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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 24, 2006
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 0-19528
QUALCOMM Incorporated
(Exact name of registrant as specified in its charter)
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Delaware
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95-3685934 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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5775 Morehouse Drive |
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San Diego, California
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92121-1714 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (858) 587-1121
Securities registered pursuant to section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered |
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Common stock, $0.0001 par value
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NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
YES þ NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act.
YES o NO þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES þ NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
þ Accelerated Filer o Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
YES o NO þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates
of the registrant as of March 24, 2006 was $79,773,673,077.*
The
number of shares outstanding of the registrants common stock
was 1,652,553,203 as of
October 31, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants Definitive Proxy Statement to be filed with the Commission
pursuant to Regulation 14A in connection with the registrants 2007 Annual Meeting of Stockholders,
to be filed subsequent to the date hereof, are incorporated by reference into Part III of this
Report. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission
not later than 120 days after the conclusion of the registrants fiscal year ended September 24,
2006.
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* |
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Excludes the Common Stock held by executive
officers, directors and stockholders whose ownership exceeds 5% of the Common
Stock outstanding at March 24, 2006. This calculation does not reflect a
determination that such persons are affiliates for any other purposes. |
QUALCOMM INCORPORATED
Form 10-K
For the Fiscal Year Ended September 24, 2006
Index
TRADEMARKS AND TRADE NAMES
QUALCOMM®, QUALCOMM CDMA University®, QUALCOMM Wireless Business SolutionsÒ, OmniTRACS®,
OmniVision, OmniOneÒ, GlobalTRACS, TrailerTRACS®, SensorTRACSÒ, TruckMAIL,
OmniExpress®, QConnect, T2, EutelTRACS, QCT-Ò, MSM, Secure MSM, CMX, CSM,
MSM6250Ô, MSM6275, MSM6280, MSM6500Ô, MSM6550, MSM7200, CSM6700, CSM6800,
Wireless Reach, DMMX, HMMX, gpsOne, SnapTrackÒ, BREWÒ, BREW SDKÒ, BINARY
RUNTIME ENVIRONMENT FOR WIRELESSÒ, MediaFLO, FLO, QPoint, FLASH-OFDM®, RadioRouter®,
QConcert, Qtunes, Qtv, Q3Dimension, Qcamera, Qcamcorder, Qvideophone, deliveryOne, uiOne,
iMoD, and QChat® are trademarks and/or service marks of QUALCOMM Incorporated. QUALCOMM, QUALCOMM
Wireless Business Solutions, QWBS, QUALCOMM CDMA Technologies, QCT, QUALCOMM Technology Licensing,
QTL, QUALCOMM Wireless Systems, QWS, QUALCOMM Wireless & Internet, QUALCOMM Wireless & Internet
Group, QWI, QUALCOMM Internet Services, QIS, QUALCOMM Government Technologies, QGOV, QUALCOMM MEMS
Technologies, QMT, QUALCOMM Technologies & Ventures, QUALCOMM MediaFLO Technologies, QUALCOMM
Flarion Technologies, QUALCOMM Global Development, QUALCOMM Global Trading, QGT, QUALCOMM Strategic
Initiatives, QSI, ELATA, Iridigm, MediaFLO USA, Trigenix, Spike, SnapTrack are trade names of
QUALCOMM Incorporated.
cdmaOne® is a trademark of the CDMA Development Group, Inc. CDMA2000® is a registered
trademark and certification mark of the Telecommunications Industry Association. Globalstar and
Globalstar® are a trademark and service mark, respectively, of Globalstar, Inc. RentalMan® is a
registered trademark of Wynne Systems, Inc.
All other trademarks, service marks and/or trade names appearing in this document are the
property of their respective holders.
In this document, the words we, our, ours and us refer only to QUALCOMM Incorporated
and not any other person or entity.
PART I
Item 1. Business
This Annual Report (including the following section regarding Managements Discussion and
Analysis of Financial Condition and Results of Operations) contains forward-looking statements
regarding our business, financial condition, results of operations and prospects. Words such as
expects, anticipates, intends, plans, believes, seeks, estimates and similar
expressions or variations of such words are intended to identify forward-looking statements, but
are not the exclusive means of identifying forward-looking statements in this Annual Report.
Additionally, statements concerning future matters such as the development of new products,
enhancements or technologies, sales levels, expense levels and other statements regarding matters
that are not historical are forward-looking statements.
Although forward-looking statements in this Annual Report reflect the good faith judgment of
our management, such statements can only be based on facts and factors currently known by us.
Consequently, forward-looking statements are inherently subject to risks and uncertainties and
actual results and outcomes may differ materially from the results and outcomes discussed in or
anticipated by the forward-looking statements. Factors that could cause or contribute to such
differences in results and outcomes include without limitation those discussed under the heading
Risk Factors below, as well as those discussed elsewhere in this Annual Report. Readers are urged
not to place undue reliance on these forward-looking statements, which speak only as of the date of
this Annual Report. We undertake no obligation to revise or update any forward-looking statements
in order to reflect any event or circumstance that may arise after the date of this Annual Report.
Readers are urged to carefully review and consider the various disclosures made in this Annual
Report, which attempt to advise interested parties of the risks and factors that may affect our
business, financial condition, results of operations and prospects.
We incorporated in 1985 under the laws of the state of California. In 1991, we reincorporated
in the state of Delaware. We operate and report using a 52-53 week fiscal year ending the last
Sunday in September. Our 52-week fiscal years consist of four equal quarters of 13 weeks each, and
our 53-week fiscal years consist of three 13-week fiscal quarters and one 14-week fiscal quarter.
The financial results for our 53-week fiscal years and our 14-week fiscal quarters will not be
exactly comparable to our 52-week fiscal years and our 13-week fiscal quarters. Each of the fiscal
years ended September 24, 2006, September 25, 2005 and September 26, 2004 include 52 weeks.
Overview
In 1989, we publicly introduced the concept that a digital communication technique called CDMA
could be commercially successful in wireless communication applications. CDMA stands for Code
Division Multiple Access and is one of the main technologies currently used in digital wireless
communications networks. CDMA and the other main digital wireless communications technologies, TDMA
(which stands for Time Division Multiple Access) and GSM (which is a form of TDMA and stands for
Global System for Mobile Communications) are the digital technologies used to transmit a wireless
phone users voice or data over radio waves using the wireless phone operators network. CDMA works
by converting speech into digital information, which is then transmitted in the form of a radio
signal over the phone network. These digital wireless phone networks are complete phone systems
comprised primarily of base stations, or cells, which are geographically placed throughout a
service or coverage area. Once communication between a wireless phone user and a base station is
established, the system detects the movement of the wireless phone user and the communication is
handed off to another base station, or cell, as the wireless phone user moves throughout the
service area.
Because we led, and continue to lead, the development and commercialization of all versions of
CDMA technology, we own significant intellectual property, including patents, patent applications
and trade secrets, portions of which we license to other companies and implement in our own
products. The wireless communications industry generally recognizes that a company seeking to
develop, manufacture and/or sell products that use CDMA technology will require a patent license
from us.
There are several versions of CDMA technology recognized worldwide as public cellular
standards. The first version, known as cdmaOne, is a second generation (2G) cellular technology
that was first commercially deployed in
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the mid-1990s. The other subsequent versions of CDMA are
popularly referred to as third generation (3G) technologies known commonly throughout the wireless
industry as:
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CDMA2000, including 1X, 1xEV-DO (EV-DO, or Evolution Data Optimized), EV-DO Revision
A and EV-DO Revision B; |
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Wideband CDMA (WCDMA), also known as Universal Mobile Telecommunications Systems
(UMTS), including High Speed Download Packet Access (HSDPA) and High Speed Uplink
Packet Access (HSUPA); and |
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CDMA Time Division Duplex (TDD), of which there are currently two versions, Time
Division Duplex CDMA (TD-CDMA) and Time Division Synchronous-CDMA (TD-SCDMA). |
CDMA2000 and WCDMA are deployed today in commercial mobile phone networks (also known as
wireless networks) throughout the world. In addition to increasing voice capacity, these 3G CDMA
technologies enable greater data capacity at higher data rates. In the future, a broader range of
multiple airlinks will be utilized depending on the spectrum availability and applications that
will be offered by each operator. These include WCDMA upgrades beyond HSUPA (called HSPA+),
CDMA2000 upgrades beyond 1xEV-DO Revisions A and B (called Ultra Mobile Broadband (UMB)), an
Orthogonal Frequency Division Multiplexing Access (OFDMA)/CDMA upgrade path for ultra mobile
broadband data rates using up to 20 MHz channels in new spectrum and other OFDMA-based
air-interfaces.
Our Revenues. We generate revenues by licensing portions of our intellectual property to other
manufacturers of wireless products (such as wireless phones and the hardware required to establish
and operate a wireless network). Revenues are generated through licensing fees and royalties on
products sold by our licensees that incorporate our patented technologies. We also sell and license
products and services, which include the following, all of which are described in greater detail
below:
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CDMA-based integrated circuits (also known as chips) and system software used in
mobile phones (also known as subscriber units and handsets) and wireless networks; |
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Radio Frequency and Power Management chips used in wireless phones and sold in
conjunction with our CDMA-based integrated circuits; |
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Messaging and other services and related equipment and software used by
transportation and other companies to communicate with and track their equipment
fleets; |
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Software products and services related to BREW (Binary Runtime Environment for
Wireless), a package of products that enable software developers to create
applications, or programs, wireless phone operators and wireless network operators
(also known as mobile operators, mobile phone service providers, wireless phone
operators or wireless operators) to deliver content to mobile phones. BREW also offers
software products and services to increase the functionality and appeal of mobile
phones, including uiOne for customized user interfaces for mobile phones, porting tools
and technical assistance for device manufacturers, and the deliveryOne/marketOne suite
of products which includes the Content Delivery System, the BREW Delivery System (BDS),
and the uiOne Delivery System; and |
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Software and hardware development services. |
We sell network products based on OFDMA technology to mobile phone service providers. We also
provide products and services to service providers and other customers of Globalstar, Inc., a
company that operates a worldwide, low-Earth-orbit satellite-based telecommunications system. Our
wholly-owned wireless multicast operator subsidiary, MediaFLO USA, Inc., expects to offer a
nationwide network to deliver multimedia content to multiple wireless subscribers simultaneously.
This network is expected to be utilized as a shared resource for wireless operators and their
customers in the United States. We make strategic investments to promote the development of new
CDMA products as well as the adoption of CDMA and other technologies by more mobile phone service
providers.
Our Engineering Resources. We have significant engineering resources, including engineers with
substantial expertise in CDMA and a broad range of other technologies. Using these engineering
resources, we expect to continue to develop new versions and new technologies that use CDMA and
other technologies, develop alternative technologies for certain specialized applications
(including multicast), participate in the formulation of new wireless telecommunications standards
and technologies and assist in deploying wireless voice and data communications networks around the
world.
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Our Integrated Circuits Business. We develop and supply CDMA-based integrated circuits and
system software for wireless voice and data communications, multimedia functions and global
positioning system products. Our integrated circuit products and system software are used in
wireless devices, particularly mobile phones, data cards and infrastructure equipment. The
integrated circuits for wireless phones include the baseband Mobile Station Modem (MSM), Radio
Frequency (RF) and Power Management (PM) devices, as well as the system software which enables the
other phone components to interface with the integrated circuit products and is the foundation
software enabling phone manufacturers to develop handsets utilizing the functionality within the
integrated circuits. These integrated circuits for wireless phones and system software perform
voice and data communication, multimedia and global positioning functions, radio conversion between
RF and baseband signals and power management. Our infrastructure equipment integrated circuits and
system software perform the core baseband CDMA modem functionality in the wireless operators
equipment. Because of our broad and unique experience in designing and developing CDMA-based
products, we not only design the baseband integrated circuit, but the supporting system as well,
including the RF devices, PM devices and accompanying software products. This approach enables us
to optimize the performance of the wireless phone itself with improved product features, as well as
the integration and performance of the network system. Our design of the system also allows CDMA
systems and devices manufactured by our customers to come to market faster. We provide our
integrated circuits and system software, including reference designs and tools, to many of the
worlds leading wireless phone and infrastructure equipment manufacturers. We plan to add
additional features and capabilities to our future integrated circuit products to help our
customers reduce the costs and size of their products and to simplify our customers design
processes. We also design and create multimode and multiband integrated circuits incorporating
other wireless standards for global roaming markets. In addition, we will continue to provide high
quality support to enable our customers to reduce the time required to design their products and
bring their products to market faster.
Our Phone Software and Related Services Business. We provide our BREW (Binary Runtime
Environment for Wireless) products and services to support the development of over-the-air wireless
applications and services. We provide BREW to wireless network operators, handset manufacturers and
software developers. The BREW products and services include the BREW software development kit (SDK)
for developers; the BREW applications platform (i.e. software programs) and interface tools for
device manufacturers; and the uiOne customized user interface product and services and the
deliveryOne Content Distribution System to wireless operators to enable the distribution of content
and applications to the market, while also providing the settlement of the billing and payment
process. The BREW platform is a software application that provides an open, standard platform for
wireless devices, which means that BREW can be made to interface with many software applications,
including those developed by others. We make the BREW SDK available, free of charge, to any
qualified person or company interested in developing a new software application for wireless
communications. BREW leverages the capabilities available in integrated circuits and system
software, enabling our customers to develop feature-rich applications and content while reducing
memory and maximizing system performance of the wireless phone itself. In addition to CDMA2000,
BREW can be used on wireless phones and other devices that support other wireless technologies,
such as GSM, General Packet Radio System (GPRS), Enhanced Data Rates for GSM Evolution (EDGE) and
WCDMA. We also provide QChat, which enables virtually instantaneous push-to-talk functionality on
CDMA-based wireless devices, and QPoint, which enables operators to offer enhanced 911 (E-911)
wireless emergency and other location-based applications and services.
Subscriber Growth. Based on reports by Wireless Intelligence, an independent source of
wireless operator data, the wireless telecommunications industry continued to grow at a rapid pace
during fiscal 2006, with worldwide wireless subscribers growing by more than 24% to reach
approximately 2.5 billion as of September 2006. CDMA-based subscribers, including both 2G (cdmaOne)
and 3G (CDMA2000, 1xEV-DO and WCDMA), represent approximately 17% of total worldwide wireless
subscribers. In September 2006, Strategy Analytics, a global research and consulting firm, forecast
that there will be approximately 3 billion mobile phone users, also referred
to as subscribers, by the end of calendar year 2007 and that the figure will grow to more than
3.8 billion globally by the end of 2011.
The CDMA Development Group (CDG) is an international consortium of companies that joined
together to lead the adoption and evolution of cdmaOne and CDMA2000 wireless systems around the
world. The CDG reports subscriber information which includes 2G cdmaOne as well as 3G CDMA2000 1X
and CDMA2000 1xEV-DO
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(collectively, CDMA2000). The CDG does not report WCDMA. According to the CDG,
cdmaOne and CDMA2000 wireless networks have been commercially deployed in 76 countries around the
world. As reported by the CDG, worldwide subscribers grew by 24% during the 12-month period ended
June 2006, to more than 335 million, including approximately 275 million CDMA2000 1X subscribers,
approximately 36 million CDMA2000 1xEV-DO subscribers and approximately 24 million cdmaOne
subscribers. As of October 2006, over 1,460 different CDMA2000 devices have been introduced to the
market, including over 350 1xEV-DO devices, according to public reports made available at
www.cdg.org.
As reported by the CDG, the North America market has nearly 116 million subscribers at June
2006, representing annual growth of 15%. In the Asian Pacific market, the largest and
fastest-growing region for CDMA, operators added more than 26 million subscribers during the
12-month period ended June 2006, bringing the total number of cdmaOne and CDMA2000 subscribers in
this region to nearly 143 million, an increase of 23% over the prior year. In January 2002, China
Unicom launched its nationwide CDMA2000 network, and as of August 2006, China Unicom announced that
it had approximately 35 million CDMA2000 subscribers. In Latin America and the Caribbean, the
number of subscribers grew by 43% during the year ended June 2006, reaching more than 70 million
cdmaOne and CDMA2000 subscribers through 47 commercial operators.
Third Generation Technologies. The primary 3G standards commonly referred to throughout the
wireless industry are CDMA2000, WCDMA and TDD, which includes TD-CDMA and TD-SCDMA.
According to Wireless Intelligence as of September 2006:
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3G subscribers to wireless operators services grew to approximately 402 million worldwide; |
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There are approximately 45 million 1xEV-DO subscribers, including over 14 million in
South Korea and more than 16 million in the United States; |
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There are approximately 85 million WCDMA subscribers, including approximately 34
million in Japan with the remainder primarily located in Western Europe. |
As reported by the CDG as of October 2006:
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CDMA2000 1X has been commercially deployed by more than 170 operators worldwide; |
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Within the CDMA2000 family, the higher speed CDMA2000 1xEV-DO has been commercially
deployed by more than 50 operators worldwide; |
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In the United States, there are 26 operators that have commercially deployed
CDMA2000 1X and 5 operators that have commercially deployed 1xEV-DO, making CDMA2000
the first 3G technology commercially available in North America. |
CDMA2000 1xEV-DO continues to evolve with EV-DO Revision A, Revision B and future
enhancements, which will allow operators to introduce Voice over Internet Protocol (VoIP),
multi-megabit-per-second speeds, multimedia and broadcast capabilities in the coming years.
The
first commercial deployment of WCDMA was in Japan in
October 2001. WCDMA has been deployed by
more than 122 operators worldwide, as reported by the Global mobile Suppliers Association (GSA), an
international organization of WCDMA and GSM (Global System for Mobile
Communications) suppliers, in
its September 2006 reports. The WCDMA family includes HSDPA, part of 3rd Generation
Partnership Project (3GPP) Release 5, which was first deployed commercially in December 2005 in the
United States using our chipsets; as well as, HSUPA, part of 3GPP Release 6, which is in trial
phase. We expect other future enhancements in future revisions of the 3GPP specifications will
further increase performance capacity and data speeds. We expect many WCDMA operators to eventually
upgrade their networks to HSDPA. More than 65 operators have launched commercial
HSDPA networks, as reported by GSA in October 2006. Another 3G technology, TD-SCDMA, is being
considered for launch in China along with WCDMA and CDMA2000.
Our Asset Tracking and Messaging Business. We design, manufacture and sell equipment and
provide satellite and terrestrial-based two-way data messaging and position reporting services to
transportation companies, private fleets, construction equipment fleets and other enterprise
companies throughout parts of the world. These products permit our customers to track the location
of their vehicles or other assets and to communicate with them en route. These products and
services use commercially available satellite and wireless terrestrial-based networks to permit
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this communication. Our customers use these products to communicate with drivers, monitor vehicle
location and performance, and provide automated driver logs, fuel tax reporting, security and
enhanced customer services. Our products, which collect and transmit this data, are also integrated
with our customers operations software, such as dispatch, payroll and accounting, so our customers
can better manage their information and operations. Using our asset tracking and messaging
infrastructure, we also provide a managed wireless data service, QConnect, to other service
providers. For example, we provide the QConnect service to CardioNet, a provider of outpatient
cardiac telemetry technology services, where we manage the wireless data service connectivity
between CardioNet mobile monitoring devices and the CardioNet Monitoring Center.
Further Investments in New Products, Services and Technologies. We continue to invest heavily
in research and development in a variety of ways, to grow our earnings and extend the market for
our products and services.
We continue to develop and commercialize third generation CDMA-based technologies, such as
CDMA2000 1X, 1xEV-DO, EV-DO Revision A, EV-DO Revision B, WCDMA, HSDPA, HSUPA and other future
standards. These technologies support more efficient voice communications, broadband access to the
Internet, multimedia services, delay sensitive applications (including Voice over Internet
Protocol, video telephony, push-to-talk and multiplayer gaming) and other revenue-generating
services, in turn accelerating the growth of CDMA. At the same time, we are working to fulfill the
growing demand for affordable, voice-centric CDMA phones within the emerging entry-level market
through various efforts including the introduction of Single Chip (SC) solutions, streamlined test
and certification processes and the aggregation of device procurements. With regard to our 1xEV-DO
technology, we have improved its value, performance and economics with EV-DO Revision A, which
provides a number of enhancements, including greater spectral efficiency, faster reverse-link data
rates, lower latency and optimized quality of service.
We also continue to develop and commercialize multimode, multiband and multinetwork products
that embody technologies such as GSM, GPRS, EDGE, Bluetooth, Wireless Fidelity (Wi-Fi), Universal
Serial Bus (USB), Forward Link Only (FLO), Orthogonal Frequency Division Multiplexing (OFDM),
Global System for Mobile Communications-Mobile Application Port (GSM-MAP), American National
Standards Institute 41 (ANSI-41) and Internet Protocol-based (IP-based) core networks. We continue
to support multiple mobile client software environments in our multimedia and convergence chipsets,
such as BREW, Java, Windows Mobile, PalmOS and Linux.
We continue to develop on our own, and with our partners, new innovations that are integrated
into our product portfolio to further expand the market and enhance the value of our products and
services. These products and features include BREW, uiOne, deliveryOne, OmniOne, gpsOne, QChat,
Qtunes, QConcert, Qtv, Q3Dimension, Qcamera, Qcamcorder, Qvideophone, Secure MSM, compact media
extension (CMX), mobile display digital interface (MDDI), next-generation voice codec (4GV),
Platinum Multicasting and MediaFLO. At the same time, we are very active within many industry
bodies, including 3rd Generation Partnership Project (3GPP), 3rd Generation
Partnership Project 2 (3GPP2), Institute for Electrical and Electronic Engineers (IEEE) and Open
Mobile Alliance (OMA), to ensure these innovations are (1) universally implemented to support
economies of scale and (2) interoperable with existing and future mobile communication services to
preserve ongoing investments.
In particular, we continue to contribute to 3GPP2 and 3GPP standards to enable the next level
of mobile broadband data services. 3GPP2 standards are evolving beyond EV-DO Revision A to offer
much higher broadband data rates through Revision B and Revision C. Revision B enables CDMA
operators to upgrade their networks through software upgrades to support transmissions to a single
handset using multiple carriers to increase the data rates (in a 5 MHz bandwidth, more than three
times the data rate). Revision C will enable an OFDMA/CDMA path for delivering ultra mobile
broadband data rates using up to 20 MHz channels in new and vacant spectrum. In a system using 20
MHz bandwidths on both the uplink and downlink, uplink rates are greater
than 50 Mbps and downlink rates are greater than 100 Mbps with two base station antennas and
two handset antennas. With the same bandwidths and with four antennas at both the base station and
handset, downlink rates greater than 200 Mpbs can be obtained. The data rates will be less with
lower bandwidths. 3GPP standards are also evolving beyond current HSDPA and HSUPA through Release 7
and Release 8 to offer Evolved HSPA (High Speed Packet Access) or HSPA+ technologies to enable much
higher broadband data rates. In parallel, 3GPP is also introducing an
OFDMA-based air-interface
through its Long Term Evolution (LTE) to deliver ultra mobile broadband data rates using channel
bandwidths up to 20 MHz. These standards also enable end-to-end IP transport using advanced IP
Multimedia Subsystem (IMS) platform to deliver voice (VoIP), multimedia and other broadband data
services cost
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effectively. Our patented technologies, resulting from our strong investment in
fundamental system research and development, have been and are expected to continue to play a
significant role in each of these future standards.
These innovations are expected to enable our customers to improve the performance or value of
their existing services, offer these services more affordably, and introduce new revenue-generating
broadband data services well ahead of their competition. CDMA network service providers also
benefit from these innovations through increased numbers of subscribers, handset replacements and
increased annual revenues per user.
Wireless Local Area Networks (WLAN), such as Wi-Fi, are complementary to Wide Area Networks
(WAN), such as CDMA2000 and WCDMA. They both provide affordable high-speed wireless access to the
Internet. The limited coverage offered by Wi-Fi is well suited for private networks (e.g.
enterprises, campuses and homes) and certain public hot spots (e.g. airports, conference halls
and coffee shops) where data usage is expected to be high in a limited portable and stationary
environment; whereas, 3G CDMA networks are ideally suited for geographically diverse voice and data
coverage (e.g. cities, highways and neighborhoods) and in environments where public access to the
Wi-Fi network is blocked due to a firewall (e.g. a clients enterprise). We may incorporate this
OFDM-based standard into our future multimode 3G CDMA chipsets as we continue to identify and
integrate other complementary wireless technologies into our chipsets.
We are also developing our MediaFLO Media Distribution System (MDS) and OFDM-based FLO
technology to optimize the low cost delivery of multimedia content to multiple wireless subscribers
simultaneously, otherwise known as multicasting. As part of the standardization of FLO technology,
the FLO Forum (www.floforum.org) was established in fiscal 2005. To date, more than 65 companies
have joined the FLO Forum, including leaders from across the mobile content distribution industry.
In 2005, the Telecommunications Industry Association (TIA) established a Committee to develop
standards for Terrestrial Mobile Multimedia Multicast. In August 2006, TIA published the Standard
Forward Link Only Air Interface Specification that was based upon the FLO Forums submissions, thus
standardizing the lower layers of the FLO air interface.
Our subsidiary, MediaFLO USA, Inc. (MediaFLO USA), plans to deploy and operate a nationwide
multicast network based on our MDS and FLO technology. MediaFLO USA
will use 700 megahertz (MHz) spectrum for
which we hold licenses for a nationwide footprint to deliver high-quality video and audio
programming to wireless subscribers in the United States. Additionally, MediaFLO USA plans to
procure, aggregate and distribute content in service packages which we will make available on a
wholesale basis to our wireless operator customers (whether they operate on CDMA or GSM/WCDMA
networks) in the United States. MediaFLO USA will require minimal access to third generation
networks (CDMA or WCDMA) operated by our wireless operator customers for activities such as
subscription management. We believe that the service provided by MediaFLO USA will serve to
complement many of the wireless operators third generation network service offerings.
MediaFLO USA continues to prepare for the launch of its commercial service. Its San Diego
Broadcast Operation Center and Network Operations Center are currently operating, while
construction of the initial phase of its network is nearing completion in several major markets. In
addition to Verizon Wireless, which announced its intention to launch the MediaFLO USA service in
early calendar 2007, MediaFLO USA is actively engaged in discussions with multiple domestic
wireless operators on how they might utilize the MediaFLO USA service.
Outside of the United States, we continue to see interest in FLO technology. In May 2006, we
signed a nonbinding letter of intent with British Sky Broadcasting (BSkyB) to conduct the first
technical trials of MediaFLO technology in the United Kingdom. The trial features 10 channels of BSkyB content
and a small number of non-commercial devices provided by us. The BSkyB technical trial is the first
of what we expect will be a number of FLO technology trials in Europe and other parts of the world.
In Japan, we formed a joint venture with KDDI to explore
the deployment of MediaFLO services, and Softbank (which acquired Vodafone KK) is setting up a
new company called Mobile Media Planning Corp. to conduct a technical study of MediaFLO and plan a
new service using MediaFLO technology.
Consistent with our strategic approach over the past fifteen years, we intend to continue our
active support of CDMA-based technologies, products and network operations to grow our royalty
revenues and integrated circuit and software revenues. We also plan to continue to broadly grant
royalty-bearing licenses to our patented technologies (including CDMA and OFDMA) and software
applications under terms and conditions that are fair, reasonable and free from unfair
discrimination. From time to time, we may also make acquisitions to meet certain technology needs,
to obtain development resources or to pursue new business opportunities. For example, in fiscal
2006, we completed the acquisition of Flarion Technologies, Inc. (Flarion), a developer of OFDMA
technology. Our acquisition of
6
Flarion is intended to broaden our ability to effectively support
operators who may prefer an OFDMA or a hybrid OFDM/CDMA/WCDMA network alternative. The addition of
Flarions engineering resources also supplements the resources that we have already dedicated over
the years towards the development of OFDM/OFDMA technologies. Flarions intellectual property
portfolio contributed significantly to our strong OFDM/OFDMA patent portfolio.
We plan to continue to make strategic investments in start-up companies that we believe open
new markets for our technology, support the design and introduction of new products or possess
unique capabilities or technology. Most of our strategic investments entail a high degree of risk
and will not become liquid until more than one year from the date of investment, if at all. To the
extent such investments become liquid and meet our strategic objectives, we intend to make regular
periodic sales of our interests in these investments that are recognized in investment income
(expense). In some cases, we make strategic investments in early-stage companies, which require us
to consolidate or record our equity in losses of those companies. These losses will adversely
affect our financial results until we exit from or reduce our exposure to these investments.
Giving Back. At QUALCOMM, we are not only committed to being good corporate citizens, but also
good neighbors in the communities we call home. We contribute collectively as a corporation, and we
participate in ways that touch peoples lives on a personal level. We encourage our employees to
give their time and considerable talents to the community, and their significant volunteer efforts
are evident in, for example, schools, the arts, feeding the homeless and serving on the advisory
boards of not-for-profit organizations. We make donations to community causes, with a focus on
programs that promote education, health and human services, and culture and the arts. Our
charitable giving programs include our active and ongoing employee matching grant program, which
matches a certain level of donations made by employees to qualifying organizations, and educational
giving, such as engineering partnerships with universities intended to make a sustainable
difference in educational systems in the various regions in which we do business. Our charitable
giving and volunteer programs are based on respect for community organizations, cooperative
leadership development and philanthropic creativity.
In addition, our Wireless Reach initiative empowers underserved communities through the use of
3G wireless technologies. The objective of this initiative is to strengthen economic and social
development with a focus on education, governance, healthcare and public safety. Wireless Reach
creates sustainable 3G projects through partnerships with non-government organizations,
universities, government institutions, development agencies and other private sector companies.
Wireless Telecommunications Industry Overview
The International Telecommunications Union (ITU) is a telecommunication standards setting
organization that is recognized as an impartial, international organization within which
governments and the private sector work together to advance the development of international
standards for communications technology. The ITUs standardization activities foster the growth of
new technologies, such as mobile telephony, mobile broadcast and mobile Internet, as well as the
emerging global information infrastructure, which handles a mix of voice, data and multimedia
signals. The ITU develops internationally agreed-upon technical and operating standards to foster
seamless interconnection of the worlds communication networks and their subsystems. As the world
of telecommunications, information technology and media content distribution rapidly converge, the
role of the ITU is to forge new recommendations that promote the interoperability of equipment and
facilitate the development of advanced communication networks. The ITU identifies sound technical
recommendations and develops them into internationally recognized ITU standards.
The
Telecommunications Industry Association (TIA) is a United States-based non-profit trade association
serving the telecommunications technology industry. The TIA provides a forum for its member
companies, which manufacture or supply the products and services used in global communications.
Through its voluntary standards setting committees, the TIA facilitates the interoperability of new
communications networks with the stated objective of working towards a competitive and innovative
market environment. The TIA is a major contributor of voluntary industry standards that support
global trade and commerce in communications products and systems.
Standards Development Organizations (SDO), including, among others, TIA and Alliance for
Telecommunications Industry Solutions (ATIS) in the United States, European Telecommunications
Standards Institute (ETSI), Telecommunications Technology Association (TTA) in South Korea, Association
of Radio Industries and Businesses (ARIB) in Japan, China Communications Standards Association
(CCSA), and the Institute for Electrical and Electronic Engineers (IEEE), are non-profit voluntary
standards, trade and professional associations that serve the telecommunications technology
industry. Through their worldwide activities, these organizations work in
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conjunction with the ITU,
to develop common specifications to facilitate global business development opportunities. They each
provide a market-focused forum for their member companies, which manufacture or supply products and
services used in global communications. They also facilitate the interoperability of new
communications networks with a stated objective of working towards a competitive and innovative
market environment. Each organization contributes voluntary industry standards that support global
trade and commerce in communications products and systems.
None of these organizations have the mission, ability or authority to enforce or protect
intellectual property rights. Today, these organizations generally ask participating companies to
declare whether they believe they hold patents essential for compliance with a particular standard
and, if so, whether they are willing to license such patents on terms and conditions that are fair,
reasonable and free from unfair discrimination (and, in some instances, whether the patent holder
is willing to license royalty free).
Usage of mobile phones and other types of wireless telecommunications equipment has increased
dramatically in the past decade. According to forecasts made in September 2006 by Strategy
Analytics, worldwide mobile subscribers are expected to reach approximately 3 billion by the end of
2007 and to exceed 3.8 billion in 2011, including approximately 3.1 billion unique
users, equivalent to a penetration rate of 47%. Growth in the market for wireless
telecommunications services has traditionally been fueled by demand for voice communications. There
have been several factors responsible for the increasing demand for wireless voice services,
including:
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lower cost of wireless handsets, joined with an increasing selection of appealing mobile devices; |
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lower cost of service, including flat-rate and bundled long-distance calling plans; |
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prepaid services, particularly popular in developing countries; |
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an increasingly mobile workforce with increased need for wireless voice communications; |
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a consumer base that desires to be accessible, informed and entertained within a mobile environment; |
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increased coverage, roaming, privacy and call clarity of voice transmissions; |
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wireless networks becoming the primary communications infrastructure in
developing countries due to the higher costs of and longer time required for installing
wireline networks; and |
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regulatory environments worldwide favoring increased competition in wireless
telecommunications. |
In addition to the tremendous demand for wireless voice services, wireless service providers
are increasingly focused on providing broadband wireless access to the Internet, as well as
multimedia entertainment, messaging, mobile commerce and position location services. These services
have been aided by the development and commercialization of 3G wireless networks and 3G handsets
which are capable of supporting higher data rates that incorporate an ever-increasing array of new
features and functionality, such as assisted GPS-based position location, digital cameras with
flash and zoom capabilities, internet browsers, email, interactive games, music and video downloads
and software download capability (e.g. our BREW platform). In June 2006, the Yankee Group, a
global market intelligence and advisory firm in the technology and telecommunications industries,
estimated that more than 1.9 billion people will be using mobile data services by 2010 and the
revenue produced from these services will account for 23% of total service revenue worldwide. We
believe the growing availability of 3G-enabled handsets capable of performing a wide variety of
consumer and enterprise applications
will accelerate the demand for many wireless data services on a global basis and thus lead to
an increased replacement rate of mobile devices to those using our technologies and integrated
circuits. Affordable wireless broadband data connectivity is important to the consumer and
enterprise, and its demand will continue to drive the evolution of wireless standards.
The adoption of wireless standards for mobile communications within individual countries is
generally determined by the telecommunication service providers operating in those countries and,
in some instances, local government regulations. Such determinations are typically based on
economic criteria and the service providers evaluation of each technologys ability to provide the
features and functionality required for its business plan. More than a decade and a half ago, the
European Community developed regulations requiring the use of a telecommunication standard known as
Global System for Mobile Communications, commonly referred to as GSM, a TDMA-based technology.
According to Wireless Intelligence, the use of this second generation wireless standard has spread
throughout the world and is currently the basis for approximately 80% of the digital mobile
8
communications in use. With the deployment of WCDMA, a third generation CDMA-based technology, by
GSM operators, many of the current 2 billion GSM subscribers will upgrade to third generation
wireless services to enjoy the added features and functionality available with 3G systems.
The Evolution of Wireless Standards
The significant growth in the use of wireless phones worldwide and demand for enhanced network
functionality requires constant innovation to further improve network reliability, expand capacity
and introduce new types of services. To meet these requirements, progressive generations of
wireless telecommunications technology standards have evolved.
First Generation. The first generation of wireless telecommunications, widely deployed by the
late 1980s in most of the developed world, was based on analog technology. While this generation
helped introduce the adoption of cellular wireless telecommunications by some business and consumer
users, the technology was characterized by inherent capacity limitations, minimal or no data
transfer capabilities, lack of privacy, inconsistent service levels and significant power
consumption.
Second Generation. As the deployment of mobile phone systems grew, the limitations of analog
technology drove the development of second generation, digital-based technologies. Second
generation digital technology provided for significantly enhanced efficiency within a fixed
spectrum as well as greatly increased voice capacity compared to analog systems. Second generation
technologies also enabled numerous enhanced services, including paging, e-mail, facsimile,
connections to computer networks, greater privacy, lower prices, a greater number of service
options and greater fraud protection. However, data services (email, fax, computer connections)
were generally limited to low speed transmission rates. The main second-generation digital cellular
technologies are CDMA, called cdmaOne or IS-95A/B, a technology we developed and patented, North
American TDMA, PDC (Personal Digital Cellulara variant of North American TDMA), and GSM, also a
form of TDMA.
Some of the advantages of CDMA technology over both analog and TDMA- and GSM-based
technologies include increased network capacity, network flexibility, compatibility with Internet
protocols, higher capacity for data and faster access to data (Internet), higher data throughput
rates and easier transition to 3G networks. GSM has the benefits of roaming due to its wider
worldwide deployment, and, for the near term, lower priced low-end handsets.
