| • | | 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:We believe the recent global financial crisis and the resulting slowdown in global economies is causing current contraction in the channel inventory and will likely result in lower consumer demand and prices for CDMA-based devices, among other things, adversely affecting our revenues and operating results. In addition, the financial crisis has, and may continue to have, an impact on the value of our marketable securities portfolio and net investment income. The deployment and upgrading of CDMA2000 networks is expected to continue. | o | | More than 275 wireless operators have launched CDMA2000 1X;(1) and | | | o | | More than 100 wireless operators have deployed the higher data speeds of 1xEV-DO and more than 40 wireless operators have deployed commercial EV-DO Revision A networks.(1) |
GSM operators are expected to continue transitioning to WCDMA networks. | o | | More than 235 GSM operators have migrated their networks to WCDMA; (2)and | | | o | | More than 220 wireless operators have upgraded and launched commercial HSDPA networks, and more than 50 wireless operators have upgraded and launched commercial HSUPA networks. (2) |
| • | | We expect that CDMA-based 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 and EV-DO Revision A and as manufacturers introduce additional highly-featured, converged devices, we expect consumer demand for advanced 3G devices to accelerate. | | | | | • | | AsTo 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 October 2005, 87 WCDMA networksmultimedia products, software and services for the wireless industry. However, we expect that a portion of our research and development initiatives in fiscal 2009 will not reach commercialization until several years in the future. | | | • | | We expect demand for low-end wireless devices to continue to grow and have launched,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. | | | • | | We will continue to invest in the evolution of CDMA and a broad range of other technologies as part of our vision to enable a range of technologies, each optimized for specific services, including the following products and technologies: |
| o | | The continued evolution of CDMA-based technologies, including the long-term roadmaps of 1xEV-DO and High Speed Packet Access (HSPA); | | | o | | OFDM and OFDMA-based technologies; | | | o | | Our service applications platform, content delivery services and user interfaces; | | | o | | Our MediaFLO MDS and FLO technology for delivery of multimedia content; and | | | o | | Our IMOD display technology. |
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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 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. For example, we expect that we will continue to be involved in litigation, including our ongoing disputes with Broadcom, 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 to rebuff efforts by companies seeking to gain competitive advantage or negotiating leverage. | | | • | | We have been and will continue evaluating and providing reasonable assistance to our customers. This includes, in some cases, certain levels of financial support to minimize the impact of the litigation in which we are involved. |
| | | | (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 2008 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%35%, 21%, 14% and 18%9%, respectively, of total consolidated revenues infor fiscal 20052008, as compared to 43%31%, 18% and 21%, respectively, in fiscal 2004,17% and 45%, 15% and 23%13%, respectively, infor fiscal 2003.2007, and 32%, 17%, 21% and 13%, respectively, for fiscal 2006. 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 invoiced addresses of our licensees. The increase in revenues from customers in Japan increased as a percentageSouth Korea from 32% and 31% of total revenues from 15% in fiscal 20032006 and 2007, respectively, to 18%35% in fiscal 2004 and 21% in fiscal 2005, due2008 is primarily attributable to increased royalties reported by licenseesshipments of integrated circuits to CDMA device manufacturers with locations in Japan resultingSouth Korea and royalty revenues from the growth of CDMA2000 and WCDMAcustomers in Japan as well as their success in exporting products worldwide.South Korea. Combined revenues from customers in South KoreaJapan and the United States decreased as a percentage of total revenues, from 68%34% in fiscal 20032006 to 64%30% in fiscal 20042007 and 55%23% in fiscal 2005,2008, primarily due primarily to increasesthe increased activity by manufacturers with locations in revenues from manufacturers of CDMA and WDCMA products in other regions such as China, Japan and Western Europe.South Korea. 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 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. 46
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.services, software hosting services and services related to delivery of multimedia content. 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 CDMA products, including, without limitation, products implementing cdmaOne, CDMA2000, WCDMA and/or the CDMA TDD standards and their derivatives.certain wireless products. 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 sevenfifteen 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 thequarter. We 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 inquarter and when other revenue recognition criteria are met. From time to time, licensees will not report royalties timely due to legal disputes, and when this occurs, the timing of recognizing royalty revenue was made prospectively and had the initial one-time effectcomparability 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. We also acquire intangible assets in other types of transactions. As of September 25, 2005,28, 2008, our goodwill and intangible assets, net of accumulated amortization, were $571 million$1.5 billion and $237 million,$3.1 billion, respectively. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements. For intangible assets purchased in a business combination or received in a non-monetary exchange, the estimated fair values of the assets received (or, for non-monetary exchanges, the estimated fair values of the assets transferred if more clearly evident) are used to establish their recorded values, except when neither the values of the assets received or the assets transferred in non-monetary exchanges are determinable within reasonable limits. Valuation techniques consistent with the market approach, income approach and/or cost approach are used to measure fair value. An estimate of fair value can be affected by many assumptions which require significant judgment. For example, the income approach generally requires assumptions related to the appropriate business model to be used to estimate cash flows, total addressable market, pricing and share forecasts, competition, technology obsolescence, future tax rates and discount rates. Our estimate of the fair value of certain assets may differ materially from that determined by others who use different assumptions or utilize different business models. New information may arise in the future that affects our fair value estimates and could result in adjustments to our estimates in the future, which could have an adverse impact on our results of operations. 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 or asset group 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 isare 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 and exchange traded funds, corporate bonds and notes, auction rate securities and mortgage- and 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, 2005.28, 2008. We record impairment charges through the statement of 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. Future adverseIn addition, the fair values of our strategic investments are subject to substantial quarterly and annual fluctuations and to significant market volatility. 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.charges. 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 thanbelow its original cost, the extent of the general decline in prices or an increase in the default or recovery rates of securities in an asset class, negative events such as a bankruptcy filing or a need to raise capital or seek financial support from the government or others, the performance and pricing of the investee’s stock pricesecurities in relation to the stock pricesecurities 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,If we determine that a security price decline is other than temporary, we may record an impairment loss, which could have an adverse impact on our results of operations. During fiscal 2005, 20042008, 2007 and 2003,2006, we recorded $12$502 million, $12$16 million and $100$20 million, respectively, in other-than-temporary losses on our minority investments in publicly-traded companies.marketable securities. 47
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. Share-based compensation expense recognized under FAS 123R for fiscal 2008, 2007 and 2006 was $543 million, $493 million and $495 million, respectively. At September 28, 2008, total unrecognized estimated compensation expense related to non-vested stock options granted prior to that date was $1.6 billion, which is expected to be recognized over a weighted-average period of 3.5 years. Net stock options, after forfeitures and cancellations, granted during fiscal 2008 represented 2.7% of outstanding shares as of the beginning of the fiscal period. Total stock options granted during fiscal 2008 represented 3.2% of outstanding shares as of the end of the fiscal period. We hold minority strategic investmentsestimate 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 private companies whoseestimating the value of traded options that have no vesting or hedging restrictions, are fully transferable and do not cause dilution. Because our share-based payments have characteristics significantly different from those of freely traded options, and because 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 are difficultof our share-based compensation awards. There is not currently a generally accepted market-based mechanism or other practical application to determine. These investments totaled $122 million at September 25, 2005. We record impairment charges whenverify the reliability and accuracy of the estimates stemming from these valuation models. Although we believe an investment has experiencedestimate 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 declinevalue that is other than temporary. The determination thatindicative of the fair value observed in a decline is other than temporary is subjective and influenced by many factors. Future adverse changes inwilling buyer/willing seller market conditions or poor operating resultstransaction. For purposes of investees could result in losses or an inability to recoverestimating the carryingfair value of stock options granted during fiscal 2008, we used the investments, thereby possibly requiring impairment chargesimplied 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 41.1% for fiscal 2008, which if increased to 45%, would increase the weighted-average estimated fair value of stock options granted during fiscal 2008 by $0.89 per share, or 5%. 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 3.8% for fiscal 2008, which if increased to 6.5% would increase the weighted-average estimated fair value of stock options granted during fiscal 2008 by $1.17 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 2008, which if decreased to 0.4% would increase the weighted-average estimated fair value of stock options granted during fiscal 2008 by $0.92 per share, or 6%. Dividends and/or increases or decreases in dividend payments are subject to approval by our Board of Directors 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. When assessing investments in private companiesfuture, 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. 48
The post-vesting forfeiture rate is estimated using historical option cancellation information. The weighted-average post-vesting forfeiture rate assumption was 8.0% for an other-than-temporary decline infiscal 2008, which if decreased to 1.5%, would increase the weighted-average estimated fair value we consider such factors as, among other things,of stock options granted during fiscal 2008 by $0.91 per share, or 6%. The suboptimal exercise factor is estimated using historical option exercise information. The weighted-average suboptimal exercise factor assumption was 1.9 for fiscal 2008, which if increased to 2.3, would increase the weighted-average estimated fair value of stock options granted during fiscal 2008 by $1.01 per 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 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 2005 and 2003, we recorded $1 million and $28 million, respectively, in other than temporary losses on our investments in private companies. Such losses were not significant in fiscal 2004.6%. Income Taxes.On October 1, 2007, we adopted the accounting provisions of FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” As a result of the adoption, we increased our liabilities related to uncertain tax positions by $2 million and accounted for the cumulative effect of this change as a decrease to retained earnings. See “Notes to Consolidated Financial Statements, Note 5 – Income Taxes” for additional information. As of September 28, 2008, our liability for net unrecognized tax benefits was $227 million. Our income tax returns are based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. As a result of the implementation of FIN 48, we recognize liabilities for uncertain tax positions based on the two-step process prescribed in the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. 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 liabilityincome taxes payable 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. 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, 2005,28, 2008, gross deferred tax assets were $937 million.$1.4 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 ourthe 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, 2005,28, 2008, we had gross deferred tax assets of $301$430 million related to capital loss carry forwards.losses and $21 million related to foreign and state net operating losses. We can only use realized capital losses to offset realized capital gains. Based upon our assessments of projected futurewhen capital gains and losses and related tax planning strategies,will be realized, we expectestimate that our future capital gains will not be sufficient to utilize all of the temporary and other-than-temporary capital losses that we have incurredwere recorded through fiscal 2005.2008. Therefore, we have provided a $134 million valuation allowance in the amount of $62 million for the portion of capital losses we do not expect to utilize.utilize, of which $81 million was recorded as an increase in other comprehensive loss in fiscal 2008. We can only use net operating losses to offset taxable income of certain legal entities in certain 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 net operating losses we have incurred through fiscal 2008. Therefore, we have provided a $15 million 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 jurisdictions. Adjustments to our valuation allowance based on changes to our forecast of capital losses, and capital gains and 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$6.8 billion as of September 25, 2005.28, 2008. 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, 49
We recognize windfall tax benefits associated with the American Jobs Creation Actexercise of 2004 (the Jobs Creation Act) was signed into law. The Jobs Creation Act createdstock 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 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 Incorporatedmatters, 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 20052008 Compared to Fiscal 20042007 Revenues.Total revenues for fiscal 20052008 were $5.67$11.14 billion, compared to $4.88$8.87 billion for fiscal 2004.2007. Revenues from LG Electronics, Samsung and Motorola,two customers of our QCT, QTL and QWI segments (each of whom accounted for more than 10% of our consolidated revenues for the period) comprised anapproximately 30% and 27% in aggregate of 15%, 13% and 11% of total consolidated revenues respectively, in fiscal 2005, compared to 15%, 15%2008 and 10% of total consolidated revenues, respectively, in fiscal 2004.2007, respectively. Revenues from sales of equipment and services for fiscal 20052008 were $3.74$7.16 billion, compared to $3.51$5.77 billion for fiscal 2004.2007. Revenues from sales of integrated circuitscircuit products increased $165 million,$1.41 billion, resulting primarily from an increase of $396 million$1.23 billion related to higher unit shipments, mostly consisting of MSM and accompanying RF and PM integrated circuits, partially offset by a decreaseand an increase of $241$219 million related to the net effects of reductionschanges in product mix and the 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.such products. Revenues from licensing and royalty fees for fiscal 20052008 were $1.93$3.98 billion, compared to $1.37$3.11 billion for fiscal 2004. During fiscal 2005, the QTL segment recorded royalty revenues solely based on royalties reported by licensees during the year, as compared to the method used during the first three quarters of fiscal 2004 of recording royalty revenues from certain licensees based on estimates of royalty revenues earned by those licensees during the quarter.2007. The increase in revenues from licensing and royalty revenue year to year resultedfees primarily from a $350 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 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 duerelated to an increase in sales of CDMACDMA-based products reported by QTL’s licensees resulting from higher worldwide demand for CDMA productsother than Nokia, driven by the continued adoption of WCDMA at higher average selling prices than CDMA and fluctuations in currency exchange rates. In addition, revenues from licensing and royalties in fiscal 2008 included $560 million (attributable to both fiscal 2008 and 2007) related to the new agreements with Nokia. Revenues from licensing and royalties in fiscal 2007 included royalty payments from Nokia only for sales of Nokia products through April 9, 2007. Cost of Equipment and Services.Cost of equipment and services revenues for fiscal 2008 was $3.41 billion compared to $2.68 billion for fiscal 2007. Cost of equipment and services revenues as a percentage of equipment and services revenues was 48% for fiscal 2008, compared to 47% for fiscal 2007. Cost of equipment and services revenues included $39 million in share-based compensation in both fiscal 2008 and 2007. Research and Development Expenses.For fiscal 2008, research and development expenses were $2.28 billion or 20% of revenues, compared to $1.83 billion or 21% of revenues for fiscal 2007. The dollar increase was primarily attributable to a $358 million increase in costs related to the development of 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, HSDPA, HSUPA, HSPA+ and OFDMA. Research and development expenses related to the development of our FLO technology, MediaFLO MDS, IMOD display products using MEMS technology, BREW products and mobile commerce applications increased by $63 million. Research and development expenses in fiscal 2008 included share-based compensation and in-process research and development of $250 million and $14 million, respectively, compared to $221 million and $10 million, respectively, in fiscal 2007. 50
Selling, General and Administrative Expenses.For fiscal 2008, selling, general and administrative expenses were $1.71 billion or 15% of revenues, compared to $1.48 billion or 17% of revenues for fiscal 2007. The dollar increase was primarily attributable to a $137 million increase in employee-related expenses and a $72 million increase in certain professional fees, primarily related to patent activities. Selling, general and administrative expenses in fiscal 2008 included share-based compensation of $254 million, compared to $233 million in fiscal 2007. Net Investment Income.Net investment income was $96 million for fiscal 2008, compared to $743 million for fiscal 2007. The net decrease was primarily comprised as follows (in millions): | | | | | | | | | | | | | | | | | Year Ended | | | | | | | | | September 28,
2008 | | | September 30,
2007 | | | Change | | | Interest and dividend income: | | | | | | | | | | | | | | Corporate and other segments | | $ | 487 | | | $ | 551 | | | $ | (64 | ) | | QSI | | | 4 | | | | 7 | | | | (3 | ) | | Interest expense | | | (22 | ) | | | (11 | ) | | | (11 | ) | | Net realized gains on investments: | | | | | | | | | | | | | | Corporate and other segments | | | 104 | | | | 201 | | | | (97 | ) | | QSI | | | 51 | | | | 21 | | | | 30 | | | Other-than-temporary losses on investments: | | | | | | | | | | | | | | Corporate and other segments | | | (502 | ) | | | (16 | ) | | | (486 | ) | | QSI | | | (33 | ) | | | (11 | ) | | | (22 | ) | | Gains on derivative instruments | | | 6 | | | | 2 | | | | 4 | | | Equity in earnings (losses) of investees | | | 1 | | | | (1 | ) | | | 2 | | | | | | | | | | | | | | | | $ | 96 | | | $ | 743 | | | $ | (647 | ) | | | | | | | | | | | |
The decrease in interest and dividend income on cash, cash equivalents and marketable securities held by corporate and other segments was primarily a result of lower interest rates earned on interest-bearing securities. Other-than-temporary losses in fiscal 2008 included $327 million recognized in the fourth quarter on marketable securities held by corporate and other segments. Both other-than-temporary losses on marketable securities and the decrease in net realized gains on corporate investments were generally related to depressed securities values caused by a major disruption in U.S. and foreign credit and financial markets affecting consumers and the banking, finance and housing industries. This disruption is evidenced by a deterioration of confidence in financial markets and a severe decline in the availability of capital and demand for debt and equity securities. Income Tax Expense.Income tax expense was $666 million for fiscal 2008, compared to $323 million for fiscal 2007. The annual effective tax rate was 17% for fiscal 2008, compared to 9% for fiscal 2007. The annual effective tax rate for fiscal 2008 is higher than the annual effective tax rate for fiscal 2007 primarily due to the impact of prior year audits completed during fiscal 2007. The annual effective tax rate for fiscal 2008 is 18% lower than the United States federal statutory rate primarily due to benefits of approximately 22% related to foreign earnings taxed at less than the United States federal rate, and 1% related to research and development tax credits, partially offset by state taxes of approximately 4% and 1% related to an increase in the valuation allowance. Fiscal 2007 Compared to Fiscal 2006 Revenues.Total revenues for fiscal 2007 were $8.87 billion, compared to $7.53 billion for fiscal 2006. Revenues from three customers of our QCT, QTL and 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. 51
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 QTL royalties related to an increase in our licensee’s sales of CDMA-based products driven by the continued adoption of WCDMA at higher average selling prices than CDMA, 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 CDMACDMA2000 products. 46
Cost of Equipment and Services.Cost of equipment and services revenues for fiscal 20052007 was $1.65$2.68 billion, compared to $1.48$2.18 billion for fiscal 2004.2006. Cost of equipment and services revenues as a percentage of equipment and services revenues was 44%47% for fiscal 2005,2007, compared to 42%46% for fiscal 2004. The margin percentage decline in fiscal 2005 compared to fiscal 2004 was primarily due to a 1.3% decrease in QCT margin percentage. Increases in product support costs and the reserves for excess and obsolete inventory contributed 1.1% and 0.5%, respectively, to the total decrease in QCT margin percentage.2006. 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.fiscal 2007 included $39 million in share-based compensation, compared to $41 million in fiscal 2006. Research and Development Expenses.For fiscal 2005,2007, research and development expenses were $1.01$1.83 billion or 18%21% of revenues, compared to $720 million$1.54 billion or 15%20% of revenues for fiscal 2004.2006. The dollar and percentage increases in research and development expensesincrease was primarily resulted fromattributable to a $275$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 phones, multimedia applications, high-speeddevices, the integration of wireless Internet accesswith consumer electronics and computing, the convergence of multiband, multimode, multiband, multinetwork products and technologies, includingthird party operating systems and services platforms. The technologies supporting these initiatives may include CDMA2000 1X/1X, 1xEV-DO, EV-DO Revision A, EV-DO Revision B, WCDMA, HSDPA, GSM/GPRS/EDGEHSUPA and OFDMA,OFDMA. The increase in research and development expenses incurred also related to the development of our FLO technology, MediaFLO MDS and iMoDIMOD display products using MEMS technology. We expect thatResearch and development expenses in fiscal 2007 included share-based compensation and in-process research and development costs will increaseof $221 million and $10 million, respectively, compared to $216 million and $22 million, respectively, in fiscal 2006 as we continue our active support of CDMA-based technologies, products and network operations and other product initiatives.2006. Selling, General and Administrative Expenses.For fiscal 2005,2007, selling, general and administrative expenses were $631 million$1.48 billion or 11%17% of revenues, compared to $547 million$1.12 billion or 11%15% of revenues for fiscal 2004.2006. The dollar increase wasand percentage increases were primarily dueattributable to a $38$152 million increase in professional fees, primarily patent administrationcosts related to litigation and outside consultants,other legal matters, a $33$98 million increase in employee-relatedemployee 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 $13$28 million decreaseincrease in other income.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. Net Investment Income.Net investment income was $423$743 million for fiscal 2005,2007, compared to $184$466 million for fiscal 2004.2006. The changenet increase was primarily comprised as follows (in millions): | | | | | | | | | | | | | | | | | | Year Ended | | | | | | | | | | | | | | | | | | | September 25, | | September 26, | | | | | Year Ended | | | | | | | 2005 | | 2004 | | Change | | | September 30,
2007 | | September 24,
2006 | | Change | | | Interest and dividend income: | | | | Corporate and other segments | | | $ | 551 | | $ | 410 | | $ | 141 | | | QSI | | $ | 4 | | $ | 14 | | $ | (10 | ) | | 7 | | 6 | | 1 | | | Corporate and other segments | | 252 | | 161 | | 91 | | | | Interest expense | | | (3 | ) | | | (2 | ) | | | (1 | ) | | | (11 | ) | | | (4 | ) | | | (7 | ) | | Net realized gains on investments: | | | | Corporate and other segments | | | 201 | | 106 | | 95 | | | QSI | | 101 | | 56 | | 45 | | | 21 | | 30 | | | (9 | ) | | Corporate | | 78 | | 32 | | 46 | | | | Other-than-temporary losses on investments | | | (14 | ) | | | (12 | ) | | | (2 | ) | | | (27 | ) | | | (24 | ) | | | (3 | ) | | Gains on derivative instruments | | 33 | | 7 | | 26 | | | | Gains (losses) on derivative instruments | | | 2 | | | (29 | ) | | 31 | | | Equity in losses of investees | | | (28 | ) | | | (72 | ) | | 44 | | | | (1 | ) | | | (29 | ) | | 28 | | | | | | | | | | | | | | | | | | | | | $ | 423 | | $ | 184 | | $ | 239 | | | $ | 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 earned on interest-bearing securities. Net realized gains on corporate investments increased primarily as a result of an increasedue to strength in the positive performanceequity markets and reallocation of marketable equity securities as a percentage of total corporate investments in fiscal 2005, as compared to fiscal 2004. The increase in net realized gains on strategic investments in QSI resulted primarily from a $48 million gain on our minority investment in a wireless publisher and a $41 million gain on the sale of our investment in NextWaveTelecom Inc. Gains and losses on derivative instruments in both fiscal 2005 and 2004 related primarily to changes in the fair values of put options sold in connection with our stock repurchase program. Equity in losses of investees decreased primarily due to a decrease in losses incurred by Inquam, of which our share was $33 million for fiscal 2005 as compared to $59 million for fiscal 2004.certain portfolio assets. 52
Income Tax Expense.Income tax expense from continuing operations was $666$323 million for fiscal 2005,2007, compared to $588$686 million for fiscal 2004.2006. The annual effective tax rate was 9% for fiscal 2007, compared to 22% for fiscal 2006. The annual effective tax rate for continuing operations was approximately 24% for fiscal 2005, compared to 25% for fiscal 2004. The annual effective tax rate from continuing operations for fiscal 2005 was2007 is lower than the annual effective tax rate from continuing operations for fiscal 20042006 primarily due to an increase inthe impact of prior year audits completed during fiscal 2007 and additional foreign earnings taxed at less than the United States federal statutory tax rate. 47
The annual effective tax rate for fiscal 2005 was 11%2007 is 26% lower than the United States federal statutory rate primarily due to benefits of approximately 10%20% related to foreign earnings taxed at less than the United States federal rate, 3%9% related to an increase inthe impact of the tax benefits resulting from our increased ability to use our capital loss carryforwardsaudits completed during the year and 2% related to research and development tax credits, partially offset by state taxes of approximately 4%5%. 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 provisionOur Segment Results for income taxes in the period the change occurs.
