43.07 | | | $45.56 to $86.19 | | | 4,081 | | | | 4.51 | | | | 58.65 | | | | 4,073 | | | | 58.66 | | | | | | | | | | | | | | | | | | | | | | | | | | | | 202,794 | | | | 6.14 | | | $ | 24.35 | | | | 124,491 | | | $ | 21.11 | | | | | | | | | | | | | | | | | | | | | | | |
There were approximately 124,650,000 options exercisable with a weighted average exercise price of $17.41 per share atcomplex and subjective variables. At September 26, 2004. There were approximately 129,990,000 options exercisable with a weighted average exercise price of $13.42 per share at September 28, 2003.
Information about30, 2007, total unrecognized estimated compensation cost related to non-vested stock options outstanding at September 25, 2005 withgranted prior to that date was $1.3 billion, which is expected to be recognized over a weighted-average period of 3.4 years. Total share-based compensation cost capitalized as part of inventory and fixed assets was $1 million during both fiscal 2007 and 2006. The total intrinsic value of stock options exercised during fiscal 2007 and 2006 was $708 million and $1.1 billion, respectively. The Company recorded cash received from the exercise prices less than or above $44.76 per share,of stock options of $479 million and $608 million and related tax benefits of $272 million and $421 million during fiscal 2007 and 2006, respectively. Upon option exercise, the closing price at September 25, 2005, follows (numberCompany issues new shares 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 $44.76 | | | 120,418 | | | $ | 19.84 | | | | 78,295 | | | $ | 29.48 | | | | 198,713 | | | $ | 23.64 | | | Above $44.76 | | | 4,073 | | | | 58.66 | | | | 8 | | | | 54.32 | | | | 4,081 | | | | 58.65 | | | | | | | | | | | | | | | | | | | | | | | | | | Total outstanding | | | 124,491 | | | $ | 21.11 | | | | 78,303 | | | $ | 29.48 | | | | 202,794 | | | $ | 24.35 | | | | | | | | | | | | | | | | | | | | | | | | |
Employee Stock Purchase Plans.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 2007, 2006 and 2005, 2004approximately 2,650,000, 2,220,000 and 2003, approximately 1,786,000 2,205,000 and 2,744,000 shares were issued under the plans at an average price of $29.63, $18.60$32.08, $31.10 and $13.20$29.63 per share, respectively. At September 25, 2005,30, 2007, approximately 15,446,00010,576,000 shares were reserved for future issuance. At September 30, 2007, total unrecognized estimated compensation cost related to non-vested purchase rights granted prior to that date was $9 million. The Company recorded cash received from the exercise of purchase rights of $85 million and $69 million during fiscal 2007 and 2006, respectively. Executive Retirement Plans.The Company has voluntary retirement plans that allow eligible executives to defer up to 100% of their income on a pre-tax basis. On a quarterly basis, the Company matches up to 10% of the participants’ deferral in Company common stock based on the then-current market price, to be distributed to the participant upon eligible retirement. The income deferred and the Company match held in trust are unsecured and subject to the claims of general creditors of the Company. Company contributions begin vesting based on certain minimum participation or service requirements and are fully vested at age 65. Participants who terminate employment forfeit their unvested shares. All shares forfeited are used to reduce the Company’s future matching contributions. The plans authorize up to 1,600,000 shares to be allocated to participants at any time. During fiscal 2007, 2006 and 2005, 2004approximately 126,000, 47,000 and 2003, approximately 92,000 108,000 and 89,000 shares, respectively, were allocated under the plans. The Company recorded $3 million, $5 million, $2 million and $2$3 million in compensation expense during fiscal 2005, 20042007, 2006 and 2003,2005, respectively, related to its net matching contributions to the plans. At September 25, 2005, approximately 238,000 shares were reserved for future allocation. F-26
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Commitments and Contingencies LitigationLitigation. Durante, et al v. QUALCOMM: On February 2, 2000, three former employees filed a putative class action against the Company, alleging unlawful age discrimination in their selection for layoff in 1999, and seeking monetary damages based thereon. On June 18, 2003, the Court ordered decertification of the class and dismissed all remaining claims of the plaintiffs. On August 1, 2005, the Ninth Circuit Court of Appeals upheld the judgment in favor of the Company. On June 20, 2003, 76 of the opt-in plaintiffs filed, but did not serve, a new action in the same court, alleging violations of the Age Discrimination in Employment Act as a result of their layoffs in 1999. All plaintiffs have now dismissed all remaining claims in exchange for the Company’s agreement not to seek litigation costs against them.
Zoltar Satellite Alarm Systems, Inc. v. QUALCOMM, Inc. and SnapTrack, Inc.: On March 30, 2001, Zoltar Satellite Alarm Systems, Inc. filed suit against QUALCOMM and its subsidiary SnapTrack, Inc. in the United States District Court for the Northern District of California seeking monetary damages and injunctive relief based on the alleged infringement of three patents. Following a verdict and finding of no infringement of Zoltar’s patent claims, the Court entered a judgment in favor of the Company and SnapTrack on Zoltar’s complaint and awarded the Company and SnapTrack their costs of suit. Zoltar filed a notice of appeal, and the Company and SnapTrack filed a responsive notice and motion to dismiss. Zoltar’s appeal was dismissed and the issue of reaching a final judgment on issues aside from non-infringement is pending before the district court.