A number of GSM operators deployed 2.5G mobile packet data technologies, such as GPRS and EDGE
(Enhanced Data Rates for GSM Evolution) in areas serviced by GSM, as a bridging technology, while
they waited for 3G WCDMA devices to become more readily available and affordable so they can
justify the expense of upgrading their GSM system to provide WCDMA service. In some regions of the
world, regulatory restrictions prevent deploying WCDMA in the lower frequency bands used by GSM,
thus requiring more cell sites for WCDMA to provide coverage. As a result, in less dense areas,
some operators have not deployed WCDMA. From a technological perspective, we do not believe that
GPRS and EDGE effectively compete with 3G CDMA-based packet data services, either on a cost per bit
or transmitted performance basis.
Third Generation. As a result of demand for wireless networks that simultaneously carry both
high speed data and voice traffic, several 3G wireless standards were proposed to the ITU by a
variety of SDOs. These proposals included both CDMA- and TDMA-based technologies. A technology
standard selected for 3G must efficiently
support significantly increased data speeds and increased voice and data capacity, thereby
enabling new and enhanced services and applications such as mobile e-commerce, position location
and mobile multimedia web browsing, including music and video downloads.
CDMA-Based 3G Technology. In May 2000, the ITU adopted the 3G standard known as IMT-2000,
which encompasses five terrestrial operating radio interfaces, three of them based on our CDMA
intellectual property.
The three IMT-2000 CDMA radio interfaces are:
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CDMA Multicarrier (MC). This is also called MC-CDMA and CDMA2000. It includes CDMA2000
1X, 1xEV-DO (EV-DO), and 1xEV-DV; |
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CDMA Direct Spread (DS). This is also called WCDMA (Wideband CDMA) and UTRA-FDD
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CDMA TDD. There are two versions of CDMA TDD: TD-CDMA, also known as UTRA-TDD (Time
Division Duplex), and TD-SCDMA. Effectively TD-CDMA and TD-SCDMA are different radio
interfaces, but are classified as one by the ITU. |
There are two IMT-2000 radio interfaces that are not based upon CDMA:
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TDMA Single Carrier. This is also called Universal Wireless Communication-136
(UWC-136). The main parts are based upon the TIA/EIA-136 standard for TDMA and EDGE. |
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FDMA/TDMA. This is also called Digital Enhanced Cordless Telephone (DECT). |
The two current commercial versions of CDMA2000 are: CDMA2000 1X and 1xEV-DO. These versions
use a pair of 1.25 MHz channels to provide both voice and high-speed wireless data
communications. CDMA2000 1X/1xEV-DO utilizes the same standard channel bandwidth as existing
cdmaOne systems and, as a result, is compatible with wireless telecommunications operators
existing network equipment, making the migration to 3G simple and affordable. We believe CDMA2000
1X provides approximately twice the voice capacity of cdmaOne and six to eight times that of
TDMA-based networks. Position location technology, accomplished through a hybrid approach that
utilizes signals from both the GPS satellite constellation and CDMA cell sites, enables CDMA system
operators to meet the Federal Communications Commission (FCC) mandate requiring wireless operators
to implement enhanced 911 (E911) wireless emergency location services and offer other commercial
location-based services. In the future, updates of CDMA2000 1X and 1xEV-DO are expected to further
increase performance. Other enhancements, such as multicast services, higher-resolution displays,
longer battery life, push-to-talk services and Voice over Internet Protocol are becoming available
to improve the user experience and operator profitability. The price differential between low-end
third generation CDMA2000 handsets and GSM handsets is diminishing.
Commercial deployment of CDMA2000 1X began in South Korea in October 2000. CDMA2000 1xEV-DO
was first commercially launched in January 2002 with SKTs high-speed mobile multimedia and
broadcast service called June, and KTF also launched 1xEV-DO later the same year. Other prominent
carriers, such as Verizon Wireless and Sprint Nextel in the United States, KDDI in Japan, VIVO in
Brazil and Telecom New Zealand, have deployed 1xEV-DO network equipment in numerous markets and are
expanding coverage nationwide. CDMA2000 1xEV-DO subscribers are expected to continue to grow as
more operators begin to offer the service and the cost of providing the wireless broadband service
becomes more affordable and attractive through lower cost handsets, additional network
enhancements, the embedding of the technology into laptops and increased competition between
operators. Currently, major laptop computer companies, including Lenovo, Dell, HP, Toshiba and
Panasonic, have products incorporating 1xEV-DO technology.
The European Community and Cingular, a United States carrier, have focused primarily on the
UTRA-FDD radio interface of the IMT-2000 standard, known as WCDMA, which is based on our underlying
CDMA technology and incorporates many of our patented inventions (as are all of the CDMA radio
interfaces of the IMT-2000 Standard). The majority of the worlds leading wireless phone and
infrastructure manufacturers (more than 70) have licensed our technology for use in WCDMA products,
enabling them to utilize this WCDMA mode of the 3G technology. This includes the following major
wireless equipment suppliers: Agilent, Alcatel, BenQ, Ericsson, Fujitsu, Hitachi, Kyocera, LG
Electronics, Lucent, Panasonic, Mitsubishi, Motorola, Pantech & Curitel, NEC, Nokia, Nortel,
Novatel Wireless, Samsung, Sanyo, Sharp, Siemens, Sierra Wireless and
Toshiba, among others. We expect significant growth in the WCDMA subscriber base over the next five years, driven by
Japan (led by NTT DoCoMo), Europe, China and the United States (led by Cingular); thus, we have
allocated a significant amount of engineering, production and business resources to support this large growth opportunity.
The three ITU 3G CDMA radio interfaces are all based on the underlying core principles of CDMA
technology; however, the CDMA2000 mode enables a direct and more economical conversion for current
cdmaOne networks. While the WCDMA wireless air interface does use CDMA technology for
communications between the wireless device and the network, the infrastructure network has been
specifically designed to be compatible with the GSM network, which is why it is expected that most
GSM operators will migrate to WCDMA rather than to CDMA2000. We will continue to develop integrated
circuits for CDMA2000 and WCDMA and expect to develop integrated circuits for all 3G versions based
on CDMA when commercially worthwhile. In addition, our intellectual property rights include a
valuable patent portfolio that includes patents essential to implementation of each of the 3G CDMA
alternative standards and patents that are useful for commercially successful product
implementations. Generally, we have licensed substantially all of our
patents to our CDMA
licensees. Under each of our existing license
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agreements covering multiple CDMA standards, the
royalty rate paid to us for sales of licensed 3G CDMA (regardless of whether it is CDMA2000, WCDMA,
TD-CDMA or TD-SCDMA) subscriber products is no less than the rate that such licensee pays for its
licensed second generation cdmaOne subscriber products.
These 3G CDMA versions (CDMA2000, WCDMA, TD-CDMA and TD-SCDMA) from a technological
perspective require separate implementations and are not interchangeable. While the fundamental
core technologies are derived from CDMA and, in addition to other features and functionality, are
covered by our patents, they each require unique infrastructure products, network design and
management. However, subscriber roaming amongst systems using different air interfaces is made
possible through multimode wireless devices.
Operating Segments
Consolidated revenues from international customers as a percentage of total revenues were 87%,
82% and 79% in fiscal 2006, 2005 and 2004, respectively. During fiscal 2006, 32%, 21% and 17% of
our revenue was from customers and licensees based in South Korea, Japan and China, respectively,
as compared to 37%, 21% and 11% during fiscal 2005, respectively, and 43%, 18% and 7% during fiscal
2004, respectively.
Risks related to our conducting business with customers and licensees outside of the United
States are described in Risk Factors We, and our
licensees, are subject to the risks of conducting business outside of the United States. Additional information regarding our operating
segments is provided in the notes to our consolidated financial statements. See Notes to
Consolidated Financial Statements, Note 10 Segment Information.
QUALCOMM CDMA Technologies Segment (QCT)
QCT is a leading developer and supplier of CDMA-based integrated circuits and system software
for wireless voice and data communications, multimedia functions and global positioning system
products. QCTs integrated circuit products and system software are used in wireless devices,
particularly mobile phones, data cards and infrastructure equipment. These products provide
customers with advanced wireless technology, enhanced component integration and interoperability,
and reduced time-to-market. QCT products are sold to many of the worlds leading wireless handset,
data card and infrastructure manufacturers. In fiscal 2006, QCT shipped approximately 207 million
MSM integrated circuits for CDMA wireless devices worldwide. QCT revenues comprised 58%, 58% and
64% of total consolidated revenues in fiscal 2006, 2005 and 2004, respectively. Three customers, LG
Electronics, Motorola Inc. and Samsung Electronics Company, constitute a significant portion of
QCTs revenues.
QCT utilizes a fabless production business model, which means that we do not own or operate
foundries for the production of silicon wafers from which our integrated circuits are made.
Integrated circuits are die, cut from silicon wafers, that have completed the assembly and final
test manufacturing processes. Die, cut from silicon wafers, are the essential components of all of
our integrated circuits and a significant portion of the total integrated circuit cost. We rely on
independent third party suppliers to perform the manufacturing and assembly, and most of the
testing, of our integrated circuits. Our suppliers are also responsible for the procurement of most
of the raw materials used in the production of our integrated circuits. The majority of our
integrated circuits are purchased on
a turnkey basis, in which our foundry suppliers are responsible for delivering fully assembled
and tested integrated circuits. We also employ a two-stage manufacturing business model in which we
purchase completed die directly from semiconductor manufacturing foundries and directly manage and
contract with third party manufacturers for back-end assembly and test services. We refer to this
two-stage manufacturing business model as Integrated Fabless Manufacturing (IFM). IBM, Taiwan
Semiconductor Manufacturing Company, Ltd. and United Microelectronics are the primary foundry
suppliers for our family of baseband integrated circuits. Atmel, Freescale (formerly Motorola
Semiconductor) and IBM are the primary foundry suppliers for our family of analog, radio frequency
and power management integrated circuits. We continue to add foundry suppliers and have recently
begun volume manufacturing with Chartered Semiconductor Manufacturing Ltd., Samsung Electronics
Co., and Semiconductor Manufacturing International Corporation. Our fabless model provides us the
flexibility to select suppliers that offer advanced process technologies to manufacture, assemble
and test our integrated circuits at a competitive price.
QCTs integrated circuit products, including the MSM, RF and PM devices and system software
enable phone manufacturers to design attractive, slim and feature-rich handsets for cdmaOne and 3G
services with longer standby and talk times. These products also enable data card manufacturers to
design modems that insert into laptop computers to facilitate access to the Internet via wireless
networks. For wireless infrastructure manufacturers, QCT offers integrated circuits and system
software that provide wireless standards-compliant processing of voice and data
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signals to and from
wireless handsets. In addition to the key components in a wireless system, QCT provides our
customers with system reference designs and development tools to assist in customizing wireless
phones and user interfaces, to integrate our products with components developed by others, and to
test interoperability with existing and planned networks. QCT is also closely aligned with
manufacturers and operators in product plans, design specifications and development timelines.
The 1xEV-DO technology is designed to provide reliable, cost-effective and always-on wireless
data and Internet access to consumers. It is fully compatible with existing cdmaOne and CDMA2000 1X
technologies and has been standardized as part of the CDMA2000 mode of the 3G standard. The 1xEV-DO
technology can be embedded in phones, laptop and handheld computers, and other fixed, portable and
mobile devices to enable manufacturers to deliver products with access to services that were
previously only available through wired connections to the Internet or to enterprise networks. The
1xEV-DO technology also allows operators to leverage their current infrastructure investment and
maintain compatibility with existing phone equipment. We designed and developed a complete package
of products, including both infrastructure and phone integrated circuits, in support of the
industry-wide movement to standardize, develop and deploy 1xEV-DO technology in CDMA2000 networks.
Leveraging our expertise in CDMA, we have developed integrated circuits for manufacturers and
operators deploying the WCDMA version of 3G. More than 30 device manufacturers have selected
our WCDMA products that support GSM/GPRS, WCDMA and HSDPA for their devices. To support near-term
commercial network roll-outs, we have also completed interoperability testing with global
infrastructure providers representing wireless network operators worldwide using test devices based
on our integrated circuit products.
Our MSM integrated circuit products are offered on four distinct platforms (Value, Multimedia,
Enhanced Multimedia and Convergence) in order to address specific market segments and offer
products tailored to the needs of users in those various market segments. The Value Platform
addresses entry-level markets and enables voice-centric and basic data wireless phones. The Value
Platform includes our QUALCOMM Single Chip (QSC) product family, the industrys first single-chip
CDMA2000 1X products targeted at lowering overall handset costs and driving the broader adoption of
high-speed data services in emerging markets. The first generation of QSC products, which includes
the QSC6020, QSC6030 and QSC6040, are now shipping in volume. The second generation of QSC
products, the QSC6055 and QSC6065, are expected to ship samples in the first quarter of fiscal
2007. The QSC1100 product is expected to ship samples in the second half of calendar year 2007.
The Multimedia and Enhanced Multimedia Platforms are designed to facilitate the rapid adoption
of high-speed wireless data applications. Features from the Multimedia and Enhanced Multimedia
Platforms include support for multi-megapixel cameras, videotelephony, streaming multimedia, audio,
3D graphics and advanced position-location capabilities. Our CDMA2000 Multimedia Platform MSM6500 and Enhanced
Multimedia Platform MSM6550 integrated circuits have been widely adopted and used in numerous devices currently
commercially available. WCDMA/HSDPA devices based on
Multimedia Platform MSM6250 and Enhanced Multimedia Platform MSM6275 integrated circuits are
also commercially available or currently in design. The MSM6275 was our first high performance HSDPA integrated circuit shipped to customers in
the first quarter of fiscal 2005. In the first quarter of fiscal 2006, we shipped samples of our
second generation HSDPA integrated circuit, the MSM6280, which supports data speeds of up to 7.2
megabits per second to enable the deployment of advanced data and multimedia services among
wireless subscribers worldwide. The MSM6280 integrated circuit also integrates advanced receiver
technologies for increased data throughput and network capacity. In the second quarter of fiscal
2006, we also shipped samples of the industrys first HSUPA chipset for wireless devices, the
MSM7200. In addition to supporting HSUPA networks, the MSM7200 chipset also supports Multimedia
Broadcast Multicast Service (MBMS).
The Convergence Platform enables portable business, high-fidelity entertainment, interactive
3D gaming and other advanced multimedia, connectivity and position location applications which are
easily integrated to enable the convenience of wireless devices and the next generation of wireless
capabilities. With a dual-core architecture, the MSM7xxx-series of Convergence Platform chipsets is
also capable of supporting third party operating systems, such as Windows Mobile. In the third
quarter of fiscal 2006, we announced a collaboration with Microsoft to provide integrated support
for Windows Mobile on the MSM7xxx-series products.
Our Cell Site Modem (CSM) integrated circuit products are the primary integrated circuits in a
wireless operators CDMA2000 base station equipment. EV-DO Revision A networks based on our CSM6800
product are beginning to launch around the world. The CSM6800 provides a seamless migration path to
EV-DO Revision A, which enables feature-rich wireless multimedia services such as high-speed
transfer of bandwidth-intensive files
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(including high-quality pictures, video and music) and
interactive 3D gaming, as well as multicasting services powered by our FLO technology. The CSM6700
product is compatible with IS-95 and EV-DO Revision A standards. We have not commercially sold a
CSM integrated circuit product for WCDMA base station equipment.
Our gpsOne position-location technology is in more than 200 million gpsOne-enabled handsets
sold worldwide. Enabling a wide range of consumer and enterprise location-based services
around the globe, gpsOne supports four modes of operation across a variety of terrains: Hybrid
Mobile Station-Assisted GPS (Global Positioning System) enables a location fix whenever a call can
be placed; Mobile Station-Assisted GPS provides extreme sensitivity to GPS signals across a broad
range of environments; Mobile Station-Based GPS provides repetitive fix capabilities that are ideal
for navigation, tracking and games; and Standalone GPS enables positioning in off-network
scenarios. Compatible with all major air interfaces, the gpsOne technology is the industrys only
fully-integrated wireless baseband and GPS product, and has enabled CDMA system operators to
cost-effectively meet the FCCs E911 mandate.
We also offer a broad portfolio of power management integrated circuits to provide optimized
system performance for each MSM platform. In fiscal 2006, we announced and began to ship samples of
the PM7500, a power management product which supports the advanced capabilities of our Convergence
Platform chipsets. Our portfolio of PM integrated circuits delivers enhanced performance,
time-to-market advantages and reduced power demands on wireless handsets when combined with MSM
integrated circuits.
In addition to our relationship with Phillips Semiconductor, Inc. announced in fiscal 2005, we
announced a relationship in fiscal 2006 with Atheros Communications, Inc. to provide support for
its wireless local area network (WLAN) module on select MSM integrated circuits. These MSM
integrated circuits will offer connectivity to WLAN networks, as well as to existing wireless
networks, and will feature compatibility with 802.11b and 802.11g protocols on both CDMA2000 and
WCDMA networks.
In fiscal 2006, we also announced the introduction of the Universal Broadcast Modem integrated
circuit, which supports our FLO technology, as well as Digital Video Broadcasting-Handheld (DVB-H)
and one-segment Integrated Services Digital Broadcasting-Terrestrial (ISDB-T), creating a common
platform that handset manufacturers can leverage to address multiple standards. The Universal
Broadcast Modem product will interface with integrated circuits from the Enhanced Multimedia and
Convergence Platforms for both CDMA2000 and WCDMA networks, and we expect to ship samples in the
second quarter of fiscal 2007.
QUALCOMM Technology Licensing Segment (QTL)
QTL grants licenses to use portions of our intellectual property portfolio, which includes
certain patent rights essential to and/or useful in the manufacture and sale of certain wireless
products, including, without limitation, products implementing cdmaOne, CDMA2000, WCDMA, CDMA TDD
and/or OFDMA (including WiMax)
standards and their derivatives. QTL receives revenue from license fees as well as ongoing
royalties based on worldwide sales by licensees of products incorporating or using our intellectual
property. License fees are fixed amounts paid in one or more installments. Ongoing royalties are
generally based upon a percentage of the wholesale selling price of licensed products, net of
certain permissible deductions (e.g. certain shipping costs, packing costs, VAT, etc.). Revenues
generated from royalties are subject to quarterly and annual fluctuations. QTL revenues comprised
35%, 32% and 27% of total consolidated revenues in fiscal 2006, 2005 and 2004, respectively.
QUALCOMM Wireless & Internet Segment (QWI)
QWI revenues comprised 9%, 11% and 12% of total consolidated revenues in fiscal 2006, 2005 and
2004, respectively. The three divisions aggregated into QWI are:
QUALCOMM Internet Services (QIS). The QIS division provides technology to support and
accelerate the growth of the wireless data market. The BREW (Binary Runtime Environment for
Wireless) products and services facilitate the delivery of data services. BREW customers can
benefit from several offerings which include: uiOne for rich, integrated user experiences with fast
access to services on mobile phones; deliveryOne for differentiated and integrated,
operator-managed support and delivery of advanced wireless data content and services; and marketOne
for a quick-to-market, hosted, scalable content delivery service that includes media titles,
flexible management and monetization, content provider settlement and business intelligence
services. QIS offers this comprehensive set of BREW offerings to meet the distinct needs of
companies delivering mobile products and services around the world. The BREW platform is part of a
complete package of products for wireless applications development, device configuration,
application distribution and billing and payment.
13
KTF, a leading wireless phone operator in South Korea, launched the worlds first commercial
BREW-enabled applications service in 2001. KTFs BREW-enabled wireless data service runs on both
CDMA2000 1X and 1xEV-DO high-speed data networks. Numerous other operators have since commercially
launched BREW services, including Alltel, Midwest Cellular, Sprint Nextel, US Cellular and Verizon
Wireless in the United States, KDDI in Japan, Telefonica in Colombia, VIVO in Brazil, Reliance and
Tata in India, and China Unicom in China.
In October 2006, we announced an agreement with Sprint for the continued development and use
of our QChat product, a next-generation push-to-talk technology designed to deliver advanced
walkie-talkie services optimized for EV-DO Revision A wireless networks, as well as
interoperability with the Nextel National Network which uses Integrated Dispatch Enhance Network
(iDen) technology. QChat enables one-to-one (private) and one-to-many (group) calls over 3G CDMA
networks. The technology also allows over-the-air upgrades of handset software, management of group
membership by subscribers and ad-hoc creation of chat groups. QChat uses Voice over Internet
Protocol technologies, thereby sending voice information in digital form over Internet
protocol-based data networks (including CDMA) in discrete packets rather than the traditional
circuit-switched protocols of the public switched telephone network.
QUALCOMM Wireless Business Solutions (QWBS). The QWBS division provides satellite and
terrestrial-based two-way data messaging and position reporting services to transportation
companies, private fleets, construction equipment fleets and other enterprise companies. QWBS
wirelessly enables businesses to assist in tracking and managing their assets through backend
platforms and services which provide information to the businesses and their employees on a
real-time basis. The satellite-based OmniTRACS mobile communications system was first introduced in
the United States in 1988. Through September 2006, we have shipped approximately 609,000
satellite-based mobile communications systems (OmniTRACS, OmniVision, EutelTRACS and TruckMAIL) and
approximately 125,000 terrestrial-based mobile communications systems (OmniExpress, T2 Untethered
TrailerTRACS and GlobalTRACS), which currently operate in 40 countries. Message transmission and
position tracking for the OmniTRACS, OmniVision and TruckMAIL systems are provided by use of leased
Ku-band and C-band transponders on commercially available geostationary earth orbit satellites. The
OmniExpress, T2 Untethered TrailerTRACS and GlobalTRACS systems use wireless digital and analog
terrestrial networks for messaging transmission, and the GPS constellation for position tracking.
These mobile communications systems help transportation companies, private fleets and construction
equipment fleets improve the utilization of assets and increase efficiency and safety by improving
communications between drivers, machines and dispatchers. System features include status updates,
load and pick-up reports, position reports at regular intervals, and vehicle and driving
performance information.
In the United States and Mexico, we manufacture OmniTRACS, EutelTRACS, TruckMAIL, OmniExpress,
T2 Untethered TrailerTRACS and GlobalTRACS mobile communications equipment, sell related software
packages and provide ongoing messaging and maintenance services. We have sold OmniTRACS,
OmniVision, TruckMAIL and OmniExpress systems for use by for-hire and private trucking fleets,
service vans, marine vessels, trains, federal emergency vehicles, and for oil and gas pipeline
control and monitoring sites. Our GlobalTRACS system is sold to the construction equipment
industry, providing wireless access to equipment operating data and location, regardless of
equipment type or manufacturer. Message transmissions for operations in the United States are
formatted and processed at our Network Management Center in San Diego, California, with a
fully-redundant backup Network Management Center located in Las Vegas, Nevada.
In fiscal 2006, we announced the availability of our integration of our GlobalTRACS equipment
management system with the next generation of the RentalMan product, a third party enterprise
resource planning application. The enhanced application further integrates telematics data from the
GlobalTRACS platform with RentalMans improved business information capabilities. Further
integration of GlobalTRACS data into the RentalMan application means that users can more easily
access and use information about equipment hours, operational history, location, maintenance and
administrative data provided by GlobalTRACS. Other new or enhanced functionalities of the
application include the capacity to help rental companies capture off-rent revenue, provide more
accurate and timely overtime billings and help validate rain day, holiday and downtime credits. The
Data Visor business intelligence platform and the Critical Event Reporting service were also
announced. The Data Visor business intelligence platform, initially designed for use with
our SensorTRACS/400 services, improves fuel and driver management through pinpointing excess
idling and identifying important business trends. The Critical Event Reporting service provides an
automatic, accurate critical incident record, initiated by either an automatic or manual trigger helping truckload carriers and private fleets improve driver performance and operational
efficiency, and help effectively manage liability exposure.
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In addition to the United States, the OmniTRACS system is currently operating throughout
Europe and in the Middle East, Argentina, Brazil, Canada, Mexico, China, Japan and South Korea.
Outside of the United States, Mexico and Europe, we work with distributors or through joint
ventures to provide the OmniTRACS service and products in foreign markets. We generate revenues
from the OmniTRACS system through license fees, sales of network products and terminals, and
messaging and service fees. Service providers that operate network management centers for a region
under our granted licenses provide OmniTRACS messaging services.
QUALCOMM Government Technologies (QGOV). The QGOV division provides development, hardware and
analytical expertise to United States government (USG) agencies involving wireless communications
technologies. We have developed, produced and shipped second generation CDMA secure wireless
terrestrial phones for the USG that operate in enhanced security modes (referred to as Type 1) and
incorporate end-to-end encryption. In fiscal 2006, QGOV adapted, integrated and shipped CDMA2000 1X
deployable base stations to the USG. Additionally, OmniTRACS products and services are being used
for USG worldwide applications and were sold to
the USG during fiscal 2006. Based on the percentage of QGOV revenues to our total consolidated
revenues, the USG is not a major customer.
QUALCOMM Strategic Initiatives Segment (QSI)
We make strategic investments to promote the worldwide adoption of CDMA-based products and
services for wireless voice and Internet data communications, including CDMA operators, licensed
device manufacturers and companies that support the design and introduction of new CDMA-based
products or possess unique capabilities or technology. We make strategic investments in early-stage
companies and, from time to time, venture funds to support the adoption of CDMA and the use of the
wireless Internet.
Our MediaFLO USA subsidiary plans to deploy and operate a nationwide multicast network in the
United States based on our MDS and FLO technology. MediaFLO USA will use 700 MHz spectrum for which
we hold licenses for a nationwide footprint to deliver high-quality video and audio programming to
wireless subscribers. Additionally, MediaFLO USA plans to procure, aggregate and distribute content
in service packages which we will make available on a wholesale basis to our wireless operator
customers (whether they operate on CDMA or GSM/WCDMA networks) in the United States. The commercial
availability of the MediaFLO network and service will be determined by our wireless operator
partners.
MediaFLO USA continues to prepare for the launch of its commercial service. Its San Diego
based Broadcast Operations Center and Network Operations Center are currently operating, while
construction of the initial phase of its network is nearing completion in several major markets. In
addition to Verizon Wireless, which announced its intention to launch the MediaFLO USA service
during early calendar 2007, MediaFLO USA is actively engaged in discussions with multiple domestic
wireless operators on how they might utilize the MediaFLO USA service.
We are developing our MediaFLO MDS and FLO technology to enable MediaFLO USA and potentially
other international operators to optimize the low cost delivery of multimedia content to multiple
wireless subscribers simultaneously. Our efforts to sell this technology internationally will be
conducted by a nonreportable segment and not by MediaFLO USA or QSI. The MDS will provide wireless
network operators the ability to enhance their multimedia service offering capabilities via
efficient scheduling and delivery of multimedia content. Wireless network operators can utilize the
MDS with their current unicast networks and with multicast networks, which are soon to be
available, operating on CDMA2000 1xEV-DO or WCDMA. The MDS is not air interface specific and thus
can be utilized by CDMA2000, WCDMA and FLO technology operators alike. FLO is a multicast air
interface technology specifically designed for markets where dedicated spectrum is available and
where regulations permit high-power transmission, thereby reducing the number of towers and related
infrastructure required to provide market coverage. MediaFLO MDS and FLO technology are
complementary to existing wireless networks because interactive services are supported within the
mobile device using the CDMA2000 1X, 1xEV-DO or WCDMA wireless link. Furthermore, the MediaFLO MDS
can seamlessly integrate multicasting services provided over 3G operator networks with such
services provided over a stand-alone FLO network.
As part of our strategic investment activities, we may consider various corporate structuring
and exit strategies at some point in the future, which may include distribution of our ownership
interest in MediaFLO USA to our stockholders in a spin-off transaction.
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Other Businesses
QUALCOMM MEMS Technologies (QMT). QMT is developing display technology for the full range of
consumer-targeted mobile products. QMTs interferometric modular display (iMoD) technology, based
on a micro-electro-mechanical-systems (MEMS) structure combined with thin film optics, is expected
to provide substantial performance, power consumption and cost benefits as compared to current
display technologies. We expect the iMoD product to deliver a vivid and realistic display image
quality that can withstand extreme temperatures and be viewed in virtually any environment,
including bright sunlight. Displays have become a key factor in the overall power consumption of
wireless devices, with the increasing use of vibrant color screens and multimedia applications that
generate rapidly changing images. The iMoD product is expected to offer significantly lower power
consumption than existing display products, thereby extending the battery life of wireless devices.
With the inclusion of color displays in all types of wireless phones, including models at the low
end of the market, the cost of the display has become an even more significant factor in the
overall cost of the handset. An iMoD display
should cost less to manufacture than a comparable liquid crystal display because it requires
fewer components and processing steps, thus enabling advanced multimedia capabilities on all tiers
of mobile devices.
QUALCOMM Flarion Technologies (QFT). QFT is the developer and provider of FLASH-OFDM, the
wireless industrys first and only fully mobile OFDM offering. We acquired Flarion Technologies,
Inc. in January 2006 to expand our already extensive portfolio of OFDMA intellectual property and
enhance our research and development organization with expertise in OFDMA technology and products.
FLASH-OFDM is an air interface technology designed for the delivery of advanced Internet services
in the mobile environment. The technology is based on the OFDM airlink, a wireless access method
that combines the attributes of its two predecessors, TDMA and CDMA, to address the unique demands
posed by mobile users of broadband data and packetized voice applications. Through FLASH-OFDM, QFT
has created an end-to-end network offering for mobile operators, which includes the RadioRouter
base station product line, wireless modems, embedded chipsets and system software. The all-IP
wireless network will support both broadband data and packetized voice applications.
QUALCOMM Wireless Systems (QWS). QWS sells products and provides services under commercial
agreements to Globalstar, Inc. (Globalstar) and its service providers and other customers.
Globalstar operates a worldwide, low-Earth-orbit satellite-based telecommunications system. We
received ownership interests in Globalstar in fiscal 2004 as a result of its emergence from
bankruptcy related to our claims as a creditor. On October 5, 2004, we received an additional
ownership interest in Globalstar as partial consideration for the sale of mobile phones. At
September 24, 2006, we held an approximate 6.6% interest in Globalstar in our QSI segment.
Research and Development
The wireless telecommunications industry is characterized by rapid technological change,
requiring a continuous effort to enhance existing products and develop new products and
technologies. Our research and development team has a strong and proven track record of innovation
in wireless communications technologies. Our research and development expenditures in fiscal 2006,
2005 and 2004 totaled approximately $1.5 billion, $1.0 billion and $720 million, respectively.
Research and development expenditures in fiscal 2006, 2005 and 2004 were primarily related to
integrated circuit product and other initiatives to support lower cost phones, multimedia
applications, high-speed wireless Internet access and multimode, multiband, multinetwork products
and technologies, including CDMA2000 1X, 1xEV-DO, EV-DO Revision A, EV-DO Revision B, WCDMA
(including GSM/GPRS/EDGE), HSDPA, HSUPA and OFDMA, and the development of our FLO technology,
MediaFLO MDS and iMoD display products using MEMS technology.
We have research and development centers in various locations throughout the world that
support our global development activities and ongoing efforts to advance CDMA and a broad range of
other technologies. We continue to use our substantial engineering resources and expertise to
develop new technologies, applications and services and make them available to licensees to help
grow the wireless telecommunications market and generate new or expanded licensing opportunities.
In addition to internally sponsored research and development, we perform contract research and
development for various government agencies and commercial contractors.
Sales and Marketing
QCT markets and sells products in the United States through a sales force based in San Diego,
California, and internationally through a direct sales force based in China, Germany, India, Italy,
Japan, South Korea, Taiwan and the United Kingdom. QCTs sales and marketing strategy is to achieve
design wins with technology leaders in our targeted markets by, among other things, providing high
performance products combined with superior field application and engineering support.
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The QIS division of QWI develops and sells business-to-business products and services to
companies worldwide. The sales and marketing team is headquartered in San Diego with offices
worldwide. The QIS sales and marketing strategy is to enter into agreements with companies in
target markets by providing comprehensive technology and services to help them provide
next-generation wireless data services that combine wireless Internet, data and voice capabilities.
The QWBS division of QWI markets and sells products through a sales force, partnerships and
distributors based in the United States, Europe, the Middle East, Argentina, Brazil, Canada, China,
Japan, South Korea and Mexico. QWBS sales and marketing strategy is to enter into contracts with
companies in our target markets by
providing high-value wireless fleet management products and services to the transportation,
logistics and construction equipment industries.
Marketing activities include advertising and public relations, web-marketing, participation in
technical conferences and trade shows, development of business cases, competitive analyses and
other marketing collateral programs. Corporate Marketing provides company information on products,
strategies and technology to industry analysts and publications which are also supported on our
Internet website. We also developed and maintain an Internet website (www.3Gtoday.com) dedicated to
highlighting commercial 3G wireless services and products around the world.
Our
Technology Center in China is a 36,000 square foot facility in
Beijing in an area
popularly known as Chinas Silicon Valley. The center provides consultation, training, support
and equipment testing services primarily to manufacturers and mobile operators in China, as well as
supporting research and development of 3G and future broadband wireless standards based on CDMA and
OFDMA. The center houses the QUALCOMM CDMA University, which offers classroom and hands-on training
programs on CDMA2000 and WCDMA. The center also offers an integrated test program designed to
enable time and cost savings when bringing products to market. The center and its staff are focused
on providing China with the resources to enable the most timely development of its mobile
communications industry using our technologies and applications, such as cdmaOne, CDMA2000 1X,
1xEV-DO, UMTS/HSDPA multimode solutions, GSM1x and gpsOne. The center also supports the transfer of
certain hardware and software technologies for product development and manufacturing to licensed
manufacturers, as well as network design and optimization methods to operators and government
bodies in China.
Competition
Competition in the telecommunications industry throughout the world continues to increase at a
rapid pace as businesses and governments realize the market potential of wireless
telecommunications products and services. We have facilitated competition in the CDMA market by
licensing a large number of manufacturers. Although we have attained a major position in the
industry, many of our current and potential competitors may have advantages over us, including:
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These competitors may have more established relationships and greater technical, marketing,
sales and distribution capabilities and greater access to channels in markets not currently
deploying wireless communications technology or markets primarily deploying 2G wireless
communications technology. These competitors also have established or may establish financial or
strategic relationships among themselves or with our existing or potential customers, resellers or
other third parties. These relationships may affect customers decisions to purchase products or
license technology from us or to use alternative technologies. Accordingly, new competitors or
alliances among competitors could emerge and rapidly acquire significant market share to our
detriment. In addition, many of these companies are licensees of our technology and have
established market positions, trade names, trademarks, patents, copyrights, intellectual property
rights and substantial technological capabilities. We may face competition throughout the world
with new technologies and services introduced in the future as additional competitors enter the
marketplace for products based on 3G standards or other wireless technologies. Although we intend
to continuously
17
develop improvements to existing technologies, as well as potential new
technologies, there may be a continuing competitive threat from companies introducing alternative
versions of wireless technologies. We also expect that the price we charge for our products and
services may continue to decline as competition intensifies.
QCT Segment. The markets in which our QCT segment operates are intensely competitive. QCT
competes worldwide with a number of United States and international semiconductor designers and
manufacturers in the United States and internationally. As a result of the trend toward a larger
CDMA wireless market, global expansion by foreign and domestic competitors and technological
changes, we anticipate that additional competitors will enter this market. We believe that the
principal competitive factors for CDMA integrated circuit
providers to our addressed markets are product performance, level of integration, quality,
compliance with industry standards, price, time-to-market, system cost, design and engineering
capabilities, new product innovation and customer support. The specific bases on which we compete
against alternative CDMA integrated circuit providers vary by product platform. We also compete in
both single and dual-mode environments against alternative wireless communications technologies
including, but not limited to, GSM/GPRS/EDGE, TDMA, WiMax and analog.
QCTs current competitors include major semiconductor companies such as Freescale, Infineon,
NEC, Philips, STMicroelectronics, Texas Instruments and VIA Telecom, as well as major
telecommunication equipment companies such as Ericsson, Matsushita, Motorola, Nokia and Samsung,
who design their own integrated circuits and software for certain products. QCT also faces
competition from some start-up ventures.
Our competitors may devote a significantly greater amount of their financial, technical,
marketing and other resources to aggressively market competitive telecommunications systems or to
develop and adopt competitive digital cellular technologies, and those efforts may materially and
adversely affect QCT. Moreover, competitors may offer more attractive product pricing or financing
terms than we do as a means of gaining access to the wireless telecommunications markets.
We have entered into licensing agreements with certain companies, including EoNex
Technologies, Infineon, Lucent, Motorola, NEC, Philips, Texas Instruments and VIA Telecom. These
licenses permit the licensees to manufacture CDMA-based integrated circuits using certain of our
intellectual property for sale to CDMA-based phone manufacturers. In exchange for granting the
licenses, we are entitled to receive license fees, royalties (determined as a percentage of the
selling price of the integrated circuits) and/or royalty-free cross-licenses, which allow us to use
these companies CDMA and, in some cases, non-CDMA intellectual property for specified purposes. In
every case, the phone manufacturers sales of CDMA-based phones are subject to the payment of
royalties to us on the products into which the integrated circuits are incorporated in accordance
with the manufacturers separate licensing arrangements with us. We license our CDMA intellectual
property to the competitors of our QCT segment to support the deployment of CDMA-based systems and
technologies worldwide in order to grow our royalty revenues from customers licensed to sell CDMA
phones and equipment. We believe that, if CDMA based systems expand sufficiently, QCTs business
will also grow, even if we lose market share. To date, most cdmaOne and CDMA2000 phone manufacturer
licensees have elected to purchase their CDMA-based integrated circuits from us.