Fiscal 20042008 Compared to Fiscal 20032007 The following should be read in conjunction with the fiscal 2008 and 2007 financial results for each reporting segment. See “Notes to Consolidated Financial Statements – Note 9 – Segment Information.” Revenues.QCT Segment.TotalQCT revenues for fiscal 20042008 were $4.88$6.72 billion, compared to $3.85$5.28 billion for fiscal 2003. Revenues from Samsung, LG Electronics2007. Equipment and Motorola, customersservices revenues, mostly consisting of our QCT, QTLMSM and QWI segments, comprised an aggregate of 15%, 15%accompanying RF and 10% of total consolidated revenues, respectively, inPM integrated circuits, were $6.53 billion for fiscal 2004,2008, compared to 17%, 13% and 13% of total consolidated revenues, respectively,$5.12 billion for fiscal 2007. The increase 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, resultingrevenues resulted primarily from an increase of $994 million$1.23 billion related to higher unit shipments and an increase of MSM and accompanying RF integrated circuits, partially offset by a decrease of $331$219 million related to the net effects of reductionschanges in product mix and the average sales prices and changes in product mix.of such products. Approximately 336 million MSM integrated circuits were sold during fiscal 2008, compared to approximately 253 million for fiscal 2007.
RevenuesQCT’s earnings before taxes for fiscal 2008 were $1.83 billion, compared to $1.55 billion for fiscal 2007. QCT’s operating income as a percentage of its revenues (operating margin percentage) was 27% in fiscal 2008, compared to 29% in fiscal 2007. The decrease in operating margin percentage was primarily due to a decrease in gross margin percentage related to an increase in reserves for excess and obsolete inventory and product support costs. QCT inventories increased by 17% in fiscal 2008 from $387 million to $453 million primarily due to the shift in our manufacturing business model from turnkey to IFM and the related work-in process which includes purchased die and related back-end assembly and test manufacturing services needed to complete QCT’s integrated circuit products. The increase is also attributable to an increase in finished goods associated with growth in sales volume. QTL Segment.QTL revenues for fiscal 2008 were $3.62 billion, compared to $2.77 billion for fiscal 2007. QTL’s earnings before taxes for fiscal 2008 were $3.14 billion, compared to $2.34 billion for fiscal 2007. QTL’s operating margin percentage was 87% in fiscal 2008, compared to 84% in fiscal 2007. The increase in revenues from licensing and royalty fees for fiscal 2004 were $1.37 billion, comparedprimarily related 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 of CDMA-based products reported by ourQTL’s licensees other than Nokia, driven by the continued adoption of WCDMA at higher average selling prices partially offset by the effect of the changethan CDMA and fluctuations in timing of recognizingcurrency exchange rates. In addition, QTL revenues from licensing and royalties to an “as reported” method during the fourth quarter of fiscal 2004. Royalty revenues recorded in fiscal 2004 excluded $1512008 included $560 million of(attributable to both fiscal 2008 and 2007) related to the new agreement with Nokia. Revenues from licensing and 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 million2007 included royalty payments from Nokia only for sales of Nokia products through April 9, 2007. The increase 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 2003earnings before taxes was primarily dueattributable to the increase in QCT revenues as a percentageand the effect of total equipment and services revenues, resultingbad debt expenses recognized 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 percentage2007, partially offset by increases in research and development expenses and patent costs, which resulted in a corresponding increase in operating margin percentage.
QWI Segment.QWI revenues for fiscal 2008 were $785 million, compared to $828 million for fiscal 2007. Revenues decreased primarily resulted fromdue to a $187$78 million decrease in QES revenues, partially offset by a $27 million increase in costs relatedQIS revenues. The decrease in QES revenues was primarily attributable to integrated circuit productsan $88 million decrease in revenues from product sales, partially offset by an $11 million increase in messaging revenues. QES shipped approximately 91,200 terrestrial-based 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 development of our FLO technology and MediaFLO MDS. Selling, General and Administrative Expenses.Forsatellite-based systems during fiscal 2004, selling, general and administrative expenses were $547 million or 11% of revenues,2008, compared to $483 million or 13% ofapproximately 190,300 terrestrial-based and satellite-based systems in fiscal 2007. The increase in QIS revenues was primarily attributable to increases in QChat revenues resulting from increased development efforts under a licensing agreement with Sprint and our expanded BREW customer base and products.
QWI’s loss before taxes for fiscal 2003.2008 was $1 million, compared to earnings before taxes of $88 million for fiscal 2007. QWI’s operating margin percentage was zero percent in fiscal 2008, compared to 11% in fiscal 2007. The dollar increasedecrease in QWI’s earnings before taxes was primarily due to the decrease in revenues, a $61$30 million increase in employee-relatedQIS research and development expenses related to our BREW products and a $21$34 million increase in professional fees, primarily patent administration and outside consultants, andoperating expenses as a $12 million increase relatedresult of the acquisition of Firethorn during the first quarter of fiscal 2008, all of which contributed 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 recordedcorresponding decline 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.operating margin percentage. 4853
Net Investment Income (Expense).QSI SegmentNet investment income was $184. QSI revenues for fiscal 2008 were $12 million, compared to $1 million for fiscal 2004,2007, related to the commencement of our MediaFLO service in March 2007. QSI’s loss before taxes for fiscal 2008 was $304 million, compared to net investment expense of $8$240 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 | | | | | | | | | | | | |
The2007. QSI’s loss before taxes also included a $71 million increase in interest and dividend income on cash and marketable securities held by corporate and other segments was a resultour MediaFLO USA subsidiary’s loss before taxes comprised primarily of higher average cash and marketable securities balances, partially offset by the impactan increase of lower interest rates earned on interest-bearing securities, and $6$50 million in interest income recorded as a resultcost 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 Koreaequipment and services revenues and a $16$22 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%.expenses.
Our Segment Results for Fiscal 20052007 Compared to Fiscal 20042006 The following should be read in conjunction with the financial results of fiscal 20052007 and 20042006 for each reporting segment. See “Notes to Consolidated Financial Statements, — Note 10 —9 – Segment Information.” 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, primarily frommostly consisting of MSM and accompanying RF and PM integrated circuits, were $3.20$5.12 billion for fiscal 2005,2007, compared to $3.04$4.20 billion for fiscal 2004.2006. The increase in integrated circuitsequipment and services revenue was comprisedresulted primarily from an increase of $396$761 million related to higher unit shipments partially offset by a decreaseand an increase of $241$144 million related to the net effects of reductionschanges in product mix and the average sales prices and changes in product mix.of such products. Approximately 151253 million MSM integrated circuits were sold during fiscal 2005,2007, compared to approximately 137207 million for fiscal 2004.2006. 49
QCT’s earnings before taxes for fiscal 20052007 were $852 million,$1.55 billion, compared to $1.05$1.30 billion for fiscal 2004.2006. QCT’s operating income as a percentage of its revenues (operating margin percentage) was 26%29% in fiscal 2005,2007, compared to 34%30% in fiscal 2004.2006. The declinedecrease in operating margin percentage in fiscal 2005 as compared to fiscal 2004 was primarily the result of a 45% increasedue to increases in research and development and selling, general and administrative expenses, forpartially offset by an increase in the gross margin percentage. QCT inventories increased by 116% in fiscal 2005 as compared2007 from $179 million to fiscal 2004, mainly related$387 million due to increased investmentpurchases of completed die directly from foundry suppliers for use in newQCT’s CDMA-based integrated circuit products and technology research and development initiativesin connection with the shift in our manufacturing business model from turnkey 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.IFM. QTL Segment.QTL revenues for fiscal 20052007 were $1.84$2.77 billion, compared to $1.33$2.47 billion for fiscal 2004.2006. QTL’s earnings before taxes for fiscal 20052007 were $1.66$2.34 billion, compared to $1.20$2.23 billion for fiscal 2004.2006. QTL’s operating margin percentage was 84% in fiscal 2007, compared to 90% during bothin fiscal 2005 and 2004.2006. The increase in both revenues and earnings before taxes primarily resulted from a $350$306 million increase in royalties, reported to usdriven 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 to an increase in sales of CDMACDMA-based products by licensees, resulting from higher worldwide demand for CDMA products at higher average selling prices duelicensees. The increase in earnings before taxes was primarily attributable to the growth of higher priced WCDMA salesincrease in revenues, partially offset by increases in legal and shiftsbad debt expenses, which resulted in the geographic distribution of sales of CDMA products. Revenues from license fees were $69 milliona corresponding decline in fiscal 2005, as compared to $59 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.operating margin percentage.
QWI Segment.QWI revenues for fiscal 20052007 were $644$828 million, compared to $571$731 million for fiscal 2004.2006. Revenues increased primarily due to a $37increases of $78 million increaseand $11 million in QIS revenue and a $27 million increase in QWBS revenue.QES revenues, respectively. The increase in QIS revenue wasrevenues is primarily attributable to a $41$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 QWBS revenue wasQES revenues is primarily attributable to a $16$26 million increase in equipment revenue, net of a $24 million decrease in amortization of deferredand messaging revenues, related to historical equipment sales, and a $10 million increase in related messaging services revenue. QWBS shipped approximately 46,800 satellite-based systems and 62,500 terrestrial-based systems during fiscal 2005, compared to approximately 43,400 satellite-based systems and 10,000 terrestrial-based systems in fiscal 2004. QWI’s earnings before taxes for fiscal 2005 were $57 million, compared to $19 million for fiscal 2004. QWI’s operating margin percentage was 9% in fiscal 2005, compared to 3% in fiscal 2004. The increases in QWI earnings before taxes and operating percentage were 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, 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, 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$15 million decrease in amortization of deferred revenues related to historical equipment sales. QWBSQES shipped approximately 43,400
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satellite-based systems190,300 terrestrial-based and 10,000 terrestrial-basedsatellite-based systems during fiscal 2004,2007, compared to approximately 32,200140,300 terrestrial-based and 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.2006.
QWI’s earnings before taxes for fiscal 20042007 were $19$88 million, compared to $15$78 million for fiscal 2003.2006. QWI’s operating margin percentage was 3%11% in both fiscal 2004 and 2003.2007, compared to 10% in fiscal 2006. The increase in QWI’s earnings before taxes was primarily due to a $31$54 million increase in QIS gross margin, largely resulting from the increase in fees related to our expanded BREW customer base and products and QChat development efforts, partially offset by a $29 million increase in QWI research and development and selling, general and administrative expenses.expenses and an $18 million decrease in QES gross margin. The increase in QWI’s operating margin percentage remained flat in fiscal 2004 as compared to fiscal 2003 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, partially offset by the decrease in QES gross margin. QSI Segment.QSI’s lossesloss before taxes from continuing operations for fiscal 2004 were $312007 was $240 million, compared to $168$133 million for fiscal 2003.2006. 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 service 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 decreased by $42 million primarily due to a decrease in losses incurred by Inquamwas negligible 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. During fiscal 2004, we recorded $12 million in other-than-temporary losses 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 million in MediaFLO USA operating expenses.2007. 54
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$11.3 billion at September 25, 2005, an increase28, 2008, a decrease of $1.0 billion$546 million from September 26, 2004. The increase was30, 2007. Our cash, cash equivalents and marketable securities at September 28, 2008 consisted of $6.8 billion held by foreign subsidiaries with the remaining balance of $4.5 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. Total cash provided by operating activities and $386 million in netwas $3.6 billion during fiscal 2008, compared to $3.8 billion during fiscal 2007. Net proceeds from the issuance of common stock under our stock option and employee stock purchase plans partially offset by $953was $1.2 billion during fiscal 2008, compared to $556 million in repurchases of our common stock under our stock repurchase program, $576 million in capital expenditures, $524 million in dividends paid and $249 million invested in other entities and acquisitions.during fiscal 2007. On March 8, 2005,11, 2008, we announced that we had been authorized theto repurchase of up to $2$2.0 billion of our common stock under astock. The $2.0 billion stock repurchase program withreplaced a $3.0 billion stock repurchase program, of which approximately $2 million remained authorized for repurchases. The stock repurchase program has no expiration date. Through November 2, 2005,During fiscal 2008, we repurchased and retired approximately 27,083,00042,616,000 shares of our common stock for $953 million. In connection with this$1.7 billion. At September 28, 2008, we had not repurchased any of our shares under the $2.0 billion stock repurchase program, we have two put options outstanding, with expiration dates of December 7, 2005program. We declared and March 21, 2006, that may require us to repurchase 11,500,000 shares for $411 million (net of the option premiums received). At November 2, 2005, $636 million remained authorized for repurchases under our stock repurchase program. We announcedpaid dividends totaling $524$982 million, $307$862 million and $135$698 million, or $0.320, $0.190$0.60, $0.52 and $0.085$0.42 per common share, during fiscal 2005, 20042008, 2007 and 2003,2006, respectively. On October 10, 2005,22, 2008, we announced a cash dividend of $0.09$0.16 per share on our common stock, payable on January 4, 20067, 2009 to stockholders of record as of December 7, 2005.11, 2008. 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. Since September 2007, there has been a major disruption in U.S. and foreign credit and financial markets affecting consumers and the banking, finance and housing industries. This disruption was evidenced by a deterioration of confidence in financial markets and a severe decline in the availability of capital and demand for debt and equity securities. At September 28, 2008 and October 31, 2008, gross unrealized gains on marketable securities were $102 million and approximately $75 million, respectively, and gross unrealized losses were $449 million and approximately $1.3 billion, respectively. Our analyses of the severity and duration of price declines, market research, industry reports, economic forecasts and the specific circumstances of issuers indicate that it is reasonable to expect marketable securities with unrealized losses to recover within a reasonable period of time. Further, we have the ability and the intent to hold such securities until they recover. As a result, we do not believe the decline in the fair value of our marketable securities portfolio will materially affect our liquidity. At September 28, 2008, we classified our auction rate securities with recorded values of $186 million as noncurrent assets due to a disruption in credit markets that caused the auction mechanism to fail to set market-clearing rates and provide liquidity for sellers. However, a failed auction does not represent a default by the issuer of the underlying security. Our auction rate securities are predominantly rated AAA/Aaa, are collateralized by student loans substantially guaranteed by the U.S. government and continue to pay interest in accordance with their contractual terms. The cash values of our auction rate securities, which are held by a foreign subsidiary, may not be accessible until a successful auction occurs, a buyer is found outside of the auction process, the securities are called by the issuer or the underlying securities have been prepaid or have matured. Due to the combined strength of our significant cash, short-term investments and operating cash flows, we do not anticipate the current illiquidity of auction rate securities to affect our operating plans. Accounts receivable decreased by 6%increased greater than 100% during fiscal 2005.2008 primarily due to a $2.5 billion trade receivable for which we received payment in October 2008 related to the new agreements with Nokia, an increase of $423 million in other trade accounts receivable and an increase of $400 million related to amounts receivable for redemptions of money market funds for which we received partial payment in October 2008. Days sales outstanding on a consolidated basis,related to other trade accounts receivable were 30 days at September 25, 2005,28, 2008 compared to 4327 days at September 26, 2004.30, 2007. The changeincrease in other trade accounts receivable and the related days sales outstanding is consistent with the increase in revenuewere primarily due to increased revenues for integrated circuits and the decrease in accounts receivable resulting fromtiming of 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, areceipts for related receivables.
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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.
We intend to continue our strategic investment activities to promote the worldwide adoption of CDMA products and the growth of CDMA-based wireless data and wireless Internet products. As part of these investment activities, we may provide financing or other support to facilitate the marketing and sale of CDMA equipment by authorized suppliers. In the event additional needs for cash arise, we may raise additional funds from a combination of sources including potential debt and equity issuance.