QUALCOMM Incorporated v. Maxim Integrated Products, Inc.:On December 2, 2002, the Company filed an action in the United States District Court for the Southern District of California against Maxim alleging infringement of three patents and seeking monetary damages and injunctive relief based thereon. The Company amended the complaint, bringing the total number of patents at issue to four and adding misappropriation of trade secret and unfair competition claims. Maxim counterclaimed against the Company, alleging antitrust violations, patent misuse and unfair competition seeking monetary damages and injunctive relief based thereon. On 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. A motion by the Company for preliminary injunction regarding the alleged trade secret misappropriations by Maxim was heard on January 4, 2005. The Court found that Maxim had acted unlawfully by misappropriating the Company’s trade secrets and issued an injunction order prohibiting further misappropriation and requiring Maxim to notify customers of the order. Maxim has sought appellate review of the injunction order.
Whale Telecom Ltd v. QUALCOMM Incorporated:On 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.
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 the United States District Court for the District of New Jersey against the Company alleging violations 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. Discovery has commencedOn September 1, 2006, the New Jersey District Court dismissed the complaint; Broadcom appealed. On September 4, 2007, the Court of Appeals for the Third Circuit reinstated two of the eight federal claims and five pendant state claims in Broadcom’s complaint and affirmed the dismissal of the remaining counts. On November 2, 2007, Broadcom filed an amended complaint in the actions. QUALCOMM Incorporated v. Broadcom Corporation:New Jersey case, adding the allegations from a state court case in California that had been stayed, as discussed below. On July 11,December 12, 2005, the CompanyCentral District Court in California ordered two of the Broadcom patent claims filed an action in the United Statesother Central District Court forpatent action (which is stayed pending completion of the ITC action) to be transferred to the Southern District of California against Broadcom allegingto be considered in the case filed by the Company on August 22, 2005. That case was subsequently dismissed by agreement of the parties. Trial was held in May 2007 in one of the remaining Central District Court patent actions, and on May 29, 2007, the jury rendered a verdict finding willful infringement of seventhree patents each of which is essential to the practice of either the GSM or 802.11 standards, and seeking monetaryawarding past damages and injunctive relief based thereon. On September 23, 2005, Broadcom answered and counterclaimed, alleging infringement of six patents. Discovery has yet to begin in the action.approximate amount of $20 million, which has been expensed pending appeals. Following a change in the law governing the definition of willfulness, the Court issued a tentative ruling that the jury’s finding of willfulness and inducement should be vacated. After a hearing on October 15, 2007, the Court requested additional briefings by both parties, including briefing on the question of whether the damages awarded
F-27F-22
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
under the two patents must be vacated and indicated that the Court would postpone any decision on an appropriate injunction remedy pending its final decision on the jury’s finding of willfulness. The Court’s final ruling on these issues and the appropriate remedy for the jury’s infringement findings is expected within the next several weeks. On February 14, 2006, an ITC hearing also commenced as to three patents alleged by Broadcom to be infringed by the Company. On October 10, 2006, the Administrative Law Judge (ALJ) issued an initial determination in which he recommended against any downstream remedies and found no infringement by the Company on two of 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 ALJ did not recommend excluding chips accused by Broadcom but, instead, recommended a limited exclusion order directed only to chips that are already programmed with a specific software module and recommended a related cease and desist order. The Commission adopted the ALJ’s initial determination on violation and, on June 7, 2007, issued a cease and desist order and an exclusion order directed at chips programmed with specific software and certain downstream products first imported after the date of the exclusion order. The Federal Circuit has issued stays of the exclusion order with respect to the downstream products of all of the Company’s customers that requested the stay. The Company is appealing both the infringement finding and the cease and desist order and the exclusion order to the United States Court of Appeal for the Federal Circuit. On April 13, 2007, Broadcom filed a new complaint in California state court against the Company alleging unfair competition, breach of contract and fraud, and seeking injunctive and monetary relief. On October 5, 2007, the Court ordered the case stayed pending resolution of the New Jersey case, referenced above. QUALCOMM Incorporated v. Broadcom Corporation:On October 14, 2005, the Company filed an 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 decoding for high-end multimedia processing, and seeking monetary damages and injunctive relief based thereon. In January 2007, a jury rendered a verdict finding the patents valid but not infringed. In a subsequent ruling, the trial judge held that the Company was not guilty of inequitable conduct before the Patent Office but the Company’s actions in a video-encoding standards development organization amounted to a waiver of the right to enforce the patents under any circumstances. The Court also ordered Qualcomm to pay Broadcom’s attorneys’ fees and costs for the case. Qualcomm and Broadcom has yethave each filed notices of appeal. The Court is also considering a motion for discovery sanctions against Qualcomm for failing to answer.produce certain documents in discovery. Other:TheActions by the Company has been named,and its subsidiaries against Nokia Corporation and/or Nokia Inc.:On November 4, 2005, the Company, along with many other manufacturers of wireless phones, wireless operators and industry-related organizations, as a defendantits wholly-owned subsidiary, SnapTrack, filed an action in purported class action lawsuits, including In re Wireless Telephone Frequency Emissions Products Liability Litigation,the United States District Court for the Southern District of Maryland,California against Nokia alleging infringement of eleven Qualcomm patents and several individually filed actions,one SnapTrack patent relating to GSM/GPRS/EDGE and position location and seeking monetary damages arising out of its sale of cellular phones.and injunctive relief. On March 5, 2003,May 24, 2006, the Court grantedCompany filed an action in the defendants’ motions to dismiss fiveChancery Division of the consolidated cases (Pinney, Gimpleson, Gillian, Farina and Naquin) on the grounds that the claims were preempted by federal law. On March 21, 2005, the 4th CircuitHigh Court of Appeals reversedJustice for England and Wales against Nokia alleging infringement of two Qualcomm patents relating to GSM/GPRS/EDGE, seeking monetary damages and injunctive relief. On June 9, 2006, the ruling byCompany 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. The Company subsequently withdrew three of the patents from the proceedings. The ITC trial was completed in September 2007. The date for an initial determination from the ITC ALJ is December 12, 2007, and the target date for resolution of the investigation is April 14, 2008. 