QTL Segment. As part of our strategy to generate new and ongoing licensing revenues,
significant resources are allocated to develop leading edge technology for the telecommunications
industry. In addition to licensing manufacturers of subscriber and network equipment, we have made
licenses to our essential CDMA patents available to competitors of our QCT segment. We face
competition in the development of intellectual property for future generations of digital wireless
communications technology and services.
On a worldwide basis, we currently compete primarily with the GSM/GPRS/EDGE digital wireless
telecommunications technologies. GSM has been extensively utilized in Europe, much of Asia other
than Japan and South Korea, and certain other markets. To date, GSM has been more widely adopted than
CDMA, however, CDMA technologies have been adopted for all third generation wireless systems. In
addition, most GSM operators have deployed GPRS, a packet data technology, as a 2.5G bridge
technology, and a number of GSM operators have deployed or are expected to deploy EDGE, while
waiting for third generation WCDMA to become available and/or more cost effective for their system.
A limited number of operators have started testing OFDMA technology, a multi-carrier transmission
technique not based on CDMA technology, which divides the available spectrum into many carriers,
with each carrier being modulated at a low data rate relative to the combined rate for all
carriers. We have invested in the development of our own OFDMA technology and intellectual property
and have acquired Flarion, a major developer and patent holder of OFDMA technology.
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QWI Segment. Existing competitors of our QWBS division offering alternatives to our products
are aggressively pricing their products and services and could continue to do so in the future. In
our domestic markets, we face over ten key competitors to our OmniTRACS, TruckMAIL, OmniExpress, T2
Untethered TrailerTRACS and QConnect products and services, as well as over six key competitors to
our GlobalTRACS system. Internationally, we face several key competitors each in Europe and Mexico.
These competitors are offering new value-added products and services similar in many cases to our
existing or developing technologies. Emergence of new competitors, particularly those offering low
cost terrestrial-based products and current as well as future
satellite-based systems, may impact margins and intensify competition in new markets.
Similarly, some original equipment manufacturers of trucks and truck components are beginning to
offer built-in, on-board communications and position location reporting systems that may impact our
margins and intensify competition in our current and new markets.
We have numerous competitors for each of our BREW products and services. These competitors are
continuing to develop their products with a focus on client, provisioning, user interface, content
distribution, and billing products and services. Competitors are attempting to offer value added
products and services similar, in many cases, to our existing or developing BREW technologies. In
some cases, competitors are continuing to explicitly attempt to displace only certain components or
areas of the greater BREW offering, such as only the runtime client/device environment portion of
BREW. In addition, certain competitors in the computing and device manufacturing industries are now
beginning to more aggressively attempt to replicate the entire BREW system offering that includes
both runtime device environments and billing/distribution systems. Similarly, some operators are
developing their own products by piecing together both internal and external components. Emergence
of these and other new competitors may adversely impact our margins and market share.
Patents, Trademarks and Trade Secrets
We rely on a combination of patents, copyrights, trade secrets, trademarks and proprietary
information to maintain and enhance our competitive position. We have filed approximately 5,100
United States patent applications, of which approximately 1,900 patents have been issued. The vast
majority of such patents and patent applications relate to digital wireless communications
technologies, including patents that are essential or useful for CDMA2000, UMTS, TD-SCDMA, TD-CDMA
and OFDMA products. We also have and will continue to actively file for broad patent protection
outside the United States. We have filed approximately 25,800 foreign patent applications, of which
approximately 7,400 patents have been issued, with broad coverage throughout most of the world,
including China, Japan, South Korea, Europe, Brazil, India and elsewhere.
The standards bodies and the ITU have been informed that we hold essential intellectual
property rights for all 3G standards that are based on CDMA. We have committed to the ITU to
license our essential patents for these CDMA standards on a fair and reasonable basis free from
unfair discrimination. We have also informed the standards bodies that we may hold essential
intellectual property rights for certain standards that are based on OFDMA technology, e.g. 802.16e
and 802.20.
Under our license agreements, licensees are generally required to pay us a license fee as well
as ongoing royalties based on a percentage of the wholesale selling price, net of certain
permissible deductions (e.g. certain shipping costs, packing costs, VAT, etc.), of subscriber,
infrastructure and test equipment. License fees are paid in one or more installments, while
royalties generally continue throughout the life of the licensed patents. Our license agreements
generally provide us rights to use certain of our licensees technology and intellectual property
rights to manufacture and sell certain products, e.g. application specific integrated circuits
(ASICs) and related software, subscriber units and/or infrastructure equipment. In most cases, our
use of our licensees technology and intellectual property is royalty free. However, under some of
the licenses, if we incorporate certain of the licensed technology or intellectual property into
certain products, we are obligated to pay royalties on the sale of such products. Under their
existing agreements with us, two entities were entitled to share in a percentage of the royalty
revenues that we receive from third parties for their sale of certain CDMA products. Our sharing
obligation under one of these arrangements expired in fiscal 2005, and the other sharing obligation
expired in fiscal 2006.
As part of our strategy to generate licensing revenues and support worldwide adoption of our
CDMA technology, we license to other companies, including the competitors of our QCT segment, the
rights to design, manufacture and sell products utilizing certain portions of our CDMA intellectual
property. Our current publicly announced CDMA licensees are listed on our Internet website
(www.qualcomm.com).
19
Employees
As of September 24, 2006, we employed approximately 11,200 full-time, part-time and temporary
employees. During fiscal 2006, the number of employees increased by approximately 300 from
acquisitions and 1,600 primarily from increases in engineering resources.
Available Information
Our Internet address is www.qualcomm.com. There we make available, free of charge, our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments
to those reports, as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the Securities and Exchange Commission (SEC). Our SEC reports can be
accessed through the investor relations section of our Internet website. The information found on
our Internet website is not part of this or any other report we file with or furnish to the SEC.
The public may read and copy any materials that we file with the SEC at the SECs Public
Reference Room located at 100 F Street, N.E., Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-202-551-8090. The
SEC also maintains electronic versions of our reports on its website at www.sec.gov.
Executive Officers
Our executive officers and their ages as of September 24, 2006 are as follows:
Irwin Mark Jacobs, age 72, one of the founders of the Company, has served as Chairman of the
Board of Directors since it began operations in July 1985. He also served as Chief Executive
Officer of the Company from July 1985 to June 2005. Dr. Jacobs received a B.S. degree in Electrical
Engineering from Cornell University and M.S. and Sc.D. degrees from the Massachusetts Institute of
Technology. Dr. Irwin Jacobs is the father of Dr. Paul Jacobs, our Chief Executive Officer, and
Jeffrey A. Jacobs, President of QUALCOMM Global Development.
Paul E. Jacobs, age 43, has served as a director since June 2005 and as our Chief Executive
Officer since July 2005. He served as Group President of the QUALCOMM Wireless & Internet Group
from July 2001 to June 2005. In addition, he served as an Executive Vice President from February
2000 to June 2005. Dr. Jacobs holds a B.S. degree in Electrical Engineering and Computer Science, a
M.S. degree in Electrical Engineering and a Ph.D. degree in Electrical Engineering and Computer
Science from the University of California, Berkeley. Dr. Paul Jacobs is the son of Dr. Irwin Mark
Jacobs, Chairman of our Board of Directors, and the brother of Jeffrey A. Jacobs, President of
QUALCOMM Global Development.
Steven R. Altman, age 45, has served as our President since July 2005. He served as an
Executive Vice President from November 1997 to June 2005 and as President of QUALCOMM Technology
Licensing from September 1995 to April 2005. Mr. Altman currently serves on the board of Amylin
Pharmaceuticals, Inc. He received a B.S. degree from Northern Arizona University and a J.D. from
the University of San Diego.
Sanjay K. Jha, age 43, has served as Group President, QUALCOMM CDMA Technologies (QCT) since
February 2004 and as an Executive Vice President since December 2003. He was appointed President of
QCT in January 2003. He served as Senior Vice President and General Manager of QUALCOMM
Technologies & Ventures from March 2002 to January 2003 and as a Senior Vice President, Engineering
from July 1998 to March 2002. Dr. Jha holds a Ph.D. in Electronic and Electrical Engineering from
Strathclyde University, Scotland and a B.S. degree in Engineering from the University of Liverpool,
England.
William E. Keitel, age 53, has served as an Executive Vice President since December 2003 and
as our Chief Financial Officer since February 2002. He previously served as a Senior Vice President
and as our Corporate Controller from May 1999 to February 2002. Mr. Keitel received a M.B.A. from
Arizona State University and a B.A. degree in Business Administration from the University of
Wisconsin.
Roberto Padovani, age 52, has served as an Executive Vice President and as our Chief
Technology Officer since January 2002. He previously served as Senior Vice President from July 1996
to July 2001 and as Executive Vice President from July 2001 to January 2002 of our Corporate
Research and Development. Dr. Padovani received a Laureate degree from the University of Padova,
Italy and M.S. and Ph.D. degrees from the University of Massachusetts, Amherst, all in Electrical
and Computer Engineering.
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Marvin Blecker, age 59, has served as President of QUALCOMM Technology Licensing (QTL) since
April 2005. From November 2001 to April 2005, he served as General Manager of QTL, as well as
Senior Vice President of that division from October 1995 to November 2001. He holds B.S. and M.S.
degrees in Mathematics and a M.S. degree in Electrical Engineering-Systems Science from the
Polytechnic Institute of Brooklyn, New York (now Polytechnic University).
Jeffrey A. Jacobs, age 40, has served as President of QUALCOMM Global Development since May
2001. He served as Senior Vice President of Business Development from June 1999 to May 2001. Mr.
Jacobs holds a B.A. degree in International Economics from the University of California, Berkeley.
Mr. Jeffrey Jacobs is the son of Dr. Irwin Mark Jacobs, Chairman of our Board of Directors, and the
brother of Dr. Paul E. Jacobs, a member of our Board of Directors and our Chief Executive Officer.
Margaret Peggy L. Johnson, age 44, has served as President of QUALCOMM Internet Services
(QIS) since July 2001 and as President of QUALCOMM MediaFLO Technologies since December 2005. She
served as Senior Vice President and General Manager of QIS from September 2000 to July 2001. Ms.
Johnson holds a B.S. degree in Electrical Engineering from San Diego State University.
Louis M. Lupin, age 51, has served as a Senior Vice President and as our General Counsel since
September 2000. Mr. Lupin received a B.A. degree from Swarthmore College and a J.D. from Stanford
Law School.
Daniel L. Sullivan, age 55, has served as Executive Vice President of Human Resources since
August 2001. He served as Senior Vice President of Human Resources from February 1996 to July 2001.
Dr. Sullivan holds a Ph.D. in Organization Communication from the University of Nebraska. He also
holds B.S and M.A. degrees in Communication from Illinois State University and West Virginia
University, respectively.
Item 1A. Risk Factors
You should consider each of the following factors as well as the other information in this
Annual Report in evaluating our business and our prospects. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties not presently known to us
or that we currently consider immaterial may also impair our business operations. If any of the
following risks actually occur, our business and financial results could be harmed. In that case,
the trading price of our common stock could decline. You should also refer to the other information
set forth in this Annual Report, including our financial statements and the related notes.
Risks Related to Our Businesses
If CDMA and CDMA-related technology deployment does not expand as anticipated, our revenues may not
grow as anticipated.
We focus our business primarily on developing, patenting and commercializing CDMA technology
for wireless telecommunications applications. In addition, with the acquisition of Flarion, we
expect an increased emphasis on developing, patenting and commercializing OFDMA technology. Other
digital wireless communications technologies, particularly GSM technology, have been more widely
deployed than CDMA technology. OFDMA has not been widely deployed commercially. Notwithstanding our
portfolio of OFDM/OFDMA intellectual property, technology and products, if CDMA technology does not
become the preferred wireless communications industry standard in the countries where our products
and those of our customers and licensees are sold, our business and financial results could suffer.
If wireless operators do not select CDMA for their networks or update their current networks to any
CDMA-based third generation (3G) technology, our business and financial results could suffer since
we generally have not generated revenues from GSM product sales, and there is no assurance that our
OFDM/OFDMA patent portfolio will be as valuable as our CDMA portfolio or that our OFDMA chipset
business will be as successful as our CDMA chipset business. Further, if OFDMA technology is not
adopted and deployed commercially, our investment in Flarion and OFDMA technology may not provide
us an adequate return on our investment.
To increase our revenues in future periods, we are dependent upon the commercial deployment of
3G wireless communications equipment, products and services based on our CDMA technology. Although
wireless network operators have commercially deployed CDMA2000 and WCDMA, we cannot predict the
timing or success of further commercial deployments or expansions of CDMA2000, WCDMA or other CDMA
systems. If existing deployments are not commercially successful or do not continue to grow their
subscriber base, or if new commercial deployments of CDMA2000, WCDMA or other CDMA-based systems
are delayed or unsuccessful, our business and financial
21
results may be harmed. In addition, our
business could be harmed if wireless network operators deploy competing technologies or switch
existing networks from CDMA to GSM without upgrading to WCDMA or if wireless network operators
introduce new technologies. A limited number of operators have started testing OFDMA technology,
but there can be no assurance that OFDMA will be adopted or deployed commercially or that we will
be successful in developing and marketing OFDMA products. Although the acquisition of Flarion
brings us an additional and very strong portfolio of issued and pending patents related to
OFDMA technology, and, prior to the acquisition, we had hundreds of issued or pending patents
relating to applications of GPRS, EDGE, OFDM, OFDMA and multi in, multi out (MIMO), there can be no
assurance that our patent portfolio in these areas would be as valuable as our CDMA portfolio.
Sprint Nextel has indicated that it is planning to deploy WiMax (an OFDMA based technology) in
its 2.5 Ghz spectrum, also known as the Broadband Radio Services band. Other operators are
investigating deployment of WiMax. Although we believe that our patented technology is essential
and useful to implementation of the WiMax standard, there is no assurance that we will achieve the
same royalty revenue on such WiMax deployments as on CDMA or other technology deployments or that
we will achieve the same chipset market shares within a WiMax network.
Our business and the deployment of our technologies, products and services are dependent on
the success of our customers, licensees and CDMA-based wireless operators, as well as the timing of
their deployment of new services. Our licensees and CDMA-based wireless operators may incur lower
operating margins on products or services based on our technologies than on products using
alternative technologies due to greater competition in the relevant market or other factors. If
CDMA-based wireless operators, phone and/or infrastructure manufacturers exit the CDMA-based
markets, the deployment of CDMA technology could be negatively affected, and our business could
suffer.
Our three largest customers accounted for 39%, 39% and 40% of consolidated revenues in fiscal 2006,
2005 and 2004, respectively. The loss of any one of our major customers or any reduction in the
demand for devices utilizing our CDMA technology could reduce our revenues and harm our ability to
achieve or sustain desired levels of operating results.
QCT Segment. Three customers, LG Electronics, Motorola Inc. and Samsung Electronics Company,
constitute a significant portion of QCTs revenues such that the loss of any one of these customers
or the delay, even if only temporary, or cancellation of significant orders from any of these
customers would reduce our revenues in the period of the cancellation or deferral and harm our
ability to achieve or sustain acceptable levels of operating results. Accordingly, unless and until
our QCT segment diversifies and expands its customer base, our future success will significantly
depend upon the timing and size of future purchase orders, if any, from these customers. Factors
that may impact the size and timing of orders from customers of our QCT segment include, among
others, the following:
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the product requirements of our customers and the network operators; |
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the financial and operational success of our customers; |
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the success of our customers products that incorporate our products; |
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changes in wireless penetration growth rates; |
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value added features which drive replacement rates; |
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shortages of key products and components; |
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fluctuations in channel inventory levels; |
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the success of products sold to our customers by licensed competitors; |
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the rate of deployment of new technology by the wireless network operators and the
rate of adoption of new technology by the end consumers; |
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the extent to which certain customers successfully develop and produce CDMA-based
integrated circuits and system software to meet their own needs; |
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general economic conditions; |
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changes in governmental regulations in countries where we or our customers currently
operate or plan to operate; and |
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widespread illness. |
22
QTL Segment. Our QTL segment derives royalty revenues primarily from sales of CDMA products by
our licensees. Although we have more than 135 licensees, we derive a significant portion of our
royalty revenue from a limited number of licensees. Our future success depends upon the ability of
our licensees to develop, introduce and deliver high-volume products that achieve and sustain
market acceptance. We have little or no control over the sales efforts of our licensees, and we
cannot assure you that our licensees will be successful or that the demand for wireless
communications devices and services offered by our licensees will continue to increase. Any
reduction in the demand for or any delay in the development, introduction or delivery of wireless
communications devices utilizing our CDMA technology could have a material adverse effect on our
business. Reductions in the average selling price of wireless communications devices utilizing our
CDMA technology, without a comparable increase in the volumes of such devices sold, could have a
material adverse effect on our business. Weakness in the value of foreign currencies in which our
customers products are sold may reduce the amount of royalties payable to us in U.S. dollars.
Royalties under our license agreements are generally payable to us for the life of the patents
that we license under our agreements. The licenses granted to and from us under a number of our
license agreements include only patents that are either filed or issued prior to a certain date,
and, in a small number of agreements, royalties are payable on those patents for a specified time
period. As a result, there are agreements with some licensees where later patents are not licensed
by or to us under our license agreements. In order to license any such later patents, we will need
to extend or modify our license agreements or enter into new license agreements with such
licensees. Although in the past we have amended many of our license agreements to include later
patents without affecting the material terms and conditions of our license agreements, there is no
assurance that we will be able to modify our license agreements in the future to license any such
later patents or extend such date(s) to incorporate later patents without affecting the material
terms and conditions of our license agreements with such licensees. We have a license agreement
with Nokia Corp., which in part expires on April 9, 2007. While the parties have been in
discussions to conclude an extension or a new license agreement beyond that time period, there is
no certainty as to when we will be able to conclude an agreement or the terms of any such
agreement. There is also a possibility that the parties will not be able to conclude a new or
extended agreement by April 2007. In that event after April 9, 2007, unless and until the existing
agreement is extended or a new agreement is concluded, Nokias right to sell subscriber products
under most of our patents (including many that we have declared as essential to the CDMA, WCDMA and
other standards) and therefore Nokias obligation to pay royalties to us will both cease under the
terms of the current agreement, and our rights to sell integrated circuits under Nokias patents
will likewise cease under the terms of the current agreement. Please refer to our discussion below
under the subheadings entitled The enforcement and protection of our intellectual property rights
may be expensive and could divert our valuable resources and Claims by other companies that we
infringe their intellectual property, that patents on which we rely are invalid, or that our
business practices are in some way unlawful, could adversely affect our business and note that any
company that makes or sells products without a license under the applicable patents of another
company would be exposed to patent infringement litigation by such other company. The patent
holder, whether we or another company, would generally be entitled to seek all available legal
remedies including an injunction against making and selling products infringing such patent without
a license and damages for past unlicensed sales in the form of lost profits or a reasonable royalty
(which damages may be trebled for willful infringement).
Although our patents apply to multiple technologies, such as GPRS, EDGE, OFDM, OFDMA
(including WiMax) and MIMO, there can be no assurance that our patent portfolio will generate
licensing income or be as valuable in generating licensing income with respect to other
technologies, as compared to CDMA-based technologies.
Efforts by some telecommunications equipment manufacturers and component suppliers to avoid paying
fair and reasonable royalties for the use of our intellectual property may create uncertainty about
our future business prospects, may require the investment of substantial management time and
financial resources, and may result in legal decisions and/or political actions by foreign
governments that harm our business.
Since our founding in 1985, we have focused heavily on technology development and innovation.
These efforts have resulted in a leading intellectual property portfolio related to wireless
technology. Because all commercially deployed forms of CDMA and their derivatives require the use
of our patents, our patent portfolio is the most widely and extensively licensed portfolio in the
industry with over 135 licensees. Over the years a number of companies have challenged our patent
position but at this time most, if not all, companies recognize that any
company seeking
23
to develop, manufacture and/or sell products that use CDMA technologies will
require a patent license from us. Notwithstanding the strength of this intellectual property
position, we have a policy of, and have succeeded in, licensing our technology to all interested
companies on terms that are fair, reasonable and free from unfair discrimination. Unlike some other
companies in our industry that hold back certain key technologies, we offer interested companies
the opportunity to license essentially our entire patent portfolio. Our broad licensing strategy
has been a catalyst for industry growth, helping to enable a wide range of companies offering a
broad array of wireless products and features while driving down average and low-end selling prices
for 3G handsets and other wireless devices. By licensing a wide range of equipment manufacturers,
encouraging innovative applications, supporting equipment manufacturers with a total chipset and
software solution, and focusing on improving the efficiency of the airlink for operators, we have
helped 3G CDMA evolve, grow, and reduce handset pricing all at a faster pace than the second
generation technologies that preceded it (e.g. GSM).
Having failed in their efforts to challenge the strength of our intellectual property position
and, in most cases, despite contracts with us that were freely and fairly negotiated and contain
fair and reasonable royalty provisions, a small number of companies have now initiated various
strategies in an attempt to renegotiate, mitigate and/or eliminate their need to pay royalties to
us for the use of our intellectual property in order to negatively affect our business model and
that of our other licensees. These strategies have included (i) litigation, often alleging
infringement of patents held by such companies or unfair competition of some variety, (ii) taking
questionable positions on the interpretation of contracts with us, with royalty reduction as the
likely true motive, (iii) appeals to governmental authorities, such as the complaints filed with
the European Commission (EC) during the fourth calendar quarter of 2005 and the Korean Fair Trade
Commission during June 2006, and (iv) lobbying with governmental regulators and elected officials
for the purpose of seeking the imposition of some form of compulsory licensing and/or to weaken a
patent holders ability to enforce its rights or obtain a fair return for such rights.
We were notified by the Competition Directorate of the EC that six
companies (Nokia, Ericsson, Panasonic, Texas Instruments, Broadcom and NEC) submitted separate
formal complaints accusing our business practices, with respect to licensing of patents and sales
of chipsets, to be in violation of Article 82 of the EC treaty. We received the complaints and have
submitted a response. While we believe that none of our business practices violate the legal
requirements of Article 82 of the EC treaty, if the EC decides to formally investigate these
accusations and determines liability as to any of the alleged violations, it could impose fines
and/or require us to modify our practices. Further, such an investigation could be expensive and
time consuming to address, divert management attention from our business and harm our reputation.
Although such potential adverse findings may be appealed within the EC legal system, an adverse
final determination could have a significant negative impact on our revenues and/or earnings. We
also understand that two U.S. companies (Texas Instruments and Broadcom) and two South Korean companies
(Nextreaming Corp. and THINmultimedia Inc.) have filed complaints with the Korean Fair Trade
Commission alleging that our business practices are, in some way, a violation of South Korean anti-trust
regulations. While we have not seen these complaints, we believe that none of our business
practices violate the legal requirements of South Korean competition law. However, any resulting
investigation in South Korea could be expensive and time consuming to address, divert management
attention from our business and harm our reputation. An adverse final determination on these
charges could have a significant negative impact on our revenues and/or earnings.
Given our substantial investment in technology innovation, the demonstrable benefits provided
by our intellectual property, and long-standing license agreements with more than 135 licensees
including many of the worlds foremost wireless equipment manufacturers, we believe that our
royalty rates are reasonable and fair to the companies that benefit from our intellectual property
and provide significant incentives for others to invest in CDMA applications, as evidenced by the
significant growth in the CDMA portion of the wireless industry, the integration of new features
and functionality into CDMA wireless products, and the rapid reduction in the price of low-end CDMA
handsets over recent years. While the distractions caused by challenges to our business model and
licensing program are undesirable and the legal and other costs associated with defending our
position have been and continue to be significant, we believe that these challenges are without
merit, and we will continue to vigorously defend our intellectual property rights and our right to
continue to receive a fair return for our innovations. A recent ruling in New Jersey Federal
district court granted our motion to dismiss unfounded claims by Broadcom that our business
practices have been in violation of anti-trust law in the United
States. These business practices are essentially
the same as cited in the EC complaints. The court ruled that, assuming all the facts stated by
Broadcom are correct (which we believe is not the case), we have not violated any anti-trust laws.
This ruling is very
important and favorable. Broadcom has appealed it. Regrettably, we assume, as should
investors, that challenges of this nature will continue into the foreseeable future and may require
the investment of substantial management time and financial resources to explain and defend our
position.
24
Although there can be no guarantees as to the ultimate outcome of these challenges, we intend
to expend appropriate resources to educate governmental authorities, elected officials, courts of
law, our licensees, wireless service operators and the general public as to the true nature of
these disputes. We believe that when such information is fairly evaluated by such parties, these
challenges by the complainants to the EC will be seen for what they truly are, an
attempt to avoid paying the agreed upon and fair compensation for the use of our significant
intellectual property portfolio, and to extend their domination of the second generation wireless
handset market into the third generation.
The enforcement and protection of our intellectual property rights may be expensive and could
divert our valuable resources.
We rely primarily on patent, copyright, trademark and trade secret laws, as well as
nondisclosure and confidentiality agreements and other methods, to protect our proprietary
information, technologies and processes, including our patent portfolio. Policing unauthorized use
of our products and technologies is difficult and time consuming. We cannot be certain that the
steps we have taken will prevent the misappropriation or unauthorized use of our proprietary
information and technologies, particularly in foreign countries where the laws may not protect our
proprietary rights as fully or as readily as United States laws. We cannot be certain that the laws
and policies of any country, including the United States, or the practices of any of the
international standards bodies, foreign or domestic, with respect to intellectual property
enforcement or licensing, issuance of wireless licenses or the adoption of standards, will not be
changed in a way detrimental to our licensing program or to the sale or use of our products or
technology. Within the United States Congress, committee work has been initiated to draft a patent
reform law. The end product of such work could be new patent legislation detrimental to our
licensing program or to the sale or use of our products or technology. Any action we take to
influence such potential changes could absorb significant management time and attention, which, in
turn, could negatively impact our operating results.
The vast majority of our patents and patent applications relate to our wireless communications
technology and much of the remainder of our patents and patent applications relate to our other
technologies and products. Litigation may be required to enforce our intellectual property rights,
protect our trade secrets or determine the validity and scope of proprietary rights of others. As a
result of any such litigation, we could lose our proprietary rights or incur substantial unexpected
operating costs. Any action we take to enforce our intellectual property rights could be costly and
could absorb significant management time and attention, which, in turn, could negatively impact our
operating results. In addition, failure to protect our trademark rights could impair our brand
identity.
Claims by other companies that we infringe their intellectual property, that patents on which we
rely are invalid, or that our business practices are in some way unlawful, could adversely affect
our business.
From time to time, companies have asserted, and may again assert, patent, copyright and other
intellectual proprietary rights against our products or products using our technologies or other
technologies used in our industry. These claims have resulted (see Item 3. Legal Proceedings) and
may again result in our involvement in litigation. We may not prevail in such litigation given the
complex technical issues and inherent uncertainties in intellectual property litigation. If any of
our products were found to infringe on another companys intellectual property rights, we could be
required to redesign our products or license such rights and/or pay damages or other compensation
to such other company. If we were unable to redesign our products or license such intellectual
property rights used in our products, we could be prohibited from making and selling such products.
In addition, as the number of competitors in our market increases and the functionality of our
products is enhanced and overlaps with the products of other companies, we may become subject to
claims of infringement or misappropriation of the intellectual property rights of others. Any
claims, with or without merit, could be time consuming to address, result in costly litigation,
divert the efforts of our technical and management personnel or cause product release or shipment
delays, any of which could have a material adverse effect upon our operating results. In any
potential dispute involving other companies patents or other intellectual property, our licensees
could also become the targets of litigation. Any such litigation could severely disrupt the
business of our licensees, which in turn could hurt our relations with our licensees and cause our
revenues to decrease.
A number of other companies have claimed to own patents essential to various CDMA standards,
GSM standards and implementations of OFDM and OFDMA systems. If we or other product manufacturers
are required to
25
obtain additional licenses and/or pay royalties to one or more patent holders, this
could have a material adverse effect on the commercial implementation of our CDMA or multimode
products and technologies, demand for our licensees products, and our profitability.
Our currently pending or future patent applications for iMoD may not result in issued patents.
In addition, our issued iMoD patents may not contain claims sufficiently broad to protect us
against third parties with similar technologies or products or from third parties infringing our
patents or misappropriating our trade secrets or provide us with any competitive advantage.
Other companies or entities also may commence actions seeking to establish the invalidity of
our patents. In the event that one or more of our patents are challenged, a court may invalidate
the patent or determine that the patent is not enforceable, which could harm our competitive
position. If any of our key patents are invalidated, or if the scope of the claims in any of these
patents is limited by court decision, we could be prevented from licensing the invalidated or
limited portion of such patents. Even if such a patent challenge is not successful, it could be
expensive and time consuming to address, divert management attention from our business and harm our
reputation.
Successful attempts by certain companies to amend or modify Standards Development Organizations
(SDOs) intellectual property policies could impact our licensing business.
Our technologies, such as CDMA and OFDMA, are generally proposed and incorporated into
standards adopted by SDOs throughout the world (e.g. European Telecommunications Standards
Institute (ETSI), Telecommunications Industry Association, Telecommunications Technology
Association, IEEE, etc.). These SDOs have policies with respect to intellectual property
contributed by their member companies, which generally require member companies to commit to
license their patents essential to the practice of the adopted standard on terms and conditions
that are fair, reasonable and free from unfair discrimination (FRAND). We, as a member of these
SDOs and a significant contributor to a number of adopted standards, have made a number of FRAND
commitments. Some companies have proposed significant new SDO intellectual property policies, some
of which would require a maximum aggregate intellectual property royalty rate for the use of all
essential patents owned by its member companies to be applied to the selling price of any product
implementing the adopted standard. They have further proposed that the maximum aggregate royalty
rate be apportioned to each member company with essential patents based upon the size of its
essential patent portfolio. Recently, NGMN Ltd., an industry standards development group organized
by several wireless operators, has invited other companies in the industry to participate within
NGMN Ltd. subject to IP restrictions substantially similar to these proposals. It is quite early in the
process of discussing and evaluating these proposals but we expect that, once all parties analyze
and understand the full impact of these proposals, they will come to understand that such proposals
are not in the best interests of the industry and would have serious undesirable consequences. For
example, these proposals, if adopted, would discourage research and
development investment, invention and innovation,
incentivize bulk filings of marginal patents, and encourage lobbying for introduction of needless
features into standards. Further, they would discriminate against companies that develop new
technology and enable other companies to manufacture and use products incorporating those new
technologies in favor of such manufacturers and users. We are participating in the process and
expect to channel it into useful improvements of the existing processes. Although the ETSI ad hoc
IPR group has determined that such proposals should not be adopted as amendments to existing ETSI
policies, there can be no assurance that such proposals as described above will not be adopted by
other SDOs or industry groups, such as the recently formed NGMN Ltd., resulting in a disadvantage
to our business model either by limiting our return on investment with respect to new technologies
or forcing us to work outside of the SDOs or such other industry groups for promoting our new
technologies.
We depend upon a limited number of third party suppliers to manufacture component parts,
subassemblies and finished goods for our products. If these third party suppliers do not allocate
adequate manufacturing capacity in their facilities to manufacture products on our behalf, or if
there are any disruptions in the operations of, or the
loss of, any of these third parties, it could harm our ability to meet our delivery obligations to
our customers, reduce our revenue, increase our cost of sales and harm our business.
Our ability to meet customer demand depends, in part, on available manufacturing capacity and
our ability to obtain timely and adequate delivery of parts and components from our suppliers. A
reduction or interruption in our product supply source, an inability of our suppliers to react to
shifts in product demand or an increase in component prices could have a material adverse effect on
our business or profitability. Component shortages could adversely affect our ability and that of
our customers to ship products on a timely basis and as a result our customers demand
26
for our products. Any such shipment delays or declines in demand could reduce our revenues and harm our
ability to achieve or sustain desired levels of profitability. Additionally, failure to meet
customer demand in a timely manner could damage our reputation and harm our customer relationships
potentially resulting in reduced market share.
Our operations may also be harmed by lengthy or recurring disruptions at any of our suppliers
manufacturing facilities and by disruptions in the distribution channels from our suppliers and to
our customers. These disruptions may include labor strikes, work stoppages, widespread illness,
terrorism, war, political unrest, fire, earthquake, flooding or other natural disasters. These
disruptions could cause significant delays in shipments until we are able to shift the products
from an affected manufacturer to another manufacturer. If the affected supplier was a sole source
supplier, we may not be able to resource the product without significant cost and delay. The loss
of a significant third party supplier or the inability of a third party supplier to meet
performance and quality specifications or delivery schedules could harm our ability to meet our
delivery obligations to our customers and negatively impact our revenues and business operations.
QCT Segment. A suppliers ability to meet our product manufacturing demand is limited mainly
by their overall capacity and current capacity availability. Although we have entered into
long-term contracts with our suppliers, most of these contracts do not provide for long-term
capacity commitments. To the extent that we do not have firm commitments from our suppliers over a
specific time period, or in any specific quantity, our suppliers may allocate, and in the past have
allocated, capacity to the production of products for their other customers while reducing capacity
to manufacture our products. Accordingly, capacity for our products may not be available when we
need it or available at reasonable prices. We have experienced capacity limitations from our
suppliers in the past and may experience it in the future. During fiscal 2004 and the first quarter
of fiscal 2005, we experienced supply constraints which resulted in our inability to meet certain
customer demand. While we were able to alleviate these supply constraints and improve the supply
and delivery of integrated circuits by working with our existing suppliers to increase available
manufacturing capacity, and by increasing and extending our firm orders to our suppliers, there can
be no assurance that we will not experience supply constraints in the future, which could result in
our failure to meet customer demand.
While our goal is to establish alternate suppliers for technologies that we consider critical,
some of our integrated circuits products are only available from single sources, with which we do
not have long-term contracts. Our reliance on sole or limited-source vendors involves significant
risks including possible shortages of manufacturing capacity, poor product performance and reduced
control over delivery schedules, manufacturing capability and yields, quality assurance, quantity
and costs.
In the event of a loss of, or a decision to change a key third party supplier, qualifying a
new foundry supplier and commencing volume production or testing could involve delay and expense,
resulting in lost revenues, reduced operating margins and possible loss of customers. We work
closely with our customers to expedite their processes for evaluating new integrated circuits from
our foundry suppliers; however, in some instances, transition of integrated circuit production to a
new foundry supplier may cause a temporary decline in shipments of specific integrated circuits to
individual customers.
QMT Division. QMT needs to form and maintain reliable business relationships with flat panel
display manufacturers or other targeted partners to support the manufacture of iMoD displays in
commercial volumes. All of our current relationships have been for the development and limited
production of certain iMoD display panels and/or modules. Some or all of these relationships may
not succeed or, even if they are successful, may not result in the display manufacturers entering
into material supply relationships with us.
We are expanding our manufacturing model to purchase completed die from semiconductor manufacturing
foundries and to contract directly with third party manufacturers for assembly and test services.
This new production model may increase costs and lower our control over the manufacturing process.
To further enable flexibility of supply and access to potential new foundry suppliers, and in
response to the complexity of our product roadmap, starting in fiscal 2005, we expanded our
manufacturing model to include purchasing completed die directly from semiconductor manufacturing
foundries. Under our IFM model, we directly manage and contract with third party manufacturers for
back-end assembly and test services, and we ship the completed integrated circuits to our
customers. We expect to increase the volume of our purchases of completed die directly from our
foundry suppliers under our IFM model and to continue to purchase the majority of our requirements
for integrated circuit products on a turnkey basis. We have a limited history of working with these
third party suppliers under this expanded manufacturing model, and their services and volume of
activity may not be
27
completely reliable during the initial stages. We cannot guarantee that this
change will not cause disruptions in our operations that could harm our ability to meet our
delivery obligations to our customers or increase our cost of sales.
Our suppliers may also be our competitors putting us at a disadvantage for pricing and capacity
allocation.
One or more of our suppliers may obtain licenses from us to manufacture CDMA-based integrated
circuits that compete with our products. In this event, the supplier could elect to allocate raw
materials and manufacturing capacity to their own products and reduce deliveries to us to our
detriment. In addition, we may not receive reasonable pricing, manufacturing or delivery terms. We
cannot guarantee that the actions of our suppliers will not cause disruptions in our operations
that could harm our ability to meet our delivery obligations to our customers or increase our cost
of sales.
We, and our licensees, are subject to the risks of conducting business outside the United States.
A significant part of our strategy involves our continued pursuit of growth opportunities in a
number of international markets. We market, sell and service our products internationally. We have
established sales offices around the world. We expect to continue to expand our international sales
operations and enter new international markets. This expansion will require significant management
attention and financial resources to successfully develop direct and indirect international sales
and support channels, and we cannot assure you that we will be successful or that our expenditures
in this effort will not exceed the amount of any resulting revenues. If we are not able to maintain
or increase international market demand for our products and technologies, we may not be able to
maintain a desired rate of growth in our business.