We believe our current cash and cash equivalents, marketable securities and our expected cash flow generated from operations will provide us with flexibility and satisfy our expected working and other capital requirements over the next fiscal year and beyond based on our current business plans. Our total research and development expenditures were $2.28 billion in fiscal 2008 and $1.83 billion in fiscal 2007, and we expect to continue to invest heavily in research and development for new technologies, applications and services for the foreseeable future based on currentwireless industry. Our purchase obligations for fiscal 2009, some of which relate to research and development activities, totaled $868 million, at September 28, 2008. Cash used for strategic investments and acquisitions, net of cash acquired, was $298 million in fiscal 2008 and $249 million in fiscal 2007, and we expect to continue making strategic investments and acquisitions to open new markets for our technology, expand our technology, obtain development resources, grow our patent portfolio or pursue new 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.opportunities. 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, 2005,28, 2008, 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 | | | 2009 | | | 2010-2011 | | | 2012-2013 | | | Beyond 2013 | | | Date | | Purchase obligations(1) | | $ | 1,187 | | | $ | 868 | | | $ | 179 | | | $ | 85 | | | $ | 55 | | | $ | — | | | Operating leases | | | 453 | | | | 85 | | | | 116 | | | | 51 | | | | 201 | | | | — | | Equity funding commitments(2) | | | 9 | | | | — | | | | — | | | | — | | | | — | | | | 9 | | | | | | | | | | | | | | | | | | | | | | | Total commitments | | | 1,649 | | | | 953 | | | | 295 | | | | 136 | | | | 256 | | | | 9 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital leases(3) | | | 322 | | | | 10 | | | | 20 | | | | 20 | | | | 272 | | | | — | | Other long-term liabilities (4)(5) | | | 46 | | | | — | | | | 38 | | | | 1 | | | | 6 | | | | 1 | | | | | | | | | | | | | | | | | | | | | | | Total recorded liabilities | | | 368 | | | | 10 | | | | 58 | | | | 21 | | | | 278 | | | | 1 | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 2,017 | | | $ | 963 | | | $ | 353 | | | $ | 157 | | | $ | 534 | | | $ | 10 | | | | | | | | | | | | | | | | | | | | | |
| | | | (1) | | Total purchase obligations include $678 million in commitments to purchase integrated circuit product inventories. | | | (2) | | These commitments do not have fixed funding dates. Amountsdates and 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.amounts or not at all. | | | (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 28, 2008. | | | (3)(4) | | Certain long-term liabilities reflected on our balance sheet, such as unearned revenue,revenues and the obligation under securities lending, are not presented in this table because they do not require cash settlement in the future. | | | (5) | | Our consolidated balance sheet at September 28, 2008 included a $227 million noncurrent liability for uncertain tax positions, of which $138 million may result in cash payment. The future payments related to uncertain tax positions have not been presented in the table above due to the uncertainty of the amounts and timing of cash settlement with the taxing authorities. |
Additional information regarding our financial commitments at September 25, 200528, 2008 is provided in the Notesnotes to our Consolidated Financial Statements.consolidated financial statements. See “Notes to Consolidated Financial Statements, Note 4 — Investments in Other Entities and Note 9 —8 – Commitments and Contingencies.” 53
Future Accounting Requirements In September 2006, the FASB issued Statement No. 157 (FAS 157), “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value and expands disclosures about assets and liabilities measured at fair value in the financial statements. FAS 157 does not require any new fair value measurements, but applies to other accounting pronouncements that require or permit fair value measurements. In February 2008, the FASB issued FASB Staff Position 157-2 (FSP 157-2) which delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until the beginning of the first quarter of fiscal 2010. In October 2008, the FASB issued FASB Staff Position 157-3 (FSP 157-3) which clarifies the application of FAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The accounting provisions of FAS 157 for financial assets and financial liabilities will be effective for our fiscal 2009 beginning September 29, 2008. The adoption of FAS 157 for financial assets and financial liabilities is not expected to have a material impact on our consolidated financial statements, and we are in the process of determining the effect such adoption will have on our financial statement disclosures. We are also in the process of assessing the effects, if any, the adoption of FAS 157 for nonfinancial assets and nonfinancial liabilities will have on our consolidated financial statements. 56
In February 2007, the FASB issued Statement No. 159 (FAS 159), “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115,” which provides companies the irrevocable option to measure many financial assets and liabilities at fair value with the changes in fair value recognized in earnings (the fair value option) resulting in an opportunity to mitigate volatility in earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The accounting provisions of FAS 159 will be effective for our fiscal 2009 beginning September 29, 2008. We are still in the process of determining whether we will apply the fair value option to any of our financial assets. If we do elect the fair value option, the cumulative effect of initially adoption FAS 159 will be recorded as an adjustment to opening retained earnings in the year of adoption and will be presented separately. In December 2004,2007, the FASB revised Statement No. 123141 (FAS 123R)141R), “Share-Based Payment,“Business Combinations,” which requires companiesestablishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and (iii) determines what information to expensedisclose to enable users of the estimated fair valuefinancial statements to evaluate the nature and financial effects of employee stock options and similar awards. On April 14, 2005, the U.S. Securities and Exchange Commission adopted a new rule amending the compliance dates forbusiness combination. FAS 123R. In accordance with the new rule, the accounting provisions of FAS 123R141R will be effective for usour fiscal 2010 beginning in the first quarter of fiscal 2006. We tentatively expect to adopt 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 on the effective date and are subsequently modified or cancelled. Compensation expense for outstanding awards for which the requisite service had not been rendered as of the effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under FAS 123. At September 25, 2005, unamortized compensation expense related to outstanding unvested options, as determined in accordance with FAS 123, that 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.28, 2009. We are in the process of determining how the guidance regarding valuing share-based compensation as prescribedeffects, if any, the adoption of FAS 141R will have on our consolidated financial statements. In March 2008, the FASB issued Statement No. 161 (FAS 161), “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133,” which requires additional disclosures about the objectives of using derivative instruments, the method by which the derivative instruments and related hedged items are accounted for under FASB Statement No.133 and its related interpretations, and the effect of derivative instruments and related hedged items on financial position, financial performance and cash flows. FAS 161 also requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. FAS 123R161 will be applied to valuing share-based awards granted aftereffective for our second quarter of fiscal 2009 beginning December 29, 2008. We are in the effective date andprocess of determining the impact thateffects the recognitionadoption of compensation expense related to such awardsFAS 161 will have on our financial statements.statement disclosures. Item 7A. Quantitative and Qualitative Disclosures Aboutabout Market Risk Credit Risk.Since September 2007, there has been a major disruption in U.S. and foreign credit and financial markets affecting consumers and the banking, finance and housing industries. This disruption is evidenced by a deterioration of confidence in financial markets and a severe decline in the availability of capital and demand for debt and equity securities. The result has been depressed security values and widening credit spreads in most types of investment- and non-investment-grade bonds and debt obligations and mortgage- and asset-backed securities. We have no direct investments in the lowest credit quality, or subprime, mortgages, nor do we have 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. At September 28, 2008, we held a significant portion of our corporate cash in diversified portfolios of fixed- and floating-rate, investment-grade marketable securities, mortgage- and asset-backed securities, non-investment-grade bank loans and bonds, preferred stocks, equities and other securities that have been affected by these credit market concerns and had temporary gross unrealized losses of $449 million. At October 31, 2008, gross unrealized losses of our marketable securities portfolio were approximately $1.3 billion. Although we consider these unrealized losses to be temporary, there is a risk that we may incur other-than-temporary impairment charges or realized losses on the values of these and other similarly affected securities if U.S. credit and equity markets do not stabilize and recover to previous levels in the coming quarters. We engage in transactions in which certain fixed-income and equity securities are loaned to selected broker-dealers. We may incur a loss in the event that a broker does not return our securities, the collateral value is insufficient or cannot be maintained at required values or the lending agent fails to restore or pay us the cash value of our loaned securities. Interest Rate Market Risk.We invest most of our cash in a number of diversified investmentinvestment- and non-investment gradenon-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. IfWhen the general economy were to weakenweakens significantly, as it has recently, the credit profile, financial strength and growth prospects of certain issuers of interest-bearing securities held in our investment portfolios couldmay deteriorate, and our investments couldinterest-bearing securities may lose value.value either temporarily or other than temporarily. We may implement investment strategies of different types with varying duration and risk/return trade-offs that do not perform well. 57
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 averageweighted-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. 54
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rates
(Dollars in millions) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | No Single | | Fair | | No Single | | | | | | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | Thereafter | | Maturity | | Total | | Value | | 2009 | | 2010 | | 2011 | | 2012 | | 2013 | | Thereafter | | Maturity | | Total | | Fixed interest-bearing securities: | | | | Cash and cash equivalents | | $ | 608 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 608 | | $ | 608 | | | $ | 758 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 758 | | | Interest rate | | | 3.6 | % | | | | Held-to-maturity securities | | $ | 60 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 60 | | $ | 60 | | | | Interest rate | | | 2.1 | % | | | | 3.1 | % | | | Available-for-sale securities: | | | | Investment grade | | $ | 2,266 | | $ | 336 | | $ | 221 | | $ | 9 | | $ | 20 | | $ | 9 | | $ | 213 | | $ | 3,074 | | $ | 3,074 | | | $ | 1,562 | | $ | 314 | | $ | 279 | | $ | 95 | | $ | 39 | | $ | 130 | | $ | 198 | | $ | 2,617 | | | Interest rate | | | 3.4 | % | | | 3.7 | % | | | 4.1 | % | | | 4.4 | % | | | 4.1 | % | | | 6.7 | % | | | 4.5 | % | | | | 3.4 | % | | | 3.9 | % | | | 3.9 | % | | | 4.0 | % | | | 5.2 | % | | | 8.7 | % | | | 5.0 | % | | | Non-investment grade | | $ | 2 | | $ | 5 | | $ | 24 | | $ | 48 | | $ | 38 | | $ | 573 | | $ | — | | $ | 690 | | $ | 690 | | | $ | 42 | | $ | 13 | | $ | 41 | | $ | 67 | | $ | 84 | | $ | 521 | | $ | — | | $ | 768 | | | Interest rate | | | 6.5 | % | | | 7.5 | % | | | 7.3 | % | | | 7.3 | % | | | 8.2 | % | | | 7.9 | % | | | | 8.1 | % | | | 7.5 | % | | | 9.7 | % | | | 7.8 | % | | | 8.0 | % | | | 9.3 | % | | | | | | | Floating interest-bearing securities: | | | | Cash and cash equivalents | | $ | 1,364 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 1,364 | | $ | 1,364 | | | $ | 903 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 903 | | | Interest rate | | 3.7 | % | | | | | 2.0 | % | | | 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 | | | $ | 588 | | $ | 711 | | $ | 114 | | $ | 68 | | $ | — | | $ | 87 | | $ | 574 | | $ | 2,142 | | | Interest rate | | | 3.6 | % | | | 3.7 | % | | | 3.6 | % | | | 3.5 | % | | | 4.0 | % | | | 4.3 | % | | | 4.1 | % | | | | 2.9 | % | | | 3.0 | % | | | 3.1 | % | | | 3.1 | % | | | 5.2 | % | | | 4.5 | % | | | Non-investment grade | | $ | — | | $ | 6 | | $ | — | | $ | 3 | | $ | 2 | | $ | 17 | | $ | — | | $ | 28 | | $ | 28 | | | $ | 13 | | $ | 26 | | $ | 57 | | $ | 99 | | $ | 136 | | $ | 270 | | $ | 684 | | $ | 1,285 | | | Interest rate | | | 4.9 | % | | | 6.4 | % | | | 7.1 | % | | | 8.5 | % | | | | 4.5 | % | | | 6.8 | % | | | 7.4 | % | | | 7.1 | % | | | 7.2 | % | | | 7.5 | % | | | 7.1 | % | |
Cash and cash equivalents and available-for-sale securities are recorded at fair value. Equity Price Market Risk.The recent major disruption in U.S. and foreign credit and financial markets caused increased volatility in the fair values of our equity securities and equity mutual and exchange-traded fund shares. We invest inhave a number of diversified marketable securities portfolio that includes equities held by mutual and mutualexchange-traded fund shares that are subject to equity price risk. The recorded values of marketable equity securities increaseddecreased to $1.16$1.34 billion at September 25, 200528, 2008 from $765 million$1.52 billion at September 26, 2004.30, 2007. The recorded valuevalues of equity mutual fund and exchange-traded fund shares decreased to $293 million$1.28 billion at September 25, 200528, 2008 from $296 million$1.87 billion at September 26, 2004. Our diversified30, 2007. The combined recorded values of marketable equity securities and equity mutual and exchange-traded fund shares decreased by approximately $725 million due to price declines and by approximately $48 million as a result of actions taken to reduce our exposure to equity investments. We have made investments in specificmarketable equity securities of 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, 200528, 2008 would cause a corresponding 10% decrease in the carrying amounts of these securities, or $145$262 million. Our strategic investments in other entities consist substantially of investments in private early 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 At October 31, 2008, gross unrealized losses of our market risk exposures or in management’s objectivesmarketable equity securities and strategies with respect to managing such exposures. The recorded values of these strategic investments totaled $121 million at September 25, 2005, as compared to $162 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 Instrumentsmutual fund 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.
In connection with our stock repurchase program, we sell put options that may require us to repurchaseexchange-traded fund shares of our common stock at fixed prices. These written put options subject us to equity price risk. At September 25, 2005, two put options were outstanding, which expire on December 7, 2005 and March 21, 2006, that may require us to repurchase 11,500,000 shares of our common stock upon exercise for $411 million (net of the option premiums received). The put option liabilities, with a fair value of $7 million at September 25, 2005, were included in other current liabilities. If the fair value of our common stock at September 25, 2005 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%, the amount required to physically settle the put options would exceed the fair value of the shares repurchased by approximately $25 million, net of the $23 million in premiums received.$786 million.
Additional information regarding our strategic investments is provided in Management’s Discussion and Analysis of Financial Condition and Operating Results in this Annual Report.
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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.contracts with financial counterparties. Such derivative financial instruments are viewed as hedging or risk management tools and are not used for speculative or trading purposes. At September 25, 2005,28, 2008, we had no foreign currency forward contracts outstanding. At September 25, 2005, the recorded values28, 2008, we had a net asset of $37 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. In the event of the financial insolvency or distress of a counterparty to our derivative financial instruments, we may be unable to settle transactions, which could materially impact our results. If our forecasted royalty revenues were to decline by 20% and foreign exchange rates were to change unfavorably by 20% in each of our hedged foreign currencies, we would incur a loss of approximately $6$8 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. 58
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, 200528, 2008 and September 26, 200430, 2007 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-31. 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 isterms are 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, 2005.28, 2008. 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, 2005,28, 2008, as stated in theirits report which appears on pages F-1page F-1. 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. |
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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 2008 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 20062009 (the “2006“2009 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 2009 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 20062009 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 20062009 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 20062009 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 20062009 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: Financial statement schedules other than those listed above have been omitted because they are either not required, not applicable or the information is otherwise included in the notes to the Financial Statements.consolidated financial statements. (b) Exhibits: | | | | | Exhibit | | | | Number | | Description | | 2.6 | | 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)(7) | | | | | | 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)(7) | | | | | | 10.58 | | Form of Annual Grant under the 1998 Non-Employee Directors’ Stock Option Plan.(4)(6) | | | | | 10.59 | | Iridigm Display Corporation 2000 Stock Option Plan.(4)(13) | | | | 10.60 | | Forms of Stock Option Agreements under the Iridigm Display Corporation 2000 Stock Option Plan.(4)(13) | | | | 10.61 | | Summary of 2005 Annual Bonus Program (4)(14) |
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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)(9) | | | | | | 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) | | | | | | 10.71 | | Voluntary Executive Retirement Contribution Plan, as amended.(4)(21)(11) | | | | | 10.74 | | Form of Grant Notice and Stock Option Agreement under the 2006 Long-Term Incentive Plan.(1)(4) | | | | | 10.78 | | 2006 Long-Term Incentive Plan, as amended. (4)(12) | | | | | 10.79 | | 2001 Employee Stock Purchase Plan, as amended. (4)(12) | | | | | 10.80 | | Form of Grant Notice and Restricted Stock Unit Agreement under the 2006 Long-Term Incentive Plan.(4) | | | | | | 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. |
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| | | | | Exhibit | | | | Number | | Description | | 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, 2000.28, 2004. | | | (11)(8) | | Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 1, 2001. | | | (12) | | 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)(9) | | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on February 25, 2005. | | | (17)(10) | | 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)(11) | | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on October 26, 2005. | | | (12) | | Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 30, 2008. |
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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, 20056, 2008 | | | | | | | | QUALCOMM Incorporated
| | | | By /s/ | /s/ Paul E. Jacobs | | | | Paul E. Jacobs, | | | | | Chief Executive Officer | |
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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. JACOBSJacobs | | Chief Executive Officer and Director | | November 2, 20056, 2008 | | | | | | | | Paul E. Jacobs | | (Principal Executive Officer) | | | | | | | | | /s/ WILLIAM E. KEITEL
William E. Keitel | | Chief Financial Officer
| | November 6, 2008 | | | | | | | William E. Keitel | | (Principal Financial and Accounting Officer) | | November 2, 2005 | | | | | | | /s/ IRWIN JACOBS
Irwin Jacobs | | Chairman of the Board | | November 2, 20056, 2008 | | | | | | | Irwin Jacobs | | | | | | | | | | | /s/ RICHARD C. ATKINSON
Richard C. AtkinsonBarbara T. Alexander | | Director | | November 2, 20056, 2008 | | | | | | | Barbara T. Alexander | | | | | | | | | | | /s/ ADELIA A. COFFMAN
Adelia A. CoffmanStephen M. Bennett | | Director | | November 2, 20056, 2008 | | | | | | | Stephen M. Bennett | | | | | | | | | | | /s/ DONALD CRUICKSHANK
Donald Cruickshank | | Director | | November 2, 20056, 2008 | | | | | | | Donald Cruickshank | | | | | | | | | | | /s/ RAYMOND V. DITTAMORE
Raymond V. Dittamore | | Director | | November 2, 20056, 2008 | | | | | | | Raymond V. Dittamore | | | | | | | | | | | /s/ DIANA LADY DOUGAN
Diana Lady DouganRobert E. Kahn | | Director | | November 2, 20056, 2008 | | | | | | | Robert E. Kahn | | | | | | | | | | | /s/ ROBERT E. KAHN
Robert E. KahnSherry Lansing | | Director | | November 2, 20056, 2008 | | | | | | | Sherry Lansing | | | | | | | | | | | /s/ DUANE A. NELLES
Duane A. Nelles | | Director | | November 2, 20056, 2008 | | | | | | | Duane A. Nelles | | | | | | | | | | | /s/ PETER M. SACERDOTE
Peter M. SacerdoteBrent Scowcroft | | Director | | November 2, 20056, 2008 | | | | | | | Brent Scowcroft | | | | | | | | | | | /s/ BRENT SCOWCROFT | | | | | Brent ScowcroftMarc I. Stern | | Director | | November 2, 20056, 2008 | | | | | | | /s/ MARC I. STERN
Marc I. Stern | | Director | | November 2, 2005 | | | | | | /s/ RICHARD SULPIZIO
Richard Sulpizio | | Director | | November 2, 2005 |
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, 200528, 2008 and September 26, 2004,30, 2007 and the results of their operations and their cash flows for each of the three years in the period ended September 25, 200528, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2)presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. 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 28, 2008, 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 the accompanying 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, effective October 1, 2007, the Company maintained effective internal control over financial reporting asadopted the provisions of September 25, 2005 based on criteria establishedFASB Interpretation No. 48, “Accounting for Uncertainty inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 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. Income Taxes.” 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, 20056, 2008
F- 2F-1