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, seeking monetary damages and orderedinjunctive 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, 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, seeking monetary damages and injunctive relief. In February 2007, the Company initiated proceedings in the People’s Republic of China against Nokia for infringement of three patents by Nokia’s GSM/GPRS/EDGE products. On April 2, 2007, the Company filed suit against Nokia in the Eastern District of Texas, Marshall Division for infringement of two patents and in the Western District of Wisconsin for infringement of three patents. These cases remandedare directed to state court. All remaining casesNokia GSM/GPRS/EDGE cellular phones. In response, Nokia filed counterclaims alleging infringement by the Company of six Nokia patents, two of which Nokia also asserted against the F-23
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Company’s subsidiary, MediaFLO USA, Inc. No trial date is set and discovery has not yet begun. On October 17, 2007, the Company and MediaFLO USA, Inc. filed a motion to stay Nokia’s infringement counterclaims pending the arbitration proceeding filed on April 5, 2007, discussed below. On July 11, 2007, the Wisconsin Court issued an order transferring that case to the United States District Court for the Southern District of California and the parties have consolidated the matter with the San Diego matter referenced above and stipulated to a stay of the proceedings pending final resolution of the ITC matter referenced above. On April 5, 2007, the Company filed an arbitration demand with the American Arbitration Association requesting a ruling that, among other things, Nokia’s continued use of the Company’s patents in Nokia’s CDMA cellular handsets (including WCDMA) after April 9, 2007 constitutes an election by Nokia to extend its license under the parties’ existing agreement. On July 9, 2007, the Company filed an amended demand for arbitration, alleging that Nokia’s institution of certain patent infringement proceedings against the Company allege personal injury aswas a resultmaterial breach of their usethe license agreement between the parties. 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 moved to dismiss the complaint. On April 12, 2007 and June 5, 2007, the Company filed counterclaims seeking declarations that, among other things, the Company’s 2001 license agreement with Nokia fulfilled and/or superseded any ostensible obligations to offer or grant patent licenses to Nokia allegedly arising from the Company’s participation in certain standards setting organizations. Both parties have moved to dismiss the other’s complaints. In March 2007, Nokia filed actions in Germany and the Netherlands alleging that certain of the Company’s patents are exhausted with regards to Nokia’s products placed on the European market that contain chipsets supplied to Nokia by Texas Instruments. On October 23, 2007, the German court dismissed Nokia’s claims. On August 16, 2007, Nokia Corporation and Nokia Inc. filed a wireless telephone. Those cases have been remandedcomplaint with the United States International Trade Commission (ITC) alleging importation of products that infringe five Nokia patents and seeking an exclusionary order and a cease and desist order. The ITC instituted an investigation on September 17, 2007. The Company filed a motion to terminate the Washington, D.C. Superior Court.investigation pending resolution of the arbitration proceeding instituted by the Company on April 5, 2007. On October 18, 2007, the ALJ issued an order recommending the Company’s motion be granted. The courts that have reviewed similar claims against other companiesALJ’s determination will become the ITC’s final decision unless the ITC decides within 30 days to date have held that there was insufficient scientific basis forreview the plaintiffs’ claims in those cases.decision. European Commission Complaint:On October 28, 2005, it was reported that six telecommunications 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 replies to the allegations, as well as documents and other information requested by the European Commission. On October 1, 2007, the European Commission announced that it was initiating a proceeding, though it has not decided to issue a Statement of Objections, and it has not made any conclusions as to the merits of the complaints. Tessera, Inc. v. QUALCOMM Incorporated:On April 17, 2007, Tessera, Inc. filed a patent infringement lawsuit in the United States District Court for the Eastern Division of Texas and a complaint with the United States ITC pursuant to Section 337 of the Tariff Act of 1930 against the Company and other companies, alleging infringement of two patents relating to semiconductor packaging structures and seeking monetary damages and injunctive and other relief based hereon. The ITC instituted the investigation on May 15, 2007. On July 11, 2007, the ITC issued an order that set August 21, 2008 as the target date for completion of the investigation. 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, and individually filed actions pending in Pennsylvania and Washington D.C., seeking monetary damages arising out of its sale of cellular phones. 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. 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 Korea 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 been formally served withreceived the complaints.complaints but has submitted information and documents to the Korea Fair Trade Commission. F-24
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Japan Fair Trade Commission has also received unspecified complaints alleging the Company’s business practices are, in some way, a violation of Japanese law. The Company has not received the complaints but has submitted information and documents to the Japan Fair Trade Commission. 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. TheOther than amounts relating to theBroadcom Corporation v. QUALCOMM IncorporatedandQUALCOMM Incorporated v. Broadcom Corporationmatters, the Company has not recorded any accrual for contingent liabilityliabilities associated with the other legal proceedings described above, based on the Company’s belief that a liability,additional liabilities, while possible, isare 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. Long-Term Financing.The Company agreed to provide certain CDMA customers of Telefonaktiebolaget LM Ericsson (Ericsson) with long-term interest bearing debt financing for the purchase of equipment and/or services. At September 25, 2005, the Company had a 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.
Operating Leases.The Company leases certain of its facilities and equipment under noncancelable operating leases, with terms ranging from less than 1 year to 26 years and with provisions for cost-of-living increases for certain leases. Rental expense for fiscal 2005, 2004 and 2003 was $39 million, $31 million and $34 million, respectively. Future minimum lease payments in each of the next five years from fiscal 2006 through 2010 are $67 million, $51 million, $24 million and $16 million, and $13 million respectively, and $22 million thereafter.