Our international customers sell their products to markets throughout the world, including
China, India, Japan, South Korea, North America, South America and Europe. We distinguish revenues
from external customers by geographic areas based on customer location. Consolidated revenues from
international customers as a percentage of total revenues were 87%, 82% and 79% in fiscal 2006,
2005 and 2004, respectively. Because most of our foreign sales are denominated in U.S. dollars, our
products and those of our customers and licensees that are sold in U.S. dollars become less
price-competitive in international markets if the value of the U.S. dollar increases relative to
foreign currencies.
In many international markets, barriers to entry are created by long-standing relationships
between our potential customers and their local service providers and protective regulations,
including local content and service requirements. In addition, our pursuit of international growth
opportunities may require significant investments for an extended period before we realize returns,
if any, on our investments. Our business could be adversely affected by a variety of uncontrollable
and changing factors, including:
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changes in legal or regulatory requirements, including regulations governing the
materials used in our products; |
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legal or regulatory limitations on the spectrum available for the deployment of
CDMA-based technologies; |
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difficulty in protecting or enforcing our intellectual property rights and/or
contracts in a particular foreign jurisdiction, including challenges to our licensing
practices under such jurisdictions competition laws; |
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our inability to succeed in significant foreign markets, such as China, India or Europe; |
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cultural differences in the conduct of business; |
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difficulty in attracting qualified personnel and managing foreign activities; |
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recessions in economies outside the United States; |
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longer payment cycles for and greater difficulties collecting accounts receivable; |
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export controls, tariffs and other trade protection measures; |
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fluctuations in currency exchange rates; |
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inflation and deflation; |
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nationalization, expropriation and limitations on repatriation of cash; |
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social, economic and political instability; |
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natural disasters, acts of terrorism, widespread illness and war; |
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taxation; and |
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changes in laws and policies affecting trade, foreign investments, licensing practices and loans. |
In addition to general risks associated with our international sales, licensing activities and
operations, we are also subject to risks specific to the individual countries in which we do
business. We cannot be certain that the laws and policies of any country with respect to
intellectual property enforcement or licensing, issuance of wireless licenses or the adoption of
standards will not be changed or enforced in a way detrimental to our licensing program or to
the sale or use of our products or technology. Declines in currency values in selected regions may
adversely affect our operating results because our products and those of our customers and
licensees may become more expensive to purchase in the countries of the affected currencies. During
fiscal 2006, 70% of our revenues were from customers and licensees based in South Korea, Japan and
China, as compared to 69% during fiscal 2005 and 68% during fiscal 2004. These customers sell their
products to markets worldwide, including Japan, South Korea, China, India, North America, South
America and Europe. A significant downturn in the economies of Asian countries where many of our
customers and licensees are located, particularly the economies of South Korea, Japan and China, or
the economies of the major markets they serve would materially harm our business.
The wireless markets in Brazil, China and India, among others, represent growth opportunities
for us. If wireless operators in Brazil, China or India, or the governments of Brazil, China or
India, make technology deployment or other decisions that result in actions that are adverse to the
expansion of CDMA technologies, our business could be harmed.
We are subject to risks in certain global markets in which wireless operators provide
subsidies on phone sales to their customers. Increases in phone prices that negatively impact phone
sales can result from changes in regulatory policies related to phone subsidies. Limitations or
changes in policy on phone subsidies in South Korea, Japan, China and other countries may have
additional negative impacts on our revenues.
We expect that royalty revenues from international licensees based upon sales of their
products outside of the United States will continue to represent a significant portion of our total
revenues in the future. Our royalty revenues from international licensees are denominated in U.S.
dollars. To the extent that such licensees products are sold in foreign currencies, any royalties
that we derive as a result of such sales are subject to fluctuations in currency exchange rates. In
addition, if the effective price of products sold by our customers were to increase as a result of
fluctuations in the exchange rate of the relevant currencies, demand for the products could fall,
which in turn would reduce our royalty revenues.
Currency fluctuations could negatively affect future product sales or royalty revenue, harm our
ability to collect receivables, or increase the U.S. dollar cost of the activities of our foreign
subsidiaries and international strategic investments.
We are exposed to risk from fluctuations in currencies, which may change over time as our
business practices evolve, that could impact our operating results, liquidity and financial
condition. We operate and invest globally. Adverse movements in currency exchange rates may
negatively affect our business due to a number of situations, including the following:
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Assets or liabilities of our consolidated subsidiaries and our foreign investees that
are not denominated in the functional currency of those entities are subject to the
effects of currency fluctuations, which may affect our reported earnings. Our exposure
to foreign currencies may increase as we expand into new markets. |
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Investments in our consolidated foreign subsidiaries and in other foreign entities
that use the local currency as the functional currency may decline in value as a result
of declines in local currency values. |
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Certain of our revenues, such as royalty revenues, are derived from licensee or
customer sales that are denominated in foreign currencies. If these revenues are not
subject to foreign exchange hedging transactions, weakening of currency values in
selected regions could adversely affect our anticipated revenues and cash flows. |
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We may engage in foreign exchange hedging transactions that could affect our cash
flows and earnings because they may require the payment of structuring fees, and they
may limit the U.S. dollar value of royalties from licensees sales that are denominated
in foreign currencies. |
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Our trade receivables are generally U.S. dollar denominated. Any significant
increase in the value of the dollar against our customers or licensees functional
currencies could result in an increase in our customers or licensees cash flow
requirements and could consequently affect our ability to sell products and collect
receivables. |
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Strengthening of currency values in selected regions may adversely affect our
operating results because the activities of our foreign subsidiaries may become more
expensive in U.S. dollars. |
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Strengthening of currency values in selected regions may adversely affect our cash
flows and investment results because strategic investment obligations denominated in
foreign currencies may become more expensive, and the U.S. dollar cost of equity in
losses of foreign investees may increase. |
We may engage in acquisitions or strategic transactions that could result in significant changes or
management disruption and fail to enhance stockholder value.
From time to time, we engage in acquisitions or strategic transactions with the goal of
maximizing stockholder value. We have acquired businesses, entered into joint ventures and made
strategic investments in or loans to CDMA wireless operators, early-stage companies, or venture
funds to support our business, including the global adoption of CDMA-based technologies and related
services. Most of our strategic investments entail a high degree of risk and will not become liquid
until more than one year from the date of investment, if at all. We cannot provide assurance that
our acquisitions or strategic investments (either those we currently have completed or may
undertake in the future) will generate financial returns or that they will result in increased
adoption or continued use of our technologies.
Achieving the anticipated benefits of acquisitions will depend in part upon our ability to
integrate the acquired businesses in an efficient and effective manner. The integration of two
companies that have previously operated independently may result in significant challenges, and we
may be unable to accomplish the integration smoothly or successfully. The difficulties of
integrating two companies include, among others:
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retaining key employees; |
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maintenance of important relationships of QUALCOMM and the acquired business; |
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minimizing the diversion of managements attention from ongoing business matters; |
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coordinating geographically separate organizations; |
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consolidating research and development operations; and |
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consolidating corporate and administrative infrastructures. |
We cannot assure you that the integration of the acquired businesses with our business will
result in the realization of the full benefits anticipated by us to result from the acquisition. We
may not derive any commercial value from the acquired technology, products and intellectual
property or from future technologies and products based on the acquired technology and/or
intellectual property, and we may be subject to liabilities that are not covered by indemnification
protection we may obtain.
We will continue to evaluate potential future transactions that we believe may enhance
stockholder value. These potential future transactions may include a variety of different business
arrangements, including acquisitions, spin-offs, strategic partnerships, joint ventures,
restructurings, divestitures, business combinations and equity or debt investments. Although our
goal is to maximize stockholder value, such transactions may impair stockholder value or otherwise
adversely affect our business and the trading price of our stock. Any such transaction may require
us to
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incur non-recurring or other charges and/or to consolidate or record our equity in losses and
may pose significant integration challenges and/or management and business disruptions, any of
which could harm our operating results and business.
Defects or errors in our products and services or in products made by our suppliers could harm our
relations with our customers and expose us to liability. Similar problems related to the products
of our customers or licensees could harm our business.
Our products are inherently complex and may contain defects and errors that are detected only
when the products are in use. Further, because our products and services are responsible for
critical functions in our customers products and/or networks, such defects or errors could have a
serious impact on our customers, which could damage our reputation, harm our customer relationships
and expose us to liability. Defects or impurities in our components, materials or software or those
used by our customers or licensees, equipment failures or other difficulties could adversely affect
our ability and that of our customers and licensees to ship products on a timely basis as well as
customer or licensee demand for our products. Any such shipment delays or declines in demand could
reduce our revenues and harm our ability to achieve or sustain desired levels of profitability. We
and our customers or licensees may also experience component or software failures or defects that
could require significant product recalls, reworks and/or repairs which are not covered by warranty
reserves and which could consume a substantial portion of the capacity of our third party
manufacturers or those of our customers or licensees. Resolving any defect or failure related
issues could consume financial and/or engineering resources that could affect future product
release schedules. Additionally, a defect or failure in our products or the products of our
customers or licensees could harm our reputation and/or adversely affect the growth of 3G wireless
markets.
As our product complexities increase, we are required to migrate to integrated circuit
technologies with smaller geometric feature sizes such as 90nm, 65nm, etc. The design process
interface issues are more complex as we enter into these new domains of technology, which adds
risks on yield and reliability. In addition, the timely readiness of our foundry suppliers to
support such technology changes could impact our ability to meet customer demand, revenue, and cost
expectations. The timing of acceptance of the smaller technology designs by our customers may
subject us to the risk of excess inventories of earlier designs.
Global economic conditions that impact the wireless communications industry could negatively affect
our revenues and operating results.
Global economic conditions can have wide-ranging effects on markets that we serve,
particularly wireless communications equipment manufacturers and wireless network operators. We
cannot predict negative events, such as war, that may have adverse effects on the economy or on
phone inventories at CDMA-based equipment manufacturers and operators. The continued threat of
terrorism and heightened security and military action in response to this threat, or any future
acts of terrorism, may cause disruptions to the global economy and to the wireless communications
industry and create uncertainties. Recent reports suggest that inflation could have adverse
effects on the global economy and capital markets. Inflation could adversely affect our customers,
including their ability to obtain financing, upgrade wireless networks and purchase our products
and services, and our end consumers, by lowering their standards of living and diminishing their
ability to purchase wireless devices based on our technology. Inflation could also increase our
costs of raw materials and operating expenses and harm our business in other ways. Should such
negative events occur, subsequent economic recovery might not benefit us in the near term. If it
does not, our ability to increase or maintain our revenues and operating results may be impaired.
In addition, because we intend to continue to make significant investments in research and
development and to maintain extensive ongoing customer service and support capability, any decline
in the rate of growth of our revenues will have a significant adverse impact on our operating
results.
Our industry is subject to competition that could result in decreased demand for our products and
the products of our customers and licensees and/or declining average selling prices for our
licensees products and our products, negatively affecting our revenues and operating results.
We currently face significant competition in our markets and expect that competition will
continue. Competition in the telecommunications market is affected by various factors, including:
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comprehensiveness of products and technologies; |
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value added features which drive replacement rates; |
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manufacturing capability; |
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scalability and the ability of the system technology to meet customers immediate and
future network requirements; |
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product performance and quality; |
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design and engineering capabilities; |
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compliance with industry standards; |
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time-to-market; |
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system cost; and |
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customer support. |
This competition may result in increased development costs and reduced average selling prices
for our products and those of our customers and licensees. Reductions in the average selling price
of our licensees products, unless offset by an increase in volumes, generally result in reduced
royalties payable to us. While pricing pressures from competition may, to a large extent, be
mitigated by the introduction of new features and functionality in our licensees products, there
is no guarantee that such mitigation will occur. We anticipate that additional competitors will
enter our markets as a result of growth opportunities in wireless telecommunications, the trend
toward global expansion by foreign and domestic competitors, technological and public policy
changes and relatively low barriers to entry in selected segments of the industry.
Companies that promote non-CDMA technologies (e.g. GSM and WiMax) and companies that design
competing CDMA-based integrated circuits are included amongst our competitors. Examples of such
competitors (some of whom are strategic partners of ours in other areas) include Agere, Broadcom,
EoNex Technologies, Ericsson, Freescale, Fujitsu, Intel, NEC, Nokia, Samsung, Texas Instruments and
VIA Telecom. With respect to our QWBS business, our competitors are aggressively pricing products
and services and are offering new value-added products and services which may impact margins,
intensify competition in current and new markets and harm our ability to compete in certain
markets.
Many of these current and potential competitors have advantages over us, including:
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longer operating histories and presence in key markets; |
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greater name recognition; |
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motivation by our customers in certain circumstances to find alternate suppliers; |
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access to larger customer bases; |
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economies of scale and cost structure advantages; and |
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greater sales and marketing, manufacturing, distribution, technical and other resources than we have. |
As a result of these and other factors, our competitors may be more successful than us. In
addition, we anticipate additional competitors will enter the market for products based on 3G
standards. These competitors may have more established relationships and distribution channels in
markets not currently deploying CDMA-based wireless communications technology. These competitors
also may have established or may establish financial or strategic relationships among themselves or
with our existing or potential customers, resellers or other third parties. These relationships may
affect our customers decisions to purchase products or license technology from us. Accordingly,
new competitors or alliances among competitors could emerge and rapidly acquire significant market
share to our detriment.
While we continue to believe our iMoD displays will offer compelling advantages to the display
market, there can be no assurance that other technologies will not continue to improve in ways that
reduce the advantages we anticipate from our iMoD displays. The flat panel display market is
currently, and we believe will likely continue to be for some time, dominated by displays based on
liquid crystal display (LCD) technology. Numerous companies are making substantial investments in,
and conducting research to improve characteristics of LCDs. Additionally, several other flat panel
display technologies have been, or are being, developed, including technologies for the production
of
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organic light-emitting diode (OLED), field emission, inorganic electroluminescence, gas plasma
and vacuum fluorescent displays. In each case, advances in LCD or other flat panel display
technologies could result in technologies that are more cost effective, have fewer display
limitations, or can be brought to market faster than our iMoD technology. These advances in
competing technologies might cause display manufacturers to avoid entering into commercial
relationships with us, or not renew planned or existing relationships with us.
Our business and operating results will be harmed if we are unable to manage growth in our
business.
Certain of our businesses have experienced periods of rapid growth and/or increased their
international activities, placing significant demands on our managerial, operational and financial
resources. In order to manage growth and geographic expansion, we must continue to improve and
develop our management, operational and financial systems and controls, including quality control
and delivery and service capabilities. We also need to continue to expand, train and manage our
employee base. We must carefully manage research and development capabilities and production and
inventory levels to meet product demand, new product introductions and product and technology
transitions. We cannot assure you that we will be able to timely and effectively meet that demand
and maintain the quality standards required by our existing and potential customers and licensees.
In addition, inaccuracies in our demand forecasts, or failure of the systems used to develop
the forecasts, could quickly result in either insufficient or excessive inventories and
disproportionate overhead expenses. If we ineffectively manage our growth or are unsuccessful in
recruiting and retaining personnel, our business and operating results will be harmed.
Our operating results are subject to substantial quarterly and annual fluctuations and to market
downturns.
Our revenues, earnings and other operating results have fluctuated significantly in the past
and may fluctuate significantly in the future. General economic or other conditions causing a
downturn in the market for our products or technology, and in turn affecting the timing of customer
orders or causing cancellations or rescheduling of orders, could also adversely affect our
operating results. Moreover, our customers may change delivery schedules, cancel or reduce orders
without incurring significant penalties and generally are not subject to minimum purchase
requirements.
Our future operating results will be affected by many factors, including, but not limited to:
our ability to retain existing or secure anticipated customers or licensees, both domestically and
internationally; our ability to develop, introduce and market new technology, products and services
on a timely basis; management of inventory by us and our customers and their customers in response
to shifts in market demand; changes in the mix of technology and products developed, licensed,
produced and sold; seasonal customer demand; the Flarion acquisition; and other factors described
elsewhere in this Annual Report and in these risk factors. Our cash investments represent a
significant asset that may be subject to fluctuating or even negative returns depending upon
interest rate movements and financial market conditions in fixed income and equity securities.
These factors affecting our future operating results are difficult to forecast and could harm
our quarterly and/or annual operating results. If our operating results fail to meet the financial
guidance we provide to investors, or the expectations of investment analysts or investors in any
period, securities class action litigation could be brought against us and/or the market price of
our common stock could decline.
Our stock price may be volatile.
The stock market in general, and the stock prices of technology-based and wireless
communications companies in particular, have experienced volatility that often has been unrelated
to the operating performance of any specific public company. The market price of our common stock
has fluctuated in the past and is likely to fluctuate in the future as well. Factors that may have
a significant impact on the market price of our stock include:
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announcements concerning us or our competitors, including the selection of wireless
communications technology by wireless operators and the timing of the roll-out of those
systems; |
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receipt of substantial orders or order cancellations for integrated circuits and
system software products; |
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quality deficiencies in services or products; |
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announcements regarding financial developments or technological innovations; |
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international developments, such as technology mandates, political developments or
changes in economic policies; |
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lack of capital to invest in 3G networks; |
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new commercial products; |
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changes in recommendations of securities analysts; |
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general stock market volatility; |
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government regulations, including share-based compensation accounting and tax regulations; |
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energy blackouts; |
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acts of terrorism and war; |
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inflation and deflation; |
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widespread illness; |
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proprietary rights or product or patent litigation against us or against our customers or licensees; |
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strategic transactions, such as acquisitions and divestitures; or |
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rumors or allegations regarding our financial disclosures or practices. |
Our future earnings and stock price may be subject to volatility, particularly on a quarterly
basis. Shortfalls in our revenues or earnings in any given period relative to the levels expected
by securities analysts could immediately, significantly and adversely affect the trading price of
our common stock.
In the past, securities class action litigation has often been brought against a company
following periods of volatility in the market price of its securities. Due to changes in the
volatility of our stock price, we may be the target of securities litigation in the future.
Securities litigation could result in substantial uninsured costs and divert managements attention
and resources. In addition, stock price volatility may be precipitated by failure to meet earnings
expectations or other factors, such as the potential uncertainty in future reported earnings
created by the assumptions used for share-based compensation and the related valuation models used to
determine such expense.
Our industry is subject to rapid technological change, and we must make substantial investments in
new products and technologies to compete successfully.
New technological innovations generally require a substantial investment before they are
commercially viable. We intend to continue to make substantial investments in developing new
products and technologies, and it is possible that our development efforts will not be successful
and that our new technologies will not result in meaningful revenues. In particular, we intend to
continue to invest significant resources in developing integrated circuit products to support
high-speed wireless Internet access and multimode, multiband, multinetwork operation and multimedia
applications, which encompass development of graphical display, camera and video capabilities, as
well as higher computational capability and lower power on-chip computers and signal processors.
While our research and development activities have resulted in inventions relating to applications
of GPRS, EDGE, OFDM, OFDMA and MIMO, and hundreds of issued or pending patent applications, there
can be no assurance that our patent portfolio in these areas would be as valuable as our CDMA
portfolio. Further, if OFDMA technology is not adopted and deployed commercially, our investment in
Flarion and OFDMA technology may not provide us an adequate return on our investment. We also
continue to invest in the development of our BREW applications development platform, our MediaFLO
MDS and FLO technology and our iMoD display technology. All of these new products and technologies
face significant competition, and we cannot assure you that the revenues generated from these
products or the timing of the deployment of these products or technologies, which may be dependent
on the actions of others, will meet our expectations. We cannot be certain that we will make the
additional advances in development that may be essential to successfully commercialize our iMoD
technology.
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The market for our products and technology is characterized by many factors, including:
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rapid technological advances and evolving industry standards; |
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changes in customer requirements; |
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frequent introductions of new products and enhancements; |
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evolving methods for transmission of wireless voice and data communications; and |
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intense competition from companies with greater resources, customer relationships and
distribution capabilities. |
Our future success will depend on our ability to continue to develop and introduce new
products, technology and enhancements on a timely basis. Our future success will also depend on our
ability to keep pace with technological developments, protect our intellectual property, satisfy
customer requirements, price our products competitively and achieve market acceptance. The
introduction of products embodying new technologies and the emergence of new industry standards
could render our existing products and technology, and products and technology currently under
development, obsolete and unmarketable. If we fail to anticipate or respond adequately to
technological developments or customer requirements, or experience any significant delays in
development, introduction or shipment of our products and technology in commercial quantities,
demand for our products and our customers and licensees products that use our technology could
decrease, and our competitive position could be damaged.
Changes in financial accounting standards related to share-based payments are expected to continue
to have a significant effect on our reported results.
On September 26, 2005, we adopted the revised statement of Financial Accounting Standards No.
FAS 123 (FAS 123R), Share-Based Payment, which requires that we record compensation expense in
the statement of operations for share-based payments, such as employee stock options, using the
fair value method. The adoption of this new standard is expected to continue to have a significant
effect on our reported earnings, although it will not affect our cash flows, and could adversely
impact our ability to provide accurate guidance on our future reported financial results due to the
variability of the factors used to estimate the values of share-based payments. If factors change
and we employ different assumptions or different valuation methods in the application of FAS 123R
in future periods, the compensation expense that we record under FAS 123R may differ significantly
from what we have recorded in the current period, which could negatively affect our stock price and
our stock price volatility.
Potential tax liabilities could adversely affect our results.
We are subject to income taxes in both the United States and numerous foreign jurisdictions.
Significant judgment is required in determining our provision for income taxes. Although we believe
our tax estimates are reasonable, the final determination of tax audits and any related litigation
could be materially different than that which is reflected in historical income tax provisions and
accruals. In such case, a material effect on our income tax provision and net income in the period
or periods in which that determination is made could result.
If we experience product liability claims or recalls, we may incur significant expenses and
experience decreased demand for our products.
Testing, manufacturing, marketing and use of our products and those of our licensees and
customers entail the risk of product liability. The use of wireless devices containing our products
to access un-trusted content creates a risk of exposing the system software in those devices to
viral or malicious attacks. We continue to expand our focus on this issue and take measures to
safeguard the software from this threat. However, this issue carries the risk of general product
liability along with the associated impacts on reputation and demand. Although we believe our
product liability insurance will be adequate to protect against product liability claims, we cannot
assure you that we will be able to continue to maintain such insurance at a reasonable cost or in
sufficient amounts to protect us against losses due to product liability. Our inability to maintain
insurance at an acceptable cost or to otherwise protect against potential product liability claims
could prevent or inhibit the commercialization of our products and those of our licensees and
customers and harm our future operating results. Furthermore, not all losses associated with
alleged product failure are insurable. In addition, a product liability claim or recall, whether
against our licensees, customers, or us could harm our reputation and result in decreased demand
for our products.
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The high amount of capital required to obtain radio frequency licenses, deploy and expand wireless
networks and obtain new subscribers could slow the growth of the wireless communications industry
and adversely affect our business.
Our growth is dependent upon the increased use of wireless communications services that
utilize our technology. In order to provide wireless communications services, wireless operators
must obtain rights to use specific radio frequencies. The allocation of frequencies is regulated in
the United States and other countries throughout the world, and limited spectrum space is allocated
to wireless communications services. Industry growth may be affected by the amount of capital
required to: obtain licenses to use new frequencies; deploy wireless networks to offer voice and
data services; expand wireless networks to grow voice and data services; and obtain new
subscribers. The significant cost of licenses, wireless networks and subscriber additions may slow
the growth of the industry if wireless operators are unable to obtain or service the additional
capital necessary to implement or expand 3G wireless networks. Our growth could be adversely
affected if this occurs.
If wireless phones pose safety risks, we may be subject to new regulations, and demand for our
products and those of our licensees and customers may decrease.
Concerns over the effects of radio frequency emissions, even if unfounded, may have the effect
of discouraging the use of wireless phones, which would decrease demand for our products and those
of our licensees and customers. In recent years, the FCC and foreign regulatory agencies have
updated the guidelines and methods they use for evaluating radio frequency emissions from radio
equipment, including wireless phones. In addition, interest groups have requested that the FCC
investigate claims that wireless communications technologies pose health concerns and cause
interference with airbags, hearing aids and medical devices. Concerns have also been expressed over
the possibility of safety risks due to a lack of attention associated with the use of wireless
phones while driving. Any legislation that may be adopted in response to these expressions of
concern could reduce demand for our products and those of our licensees and customers in the United
States as well as foreign countries.
Our QWBS business depends on the availability of satellite and other networks.
Our OmniTRACS and OmniVision systems currently operate in the United States market on leased
Ku-band satellite transponders. Our primary data satellite transponder and position reporting
satellite transponder lease runs through October 2012 and includes transponder and satellite
protection (back-up capacity in the event of a transponder or satellite failure), which we believe
will provide sufficient transponder capacity for our United States OmniTRACS and OmniVision
operations through fiscal 2012. A failure to maintain adequate satellite capacity could harm our
business, operating results, liquidity and financial position. QWBS terrestrial-based products rely
on various wireless terrestrial communication networks operated by third parties. The
unavailability or nonperformance of these network systems could harm our business.
Our business and operations would suffer in the event of system failures.
Despite system redundancy, the implementation of security measures and the existence of a
Disaster Recovery Plan for our internal information technology networking systems, our systems are
vulnerable to damages from computer viruses, unauthorized access, energy blackouts, natural
disasters, terrorism, war and telecommunication failures. Any system failure, accident or security
breach that causes interruptions in our operations or to our customers or licensees operations
could result in a material disruption to our business. To the extent that any disruption or
security breach results in a loss or damage to our customers data or applications, or
inappropriate disclosure of confidential information, we may incur liability as a result. In
addition, we may incur additional costs to remedy the damages caused by these disruptions or
security breaches.
Message transmissions for QWBS operations are formatted and processed at the Network
Management Center in San Diego, California, with a fully redundant backup Network Management Center
located in Las Vegas, Nevada. Both centers, operated by us, are subject to system failures, which
could interrupt the services and have an adverse effect on our operating results.
From time to time, we install new or upgraded business management systems. To the extent such
systems fail or are not properly implemented, we may experience material disruptions to our
business, delays in our external financial reporting or failures in our system of internal
controls, that could have a material adverse effect on our results of operations.
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Noncompliance with environmental or safety regulations could cause us to incur significant expenses
and harm our business.
As part of the development of our iMoD display technology, we are operating a research and
development fabrication facility. The development of iMoD display prototypes is a complex and
precise process involving hazardous materials subject to environmental and safety regulations.
Failure or inability to comply with existing or future environmental and safety regulations could
result in significant remediation liabilities, the imposition of fines and/or the suspension or
termination of development activities.
We cannot assure stockholders that our stock repurchase program will result in a positive return of
capital to stockholders.
At September 24, 2006, we have remaining authority to repurchase up to $0.9 billion of our
common stock, net of outstanding put options. There can be no assurance that stock repurchases will
create value for stockholders because the market price of the stock may decline significantly below
the levels at which we repurchased shares of stock. Our stock purchase program is intended to
deliver stockholder value over the long-term, but short-term stock price fluctuations can reduce
the programs effectiveness.
As part of our stock repurchase program, we may sell put options or engage in structured
derivative transactions to reduce the cost of repurchasing stock. In the event of a significant and
unexpected drop in stock price, these arrangements may require us to repurchase stock at price
levels that are significantly above the then-prevailing market price of our stock. Such
overpayments may have an adverse effect on the effectiveness of our overall stock repurchase
program and may lose value for our stockholders.
We cannot provide assurance that we will continue to declare dividends at all or in any particular
amounts.
We intend to continue to pay quarterly dividends subject to capital availability and periodic
determinations that cash dividends are in the best interest of our stockholders. Future dividends
may be affected by, among other items, our views on potential future capital requirements,
including those related to research and development, creation and expansion of sales distribution
channels and investments and acquisitions, legal risks, stock repurchase programs, changes in
federal income tax law and changes to our business model. Our dividend payments may change from
time to time, and we cannot provide assurance that we will continue to declare dividends at all or
in any particular amounts. A reduction in our dividend payments could have a negative effect on our
stock price.
Government regulation may adversely affect our business.
Our products and those of our customers and licensees are subject to various regulations,
including FCC regulations in the United States and other international regulations, as well as the
specifications of national, regional and international standards bodies. Changes in the regulation
of our activities, including changes in the allocation of available spectrum by the United States
government and other governments or exclusion or limitation of our technology or products by a
government or standards body, could have a material adverse effect on our business, operating
results, liquidity and financial position.
We may not be able to attract and retain qualified employees.
Our future success depends largely upon the continued service of our board members, executive
officers and other key management and technical personnel. Our success also depends on our ability
to continue to attract, retain and motivate qualified personnel. In addition, implementing our
product and business strategy requires specialized engineering and other talent, and our revenues
are highly dependent on technological and product innovations. The market for such specialized
engineering and other talented employees in our industry is extremely competitive. In addition,
existing immigration laws make it more difficult for us to recruit and retain highly skilled
foreign national graduates of U.S. universities, making the pool of available talent even smaller.
Key employees represent a significant asset, and the competition for these employees is intense in
the wireless communications industry. In the event of a labor shortage, or in the event of an
unfavorable change in prevailing labor and/or immigration laws, we could experience difficulty
attracting and retaining qualified employees. We continue to anticipate increases in human
resources, particularly in engineering, through fiscal 2007. If we are unable to attract and retain
the qualified employees that we need, our business may be harmed.
We may have particular difficulty attracting and retaining key personnel in periods of poor
operating performance given the significant use of incentive compensation by our competitors. We do
not have employment agreements with our key management personnel and do not maintain key person
life insurance on any of our personnel. The loss
37
of one or more of our key employees or our
inability to attract, retain and motivate qualified personnel could negatively impact our ability
to design, develop and commercialize our products and technology.
Since our inception, we have used stock options and other long-term equity incentives as a
fundamental component of our employee compensation packages. We believe that stock options and
other long-term equity incentives directly motivate our employees to maximize long-term stockholder
value and, using long-term vesting, encourage employees to remain with us. To the extent that new
regulations make it less attractive to grant options to employees, we may incur increased
compensation costs, change our equity compensation strategy or find it difficult to attract, retain
and motivate employees, each of which could materially and adversely affect our business.
Future changes in financial accounting standards or practices or existing taxation rules or
practices may cause adverse unexpected revenue fluctuations and affect our reported results of
operations.
A change in accounting standards or practices or a change in existing taxation rules or
practices can have a significant effect on our reported results and may even affect our reporting
of transactions completed before the change is effective. New and often complex accounting
pronouncements, taxation rules, and varying interpretations of accounting pronouncements and
taxation practice have occurred and may occur in the future. Changes to existing rules or the
questioning of current practices may adversely affect our reported financial results or the way we
conduct our business.
Compliance with changing regulation of corporate governance and public disclosure may result in
additional expenses.
Changing laws, regulations and standards relating to corporate governance and public
disclosure may create uncertainty regarding compliance matters. New or changed laws, regulations
and standards are subject to varying interpretations in many cases. As a result, their application
in practice may evolve over time. We are committed to maintaining high standards of corporate
governance and public disclosure. Complying with evolving interpretations of new or changed legal
requirements may cause us to incur higher costs as we revise current practices, policies and
procedures, and may divert management time and attention from revenue generating to compliance
activities. If our efforts to comply with new or changed laws, regulations and standards differ
from the activities intended by regulatory or governing bodies due to ambiguities related to
practice, our reputation might also be harmed. In addition, it has become more difficult and more
expensive for us to obtain director and officer
liability insurance, and we have purchased reduced coverage at substantially higher cost than
in the past. Further, our board members, chief executive officer and chief financial officer could
face an increased risk of personal liability in connection with the performance of their duties. As
a result, we may have difficulty attracting and retaining qualified board members and executive
officers, which could harm our business.
Our charter documents and Delaware law could limit transactions in which stockholders might obtain
a premium over current market prices.
Our certificate of incorporation includes a provision that requires the approval of holders of
at least 66 2/3% of our voting stock as a condition to certain mergers or other business
transactions with, or proposed by, a holder of 15% or more of our voting stock. Under our charter
documents, stockholders are not permitted to call special meetings of our stockholders or to act by
written consent. These charter provisions may discourage certain types of transactions involving an
actual or potential change in our control, including those offering stockholders a premium over
current market prices. These provisions may also limit our stockholders ability to approve
transactions that they may deem to be in their best interests.
Further,
our Board of Directors has the authority under Delaware law to fix the rights and
preferences of and issue shares of preferred stock, and our preferred share purchase rights
agreement will cause substantial dilution to the ownership of a person or group that attempts to
acquire us on terms not approved by our Board of Directors. While our Board of Directors approved
our preferred share purchase rights agreement to provide the board with greater ability to maximize
shareholder value, these rights could deter takeover attempts that the board finds inadequate and
make it more difficult to bring about a change in our ownership.
Item 1B. Unresolved Staff Comments
None
38
Item 2. Properties
At September 24, 2006, we occupied the indicated square footage in the owned or leased
facilities described below (square footage in thousands):
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
Total |
|
|
of |
|
|
|
|
|
Square |
|
|
Buildings |
|
Location |
|
Status |
|
Footage |
|
Primary Use |
18 |
|
United States |
|
Owned |
|
|
2,498 |
|
|
Executive and administrative offices, research and development, sales and marketing, service functions, manufacturing and network management hub. |
|
|
|
|
|
|
|
|
|
|
|
41 |
|
United States |
|
Leased |
|
|
1,578 |
|
|
Administrative offices, research and development, sales and marketing, service functions and network management hub. |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
India |
|
Leased |
|
|
154 |
|
|
Administrative offices, research and development and sales and marketing. |
|
|
|
|
|
|
|
|
|
|
|
8 |
|
Mexico |
|
Leased |
|
|
134 |
|
|
Administrative offices, sales and marketing, service functions, manufacturing and network operating centers. |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
China |
|
Leased |
|
|
88 |
|
|
Administrative offices, research and development, sales and marketing, service functions and network operating centers. |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
Korea |
|
Leased |
|
|
71 |
|
|
Administrative offices, research and development and sales and marketing. |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
England |
|
Leased |
|
|
62 |
|
|
Administrative offices, research and development and sales and marketing. |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
India |
|
Owned |
|
|
56 |
|
|
Administrative offices, research and development and sales and marketing. |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Israel |
|
Leased |
|
|
49 |
|
|
Administrative offices, research and development and sales and marketing. |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
Germany |
|
Leased |
|
|
31 |
|
|
Administrative offices, research and development and sales and marketing. |
|
|
|
|
|
|
|
|
|
|
|
23 |
|
Other International |
|
Leased |
|
|
102 |
|
|
Administrative offices, research and development and sales and marketing. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total square footage |
|
|
|
|
4,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the facilities above, we own or lease approximately 311,000 square feet of
properties that are leased or subleased to third parties. Our facility leases expire at varying
dates through 2016 not including renewals that would be at our option. As of September 24, 2006, we
also lease space on base station towers and buildings pursuant to 129 lease arrangements for our
MediaFLO USA network. The majority of our cell site leases have an initial term of five to seven
years with renewal options of up to five additional five-year periods.
We are constructing several facilities in San Diego, California totaling approximately 800,000
additional square feet to meet the requirements projected in our long-term business plan. We expect
to place the new facilities in service in fiscal 2007. We believe that our facilities will be
suitable and adequate for the present purposes and that
39
the productive capacity in such facilities
is substantially utilized. In the future, we may need to purchase, build or lease additional
facilities to meet the requirements projected in our long-term business plan.
Item 3. Legal Proceedings
Zoltar Satellite Alarm Systems, Inc. v. QUALCOMM Incorporated and SnapTrack, Inc.: On March
30, 2001, Zoltar Satellite Alarm Systems, Inc. filed suit against us and SnapTrack, Inc.
(SnapTrack), a QUALCOMM wholly-owned subsidiary, in the United States District Court for the
Northern District of California seeking monetary damages and injunctive relief based on the alleged
infringement of three patents. Following a verdict and finding of no infringement of Zoltars
patent claims, the Court entered a judgment in favor of us and SnapTrack on Zoltars complaint and
awarded us and SnapTrack our costs of suit. Zoltar filed a notice of appeal that was dismissed as
premature. While we have already obtained a verdict of non-infringement of Zoltars patents, our
additional affirmative claims seeking declarations of the non-enforceability and invalidity of
those patents were set to be retried in the same Court on October 10, 2006. However, Zoltar has
informed the Court that it will covenant not to sue us or SnapTrack on the patents. The final form
of dismissal and judgment in favor of us and SnapTrack remains to be determined.
Whale Telecom Ltd. v. QUALCOMM Incorporated: On November 15, 2004, Whale Telecom Ltd. sued us
in the New York State Supreme Court, County of New York, seeking monetary damages based on the
claim that we fraudulently induced it to enter into certain infrastructure services agreements in
1999 and later interfered with their performance of those agreements. On March 15, 2006, the Court
dismissed all claims against us. The plaintiff has filed a notice of appeal.