QUALCOMM Incorporated CONSOLIDATED BALANCE SHEETS (In millions, except per share data) | | | | | | | | | | | | | | | | | | | | | September 25, | | September 26, | | | September 28, | | September 30, | | | | | 2005 | | 2004 | | | 2008 | | 2007 | | ASSETS | | ASSETS
| | | | | | Current assets: | | | | Cash and cash equivalents | | $ | 2,070 | | $ | 1,214 | | | $ | 1,840 | | $ | 2,411 | | | Marketable securities | | 4,478 | | 4,768 | | | 4,571 | | 4,170 | | | Accounts receivable, net | | 544 | | 581 | | | 4,038 | | 715 | | | Inventories | | 177 | | 154 | | | 521 | | 469 | | | Deferred tax assets | | 343 | | 409 | | | 289 | | 435 | | | Collateral held under securities lending | | | 173 | | 421 | | | Other current assets | | 179 | | 101 | | | 291 | | 200 | | | | | | | | | | | | | | | Total current assets | | 7,791 | | 7,227 | | | 11,723 | | 8,821 | | | Marketable securities | | 2,133 | | 1,653 | | | 4,858 | | 5,234 | | | Deferred tax assets | | | 830 | | 318 | | | Property, plant and equipment, net | | 1,022 | | 675 | | | 2,162 | | 1,788 | | | Goodwill | | 571 | | 356 | | | 1,517 | | 1,325 | | | Deferred tax assets | | 444 | | 493 | | | | Other intangible assets, net | | | 3,104 | | 664 | | | Other assets | | 518 | | 416 | | | 369 | | 345 | | | | | | | | | | | | | | | Total assets | | $ | 12,479 | | $ | 10,820 | | | $ | 24,563 | | $ | 18,495 | | | | | | | | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | LIABILITIES AND STOCKHOLDERS’ EQUITY
| | | | | | Current liabilities: | | | | Trade accounts payable | | $ | 376 | | $ | 286 | | | $ | 570 | | $ | 635 | | | Payroll and other benefits related liabilities | | 196 | | 194 | | | 406 | | 311 | | | Unearned revenue | | 163 | | 172 | | | | Income taxes payable | | | 20 | | 119 | | | Unearned revenues | | | 394 | | 218 | | | Obligation under securities lending | | | 173 | | 421 | | | Other current liabilities | | 335 | | 242 | | | 728 | | 554 | | | | | | | | | | | | | | | Total current liabilities | | 1,070 | | 894 | | | 2,291 | | 2,258 | | | Unearned revenue | | 146 | | 170 | | | | Unearned revenues | | | 3,768 | | 142 | | | Income taxes payable | | | 227 | | — | | | Other liabilities | | 144 | | 92 | | | 333 | | 260 | | | | | | | | | | | | | | | Total liabilities | | 1,360 | | 1,156 | | | 6,619 | | 2,660 | | | | | | | | | | | | | | | | | | Commitments and contingencies (Notes 4 and 9) | | | | Commitments and contingencies (Note 8) | | | | | | | | 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 28, 2008 and September 30, 2007 | | | — | | — | | | Common stock, $0.0001 par value; 6,000 shares authorized; 1,656 and 1,646 shares issued and outstanding at September 28, 2008 and September 30, 2007, respectively | | | — | | — | | | Paid-in capital | | 6,753 | | 6,940 | | | 7,511 | | 7,057 | | | Retained earnings | | 4,328 | | 2,709 | | | 10,717 | | 8,541 | | | Accumulated other comprehensive income | | 38 | | 15 | | | | Accumulated other comprehensive (loss) income | | | | (284 | ) | | 237 | | | | | | | | | | | | | | | Total stockholders’ equity | | 11,119 | | 9,664 | | | 17,944 | | 15,835 | | | | | | | | | | | | | | | Total liabilities and stockholders’ equity | | $ | 12,479 | | $ | 10,820 | | | $ | 24,563 | | $ | 18,495 | | | | | | | | | | | | | |
See accompanying notes. F- 3F-2
QUALCOMM Incorporated CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except per share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended | | | Year Ended | | | | | September 25, | | September 26, | | September 28, | | | September 28, | | September 30, | | September 24, | | | | | 2005 | | 2004 | | 2003 | | | 2008 | | 2007 | | 2006 | | | Revenues: | | | | Equipment and services | | $ | 3,744 | | $ | 3,514 | | $ | 2,862 | | | $ | 7,160 | | $ | 5,765 | | $ | 4,776 | | | Licensing and royalty fees | | 1,929 | | 1,366 | | 985 | | | 3,982 | | 3,106 | | 2,750 | | | | | | | | | | | | | | | | | | | | | 5,673 | | 4,880 | | 3,847 | | | | Total revenues | | | 11,142 | | 8,871 | | 7,526 | | | | | | | | | | | | | | | | | | | Operating expenses: | | | | Cost of equipment and services revenues | | 1,645 | | 1,484 | | 1,268 | | | 3,414 | | 2,681 | | 2,182 | | | Research and development | | 1,011 | | 720 | | 523 | | | 2,281 | | 1,829 | | 1,538 | | | Selling, general and administrative | | 631 | | 547 | | 483 | | | 1,717 | | 1,478 | | 1,116 | | | | | | | | | | | | | | | | | | | Total operating expenses | | 3,287 | | 2,751 | | 2,274 | | | 7,412 | | 5,988 | | 4,836 | | | | | | | | | | | | | | | | | | | | | | | Operating income | | 2,386 | | 2,129 | | 1,573 | | | 3,730 | | 2,883 | | 2,690 | | | 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 4) | | | 96 | | 743 | | 466 | | | | | | | | | | | | | Income before income taxes | | | 3,826 | | 3,626 | | 3,156 | | | Income tax expense | | | (666 | ) | | | (588 | ) | | | (536 | ) | | | (666 | ) | | | (323 | ) | | | (686 | ) | | | | | | | | | | | | 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 | | | $ | 3,160 | | $ | 3,303 | | $ | 2,470 | | | | | | | | | | | | | | | | | | | | | | | 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 | | | $ | 1.94 | | $ | 1.99 | | $ | 1.49 | | | | | | | | | | | | | | | | | | | | | | | 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 | | | $ | 1.90 | | $ | 1.95 | | $ | 1.44 | | | | | | | | | | | | | | | | | | | | | | | Shares used in per share calculations: | | | | Basic | | 1,638 | | 1,616 | | 1,579 | | | 1,632 | | 1,660 | | 1,659 | | | | | | | | | | | | | | | | | | | Diluted | | 1,694 | | 1,675 | | 1,636 | | | 1,660 | | 1,693 | | 1,711 | | | | | | | | | | | | | | | | | | | | | | | Dividends per share announced | | $ | 0.320 | | $ | 0.190 | | $ | 0.085 | | | $ | 0.60 | | $ | 0.52 | | $ | 0.42 | | | | | | | | | | | | | | | | | |
See accompanying notes. F- 4F-3
QUALCOMM Incorporated CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended | | | Year Ended | | | | | September 25, | | September 26, | | September 28, | | | September 28, | | September 30, | | September 24, | | | | | 2005 | | 2004 | | 2003 | | | 2008 | | 2007 | | 2006 | | Operating Activities: | | | | Income from continuing operations | | $ | 2,143 | | $ | 1,725 | | $ | 1,029 | | | | Net income | | | $ | 3,160 | | $ | 3,303 | | $ | 2,470 | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | Depreciation and amortization | | 200 | | 163 | | 146 | | | 456 | | 383 | | 272 | | | Asset impairment and related charges | | — | | — | | 34 | | | | Revenues related to non-monetary exchanges | | | | (172 | ) | | — | | | (1 | ) | | Non-cash portion of income tax expense | | | 306 | | 91 | | 514 | | | Non-cash portion of share-based compensation expense | | | 541 | | 488 | | 495 | | | Incremental tax benefits from stock options exercised | | | | (408 | ) | | | (240 | ) | | | (403 | ) | | Net realized gains on marketable securities and other investments | | | (179 | ) | | | (88 | ) | | | (80 | ) | | | (155 | ) | | | (222 | ) | | | (136 | ) | | (Gains) losses on derivative instruments | | | (33 | ) | | | (7 | ) | | 3 | | | | Other-than-temporary losses on marketable securities and other investments | | 14 | | 12 | | 128 | | | 535 | | 27 | | 24 | | | Equity in losses of investees | | 28 | | 72 | | 113 | | | | Non-cash income tax expense | | 498 | | 419 | | 411 | | | | Other non-cash charges | | — | | 35 | | 13 | | | | Proceeds from (purchases of) trading securities | | — | | — | | 2 | | | | Increase (decrease) in cash resulting from changes in: | | | | Other items, net | | | 3 | | | (43 | ) | | 31 | | | Changes in assets and liabilities, net of effects of acquisitions (Note 10): | | | | Accounts receivable, net | | 35 | | | (93 | ) | | 53 | | | | (653 | ) | | | (16 | ) | | | (133 | ) | | Inventories | | | (23 | ) | | | (50 | ) | | | (23 | ) | | | (47 | ) | | | (234 | ) | | | (71 | ) | | Other assets | | | (74 | ) | | 51 | | | (12 | ) | | | (17 | ) | | | (96 | ) | | 15 | | | Trade accounts payable | | 57 | | 151 | | | (24 | ) | | | (63 | ) | | 209 | | 51 | | | Payroll, benefits and other liabilities | | 49 | | 148 | | 43 | | | 161 | | 139 | | 96 | | | Unearned revenue | | | (29 | ) | | | (57 | ) | | | (12 | ) | | | Unearned revenues | | | | (89 | ) | | 22 | | 29 | | | | | | | | | | | | | | | | | | | Net cash provided by operating activities | | 2,686 | | 2,481 | | 1,824 | | | 3,558 | | 3,811 | | 3,253 | | | | | | | | | | | | | | | | | | Investing Activities: | | | | Capital expenditures | | | (576 | ) | | | (332 | ) | | | (202 | ) | | | (1,397 | ) | | | (818 | ) | | | (685 | ) | | Purchases of available-for-sale securities | | | (8,055 | ) | | | (8,372 | ) | | | (4,484 | ) | | | (7,680 | ) | | | (8,492 | ) | | | (12,517 | ) | | Proceeds from sale of available-for-sale securities | | 8,072 | | 5,026 | | 3,183 | | | 6,689 | | 7,998 | | 10,853 | | | Purchases of held-to-maturity securities | | — | | | (184 | ) | | | (355 | ) | | | Increase in receivables for settlement of investments | | | | (406 | ) | | — | | — | | | Maturities of held-to-maturity securities | | 10 | | 401 | | 257 | | | — | | — | | 130 | | | Issuance of finance receivables | | — | | | (1 | ) | | | (150 | ) | | | Collection of finance receivables | | 2 | | 196 | | 813 | | | | Other investments and acquisitions, net of cash acquired | | | (249 | ) | | | (70 | ) | | | (37 | ) | | | (298 | ) | | | (249 | ) | | | (407 | ) | | Change in collateral held under securities lending | | | 248 | | | (421 | ) | | — | | | Other items, net | | 20 | | 10 | | | (17 | ) | | 25 | | 84 | | 3 | | | | | | | | | | | | | | | | | | | Net cash used by investing activities | | | (776 | ) | | | (3,326 | ) | | | (992 | ) | | | (2,819 | ) | | | (1,898 | ) | | | (2,623 | ) | | | | | | | | | | | | | | | | | Financing Activities: | | | | Proceeds from issuance of common stock | | 386 | | 330 | | 191 | | | 1,184 | | 556 | | 692 | | | Incremental tax benefits from stock options exercised | | | 408 | | 240 | | 403 | | | Repurchase and retirement of common stock | | | (953 | ) | | — | | | (166 | ) | | | (1,670 | ) | | | (1,482 | ) | | | (1,500 | ) | | Proceeds from put options | | 37 | | 5 | | 7 | | | | Dividends paid | | | (524 | ) | | | (308 | ) | | | (135 | ) | | | (982 | ) | | | (862 | ) | | | (698 | ) | | Change in obligation under securities lending | | | | (248 | ) | | 421 | | — | | | Other items, net | | | 1 | | 16 | | 11 | | | | | | | | | | | | | | | | | | | 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 | | | | (1,307 | ) | | | (1,111 | ) | | | (1,092 | ) | | | | | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | — | | — | | | (2 | ) | | | (3 | ) | | 2 | | | (1 | ) | | | | | | | | | | | | | | | | | Net increase (decrease) in cash and cash equivalents | | 856 | | | (831 | ) | | 638 | | | Net (decrease) increase in cash and cash equivalents | | | | (571 | ) | | 804 | | | (463 | ) | Cash and cash equivalents at beginning of year | | 1,214 | | 2,045 | | 1,407 | | | 2,411 | | 1,607 | | 2,070 | | | | | | | | | | | | | | | | | | Cash and cash equivalents at end of year | | $ | 2,070 | | $ | 1,214 | | $ | 2,045 | | | $ | 1,840 | | $ | 2,411 | | $ | 1,607 | | | | | | | | | | | | | | | | | |
See accompanying notes. F- 5F-4
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 | | | Balance at September 25, 2005 | | | 1,640 | | $ | 6,753 | | $ | 4,328 | | $ | 38 | | $ | 11,119 | | | | | | | | | | | Components of comprehensive income: | | | | Net income | | — | | — | | 827 | | — | | 827 | | | — | | — | | 2,470 | | — | | 2,470 | | | 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 | | | | 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 | | 934 | | | 2,496 | | | | | | | | | | | Exercise of stock options | | 47 | | 153 | | — | | — | | 153 | | | 36 | | 608 | | — | | — | | 608 | | | Tax benefit from exercise of stock options | | — | | 267 | | — | | — | | 267 | | | — | | 394 | | — | | — | | 394 | | | Issuance for Employee Stock Purchase and Executive Retirement Plans | | 3 | | 38 | | — | | — | | 38 | | | 2 | | 71 | | — | | — | | 71 | | | Reversal of the valuation allowance on certain deferred tax assets | | — | | 1,106 | | — | | — | | 1,106 | | | | Share-based compensation | | | — | | 496 | | — | | — | | 496 | | | Repurchase and retirement of common stock | | | (10 | ) | | | (158 | ) | | — | | — | | | (158 | ) | | | (34 | ) | | | (1,473 | ) | | — | | — | | | (1,473 | ) | | Dividends | | — | | — | | | (135 | ) | | — | | | (135 | ) | | — | | — | | | (698 | ) | | — | | | (698 | ) | | Stock-based compensation expense | | — | | 1 | | — | | — | | 1 | | | | Value of common stock issued for acquisition | | | 8 | | 353 | | — | | — | | 353 | | | Value of options exchanged for acquisitions | | | — | | 40 | | — | | — | | 40 | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at September 28, 2003 | | 1,597 | | 6,325 | | 1,297 | | | (24 | ) | | 7,598 | | | Balance at September 24, 2006 | | | 1,652 | | 7,242 | | 6,100 | | 64 | | 13,406 | | | | | | | | | | | Components of comprehensive income: | | | | Net income | | — | | — | | 1,720 | | — | | 1,720 | | | — | | — | | 3,303 | | — | | 3,303 | | | 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 | | | | 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 | | 1,759 | | | 3,476 | | | | | | | | | | | Exercise of stock options | | 36 | | 284 | | — | | — | | 284 | | | 28 | | 477 | | — | | — | | 477 | | | Tax benefit from exercise of stock options | | — | | 285 | | — | | — | | 285 | | | — | | 229 | | — | | — | | 229 | | | Issuance for Employee Stock Purchase and Executive Retirement Plans | | 2 | | 46 | | — | | — | | 46 | | | 3 | | 88 | | — | | — | | 88 | | | Share-based compensation | | | — | | 485 | | — | | — | | 485 | | | Repurchase and retirement of common stock | | | | (37 | ) | | | (1,459 | ) | | — | | — | | | (1,459 | ) | | Dividends | | — | | — | | | (308 | ) | | — | | | (308 | ) | | — | | — | | | (862 | ) | | — | | | (862 | ) | | Other | | | — | | | (5 | ) | | — | | — | | | (5 | ) | | | | | | | | | | | | | | | | | | | | | | | | | Balance at September 26, 2004 | | 1,635 | | 6,940 | | 2,709 | | 15 | | 9,664 | | | Balance at September 30, 2007 | | | 1,646 | | 7,057 | | 8,541 | | 237 | | 15,835 | | | | | | | | | | | Components of comprehensive income: | | | | Net income | | — | | — | | 2,143 | | — | | 2,143 | | | — | | — | | 3,160 | | — | | 3,160 | | | Unrealized net losses on securities and derivative instruments, net of income tax benefits of $373 | | | — | | — | | — | | | (738 | ) | | | (738 | ) | | Reclassification adjustment for net realized gains on securities and derivative instruments included in net income, net of income taxes of $48 | | | — | | — | | — | | | (72 | ) | | | (72 | ) | | Reclassification adjustment for other-than-temporary losses on marketable securities included in net income, net of income tax benefits of $201 | | | — | | — | | — | | 301 | | 301 | | | Foreign currency translation | | — | | — | | — | | 5 | | 5 | | | — | | — | | — | | | (12 | ) | | | (12 | ) | | Unrealized net gains on securities, net of income taxes of $73 | | — | | — | | — | | 103 | | 103 | | | | Unrealized net gains on derivative instruments, net of income taxes of $6 | | — | | — | | — | | 9 | | 9 | | | | Reclassification adjustment for net realized gains on securities included in net income, net of income taxes of $68 | | — | | — | | — | | | (102 | ) | | | (102 | ) | | | Reclassification adjustment for other-than-temporary losses on marketable securities included in net income, net of income taxes of $5 | | — | | — | | — | | 8 | | 8 | | | | | | | | | | | | Total comprehensive income | | 2,166 | | | 2,639 | | | | | | | | | | | Exercise of stock options | | 30 | | 348 | | — | | — | | 348 | | | 49 | | 1,070 | | — | | — | | 1,070 | | | Tax benefit from exercise of stock options | | — | | 346 | | — | | — | | 346 | | | — | | 385 | | — | | — | | 385 | | | Issuance for Employee Stock Purchase and Executive Retirement Plans | | 2 | | 56 | | — | | — | | 56 | | | 4 | | 117 | | — | | — | | 117 | | | Share-based compensation | | | — | | 544 | | — | | — | | 544 | | | Repurchase and retirement of common stock | | | (27 | ) | | | (953 | ) | | — | | — | | | (953 | ) | | | (43 | ) | | | (1,666 | ) | | — | | — | | | (1,666 | ) | | Dividends | | — | | — | | | (524 | ) | | — | | | (524 | ) | | — | | — | | | (982 | ) | | — | | | (982 | ) | | Value of options exchanged for acquisitions | | — | | 19 | | — | | — | | 19 | | | | Deferred stock-based compensation from acquisitions | | — | | | (3 | ) | | — | | — | | | (3 | ) | | | Value of options exchanged for acquisition | | | — | | 4 | | — | | — | | 4 | | | Cumulative effect of adoption of FIN 48 (Note 1) | | | — | | — | | | (2 | ) | | — | | | (2 | ) | | | | | | | | | | | | | | | | | | | | | | | | | Balance at September 25, 2005 | | 1,640 | | $ | 6,753 | | $ | 4,328 | | $ | 38 | | $ | 11,119 | | | Balance at September 28, 2008 | | | 1,656 | | $ | 7,511 | | $ | 10,717 | | $ | (284 | ) | | $ | 17,944 | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes. F- 6F-5
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 revenues 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, handsetdevice 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. The fiscal years ended September 25, 2005, September 26, 200428, 2008 and September 28, 200324, 2006 each includeincluded 52 weeks. The fiscal year ended September 30, 2007 included 53 weeks. Revenue Recognition.The Company derives revenuerevenues principally from sales of integrated circuit products, from royalties and license fees for its intellectual property, from messaging and other services and related hardware sales, from software development and licensing and related services, software hosting services and from license fees for intellectual property.services related to delivery of multimedia content. 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 stageCompany allocates revenue for transactions that include multiple elements to each unit of accounting based on its relative fair value and recognizes revenue for each unit of accounting when revenue recognition criteria have been met. The price charged when the element is sold separately generally determines fair value. When the Company has objective evidence of the fair values of undelivered elements but not delivered elements, the Company allocates revenue first to the fair value of the undelivered elements, and the residual revenue is then allocated to the delivered elements. If the fair value of any undelivered element included in a multiple element arrangement cannot be objectively determined, revenue is deferred until all elements are delivered or services have been performed, or until fair value can objectively be determined for any remaining undelivered elements. Revenues from sales of the Company’s customers’ products does not affectare recognized at the timingtime of shipment, or amountwhen title and risk of loss pass to the customer and other criteria for revenue recognized.recognition are met, if later. Revenues from providing services, including software hosting services and the delivery of multimedia content, are recognized when earned. F-6
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company licenses rights to use portions of its intellectual property portfolio, which includes certain patent rights essential to and/or useful in the manufacture and sale of CDMA products, including, without limitation, products implementing cdmaOne, CDMA2000, Wideband CDMA (WCDMA) and/or the CDMA Time Division Duplex (TDD) standards and their derivatives.certain wireless products. 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 sevenfifteen 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- 7
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reported quarterly, payment is on a semi-annual basis. During the periods preceding the fourth quarter of fiscal 2004, thequarter. The 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 such quarter. The change in the timing of recognizing royalty revenue was made prospectivelyquarter 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 criteria 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 recognized revenues and expenses from sales of certain satellite and terrestrial-based two-way data messaging and position reporting hardware and related software products by its QWBS division (Note 10) ratably over the shorter of the estimated useful life of the hardware product or the expected messaging service period, which is typically five years, 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 expenses from such sales at the time of shipment, or when title and risk of loss pass to the customer and other criteria for revenue recognition are met, if later, 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. RevenueRevenues and profitprofits 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. 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 STATEMENTSdetermined
The Company provides both perpetual and renewable time-based software licenses. Revenues from software license fees are recognized when all of the followingrevenue recognition 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;met and, if applicable, when vendor-specific objective evidence exists to allocate the total license fee to elements of multiple-element software arrangements, including post-contract customer support. Post-contract support is recognized ratably over the term of the related contract. When contracts contain multiple elements wherein vendor-specific objective evidence 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 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 specificvendor-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 consistsrevenues consist primarily of fees related to software products, license fees for intellectual property, and hardware productsproduct 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,two customers of the Company’s QCT, QTL and QWI segments each comprised 15%, 13%an aggregate of 16% and 11% of total consolidated revenues, respectively, in fiscal 2005, as compared to 15%, 15% and 10%14% of total consolidated revenues in fiscal 2004, respectively,2008, compared to 13% and 13%, 17% and 13%, respectively,14% of total consolidated revenues in fiscal 2003.2007 and 13% of total consolidated revenues in fiscal 2006, respectively. Aggregated accounts receivable from Samsung, LG Electronicsthese two customers and Motorolafrom Nokia Corporation/Nokia Inc. (Nokia) (Notes 3 and 8) comprised 45%73% and 51%40% of gross accounts receivable at September 25, 200528, 2008 and September 26, 2004,30, 2007, respectively. Revenues from international customers were approximately 82%, 79% and 77%91% of total consolidated revenues in fiscal 2005, 20042008 and 2003, respectively.87% of total consolidated revenues in fiscal 2007 and 2006. 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 and multimedia content delivery services revenues and the cost of development and other services revenues. Cost of equipment revenues consists of the cost of equipment sold, the amortization of certain intangible assets, including license fees and patents, and sustaining engineering costs, including personnel and related costs. Cost of messaging and multimedia content delivery services revenues consists principally of satellite transponder costs, network operations expenses, including personnel and related costs, depreciation, content costs 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. F-7
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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
On October 1, 2007, the Company adopted FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes,” which prescribes a comprehensive model for the financial statement recognition, measurement, classification and disclosure of uncertain tax positions. As a result of the adoption, the Company increased its liabilities related to uncertain tax positions by $2 million and accounted for the cumulative effect of this change as a decrease to retained earnings. The Company historically classified such liabilities as reductions to deferred tax assets or as current income taxes payable. Upon adoption, the Company reclassified $174 million in unrecognized tax benefits for which the Company does not anticipate payment or receipt of cash within one year to noncurrent income taxes payable. The total amount of gross unrecognized tax benefits as of the date of adoption of FIN 48 was $224 million, of which $159 million would affect the effective tax rate if recognized.