Purchase Obligations.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 20062008 to 20092012 to be approximately $750$760 million, $200$118 million, $86$75 million, $59 million and $6$32 million, respectively. The Company’s noncancelable obligations are insignificant in fiscal 2010.respectively, and $8 million thereafter. Of these amounts, commitments to purchase integrated circuit product inventories for fiscal 2006 to2008 and 2009 comprised $634 million, $177 million, $82$586 million and $5$29 million, respectively. F-28
Leases.The Company leases certain of its facilities and equipment under noncancelable operating leases, with terms ranging from less than one year to 30 years and with provisions for cost-of-living increases with certain leases. Rental expense for fiscal 2007, 2006 and 2005 was $60 million, $47 million and $39 million, respectively. The Company leases certain property under capital lease agreements that expire at various dates through 2038. Capital lease obligations are included in other liabilities. The future minimum lease payments for all capital leases and operating leases as of September 30, 2007 are as follows (in millions):
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS| | | | | | | | | | | | | | | | | Capital | | | Operating | | | | | | | | Leases | | | Leases | | | Total | | | 2008 | | $ | 6 | | | $ | 75 | | | $ | 81 | | | 2009 | | | 6 | | | | 63 | | | | 69 | | | 2010 | | | 6 | | | | 50 | | | | 56 | | | 2011 | | | 6 | | | | 35 | | | | 41 | | | 2012 | | | 6 | | | | 28 | | | | 34 | | | Thereafter | | | 170 | | | | 139 | | | | 309 | | | | | | | | | | | | | | Total minimum lease payments | | $ | 200 | | | $ | 390 | | | $ | 590 | | | | | | | | | | | | | | | Deduct: Amounts representing interest | | | (109 | ) | | | | | | | | | | | | | | | | | | | | | | | Present value of minimum lease payments | | | 91 | | | | | | | | | | | Deduct: Current portion of capital lease obligations | | | — | | | | | | | | | | | | | | | | | | | | | | | | Long-term portion of capital lease obligations | | $ | 91 | | | | | | | | | | | | | | | | | | | | | | |
Note 10. Segment Information The Company is organized on the basis of products and services. The Company aggregates three of its divisions into the QUALCOMMQualcomm 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 system 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 TDD and/or OFDMA standards and their derivatives, and collects license fees and royalties in partial consideration for such licenses; F-25
| • | | QUALCOMM CDMA Technologies (QCT) – develops and supplies CDMA and WCDMA-based integrated circuits and system software for wireless voice and data communications, multimedia functions and global positioning systems products; | | | • | | QUALCOMM Technology Licensing (QTL) – grants licenses to use portions of the Company’s intellectual property portfolio, which includes certain patent rights essential to and/or useful in the manufacture and sale of CDMA products, including, without limitation, products implementing cdmaOne, CDMA2000, WCDMA and/or the CDMA TDD standards and their derivatives, and collects license fees and royalties in partial consideration for such licenses; | | | • | | QUALCOMM Wireless & Internet (QWI) – comprised of: |
| o | | QUALCOMM Internet Services (QIS) — provides technology to support and accelerate the convergence of the wireless data market, including its BREW product and services, QChat and QPoint; | | | o | | QUALCOMM Government Technologies (QGOV) – formerly QUALCOMM Digital Media, provides development, hardware and analytical expertise to United States government agencies involving wireless communications technologies; and | | | o | | QUALCOMM Wireless Business Solutions (QWBS) — provides satellite and terrestrial-based two-way data messaging, position reporting and wireless application services to transportation companies, private fleets, construction equipment fleets and other enterprise companies. |
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSQUALCOMMQualcomm Wireless & Internet (QWI) — comprised of:
Qualcomm Internet Services (QIS) — provides technology to support and accelerate the convergence of the wireless data market, including its BREW and QChat products and services; Qualcomm Government Technologies (QGOV) — provides development, hardware and analytical expertise to United States government agencies involving wireless communications technologies; and Qualcomm Enterprise Services (QES) — formerly Qualcomm Wireless Business Solutions, provides satellite and terrestrial-based two-way data messaging, position reporting and wireless application services to transportation and logistics fleets, construction equipment fleets and other enterprise companies. QES also sells products that operate on the Globalstar low-Earth-orbit satellite-based telecommunications system and provides related services. Qualcomm Strategic Initiatives (QSI) — manages the Company’s strategic investment 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. During the first quarter of fiscal 2005,2007, the Company reassessed the intersegment royalty charged to QCT by QTL and determined that the royalty should be eliminated starting in fiscal 2007 for management reporting purposes to, among other reasons, recognize other value that QTL has increasingly been realizing from QCT. As a result, QCT did not record a royalty to QTL in fiscal 2007, and prior period segment information has been adjusted in the same manner for comparative purposes. During the first quarter of fiscal 2007, the Company also reorganized its MediaFLO USA businessthe Qualcomm Wireless Systems (QWS) division, which sells products and services to Globalstar, into the QSIQES division in the QWI segment. TheRevenues and operating expensesresults related to the MediaFLO USAQWS business were included in other nonreportable segments as a component of reconciling items through the end of fiscal 2004. During the first quarter of fiscal 2005, the Company also reorganized a division in the QWI segment that develops and sells test tools to support the design, development, testing and deployment of infrastructure and subscriber products into the QCT segment.2006. Prior period segment information has been adjusted to conform to the new segment presentation. 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. F-29