Broadcom Corporation v. QUALCOMM Incorporated: On May 18, 2005, Broadcom filed two actions in
the United States District Court for the Central District of California against us alleging
infringement of ten patents and seeking monetary damages and injunctive relief based thereon. On
the same date, Broadcom also filed a complaint in the United States International Trade Commission
(ITC) alleging infringement of five of the same patents at issue in the Central District Court
cases seeking a determination and relief under Section 337 of the Tariff Act of 1930. On July 1,
2005, Broadcom filed an action in the United States District Court for the District of New Jersey
against us 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. On September 1, 2006, the New Jersey District Court dismissed
the complaint; Broadcom has filed notice of appeal. Discovery is underway in one of the Central
District Court patent actions, with trial scheduled for May 2007. On December 12, 2005, the Central
District Court ordered two of the Broadcom patent claims filed in the other Central District patent
action (which is stayed pending completion of the ITC action) to be transferred to the Southern
District of California to be considered in the case filed by us on August 22, 2005. That case now
contains additional related claims filed by us and Broadcom. On February 14, 2006, the ITC hearing
commenced as to three of the patents alleged. On October 10, 2006, the Administrative Law Judge
(ALJ) issued an interim decision in which he recommended against downstream remedies, and found no
infringement by us 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. We will petition the
Commission for review of at least the limited infringement findings and patent validity findings.
QUALCOMM Incorporated v. Broadcom Corporation: On July 11, 2005, we 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 essential 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. On October
14, 2005, we filed another action in the United States District Court for the Southern District of
California against Broadcom alleging infringement of two patents, each of which relates to video
encoding and decoding for high-end multimedia processing, and seeking monetary damages and
injunctive relief based thereon. That action is scheduled for trial in January 2007. On March 24,
2006, we filed another action in the United States District Court for the Southern District of
California, alleging that Broadcom, during the period in which it has been attempting to bring to
market a WCDMA baseband solution, misappropriated our confidential and trade secret information
relating to our WCDMA baseband chips, and relating to our multimedia capabilities for such chips.
The complaint also asserts another patent claim against Broadcoms wireless local area network
products, including such capability bundled with Broadcoms WCDMA product offerings. Broadcom
counterclaimed with the assertion of two patents. On October 27, 2006, the Court issued a
preliminary injunction against Broadcom, prohibiting the future use or solicitation of certain of
our confidential business and technical documents and information.
40
QUALCOMM Incorporated and SnapTrack, Inc. v. Nokia Corporation and Nokia Inc.: On November 4,
2005, we, along with our wholly-owned subsidiary, SnapTrack, filed an action in the United States
District Court for the Southern District of California against Nokia alleging infringement of
eleven of our patents and one SnapTrack patent relating to GSM/GPRS/EDGE and position location and
seeking monetary damages and injunctive relief. The case is currently stayed pending a decision by
the Federal Circuit regarding Nokias arbitration demand. On May 24, 2006, we filed an action in
the Chancery Division of the High Court of Justice for England and Wales against Nokia alleging
infringement of two of our patents relating to GSM/GPRS/EDGE technology seeking monetary damages
and injunctive relief. On June 9, 2006, we filed a complaint with the ITC against Nokia alleging
importation of products that infringe six of our patents relating to power control, video encoding
and decoding, and power conservation mode technologies and seeking an exclusionary order and a
cease and desist order. On July 7, 2006, the ITC commenced an investigation. On August 9, 2006, we
filed an action in the District Court of Dusseldorf, Federal Republic of Germany, against Nokia
alleging infringement of two of our patents relating to GSM/GPRS/EDGE technology seeking monetary
damages and injunctive relief. On October 9, 2006, we filed an action in the High Court of Paris,
France against Nokia alleging infringement of two patents relating to GSM/GPRS/EDGE technology
seeking monetary damages and injunctive relief. On October 9, 2006, we filed an action in the Milan
Court, Italy against Nokia alleging infringement of two patents relating to GSM/GPRS/EDGE
technology seeking monetary damages and injunctive relief.
Nokia Corporation and Nokia Inc. v. QUALCOMM Incorporated: On August 9, 2006, Nokia
Corporation and Nokia, Inc. filed a complaint in Delaware Chancery Court seeking declaratory and
injunctive relief relating to alleged commitments made by us to wireless industry standards setting
organizations. We have moved to dismiss the complaint.
Other: We have been named, along with many other manufacturers of wireless phones, wireless
operators and industry-related organizations, as a defendant in several purported class action
lawsuits, and several individually filed actions pending in Pennsylvania, Washington D.C., and
Louisiana, seeking monetary damages arising out of
its sale of cellular phones. The courts that have reviewed similar claims against other
companies to date have held that there was insufficient scientific basis for the plaintiffs claims
in those cases.
On October 28, 2005, it was reported that six companies (Broadcom, Nokia, Texas Instruments,
NEC, Panasonic and Ericsson) filed complaints with the European Commission, alleging that we
violated European Union competition law in its WCDMA licensing practices. We have received the
complaints and have submitted a reply.
It
has been reported that two U.S. companies (Texas Instruments and
Broadcom) and two South Korean
companies (Nextreaming Corp. and THINmultimedia Inc.) have filed complaints with the Korean Fair
Trade Commission alleging that our business practices are, in some way, a violation of South Korean
anti-trust regulations. To date, we have not received the complaints.
Although there can be no assurance that unfavorable outcomes in any of the foregoing matters
would not have a material adverse effect on our operating results, liquidity or financial position,
we believe the claims made by other parties are without merit and will vigorously defend the
actions. We have not recorded any accrual for contingent liability associated with the legal
proceedings described above based on our belief that a liability, while possible, is not probable.
Further, any possible range of loss cannot be estimated at this time. We are engaged in numerous
other legal actions arising in the ordinary course of its business and believe that the ultimate
outcome of these actions will not have a material adverse effect on its operating results,
liquidity or financial position. In addition, some matters that have previously been disclosed may
no longer be described in this Annual Report because of rulings in the case, settlements, changes
in our business or other developments rendering them, in our judgment, no longer material to our
operating results, liquidity or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter ended September 24,
2006.
41
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
On July 13, 2004, we announced a two-for-one stock split in the form of a stock dividend.
Stock was distributed on August 13, 2004 to stockholders of record as of July 23, 2004. All
references in this Annual Report to number of shares and per share amounts reflect the stock split.
Market Information
Our common stock is traded on the NASDAQ Stock Market LLC under the symbol QCOM. The
following table sets forth the range of high and low sales prices on the NASDAQ Stock Market of the
common stock for the periods indicated, as reported by NASDAQ. Such quotations represent
inter-dealer prices without retail markup, markdown or commission and may not necessarily represent
actual transactions.
|
|
|
|
|
|
|
|
|
|
|
High ($) |
|
Low ($) |
Fiscal 2005 |
|
|
|
|
|
|
|
|
First quarter |
|
|
44.99 |
|
|
|
37.71 |
|
Second quarter |
|
|
44.91 |
|
|
|
33.99 |
|
Third quarter |
|
|
38.52 |
|
|
|
32.08 |
|
Fourth quarter |
|
|
44.92 |
|
|
|
32.98 |
|
|
|
|
|
|
|
|
|
|
Fiscal 2006 |
|
|
|
|
|
|
|
|
First quarter |
|
|
46.60 |
|
|
|
39.02 |
|
Second quarter |
|
|
51.18 |
|
|
|
42.91 |
|
Third quarter |
|
|
53.01 |
|
|
|
38.77 |
|
Fourth quarter |
|
|
40.92 |
|
|
|
32.76 |
|
As
of October 31, 2006, there were 10,549 holders of record of our common stock. On
October 31, 2006, the last sale price reported on the NASDAQ Stock Market LLC for our common stock
was $36.39 per share.
Dividends
On March 8, 2005, we announced an increase in our quarterly dividend from $0.07 to $0.09 per
share on our common stock. On March 7, 2006, we announced an increase in our quarterly dividend
from $0.09 to $0.12 per share on our common stock. Cash dividends announced in fiscal 2005 and 2006
were as follows (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative |
|
|
|
Per Share |
|
|
Total |
|
|
by Fiscal Year |
|
Fiscal 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
$ |
0.07 |
|
|
$ |
115 |
|
|
$ |
115 |
|
Second quarter |
|
|
0.07 |
|
|
|
115 |
|
|
|
230 |
|
Third quarter |
|
|
0.09 |
|
|
|
147 |
|
|
|
377 |
|
Fourth quarter |
|
|
0.09 |
|
|
|
147 |
|
|
|
524 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0.32 |
|
|
$ |
524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
$ |
0.09 |
|
|
$ |
148 |
|
|
$ |
148 |
|
Second quarter |
|
|
0.09 |
|
|
|
150 |
|
|
|
298 |
|
Third quarter |
|
|
0.12 |
|
|
|
202 |
|
|
|
500 |
|
Fourth quarter |
|
|
0.12 |
|
|
|
198 |
|
|
|
698 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0.42 |
|
|
$ |
698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On October 5, 2006, we announced a cash dividend of $0.12 per share on our common stock,
payable on January 4, 2007 to stockholders of record as of December 7, 2006. We intend to continue
to pay quarterly dividends subject to capital availability and periodic determinations that cash
dividends are in the best interests of our stockholders. Future dividends may be affected by, among
other items, our views on potential future capital requirements,
42
including those relating to
research and development, creation and expansion of sales distribution channels and investments and
acquisitions, legal risks, stock repurchase programs, changes in federal income tax law and changes
to our business model.
Stock Options
Our stock option plans are part of a broad-based, long-term retention program that is intended
to attract and retain talented employees and directors and align stockholder and employee
interests.
Pursuant to our 2006 Long-Term Incentive Plan (2006 Plan), we grant options to selected
employees, directors and consultants to purchase shares of our common stock at a price not less
than the fair market value of the stock at the date of grant. The 2006 Plan provides for the grant
of both incentive and non-qualified stock options as well as stock appreciation rights, restricted
stock, restricted stock units, performance units and shares and other stock-based awards.
Generally, options outstanding vest over five years and are exercisable for up to 10 years from the
grant date. The Board of Directors may terminate the 2006 Plan at any time.
Additional information regarding our stock option plans and plan activity for fiscal 2006,
2005 and 2004 is provided in the notes to our consolidated financial statements in this Annual
Report in Notes to Consolidated Financial Statements, Note 8 Employee Benefit Plans and in our
2007 Proxy Statement under the heading Equity Compensation Plan Information. All of our equity
compensation plans have been approved by our stockholders.
Issuer Purchases of Equity Securities
Issuer purchases of equity securities (in millions, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
Approximate Dollar Value |
|
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
of Shares that May Yet Be |
|
|
Total Number of |
|
Average Price Paid |
|
Announced Plans or |
|
Purchased Under the |
|
|
Shares Purchased |
|
Per Share (1) |
|
Programs (2) |
|
Plans or Programs (3) |
June 26, 2006 to
July 23, 2006 |
|
|
5,641,028 |
|
|
$ |
42.11 |
|
|
|
5,641,028 |
|
|
$ |
1,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 24, 2006 to
August 20, 2006 |
|
|
1,000,000 |
|
|
|
48.50 |
|
|
|
1,000,000 |
|
|
|
1,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 21, 2006 to
September 24, 2006 |
|
|
1,000,000 |
|
|
|
49.00 |
|
|
|
1,000,000 |
|
|
|
1,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
7,641,028 |
|
|
$ |
43.84 |
|
|
|
7,641,028 |
|
|
$ |
1,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Average price paid per share excludes cash paid for commissions. We repurchased
2,000,000 shares in the fourth quarter of 2006 upon the exercise of two outstanding put options.
Premiums totaling $5 million were excluded from the average price paid per share. If the premiums
had been included, the average price paid per share for the purchases of shares made during the
fourth quarter would have been $43.23. |
|
(2) |
|
On November 7, 2005, we announced that we authorized the expenditure of up to $2.5
billion to repurchase shares of our common stock with no expiration date. The $2.5 billion stock
repurchase program replaced a $2.0 billion stock repurchase program, of which approximately $1.0
billion remained authorized for repurchases. |
|
(3) |
|
The approximate dollar value of shares that may yet be purchased has not been
reduced by the net cost of $89 million (net of the premiums received) of 2,000,000 shares that may
be repurchased related to put options we sold during fiscal 2006. |
43
Item 6. Selected Financial Data
The following balance sheet data and statement of operations data for the five fiscal years
ended September 24, 2006, September 25, 2005, September 26, 2004, September 28, 2003 and September
29, 2002 were derived from our audited consolidated financial statements. Consolidated balance
sheets at September 24, 2006 and September 25, 2005 and the related consolidated statements of
operations and cash flows for fiscal 2006, 2005 and 2004 and notes thereto appear elsewhere
herein. The data should be read in conjunction with the annual consolidated financial statements,
related notes and other financial information appearing elsewhere herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended (1) |
|
|
|
September 24, |
|
|
September 25, |
|
|
September 26, |
|
|
September 28, |
|
|
September 29, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 (2)(4) |
|
|
2003 (2) |
|
|
2002 (2) |
|
|
|
(In millions, except per share data) |
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
7,526 |
|
|
$ |
5,673 |
|
|
$ |
4,880 |
|
|
$ |
3,847 |
|
|
$ |
2,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
2,690 |
|
|
|
2,386 |
|
|
|
2,129 |
|
|
|
1,573 |
|
|
|
840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
2,470 |
|
|
|
2,143 |
|
|
|
1,725 |
|
|
|
1,029 |
|
|
|
525 |
|
Discontinued operations, net of tax |
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
(202 |
) |
|
|
(165 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,470 |
|
|
$ |
2,143 |
|
|
$ |
1,720 |
|
|
$ |
827 |
|
|
$ |
360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share: (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.49 |
|
|
$ |
1.31 |
|
|
$ |
1.07 |
|
|
$ |
0.65 |
|
|
$ |
0.34 |
|
Discontinued operations, net of tax |
|
|
|
|
|
|
|
|
|
|
(0.01 |
) |
|
|
(0.13 |
) |
|
|
(0.11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1.49 |
|
|
$ |
1.31 |
|
|
$ |
1.06 |
|
|
$ |
0.52 |
|
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share: (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.44 |
|
|
$ |
1.26 |
|
|
$ |
1.03 |
|
|
$ |
0.63 |
|
|
$ |
0.32 |
|
Discontinued operations, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.12 |
) |
|
|
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1.44 |
|
|
$ |
1.26 |
|
|
$ |
1.03 |
|
|
$ |
0.51 |
|
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share announced |
|
$ |
0.420 |
|
|
$ |
0.320 |
|
|
$ |
0.190 |
|
|
$ |
0.085 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in earnings per share calculations: (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
1,659 |
|
|
|
1,638 |
|
|
|
1,616 |
|
|
|
1,579 |
|
|
|
1,542 |
|
Diluted |
|
|
1,711 |
|
|
|
1,694 |
|
|
|
1,675 |
|
|
|
1,636 |
|
|
|
1,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and marketable securities |
|
$ |
9,949 |
|
|
$ |
8,681 |
|
|
$ |
7,635 |
|
|
$ |
5,372 |
|
|
$ |
3,200 |
|
Total assets |
|
|
15,208 |
|
|
|
12,479 |
|
|
|
10,820 |
|
|
|
8,822 |
|
|
|
6,506 |
|
Long-term debt (5) |
|
|
58 |
|
|
|
3 |
|
|
|
|
|
|
|
123 |
|
|
|
94 |
|
Total stockholders equity |
|
|
13,406 |
|
|
|
11,119 |
|
|
|
9,664 |
|
|
|
7,598 |
|
|
|
5,392 |
|
|
|
|
(1) |
|
Our fiscal year ends on the last Sunday in September. The five fiscal years
ended September 24, 2006, September 25, 2005, September 26, 2004, September 28, 2003 and
September 29, 2002 each included 52 weeks. |
|
(2) |
|
During fiscal 2004, we sold the Vésper Operating Companies and the Vésper Towers and
returned personal mobile service (SMP) licenses to Anatel, the telecommunications regulatory
agency in Brazil. The results of operations, including gains and losses realized on the sales
transactions and the SMP licenses, are presented as discontinued operations. |
|
(3) |
|
We effected a two-for-one stock split in August 2004. All references to number of
shares and per share amounts reflect this stock split. |
|
(4) |
|
Prior to the fourth quarter of fiscal 2004, we recorded royalty revenues from
certain licensees based on our estimates of royalties during the period they were earned.
Starting in the fourth quarter of fiscal 2004, we began recognizing royalty revenues solely
based on royalties reported by licensees during the quarter. The change in the timing of
recognizing royalty revenue was made prospectively and had the initial one-time effect of
reducing royalty revenues recorded in the fourth quarter of fiscal 2004. See Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations in this
Annual Report for more information. |
|
(5) |
|
Long-term debt for the years ended September 24, 2006 and September 25, 2005
consisted of capital lease obligations, which are included in other liabilities in the
consolidated balance sheets. |
44
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
In addition to historical information, the following discussion contains forward-looking
statements that are subject to risks and uncertainties. Actual results may differ substantially
from those referred to herein due to a number of factors, including but not limited to risks
described in the section entitled Risk Factors and elsewhere in this Annual Report.
Overview
Recent Highlights
Revenues for fiscal 2006 were $7.53 billion, with net income of $2.47 billion. The following
recent developments occurred with respect to key elements of our business or our industry:
During fiscal 2006:
|
|
|
Worldwide wireless subscribers grew by more than 24% to reach approximately 2.5 billion. (1) |
|
|
|
|
CDMA subscribers, including both 2G (cdmaOne) and 3G (CDMA2000 1X, 1xEV-DO and
WCDMA), grew to 17% of total worldwide wireless subscribers to date. (1) |
|
|
|
|
3G subscribers (all CDMA-based) grew to approximately 402 million worldwide through
September 2006, including approximately 272 million CDMA2000 1X subscribers,
approximately 85 million WCDMA subscribers and approximately 45 million 1xEV-DO
subscribers. (1) |
|
|
|
|
CDMA-based handset shipments totaled approximately 255 million units, an increase of
40% over the 182 million units shipped in fiscal 2005. (2) |
|
|
|
|
CDMA-based handset shipments grew faster than total worldwide handsets and represent
an estimated 28% of the total (916 million) worldwide handset
shipments, compared to 25%
of the total (726 million) shipments in fiscal 2005. (3) |
|
|
|
|
Average selling prices of CDMA-based handsets were approximately $215, same as the
prior year. (2) |
|
|
|
|
We shipped approximately 207 million Mobile Station Modem (MSM) integrated circuits
for CDMA-based phones and data modules (all of which were 3G, including CDMA2000 1X,
1xEV-DO and WCDMA), an increase of 37%, compared to approximately 151 million MSM
integrated circuits in the prior fiscal year. |
During the fourth quarter of fiscal 2006:
|
|
|
We estimate the ratio of WCDMA reported royalties to total reported royalties was
49%, up from 41% reported in the year ago quarter. |
|
|
|
|
We estimate that, in Western Europe, WCDMA handset sales represented approximately
41% of all manufacturer handset sales during the period from April 2006 through June
2006, up from 14% in the year ago quarter. (4) |
|
|
|
(1) |
|
According to Wireless Intelligence, an independent source of wireless
operator data. |
|
(2) |
|
Unit shipments and average selling prices are for the period from July through
June based on reports provided during the fiscal year by our licensees/manufacturers. |
|
(3) |
|
Based on reports by Strategy Analytics, a global research and consulting firm in
their Global Handset Market Share Updates. |
|
(4) |
|
Based on estimates derived from our licensee reports and estimates from the
Yankee Group, a global market intelligence and advisory firm in the technology and
telecommunications industry. |
Our Business and Operating Segments
We design, manufacture, have manufactured on our behalf and market digital wireless
telecommunications products and services based on our CDMA technology and other technologies. We
derive revenue principally from sales of integrated circuit products, from license fees and
royalties for use of our intellectual property, from services and related hardware sales and from
software development and licensing and related services. Operating expenses primarily consist of
cost of equipment and services, research and development and selling, general and administrative
expenses.
45
We conduct business primarily through four reportable segments. These segments are: QUALCOMM
CDMA Technologies, or QCT; QUALCOMM Technology Licensing, or QTL; QUALCOMM Wireless & Internet, or
QWI; and QUALCOMM Strategic Initiatives, or QSI.
QCT is a leading developer and supplier of CDMA-based integrated circuits and system software
for wireless voice and data communications, multimedia functions and global positioning system
products. QCTs integrated circuit products and system software are used in wireless devices,
particularly mobile phones, data cards and infrastructure equipment. The integrated circuits for
wireless phones include the Mobile Station Modem (MSM), Radio Frequency (RF) and Power Management
(PM) devices. These integrated circuits for wireless phones and system software perform voice and
data communication, multimedia and global positioning functions, radio conversion between RF and
baseband signals and power management. The infrastructure equipment integrated circuits and system
software perform the core baseband CDMA modem functionality in the wireless operators equipment
providing wireless standards-compliant processing of voice and data signals to and from wireless
phones. QCTs system software enables the other phone components to interface with the integrated
circuit products and is the foundation software enabling phone manufacturers to develop handsets
utilizing the functionality within the integrated circuits. In addition to the key components in a
wireless system, QCT provides system reference designs and development tools to assist in
customizing wireless phones and user interfaces, to integrate our products with components
developed by others, and to test interoperability with existing and planned networks. QCT revenues
comprised 58%, 58% and 64% of total consolidated revenues in fiscal 2006, 2005 and 2004,
respectively.
QCT utilizes a fabless production business model, which means that we do not own or operate
foundries for the production of silicon wafers from which our integrated circuits are made.
Integrated circuits are die, cut from silicon wafers, that have completed the assembly and final
test manufacturing processes. Die, cut from silicon wafers, are the essential components of all of
our integrated circuits and a significant portion of the total integrated circuit cost. We rely on
independent third party suppliers to perform the manufacturing and assembly, and most of the
testing, of our integrated circuits. Our suppliers are also responsible for the procurement of most
of the raw materials used in the production of our integrated circuits. The majority of our
integrated circuits are purchased on a turnkey basis, in which our foundry suppliers are
responsible for delivering fully assembled and tested integrated circuits. We also employ a
two-stage manufacturing business model in which we purchase completed die directly from
semiconductor manufacturing foundries, and directly manage and contract with third party
manufacturers for back-end assembly and test services. We refer to this two-stage manufacturing
business model as Integrated Fabless Manufacturing (IFM). IBM, Taiwan Semiconductor Manufacturing
Company, Ltd. and United Microelectronics are the primary foundry suppliers for our family of
baseband integrated circuits. Atmel, Freescale (formerly Motorola Semiconductor) and IBM are the
primary foundry suppliers for our family of analog, radio frequency and power management integrated
circuits. Our fabless model provides us the flexibility to select suppliers that offer advanced
process technologies to manufacture, assemble and test our integrated circuits at a competitive
price.
QTL grants licenses to use portions of our intellectual property portfolio, which includes
certain patent rights essential to and/or useful in the manufacture and sale of certain wireless
products, including, without limitation, products implementing cdmaOne, CDMA2000, WCDMA, CDMA TDD
and/or OFDMA standards and their derivatives. QTL receives revenue from license fees as well as
ongoing royalties based on worldwide sales by licensees of products incorporating or using our
intellectual property. License fees are fixed amounts paid in one or more installments. Ongoing
royalties are generally based upon a percentage of the wholesale selling price of licensed
products, net of certain permissible deductions (e.g. certain shipping costs, packing costs, VAT,
etc.). QTL revenues comprised 35%, 32% and 27% of total consolidated revenues in fiscal 2006, 2005
and 2004, respectively. The vast majority of such revenues has been generated primarily through our
licensees sales of cdmaOne, CDMA2000 and WCDMA products.
QWI, which includes QUALCOMM Wireless Business Solutions (QWBS), QUALCOMM Internet Services
(QIS) and QUALCOMM Government Technologies (QGOV), generates revenues primarily through mobile
communication products and services, software and software development aimed at support and
delivery of wireless applications. QWBS provides satellite and terrestrial-based two-way data
messaging, position reporting and wireless application services to transportation companies,
private fleets, construction equipment fleets and other enterprise companies. QIS provides
BREW-based (Binary Runtime Environment for Wireless) products that include user interface and
content delivery and management products and services for the wireless industry. QIS
also provides QChat and QPoint products and services. QChat enables virtually instantaneous
push-to-talk functionality on CDMA-based wireless devices while QPoint enables operators to offer
E-911 and location-based applications and
46
services. The QGOV division provides development,
hardware and analytical expertise to United States government agencies involving wireless
communications technologies. QWI revenues comprised 9%, 11% and 12% of total consolidated revenues
in fiscal 2006, 2005 and 2004, respectively.
QSI manages the Companys strategic investment activities, including MediaFLO USA, Inc.
(MediaFLO USA), the Companys wholly-owned wireless multimedia operator subsidiary. QSI also makes
strategic investments to promote the worldwide adoption of CDMA-based products and services. Our
strategy is to invest in CDMA-based operators, licensed device manufacturers and start-up companies
that we believe open new markets for CDMA technology, support the design and introduction of new
CDMA-based products or possess unique capabilities or technology. Our MediaFLO USA subsidiary
expects to offer a nationwide multicasting network based on our MediaFLO MDS and FLO technology.
This network is expected to be utilized as a shared resource for wireless operators and their
customers in the United States. The commercial availability of the MediaFLO USA network and service
will be determined by our wireless operator partners. MediaFLO USAs network will use the 700 MHz
spectrum for which we hold licenses for a nationwide footprint. Additionally, MediaFLO USA plans to
procure, aggregate and distribute content in service packages which we will make available on a
wholesale basis to our wireless operator customers (whether they operate on CDMA or GSM/WCDMA
networks) in the United States. Distribution, marketing, billing and customer relationships are
expected to remain services provided by our wireless operator partners. As part of our strategic
investment activities, we may consider various corporate structuring and exit strategies at some
point in the future, which may include distribution of our ownership interest in MediaFLO USA to
our stockholders in a spin-off transaction.
Nonreportable segments include: the QUALCOMM Wireless Systems division, which sells products
that operate on the Globalstar low-Earth-orbit satellite-based telecommunications system and
provides related services; the QUALCOMM MEMS Technologies division, which is developing an iMoD
display technology based on micro-electro-mechanical-system (MEMS) structure combined with thin
film optics; the QUALCOMM Flarion Technologies division, which is developing OFDM/OFDMA
technologies; and other product initiatives.
Looking Forward
The deployment of 3G networks (CDMA2000 and WCDMA) enables higher voice capacity and data
rates, thereby supporting more minutes of use and data intensive applications like multimedia. As a
result, we expect continued growth in demand for 3G products and services around the world:
|
|
|
The deployment of CDMA2000 networks is expected to continue. |
|
o |
|
More than 170 operators have launched CDMA2000 1X; (1) |
|
|
o |
|
More than 50 operators have deployed the higher data speeds of
1xEV-DO and several are preparing to deploy EV-DO Revision A. (1) |
|
|
|
GSM operators are expected to continue transitioning to WCDMA networks. |
|
o |
|
More than 122 GSM operators have migrated their networks to WCDMA; (2) |
|
|
o |
|
More than 65 operators have launched commercial HSDPA networks
and manufacturers are beginning to trial the faster uplink speeds of HSUPA.
(2) |
|
|
|
We expect WCDMA phone prices to segment into high and low end, with low-end prices
decreasing significantly as volumes increase and competition intensifies among WCDMA
phone manufacturers and integrated circuit suppliers, as happened with CDMA2000. We
expect phone market share will change and competition will increase as WCDMA networks
grow and expand beyond Japan and Western Europe into the United States and China. |
|
|
|
|
To meet growing demand for advanced 3G phones and increased multimedia MSM
functionality, we intend to continue to invest significant resources toward the
development of multimedia products,
software and services for the wireless industry. However, we expect that a portion of our
research and development initiatives in fiscal 2007 will not reach commercialization
until several years in the future. |
47
|
|
|
We expect demand for low-end phones to continue, and we have invested resources to
develop single chip products, which integrate the baseband, radio frequency and power
management chips into one package, lowering component counts and enabling faster
time-to-market. While we are moving aggressively to address the low-end market more
effectively with CDMA-based products, we still face significant competition from
GSM-based products at the very low end, particularly in Brazil and India. |
|
|
|
|
We will continue to invest in the evolution of CDMA and a broad range of other
technologies as part of our vision to enable a range of technologies, each optimized for
specific services, including the following products and technologies: |
|
o |
|
The BREW applications platform, content delivery services and
user interfaces; |
|
|
o |
|
The MediaFLO Media Distribution System (MDS) and FLO technology
for delivery of multimedia content; |
|
|
o |
|
The DO Multicarrier Multilink eXtensions (DMMX) and HSDPA
Multicarrier Multilink eXtensions (HMMX) platforms to support the long-term
roadmaps of 1xEV-DO and HSDPA; |
|
|
o |
|
OFDM and OFDMA-based technologies; |
|
|
o |
|
Our iMoD display technology. |
|
|
|
We will continue to devote resources to working with and educating all participants
in the wireless value chain as to the benefits of our business model in promoting a
highly competitive and innovative wireless market. However, we expect that certain
companies may continue to be dissatisfied with the need to pay fair royalties for the
use of our technology and not welcome the success of our business model in enabling new,
highly cost-effective competitors to their products. We expect that such companies will
continue their attacks on our business model in various forums throughout the world. |
|
|
|
|
In addition, our license agreement with Nokia Corp. expires in part on April 9, 2007. If we cannot
conclude an extension or a new license agreement beyond that time period, Nokias rights to sell
subscriber products under most of our patents will expire, as will our rights to sell integrated
circuits under Nokias patents. While we continue to work with Nokia to see if we can reach an
agreement, there is no guarantee that we will be able to successfully resolve this matter before
April 9, 2007, and little progress has been made to date. If we are unable to reach agreement, we
will aggressively pursue all our legal and business remedies and assume that Nokia will do
likewise. Nokia has stated publicly that it does not intend to pay us for its use of our patents
prior to the resolution of the dispute. As a result, under generally accepted accounting
principles, we will be unable to record royalty revenue attributable to Nokias sales until a court
awards damages or agreement is reached, potentially resulting in a negative impact on future
royalty revenues reported by our QTL segment. |
|
|
|
(1) |
|
According to public reports made available at www.cdg.org. |
|
(2) |
|
As reported by the Global mobile Suppliers Association, an international
organization of WCDMA and GSM (Global System for Mobile Communications) suppliers in their
September and October 2006 reports. |
Further discussion of risks related to our business is presented in the Risk Factors
included in this Annual Report.
Revenue Concentrations
Revenues from customers in South Korea, Japan, China and the United States comprised 32%, 21%,
17% and 13%, respectively, of total consolidated revenues in fiscal 2006 as compared to 37%, 21%,
11% and 18%, respectively, in fiscal 2005, and 43%, 18%, 7% and 21%, respectively, in fiscal 2004.
We distinguish revenue from external customers by geographic areas based on customer location.
Revenues from customers in China increased as a percentage of total revenues in fiscal 2006 and in
fiscal 2005, as compared to the prior years, primarily due to the maturing of CDMA-based
manufacturers in China that are experiencing wider adoption of their products in international
markets for low priced CDMA2000 phones and WCDMA phones. Combined revenues from customers in South
Korea, Japan and the United States decreased as a percentage of total revenues, from 82% in fiscal
2004 to 76% in fiscal 2005 and 66% in fiscal 2006, primarily due to increases in the percentage of
revenues from WCDMA manufacturers in Western Europe and increased activity by manufacturers in
China.
Critical Accounting Policies and Estimates
Our discussion and analysis of our results of operations and liquidity and capital resources
are based on our consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and
judgments, including those related to revenue recognition, valuation of intangible assets and
investments, share-based payments, income taxes, and litigation. We base our estimates on
historical and anticipated results and trends and on various other assumptions that we believe are
reasonable under the circumstances, including assumptions as to future events. These estimates form
the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. By their nature, estimates are subject to an inherent degree
of uncertainty. Actual results that
48
differ from our estimates could have a significant adverse
effect on our operating results and financial position. We believe that the following significant
accounting policies and assumptions may involve a higher degree of judgment and complexity than
others.
Revenue Recognition. We derive revenue principally from sales of integrated circuit products,
from royalties and license fees for our intellectual property, from messaging and other services
and related hardware sales and from software development and licensing and related services. The
timing of revenue recognition and the amount of revenue actually recognized in each case depends
upon a variety of factors, including the specific terms of each arrangement and the nature of our
deliverables and obligations. Determination of the appropriate amount of revenue recognized
involves judgments and estimates that we believe are reasonable, but it is possible that actual
results may differ from our estimates. We record reductions to revenue for customer incentive
programs, including special pricing agreements and other volume-related rebate programs. Such
reductions to revenue are estimates, which are based on a number of factors, including our
assumptions related to historical and projected customer sales volumes and the contractual
provisions of our customer agreements.
We license rights to use portions of our intellectual property portfolio, which includes
certain patent rights essential to and/or useful in the manufacture and sale of certain wireless
products, including, without limitation, products implementing cdmaOne, CDMA2000, WCDMA, CDMA TDD
and/or the OFDMA standards and their derivatives. Licensees typically pay a license fee in one or
more installments and ongoing royalties based on their sales of products incorporating or using our
licensed intellectual property. License fees are recognized over the estimated period of future
benefit to the average licensee, typically five to seven years. We earn royalties on such licensed
CDMA products sold worldwide by our licensees at the time that the licensees sales occur. Our
licensees, however, do not report and pay royalties owed for sales in any given quarter until after
the conclusion of that quarter, and, in some instances, although royalties are reported quarterly,
payment is on a semi-annual basis. During the periods preceding the fourth quarter of fiscal 2004,
we estimated and recorded 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.
Valuation of Intangible Assets and Investments. Our business acquisitions typically result in
the recording of goodwill and other intangible assets, and the recorded values of those assets may
become impaired in the future. As of September 24, 2006, our goodwill and intangible assets, net of
accumulated amortization, were $1.2 billion and $450 million, respectively. The determination of
the value of such intangible assets requires management to make estimates and assumptions that
affect our consolidated financial statements. We assess potential impairments to intangible assets
when there is evidence that events or changes in circumstances indicate that the carrying amount of
an asset may not be recovered. Our judgments regarding the existence of impairment indicators and
future cash flows related to intangible assets are based on operational performance of our
businesses, market conditions and other factors. Although there are inherent uncertainties in this
assessment process, the estimates and assumptions we use, including estimates of future cash flows,
volumes, market penetration and discount rates, are consistent with our internal planning. If these
estimates or their related assumptions change in the future, we may be required to record an
impairment charge on all or a portion of our goodwill and intangible assets. Furthermore, we cannot
predict the occurrence of future impairment-triggering events nor the impact such events might
have on our reported asset values. Future events could cause us to conclude that impairment
indicators exist and that goodwill or other intangible assets associated with our acquired
businesses is impaired. Any resulting impairment loss could have an adverse impact on our results
of operations.
We hold minority investments in publicly-traded companies whose share prices may be highly
volatile. These investments, which are recorded at fair value with increases or decreases generally
recorded through stockholders equity as other comprehensive income or loss, totaled $1.3 billion
at September 24, 2006. We record impairment charges when we believe an investment has experienced a
decline that is other than temporary. The determination
49
that a decline is other-than-temporary is
subjective and influenced by many factors. Future adverse changes in market conditions or poor
operating results of investees could result in losses or an inability to recover the carrying value
of the investments, thereby possibly requiring impairment charges in the future. When assessing a
publicly-traded investment for an other-than-temporary decline in value, we consider such factors
as, among other things, how significant the decline in value is as a percentage of the original
cost, how long the market value of the investment has been less than its original cost, the
performance of the investees stock price in relation to the stock price of its competitors within
the industry and the market in general and analyst recommendations. We also review the financial
statements of the investee to determine if the investee is experiencing financial difficulties. In
the event our judgments change as to other-than-temporary declines in value, we may record an
impairment loss which could have an adverse impact on our results of operations. During fiscal
2006, 2005 and 2004, we recorded $15 million, $12 million and $12 million, respectively, in
other-than-temporary losses on our minority investments in publicly-traded companies.
We hold minority strategic investments in private companies whose values are difficult to
determine. These investments totaled $94 million at September 24, 2006. We record impairment
charges 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 adverse changes in market conditions or poor operating results of investees could result in
losses or an inability to recover the carrying value of the investments, thereby possibly requiring
impairment charges in the future. When assessing investments in private companies for an
other-than-temporary decline in value, we consider such factors as, among other things, the share
price from the investees latest financing round, the performance of the investee in relation to
its own operating targets and its business plan, the investees revenue and cost trends, the
investees liquidity and cash position, including its cash burn rate, and market acceptance of the
investees 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 investees competitors and/or industry and the outlook of the overall industry in which the
investee operates. In the event our judgments change as to other-than temporary declines in value,
we may record an impairment loss which could have an adverse impact on our results of operations.
During fiscal 2006 and 2005, we recorded $4 million and $1 million, respectively, in
other-than-temporary losses on our investments in private companies. Such losses were not
significant in fiscal 2004.