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company’s policy of including interest and penalties related to income taxes, including unrecognized tax benefits, within the provision for income taxes did not change as a result of implementing FIN 48. As of the date of adoption, the amounts recognized in income tax expense and income taxes payable for interest and penalties relating to unrecognized tax benefits were negligible.
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. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. As a result of the implementation of FIN 48, we recognize liabilities for uncertain tax positions based on the two-step process prescribed in the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. 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 liabilityincome taxes payable 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. F-8
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 other comprehensive income (loss), net of tax. The specific identification method is used to compute the realized gains and losses on debt and equity securities. The Company regularly monitors and evaluates the realizable value of its marketable securities. When assessing marketable securities for other-than-temporary declines in value, the Company considers such factors as, among other things,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 underlying factors contributing to a decline in the prices of securities in a single asset class, 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, 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 Company uses the equity method to account for investments in corporate entities, including limited liability corporations that do not maintain specific ownership accounts, in which it has a voting interest of 20% to 50% and other than minor to 50% ownership interests in partnerships and limited liability corporations that do maintain specific ownership accounts, or in which it otherwise has the ability to exercise significant influence. Under the equity method, the investment is originally recorded at cost and adjusted to recognize the Company’s share of net earnings or losses of the investee, limited to the extent of the Company’s investment in and advances to the investee and financial guarantees on behalf of the investee that create additional basis. The Company’s equity in net earnings or losses of its investees are recorded one month in arrears to facilitate the timely inclusion of such equity in net earnings or losses in the Company’s consolidated financial statements. The Company regularly monitors and evaluates the realizable value of its investments. When assessing an investment for an other-than-temporary decline in value, the Company considers such factors as, among other things, the share price from the investee’s latest financing round, the performance of the investee in relation to its own operating targets and its business plan, the investee’s revenue and cost trends, as well as liquidity and cash position, including its cash burn rate, market acceptance of the investee’s products/services as well as any new products or services that may be forthcoming, any significant news that has been released specific to the investee or the investee’s competitors and/or industry, and the outlook for the overall industry in which the investee operates. From time to time, the Company may consider third party evaluations, valuation reports or advice from investment banks. If events and circumstances indicate that a decline in the value of these assets has occurred and is other than temporary, 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, F-9
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 200528, 2008 and the value of the Company’s foreign currency forward contracts was insignificant at September 26, 2004.30, 2007. The value of the Company’s foreign currency option contracts recorded in other current assets was $16$56 million and $1 million at September 25, 2005,28, 2008 and September 30, 2007, respectively, and the value recorded in other current liabilities was $19 million and $2 million at September 28, 2008 and September 30, 2007, 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. TheAt September 28, 2008, no put options were outstanding. At September 30, 2007, the value of the put options recorded in other current liabilities was $7 million at September 25, 2005. The F-11
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company had no put options outstanding at 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.$10 million.
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, 20042008, 2007 and 20032006 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 four 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 year at both September 25, 2005 and September 26, 2004. OtherAcquired intangible assets other than goodwill are amortized on a straight-line basis over their useful lives ranging fromunless the lives are determined to be indefinite. Acquired intangible assets are carried at cost, less than one yearaccumulated amortization. For intangible assets purchased in a business combination or received in a non-monetary exchange, the estimated fair values of the assets received (or, for non-monetary exchanges, the estimated fair values of the assets transferred if more clearly evident) are used to 28 years.establish the cost bases, except when neither of the values of the assets received or the assets transferred in non-monetary exchanges are determinable within reasonable limits. Valuation techniques consistent with the market approach, income approach and/or cost approach are used to measure fair value. Amortization of finite-lived intangible assets is computed over the useful lives of the respective assets. Weighted-average amortization periods for finite livedfinite-lived intangible assets, by class, were as follows: | | | | | | | | | | | September 25, 2005 | | September 26, 2004 | Wireless licenses | | 15 years | | 15 years | Marketing-related | | 18 years | | 17 years | Technology-based | | 9 years | | 11 years | Customer-related | | 7 years | | 8 years | Other | | 28 years | | 28 years | Total intangible assets | | 13 years | | 14 years |
Changes in the weighted-average amortization periods from fiscal 2004 to 2005 resulted from additions to intangible assets related to acquisitions (Note 11).| | | | | | | | | | | | | September 28, | | September 30, | | | | 2008 | | 2007 | | Wireless licenses | | 15 years | | 15 years | | Marketing-related | | 16 years | | 17 years | | Technology-based | | 14 years | | 11 years | | Customer-related | | 5 years | | 6 years | | Other | | 22 years | | 28 years | | Total intangible assets | | 14 years | | 12 years |
ValuationImpairment of Long-Lived and Intangible Assets.The Company assesses potential impairments to its long-lived assets or asset groups when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recovered. An impairment loss is recognized when the carrying amount of the long-lived asset or asset group is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset or asset group 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.asset or asset group. Any required impairment loss is measured as the amount by which the carrying amount of a long-lived asset or asset group exceeds its fair value and is recorded as a reduction in the carrying value of the related asset or asset group and a charge to operating results. Intangible assets with indefinite lives are tested annually for impairment and in interim periods if certain events occur indicating that the carrying value of the intangible assets may be impaired. 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 $169 million and $411 million at September 28, 2008 and September 30, 2007, respectively, 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 $173 million and $421 million at September 28, 2008 and September 30, 2007, respectively, was recorded as a current asset with a corresponding current liability. F-10
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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.Share-based compensation cost, principally related to stock options, 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 records compensation expense forCompany’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 2008, 2007 and 2006 were $15.97, $14.54 and $15.73 per share, respectively, using the binomial model with the following weighted-average assumptions (annualized percentages): | | | | | | | | | | | | | | | | | 2008 | | 2007 | | 2006 | | Volatility | | | 41.1 | % | | | 33.4 | % | | | 30.7 | % | | Risk-free interest rate | | | 3.8 | % | | | 4.6 | % | | | 4.6 | % | | Dividend yield | | | 1.3 | % | | | 1.3 | % | | | 1.0 | % | | Post-vesting forfeiture rate | | | 8.0 | % | | | 6.5 | % | | | 6.0 | % | | Suboptimal exercise factor | | | 1.9 | | | | 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. The selection of implied volatility data to estimate expected volatility was based upon their intrinsic valuethe availability of actively traded options on the dateCompany’s stock and the Company’s assessment that implied volatility is more representative of grant pursuantfuture 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 Accounting Principles Board Opinion 25 (APB 25), “Accounting for Stock Issuedassume a dividend yield as an input to Employees.” Because the Company establishesbinomial 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 based onbefore employees are expected to exercise their stock options. The expected life of employee stock options represents the fair market value of the Company’s stock at the date of grant,weighted-average period the stock options have no intrinsic value upon grant,are expected to remain outstanding and therefore no expense is recorded. Each quarter,a derived output of the Company reports the potential dilutive impactbinomial model. The expected life of share-based payments in its diluted earnings per common share using the treasury-stock method. Out-of-the-moneyemployee 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 belowabove 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 5.9 years, 6.2 years and 5.8 years during fiscal 2008, 2007 and 2006, respectively. The pre-vesting forfeiture rate represents the rate at which stock options are not includedexpected to be forfeited by employees prior to their vesting. Pre-vesting forfeitures were estimated to be approximately 0% in diluted earnings per common sharefiscal 2008, 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 their effect is anti-dilutive.the forfeitures occur. The Company will continue to evaluate the appropriateness of this assumption. F-12F-11
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 ofTotal estimated 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 the 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 pursuantcompensation expense, related 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 valuesall of the Company’s share-based payments. The Black-Scholes weighted average estimated fair values of stock options granted during fiscal 2005, 2004 and 2003 were $14.80, $13.92 and $9.67 per share, respectively. The Black-Scholes weighted average estimated fair values of purchase rights granted pursuant to the Employee Stock Purchase Plans during fiscal 2005, 2004 and 2003 were $8.76, $7.53 and $4.80 per share, respectively.
For purposes of pro forma disclosures, the estimated fair value of share-based payments is assumed to be amortized to expense over their vesting periods. The pro forma effects of recognizing compensation expense under the fair value method on net income and net earnings per common share wereawards, was comprised as follows (in millions, exceptmillions):
| | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | 2006 | | | Cost of equipment and services revenues | | $ | 39 | | | $ | 39 | | | $ | 41 | | | Research and development | | | 250 | | | | 221 | | | | 216 | | | Selling, general and administrative | | | 254 | | | | 233 | | | | 238 | | | | | | | | | | | | | | Share-based compensation expense before taxes | | | 543 | | | | 493 | | | | 495 | | | Related income tax benefits | | | (176 | ) | | | (169 | ) | | | (175 | ) | | | | | | | | | | | | | Share-based compensation expense, net of taxes | | $ | 367 | | | $ | 324 | | | $ | 320 | | | | | | | | | | | | |
The Company recorded $135 million, $98 million and $86 million in share-based compensation expense during fiscal 2008, 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 earnings per common share): | | | | | | | | | | | | | | | | | 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 STATEMENTSfiscal 2008, 2007 and 2006, $408 million, $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.
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 $2 million in fiscal 2008 and $1 million. Duringmillion in both 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 and losses included in the Company’s statements of operations were insignificant.2006.
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. The reclassification adjustment for other-than-temporary losses on marketable securities included in net income results from the recognition of the unrealized losses in the statements of operations when they are no longer viewed as temporary.
Components of accumulated other comprehensive (loss) 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 28, | | | September 30, | | | | | 2008 | | | 2007 | | | Net unrealized (losses) gains on marketable securities, net of income taxes | | $ | (291 | ) | | $ | 241 | | | Net unrealized gains (losses) on derivative instruments, net of income taxes | | $ | 22 | | | $ | (1 | ) | | Foreign currency translation | | | (15 | ) | | | (3 | ) | | | | | | | | | | | | $ | (284 | ) | | $ | 237 | | | | | | | | | |
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 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 2005, 20042008, 2007 and 20032006 were approximately 56,127,000, 58,686,00027,618,000, 32,333,000 and 56,338,000,51,835,000, respectively. F-12
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Employee stock options to purchase approximately 33,660,000, 40,221,000102,397,000, 96,278,000 and 86,540,00054,541,000 shares of common stock during fiscal 2005, 20042008, 2007 and 2003,2006, 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 priceeffect on diluted earnings per share would be anti-dilutive. The computation of thediluted earnings per share excluded 781,000, 404,000 and 325,000 shares of common stock issuable under our employee stock purchase plans during fiscal 2008, 2007 and therefore,2006, respectively, because the effect on dilutivediluted earnings per common share would be anti-dilutive. Put options F-14
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
outstanding during fiscal 20052008 and 20042007 to purchase a weighted-average of 13,000,0001,607,000 and 3,000,0001,456,000 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).anti-dilutive. Future Accounting Requirements.In September 2006, the FASB issued Statement No. 157 (FAS 157), “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value and expands disclosures about assets and liabilities measured at fair value in the financial statements. FAS 157 does not require any new fair value measurements, but applies to other accounting pronouncements that require or permit fair value measurements. In February 2008, the FASB issued FASB Staff Position 157-2 (FSP 157-2) which delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until the beginning of the first quarter of fiscal 2010. In October 2008, the FASB issued FASB Staff Position 157-3 (FSP 157-3) which clarifies the application of FAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The accounting provisions of FAS 157 for financial assets and financial liabilities will be effective for the Company’s fiscal 2009 beginning September 29, 2008. The adoption of FAS 157 for financial assets and financial liabilities is not expected to have a material impact on the Company’s consolidated financial statements, and the Company is in the process of determining the effects such adoption will have on its financial statement disclosures. The Company is also in the process of assessing the effects, if any, the adoption of FAS 157 for nonfinancial assets and nonfinancial liabilities will have on its consolidated financial statements. In February 2007, the FASB issued Statement No. 159 (FAS 159), “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115,” which provides companies the irrevocable option to measure many financial assets and liabilities at fair value with the changes in fair value recognized in earnings (the fair value option) resulting in an opportunity to mitigate volatility in earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The accounting provisions of FAS 159 will be effective for the Company’s fiscal 2009 beginning September 29, 2008. The Company is still in the process of determining whether it will apply the fair value option to any of its financial assets. If the Company does elect the fair value option, the cumulative effect of initially adoption FAS 159 will be recorded as an adjustment to opening retained earnings in the year of adoption and will be presented separately. In December 2004,2007, the FASB revised Statement No. 123141 (FAS 123R)141R), “Share-Based Payment,“Business Combinations,” which requires companiesestablishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and (iii) determines what information to expensedisclose to enable users of the estimated fair valuefinancial statements to evaluate the nature and financial effects of employee stock options and similar awards. On April 14, 2005, the U.S. Securities and Exchange Commission adopted a new rule amending the compliance dates forbusiness combination. FAS 123R. In accordance with the new rule, the accounting provisions of FAS 123R141R will be effective for the CompanyCompany’s fiscal 2010 beginning in the first quarter of fiscal 2006. The Company tentatively expects to adopt 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 on the effective date and are subsequently modified or cancelled. Compensation expense for outstanding awards for which the requisite service had not been rendered as of the effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under FAS 123. At September 25, 2005, unamortized compensation expense related to outstanding unvested options, as determined in accordance with FAS 123, that the 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.28, 2009. The Company is in the process of determining how the guidance regarding valuing share-based compensation as prescribedeffects, if any, the adoption of FAS 141R will have on its consolidated financial statements. In March 2008, the FASB issued Statement No. 161 (FAS 161), “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133,” which requires additional disclosures about the objectives of using derivative instruments, the method by which the derivative instruments and related hedged items are accounted for under FASB Statement No.133 and its related interpretations, and the effect of derivative instruments and related hedged items on financial position, financial performance and cash flows. FAS 161 also requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. FAS 123R161 will be applied to valuing share-based awards granted aftereffective for the effective date andCompany’s second quarter of fiscal 2009 beginning December 29, 2008. The Company is in the impact thatprocess of determining the recognitioneffects the adoption of compensation expense related to such awardsFAS 161 will have on its financial statements.statement disclosures. F-13
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 | | | | | | | | | | | | | | | Current | | Noncurrent | | | | | 130 | | 10 | | — | | 130 | | | September 28, | | September 30, | | September 28, | | September 30, | | | | | | | | | | | | | | 2008 | | 2007 | | 2008 | | 2007 | | | Available-for-sale: | | | | U.S. Treasury securities | | 151 | | 267 | | — | | — | | | $ | 14 | | $ | 58 | | $ | — | | $ | — | | | Government-sponsored enterprise securities | | 704 | | 542 | | — | | — | | | | Municipal bonds | | 10 | | — | | — | | — | | | | Government-sponsored enterprise bonds | | | 455 | | 219 | | — | | — | | | Foreign government bonds | | 17 | | 8 | | — | | — | | | 45 | | 8 | | — | | — | | | Corporate bonds and notes | | 2,645 | | 2,603 | | 14 | | 3 | | | 3,296 | | 2,939 | | 175 | | 21 | | | Mortgage and asset-backed securities | | 767 | | 1,226 | | — | | — | | | | Mortgage- and asset-backed securities | | | 499 | | 414 | | — | | — | | | Auction rate securities | | | — | | 159 | | 186 | | — | | | Non-investment grade debt securities | | 24 | | — | | 694 | | 571 | | | 23 | | 19 | | 2,030 | | 1,812 | | | Equity mutual funds | | — | | — | | 293 | | 296 | | | | Equity securities | | 30 | | 112 | | 1,132 | | 653 | | | 150 | | 203 | | 1,187 | | 1,316 | | | Equity mutual funds and exchange-traded funds | | | — | | — | | 1,280 | | 1,871 | | | Debt mutual funds | | | 89 | | 151 | | — | | 214 | | | | | | | | | | | | | | | | | | | | | | | | | 4,348 | | 4,758 | | 2,133 | | 1,523 | | | $ | 4,571 | | $ | 4,170 | | $ | 4,858 | | $ | 5,234 | | | | | | | | | | | | | | | | | | | | | | | | | $ | 4,478 | | $ | 4,768 | | $ | 2,133 | | $ | 1,653 | | | | | | | | | | | | | | |
Marketable securities in the amount of $169 million and $411 million at September 28, 2008 and September 30, 2007, respectively, have been loaned under the Company’s securities lending program. Since March 30, 2008, the Company classified its auction rate securities as noncurrent due to a disruption in credit markets that caused the auction mechanism to fail to set market-clearing rates and provide liquidity for sellers. However, a failed auction does not represent a default by the issuer of the underlying security. The Company’s auction rate securities are predominantly rated AAA/Aaa, are collateralized by student loans substantially guaranteed by the U.S. government and continue to pay interest in accordance with their contractual terms. At September 28, 2008, the recorded values of the auction rate securities were approximately 4% less than their par values. As of September 25, 2005,28, 2008, the contractual maturities of available-for-sale debt securities were as follows (in millions): F-15
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 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | Years to Maturity | | No Single | | | | Less Than | | One to | | Five to | | Greater Than | | Maturity | | | | One Year | | Five Years | | Ten Years | | Ten Years | | Date | | Total | | | $1,527 | | | $2,564 | | | $1,042 | | | | $223 | | | | $1,456 | | | | $6,812 | | | | | | | | | | | | | |
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-maturityauction rate securities, non-investment grade debt securities at September 25, 2005 and September 26, 2004 approximate cost.debt mutual funds.