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, certain 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 | 2007 | | | | Revenues | | | $ | 5,275 | | $ | 2,772 | | $ | 828 | | $ | 1 | | $ | (5 | ) | | $ | 8,871 | | | EBT | | | 1,547 | | 2,340 | | 88 | | | (240 | ) | | | (109 | ) | | 3,626 | | | Total assets | | | 921 | | 29 | | 200 | | 896 | | 16,449 | | 18,495 | | 2006 | | | | Revenues | | | $ | 4,332 | | $ | 2,467 | | $ | 731 | | $ | — | | $ | (4 | ) | | $ | 7,526 | | | EBT | | | 1,298 | | 2,233 | | 78 | | | (133 | ) | | | (320 | ) | | 3,156 | | | Total assets | | | 651 | | 60 | | 215 | | 660 | | 13,622 | | 15,208 | | 2005 | | | | Revenues | | $ | 3,290 | | $ | 1,839 | | $ | 644 | | $ | — | | $ | (100 | ) | | $ | 5,673 | | | $ | 3,290 | | $ | 1,711 | | $ | 682 | | $ | — | | $ | (10 | ) | | $ | 5,673 | | | EBT | | 852 | | 1,663 | | 57 | | 10 | | 227 | | 2,809 | | | 980 | | 1,535 | | 62 | | 10 | | 222 | | 2,809 | | | Total assets | | 518 | | 16 | | 153 | | 442 | | 11,350 | | 12,479 | | | 518 | | 16 | | 169 | | 442 | | 11,334 | | 12,479 | | 2004 | | | | Revenues | | $ | 3,111 | | $ | 1,331 | | $ | 571 | | $ | — | | $ | (133 | ) | | $ | 4,880 | | | | EBT | | 1,048 | | 1,195 | | 19 | | | (31 | ) | | 82 | | 2,313 | | | | Total assets | | 564 | | 8 | | 117 | | 400 | | 9,731 | | 10,820 | | | 2003 | | | | Revenues | | $ | 2,428 | | $ | 1,000 | | $ | 484 | | $ | 1 | | $ | (66 | ) | | $ | 3,847 | | | | EBT | | 805 | | 897 | | 15 | | | (168 | ) | | 16 | | 1,565 | | | | Total assets | | 311 | | 155 | | 92 | | 839 | | 7,425 | | 8,822 | | |
Segment assets are comprised of accounts receivable and inventoryinventories for QCT, QTL and QWI. The QSI segment assets include certain marketable securities, accounts receivable, finance receivables, notes receivable, wireless licenses, other investments and all F-26
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS assets of QSI’s consolidated investees.subsidiary, MediaFLO USA, including property, plant and equipment. QSI’s assets related to the MediaFLO USA business totaled $457 million, $329 million and $98 million at September 30, 2007, September 24, 2006 and September 25, 2005, respectively. QSI’s assets also included $16 million, $19 million and $61 million related to investments in equity method investees at September 30, 2007, September 24, 2006 and September 25, 2005, respectively. Reconciling items for total assets included $215 million, $228 million and $188 million at September 30, 2007, 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. 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 and certain other intangible assets.assets of nonreportable segments. The net book valuevalues of long-lived assets located outside of the United States was $44were $89 million, $21$69 million and $117$44 million at September 30, 2007, September 24, 2006 and September 25, 2005, September 26, 2004 and September 28, 2003, respectively. Long-lived assets located outside of the United States were primarily in Brazil at September 28, 2003 and related to discontinued operations (Note 12). The net book valuevalues of long-lived assets located in the United States waswere $1.7 billion, $1.4 billion and $978 million, $654 million and $505 million at September 25, 2005,30, 2007, September 26, 200424, 2006 and September 28, 2003, respectively. QSI assets included $89 million, $106 million and $116 million related to investments in equity method investees at September 25, 2005, September 26, 2004 and September 28, 2003, respectively.
Revenues from each of the Company’s divisions aggregated into the QWI reportable segment were as follows (in millions): | | | | | | | | | | | | | | | Fiscal Year | | QWBS | | | QGOV | | | QIS* | | | 2005 | | $ | 441 | | | $ | 50 | | | $ | 153 | | | | | | | | | | | | | | | | | 2004 | | $ | 414 | | | $ | 41 | | | $ | 116 | | | | | | | | | | | | | | | | | 2003 | | $ | 356 | | | $ | 49 | | | $ | 79 | |
| | | | | | | | | | | | | | | | | 2007 | | | 2006* | | | 2005* | | | QES | | $ | 501 | | | $ | 490 | | | $ | 479 | | | QGOV | | | 57 | | | | 47 | | | | 50 | | | QIS | | | 272 | | | | 194 | | | | 153 | | | Eliminations | | | (2 | ) | | | — | | | | — | | | | | | | | | | | | | | Total QWI | | $ | 828 | | | $ | 731 | | | $ | 682 | | | | | | | | | | | | |
Other reconciling items were comprised as follows (in millions): | | | | | | | | | | | | | | | | | 2007 | | | 2006* | | | 2005* | | | Revenues: | | | | | | | | | | | | | | Elimination of intersegment revenues | | $ | (39 | ) | | $ | (28 | ) | | $ | (20 | ) | | Other nonreportable segments | | | 34 | | | | 24 | | | | 10 | | | | | | | | | | | | | | | | $ | (5 | ) | | $ | (4 | ) | | $ | (10 | ) | | | | | | | | | | | | | Earnings (loss) before income taxes: | | | | | | | | | | | | | | Unallocated research and development expenses | | $ | (341 | ) | | $ | (331 | ) | | $ | (45 | ) | | Unallocated selling, general, and administrative expenses | | | (268 | ) | | | (298 | ) | | | (17 | ) | | Unallocated cost of equipment and services revenues | | | (39 | ) | | | (41 | ) | | | — | | | Unallocated investment income, net | | | 718 | | | | 455 | | | | 339 | | | Other nonreportable segments | | | (158 | ) | | | (92 | ) | | | (50 | ) | | Intracompany eliminations | | | (21 | ) | | | (13 | ) | | | (5 | ) | | | | | | | | | | | | | | | $ | (109 | ) | | $ | (320 | ) | | $ | 222 | | | | | | | | | | | | |