Share-Based Payments. We grant options to purchase our common stock to our employees and
directors under our stock option plans. Eligible employees can also purchase shares of our common
stock at 85% of the lower of the fair market value on the first or the last day of each six-month
offering period under our employee stock purchase plans. The benefits provided under these plans
are share-based payments subject to the provisions of revised Statement of Financial Accounting
Standards No. 123 (FAS 123R), Share-Based Payment. Effective September 26, 2005, we use the fair
value method to apply the provisions of FAS 123R with a modified prospective application which
provides for certain changes to the method for estimating the value of share-based compensation.
The valuation provisions of FAS 123R apply to new awards and to awards that are outstanding on the
effective date, which are subsequently modified or cancelled. Under the modified prospective
application method, prior periods are not revised for comparative purposes. Share-based
compensation expense recognized under FAS 123R for fiscal 2006 was $495 million. At September 24,
2006, total unrecognized estimated compensation expense related to non-vested stock options granted
prior to that date was $1.2 billion, which is expected to be recognized over a weighted-average
period of 1.7 years. Net stock options, after forfeitures and cancellations, granted during fiscal
2006 represented 1.9% of outstanding shares as of the beginning of the fiscal period. Total stock
options granted during fiscal 2006 represented 2.1% of outstanding shares as of the end of the
fiscal period.
Upon adoption of FAS 123R, we began estimating the value of stock option awards on the date of
grant using a lattice binomial option-pricing model (binomial model). Prior to the adoption of FAS
123R, the value of all share-based awards was estimated on the date of grant using the
Black-Scholes option-pricing model (Black-Scholes model) for the pro forma information required to
be disclosed under FAS 123. The determination of the fair value of share-based payment awards on
the date of grant using an option-pricing model is affected by our stock price as well as
assumptions regarding a number of complex and subjective variables. These variables include, but
are not limited to, our expected stock price volatility over the term of the awards, actual and
projected employee stock option exercise behaviors, risk-free interest rate and expected dividends.
50
If factors change and we employ different assumptions in the application of FAS 123R in future
periods, the compensation expense that we record under FAS 123R may differ significantly from what
we have recorded in the current period. Therefore, we believe it is important for investors to be
aware of the high degree of subjectivity involved when using option-pricing models to estimate
share-based compensation under FAS 123R. Option-pricing models were developed for use in estimating
the value of traded options that have no vesting or hedging restrictions, are fully transferable
and do not cause dilution. Because our share-based payments have characteristics significantly
different from those of freely traded options, and because changes in the subjective input
assumptions can materially affect our estimates of fair values, in our opinion, existing valuation
models, including the Black-Scholes and lattice binomial models, may not provide reliable measures
of the fair values of our share-based compensation awards. Consequently, there is a risk that our
estimates of the fair values of our share-based compensation awards on the grant dates may bear
little resemblance to the actual values realized upon the exercise, expiration, early termination
or forfeiture of those share-based payments in the future. Certain share-based payments, such as
employee stock options, may expire worthless or otherwise result in zero intrinsic value as
compared to the fair values originally estimated on the grant date and reported in our consolidated
financial statements. Alternatively, value may be realized from these instruments that are
significantly in excess of the fair values originally estimated on the grant date and reported in
our consolidated financial statements. There is not currently a market-based mechanism or other
practical application to verify the reliability and accuracy of the estimates stemming from these
valuation models, nor is there a means to compare and adjust the estimates to actual values.
Although the fair value of employee share-based awards is determined in accordance with FAS 123R
and the Securities and Exchange Commissions Staff Accounting Bulletin No. 107 (SAB 107), using an
option-pricing model, that value may not be indicative of the fair value observed in a willing
buyer/willing seller market transaction.
Estimates of share-based compensation expenses are significant to our consolidated financial
statements, but these expenses are based on option valuation models and will never result in the
payment of cash by us. For this reason, and because we do not view share-based compensation as
related to our operational performance, we exclude estimated share-based compensation expense when
evaluating the business performance of our operating segments.
The guidance in FAS 123R and SAB 107 is relatively new, and best practices are not well
established. The application of these principles may be subject to further interpretation and
refinement over time. There are significant differences among valuation models, and there is a
possibility that we will adopt different valuation models in the future. This may result in a lack
of consistency in future periods and materially affect the fair value estimate of share-based
payments. It may also result in a lack of comparability with other companies that use different
models, methods and assumptions.
Theoretical valuation models and market-based methods are evolving and may result in lower or
higher fair value estimates for share-based compensation. The timing, readiness, adoption, general
acceptance, reliability and testing of these methods is uncertain. Sophisticated mathematical
models may require voluminous historical information, modeling expertise, financial analyses,
correlation analyses, integrated software and databases, consulting fees, customization and testing
for adequacy of internal controls. Market-based methods are emerging that, if employed by us, may
dilute our earnings per share and involve significant transaction fees and ongoing administrative
expenses. The uncertainties and costs of these extensive valuation efforts may outweigh the
benefits to investors.
For purposes of estimating the fair value of stock options granted during fiscal 2006 using
the binomial model, we used the implied volatility of market-traded options in our stock for the
expected volatility assumption input to the binomial model, consistent with the guidance in FAS
123R and SAB 107. We utilized the term structure of
volatility up to approximately two years, and the implied volatility of the option with the
longest time to maturity was used for the expected volatility estimates for periods beyond two
years. The weighted-average volatility assumption was 30.7% for fiscal 2006, which if increased to
37%, would increase the weighted-average estimated fair value of stock options granted during
fiscal 2006 by $1.66 per share, or 11%. The volatility percentage assumed for fiscal 2006 was based
on the implied volatility of traded options, as compared to the blend of implied and historical
volatility data used in prior years. FAS 123R includes implied volatility in its list of factors
that should be considered in estimating expected volatility. We believe implied volatility is more
useful than historical volatility in estimating expected volatility because it is generally
reflective of both historical volatility and expectations of how future volatility will differ from
historical volatility.
The risk-free interest rate is based on the yield curve of U.S. Treasury strip securities for
a period consistent with the contractual life of the option in effect at the time of grant. The
weighted-average risk-free interest rate
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assumption was 4.6% for fiscal 2006, which if increased to
6.5%, would increase the weighted-average estimated fair value of stock options granted during
fiscal 2006 by $1.19 per share, or 8%.
We do not target a specific dividend yield for our dividend payments, but we are required to
assume a dividend yield as an input to the binomial model. The dividend yield assumption is based
on our history and expectation of dividend payouts. The dividend yield assumption was 1.0% for
fiscal 2006, which if decreased to 0.4%, would increase the weighted-average estimated fair value
of stock options granted during fiscal 2006 by $0.89 per share, or 6%. Dividends and/or increases
or decreases in dividend payments are subject to board approval as well as to future cash inflows
and outflows resulting from operating performance, stock repurchase programs, mergers and
acquisitions, and other sources and uses of cash. While our historical dividend rate is assumed to
continue in the future, it may be subject to substantial change, and investors should not depend
upon this forecast as a reliable indication of future cash distributions that will be made to
investors.
The post-vesting forfeiture rate is estimated using historical option cancellation
information. The weighted-average post-vesting forfeiture rate assumption was 6.0% for fiscal 2006,
which if decreased to 1.5%, would increase the weighted-average estimated fair value of stock
options granted during fiscal 2006 by $0.88 per share, or 6%.
The suboptimal exercise factor is estimated using historical option exercise information. The
weighted-average suboptimal exercise factor assumption was 1.7 for fiscal 2006, which if increased
to 2.0, would increase the weighted-average estimated fair value of stock options granted during
fiscal 2006 by $1.06 per share, or 7%.
Income Taxes. Our income tax returns are based on calculations and assumptions that are
subject to examination by the Internal Revenue Service and other tax authorities. While we believe
we have appropriate support for the positions taken on our tax returns, we regularly assess the
potential outcomes of these examinations and any future examinations for the current or prior years
in determining the adequacy of our provision for income taxes. As part of our assessment of
potential adjustments to our tax returns, we increase our current tax liability to the extent an
adjustment would result in a cash tax payment or decrease our deferred tax assets to the extent an
adjustment would not result in a cash tax payment. We continually assess the likelihood and amount
of potential adjustments and adjust the income tax provision, the current tax liability and
deferred taxes in the period in which the facts that give rise to a revision become known. Although
we believe that the estimates and assumptions supporting our assessments are reasonable,
adjustments could be materially different from those which are reflected in historical income tax
provisions and recorded assets and liabilities.
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 24, 2006, gross deferred tax assets were $914 million. If we are unable
to generate sufficient future taxable income in certain tax jurisdictions, or if there is a
material change in the actual effective tax rates or time period within which the underlying
temporary differences become taxable or deductible, we could be required to increase our valuation
allowance against our deferred tax assets which could result in an increase in our effective tax
rate and an adverse impact on operating results.
As of September 24,
2006, we had gross deferred tax assets of $267 million related to capital
loss carryforwards. We can only use capital losses to offset capital gains. Based upon our
assessments of projected future capital gains and losses and related tax planning strategies, we
expect that our future capital gains will not
be sufficient to utilize all the capital losses that we have incurred through fiscal 2006.
Therefore, we have provided a $16 million valuation allowance for the portion of
capital losses we do not expect to utilize. Significant judgment is required to forecast the timing
and amount of future capital gains and the timing of realization of capital losses. Adjustments to
our valuation allowance based on changes to our forecast of capital losses and capital gains are
reflected in the period the change is made.
We consider the operating earnings of certain non-United States subsidiaries to be
indefinitely invested outside the United States 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
$2.7 billion as of September 24, 2006. Should we repatriate foreign earnings, we would have to
adjust the income tax provision in the period in which the decision to repatriate earnings of
foreign subsidiaries is made.
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Beginning September 26, 2005, we recognize windfall tax benefits associated with the exercise
of stock options directly to stockholders equity only when realized. Accordingly, deferred tax
assets are not recognized for net operating loss carryforwards resulting from windfall tax benefits
occurring from September 26, 2005 onward. A windfall tax benefit occurs when the actual tax benefit
realized by us upon an employees disposition of a share-based award exceeds the deferred tax
asset, if any, associated with the award that we had recorded. When assessing whether a tax benefit
relating to share-based compensation has been realized, we follow the tax law ordering method,
under which current year share-based compensation deductions are assumed to be utilized before net
operating loss carryforwards and other tax attributes.
Litigation. We are currently involved in certain legal proceedings. Although there can be no
assurance that unfavorable outcomes in any of these matters would not have a material adverse
effect on our operating results, liquidity or financial position, we believe the claims are without
merit and intend to vigorously defend the actions. We estimate the range of liability related to
pending litigation where the amount and range of loss can be estimated. We record our best estimate
of a loss when the loss is considered probable. Where a liability is probable and there is a range
of estimated loss with no best estimate in the range, we record the minimum estimated liability
related to the claim. As additional information becomes available, we assess the potential
liability related to our pending litigation and revise our estimates. We have not recorded any
accrual for contingent liability associated with our legal proceedings based on our belief that a
liability, while possible, is not probable. Further, any possible range of loss cannot be estimated
at this time. Revisions in our estimates of the potential liability could materially impact our
results of operations.
Acquisitions
On January 18,
2006, we completed our acquisition of all of the outstanding capital
stock of Flarion Technologies, Inc. (Flarion), a privately held developer of Orthogonal Frequency
Division Multiplexing Access (OFDMA) technology for approximately $613 million in consideration,
consisting of approximately $349 million in shares of QUALCOMM stock, $229 million in cash, and the
exchange of Flarions existing vested options and warrants with an estimated aggregate fair value
of approximately $35 million. In addition, we assumed Flarions existing unvested options
with an estimated aggregate fair value of $63 million, which is recorded as share-based
compensation over the requisite service period pursuant to FAS 123R. Upon achievement of certain
agreed upon milestones during the third quarter of fiscal 2006, we incurred additional
aggregate consideration of $197 million, consisting of approximately $185 million in cash (of which
$75 million will be payable in July 2007), $8 million in shares of QUALCOMM stock (of which $3
million is issuable in March 2007), and the modification of Flarions existing vested options and
warrants with an estimated incremental fair value of approximately $4 million. The additional
amounts payable in cash and shares on the milestone date were treated as additional consideration
and recorded as goodwill. In addition, the modification of Flarions existing unvested options
resulted in an estimated incremental fair value of $7 million, which will be recorded as
share-based compensation over the requisite service period pursuant to FAS 123R. The acquisition of
Flarion is intended to broaden our ability to effectively support operators who may
prefer an OFDMA or a hybrid OFDM/CDMA/WCDMA network alternative. The addition of Flarions
intellectual property and engineering resources also supplements 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 $660 million at September 24, 2006, compared to $442
million at September 25, 2005. Our MediaFLO USA subsidiary, a wireless multimedia operator, is
expected to begin commercial operations in 2007. QSIs assets related to MediaFLO USA totaled $329
million and $98 million at September 24, 2006 and September 25, 2005, respectively. We also enter
into strategic relationships with CDMA wireless operators and developers of innovative technologies
or products for the wireless communications industry. Due to financial and competitive challenges
facing 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
53
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.
Key developments in our strategic investments during fiscal 2006 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. We and another investor (the Other Investor) own minority
interests in Inquam Limited (Inquam), a wireless CDMA-based operator in Romania, and in Inquams
former subsidiaries in Portugal (the Portugal Companies). We recorded $20 million, $33 million and
$59 million in equity in losses of Inquam during fiscal 2006, 2005 and 2004, respectively,
including a $12 million loss resulting from Inquams restructuring during fiscal 2006. At September
24, 2006, our equity and debt investments in Inquam and the Portugal Companies totaled $5 million,
net of equity in losses. We and the Other Investor have each guaranteed 50% of a portion of amounts
owed under certain of Inquams long-term financing arrangements, up to a combined maximum of $53
million. The guarantee expires and the facilities mature on December 25, 2011.
Fiscal 2006 Compared to Fiscal 2005
Revenues. Total revenues for fiscal 2006 were $7.53 billion, compared to $5.67 billion for
fiscal 2005. Revenues from three customers of our QCT, QTL and QWI segments comprised an aggregate
of 39% of total consolidated revenues in fiscal 2006 and 2005.
Revenues from sales of equipment and services for fiscal 2006 were $4.78 billion, compared to
$3.74 billion for fiscal 2005. Revenues from sales of integrated circuits increased $1.00 billion,
resulting primarily from an increase of $1.34 billion related primarily to higher unit shipments of
MSM and accompanying RF integrated circuits, partially offset by a decrease of $349 million related
to the net effects of reductions in average sales prices and changes in product mix.
Revenues from licensing and royalty fees for fiscal 2006 were $2.75 billion, compared to $1.93
billion for fiscal 2005. Revenues from licensing and royalty fees increased primarily as a result
of a $774 million increase in royalty revenue, consisting primarily of royalties reported to QTL by
our external licensees, resulting from an increase in sales of CDMA-based products by licensees and
the impact of the expiration of one of our royalty sharing obligations. Worldwide demand for
CDMA-based products has increased primarily as a result of the growth in sales of WCDMA products
into markets formerly dominated by GSM products.
Cost of Equipment and Services. Cost of equipment and services revenues for fiscal 2006 was
$2.18 billion, compared to $1.65 billion for fiscal 2005. Cost of equipment and services revenues
as a percentage of equipment and services revenues was 46% for fiscal 2006, compared to 44% for
fiscal 2005. The decline in margin percentage in fiscal 2006 compared to fiscal 2005 was primarily
due to the effect of $41 million in share-based compensation during fiscal 2006 as a result of the
adoption of FAS123R during fiscal 2006 and a decrease in QCT margin
54
percentage resulting primarily
from an increase in product support costs. Cost of equipment and services revenues as a percentage
of equipment and services revenues may fluctuate in future quarters depending on the mix of
products sold and services provided, competitive pricing, new product introduction costs and other
factors.
Research and Development Expenses. For fiscal 2006, research and development expenses were
$1.54 billion or 20% of revenues, compared to $1.01 billion or 18% of revenues for fiscal 2005.
Research and development expenses for fiscal 2006 included share-based compensation of $216 million
as a result of the adoption of FAS 123R during fiscal 2006 and in-process research and development
of $22 million resulting from acquisitions, both of which caused the increase in research and
development expenses as a percentage of revenues. The dollar increase in research and development
expenses also included a $272 million increase in costs related to the development of integrated
circuit products and other initiatives to support lower cost phones, multimedia applications,
high-speed wireless Internet access and multimode, multiband, multinetwork products and
technologies, including CDMA2000 1X, 1xEV-DO, EV-DO Revision A, EV-DO Revision B, WCDMA (including
GSM/GPRS/EDGE), HSDPA, HSUPA and OFDMA, and the development of our FLO technology, MediaFLO MDS and
iMoD display products using MEMS technology. We expect that research and development costs will
increase in fiscal 2007 as we continue our active support of CDMA-based technologies, products and
network operations and other product initiatives.
Selling, General and Administrative Expenses. For fiscal 2006, selling, general and
administrative expenses were $1.12 billion or 15% of revenues, compared to $631 million or 11% of
revenues for fiscal 2005. Selling, general and administrative expenses for fiscal 2006 included
share-based compensation of $238 million as a result of the adoption of FAS 123R during fiscal
2006. The percentage increase was primarily attributable to the share-based compensation. The
dollar increase was also attributable to a $107 million increase in professional fees, primarily
related to legal activities, a $90 million increase in employee-related expenses, a $14 million
increase in selling and marketing expenses and a $14 million decrease in other income.
Net Investment Income. Net investment income was $466 million for fiscal 2006, compared to
$423 million for fiscal 2005. The change was primarily comprised as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
September 24, 2006 |
|
|
September 25, 2005 |
|
|
Change |
|
Interest and dividend income: |
|
|
|
|
|
|
|
|
|
|
|
|
QSI |
|
$ |
6 |
|
|
$ |
4 |
|
|
$ |
2 |
|
Corporate and other segments |
|
|
410 |
|
|
|
252 |
|
|
|
158 |
|
Interest expense |
|
|
(4 |
) |
|
|
(3 |
) |
|
|
(1 |
) |
Net realized gains on investments: |
|
|
|
|
|
|
|
|
|
|
|
|
QSI |
|
|
30 |
|
|
|
101 |
|
|
|
(71 |
) |
Corporate |
|
|
106 |
|
|
|
78 |
|
|
|
28 |
|
Other-than-temporary losses on investments |
|
|
(24 |
) |
|
|
(14 |
) |
|
|
(10 |
) |
(Losses) gains on derivative instruments |
|
|
(29 |
) |
|
|
33 |
|
|
|
(62 |
) |
Equity in losses of investees |
|
|
(29 |
) |
|
|
(28 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
466 |
|
|
$ |
423 |
|
|
$ |
43 |
|
|
|
|
|
|
|
|
|
|
|
The increase in interest and dividend income on cash and marketable securities held by
corporate and other segments was a result of higher average cash and marketable securities balances
and higher interest rates earned on interest-bearing securities. Net realized gains on QSI
investments in fiscal 2005 resulted primarily from a $48 million gain on our minority investment in
a wireless publisher and a $41 million gain on the sale of our investment in a wireless
telecommunications company. Losses and gains on derivative instruments in fiscal 2006 and 2005,
respectively, related primarily to changes in the fair values of put options sold in connection
with our stock repurchase program. The change in equity in losses of investees resulted primarily
from the decrease in losses recognized by Inquam, of which our share was $20 million and $33
million in fiscal 2006 and 2005, respectively, partially offset by the effect of investment gains
recognized by a venture fund investee in 2005, of which our share was $8 million.
Income Tax Expense. Income tax expense from continuing operations was $686 million for fiscal
2006, compared to $666 million for fiscal 2005. The annual effective tax rate for continuing
operations was approximately 22% for fiscal 2006, compared to 24% for fiscal 2005. The annual
effective tax rate from continuing operations for fiscal 2006 was lower than the annual effective
tax rate from continuing operations for fiscal 2005 primarily due to an increase in foreign
earnings taxed at less than the United States federal tax rate.
55
The annual effective tax rate for fiscal 2006 was 13% lower than the United States federal
statutory rate primarily due to benefits of approximately 17% related to foreign earnings taxed at
less than the United States federal rate, 1% related to an increase in tax benefits resulting from
our increased ability to use our capital loss carryforwards and 1% related to research and
development tax credits, partially offset by state taxes of approximately 5% and other permanent
differences of 1%.
As of September 24,
2006, we had a valuation allowance of $16 million on
previously incurred capital losses due to uncertainty as to our ability to generate sufficient
capital gains to utilize all capital losses. We will continue to assess the realizability of
capital losses. The amount of the valuation allowance on capital losses may be adjusted in the
future as our ability to utilize capital losses changes. A change in the valuation allowance may
impact the provision for income taxes in the period the change occurs.
Fiscal 2005 Compared to Fiscal 2004
Revenues. Total revenues for fiscal 2005 were $5.67 billion, compared to $4.88 billion for
fiscal 2004. Revenues from three customers of our QCT, QTL and QWI segments comprised an aggregate
of 39% of total consolidated revenues in fiscal 2005, compared to 40% of total consolidated
revenues in fiscal 2004.
Revenues from sales of equipment and services for fiscal 2005 were $3.74 billion, compared to
$3.51 billion for fiscal 2004. Revenues from sales of integrated circuits increased $165 million,
resulting primarily from an increase of $396 million related to higher unit shipments of MSM and
accompanying RF integrated circuits, partially offset by a decrease of $241 million related to the
effects of reductions in average sales prices and changes in product mix. Revenues from the sale of
satellite and terrestrial-based two-way data messaging systems and related messaging services
increased $25 million and revenues from the sale of satellite portable phones that operate on the
Globalstar low-Earth-orbit satellite communications system increased $19 million.
Revenues from licensing and royalty fees for fiscal 2005 were $1.93 billion, compared to $1.37
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. The increase in royalty
revenue year to year resulted 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 due to an increase in
sales of CDMA products by licensees, resulting from higher worldwide demand for CDMA products at
higher average selling prices due primarily to the growth in sales of high-end WCDMA products and
shifts in the geographic distribution of sales of CDMA products.
Cost of Equipment and Services. Cost of equipment and services revenues for fiscal 2005 was
$1.65 billion, compared to $1.48 billion for fiscal 2004. Cost of equipment and services revenues
as a percentage of equipment and services revenues was 44% for fiscal 2005, compared to 42% for
fiscal 2004. The margin percentage decline in fiscal 2005 compared to fiscal 2004 was primarily due
to a 1.3% decrease in QCT margin percentage. Increases in product support costs and the reserves
for excess and obsolete inventory contributed 1.1% and 0.5%, respectively, to the total decrease in
QCT margin percentage.
Research and Development Expenses. For fiscal 2005, research and development expenses were
$1.01 billion or 18% of revenues, compared to $720 million or 15% of revenues for fiscal 2004. The
dollar and percentage increases in research and development expenses primarily resulted from a $275
million increase in costs related to the development of integrated circuit products and other
initiatives to support lower cost phones, multimedia applications, high-speed wireless Internet
access and multimode, multiband, multinetwork products and technologies, including CDMA2000 1X,
1xEV-DO, WCDMA, HSDPA, GSM/GPRS/EDGE and OFDMA, and the development of our FLO technology, MediaFLO
MDS and iMoD display products using MEMS technology.
Selling, General and Administrative Expenses. For fiscal 2005, selling, general and
administrative expenses were $631 million or 11% of revenues, compared to $547 million or 11% of
revenues for fiscal 2004. The dollar increase was primarily due to a $38 million increase in
professional fees, primarily patent administration and outside consultants, a $33 million increase
in employee-related expenses, and a $13 million decrease in other income.
56
Net Investment Income. Net investment income was $423 million for fiscal 2005, compared to
$184 million for fiscal 2004. The change was primarily comprised as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
September 25, 2005 |
|
|
September 26, 2004 |
|
|
Change |
|
Interest and dividend income: |
|
|
|
|
|
|
|
|
|
|
|
|
QSI |
|
$ |
4 |
|
|
$ |
14 |
|
|
$ |
(10 |
) |
Corporate and other segments |
|
|
252 |
|
|
|
161 |
|
|
|
91 |
|
Interest expense |
|
|
(3 |
) |
|
|
(2 |
) |
|
|
(1 |
) |
Net realized gains on investments: |
|
|
|
|
|
|
|
|
|
|
|
|
QSI |
|
|
101 |
|
|
|
56 |
|
|
|
45 |
|
Corporate |
|
|
78 |
|
|
|
32 |
|
|
|
46 |
|
Other-than-temporary losses on investments |
|
|
(14 |
) |
|
|
(12 |
) |
|
|
(2 |
) |
Gains on derivative instruments |
|
|
33 |
|
|
|
7 |
|
|
|
26 |
|
Equity in losses of investees |
|
|
(28 |
) |
|
|
(72 |
) |
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
423 |
|
|
$ |
184 |
|
|
$ |
239 |
|
|
|
|
|
|
|
|
|
|
|
The increase in interest and dividend income on cash and marketable securities held by
corporate and other segments was a result of higher average cash and marketable securities balances
and higher interest rates earned on interest-bearing securities. Net realized gains on corporate
investments increased primarily as a result of an increase in the positive performance of
marketable equity securities as a percentage of total corporate investments in fiscal 2005, as
compared to fiscal 2004. The increase in net realized gains on strategic investments in QSI
resulted primarily from a $48 million gain on our minority investment in a wireless publisher and a
$41 million gain on the sale of our investment in a wireless telecommunications company. Gains on
derivative instruments in fiscal 2005 and 2004 related primarily to changes in the fair values of
put options sold in connection with our stock
repurchase program. Equity in losses of investees decreased primarily due to a decrease in
losses incurred by Inquam, of which our share was $33 million for fiscal 2005 as compared to $59
million for fiscal 2004.
Income Tax Expense. Income tax expense from continuing operations was $666 million for fiscal
2005, compared to $588 million for fiscal 2004. The annual effective tax rate for continuing
operations was approximately 24% for fiscal 2005, compared to 25% for fiscal 2004. The annual
effective tax rate from continuing operations for fiscal 2005 was lower than the annual effective
tax rate from continuing operations for fiscal 2004 primarily due to an increase in foreign
earnings taxed at less than the United States federal tax rate.
The annual effective tax rate for fiscal 2005 was 11% lower than the United States federal
statutory rate primarily due to benefits of approximately 10% related to foreign earnings taxed at
less than the United States federal rate, 3% related to an increase in tax benefits resulting from
our increased ability to use our capital loss carryforwards and 2% related to research and
development tax credits, partially offset by state taxes of approximately 4%.
As of September 25, 2005, we had a valuation allowance of approximately $62 million on
previously incurred capital losses due to uncertainty as to our ability to generate sufficient
capital gains to utilize all capital losses.
Our Segment Results for Fiscal 2006 Compared to Fiscal 2005
The following should be read in conjunction with the financial results of fiscal 2006 and 2005
for each reporting segment. See Notes to Consolidated Financial Statements, Note 10 Segment
Information.
QCT Segment. QCT revenues for fiscal 2006 were $4.33 billion, compared to $3.29 billion for
fiscal 2005. Equipment and services revenues, primarily from MSM and accompanying RF integrated
circuits, were $4.20 billion for fiscal 2006, compared to $3.20 billion for fiscal 2005. The
increase in equipment and services revenue was primarily comprised of an increase of $1.34 billion
related to higher unit shipments, partially offset by a decrease of $349 million related to the
effects of reductions in average sales prices and changes in product mix. Approximately 207 million
MSM integrated circuits were sold during fiscal 2006, compared to approximately 151 million for
fiscal 2005.
QCTs earnings before taxes for fiscal 2006 were $1.13 billion, compared to $852 million for
fiscal 2005. QCTs operating income as a percentage of its revenues (operating margin percentage)
was 26% during both fiscal 2006 and 2005. The operating margin percentage remained consistent as
the gross margin percentage decrease, resulting
57
primarily from an increase in product support
costs, was offset by a decrease in research and development and selling, general and administrative
expenses as a percentage of QCT revenue.
QTL Segment. QTL revenues for fiscal 2006 were $2.63 billion, compared to $1.84 billion for
fiscal 2005. QTLs earnings before taxes for fiscal 2006 were $2.40 billion, compared to $1.66
billion for fiscal 2005. QTLs operating margin percentage was 91% in fiscal 2006 as compared to
90% in fiscal 2005. The increase in both revenues and earnings before taxes primarily resulted from
a $774 million increase in royalties reported to us by our licensees which were $2.42 billion in
fiscal 2006, compared to $1.64 billion in fiscal 2005. The increase in royalty revenue relates to
the increase in sales of CDMA-based products by licensees and the impact of the expiration of one
of our royalty sharing obligations. Revenues from amortized license fees were $50 million in fiscal
2006, compared to $69 million in fiscal 2005. Other revenues were comprised of intersegment
royalties.
QWI Segment. QWI revenues for fiscal 2006 were $670 million, compared to $644 million for
fiscal 2005. Revenues increased primarily due to a $41 million increase in QIS revenue, partially
offset by a decrease in QWBS revenue of $12 million. The increase in QIS revenue was primarily
attributable to a $28 million increase in fees related to our expanded BREW customer base and
products and a $17 million increase in QChat revenue resulting from increased development efforts
under the licensing agreement with Sprint. The decrease in QWBS revenue was primarily attributable
to a $26 million decrease in equipment revenue, which includes a $19 million decrease in
amortization of deferred revenues related to historical equipment sales, partially offset by a $14
million increase in messaging services revenue. QWBS shipped approximately 42,100 satellite-based
systems and 39,600 terrestrial-based systems during fiscal 2006, compared to approximately 46,800
satellite-based systems and 62,500 terrestrial-based systems in fiscal 2005.
QWIs earnings before taxes for fiscal 2006 were $80 million, compared to $57 million for
fiscal 2005. QWIs operating margin percentage was 12% in fiscal 2006, compared to 9% in fiscal
2005. The increase in QWI
earnings before taxes was 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 and
QChat development efforts, partially offset by the effect of a $13 million increase in QWI research
and development and selling, general and administrative expenses. The increase in QWIs operating
margin percentage was primarily due to the increase in QIS gross margin.
QSI Segment. QSIs losses before taxes from continuing operations for fiscal 2006 were $133
million, compared to earnings before taxes from continuing operations of $10 million for fiscal
2005. QSIs losses before taxes from continuing operations included a $55 million increase in our
MediaFLO USA subsidiarys operating expenses. During fiscal 2006, QSI recorded $30 million in
realized gains on marketable securities and other investments, compared to $101 million in fiscal
2005.
Our Segment Results for Fiscal 2005 Compared to Fiscal 2004
The following should be read in conjunction with the financial results of fiscal 2005 and 2004
for each reporting segment. See Notes to Consolidated Financial Statements, Note 10 Segment
Information.
QCT Segment. QCT revenues for fiscal 2005 were $3.29 billion, compared to $3.11 billion for
fiscal 2004. Equipment and services revenues, primarily from MSM and accompanying RF integrated
circuits, were $3.20 billion for fiscal 2005, compared to $3.04 billion for fiscal 2004. The
increase in equipment and services revenue was comprised of $396 million related to higher unit
shipments, partially offset by a decrease of $241 million related to the effects of reductions in
average sales prices and changes in product mix. Approximately 151 million MSM integrated circuits
were sold during fiscal 2005, compared to approximately 137 million for fiscal 2004.
QCTs earnings before taxes for fiscal 2005 were $852 million, compared to $1.05 billion for
fiscal 2004. QCTs operating income as a percentage of its revenues (operating margin percentage)
was 26% in fiscal 2005, compared to 34% in fiscal 2004. The decline in operating margin percentage
in fiscal 2005 as compared to fiscal 2004 was primarily the result of a 45% increase in research
and development expenses for fiscal 2005 as compared to fiscal 2004, mainly related to increased
investment in new integrated circuit products and technology research and development initiatives
to support lower cost phones, multimedia applications, high-speed wireless Internet access and
multiband, multimode, multinetwork products and technologies, including CDMA2000 1X, 1xEV-DO,
WCDMA, HSDPA and GSM/GPRS/EDGE.
QTL Segment. QTL revenues for fiscal 2005 were $1.84 billion, compared to $1.33 billion for
fiscal 2004. QTLs earnings before taxes for fiscal 2005 were $1.66 billion, compared to $1.20
billion for fiscal 2004. QTLs operating margin percentage was 90% during both fiscal 2005 and
2004. The increase in both revenues and earnings
58
before taxes primarily resulted 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,
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 CDMA products by licensees, resulting from
higher worldwide demand for CDMA products at higher average selling prices due primarily to the
growth of higher priced WCDMA sales and shifts in the geographic distribution of sales of CDMA
products. Revenues from amortized license fees were $69 million in fiscal 2005, as compared to $59
million in fiscal 2004. Other revenues were comprised of intersegment royalties.
During the periods preceding the fourth quarter of fiscal 2004, we estimated and recorded the
royalty revenues earned for sales by certain licensees (the Estimated Licensees) in the quarter in
which such sales occurred, but only when reasonable estimates of such amounts could be made. Not
all royalties earned were recorded based on estimates. In the fourth quarter of fiscal 2004, we
determined that, due to escalating and changing business trends, we no longer had the ability to
reliably estimate royalty revenues from the Estimated Licensees. These escalating and changing
trends included the commercial launches and global expansion of WCDMA networks, changes in market
share among licensees due to increased global competition, and increased variability in the
integrated circuit and finished product inventories of licensees. Starting in the fourth quarter of
fiscal 2004, we began recognizing royalty revenues solely based on royalties reported by licensees
during the quarter. The change in the timing of recognizing royalty revenue was made prospectively
and had the initial one-time effect of reducing
royalty revenues recorded in the fourth quarter of fiscal 2004. Accordingly, we did not
estimate royalty revenues earned in fiscal 2005.
QWI Segment. QWI revenues for fiscal 2005 were $644 million, compared to $571 million for
fiscal 2004. Revenues increased primarily due to a $37 million increase in QIS revenue and a $27
million increase in QWBS revenue. The increase in QIS revenue was primarily attributable to a $41
million increase in fees related to our expanded BREW customer base and products. The increase in
QWBS revenue was primarily attributable to a $16 million increase in equipment revenue, net of a
$24 million decrease in amortization of deferred 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.
QWIs earnings before taxes for fiscal 2005 were $57 million, compared to $19 million for
fiscal 2004. QWIs operating margin percentage was 9% in fiscal 2005, compared to 3% in fiscal
2004. The increases in QWI earnings before taxes and operating margin 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 remain in San Diego.
QSI Segment. QSIs 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 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. QSIs earnings before taxes from continuing operations also included a $42 million
increase in MediaFLO USA operating expenses.
Liquidity and Capital Resources
Our principal sources of liquidity are our existing cash, cash equivalents and marketable
securities, cash generated from operations and proceeds from the issuance of common stock under our
stock option and employee stock purchase plans. Cash and cash equivalents and marketable securities
were $9.9 billion at September 24, 2006, an increase of $1.3 billion from September 25, 2005. Our
cash and cash equivalents and marketable securities at September 24, 2006 consisted of $3.8 billion
held by foreign subsidiaries with the remaining balance of $6.1 billion held domestically. Due to
income tax considerations, we derive liquidity for operations primarily from investments held
domestically. Cash provided by operating activities was $3.3 billion during fiscal 2006, compared
to $2.7 billion during fiscal 2005. The increase was primarily attributable to higher net income
(net of non-cash share-based
59
compensation expense) in fiscal 2006. Net proceeds from the issuance
of common stock under our stock option and employee stock purchase plans was $692 million during
fiscal 2006, compared to $386 million during fiscal 2005.
On November 7, 2005, we authorized the repurchase of up to $2.5 billion of our common
stock under a stock repurchase program with no expiration date. During fiscal 2006, we repurchased
and retired 34,000,000 shares of common stock for $1.5 billion. At September 24, 2006,
approximately $0.9 billion remained authorized for repurchases under our stock repurchase program,
net of put options outstanding. We will continue to actively evaluate repurchases under this
program.
We declared and paid dividends totaling $698 million, $524 million and $307 million, or $0.42,
$0.32 and $0.19 per share, during fiscal 2006, 2005 and 2004, respectively. On October 5, 2006, we
announced a cash dividend of $0.12 per share on our common stock, payable on January 4, 2007 to
stockholders of record as of December 7, 2006. We intend to continue to pay quarterly dividends
subject to capital availability and periodic determinations that cash dividends are in the best
interest of our stockholders.
Accounts receivable increased by 29% during fiscal 2006. Days sales outstanding, on a
consolidated basis, were 29 days at September 24, 2006, compared to 30 days at September 25, 2005.
The increase in accounts receivable was primarily due to the increase in revenue in fiscal 2006 as
compared to fiscal 2005 and the timing of cash
receipts for royalty receivables. The change in days sales outstanding is consistent with the
increases in revenue and accounts receivable.