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 | | | Fiscal Year | | Gains | | | Losses | | | Gains | | | 2005 | | $ | 198 | | | $ | (31 | ) | | $ | 167 | | | 2004 | | | 105 | | | | (17 | ) | | | 88 | | | 2003 | | | 82 | | | | (13 | ) | | | 69 | |
| | | | | | | | | | | | | | | | | Gross | | Gross | | Net | | | | Realized | | Realized | | Realized | | Fiscal Year | | Gains | | Losses | | Gains | | 2008 | | $ | 246 | | | $ | (119 | ) | | $ | 127 | | | 2007 | | | 244 | | | | (26 | ) | | | 218 | | | 2006 | | | 176 | | | | (47 | ) | | | 129 | |
F-14
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Available-for-sale securities were comprised as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | Unrealized | | | Unrealized | | | | | | | | Cost | | | Gains | | | Losses | | | Fair Value | | September 28, 2008 | | | | | | | | | | | | | | | | | | Equity securities | | $ | 2,810 | | | $ | 90 | | | $ | (283 | ) | | $ | 2,617 | | | Debt securities | | | 6,966 | | | | 12 | | | | (166 | ) | | | 6,812 | | | | | | | | | | | | | | | | | | | $ | 9,776 | | | $ | 102 | | | $ | (449 | ) | | $ | 9,429 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | | |
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, 200528, 2008 (in millions): F-16
QUALCOMM Incorporated| | | | | | | | | | | | | | | | | | | | | Less than 12 months | | | More than 12 months | | | | | | | | | Unrealized | | | | | | | Unrealized | | | | | Fair Value | | | Losses | | | Fair Value | | | Losses | | | Corporate bonds and notes | | $ | 1,524 | | | $ | (46 | ) | | $ | 219 | | | $ | (9 | ) | | Mortgage- and asset-backed securities | | | 457 | | | | (18 | ) | | | 8 | | | | — | | | Non-investment grade debt securities | | | 864 | | | | (78 | ) | | | 87 | | | | (9 | ) | | Government-sponsored enterprise bonds | | | 353 | | | | (2 | ) | | | — | | | | — | | | Debt mutual funds | | | 86 | | | | (4 | ) | | | — | | | | — | | | Equity securities | | | 784 | | | | (115 | ) | | | 6 | | | | (1 | ) | | Equity mutual funds and exchange-traded funds | | | 1,229 | | | | (167 | ) | | | — | | | | — | | | | | | | | | | | | | | | | | | | $ | 5,297 | | | $ | (430 | ) | | $ | 320 | | | $ | (19 | ) | | | | | | | | | | | | | | |
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 toa major disruption in U.S. and foreign credit and financial markets affecting consumers and the fact thatbanking, finance and housing industries. This disruption is evidenced by a deterioration of confidence in financial markets and a severe decline in the availability of capital and demand for debt and equity securities. The result has been depressed securities values in most types of investment- and non-investment-grade bonds and debt obligations, mortgage- and asset-backed securities and equity securities. At October 31, 2008, gross unrealized gains were approximately $75 million and gross unrealized losses were approximately $1.3 billion. When assessing marketable securities for other-than-temporary declines in value, the Company considers factors including: how significant the decline in value is as a percentage of the original cost, the underlying factors contributing to a decline in the prices of securities in a single asset class, how long the market value is attributableof the investment has been less than its original cost, the performance of the investee’s stock price in relation to changesthe stock price of its competitors within the industry, expected market volatility and the market in interest ratesgeneral, analyst recommendations, the views of external investment managers, any news or financial information that has been released specific to the investee and not credit quality, and becausethe outlook for the overall industry in which the investee operates. The Company’s analyses of the severity and duration of price declines, market research, industry reports, economic forecasts and the specific circumstances of issuers indicate that it is reasonable to expect marketable securities with unrealized losses were not significant,to recover in fair value up to the Company’s cost bases within a reasonable period of time. Further, the Company considered thesehas the ability and the intent to hold such securities until they recover. Accordingly, the Company considers the unrealized losses to be temporary at September 25, 2005.28, 2008.
F-15
Non-Investment Grade Debt Securities.QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSThe 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 specific events. The duration and severity of the unrealized losses in relation to the carrying amounts of the individual investments were consistent with typical equity market volatility. Current market forecasts support a recovery of fair value up to (or beyond) the cost of the investment within a reasonable period of time. Accordingly, the Company considered these unrealized losses to be temporary at September 25, 2005.
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 28, | | | September 30, | | | | | 2008 | | | 2007 | | | | | (In millions) | | | Trade, net of allowances for doubtful accounts of $38 and $36, respectively | | $ | 3,583 | | | $ | 657 | | | Long-term contracts | | | 33 | | | | 39 | | | Investment receivables | | | 412 | | | | 12 | | | Other | | | 10 | | | | 7 | | | | | | | | | | | | | $ | 4,038 | | | $ | 715 | | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Trade accounts receivable at September 28, 2008 included $2.5 billion for which the Company received payment in October 2008 related to new license and settlement agreements with Nokia (Note 8). Investment receivables were primarily related to amounts due for redemptions of money market investments for which the Company received partial payment in October 2008. The cash impacts of such redemption requests are presented as an investing activity in the consolidated statements of cash flows.
InventoriesInventories.
| | | | | | | | | | | | | | | | | | | | | September 25, | | September 26, | | | September 28, | | September 30, | | | | | 2005 | | 2004 | | | 2008 | | 2007 | | | | | (In millions) | | | (In millions) | | | Raw materials | | $ | 23 | | $ | 20 | | | $ | 27 | | $ | 27 | | | Work-in-process | | 6 | | 3 | | | 199 | | 161 | | | Finished goods | | 148 | | 131 | | | 295 | | 281 | | | | | | | | | | | | | | | | | $ | 177 | | $ | 154 | | | $ | 521 | | $ | 469 | | | | | | | | | | | | | |
Property, Plant and EquipmentEquipment. | | | | | | | | | | | | | | | | | | | | | September 25, | | September 26, | | | September 28, | | September 30, | | | | | 2005 | | 2004 | | | 2008 | | 2007 | | | | | (In millions) | | | (In millions) | | | Land | | $ | 65 | | $ | 47 | | | $ | 183 | | $ | 124 | | | Buildings and improvements | | 614 | | 413 | | | 1,287 | | 954 | | | Computer equipment | | 520 | | 430 | | | 932 | | 800 | | | Machinery and equipment | | 544 | | 413 | | | 1,184 | | 999 | | | Furniture and office equipment | | 33 | | 24 | | | 59 | | 48 | | | Leasehold improvements | | 107 | | 54 | | | 206 | | 205 | | | Property under capital leases | | 2 | | — | | | | | | | | | | | | | | | | | | 1,885 | | 1,381 | | | 3,851 | | 3,130 | | | | | | | Less accumulated depreciation and amortization | | | (863 | ) | | | (706 | ) | | | (1,689 | ) | | | (1,342 | ) | | | | | | | | | | | | | | | | $ | 1,022 | | $ | 675 | | | $ | 2,162 | | $ | 1,788 | | | | | | | | | | | | | |
Depreciation and amortization expense from continuing operations related to property, plant and equipment for fiscal 2005, 20042008, 2007 and 20032006 was $177$372 million, $133$317 million and $117$239 million, respectively. The net book values of property under capital leases included in buildings and improvements were $140 million and $91 million at September 28, 2008 and September 30, 2007, 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 2008, 2007 and 2006 were $51 million, $33 million and $56 million, respectively. F-16
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At September 25, 200528, 2008 and September 26, 2004,30, 2007, buildings and improvements and leasehold improvements with aaggregate net book value of $36$63 million and $38$7 million, respectively, including accumulated depreciation and amortization of $30$6 million and $27$3 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 20062009 to 2009 are $9 million, $92013 is expected to be $7 million, $7 million, $6 million, $5 million and $3 million, respectively, and $1 million respectively. F-18
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSthereafter.
Goodwill and Other Intangible Assets.The Company’s reportable segment assets do not include goodwill (Note 10).goodwill. 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, 200528, 2008 as follows: $298$435 million in QUALCOMMQualcomm CDMA Technologies, $73$683 million in QUALCOMMQualcomm Technology Licensing, $72$265 million in QUALCOMMQualcomm Wireless & Internet, and $128$134 million in QUALCOMMQualcomm MEMS Technology (a nonreportable segment included in reconciling items in Note 10)9). The increase in goodwill from September 26, 200430, 2007 to September 25, 200528, 2008 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 | | | September 28, 2008 | | September 30, 2007 | | | | | Gross | | | | Gross | | | | | Gross | | Gross | | | | | | | Carrying | | Accumulated | | Carrying | | Accumulated | | | Carrying | | Accumulated | | Carrying | | Accumulated | | | | | Amount | | Amortization | | Amount | | Amortization | | | Amount | | Amortization | | Amount | | Amortization | | | Wireless licenses | | $ | 164 | | $ | (17 | ) | | $ | 77 | | $ | (11 | ) | | $ | 849 | | $ | (38 | ) | | $ | 262 | | $ | (30 | ) | | Marketing-related | | 21 | | | (9 | ) | | 21 | | | (8 | ) | | 25 | | | (14 | ) | | 23 | | | (13 | ) | | Technology-based | | 116 | | | (48 | ) | | 77 | | | (37 | ) | | 2,406 | | | (139 | ) | | 502 | | | (97 | ) | | Customer-related | | 17 | | | (13 | ) | | 15 | | | (12 | ) | | 14 | | | (6 | ) | | 16 | | | (5 | ) | | Other | | 7 | | | (1 | ) | | 7 | | | (1 | ) | | 9 | | | (2 | ) | | 7 | | | (1 | ) | | | | | | | | | | | | | | | | | | | | | | Total intangible assets | | $ | 325 | | $ | (88 | ) | | $ | 197 | | $ | (69 | ) | | | | | | | | | | | | | | $ | 3,303 | | $ | (199 | ) | | $ | 810 | | $ | (146 | ) | | | | | | | | | | | | |
WirelessThe increase in wireless licenses increased as afrom September 30, 2007 to September 28, 2008 was primarily the result of the Company’s acquisition during the year of additional 700MHz700 MHz spectrum in the United States during fiscal 2005primarily for its MediaFLO USA business (Note 10). Increasesbusiness. At September 28, 2008, technology-based intangible assets included $1.8 billion related to the estimated fair value of patents that were assigned to the Company by Nokia in other intangible asset categories primarily resultedOctober 2008 pursuant to the new license agreement with Nokia. The estimated fair value of the patents was determined, in accordance with accounting principles generally accepted in the United States, using the income approach based on projected cash flows, on a discounted basis, over the assigned patents’ estimated useful life of approximately 15 years. The estimated fair value of the patents will be amortized on a straight-line basis over this useful life, beginning from acquisitions during fiscal 2005 (Note 11).the date the patents were assigned to the Company. All of the Company’s purchased intangible assets, other than certain wireless licenses in the amount of $84$753 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 intangible assets for fiscal 2008, 2007 and 2006 was $84 million, $68 million and $32 million, respectively, and for fiscal 2009 to 2013 is expected to be $22$199 million, $196 million, $193 million, $180 million and $162 million, respectively, and $1.4 billion thereafter. Unearned Revenues.At September 28, 2008, unearned revenues included $3.9 billion related to upfront consideration that resulted from the new agreements with Nokia. The Company will recognize this amount over the approximate 14-year remaining term of the license agreement. As a result of executing the agreements with Nokia, the Company recorded $560 million (attributable to both fiscal 2008 and 2007) in licensing and royalty revenues in fiscal 2006, $19 million in fiscal 2007, $16 million in fiscal 2008, $15 million in fiscal 2009 and $14 million in fiscal 2010. Capitalized software development costs, which are included in other assets, were $43 million and $44 million at September 25, 2005 and September 26, 2004, respectively. Accumulated amortization on capitalized software was $42 million and $39 million at September 25, 2005 and September 26, 2004, respectively. Amortization expense from continuing operations related to capitalized software for fiscal 2005, 2004 and 2003 was $4 million, $13 million and $12 million, 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, 2011.2008.
F-19F-17
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 strategic equity investments as of September 25, 2005 and September 26, 2004 totaled $96 million and $123 million, respectively, including $40 million and $50 million, respectively, accounted for using the cost method. Differences between the carrying amounts of certain other strategic equity method investments and the Company’s underlying equity in the net assets of those investees were not significant at September 25, 2005 and September 26, 2004. At September 25, 2005, effective ownership interests in these investees ranged from approximately 7% to 50%.
Funding commitments related to these investments totaled $13 million at September 25, 2005, which the Company expects to fund through fiscal 2009. Such commitments are subject to the investees meeting certain conditions; actual equity funding may be in lesser amounts. An investee’s failure to successfully develop and provide competitive products and services due to lack of financing, market demand or an unfavorable economic environment could adversely affect the value of the Company’s investment in the investee. There can be no assurance that the investees will be successful in their efforts.
Note 5.4. Investment Income (Expense) Investment income, (expense)net was comprised as follows (in millions): F-20
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | Year Ended | | | | | | September 25, | | September 26, | | September 28, | | | | | | | | | | | | | | | | | 2005 | | 2004 | | 2003 | | | 2008 | | 2007 | | 2006 | | | Interest and dividend income | | $ | 256 | | $ | 175 | | $ | 158 | | | $ | 491 | | $ | 558 | | $ | 416 | | | Interest expense | | | (3 | ) | | | (2 | ) | | | (2 | ) | | | (22 | ) | | | (11 | ) | | | (4 | ) | | Net realized gains on marketable securities | | 167 | | 88 | | 73 | | | 127 | | 218 | | 129 | | | Net realized gains on other investments | | 12 | | — | | 7 | | | 28 | | 4 | | 7 | | | Other-than-temporary losses on marketable securities | | | (13 | ) | | | (12 | ) | | | (100 | ) | | | (502 | ) | | | (16 | ) | | | (20 | ) | | Other-than-temporary losses on other investments | | | (1 | ) | | — | | | (28 | ) | | | (33 | ) | | | (11 | ) | | | (4 | ) | | Gains on derivative instruments | | 33 | | 7 | | | (3 | ) | | | Equity in losses of investees | | | (28 | ) | | | (72 | ) | | | (113 | ) | | | Gains (losses) on derivative instruments | | | 6 | | 2 | | | (29 | ) | | Equity in earnings (losses) of investees | | | 1 | | | (1 | ) | | | (29 | ) | | | | | | | | | | | | | | | | | | | | $ | 423 | | $ | 184 | | $ | (8 | ) | | $ | 96 | | $ | 743 | | $ | 466 | | | | | | | | | | | | | | | | | |
The Company had various financing arrangements, including a bridge loan facility, an equipment loan facility,Other-than-temporary losses in fiscal 2008 included $327 million recognized in the fourth quarter on marketable securities held by corporate and interimother segments. Both other-than-temporary losses on marketable securities and additional loan facilities with a wholly owned subsidiary of Pegaso Telecomunicaciones, S.A. de C.V., a CDMA wireless operatorthe decrease 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 incomenet realized gains on marketable securities were generally related to depressed securities values caused by the Pegaso financing arrangements during fiscal 2004major disruption in U.S. and 2003, respectively.foreign credit and financial markets. Note 6.5. 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 | | | 2008 | | 2007 | | 2006 | | | Current provision: | | | | Federal | | $ | 77 | | $ | 115 | | $ | 299 | | | $ | 394 | | $ | 192 | | $ | 299 | | | State | | 42 | | 60 | | 57 | | | 71 | | 37 | | 88 | | | Foreign | | 140 | | 157 | | 119 | | | 245 | | 185 | | 156 | | | | | | | | | | | | | | | | | | | | | 259 | | 332 | | 475 | | | 710 | | 414 | | 543 | | | | | | | | | | | | | | | | | | | | | | | Deferred provision (benefit): | | | | Deferred provision: | | | | Federal | | 398 | | 227 | | 45 | | | | (14 | ) | | | (75 | ) | | 165 | | | State | | 9 | | 29 | | 16 | | | | (22 | ) | | | (15 | ) | | | (23 | ) | | Foreign | | | | (8 | ) | | | (1 | ) | | 1 | | | | | 407 | | 256 | | 61 | | | | | | | | | | | | | | | | | | | | (44 | ) | | | (91 | ) | | 143 | | | | | $ | 666 | | $ | 588 | | $ | 536 | | | | | | | | | | | | | | | | | | | $ | 666 | | $ | 323 | | $ | 686 | | | | | | | | | | | |
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 | | | 2008 | | 2007 | | 2006 | | | United States | | $ | 1,570 | | $ | 1,571 | | $ | 1,163 | | | $ | 1,564 | | $ | 1,681 | | $ | 1,445 | | | Foreign | | 1,239 | | 742 | | 402 | | | 2,262 | | 1,945 | | 1,711 | | | | | | | | | | | | | | | | | | | Earnings from continuing operations before income taxes | | $ | 2,809 | | $ | 2,313 | | $ | 1,565 | | | | | | | | | | | | | $ | 3,826 | | $ | 3,626 | | $ | 3,156 | | | | | | | | | | | |
F-21F-18
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 | | | 2008 | | 2007 | | 2006 | | | Expected income tax provision at federal statutory tax rate | | $ | 983 | | $ | 809 | | $ | 548 | | | $ | 1,339 | | $ | 1,269 | | $ | 1,105 | | | State income tax provision, net of federal benefit | | 109 | | 91 | | 61 | | | 168 | | 180 | | 176 | | | One-time dividend | | 35 | | — | | — | | | | Foreign income taxed at other than U.S. rates | | | (290 | ) | | | (215 | ) | | | (59 | ) | | | (858 | ) | | | (710 | ) | | | (474 | ) | | Tax audit settlements | | | — | | | (331 | ) | | | (73 | ) | | Tax credits | | | | (47 | ) | | | (91 | ) | | | (36 | ) | | Valuation allowance | | | (78 | ) | | | (44 | ) | | — | | | 48 | | | (7 | ) | | | (46 | ) | | Tax credits | | | (66 | ) | | | (49 | ) | | | (32 | ) | | | Other | | | (27 | ) | | | (4 | ) | | 18 | | | 16 | | 13 | | 34 | | | | | | | | | | | | | | | | | | | Income tax expense | | $ | 666 | | $ | 588 | | $ | 536 | | | $ | 666 | | $ | 323 | | $ | 686 | | | | | | | | | | | | | | | | | |
The Company has not provided for United States income taxes and foreign withholding taxes on a cumulative total of approximately $1.2$6.8 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, the American Jobs Creation Act of 2004 (the Jobs Creation Act) was signed into law. The Jobs Creation Act created a temporary incentive for corporationsCompany files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. The Company is no longer subject to repatriate accumulatedUnited States federal examinations by taxing authorities for years prior to fiscal 2005. The Internal Revenue Service is currently conducting an examination of the Company’s United States income earned abroad by providing an 85 percent dividends received deductiontax returns for certain dividends from controlled foreign corporations. In the fourth quarter of fiscal 2005, 2006 and 2007, which is anticipated to be completed by August 2009. The Company is subject to examination by the California Franchise Tax Board for fiscal 2003 through 2007 and is currently under examination for fiscal 2004 and 2005. The Company repatriated approximately $0.5 billionis also subject to income taxes in many state and local taxing jurisdictions in the United States and around the world, many of foreign earnings qualifyingwhich are open to tax examinations for periods after fiscal 2002. During fiscal 2007, the special incentive under the Jobs Creation Act and recorded a related expenseInternal Revenue Service completed audits of approximately $35 million for federal and state income tax liabilities. This distribution does not change the Company’s intentiontax returns for fiscal 2003 and 2004 and during fiscal 2006, the Internal Revenue Service and the California Franchise Tax Board completed audits of the Company’s tax returns for fiscal 2001 and 2002, resulting in adjustments to indefinitely reinvest undistributed earningsthe 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 certain of its foreign subsidiaries in operations outside the United States. The Company had net deferredaudits on the reviewed and open 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-19
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company had deferred tax assets and deferred tax liabilities as follows (in millions): | | | | | | | | | | | | | September 28, | | | September 30, | | | | | 2008 | | | 2007 | | | Accrued liabilities, reserves and other | | $ | 278 | | | $ | 246 | | | Share-based compensation | | | 383 | | | | 295 | | | Capitalized start-up and organizational costs | | | 118 | | | | 86 | | | Unearned revenues | | | 51 | | | | 70 | | | Unrealized losses on marketable securities | | | 380 | | | | 59 | | | Unrealized losses on other investments | | | 37 | | | | 124 | | | Capital loss carryover | | | 13 | | | | 9 | | | Tax credits | | | 96 | | | | 91 | | | Unused net operating losses | | | 66 | | | | 80 | | | Other basis differences | | | 14 | | | | 18 | | | | | | | | | | | Total gross deferred assets | | | 1,436 | | | | 1,078 | | | Valuation allowance | | | (149 | ) | | | (20 | ) | | | | | | | | | | Total net deferred assets | | | 1,287 | | | | 1,058 | | | | | | | | | | | | | Purchased intangible assets | | | (85 | ) | | | (99 | ) | | Deferred contract costs | | | (5 | ) | | | (6 | ) | | Unrealized gains on marketable securities | | | (20 | ) | | | (179 | ) | | Property, plant and equipment | | | (59 | ) | | | (26 | ) | | | | | | | | | | Total deferred liabilities | | | (169 | ) | | | (310 | ) | | | | | | | | | | Net deferred assets | | $ | 1,118 | | | $ | 748 | | | | | | | | | | | Reported as: | | | | | | | | | | Current deferred tax assets | | $ | 289 | | | $ | 435 | | | Non-current deferred tax assets | | | 830 | | | | 318 | | Non-current deferred tax liabilities(1) | | | (1 | ) | | | (5 | ) | | | | | | | | | | | | $ | 1,118 | | | $ | 748 | | | | | | | | | |
| | | | (1) | | Included in other liabilities in the consolidated balance sheets. |
At September 28, 2008, the Company had unused federal net operating loss carryforwards of $128 million expiring from 2019 through 2027, unused state net operating loss carryforwards of $146 million expiring from 2009 through 2028, and unused foreign net operating loss carryforwards of $49 million, with $48 million expiring from 2011 through 2012. At September 28, 2008, the Company had unused federal income tax credits of $108 million, expiring from 2022 through 2028, and state income tax credits of $10 million, which do not expire. The Company does not expect its federal net operating loss carryforwards and its federal and state income tax credits to expire unused. The Company has provided a valuation allowance on a portion of its state net operating loss carryforwards. 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, 2005,28, 2008, the Company has provided a valuation allowance on foreign and state net operating losses and net capital losses of $62 million.$15 million and $134 million, respectively, of which $81 million was recorded as an increase in other comprehensive loss in fiscal 2008. 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 and state tax jurisdictions to utilize its net operating losses and the Company’s ability to generate sufficient capital gains to utilize all capital losses. DeferredA summary of the changes in the amount of unrecognized tax assets, netbenefits for the year ended September 28, 2008 is shown below (in millions): | | | | | | | Unrecognized tax benefits at October 1, 2007 | | $ | 224 | | | Additions based on prior year tax positions | | | 6 | | | Reductions for prior year tax positions | | | (38 | ) | | Additions for current year tax positions | | | 52 | | | | | | | | Unrecognized tax benefits at September 28, 2008 | | $ | 244 | | | | | | |
F-20
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Of the $244 million of valuation allowance, decreased by approximately $142unrecognized tax benefits as of September 28, 2008, $223 million has been classified as noncurrent income taxes payable on the consolidated balance sheet and $21 million has been classified as a reduction of the related deferred tax assets. Noncurrent income taxes payable also includes $4 million of accrued interest. Unrecognized tax benefits at September 28, 2008 include $201 million for tax positions that, if recognized, would impact the effective tax rate. The unrecognized tax benefits differ from September 26, 2004 to September 25, 2005the amount that would affect the Company’s effective tax rate primarily due to the useimpact of offsets in other jurisdictions. Due to the anticipated resolution of the U.S. federal examination within the next twelve months, it is reasonably possible that the Company’s unrecognized tax creditsbenefits will decrease significantly as a result of continued profitable operations in excess of tax benefits from stock option expense, partially offsettheir resolution via an adjustment by a decreasethe taxing authority or recognition in the valuation allowanceincome tax provision. Interest expense related to capital loss carryover. At September 25, 2005uncertain tax positions was $3 million in fiscal 2008 and September 26, 2004, the Company had federal, statewas negligible in both fiscal 2007 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.2006.