During fiscal 2007, share-based compensation expense included in unallocated research and development expenses and unallocated selling, general and administrative expenses totaled $221 million and $227 million, respectively. 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. F-30F-27
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other reconcilingSpecified items included in segment EBT were comprised as follows (in millions): | | | | | | | | | | | | | | | | | Year Ended | | | | | September 25, | | | September 26, | | | September 28, | | | | | 2005 | | | 2004 | | | 2003* | | Revenues | | | | | | | | | | | | | | Elimination of intersegment revenue | | $ | (148 | ) | | $ | (153 | ) | | $ | (122 | ) | | Other products | | | 48 | | | | 20 | | | | 56 | | | | | | | | | | | | | | Reconciling items | | $ | (100 | ) | | $ | (133 | ) | | $ | (66 | ) | | | | | | | | | | | | Earnings (loss) before income taxes | | | | | | | | | | | | | | Unallocated research and development expenses | | $ | (42 | ) | | $ | (23 | ) | | $ | (36 | ) | | Unallocated selling, general, and administrative expenses | | | (15 | ) | | | (41 | ) | | | (45 | ) | | EBT from other products | | | (56 | ) | | | (39 | ) | | | (20 | ) | | Unallocated investment income, net | | | 339 | | | | 192 | | | | 125 | | | Intracompany eliminations | | | 1 | | | | (7 | ) | | | (8 | ) | | | | | | | | | | | | | Reconciling items | | $ | 227 | | | $ | 82 | | | $ | 16 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | QCT | | QTL | | QWI | | QSI | 2007 | | | | | | | | | | | | | | | | | | Revenues from external customers | | $ | 5,244 | | | $ | 2,771 | | | $ | 821 | | | $ | 1 | | | Intersegment revenues | | | 31 | | | | 1 | | | | 7 | | | | — | | | Interest income | | | 2 | | | | 14 | | | | 1 | | | | 7 | | | Interest expense | | | — | | | | — | | | | 1 | | | | 5 | | 2006 | | | | | | | | | | | | | | | | | | Revenues from external customers | | $ | 4,314 | | | $ | 2,465 | | | $ | 723 | | | $ | — | | | Intersegment revenues | | | 18 | | | | 2 | | | | 8 | | | | — | | | Interest income | | | 1 | | | | 5 | | | | 3 | | | | 6 | | | Interest expense | | | 1 | | | | — | | | | 1 | | | | 2 | | 2005 | | | | | | | | | | | | | | | | | | Revenues from external customers | | $ | 3,281 | | | $ | 1,710 | | | $ | 672 | | | $ | — | | | Intersegment revenues | | | 9 | | | | 1 | | | | 10 | | | | — | | | Interest income | | | — | | | | 5 | | | | 2 | | | | 4 | | | Interest expense | | | — | | | | 1 | | | | 1 | | | | — | |
Generally, Intersegment revenues between segments are based on prevailing market rates for substantially similar products and services or an approximation thereof. Certain charges are allocated tothereof, but the corporate functional departmentpurchasing segment records the cost of revenues (or inventory write-downs) at the selling segment’s original cost. The elimination of the selling segment’s gross margin is included with other intersegment eliminations 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 certain investment income and research and development expenses and marketing expensesreconciling items. During fiscal 2007, $16 million of QCT’s intersegment revenues related to inventory that was fully reserved by QWI, 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 were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | QCT* | | | QTL | | | QWI* | | | QSI* | | Fiscal 2005 | | | | | | | | | | | | | | | | | | Revenues from external customers | | $ | 3,281 | | | $ | 1,710 | | | $ | 634 | | | $ | — | | | Intersegment revenues | | | 9 | | | | 129 | | | | 10 | | | | — | | | Interest income | | | — | | | | 5 | | | | 2 | | | | 4 | | | Interest expense | | | — | | | | 1 | | | | 1 | | | | — | | Fiscal 2004 | | | | | | | | | | | | | | | | | | Revenues from external customers | | $ | 3,107 | | | $ | 1,200 | | | $ | 553 | | | $ | — | | | Intersegment revenues | | | 4 | | | | 131 | | | | 18 | | | | — | | | Interest income | | | — | | | | 3 | | | | 1 | | | | 14 | | Fiscal 2003 | | | | | | | | | | | | | | | | | | Revenues from external customers | | $ | 2,423 | | | $ | 898 | | | $ | 469 | | | $ | 1 | | | Intersegment revenues | | | 5 | | | | 102 | | | | 15 | | | | — | | | Interest income | | | — | | | | 2 | | | | 1 | | | | 45 | |
purchasing segment. Effectively all equity in losses of investees (Note 5) was recorded in QSI in fiscal 2005, 20042007, 2006 and 2003.2005. The Company distinguishes revenues from external customers by geographic areas based on the location to which its products, software or services are delivered and, for QTL’s licensing and royalty revenue, the domicile of its licensees. Sales information by geographic area was as follows (in millions): | | | | | | | | | | | | | | | | | 2007 | | | 2006 | | | 2005 | | | United States | | $ | 1,165 | | | $ | 984 | | | $ | 1,015 | | | South Korea | | | 2,780 | | | | 2,398 | | | | 2,083 | | | Japan | | | 1,524 | | | | 1,573 | | | | 1,210 | | | China | | | 1,875 | | | | 1,266 | | | | 596 | | | Other foreign | | | 1,527 | | | | 1,305 | | | | 769 | | | | | | | | | | | | | | | | $ | 8,871 | | | $ | 7,526 | | | $ | 5,673 | | | | | | | | | | | | |
Note 11. Acquisitions During fiscal 2007, the Company acquired three businesses for total cash consideration of $178 million. An additional $6 million in consideration payable in cash through June 2008 was held back as security for certain indemnification obligations. The Company is in the process of finalizing the accounting for the acquisitions and does not anticipate material adjustments to the preliminary purchase price allocations. Goodwill recognized in these transactions, of which $21 million is expected to be deductible for tax purposes, was assigned to the QCT and QWI segments in the amounts of $74 million and $10 million, respectively. Technology-based intangible assets recognized in the amount of $46 million are being amortized on a straight-line basis over a weighted-average useful life of 3 years. 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. Upon achievement of certain agreed upon milestones during the third quarter of fiscal 2006, the Company incurred additional aggregate consideration of $195 million. Total consideration consisted of approximately $414 million in cash (of which $75 million was paid in fiscal 2007), $357 million in shares of QUALCOMM stock (of which $3 million was issued in fiscal 2007) and the exchange of Flarion’s existing vested options and warrants with an estimated aggregate fair value of approximately $37 million. In fiscal 2004 and 2003, interest expense (Note 5) was predominantly recorded as corporate expense in reconciling items.addition, the Company assumed Flarion’s existing unvested options with an estimated aggregate fair value of $68 million, which is F-31F-28