On January 18, 2006, we completed our acquisition of Flarion, a developer of OFDMA technology,
for approximately $613 million in consideration, including approximately $229 million in cash. Upon
achievement of certain agreed upon milestones during the third quarter of fiscal 2006, we incurred
additional aggregate consideration of $197 million, including approximately $185 million in cash
(of which $75 million will be payable in July 2007).
We intend to continue our strategic investment activities to promote the worldwide adoption of
CDMA products and the growth of CDMA-based wireless data and wireless Internet products. 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 cash generated
from operations will satisfy our expected working and other capital requirements for the
foreseeable future based on current business plans, including acquisitions, investments in other
companies and other assets to support the growth of our business, financing and other commitments,
the payment of dividends and possible additional stock repurchases.
Contractual Obligations / Off-Balance Sheet Arrangements
We have no significant contractual obligations not fully recorded on our consolidated balance
sheets or fully disclosed in the notes to our consolidated financial statements. We have no
material off-balance sheet arrangements as defined in S-K 303(a)(4)(ii).
At September 24, 2006, our outstanding contractual obligations included (in millions):
Contractual Obligations
Payments Due By Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No |
|
|
|
|
|
|
|
Fiscal |
|
|
Fiscal |
|
|
Fiscal |
|
|
Beyond |
|
|
Expiration |
|
|
|
Total |
|
|
2007 |
|
|
2008-2009 |
|
|
2010-2011 |
|
|
Fiscal 2011 |
|
|
Date |
|
Purchase obligations (1) |
|
$ |
829 |
|
|
$ |
663 |
|
|
$ |
110 |
|
|
$ |
38 |
|
|
$ |
18 |
|
|
$ |
|
|
Operating leases |
|
|
291 |
|
|
|
71 |
|
|
|
74 |
|
|
|
49 |
|
|
|
97 |
|
|
|
|
|
Other commitments (2) |
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitments |
|
|
1,162 |
|
|
|
734 |
|
|
|
184 |
|
|
|
87 |
|
|
|
141 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital leases (3) |
|
|
125 |
|
|
|
3 |
|
|
|
6 |
|
|
|
8 |
|
|
|
108 |
|
|
|
|
|
Other long-term liabilities (4) |
|
|
47 |
|
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recorded liabilities |
|
|
172 |
|
|
|
3 |
|
|
|
51 |
|
|
|
8 |
|
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,334 |
|
|
$ |
737 |
|
|
$ |
235 |
|
|
$ |
95 |
|
|
$ |
251 |
|
|
$ |
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Total purchase obligations include $593 million in commitments to purchase
integrated circuit product inventories. |
60
|
|
|
(2) |
|
Certain of these commitments do not have fixed funding dates. Amounts are presented
based on the expiration of the commitment, but actual funding may occur earlier or not at all
as funding is subject to certain conditions. Commitments represent the maximum amounts to be
financed or funded under these arrangements; actual financing or funding may be in lesser
amounts. |
|
(3) |
|
Amounts represent future minimum lease payments including interest
payments. Capital lease obligations are included in other liabilities in the consolidated
balance sheet at September 24, 2006. |
|
(4) |
|
Certain long-term liabilities reflected on our balance sheet, such as
unearned revenue, are not presented in this table because they do not require cash settlement
in the future. |
Additional information regarding our financial commitments at September 24, 2006 is
provided in the notes to our consolidated financial statements. See Notes to Consolidated
Financial Statements, Note 4 Investments in Other Entities and Note 9 Commitments and
Contingencies.
Future Accounting Requirements
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48) Accounting for Uncertainty
in Income Taxes which prescribes a recognition threshold and measurement process for recording in
the financial statements uncertain tax positions taken or expected to be taken in a tax return.
Additionally, FIN 48 provides guidance on the derecognition, classification, accounting in interim
periods and disclosure requirements for uncertain tax positions.
The accounting provisions of FIN 48 will be effective for us beginning October 1, 2007. The
cumulative effect of initially adopting FIN 48 will be recorded as an adjustment to opening
retained earnings in the year of adoption and will be presented separately. Only tax positions that
meet the more likely than not recognition threshold at the effective date may be recognized upon
adoption of FIN 48. We are in the process of determining the effect, if any, the adoption of FIN 48
will have on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. We invest our cash in a number of diversified investment and
non-investment grade fixed and floating rate securities, consisting of cash equivalents and
marketable securities. Changes in the general level of United States interest rates can affect the
principal values and yields of fixed income investments. If interest rates in the general economy
were to rise rapidly in a short period of time, our fixed income investments could lose value. If
the general economy were to weaken significantly, the credit profile of issuers of securities held
in our investment portfolios could deteriorate, and our investments could lose value. We may
implement investment strategies of different types with varying duration and risk/return trade-offs
that do not perform well.
The following table provides information about our financial instruments that are sensitive to
changes in interest rates. For our interest-bearing securities, the table presents principal cash
flows, weighted average yield at cost and contractual maturity dates. Additionally, we have assumed
that these securities are similar enough within the specified categories to aggregate these
securities for presentation purposes.
61
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rates
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No Single |
|
|
|
|
|
Fair |
|
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
Thereafter |
|
Maturity |
|
Total |
|
Value |
Fixed interest-bearing securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
482 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
482 |
|
|
$ |
482 |
|
Interest rate |
|
|
5.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade |
|
$ |
2,138 |
|
|
$ |
436 |
|
|
$ |
238 |
|
|
$ |
39 |
|
|
$ |
12 |
|
|
$ |
10 |
|
|
$ |
267 |
|
|
$ |
3,140 |
|
|
$ |
3,140 |
|
Interest rate |
|
|
4.1 |
% |
|
|
4.6 |
% |
|
|
5.2 |
% |
|
|
5.0 |
% |
|
|
5.2 |
% |
|
|
7.3 |
% |
|
|
4.9 |
% |
|
|
|
|
|
|
|
|
Non-investment grade |
|
$ |
2 |
|
|
$ |
13 |
|
|
$ |
37 |
|
|
$ |
30 |
|
|
$ |
61 |
|
|
$ |
352 |
|
|
$ |
|
|
|
$ |
495 |
|
|
$ |
495 |
|
Interest rate |
|
|
7.2 |
% |
|
|
5.8 |
% |
|
|
6.8 |
% |
|
|
7.7 |
% |
|
|
7.5 |
% |
|
|
8.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Floating interest-bearing securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
999 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
999 |
|
|
$ |
999 |
|
Interest rate |
|
|
5.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade |
|
$ |
157 |
|
|
$ |
116 |
|
|
$ |
192 |
|
|
$ |
52 |
|
|
$ |
3 |
|
|
$ |
87 |
|
|
$ |
348 |
|
|
$ |
955 |
|
|
$ |
955 |
|
Interest rate |
|
|
5.0 |
% |
|
|
5.3 |
% |
|
|
5.6 |
% |
|
|
5.6 |
% |
|
|
5.8 |
% |
|
|
5.8 |
% |
|
|
5.5 |
% |
|
|
|
|
|
|
|
|
Non-investment grade |
|
$ |
10 |
|
|
$ |
14 |
|
|
$ |
12 |
|
|
$ |
26 |
|
|
$ |
65 |
|
|
$ |
258 |
|
|
$ |
512 |
|
|
$ |
897 |
|
|
$ |
897 |
|
Interest rate |
|
|
6.4 |
% |
|
|
6.7 |
% |
|
|
6.6 |
% |
|
|
6.5 |
% |
|
|
7.1 |
% |
|
|
7.1 |
% |
|
|
7.2 |
% |
|
|
|
|
|
|
|
|
Equity Price Risk. We invest in a number of diversified marketable securities and mutual
fund shares subject to equity price risk. The recorded values of marketable equity securities
increased to $1.34 billion at September 24, 2006 from $1.16 billion at September 25, 2005. The
recorded value of equity mutual fund shares increased to $1.52 billion at September 24, 2006 from
$293 million at September 25, 2005. Our diversified investments in companies and industry segments
may vary over time, and changes in the concentrations of these investments may affect the price
volatility of our investments. A 10% decrease in the market price of our marketable equity
securities and equity mutual fund shares at September 24, 2006 would cause a corresponding 10%
decrease in the carrying amounts of these securities, or $285 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 of our market risk exposures or in managements objectives and strategies with respect
to managing such exposures. The recorded values of these strategic investments totaled $93 million
at September 24, 2006, compared to $121 million at September 25, 2005.
In connection with our stock repurchase program, we sell put options that may require us to
repurchase shares of our common stock at fixed prices. These written put options subject us to
equity price risk. At September 24, 2006, we had two outstanding put options, enabling holders to
purchase 2,000,000 shares of our common stock upon exercise for approximately $89 million (net of
the option premiums received). The put option liabilities, with a fair value of $19 million at
September 24, 2006, were included in other current liabilities. If the fair value of our common
stock at September 24, 2006 decreased by 10%, the amount required to physically settle the put
options would exceed the fair value of the shares by $21 million, net of the $6 million in premiums
received.
Additional information regarding our strategic investments is provided in Managements
Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report.
Foreign Exchange Risk. We manage our exposure to foreign exchange market risks, when deemed
appropriate, through the use of derivative financial instruments, consisting primarily of foreign
currency forward and option contracts. Such derivative financial instruments are viewed as hedging
or risk management tools and are not used for speculative or trading purposes. At September 24,
2006, we had no foreign currency forward contracts outstanding. At September 24, 2006, the net
recorded value of 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 was
a liability of $2 million. If our forecasted royalty revenues were to decline by 20% and foreign
exchange rates
62
were to change unfavorably by 20% in each of our
hedged foreign currencies, we would
incur a loss of approximately $3 million resulting from a decrease in fair value of the portion of
our hedges that would be rendered ineffective. See Notes to Consolidated Financial Statements,
Note 1 The Company and Its Significant Accounting Policies for a description of our foreign
currency accounting policies.
Financial instruments held by consolidated subsidiaries and equity method investees which are
not denominated in the functional currency of those entities are subject to the effects of currency
fluctuations and may affect reported earnings. As a global concern, we face exposure to adverse
movements in foreign currency exchange rates. We may hedge currency exposures associated with
certain assets and liabilities denominated in nonfunctional currencies and certain anticipated
nonfunctional currency transactions. As a result, we could experience unanticipated gains or losses
on anticipated foreign currency cash flows, as well as economic loss with respect to the
recoverability of investments. While we may hedge certain transactions with non-United States
customers, declines in currency values in certain regions may, if not reversed, adversely affect
future product sales because our products may become more expensive to purchase in the countries of
the affected currencies.
Our analysis methods used to assess and mitigate risk discussed above should not be considered
projections of future risks.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements at September 24, 2006 and September 25, 2005 and the
Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm, are included
in this Annual Report on Form 10-K on pages F-1 through F-33.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our
principal executive officer and our principal financial officer
concluded that our disclosure controls and procedures were effective as of the end of the
period covered by this Annual Report.
Managements 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 in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our
evaluation under the framework in Internal Control Integrated Framework, our management concluded
that our internal control over financial reporting was effective as of September 24, 2006.
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the
consolidated financial statements included in this Annual Report on Form 10-K, has also audited
managements assessment of our internal control over financial reporting and the effectiveness of
our internal control over financial reporting as of September 24, 2006, as stated in their report
which appears on pages F-1 and F-2.
Inherent Limitations Over Internal Controls
Our internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of consolidated financial
statements for external purposes in accordance with generally accepted accounting principles. Our
internal control over financial reporting includes those policies and procedures that:
|
i. |
|
pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of our assets; |
63
|
ii. |
|
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of consolidated financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are being made
only in accordance with authorizations of our management and directors; and |
|
|
iii. |
|
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a material
effect on the consolidated financial statements. |
Internal control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations, including the possibility of
human error and circumvention by collusion or overriding of controls. Accordingly, even an
effective internal control system may not prevent or detect material misstatements on a timely
basis. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during fiscal 2006
that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Item 9B. Other Information
None.
64
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item regarding directors is incorporated by reference to our
Definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection
with the Annual Meeting of Stockholders to be held in 2007 (the 2007 Proxy Statement) under the
heading Election of Directors. Information regarding executive officers is set forth in Item 1 of
Part I of this Report under the caption Executive Officers. The information regarding our code of
ethics is incorporated by reference to the 2007 Proxy Statement under the heading Code of Ethics.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the 2007 Proxy Statement
under the heading Executive Compensation and Other Matters.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this item is incorporated by reference to the 2007 Proxy Statement
under the headings Equity Compensation Plan Information and Stock Ownership of Certain
Beneficial Owners and Management.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the 2007 Proxy Statement
under the heading Certain Transactions.
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated by reference to the 2007 Proxy Statement
under the heading Fees Paid to PricewaterhouseCoopers LLP.
65
PART IV
Item 15. Exhibits and Financial Statement Schedule
The following documents are filed as part of this report:
|
|
|
|
|
|
|
Page |
|
|
|
Number |
|
(a) Financial Statements: |
|
|
|
|
|
|
|
F-1 |
|
|
|
|
F-3 |
|
|
|
|
F-4 |
|
|
|
|
F-5 |
|
|
|
|
F-6 |
|
|
|
|
F-7 |
|
(2) Schedule II-Valuation and Qualifying Accounts |
|
|
S-1 |
|
Financial statement schedules other than those listed above have been omitted because they are
either not required, not applicable or the information is otherwise included in the notes to the
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) |
|
|
|
3.2
|
|
Certificate of Amendment of Certificate of Designation. (3) |
|
|
|
3.4
|
|
Amended and Restated Bylaws. (4) |
|
|
|
10.1
|
|
Form of Indemnity Agreement between the Company, each director and certain officers.(5)(6) |
|
|
|
10.2
|
|
1991 Stock Option Plan, as amended.(5)(7) |
|
|
|
10.4
|
|
Form of Stock Option Grant under the 1991 Stock Option Plan.(5)(7) |
|
|
|
10.21
|
|
Executive Retirement Matching Contribution Plan, as amended.(5)(7) |
|
|
|
10.22
|
|
1996 Non-qualified Employee Stock Purchase Plan, as amended.(5)(7) |
|
|
|
10.29
|
|
1998 Non-Employee Directors Stock Option Plan, as amended.(5)(8) |
|
|
|
10.40
|
|
Form of Stock Option Grant Notice and Agreement under the 2001 Stock Option Plan.(5)(7) |
|
|
|
10.41
|
|
2001 Employee Stock Purchase Plan, as amended.(5)(7) |
|
|
|
10.43
|
|
Form of Stock Option Grant Notice and Agreement under the 2001 Non-Employee Directors Stock
Option Plan.(5)(9) |
|
|
|
10.55
|
|
2001 Stock Option Plan, as amended.(5)(10) |
|
|
|
10.58
|
|
Form of Annual Grant under the 1998 Non-Employee Directors Stock Option Plan.(5)(7) |
|
|
|
10.63
|
|
Summary of Changes to Non-Employee Director Compensation Program.(5)(11) |
|
|
|
10.66
|
|
2001 Non-Employee Directors Stock Option Plan, as amended.(5)(12) |
|
|
|
10.70
|
|
Amended and Restated Rights Agreement dated September 26, 2005 between the Company and
Computershare Investor Services LLC, as Rights Agent.(3) |
|
|
|
10.71
|
|
Voluntary Executive Retirement Contribution Plan, as amended.(5)(13) |
|
|
|
10.72
|
|
2005 Bonuses and 2006 Annual Base Salary for Named Executive Officers and Summary of 2006
Annual Bonus Program.(5)(14) |
|
|
|
10.73
|
|
2006 Long-Term Incentive Plan.(2)(5) |
|
|
|
10.74
|
|
Forms of Grant Notice and Stock Option Agreement under the 2006 Long-Term Incentive
Plan.(2)(5) |
66
|
|
|
Exhibit |
|
|
Number |
|
Description |
21
|
|
Subsidiaries of the Registrant. |
|
|
|
23.1
|
|
Consent of Independent Registered Public Accounting Firm. |
|
|
|
31.1
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Paul E. Jacobs. |
|
|
|
31.2
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for William E. Keitel. |
|
|
|
32.1
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 for Paul E. Jacobs. |
|
|
|
32.2
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 for William E. Keitel. |
|
|
|
(1) |
|
Filed as Annex A to the Registrants Registration Statement on Form S-4 (No. 333-127725).
|
|
(2) |
|
Filed as an exhibit to the Registrants Current Report on Form 8-K filed on March 13, 2006. |
|
(3) |
|
Filed as an exhibit to the Registrants Current Report on Form 8-K filed on September 30,
2005. |
|
(4) |
|
Filed as an exhibit to the Registrants Current Report on Form 8-K filed on September 22,
2006. |
|
(5) |
|
Indicates management or compensatory plan or arrangement required to be identified pursuant
to Item 15(a). |
|
(6) |
|
Filed as an exhibit to the Registrants Registration Statement on Form S-1 (No. 33-42782). |
|
(7) |
|
Filed as an exhibit to the Registrants Quarterly Report on Form 10-Q for the quarter ended
June 27, 2004. |
|
(8) |
|
Filed as an exhibit to the Registrants Quarterly Report on Form 10-Q for the quarter ended
March 26, 2000. |
|
(9) |
|
Filed as an exhibit to the Registrants Quarterly Report on Form 10-Q for the quarter ended
April 1, 2001. |
|
(10) |
|
Filed as an exhibit to the Registrants Quarterly Report on Form 10-Q for the quarter ended
March 28, 2004. |
|
(11) |
|
Filed as an exhibit to the Registrants Current Report on Form 8-K filed on February 25,
2005. |
|
(12) |
|
Filed as an exhibit to the Registrants Current Report on Form 8-K/A filed on May 6, 2005.
|
|
(13) |
|
Filed as an exhibit to the Registrants Current Report on Form 8-K filed on October 26, 2005. |
|
(14) |
|
Filed under item 1.01 of the Registrants Current Report on Form 8-K filed on November 8,
2005. |
67
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, 2006
|
|
|
|
|
|
QUALCOMM Incorporated
|
|
|
By: |
/s/ Paul E. Jacobs
|
|
|
|
Paul E. Jacobs, |
|
|
|
Chief Executive Officer |
|
68
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/ Paul E. Jacobs
|
|
Chief Executive Officer and Director
|
|
November 2, 2006 |
Paul E. Jacobs
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
/s/ William E. Keitel
|
|
Chief Financial Officer
|
|
November 2, 2006 |
William E. Keitel
|
|
(Principal Financial and Accounting Officer) |
|
|
|
|
|
|
|
/s/ Irwin Jacobs
|
|
Chairman of the Board
|
|
November 2, 2006 |
Irwin Jacobs
|
|
|
|
|
|
|
|
|
|
/s/ Barbara T. Alexander
|
|
Director
|
|
November 2, 2006 |
Barbara T. Alexander
|
|
|
|
|
|
|
|
|
|
/s/ Richard C. Atkinson
|
|
Director
|
|
November 2, 2006 |
Richard C. Atkinson
|
|
|
|
|
|
|
|
|
|
/s/ Adelia A. Coffman
|
|
Director
|
|
November 2, 2006 |
Adelia A. Coffman
|
|
|
|
|
|
|
|
|
|
/s/ Donald Cruickshank
|
|
Director
|
|
November 2, 2006 |
Donald Cruickshank
|
|
|
|
|
|
|
|
|
|
/s/ Raymond V. Dittamore
|
|
Director
|
|
November 2, 2006 |
Raymond V. Dittamore
|
|
|
|
|
|
|
|
|
|
/s/ Diana Lady Dougan
|
|
Director
|
|
November 2, 2006 |
Diana Lady Dougan
|
|
|
|
|
|
|
|
|
|
/s/ Robert E. Kahn
|
|
Director
|
|
November 2, 2006 |
Robert E. Kahn
|
|
|
|
|
|
|
|
|
|
/s/ Sherry Lansing
|
|
Director
|
|
November 2, 2006 |
Sherry Lansing
|
|
|
|
|
|
|
|
|
|
/s/ Duane A. Nelles
|
|
Director
|
|
November 2, 2006 |
Duane A. Nelles
|
|
|
|
|
|
|
|
|
|
/s/ Peter M. Sacerdote
|
|
Director
|
|
November 2, 2006 |
Peter M. Sacerdote
|
|
|
|
|
|
|
|
|
|
/s/ Brent Scowcroft
|
|
Director
|
|
November 2, 2006 |
Brent Scowcroft
|
|
|
|
|
|
|
|
|
|
/s/ Marc I. Stern
|
|
Director
|
|
November 2, 2006 |
Marc I. Stern
|
|
|
|
|
|
|
|
|
|
/s/ Richard Sulpizio
|
|
Director
|
|
November 2, 2006 |
Richard Sulpizio
|
|
|
|
|
69
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of QUALCOMM Incorporated:
We have completed integrated
audits of QUALCOMM Incorporateds consolidated financial
statements and of its internal control over financial reporting as of September 24, 2006 in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Our
opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the index appearing under Item
15(a)(1) present fairly, in all material respects, the financial position of QUALCOMM Incorporated
and its subsidiaries (the Company) at September 24, 2006 and September 25, 2005, and the results of
their operations and their cash flows for each of the three years in the period ended September 24,
2006 in conformity with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule listed in the index appearing under
Item 15(a)(2) presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements and financial
statement schedule based on our audits. We conducted our audits of these statements in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, the Company changed the
manner in which it accounts for share-based compensation in fiscal 2006.
Internal control over financial reporting
Also, in our opinion, managements assessment, included in Managements Report on Internal
Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective
internal control over financial reporting as of September 24, 2006 based on criteria established in
Internal Control Integrated Framework issued 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 24, 2006, based on criteria established in
Internal Control Integrated Framework issued by the COSO. The Companys 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 managements assessment and on the effectiveness of the Companys 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 managements 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.
A companys 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 companys internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance
F-1
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
|
|
|
/s/ PricewaterhouseCoopers LLP |
|
|
|
|
|
PricewaterhouseCoopers LLP
San Diego, California
November 2, 2006
F-2
QUALCOMM Incorporated
CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
September 24, |
|
|
September 25, |
|
|
|
2006 |
|
|
2005 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,607 |
|
|
$ |
2,070 |
|
Marketable securities |
|
|
4,114 |
|
|
|
4,478 |
|
Accounts receivable, net |
|
|
700 |
|
|
|
544 |
|
Inventories |
|
|
250 |
|
|
|
177 |
|
Deferred tax assets |
|
|
235 |
|
|
|
343 |
|
Other current assets |
|
|
143 |
|
|
|
179 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
7,049 |
|
|
|
7,791 |
|
Marketable securities |
|
|
4,228 |
|
|
|
2,133 |
|
Property, plant and equipment, net |
|
|
1,482 |
|
|
|
1,022 |
|
Goodwill |
|
|
1,230 |
|
|
|
571 |
|
Deferred tax assets |
|
|
512 |
|
|
|
444 |
|
Other assets |
|
|
707 |
|
|
|
518 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
15,208 |
|
|
$ |
12,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Trade accounts payable |
|
$ |
420 |
|
|
$ |
376 |
|
Payroll and other benefits related liabilities |
|
|
273 |
|
|
|
196 |
|
Unearned revenue |
|
|
197 |
|
|
|
163 |
|
Other current liabilities |
|
|
532 |
|
|
|
335 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,422 |
|
|
|
1,070 |
|
Unearned revenue |
|
|
141 |
|
|
|
146 |
|
Other liabilities |
|
|
239 |
|
|
|
144 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,802 |
|
|
|
1,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 4 and 9) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value; issuable in series;
8 shares authorized; none outstanding at
September 24, 2006 and September 25, 2005 |
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value; 6,000 shares
authorized; 1,652 and 1,640 shares issued and
outstanding at September 24, 2006 and September 25, 2005 |
|
|
|
|
|
|
|
|
Paid-in capital |
|
|
7,242 |
|
|
|
6,753 |
|
Retained earnings |
|
|
6,100 |
|
|
|
4,328 |
|
Accumulated other comprehensive income |
|
|
64 |
|
|
|
38 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
13,406 |
|
|
|
11,119 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
15,208 |
|
|
$ |
12,479 |
|
|
|
|
|
|
|
|
See accompanying notes.
F-3
QUALCOMM Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
September 24, |
|
|
September 25, |
|
|
September 26, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and services |
|
$ |
4,776 |
|
|
$ |
3,744 |
|
|
$ |
3,514 |
|
Licensing and royalty fees |
|
|
2,750 |
|
|
|
1,929 |
|
|
|
1,366 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
7,526 |
|
|
|
5,673 |
|
|
|
4,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of equipment and services revenues |
|
|
2,182 |
|
|
|
1,645 |
|
|
|
1,484 |
|
Research and development |
|
|
1,538 |
|
|
|
1,011 |
|
|
|
720 |
|
Selling, general and administrative |
|
|
1,116 |
|
|
|
631 |
|
|
|
547 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
4,836 |
|
|
|
3,287 |
|
|
|
2,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
2,690 |
|
|
|
2,386 |
|
|
|
2,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net (Note 5) |
|
|
466 |
|
|
|
423 |
|
|
|
184 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
3,156 |
|
|
|
2,809 |
|
|
|
2,313 |
|
Income tax expense |
|
|
(686 |
) |
|
|
(666 |
) |
|
|
(588 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
2,470 |
|
|
|
2,143 |
|
|
|
1,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations (Note 12): |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations before income taxes |
|
|
|
|
|
|
|
|
|
|
(10 |
) |
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,470 |
|
|
$ |
2,143 |
|
|
$ |
1,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share from continuing operations |
|
$ |
1.49 |
|
|
$ |
1.31 |
|
|
$ |
1.07 |
|
Basic loss per common share from discontinued operations |
|
|
|
|
|
|
|
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
1.49 |
|
|
$ |
1.31 |
|
|
$ |
1.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share from continuing operations |
|
$ |
1.44 |
|
|
$ |
1.26 |
|
|
$ |
1.03 |
|
Diluted loss per common share from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
1.44 |
|
|
$ |
1.26 |
|
|
$ |
1.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculations: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
1,659 |
|
|
|
1,638 |
|
|
|
1,616 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
1,711 |
|
|
|
1,694 |
|
|
|
1,675 |
|
|
|
|
|
|
|
|
|
|
|
Dividends per share announced |
|
$ |
0.42 |
|
|
$ |
0.32 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-4
QUALCOMM Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
September 24, |
|
|
September 25, |
|
|
September 26, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 (revised) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,470 |
|
|
$ |
2,143 |
|
|
$ |
1,720 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
272 |
|
|
|
200 |
|
|
|
171 |
|
Net realized gains on marketable securities and other investments |
|
|
(136 |
) |
|
|
(179 |
) |
|
|
(88 |
) |
Share-based compensation expense |
|
|
495 |
|
|
|
|
|
|
|
|
|
Incremental tax benefits from stock options exercised |
|
|
(403 |
) |
|
|
|
|
|
|
|
|
Losses (gains) on derivative instruments |
|
|
29 |
|
|
|
(33 |
) |
|
|
(7 |
) |
Other-than-temporary losses on marketable securities and
other investments |
|
|
24 |
|
|
|
14 |
|
|
|
12 |
|
Equity in losses of investees |
|
|
29 |
|
|
|
28 |
|
|
|
72 |
|
Non-cash income tax expense |
|
|
514 |
|
|
|
498 |
|
|
|
419 |
|
Gain on disposal of discontinued operations (Note 12) |
|
|
|
|
|
|
|
|
|
|
(7 |
) |
Other items, net |
|
|
(28 |
) |
|
|
|
|
|
|
23 |
|
Changes in assets and liabilities, net of effects of acquisitions (Note 11): |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
(133 |
) |
|
|
35 |
|
|
|
(96 |
) |
Inventories |
|
|
(71 |
) |
|
|
(23 |
) |
|
|
(48 |
) |
Other assets |
|
|
15 |
|
|
|
(74 |
) |
|
|
56 |
|
Trade accounts payable |
|
|
51 |
|
|
|
57 |
|
|
|
154 |
|
Payroll, benefits and other liabilities |
|
|
96 |
|
|
|
49 |
|
|
|
146 |
|
Unearned revenue |
|
|
29 |
|
|
|
(29 |
) |
|
|
(58 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
3,253 |
|
|
|
2,686 |
|
|
|
2,469 |
|
|
|
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(685 |
) |
|
|
(576 |
) |
|
|
(333 |
) |
Purchases of available-for-sale securities |
|
|
(12,517 |
) |
|
|
(8,055 |
) |
|
|
(8,372 |
) |
Proceeds from sale of available-for-sale securities |
|
|
10,853 |
|
|
|
8,072 |
|
|
|
5,026 |
|
Purchases of held-to-maturity securities |
|
|
|
|
|
|
|
|
|
|
(184 |
) |
Maturities of held-to-maturity securities |
|
|
130 |
|
|
|
10 |
|
|
|
401 |
|
Collection of finance receivables |
|
|
|
|
|
|
2 |
|
|
|
196 |
|
Cash paid in connection with sale of
Vésper Operating Companies (Note 12) |
|
|
|
|
|
|
|
|
|
|
(48 |
) |
Proceeds from sale of the Vésper Towers (Note 12) |
|
|
|
|
|
|
|
|
|
|
45 |
|
Other investments and acquisitions, net of cash acquired |
|
|
(407 |
) |
|
|
(249 |
) |
|
|
(70 |
) |
Other items, net |
|
|
3 |
|
|
|
20 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(2,623 |
) |
|
|
(776 |
) |
|
|
(3,327 |
) |
|
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
692 |
|
|
|
386 |
|
|
|
330 |
|
Incremental tax benefits from stock options exercised |
|
|
403 |
|
|
|
|
|
|
|
|
|
Repurchase and retirement of common stock |
|
|
(1,500 |
) |
|
|
(953 |
) |
|
|
|
|
Proceeds from put options |
|
|
11 |
|
|
|
37 |
|
|
|
5 |
|
Dividends paid |
|
|
(698 |
) |
|
|
(524 |
) |
|
|
(308 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by financing activities |
|
|
(1,092 |
) |
|
|
(1,054 |
) |
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(463 |
) |
|
|
856 |
|
|
|
(831 |
) |
Cash and cash equivalents at beginning of year |
|
|
2,070 |
|
|
|
1,214 |
|
|
|
2,045 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
1,607 |
|
|
$ |
2,070 |
|
|
$ |
1,214 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
QUALCOMM Incorporated
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Retained |
|
|
Comprehensive |
|
|
Stockholders' |
|
|
|
Shares |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Equity |
|
Balance at September 28, 2003 |
|
|
1,597 |
|
|
$ |
6,325 |
|
|
$ |
1,297 |
|
|
$ |
(24 |
) |
|
$ |
7,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
1,720 |
|
|
|
|
|
|
|
1,720 |
|
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56 |
|
|
|
56 |
|
Unrealized net gains on securities, net of income taxes of $20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29 |
|
|
|
29 |
|
Reclassification adjustment for net realized gains on securities
included in net income, net of income taxes of $35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53 |
) |
|
|
(53 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
36 |
|
|
|
284 |
|
|
|
|
|
|
|
|
|
|
|
284 |
|
Tax benefit from exercise of stock options |
|
|
|
|
|
|
285 |
|
|
|
|
|
|
|
|
|
|
|
285 |
|
Issuance for Employee Stock Purchase and Executive
Retirement Plans |
|
|
2 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
46 |
|
Dividends |
|
|
|
|
|
|
|
|
|
|
(308 |
) |
|
|
|
|
|
|
(308 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 26, 2004 |
|
|
1,635 |
|
|
|
6,940 |
|
|
|
2,709 |
|
|
|
15 |
|
|
|
9,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
2,143 |
|
|
|
|
|
|
|
2,143 |
|
Unrealized net gains on securities and derivative instruments,
net of income taxes of $84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119 |
|
|
|
119 |
|
Reclassification adjustment for net realized gains on securities
and derivative instruments included in net income,
net of income taxes of $73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(109 |
) |
|
|
(109 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
30 |
|
|
|
348 |
|
|
|
|
|
|
|
|
|
|
|
348 |
|
Tax benefit from exercise of stock options |
|
|
|
|
|
|
346 |
|
|
|
|
|
|
|
|
|
|
|
346 |
|
Issuance for Employee Stock Purchase and Executive
Retirement Plans |
|
|
2 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
56 |
|
Repurchase and retirement of common stock |
|
|
(27 |
) |
|
|
(953 |
) |
|
|
|
|
|
|
|
|
|
|
(953 |
) |
Dividends |
|
|
|
|
|
|
|
|
|
|
(524 |
) |
|
|
|
|
|
|
(524 |
) |
Value of options exchanged for acquisitions |
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
19 |
|
Deferred stock-based compensation from acquisitions |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 25, 2005 |
|
|
1,640 |
|
|
|
6,753 |
|
|
|
4,328 |
|
|
|
38 |
|
|
|
11,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
2,470 |
|
|
|
|
|
|
|
2,470 |
|
Unrealized net gains on securities and derivative instruments,
net of income taxes of $65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104 |
|
|
|
104 |
|
Reclassification adjustment for net realized gains on securities
and derivative instruments included in net income,
net of income taxes of $56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(89 |
) |
|
|
(89 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
36 |
|
|
|
608 |
|
|
|
|
|
|
|
|
|
|
|
608 |
|
Tax benefit from exercise of stock options |
|
|
|
|
|
|
394 |
|
|
|
|
|
|
|
|
|
|
|
394 |
|
Issuance for Employee Stock Purchase and Executive
Retirement Plans |
|
|
2 |
|
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
71 |
|
Share-based compensation |
|
|
|
|
|
|
496 |
|
|
|
|
|
|
|
|
|
|
|
496 |
|
Repurchase and retirement of common stock |
|
|
(34 |
) |
|
|
(1,473 |
) |
|
|
|
|
|
|
|
|
|
|
(1,473 |
) |
Dividends |
|
|
|
|
|
|
|
|
|
|
(698 |
) |
|
|
|
|
|
|
(698 |
) |
Value of common stock issued for acquisition |
|
|
8 |
|
|
|
353 |
|
|
|
|
|
|
|
|
|
|
|
353 |
|
Value of options exchanged for acquisitions |
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 24, 2006 |
|
|
1,652 |
|
|
$ |
7,242 |
|
|
$ |
6,100 |
|
|
$ |
64 |
|
|
$ |
13,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-6
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company and Its 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. The Company is a leading developer and supplier of Code 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 certain 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
Companys license fees and royalty revenue is comprised of fees and royalties from companies
selling wireless products incorporating the Companys CDMA technologies, but the Company has also
licensed its patented OFDMA technology. The Company provides satellite- and terrestrial-based
two-way data messaging and position reporting services for transportation companies, private
fleets, construction equipment fleets and other enterprise companies. The Company provides the BREW
(Binary Runtime Environment for Wireless) product and services to wireless network operators,
handset manufacturers and application developers and support for developing and delivering
over-the-air wireless applications and services. The Company also makes strategic investments to
promote the worldwide adoption of CDMA products and services for wireless voice and Internet data
communications.
Principles of Consolidation. The Companys 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 Companys foreign subsidiaries are included in the consolidated financial statements one
month in arrears to facilitate the timely inclusion of such entities in the Companys 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 the Vésper Towers during fiscal
2004 as a result of their sale (Note 12). Results of operations related to the Vésper Operating
Companies and the Vésper Towers are presented as discontinued operations.
Financial Statement 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
Companys consolidated financial statements and the accompanying notes. Actual results could differ
from those estimates. The Companys consolidated statement of cash flows for fiscal 2004 has been
revised to combine cash flows from discontinued operations with cash flows from continuing
operations. Cash flows from discontinued operations were previously aggregated and reported in a
separate line item in the statement of cash flows. Certain other prior year amounts have been
reclassified to conform to the current year presentation.
Fiscal 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 24, 2006, September 25, 2005 and
September 26, 2004 each included 52 weeks.
Revenue Recognition. The Company derives revenue principally from sales of integrated circuit
products, from royalties for its intellectual property, from messaging and other services and
related hardware sales, from software development and licensing and related services, and from
license fees for intellectual property. The timing of revenue recognition and the amount of revenue
actually recognized in each case depends upon a variety of factors, including the specific terms of
each arrangement and the nature of the Companys deliverables and obligations. The development
stage of the Companys customers products does not affect the timing or amount of revenue
recognized.
The Company licenses rights to use portions of its intellectual property portfolio, which
includes certain patent rights essential to and/or useful in the manufacture and sale of certain
wireless products, including, without limitation, products implementing cdmaOne, CDMA2000, Wideband
CDMA (WCDMA), CDMA Time Division
F-7
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Duplex (TDD) and/or OFDMA standards and their derivatives. Licensees typically pay a license
fee in one or more installments and ongoing royalties based on their sales of products
incorporating or using the Companys licensed intellectual property. License fees are recognized
over the estimated period of future benefit to the average licensee, typically five to seven years.
The Company earns royalties on such licensed CDMA products sold worldwide by its licensees at the
time that the licensees sales occur. The Companys licensees, however, do not report and pay
royalties owed for sales in any given quarter until after the conclusion of that quarter, and, in
some instances, although royalties are reported quarterly, payment is on a semi-annual basis.