Cash amounts paid for income taxes, net of refunds received, were $168$360 million, $127$233 million and $125$172 million for fiscal 2005, 20042008, 2007 and 2003,2006, respectively. The income taxes paid are primarily relaterelated to foreign withholding taxes. On October 3, 2008, the Emergency Economic Stabilization Act of 2008 was enacted. The bill extends the research and development tax credit for calendar year 2008 and 2009 and increases the Alternative Simplified Credit rate from 12% to 14% in calendar 2009. The Company expects to record an additional research and development tax credit related to fiscal 2008 of approximately $38 million in the first quarter of fiscal 2009, the period in which the research and development tax credit extension was enacted. Note 7.6. 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, 200528, 2008 and September 26, 2004,30, 2007, 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 approval of the Board approval.of Directors. 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, 2005,11, 2008, the Company announced that it had been authorized theto repurchase of up to $2$2.0 billion of the Company’s common stock. The $2.0 billion stock underrepurchase program replaced a $3.0 billion stock repurchase program, withof which approximately $2 million 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 2005,2008, 2007 and 2006, the Company repurchased and retired 27,083,00042,616,000, 37,263,000 and 34,000,000 shares of common stock for $953$1.7 billion, $1.5 billion and $1.5 billion, respectively, excluding $14 million, $9 million and $5 million of premiums received related to put options that were exercised in fiscal 2008, 2007 and 2006, respectively. At September 28, 2008, the Company had not made any repurchases under the $2.0 billion stock repurchase program. In connection with the Company’s stock repurchase program, the Company sold put options under this program.on its own stock during fiscal 2007 and 2006. At September 25, 2005, the Company had two outstanding28, 2008, no put options with expiration dates of December 7, 2005 and March 21, 2006, that may require the Company to purchase 11,500,000 shares of its common stock upon exercise for $411 million (net of the option premiums received). Any shares repurchased upon exercise of the put options will be retired. The recorded values of the put option liabilities totaled $7 million at September 25, 2005.remained outstanding. During fiscal 2005,2008, the Company recognized $16gains of $6 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 $14 million. During 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 put options, net of premiums received of $17 million and $11 million, respectively.
F-23F-21
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 of common stock from $0.09 to $0.12 on common stock. On JulyMarch 7, 2006, from $0.12 to $0.14 on March 13, 2004, the Company announced an increase in its quarterly dividend2007, and from $0.050$0.14 to $0.070 per share$0.16 on common stock. On March 8, 2005, the Company announced an increase in its quarterly dividend from $0.070 to $0.090 per share on common stock.11, 2008. Cash dividends announced in fiscal 20052008, 2007 and 20042006 were as follows (in millions, except per share data): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2005 | | 2004 | | | 2008 | | 2007 | | 2006 | | | | | Per Share | | Total | | Per Share | | Total | | | Per Share | | Total | | Per Share | | Total | | Per Share | | Total | | | First quarter | | $ | 0.070 | | $ | 115 | | $ | 0.070 | (1) | | $ | 112 | | | $ | 0.14 | | $ | 228 | | $ | 0.12 | | $ | 198 | | $ | 0.09 | | $ | 148 | | | Second quarter | | 0.070 | | 115 | | 0.050 | | 81 | | | 0.14 | | 227 | | 0.12 | | 200 | | 0.09 | | 150 | | | Third quarter | | 0.090 | | 147 | | | — | (2) | | — | | | 0.16 | | 261 | | 0.14 | | 234 | | 0.12 | | 202 | | | Fourth quarter | | 0.090 | | 147 | | 0.070 | | 114 | | | 0.16 | | 266 | | 0.14 | | 230 | | 0.12 | | 198 | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 0.320 | | $ | 524 | | $ | 0.190 | | $ | 307 | | | | | | | | | | | | | | | $ | 0.60 | | $ | 982 | | $ | 0.52 | | $ | 862 | | $ | 0.42 | | $ | 698 | | | | | | | | | | | | | | | | | |
| | | | | (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, 2005,22, 2008, the Company announced a cash dividend of $0.09$0.16 per share on the Company’s common stock, payable on January 4, 20067, 2009 to stockholders of record as of December 7, 2005,11, 2008, which will be reflected in the consolidated financial statements in the first quarter of fiscal 2006.2009. Note 8.7. 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 2005, 20042008, 2007 and 20032006 was $27$45 million, $21$39 million and $20$33 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 was 405,284,000 at September 28, 2008, including 115,000,000 shares that were equalapproved by the Company’s stockholders in March 2008. Shares subject to the number of shares available for future grantany outstanding option under the 1991a Prior Plan onthat is terminated or cancelled (but not an option under a Prior Plan that expires) following the date that the 20012006 Plan was approved by stockholders, and shares that are subject to an award under the Company’s stockholders. At that date, approximately 101,083,000 shares wereERMCP 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. Certain amendments, including an increase in the share reserve, require stockholder approval. Generally, options and restricted stock units outstanding vest over periods not exceeding five years. Options are exercisable for up to ten years from the grant date. During fiscal 2008 and 2006, the Company assumed a total of approximately 1,462,000 and 3,530,000 outstanding stock options, respectively, under various stock-based incentive plans that were assumed (the Assumed Plans) as a result of acquisitions. 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 five years and are exercisable for up to 10 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 10ten 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-24F-22
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 | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average | | | | | | | | | | | | Weighted | | | Remaining | | | Aggregate | | | | | Number of | | | Average | | | Contractual | | | Intrinsic | | | | | Shares | | | Exercise | | | Term | | | Value | | | | | (In thousands) | | | Price | | | (Years) | | | (In billions) | | Outstanding at September 30, 2007 | | | 206,454 | | | $ | 32.69 | | | | | | | | | | | Options granted | | | 51,347 | | | | 42.29 | | | | | | | | | | Options assumed(1) | | | 1,462 | | | | 24.29 | | | | | | | | | | | Options cancelled/forfeited/expired | | | (7,838 | ) | | | 40.30 | | | | | | | | | | | Options exercised | | | (49,099 | ) | | | 21.79 | | | | | | | | | | | | | | | | | | | | | | | | | | | Options outstanding at September 28, 2008 | | | 202,326 | | | $ | 37.42 | | | | 6.57 | | | $ | 1.8 | | | | | | | | | | | | | | | | | | | Exercisable at September 28, 2008 | | | 104,466 | | | $ | 33.74 | | | | 4.93 | | | $ | 1.3 | | | | | | | | | | | | | | | | | | |
| | | (a)(1) | | 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)10). | | (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 2005, 20042008, 2007 and 20032006 represented 1.8%2.7%, 1.7%2.0% and 1.6%1.9% of outstanding shares as of the beginning of each fiscal year, respectively. Total stock options granted during fiscal 2005, 20042008, 2007 and 20032006 represented 3.2%, 2.4% and 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 stock option awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. At September 28, 2008, total unrecognized estimated compensation cost related to non-vested stock options outstanding at September 25, 2005 follows (numbergranted prior to that date was $1.6 billion, which is expected to be recognized over a weighted-average period of 3.5 years. The total intrinsic value of stock options exercised during fiscal 2008, 2007 and 2006 was $1.3 billion, $708 million and $1.1 billion, respectively. The Company recorded cash received from the exercise of stock options of $1.1 billion, $479 million and $608 million and related tax benefits of $492 million, $272 million and $421 million during fiscal 2008, 2007 and 2006, respectively. Upon option exercise, the Company issues new shares in thousands): F-25
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 priceDuring fiscal 2008, the Company granted 55,000 restricted stock units to certain employees, all of $17.41 per share at September 26, 2004. There were approximately 129,990,000 options exercisable with a weighted average exercise price of $13.42 per sharewhich remain unvested at September 28, 2003. Information about stock options outstanding at September 25, 2005 with exercise prices less than or above $44.762008. The weighted-average fair value per share of the closing price atrestricted stock units awarded in fiscal 2008 was $54.42 calculated based on the fair value of the Company’s common stock on the date of grant of each award. At September 25, 2005, follows (number28, 2008, the total unrecognized estimated compensation cost related to non-vested restricted stock units granted prior to that date was $3 million, which is expected to be recognized over a weighted-average period 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 twoone employee stock purchase plansplan 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. In fiscal 2008, the Company amended the 2001 Employee Stock Purchase Plan to include a Non-423(b) Plan. The amended 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 400,00024,709,000 shares to be granted. During fiscal 2005, 20042008, 2007 and 2003,2006, approximately 1,786,000, 2,205,0002,951,000, 2,650,000 and 2,744,0002,220,000 shares were issued under the plans at an average price of $29.63, $18.60$35.96, $32.08 and $13.20$31.10 per share, respectively. At September 25, 2005,28, 2008, approximately 15,446,0007,625,000 shares were reserved for future issuance. At September 28, 2008, total unrecognized estimated compensation cost related to non-vested purchase rights granted prior to that date was $13 million. The Company recorded cash received from the exercise of purchase rights of $106 million, $85 million and $69 million during fiscal 2008, 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 2005, 20042008, 2007 and 2003,2006, approximately 92,000, 108,00096,000, 126,000 and 89,00047,000 shares, respectively, were allocated under the plans. The Company recorded $3$6 million, $5 million and $2 million in compensation expense during fiscal 2005, 20042008, 2007 and 2003,2006, respectively, related to its net matching contributions to the plans. At September 25, 2005, approximately 238,000 shares were reserved for future allocation. F-26F-23
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9.8. 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 (the 467 case and the 468 case) 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,following day, Broadcom also filed a complaint in the United States International Trade Commission (ITC) alleging infringement of five of the samefive patents at issue in the Central District Court cases468 case seeking a determination and relief under Section 337 of the Tariff Act of 1930. Allegations relating to two of the Broadcom patent claims filed in the 468 case (which is stayed pending completion of the ITC action) have been dismissed by agreement of the parties. In the 467 case, one patent was stayed due to a pending reexamination of the claims by the U.S. Patent and Trademark Office (USPTO), and another was dismissed by agreement of the parties. A trial relating to the three remaining Broadcom patents in the 467 case was held in May 2007, and on May 29, 2007, the jury rendered a verdict finding willful infringement of the three patents and awarding past damages in the approximate amount of $20 million (the court subsequently vacated the jury’s finding of willfulness). The final judgment, including damages calculations through May 29, 2007 and pre-judgment interest, was approximately $25 million, which has been secured by an irrevocable letter of credit and expensed pending appeals. On December 31, 2007, the court issued an order, amended by the court for a second time on March 11, 2008, enjoining the Company from making, using, selling, shipping, supporting or marketing products that were found to infringe the three Broadcom patents, subject to a specified limited license through January 2009 on two of the three patents and with respect to the third patent, a limited license as to one set of products. The immediately enjoined products were those WCDMA products that related to patent number 6,847,686 (the ‘686 patent). With respect to EV-DO products involving the ‘686 patent (as well as products relating to the two remaining patents), the judge’s order provided for a permanent injunction but stayed the effect of that injunction until January 31, 2009 with respect to companies that purchased those enjoined products as of May 29, 2007. The stay was subject to certain conditions, including the Company’s payment of ongoing royalties. Since the second amendment of the injunction order in March 2008, Broadcom filed a motion requesting that Qualcomm be found in contempt of the order on various bases. The court denied the motion in part but granted the motion with respect to the claim that Qualcomm should not have paid for WCDMA chips sold between the date of trial verdict and the injunction, and should not have serviced and supported products using such chips, and that Qualcomm should have paid certain royalties on revenue relating to the QChat product. Since the order, on September 24, 2008, the United States Court of Appeals for the Federal Circuit (Federal Circuit) issued its opinion in the appeal resulting from the trial of the 467 case, upholding the verdict and remedies as to two patents and overturning the verdict and remedy as to the ‘686 patent, finding it invalid. As a result, the district court has issued a third amended injunction order excluding any reference to the invalid patent and amended the contempt findings relating to the invalidated patent. Broadcom has been ordered to repay royalties relating to that patent. Qualcomm has also since filed a notice of appeal as to the contempt ruling and has sought leave from the Federal Circuit for an extension of time to file a motion for a rehearing with respect to certain issues on the appeal. That extension was granted. Broadcom has filed another motion seeking a ruling that Qualcomm is in violation of the injunction order with respect to certain sales and royalties Broadcom claims are owed under the order. Finally, the patent that was subject to the stay pending reexamination in the USPTO has since emerged from the reexamination process with certain claims cancelled and other claims added. A schedule for the litigation of that patent has not yet been determined, but it is expected to occur in the last half of calendar 2009. 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 against the Company 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 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 appealed the infringement finding, the cease and desist order and the exclusion order, and Broadcom appealed certain rulings of the ALJ. Oral arguments took place on July 8, 2008 in the Federal Circuit. On September 19, 2008, the Federal Circuit ruled on Broadcom’s appeal of the ITC’s F-24
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS determination of no violation as to two patents (the ‘311 patent and the ‘675 patent). The Federal Circuit affirmed the ITC’s determination as to the ‘311 patent and affirmed the findings on the ‘675 patent with respect to seven of eight products at issue. As to the latter patent, the court remanded for further proceedings the claims with respect to one accused product. On October 2, 2008, the USPTO issued a final office action in the reexamination of the ‘311 patent, rejecting certain of the claims, including all of the claims at issue in the ITC action, and allowing other claims added by Broadcom. On November 9, 2007, Broadcom filed an enforcement complaint in the ITC, alleging violations of the ITC’s cease and desist order by the Company. A hearing on the complaint took place on April 22 through April 24, 2008. The target date for completion of the investigation is August 30, 2009. On October 14, 2008, the Federal Circuit issued an opinion upholding the ITC’s finding that the Company did not directly infringe the ‘983 patent; vacating and remanding the ITC’s finding that the Company indirectly induced infringement of the ‘983 patent; and vacating and remanding the limited exclusion order. The Federal Circuit held that the ITC lacked authority to enjoin products of Qualcomm’s customers pursuant to a limited exclusion order because Broadcom had not named those customers as respondents. 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 below. 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. DiscoveryOn 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, adding the allegations from the state court case in California (filed on April 13, 2007) that had been stayed, as discussed above, and a federal antitrust claim based on the California allegations. On August 12, 2008, the New Jersey Court ordered the case transferred to the United States District Court for the Southern District of California. No trial date has commenced in the actions.been set. QUALCOMM Incorporated v.On October 7, 2008, Broadcom Corporation:On July 11, 2005, the Company filed an action in the United States District Court for the Southern District of California against Broadcom alleging infringement of seven patents, each of which is essentialseeking declaratory relief regarding patent misuse, patent exhaustion and patent and license unenforceability. The Company has not yet responded to the practice of either the GSM or 802.11 standards, and seeking monetary damages and injunctive relief based thereon. On September 23, 2005, Broadcom answered and counterclaimed, alleging infringement of six patents. Discovery has yet to begin in the action. F-27
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTScomplaint.