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Therecorded as share-based compensation over the requisite service period. During fiscal 2006, the Company distinguishes revenues from external customers by geographic areas basedalso acquired two other entities for a total cost of $73 million, including $4 million paid in fiscal 2007 upon the achievement of certain milestones, which was paid primarily in cash. Goodwill recognized in these three 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 $616 million and $42 million, respectively. Technology-based intangible assets recognized in the amount of $165 million are being amortized on customer location. Sales information by geographic areaa straight-line basis over a weighted-average useful life of seventeen years. Purchased in-process technology in the amount of $22 million was as follows (in millions):
| | | | | | | | | | | | | | | | | Year Ended | | | | | September 25, | | | September 26, | | | September 28, | | | | | 2005 | | | 2004 | | | 2003 | | | United States | | $ | 1,015 | | | $ | 1,016 | | | $ | 875 | | | South Korea | | | 2,083 | | | | 2,091 | | | | 1,724 | | | Japan | | | 1,210 | | | | 877 | | | | 586 | | | China | | | 394 | | | | 260 | | | | 311 | | | Brazil | | | 40 | | | | 31 | | | | 36 | | | Other foreign | | | 931 | | | | 605 | | | | 315 | | | | | | | | | | | | | | | | $ | 5,673 | | | $ | 4,880 | | | $ | 3,847 | | | | | | | | | | | | |
Note 11. Acquisitionscharged to research and development expense upon acquisition because technological feasibility had not been established and no future alternative uses existed.
During fiscal 2005, the Company acquired the following four entities for a total cost of $295$299 million, including $2 million paid in both fiscal 2007 and 2006 upon the achievement of certain milestones, which was paid primarily in cash: | • | | Iridigm Display Corporation (Iridigm), a California-based display technology company. | | | • | | Trigenix Limited, a United Kingdom-based developer of user interfaces for mobile phones. | | | • | | Spike Technologies, Inc., a semiconductor design services company based primarily in India. | | | • | | ELATA, Ltd., a United Kingdom-based developer of mobile content delivery and device management software systems. |
An additional $4 million in consideration is payable in cash through November 2006 if certain performance and other milestones are reached.cash. Goodwill recognized in thosethese transactions amounted to $216$220 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 $7$11 million, respectively. Technology-based intangible assets recognized in the amount of $36 million have a weighted-average useful life of seven years.
On August 11, 2005,The consolidated financial statements include the Company announced its intention to acquire alloperating results of these businesses from their respective dates of acquisition. Pro forma results of operations have not been presented because the effects of the outstanding capital stock of Flarion Technologies, Inc. (Flarion), a privately held developer of Orthogonal Frequency Division Multiplexing Access (OFDMA) technology. Upon completion of the acquisition, which is anticipated in the first half of fiscal 2006, pending regulatory approval and other customary closing conditions, the Company estimates that it will pay approximately $545 million in consideration, consisting of approximately $272 million in shares of QUALCOMM stock, $235 million in cash, and the exchange of Flarion’s existing vested options and warrants with a fair value of approximately $38 million. Upon achievement of certain agreed upon milestones on or prior to the eighth anniversary of the close of this transaction, the Company may issue additional aggregate consideration of $205 million, consisting of approximately $173 million payable in cash to Flarion stockholders and $32 million in shares of QUALCOMM stock, which will be issued to Flarion option holders and warrant holders upon or following the exercise of such options and warrants. 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 for differentiating their services. 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.acquisitions were not material. Note 12. Discontinued Operations in the QSI Segment On December 2, 2003, Embratel Participações S.A. (Embratel) acquired the Company’s direct and indirect ownership interests in Vésper São Paulo S.A. and Vésper S.A. (the Vésper Operating Companies), consolidated subsidiaries of the Company’s QSI segment, (the Embratel sale transaction) for no consideration. The Vésper
F-32
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Company realized a net loss of $52 million on the Embratel sale transaction during fiscal 2004, partially offset by a $40 million net gain which resulted from the subsequent sale of TowerCo. 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 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. At September 25, 2005, the Company had no remaining assets or liabilities related to the Vésper Operating Companies or TowerCo recorded on its consolidated balance sheet. Revenues of $36 million and $123 million were reported in the loss from discontinued operations during fiscal 2004 and 2003, respectively.