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 USPTO, 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 the Company to pay Broadcom’s attorneys’ fees and costs for the case. The Company and Broadcom each filed notices of appeal, but Broadcom subsequently dismissed its appeal. Oral argument in the Federal Circuit was held on August 5, 2008. On January 7, 2008, the Magistrate Judge considering Broadcom’s motions for sanctions against the Company for discovery violations issued an order sanctioning the Company and eight of its retained outside attorneys for those discovery violations. The Magistrate Judge referred the eight outside attorneys to the California State Bar for an investigation into possible ethics violations and ordered the Company to participate in a process to create a model discovery protocol. The Magistrate Judge reaffirmed the District Court’s previous award of Broadcom’s attorneys’ fees. On March 5, 2008, the District Court vacated the portion of the Magistrate Judge’s order only as it relates to the sanctions imposed on the Company’s outside counsel and remanded the case to the Magistrate Judge for further proceedings on those issues. Actions by the Company and its subsidiaries against Nokia Corporation and/or Nokia Inc.:On July 23, 2008, the Company announced that it had reached agreement with Nokia Corporation and Nokia Inc. to resolve all pending litigation between the parties, and the parties have either obtained dismissals or are in the process of seeking dismissal of all litigation between the parties. The various litigation matters between the parties in different jurisdictions around the world that were terminated during the fourth quarter involved claims of patent infringement and breach of contract by each party against the other. F-25
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS European Commission Complaint:On October 28, 2005, it was reported that six companies (Broadcom, Nokia, Texas Instruments, NEC, Panasonic and Ericsson) filed complaints with the European Commission, alleging that the Company violated European Union competition law in its WCDMA licensing practices. The Company has yetreceived the complaints and has submitted replies to answer.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. As part of its agreement with the Company, Nokia has withdrawn the complaint it filed with the European Commission, although that investigation remains active. 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 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 District Court suit for damages is stayed pending resolution of the ITC proceeding. The ITC instituted the investigation on May 15, 2007. The patents at issue are being reexamined by the USPTO based on petitions filed by a third-party. The USPTO’s Central Reexamination Unit has issued office actions rejecting all of the asserted patent claims on the grounds that they are invalid in view of certain prior art. Tessera is contesting these rejections, and the USPTO has not made a final decision. On February 26, 2008, the ALJ stayed the ITC proceedings pending completion of the USPTO’s reexamination proceedings. On March 27, 2008, the Commission reversed the ALJ’s order and ordered the ITC proceeding to be reinstated. The evidentiary hearing occurred on July 14 through July 18, 2008, and the investigation is targeted for completion by April 3, 2009. Other:The Company has been named, along with many other manufacturers of wireless phones, wireless operators and industry-related organizations, as a defendant in purported class action lawsuits, including In re Wireless Telephone Frequency Emissions Products Liability Litigation, United States District Court for the District of Maryland, and several individually filed actions pending in Pennsylvania and Washington D.C., seeking monetary damages arising out of its sale of cellular phones. On March 5, 2003, the Court granted the defendants’ motions to dismiss five of the consolidated cases (Pinney, Gimpleson, Gillian, Farina and Naquin) on the grounds that the claims were preempted by federal law. On March 21, 2005, the 4th Circuit Court of Appeals reversed the ruling by the District Court and ordered the cases remanded to state court. All remaining cases filed against the Company allege personal injury as a result of their use of a wireless telephone. Those cases have been remanded to the Washington, D.C. Superior Court. The courts that have reviewed similar claims against other companies to date have held that there was insufficient scientific basis for the plaintiffs’ claims in those cases. On October 28, 2005, it was reportedIn April 2008, two complaints were filed in San Diego Federal Court and San Diego Superior Court on behalf of purported classes of individuals who purchased UMTS devices or service, seeking damages and injunctive relief under federal and/or state antitrust and unfair competition laws as a result of the Company’s licensing practices. The Superior Court action has been removed to the San Diego Federal Court, and the plaintiff’s request for remand has been denied. The Company has filed motions to dismiss the complaints. The Company understands that six telecommunicationstwo U.S. companies (Broadcom, Nokia, Texas(Texas Instruments NEC, Panasonic and Ericsson)Broadcom) and two South Korean companies (Nextreaming Corp. and Thin Multimedia, Inc.) have filed complaints with the EuropeanKorea Fair Trade Commission alleging that the Company violated European Union competition lawCompany’s business practices are, in its WCDMA licensing practices.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 certain requested information and documents to the Korea Fair Trade Commission regarding rebates on chipset sales, chipset design integration and royalties on devices containing a QUALCOMM chipset. 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 certain requested 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 Incorporatedmatter, 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 20062009 to 20092013 to be approximately $750$868 million, $200$121 million, $86$58 million, $67 million and $6$18 million, respectively. The Company’s noncancelable obligations are insignificant in fiscal 2010.respectively, and $55 million thereafter. Of these amounts, commitments to purchase integrated circuit product inventories for fiscal 2006 to 2009 and 2010 comprised $634 million, $177 million, $82$663 million and $5$15 million, respectively. F-28F-26
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Leases.The Company leases certain of its facilities and equipment under noncancelable operating leases, with terms ranging from less than one year to 35 years and with provisions for cost-of-living increases with certain leases. Rental expense for fiscal 2008, 2007 and 2006 was $75 million, $60 million and $47 million, respectively. The Company leases certain property under capital lease agreements that expire at various dates through 2043. Capital lease obligations are included in other liabilities. The future minimum lease payments for all capital leases and operating leases as of September 28, 2008 are as follows (in millions): | | | | | | | | | | | | | | | | | Capital | | | Operating | | | | | | | | Leases | | | Leases | | | Total | | | 2009 | | $ | 10 | | | $ | 85 | | | $ | 95 | | | 2010 | | | 10 | | | | 65 | | | | 75 | | | 2011 | | | 10 | | | | 51 | | | | 61 | | | 2012 | | | 10 | | | | 32 | | | | 42 | | | 2013 | | | 10 | | | | 19 | | | | 29 | | | Thereafter | | | 272 | | | | 201 | | | | 473 | | | | | | | | | | | | | | Total minimum lease payments | | $ | 322 | | | $ | 453 | | | $ | 775 | | | | | | | | | | | | | | | Deduct: Amounts representing interest | | | 179 | | | | | | | | | | | | | | | | | | | | | | | | Present value of minimum lease payments | | | 143 | | | | | | | | | | | Deduct: Current portion of capital lease obligations | | | 1 | | | | | | | | | | | | | | | | | | | | | | | | Long-term portion of capital lease obligations | | $ | 142 | | | | | | | | | | | | | | | | | | | | | | |
Note 10.9. Segment Information The Company is organized on the basis of products and services. The Company aggregates threefour of its divisions into the QUALCOMMQualcomm Wireless & Internet segment. Reportable segments are as follows: | | • | | QUALCOMMQualcomm 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;system products based on its CDMA technology and other technologies; | | | | | • | | QUALCOMMQualcomm 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 CDMAcertain wireless products, including, without limitation, products implementing cdmaOne, CDMA2000, WCDMA, CDMA TDD, GSM/GPRS/EDGE and/or the CDMA TDDOFDMA standards and their derivatives, and collects license fees and royalties in partial consideration for such licenses; | | | | | • | | QUALCOMMQualcomm Wireless & Internet (QWI) –— comprised of: |
| | o | | QUALCOMMQualcomm Internet Services (QIS) — provides technology to support and accelerate the convergence of the wireless data market, including its BREW product and services, QChat products and QPoint;services; | | | | | o | | QUALCOMMQualcomm 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)Qualcomm Enterprise Services (QES) — provides satellitesatellite- 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. QES also sells products that operate on the Globalstar low-Earth-orbit satellite-based telecommunications system and provides related services; and | | | o | | Firethorn — builds and manages software applications that enable financial institutions and wireless operators to offer mobile commerce services. |
QUALCOMMQualcomm 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.
F-27
During the first quarter of fiscal 2005, the Company reorganized its MediaFLO USA business into the QSI segment. The operating expenses related to the MediaFLO USA business were included in 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. Prior period segment information has been adjusted to conform to the new segment presentation.QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 | 2005 | | | 2008 | | | | Revenues | | $ | 3,290 | | $ | 1,839 | | $ | 644 | | $ | — | | $ | (100 | ) | | $ | 5,673 | | | $ | 6,717 | | $ | 3,622 | | $ | 785 | | $ | 12 | | $ | 6 | | $ | 11,142 | | | EBT | | 852 | | 1,663 | | 57 | | 10 | | 227 | | 2,809 | | | 1,833 | | 3,142 | | | (1 | ) | | | (304 | ) | | | (844 | ) | | 3,826 | | | Total assets | | 518 | | 16 | | 153 | | 442 | | 11,350 | | 12,479 | | | 1,425 | | 2,668 | | 183 | | 1,458 | | 18,829 | | 24,563 | | 2004 | | | 2007 | | | | Revenues | | $ | 3,111 | | $ | 1,331 | | $ | 571 | | $ | — | | $ | (133 | ) | | $ | 4,880 | | | $ | 5,275 | | $ | 2,772 | | $ | 828 | | $ | 1 | | $ | (5 | ) | | $ | 8,871 | | | EBT | | 1,048 | | 1,195 | | 19 | | | (31 | ) | | 82 | | 2,313 | | | 1,547 | | 2,340 | | 88 | | | (240 | ) | | | (109 | ) | | 3,626 | | | Total assets | | 564 | | 8 | | 117 | | 400 | | 9,731 | | 10,820 | | | 921 | | 29 | | 200 | | 896 | | 16,449 | | 18,495 | | 2003 | | | 2006 | | | | Revenues | | $ | 2,428 | | $ | 1,000 | | $ | 484 | | $ | 1 | | $ | (66 | ) | | $ | 3,847 | | | $ | 4,332 | | $ | 2,467 | | $ | 731 | | $ | — | | $ | (4 | ) | | $ | 7,526 | | | EBT | | 805 | | 897 | | 15 | | | (168 | ) | | 16 | | 1,565 | | | 1,298 | | 2,233 | | 78 | | | (133 | ) | | | (320 | ) | | 3,156 | | | Total assets | | 311 | | 155 | | 92 | | 839 | | 7,425 | | 8,822 | | | 651 | | 60 | | 215 | | 660 | | 13,622 | | 15,208 | |
Segment assets are comprised of accounts receivable, finance receivables 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 assets of QSI’s consolidated investees.subsidiary, MediaFLO USA, including property, plant and equipment. QSI’s assets related to the MediaFLO USA business totaled $1.2 billion, $457 million and $329 million at September 28, 2008, September 30, 2007 and September 24, 2006, respectively. QSI’s assets also included $20 million, $16 million and $19 million related to investments in equity method investees at September 28, 2008, September 30, 2007 and September 24, 2006, respectively. Reconciling items for total assets included $277 million, $215 million and $228 million at September 28, 2008, September 30, 2007 and September 24, 2006, 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 certain 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 $100 million, $21$89 million and $117$69 million at September 25, 2005,28, 2008, September 26, 200430, 2007 and September 28, 2003,24, 2006, 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 was $978 million, $654 millionwere $2.1 billion, $1.7 billion and $505 million$1.4 billion at September 25, 2005,28, 2008, September 26, 200430, 2007 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, 2003,24, 2006, 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 | |
| | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | 2006 | | | QES | | $ | 423 | | | $ | 501 | | | $ | 490 | | | QIS | | | 299 | | | | 272 | | | | 194 | | | QGOV | | | 67 | | | | 57 | | | | 47 | | | Firethorn | | | (2 | ) | | | — | | | | — | | | Eliminations | | | (2 | ) | | | (2 | ) | | | — | | | | | | | | | | | | | | Total QWI | | $ | 785 | | | $ | 828 | | | $ | 731 | | | | | | | | | | | | |
F-30F-28
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other reconciling items 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 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | 2006 | | | Revenues: | | | | | | | | | | | | | | Elimination of intersegment revenues | | $ | (18 | ) | | $ | (39 | ) | | $ | (28 | ) | | Other nonreportable segments | | | 24 | | | | 34 | | | | 24 | | | | | | | | | | | | | | | | $ | 6 | | | $ | (5 | ) | | $ | (4 | ) | | | | | | | | | | | | | Earnings (loss) before income taxes: | | | | | | | | | | | | | | Unallocated research and development expenses | | $ | (353 | ) | | $ | (341 | ) | | $ | (331 | ) | | Unallocated selling, general, and administrative expenses | | | (326 | ) | | | (268 | ) | | | (298 | ) | | Unallocated cost of equipment and services revenues | | | (39 | ) | | | (39 | ) | | | (41 | ) | | Unallocated investment income, net | | | 70 | | | | 718 | | | | 455 | | | Other nonreportable segments | | | (190 | ) | | | (158 | ) | | | (92 | ) | | Intracompany eliminations | | | (6 | ) | | | (21 | ) | | | (13 | ) | | | | | | | | | | | | | | | $ | (844 | ) | | $ | (109 | ) | | $ | (320 | ) | | | | | | | | | | | |
During fiscal 2008, share-based compensation expense included in unallocated research and development expenses and unallocated selling, general and administrative expenses totaled $250 million and $251 million, respectively. 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. Specified items included in segment EBT were as follows (in millions): | | | | | | | | | | | | | | | | | | | | | QCT | | QTL | | QWI | | QSI | 2008 | | | | | | | | | | | | | | | | | | Revenues from external customers | | $ | 6,709 | | | $ | 3,619 | | | $ | 778 | | | $ | 12 | | | Intersegment revenues | | | 8 | | | | 3 | | | | 7 | | | | — | | | Interest income | | | 2 | | | | 9 | | | | 2 | | | | 4 | | | Interest expense | | | 2 | | | | 1 | | | | — | | | | 7 | | 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 | |
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 department inpurchasing segment records the Company’s management reports based oncost of revenues (or inventory write-downs) at 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 expenses related to the developmentselling segment’s original cost. The elimination of the CDMA market that were not deemed to be directly related to the businesses of the segments. Specified itemsselling segment’s gross margin is included with other intersegment eliminations 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 | |
reconciling items. Effectively all equity in lossesearnings (losses) of investees (Note 5) was recorded in QSI in fiscal 2005, 20042008, 2007 and 2003. In fiscal 2004 and 2003, interest expense (Note 5) was predominantly recorded as corporate expense in reconciling items.2006. F-31F-29
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company distinguishes revenues from external customers by geographic areas based on customer location.the location to which its products, software or services are delivered and, for QTL’s licensing and royalty revenues, the invoiced addresses of its licensees. Sales information by geographic area was as follows (in millions): | | | | | | | | | | | | | | | | | | Year Ended | | | | | | September 25, | | September 26, | | September 28, | | | | | | | | | | | | | | | | | 2005 | | 2004 | | 2003 | | | 2008 | | 2007 | | 2006 | | | United States | | $ | 1,015 | | $ | 1,016 | | $ | 875 | | | $ | 970 | | $ | 1,165 | | $ | 984 | | | South Korea | | 2,083 | | 2,091 | | 1,724 | | | 3,872 | | 2,780 | | 2,398 | | | Japan | | 1,210 | | 877 | | 586 | | | 1,598 | | 1,524 | | 1,573 | | | China | | 394 | | 260 | | 311 | | | 2,309 | | 1,875 | | 1,266 | | | Brazil | | 40 | | 31 | | 36 | | | | Other foreign | | 931 | | 605 | | 315 | | | 2,393 | | 1,527 | | 1,305 | | | | | | | | | | | | | | | | | | | | | $ | 5,673 | | $ | 4,880 | | $ | 3,847 | | | $ | 11,142 | | $ | 8,871 | | $ | 7,526 | | | | | | | | | | | | | | | | | |
Note 11.10. Acquisitions During fiscal 2005,2008, the Company acquired the following four entitiesfive businesses for a total costcash consideration of $295 million, 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$260 million. Approximately $3 million in consideration is payable in cash through November 2006 ifJune 2009 was held back as security for certain performanceindemnification obligations. The Company is in the process of finalizing the accounting for the acquisitions and other milestones are reached.does not anticipate material adjustments to the preliminary purchase price allocations. Goodwill recognized in thosethese transactions, amounted to $216 million, of which $81$179 million is expected to be deductible for tax purposes. Goodwillpurposes, was assigned to the QMT, QISQWI and QCT segments in the amountsamount of $128 million, $81$179 million and $7$23 million, respectively. Technology-based intangible assets recognized in the amount of $36$57 million haveare being amortized on a straight-line basis over a weighted-average useful life of sevensix years.
On August 11, 2005,During fiscal 2007, the Company announced its intentionacquired three businesses for total cash consideration of $181 million (of which $6 million was paid in fiscal 2008). Goodwill recognized in these transactions, of which $21 million is expected to acquire all ofbe deductible for tax purposes, was assigned to 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 anticipatedQCT and QWI segments in the first halfamounts 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 three years. During fiscal 2006, pending regulatory approval and other customary closing conditions, the Company estimates that it will payacquired three businesses for an aggregate of approximately $545$485 million in consideration, consisting of approximately $272cash (of which $75 million was paid in fiscal 2007), $357 million in shares of QUALCOMM stock $235(of which $3 million was issued in cash,fiscal 2007), and the exchange of Flarion’s existing vested options and warrants with aan estimated aggregate fair value of approximately $38 million. Upon achievementIn addition, the Company assumed existing unvested options with an estimated aggregate fair value of certain agreed upon milestones on or prior$76 million, which is recorded as share-based compensation over the requisite service period. Goodwill recognized in these three transactions, no amount of which is expected to be deductible for tax purposes, was assigned 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 stockholdersQTL 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. Note 12. Discontinued OperationsQCT segments in the QSI Segment
On December 2, 2003, Embratel Participações S.A. (Embratel) acquired the Company’s directamounts of $616 million 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$42 million, respectively. Technology-based intangible assets recognized in the Embratel sale transaction,amount of $165 million are being amortized on a straight-line basis over a weighted-average useful life of seventeen years. Purchased in-process technology in the amount of $22 million was charged to research and as such,development expense upon acquisition because technological feasibility had not been established and no future alternative uses existed.
The consolidated financial statements include the Company effectively retained, through a new wholly-owned subsidiary (TowerCo), ownership and controloperating results of the Vésper Towers. The Company realized a net lossthese businesses from their respective dates 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 theacquisition. Pro forma results of operations and cash flows related tohave not been presented because the Vésper Operating Companies, includingeffects of 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 millionacquisitions were reported in the loss from discontinued operations during fiscal 2004 and 2003, respectively.not material. 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 14.11. 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. F-30
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The table below presents quarterly data for the years ended September 25, 200528, 2008 and September 26, 200430, 2007 (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 | 2008 | | | | | | | | | | | | | | | | | Revenues(1) | | $ | 2,440 | | | $ | 2,606 | | | $ | 2,762 | | | $ | 3,334 | | Operating income(1) | | | 757 | | | | 813 | | | | 824 | | | | 1,335 | | Net income (1) | | | 767 | | | | 766 | | | | 748 | | | | 878 | | | | | | | | | | | | | | | | | | | | Basic earnings per common share(2) | | $ | 0.47 | | | $ | 0.47 | | | $ | 0.46 | | | $ | 0.53 | | Diluted earnings per common share (2) | | $ | 0.46 | | | $ | 0.47 | | | $ | 0.45 | | | $ | 0.52 | | | | | | | | | | | | | | | | | | | | 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 | |
| | | | (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-31
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 24, 2006 | | | | Allowances: | | | | — trade receivables | | $ | (22 | ) | | $ | (14 | ) | | $ | 24 | | $ | — | | $ | (12 | ) | | $ | (2 | ) | | $ | — | | $ | 1 | | $ | — | | $ | (1 | ) | | — finance receivables | | | (51 | ) | | 32 | | 1 | | — | | | (18 | ) | | | — notes receivable | | | (41 | ) | | | (28 | ) | | — | | — | | | (69 | ) | | | (63 | ) | | | (15 | ) | | — | | — | | | (78 | ) | | Inventory reserves | | | (78 | ) | | | (4 | ) | | 12 | | — | | | (70 | ) | | | Valuation allowance on deferred tax assets | | | (1,523 | ) | | | (253 | ) | | 10 | | 1,106 | | | (A | ) | | | (660 | ) | | | (69 | ) | | 46 | | 14 | | | (13 | )(a) | | | (22 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (1,715 | ) | | $ | (267 | ) | | $ | 47 | | $ | 1,106 | | $ | (829 | ) | | $ | (134 | ) | | $ | 31 | | $ | 15 | | $ | (13 | ) | | $ | (101 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Year ended September 26, 2004 Allowances: | | | | | | | | Year ended September 30, 2007 | | | | Allowances: | | | | — trade receivables | | $ | (12 | ) | | $ | (3 | ) | | $ | 8 | | $ | 2 | | | (B | ) | | $ | (5 | ) | | $ | (1 | ) | | $ | (37 | ) | | $ | 2 | | $ | — | | $ | (36 | ) | | — finance receivables | | | (18 | ) | | 10 | | 7 | | — | | | (1 | ) | | | — notes receivable | | | (69 | ) | | | (30 | ) | | 53 | | — | | | (46 | ) | | | (78 | ) | | | (13 | ) | | 58 | | — | | | (33 | ) | | Inventory reserves | | | (70 | ) | | 7 | | 13 | | — | | | (50 | ) | | | Valuation allowance on deferred tax assets | | | (660 | ) | | 27 | | 20 | | 474 | | | (B | ) | | | (139 | ) | | | (22 | ) | | | (1 | ) | | 3 | | — | | | (20 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (829 | ) | | $ | 11 | | $ | 101 | | $ | 476 | | $ | (241 | ) | | $ | (101 | ) | | $ | (51 | ) | | $ | 63 | | $ | — | | $ | (89 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Year ended September 25, 2005 Allowances: | | | | | | | | Year ended September 28, 2008 | | | | Allowances: | | | | — trade receivables | | $ | (5 | ) | | $ | (2 | ) | | $ | 5 | | $ | — | | $ | (2 | ) | | $ | (36 | ) | | $ | (5 | ) | | $ | 3 | | $ | — | | $ | (38 | ) | | — finance receivables | | | (1 | ) | | 1 | | — | | — | | — | | | | — notes receivable | | | (46 | ) | | | (41 | ) | | 24 | | — | | | (63 | ) | | | (33 | ) | | | (2 | ) | | 32 | | — | | | (3 | ) | | Inventory reserves | | | (50 | ) | | | (10 | ) | | 14 | | — | | | (46 | ) | | | Valuation allowance on deferred tax assets | | | (139 | ) | | 76 | | — | | | (6 | ) | | | (C | ) | | | (69 | ) | | | (20 | ) | | | (48 | ) | | — | | | (81 | )(b) | | | (149 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (241 | ) | | $ | 24 | | $ | 43 | | $ | (6 | ) | | $ | (180 | ) | | $ | (89 | ) | | $ | (55 | ) | | $ | 35 | | $ | (81 | ) | | $ | (190 | ) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (A)(a) | | This amount relatedwas charged 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.paid-in capital. | | | (B)(b) | | This amount relatedwas charged to the disposition of the Vésper Operating Companies (See Note 12 of the Consolidated Financial Statements). | | (C) | | This amount related to the acquisitions of Trigenix and ELATA (See Note 11 of the Consolidated Financial Statements).other comprehensive loss. |
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