Note 13. 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 was fully transferable and, subject to certain conditions, could be used in whole or in part by any entity in any FCC spectrum auction over a period of three years, including those in which the Company is not a participant.
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. During fiscal 2004, the Company also 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. 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 which the Company had no cost basis at September 26, 2004. The ADV had no remaining value at September 25, 2005.
F-33
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 25, 200530, 2007 and September 26, 200424, 2006 (in millions, except per share data): | | | | | | | | | | | | | | | | | | | | | 1st Quarter | | | 2nd Quarter | | | 3rd Quarter | | | 4th Quarter (3) | | 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 | | | | | | | | | | | | | | | | | | | | 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 earnings per common share (2) | | $ | 0.22 | | | $ | 0.30 | | | $ | 0.30 | | | $ | 0.24 | | | | | | | | | | | | | | | | | | | | | Diluted earnings per common share from continuing operations (2) | | $ | 0.25 | | | $ | 0.26 | | | $ | 0.29 | | | $ | 0.23 | | | Diluted earnings per common share (2) | | $ | 0.21 | | | $ | 0.29 | | | $ | 0.29 | | | $ | 0.23 | |
| | | | | | | | | | | | | | | | | | | | | 1st Quarter | | 2nd Quarter | | 3rd Quarter | | 4th Quarter | 2007 | | | | | | | | | | | | | | | | | Revenues(1) | | $ | 2,019 | | | $ | 2,221 | | | $ | 2,325 | | | $ | 2,306 | | Operating income(1) | | | 576 | | | | 748 | | | | 782 | | | | 777 | | Net income (1) | | | 648 | | | | 726 | | | | 798 | | | | 1,131 | | | | | | | | | | | | | | | | | | | | Basic earnings per common share(2) | | $ | 0.39 | | | $ | 0.44 | | | $ | 0.48 | | | $ | 0.68 | | Diluted earnings per common share (2) | | $ | 0.38 | | | $ | 0.43 | | | $ | 0.47 | | | $ | 0.67 | | | | | | | | | | | | | | | | | | | | 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 | |
| | | | (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-34F-29
SCHEDULE II 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 | | Expenses | | Deductions | | Other | | Period | | | Period | | Expenses | | Deductions | | Other | | Period | | | Year ended September 28, 2003 Allowances: | | | | 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 | ) | | | Valuation allowance on deferred tax assets | | | (1,523 | ) | | | (253 | ) | | 10 | | 1,106 | | | (A | ) | | | (660 | ) | | | (139 | ) | | 76 | | — | | | (6 | )(a) | | | (69 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (1,715 | ) | | $ | (267 | ) | | $ | 47 | | $ | 1,106 | | $ | (829 | ) | | $ | (191 | ) | | $ | 34 | | $ | 29 | | $ | (6 | ) | | $ | (134 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Year ended September 26, 2004 Allowances: | | | | | | | | Year ended September 24, 2006 | | | | Allowances: | | | | — trade receivables | | $ | (12 | ) | | $ | (3 | ) | | $ | 8 | | $ | 2 | | | (B | ) | | $ | (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 | ) | | | Valuation allowance on deferred tax assets | | | (660 | ) | | 27 | | 20 | | 474 | | | (B | ) | | | (139 | ) | | | (69 | ) | | 46 | | 14 | | | (13 | )(b) | | | (22 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (829 | ) | | $ | 11 | | $ | 101 | | $ | 476 | | $ | (241 | ) | | $ | (134 | ) | | $ | 31 | | $ | 15 | | $ | (13 | ) | | $ | (101 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Year ended September 25, 2005 Allowances: | | | | | | | | Year ended September 30, 2007 | | | | Allowances: | | | | — trade receivables | | $ | (5 | ) | | $ | (2 | ) | | $ | 5 | | $ | — | | $ | (2 | ) | | $ | (1 | ) | | $ | (37 | ) | | $ | 2 | | $ | — | | $ | (36 | ) | | — finance receivables | | | (1 | ) | | 1 | | — | | — | | — | | | | — notes receivable | | | (46 | ) | | | (41 | ) | | 24 | | — | | | (63 | ) | | | (78 | ) | | | (13 | ) | | 58 | | — | | | (33 | ) | | Inventory reserves | | | (50 | ) | | | (10 | ) | | 14 | | — | | | (46 | ) | | | Valuation allowance on deferred tax assets | | | (139 | ) | | 76 | | — | | | (6 | ) | | | (C | ) | | | (69 | ) | | | (22 | ) | | | (1 | ) | | 3 | | — | | | (20 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (241 | ) | | $ | 24 | | $ | 43 | | $ | (6 | ) | | $ | (180 | ) | | $ | (101 | ) | | $ | (51 | ) | | $ | 63 | | $ | — | | $ | (89 | ) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (A)(a) | | This amount is related to the reversal of the Company’s valuation allowance on substantially all of its United States deferred tax assets during fiscal 2003 as a credit to stockholders’ equity. | | (B) | | This amount related to the disposition of the Vésper Operating Companiesbusiness acquisitions (See Note 12 of11 to the Consolidated Financial Statements). | | | (C)(b) | | This amount relatedwas charged to the acquisitions of Trigenix and ELATA (See Note 11 of the Consolidated Financial Statements).paid-in capital. |
S-1 |