During the periods preceding the fourth quarter of fiscal 2004, the Company estimated and recorded
the royalty revenues earned for sales by certain licensees (the Estimated Licensees) in the quarter
in which such sales occurred, but only when reasonable estimates of such amounts could be made. Not
all royalties earned were estimated.
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 prospectively and
had the initial one-time effect of reducing royalty revenues recorded in the fourth quarter of
fiscal 2004.
Revenues from sales of the Companys CDMA-based integrated circuits are recognized at the time
of shipment, or when title and risk of loss pass to the customer and other criteria for revenue
recognition are met, if later. Revenues from providing services are recorded when earned.
The Company recognizes revenues allocated to certain satellite and terrestrial-based two-way
data messaging and position reporting hardware using the
residual method. Revenues from such sales are recorded at the time of shipment, or when title and
risk of loss pass to the customer and other criteria for revenue recognition are met.
Revenues
from long-term contracts are generally recognized using the percentage-of-completion method of accounting, based on costs incurred compared with total estimated costs.
The percentage-of-completion method relies on estimates of total contract revenue and costs.
Revenue and profit are subject to revisions as the contract progresses to completion. Revisions in
profit estimates are charged or credited to income in the period in which the facts that give rise
to the revision become known. If actual contract costs are greater than expected, reduction of
contract profit would be required. Billings on uncompleted contracts in excess of incurred cost and
accrued profit are classified as unearned revenue in the Companys consolidated balance sheets.
Estimated contract losses are recognized when determined. If substantive uncertainty related to
customer acceptance exists or the contracts duration is relatively short, the Company uses the
completed-contract method.
The Company provides both perpetual and renewable time-based software licenses. Revenues from
software license fees are recognized when all of the following criteria are met: the written
agreement is executed; the software is delivered; the license fee is fixed and determinable;
collectibility of the license fee is probable; and if applicable, when vendor-specific objective
evidence exists to allocate the total license fee to elements of multiple-element arrangements,
including post-contract customer support. When contracts contain multiple elements wherein
vendor-specific objective evidence of fair value exists for all undelivered elements, the Company
recognizes revenue for the delivered elements and defers revenue for the fair value of the
undelivered elements until the remaining obligations have been satisfied. If vendor-specific
objective evidence of fair value does not exist for all undelivered elements, revenue for the
delivered and undelivered elements is deferred until remaining obligations have been satisfied, or
if the only undelivered element is post-contract customer support and vendor specific objective
evidence of the fair value of post-contract customer support does not exist, revenue from the
entire arrangement is recognized ratably over the support period. Judgments and estimates are made
in connection with the recognition of software license revenue, which may include assessments of
collectibility, the fair value of deliverable elements and the implied support period. The amount
or timing of the Companys software license revenue may differ as a result of changes in these
judgments or estimates.
The Company records reductions to revenue for customer incentive programs, including special
pricing agreements and other volume-related rebate programs. Such reductions to revenue are
estimates, which are based on
F-8
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
a number of factors, including the Companys assumptions related to historical and projected
customer sales volumes and the contractual provisions of the customer agreements.
Unearned revenue consists primarily of fees related to software products, license fees for
intellectual property and hardware products sales with continuing performance obligations.
Concentrations. A significant portion of the Companys 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 three customers of the Companys QCT, QTL
and QWI segments, each comprised an aggregate of 13% of total consolidated revenues in fiscal 2006,
compared to 15%, 13% and 11% of total consolidated revenues in fiscal 2005 and 15%, 15% and 10% of
total consolidated revenues in fiscal 2004. Aggregated accounts receivable from these three
customers comprised 45% of gross accounts receivable at September 24, 2006 and September 25, 2005.
Revenues from international customers were approximately 87%, 82% and 79% of total
consolidated revenues in fiscal 2006, 2005 and 2004, respectively.
Cost of Equipment and Services Revenues. Cost of equipment and services revenues is primarily
comprised of the cost of equipment revenues, the cost of messaging services revenues and the cost
of development and other services revenues. Cost of equipment revenues consists of the cost of
equipment sold and sustaining engineering costs, including personnel and related costs. Cost of
messaging services revenues consists principally of satellite transponder costs, network operations
expenses, including personnel and related costs, depreciation and airtime charges by
telecommunications operators. Cost of development and other services revenues primarily includes
personnel costs and related expenses.
Research and 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.
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.
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.
The Companys income tax returns are based on calculations and assumptions that are subject to
examination by the Internal Revenue Service and other tax authorities. While the Company believes
it has appropriate support for the positions taken on its tax returns, the Company regularly
assesses the potential outcomes of examinations by tax authorities in determining the adequacy of
its provision for income taxes. As part of its assessment of potential adjustments to its tax
returns, the Company increases its current tax liability to the extent an adjustment would result
in a cash tax payment or decreases its deferred tax assets to the extent an adjustment would not
result in a cash tax payment. The Company continually assesses the likelihood and amount of
potential adjustments and adjusts the income tax provision, the current tax liability and deferred
taxes in the period in which the facts that give rise to a revision become known.
Due to the adoption of the revised Statement of Financial Accounting Standards No. 123,
Share-Based Payment (FAS 123R) beginning September 26, 2005, the Company recognizes windfall tax
benefits associated with the exercise of stock options directly to stockholders equity only when
realized. Accordingly, deferred tax assets are not recognized for net operating loss carryforwards
resulting from windfall tax benefits occurring from September 26, 2005 onward. A windfall tax
benefit occurs when the actual tax benefit realized by the Company upon an employees disposition
of a share-based award exceeds the deferred tax asset, if any, associated with the award that the
Company had recorded. When assessing whether a tax benefit relating to share-based compensation has
been realized, the Company follows the tax law ordering method, under which current year
share-based compensation deductions are assumed to be utilized before net operating loss
carryforwards and other tax attributes.
F-9
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash 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 the appropriate classification of marketable
securities at the time of purchase and reevaluates such designation as of each balance sheet date.
Held-to-maturity securities are carried at amortized cost, which approximates fair value.
Available-for-sale securities are stated at fair value as determined by the most recently traded
price of each security at the balance sheet date. The net unrealized gains or losses on
available-for-sale securities are reported as a component of comprehensive income (loss), net of
tax. The specific identification method is used to compute the realized gains and losses on debt
and equity securities.
The Company regularly monitors and evaluates the realizable value of its marketable
securities. When assessing marketable securities for other-than-temporary declines in value, the
Company considers such factors as, among other things, how significant the decline in value is as a
percentage of the original cost, how long the market value of the investment has been less than its
original cost, the performance of the investees stock price in relation to the stock price of its
competitors within the industry and the market in general, analyst recommendations, any news that
has been released specific to the investee and the outlook for the overall industry in which the
investee operates. The Company also reviews the financial statements of the investee to determine
if the investee is experiencing financial difficulties and considers new products/services that the
investee may have forthcoming that will improve its operating results. If events and circumstances
indicate that a decline in the value of these assets has occurred and is other-than-temporary, 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 Companys 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 Companys 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.
Upon the retirement or disposition of property, plant and equipment, the related cost and
accumulated depreciation or amortization are removed, and a gain or loss is recorded.
Investments in Other Entities. The Company makes strategic investments in companies that have
developed or are developing innovative wireless data applications and wireless operators that
promote the worldwide deployment of CDMA systems. Investments in corporate entities with less than
a 20% voting interest are generally accounted for under the cost method. The cost method is also
used to account for investments that are not in-substance common stock. The Company uses the equity
method to account for investments in common stock or in-substance common
F-10
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
stock of corporate entities, including limited liability corporations that do not maintain
specific ownership accounts, in which it has a voting interest of 20% to 50% or in which it
otherwise has the ability to exercise significant influence, and in partnerships and limited
liability corporations that do maintain specific ownership accounts in which it has other than
minor to 50% ownership interests. Under the equity method, the investment is originally recorded at
cost and adjusted to recognize the Companys share of net earnings or losses of the investee,
limited to the extent of the Companys investment in and advances to the investee and financial
guarantees on behalf of the investee that create additional basis. The Companys 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 Companys 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 investees latest financing round, the
performance of the investee in relation to its own operating targets and its business plan, the
investees revenue and cost trends, as well as liquidity and cash position, including its cash burn
rate, market acceptance of the investees 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 investees 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 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, net
of tax. The amounts are subsequently reclassified into revenues in the same period in which the
underlying transactions affect the Companys earnings. The Company had no outstanding forward
contracts at September 24, 2006 and September 25, 2005. The value of the Companys foreign currency
option contracts recorded in other current assets was $1 million and $16 million at September 24,
2006 and September 25, 2005, respectively, and the value recorded in other current liabilities was
$3 million at September 24, 2006, all of which were designated as cash-flow hedging instruments.
In connection with its stock repurchase program, the Company may sell put options that require
the Company to repurchase shares of its common stock at fixed prices. The premiums received from
put options are recorded as other current liabilities. Changes in the fair value of put options are
recorded in investment income (expense) as gains (losses) on derivative instruments. The value of
the put options recorded in other current liabilities was $19 million and $7 million at September
24, 2006 and September 25, 2005, respectively.
Goodwill and Other Intangible Assets. Goodwill represents the excess of purchase price and
related costs over the value assigned to the net tangible and identifiable intangible assets of
businesses acquired. Goodwill is tested annually for impairment and in interim periods if certain
events occur indicating that the carrying value of goodwill may be impaired. The Company completed
its annual testing for fiscal 2006, 2005 and 2004 and determined that its recorded goodwill was not
impaired.
Software development costs are capitalized when a products 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 three years, taking into account such factors as the
effects of obsolescence, technological advances and competition. The weighted-average amortization
period for capitalized software was three years and one year at September 24, 2006 and September
25, 2005, respectively. Other intangible assets are amortized on a straight-line basis over their
useful lives, ranging from less than one year to 28 years.
F-11
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted-average amortization periods for finite-lived intangible assets, by class, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 24, |
|
September 25, |
|
|
2006 |
|
2005 |
Wireless licenses |
|
15 years |
|
15 years |
Marketing-related |
|
19 years |
|
18 years |
Technology-based |
|
15 years |
|
9 years |
Customer-related |
|
7 years |
|
7 years |
Other |
|
28 years |
|
28 years |
Total intangible assets |
|
15 years |
|
13 years |
Changes in the weighted-average amortization periods of technology-based intangible assets
from fiscal 2005 to 2006 resulted from additions to intangible assets related to acquisitions (Note
11).
Valuation of Long-Lived and Intangible Assets. The Company assesses potential impairments to
its long-lived assets when there is evidence that events or changes in circumstances indicate that
the carrying amount of an asset may not be recovered. An impairment loss is recognized when the
carrying amount of the long-lived asset is not recoverable and exceeds its fair value. The carrying
amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash
flows expected to result from the use and eventual disposition of the asset. Any required
impairment loss is measured as the amount by which the carrying amount of a long-lived asset
exceeds its fair value and is recorded as a reduction in the carrying value of the related asset
and a charge to operating results.
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 Companys pending litigation and revises its estimates.
Share-Based Payments. On September 26, 2005, the Company adopted FAS 123R. Under FAS 123R,
share-based compensation cost is measured at the grant date, based on the estimated fair value of
the award, and is recognized as expense over the employees requisite service period. The Company
has no awards with market or performance conditions. The Company adopted the provisions of FAS 123R
using a modified prospective application. Accordingly, prior periods have not been revised for
comparative purposes. The valuation provisions of FAS 123R apply to new awards and to awards that
are outstanding on the effective date, which are subsequently modified or cancelled. Estimated
compensation expense for awards outstanding at the effective date will be recognized over the
remaining service period using the compensation cost calculated for pro forma disclosure purposes
under FASB Statement No. 123, Accounting for Stock-Based Compensation (FAS 123).
On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, Transition
Election Related to Accounting for Tax Effects of Share-Based Payment Awards. The Company has
elected to adopt the alternative transition method provided in this FASB Staff Position for
calculating the tax effects of share-based compensation pursuant to FAS 123R. The alternative
transition method includes a simplified method to establish the beginning balance of the additional
paid-in capital pool (APIC pool) related to the tax effects of employee share-based compensation,
which is available to absorb tax deficiencies which could be recognized subsequent to the adoption
of FAS 123R.
Share-Based Compensation Information under FAS 123R
Upon adoption of FAS 123R, the Company also changed its method of valuation for stock options
granted beginning in fiscal 2006 to a lattice binomial option-pricing model (binomial model) from
the Black-Scholes option-pricing model (Black-Scholes model) which was previously used for the
Companys pro forma information required under FAS 123. The Companys employee stock options have
various restrictions that reduce option value, including vesting provisions and restrictions on
transfer and hedging, among others, and are often exercised prior to their contractual maturity.
Binomial models have evolved such that the currently available models are more capable of
incorporating the features of the Companys employee stock options than closed-form models such as
the Black-Scholes model.
F-12
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted-average estimated fair value of employee stock options granted during fiscal 2006
was $15.73 per share using the binomial model with the following weighted-average assumptions
(annualized percentages) for fiscal 2006:
|
|
|
|
|
Volatility |
|
|
30.7 |
% |
Risk-free interest rate |
|
|
4.6 |
% |
Dividend yield |
|
|
1.0 |
% |
Post-vesting forfeiture rate |
|
|
6.0 |
% |
Suboptimal exercise factor |
|
|
1.7 |
|
The Company used the implied volatility of market-traded options in the Companys stock
for the expected volatility assumption, consistent with the guidance in FAS 123R and the Securities
and Exchange Commissions Staff Accounting Bulletin No. 107. The Company utilized the term
structure of volatility up to approximately two years, and the implied volatility of the option
with the longest time to maturity was used for the expected volatility estimates for periods beyond
two years. Prior to fiscal 2006, the Company had used a combination of its historical stock price
and implied volatility in accordance with FAS 123 for purposes of its pro forma information. The
selection of implied volatility data to estimate expected volatility was based upon the
availability of actively traded options on the Companys stock and the Companys assessment that
implied volatility is more representative of future stock price trends than historical volatility.
The risk-free interest rate assumption is based upon observed interest rates appropriate for
the terms of the Companys employee stock options. The Company does not target a specific dividend
yield for its dividend payments but is required to assume a dividend yield as an input to the
binomial model. The dividend yield assumption is based on the Companys 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 Companys historical option
cancellation and employee exercise information, respectively. The suboptimal exercise factor is the
ratio by which the stock price must increase before employees are expected to exercise their stock
options.
The expected life of employee stock options represents the weighted-average period the stock
options are expected to remain outstanding and is a derived output of the binomial model. The
expected life of employee stock options is impacted by all of the underlying assumptions used in
the Companys model. The binomial model assumes that employees exercise behavior is a function of
the options remaining contractual life and the extent to which the option is in-the-money (i.e.
the average stock price during the period is above the strike price of the stock option). The
binomial model estimates the probability of exercise as a function of these two variables based on
the history of exercises and cancellations of past grants made by the Company. The expected life of
employee stock options granted during fiscal 2006 derived from the binomial model was 5.8 years.
As share-based compensation expense recognized in the consolidated statement of operations for
fiscal 2006 is based on awards ultimately expected to vest, it should be reduced for estimated
forfeitures. FAS 123R requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre-vesting
forfeitures were estimated to be approximately 0% in the year ended September 24, 2006 based on
historical experience. The effect of pre-vesting forfeitures on the Companys recorded expense has
historically been negligible due to the predominantly monthly vesting of option grants. If
pre-vesting forfeitures occur in the future, the Company will record the effect of such forfeitures
as the forfeitures occur. The Company will continue to evaluate the appropriateness of this
assumption. In the Companys pro forma information required under FAS 123 for the periods prior to
fiscal 2006, the Company accounted for forfeitures as they occurred.
F-13
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total estimated share-based compensation expense, related to all of the Companys share-based
awards, recognized for fiscal 2006 was comprised as follows (in millions, except per share data):
|
|
|
|
|
|
|
Year Ended |
|
|
|
September 24, |
|
|
|
2006 |
|
Cost of equipment and services revenues |
|
$ |
41 |
|
Research and development |
|
|
216 |
|
Selling, general and administrative |
|
|
238 |
|
|
|
|
|
Share-based compensation expense before taxes |
|
|
495 |
|
Related income tax benefits |
|
|
(175 |
) |
|
|
|
|
Share-based compensation expense, net of taxes |
|
$ |
320 |
|
|
|
|
|
|
|
|
|
|
Net share-based compensation expense, per common share: |
|
|
|
|
Basic |
|
$ |
0.19 |
|
|
|
|
|
Diluted |
|
$ |
0.19 |
|
|
|
|
|
The Company recorded $86 million in share-based compensation expense during fiscal 2006
related to share-based awards granted during fiscal 2006. In addition, for fiscal 2006, the
adoption of FAS 123R resulted in a reclassification to reduce net cash provided by operating
activities by $403 million, with an offsetting increase in net cash provided by financing
activities, related to incremental tax benefits from stock options exercised in the period.
Pro Forma Information under FAS 123 for Periods Prior to Fiscal 2006
Prior to adopting the provisions of FAS 123R, the Company recorded estimated compensation
expense for employee stock options based upon their intrinsic value on the date of grant pursuant
to Accounting Principles Board Opinion 25 (APB 25), Accounting for Stock Issued to Employees and
provided the required pro forma disclosures of FAS 123. Because the Company established the
exercise price based on the fair market value of the Companys stock at the date of grant, the
stock options had no intrinsic value upon grant, and therefore no estimated expense was recorded
prior to adopting FAS 123R. Each accounting period, the Company reported the potential dilutive
impact of stock options in its diluted earnings per common share using the treasury-stock method.
Out-of-the-money stock options (i.e. the average stock price during the period was below the strike
price of the stock option) were not included in diluted earnings per common share as their effect
was anti-dilutive.
The weighted-average estimated fair value of employee stock options granted during fiscal 2005
and 2004 was $14.80 and $13.92 per share, respectively, using the Black-Scholes model with the
following weighted-average assumptions (annualized percentages) for the same periods:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
Risk-free interest rate |
|
|
3.9 |
% |
|
|
3.8 |
% |
Volatility |
|
|
36.5 |
% |
|
|
53.2 |
% |
Dividend yield |
|
|
0.8 |
% |
|
|
0.6 |
% |
Expected life (years) |
|
|
6.0 |
|
|
|
6.0 |
|
For purposes of pro forma disclosures under FAS 123, the estimated fair value of
share-based payments is assumed to be amortized to expense over the vesting periods. The pro forma
effects of recognizing estimated compensation expense under the fair value method on net income and
earnings per common share were as follows (in millions, except per share data):
F-14
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
September 25, |
|
|
September 26, |
|
|
|
2005 |
|
|
2004 |
|
Net income, as reported |
|
$ |
2,143 |
|
|
$ |
1,720 |
|
Add: Share-based employee compensation expense included
in reported net income, net of related tax benefits |
|
|
2 |
|
|
|
|
|
Deduct: Share-based employee compensation expense
determined under the fair value based method for all
awards, net of related tax effects |
|
|
(305 |
) |
|
|
(281 |
) |
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
1,840 |
|
|
$ |
1,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
1.31 |
|
|
$ |
1.06 |
|
|
|
|
|
|
|
|
Basic pro forma |
|
$ |
1.12 |
|
|
$ |
0.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
1.26 |
|
|
$ |
1.03 |
|
|
|
|
|
|
|
|
Diluted pro forma |
|
$ |
1.09 |
|
|
$ |
0.86 |
|
|
|
|
|
|
|
|
Foreign Currency. Foreign subsidiaries operating in a local currency environment use the
local currency as the functional currency. Resulting translation gains or losses are recognized as
a component of other comprehensive income. Where the United States dollar is the functional
currency, resulting translation gains or losses are recognized in the statements of operations.
During both fiscal 2006 and 2005, net foreign currency transaction gains included in the Companys
statement of operations were $1 million. During fiscal 2004, net foreign currency transaction
losses included in the Companys consolidated statements of operations were $1 million.
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 net realized gains results from the recognition of the net
realized gains in the statement of operations when marketable securities are sold or derivative
instruments are settled.
Components of accumulated other comprehensive income consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 24, |
|
|
September 25, |
|
|
|
2006 |
|
|
2005 |
|
Unrealized gains on marketable securities and
derivative instruments, net of income taxes |
|
$ |
87 |
|
|
$ |
60 |
|
Foreign currency translation |
|
|
(23 |
) |
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
$ |
64 |
|
|
$ |
38 |
|
|
|
|
|
|
|
|
Earnings Per Common Share. Basic earnings per common share is computed by dividing net
income by the weighted-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 Companys share-based compensation
plans and shares subject to written put options, and the weighted-average number of common shares
outstanding during the reporting period. Dilutive common share equivalents include the dilutive
effect of in-the-money shares, which is calculated based on the average share price for each period
using the treasury stock method. Under the treasury stock method, the exercise price of a share,
the amount of compensation cost, if any, for future service that the Company has not yet
recognized, and the amount of estimated tax benefits that would be recorded in paid-in capital, if
any, when the share is exercised are assumed to be used to repurchase shares in the current period.
The incremental dilutive common share equivalents, calculated using the treasury stock method, for
fiscal 2006, 2005 and 2004 were approximately 51,835,000, 56,127,000 and 58,686,000, respectively.
Employee stock options to purchase approximately 54,541,000, 33,660,000 and 40,221,000 shares
of common stock during fiscal 2006, 2005 and 2004, respectively, were outstanding but not included
in the computation of
F-15
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
diluted earnings per common share because the effect on dilutive earnings per
share would be anti-dilutive. Put options outstanding during 2005 and 2004 to purchase a
weighted-average 13,000,000 and 3,000,000 shares of common stock, respectively, were not included
in the earnings per common share computation for fiscal 2005 and 2004 because the put options
exercise prices were less than the average market price of the common stock while
they were outstanding, and therefore, the effect on diluted earnings per common share would be
anti-dilutive (Note 7).
Future Accounting Requirements. In July 2006, the FASB issued FASB Interpretation No. 48 (FIN
48) Accounting for Uncertainty in Income Taxes which prescribes a recognition threshold and
measurement process for recording in the financial statements uncertain tax positions taken or
expected to be taken in a tax return. Additionally, FIN 48 provides guidance on the derecognition,
classification, accounting in interim periods and disclosure requirements for uncertain tax
positions. The accounting provisions of FIN 48 will be effective for the Company beginning October
1, 2007. The cumulative effect of initially adopting FIN 48 will be recorded as an adjustment to
opening retained earnings in the year of adoption and will be presented separately. Only tax
positions that meet the more likely than not recognition threshold at the effective date may be
recognized upon adoption of FIN 48. The Company is in the process of determining the effect, if
any, the adoption of FIN 48 will have on its consolidated financial statements.
Note 2. Marketable Securities
Marketable securities were comprised as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
Noncurrent |
|
|
|
September 24, |
|
|
September 25, |
|
|
September 24, |
|
|
September 25, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprise securities |
|
$ |
|
|
|
$ |
60 |
|
|
$ |
|
|
|
$ |
|
|
Corporate bonds and notes |
|
|
|
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
|
73 |
|
|
|
151 |
|
|
|
|
|
|
|
|
|
Government-sponsored enterprise securities |
|
|
667 |
|
|
|
704 |
|
|
|
|
|
|
|
|
|
Municipal bonds |
|
|
5 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
Foreign government bonds |
|
|
17 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
Corporate bonds and notes |
|
|
2,693 |
|
|
|
2,645 |
|
|
|
23 |
|
|
|
14 |
|
Mortgage- and asset-backed securities |
|
|
617 |
|
|
|
767 |
|
|
|
|
|
|
|
|
|
Non-investment grade debt securities |
|
|
24 |
|
|
|
24 |
|
|
|
1,368 |
|
|
|
694 |
|
Equity mutual funds |
|
|
|
|
|
|
|
|
|
|
1,519 |
|
|
|
293 |
|
Equity securities |
|
|
18 |
|
|
|
30 |
|
|
|
1,318 |
|
|
|
1,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,114 |
|
|
|
4,348 |
|
|
|
4,228 |
|
|
|
2,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,114 |
|
|
$ |
4,478 |
|
|
$ |
4,228 |
|
|
$ |
2,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 24, 2006, the contractual maturities of available-for-sale debt
securities were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years to Maturity |
|
|
No Single |
|
|
|
|
|
|
Less than |
|
|
One to |
|
|
Five to |
|
|
Greater than |
|
|
Maturity |
|
|
|
|
|
|
One Year |
|
|
Five Years |
|
|
Ten Years |
|
|
Ten Years |
|
|
Date |
|
|
Total |
|
|
|
$ |
2,294 |
|
|
$ |
1,358 |
|
|
$ |
679 |
|
|
$ |
27 |
|
|
$ |
1,129 |
|
|
$ |
5,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with no single maturity date include mortgage- and asset-backed securities.
F-16
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Available-for-sale securities were comprised as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
September 24, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
2,693 |
|
|
$ |
194 |
|
|
$ |
(32 |
) |
|
$ |
2,855 |
|
Debt securities |
|
|
5,500 |
|
|
|
11 |
|
|
|
(24 |
) |
|
|
5,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,193 |
|
|
$ |
205 |
|
|
$ |
(56 |
) |
|
$ |
8,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
1,353 |
|
|
$ |
131 |
|
|
$ |
(29 |
) |
|
$ |
1,455 |
|
Debt securities |
|
|
5,039 |
|
|
|
14 |
|
|
|
(27 |
) |
|
|
5,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,392 |
|
|
$ |
145 |
|
|
$ |
(56 |
) |
|
$ |
6,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had no held-to-maturity debt securities at September 24, 2006. The fair
values of held-to-maturity debt securities at September 25, 2005 approximate cost.
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 |
2006 |
|
$ |
176 |
|
|
$ |
(47 |
) |
|
$ |
129 |
|
2005 |
|
|
198 |
|
|
|
(31 |
) |
|
|
167 |
|
2004 |
|
|
105 |
|
|
|
(17 |
) |
|
|
88 |
|
The following table shows the gross unrealized losses and fair values of the Companys
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 24, 2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
More than 12 months |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
U.S. Treasury securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
19 |
|
|
$ |
|
|
Government-sponsored enterprise securities |
|
|
82 |
|
|
|
|
|
|
|
80 |
|
|
|
(1 |
) |
Foreign government bonds |
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
Corporate bonds and notes |
|
|
515 |
|
|
|
(1 |
) |
|
|
407 |
|
|
|
(4 |
) |
Mortgage- and asset-backed securities |
|
|
132 |
|
|
|
(1 |
) |
|
|
150 |
|
|
|
(3 |
) |
Non-investment grade debt securities |
|
|
952 |
|
|
|
(10 |
) |
|
|
61 |
|
|
|
(3 |
) |
Equity mutual funds |
|
|
382 |
|
|
|
(13 |
) |
|
|
|
|
|
|
|
|
Equity securities |
|
|
288 |
|
|
|
(15 |
) |
|
|
5 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,351 |
|
|
$ |
(40 |
) |
|
$ |
732 |
|
|
$ |
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Grade Debt Securities. The Companys investments in investment grade debt
securities consist primarily of investments in certificates of deposit, U.S. Treasury securities,
government-sponsored enterprise securities, municipal bonds, foreign government bonds, mortgage-
and asset-backed securities and corporate bonds and notes. The unrealized losses on the Companys
investments in investment grade debt securities were caused by interest rate increases. Due to the
fact that the decline in market value is attributable to changes in interest rates and not credit
quality, and because the severity and duration of the unrealized losses were not significant, the
Company considered these unrealized losses to be temporary at September 24, 2006.
Non-Investment Grade Debt Securities. The Companys investments in non-investment grade debt
securities consist primarily of investments in corporate bonds and secured bank loans. The
unrealized losses on the Companys 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 24, 2006.
F-17
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marketable Equity Securities. The Companys investments in marketable equity securities
consist primarily of investments in common stock of large companies and equity mutual funds. The
unrealized losses on the Companys 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 24, 2006.
Note 3. Composition of Certain Financial Statement Captions
Accounts Receivable.
|
|
|
|
|
|
|
|
|
|
|
September 24, |
|
|
September 25, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In millions) |
|
Trade, net of allowances for doubtful
accounts of $1 and $2, respectively |
|
$ |
632 |
|
|
$ |
506 |
|
Long-term contracts |
|
|
44 |
|
|
|
26 |
|
Other |
|
|
24 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
$ |
700 |
|
|
$ |
544 |
|
|
|
|
|
|
|
|
Inventories.
|
|
|
|
|
|
|
|
|
|
|
September 24, |
|
|
September 25, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In millions) |
|
Raw materials |
|
$ |
30 |
|
|
$ |
23 |
|
Work-in-process |
|
|
13 |
|
|
|
6 |
|
Finished goods |
|
|
207 |
|
|
|
148 |
|
|
|
|
|
|
|
|
|
|
$ |
250 |
|
|
$ |
177 |
|
|
|
|
|
|
|
|
Property, Plant and Equipment.
|
|
|
|
|
|
|
|
|
|
|
September 24, |
|
|
September 25, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In millions) |
|
Land |
|
$ |
76 |
|
|
$ |
65 |
|
Buildings and improvements |
|
|
853 |
|
|
|
616 |
|
Computer equipment |
|
|
659 |
|
|
|
520 |
|
Machinery and equipment |
|
|
764 |
|
|
|
544 |
|
Furniture and office equipment |
|
|
43 |
|
|
|
33 |
|
Leasehold improvements |
|
|
171 |
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
2,566 |
|
|
|
1,885 |
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
and amortization |
|
|
(1,084 |
) |
|
|
(863 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,482 |
|
|
$ |
1,022 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to property, plant and equipment for fiscal
2006, 2005 and 2004 was $239 million, $177 million and $140 million, respectively. The net book
values of property under capital leases included in buildings and improvements were $58 million and
$2 million at September 24, 2006 and September 25, 2005, 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 for the years ended
September 24, 2006 and September 25, 2005 were $56 million and $3 million, respectively. There were
no capital lease additions in the year ended September 26, 2004.
At September 24, 2006 and September 25, 2005, buildings and improvements and leasehold
improvements with a net book value of $19 million and $36 million, respectively, including
accumulated depreciation and amortization of
F-18
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$15 million and $30 million, respectively, were leased
to third parties or held for lease to third parties. Future minimum rental income on facilities
leased to others in each of the next three years from fiscal 2007 to 2009 are $5 million, $4
million and $1 million, respectively.
Goodwill and Other Intangible Assets. The Companys reportable segment assets do not include
goodwill (Note 10). The Company allocates goodwill to its reporting units for annual impairment
testing purposes. Goodwill was allocable to reporting units included in the Companys reportable
segments at September 24, 2006 as follows: $339 million in QUALCOMM CDMA Technologies, $687
million in QUALCOMM Technology Licensing, $76 million in QUALCOMM Wireless & Internet, and $128
million in QUALCOMM MEMS Technology (a nonreportable segment included in reconciling items in Note
10). The increase in goodwill from September 25, 2005 to September 24, 2006 was the result of the
Companys business acquisitions (Note 11), partially offset by currency translation adjustments.
The components of purchased intangible assets, which are included in other assets, were as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2006 |
|
|
September 25, 2005 |
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Accumulated |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
Wireless licenses |
|
$ |
238 |
|
|
$ |
(22 |
) |
|
$ |
164 |
|
|
$ |
(17 |
) |
Marketing-related |
|
|
21 |
|
|
|
(11 |
) |
|
|
21 |
|
|
|
(9 |
) |
Technology-based |
|
|
257 |
|
|
|
(43 |
) |
|
|
116 |
|
|
|
(48 |
) |
Customer-related |
|
|
6 |
|
|
|
(2 |
) |
|
|
17 |
|
|
|
(13 |
) |
Other |
|
|
7 |
|
|
|
(1 |
) |
|
|
7 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
529 |
|
|
$ |
(79 |
) |
|
$ |
325 |
|
|
$ |
(88 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
All of the Companys purchased intangible assets other than certain wireless licenses in
the amount of $157 million and goodwill are subject to amortization. Amortization expense related
to these intangible assets for fiscal 2006, 2005 and 2004 was $32 million, $19 million and $18
million, respectively, and is expected to be $31 million in fiscal 2007, $27 million in fiscal
2008, $26 million in fiscal 2009, $24 million in fiscal 2010, $23 million in fiscal 2011 and $162
million thereafter.
Capitalized software development costs, which are included in other assets, were $27 million
and $43 million at September 24, 2006 and September 25, 2005, respectively. Accumulated
amortization on capitalized software was $27 million and $42 million at September 24, 2006 and
September 25, 2005, respectively. Amortization expense related to capitalized software for fiscal
2006, 2005 and 2004 was $1 million, $4 million and $13 million, respectively.
Note 4. Investments in Other Entities
The Company and another investor (the Other Investor) own minority interests in Inquam Limited
(Inquam), the owner of a wireless CDMA-based operator in Romania, and in Inquams former
subsidiaries in Portugal (the Portugal Companies). The Company recorded $20 million, $33 million
and $59 million in equity in losses of Inquam during fiscal 2006, 2005 and 2004, respectively,
including a $12 million loss resulting from Inquams restructuring during fiscal 2006. At September
24, 2006 and September 25, 2005, the Companys equity and debt investments in
Inquam and the Portugal Companies totaled $5 million and $26 million, respectively, net of
equity in losses. The Company and the Other Investor have each guaranteed 50% of a portion of
amounts owed under certain of Inquams long-term financing arrangements, up to a combined maximum
of $53 million. The fair value of this obligation, which is insignificant, has been recorded in the
financial statements. The guarantee expires and the facilities mature on December 25, 2011.
Other. Other strategic equity investments as of September 24, 2006 and September 25, 2005
totaled $89 million and $96 million, respectively,
including $73 million and $59 million,
respectively, accounted for using the cost method. Differences between the carrying amounts of
certain other strategic equity method investments and the Companys underlying equity in the net
assets of those investees were not significant at September 24, 2006 and September 25, 2005. At
September 24, 2006, effective ownership interests in these investees ranged from approximately 19%
to 50%. Funding commitments related to these investments totaled $16 million at September 24,
F-19
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2006, which the Company expects to fund through fiscal 2009. Such commitments are subject to the
investees meeting certain conditions. As such, actual equity funding may be in lesser amounts.
Note 5. Investment Income (Expense)
Investment income (expense) was comprised as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
September 24, |
|
|
September 25, |
|
|
September 26, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Interest and dividend income |
|
$ |
416 |
|
|
$ |
256 |
|
|
$ |
175 |
|
Interest expense |
|
|
(4 |
) |
|
|
(3 |
) |
|
|
(2 |
) |
Net realized gains on marketable securities |
|
|
129 |
|
|
|
167 |
|
|
|
88 |
|
Net realized gains on other investments |
|
|
7 |
|
|
|
12 |
|
|
|
|
|
Other-than-temporary losses on marketable securities |
|
|
(20 |
) |
|
|
(13 |
) |
|
|
(12 |
) |
Other-than-temporary losses on other investments |
|
|
(4 |
) |
|
|
(1 |
) |
|
|
|
|
(Losses) gains on derivative instruments |
|
|
(29 |
) |
|
|
33 |
|
|
|
7 |
|
Equity in losses of investees |
|
|
(29 |
) |
|
|
(28 |
) |
|
|
(72 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
466 |
|
|
$ |
423 |
|
|
$ |
184 |
|
|
|
|
|
|
|
|
|
|
|
Note 6. Income Taxes
The components of the income tax provision were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
September 24, |
|
|
September 25, |
|
|
September 26, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Current provision: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
299 |
|
|
$ |
77 |
|
|
$ |
115 |
|
State |
|
|
88 |
|
|
|
42 |
|
|
|
60 |
|
Foreign |
|
|
156 |
|
|
|
140 |
|
|
|
157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
543 |
|
|
|
259 |
|
|
|
332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred provision: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
165 |
|
|
|
398 |
|
|
|
227 |
|
State |
|
|
(23 |
) |
|
|
9 |
|
|
|
29 |
|
Foreign |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143 |
|
|
|
407 |
|
|
|
256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
686 |
|
|
$ |
666 |
|
|
$ |
588 |
|
|
|
|
|
|
|
|
|
|
|
The foreign component of the income tax provision consists primarily of foreign
withholding taxes on royalty income included in United States earnings.
The components of income from continuing operations before income taxes by United States and
foreign jurisdictions were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
September 24, |
|
|
September 25, |
|
|
September 26, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
United States |
|
$ |
1,445 |
|
|
$ |
1,570 |
|
|
$ |
1,571 |
|
Foreign |
|
|
1,711 |
|
|
|
1,239 |
|
|
|
742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,156 |
|
|
$ |
2,809 |
|
|
$ |
2,313 |
|
|
|
|
|
|
|
|
|
|
|
F-20
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a reconciliation of the expected statutory federal income tax provision
to the Companys actual income tax provision (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
September 24, |
|
|
September 25, |
|
|
September 26, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Expected income tax provision at federal
statutory tax rate |
|
$ |
1,105 |
|
|
$ |
983 |
|
|
$ |
809 |
|
State income tax provision, net of federal
benefit |
|
|
168 |
|
|
|
109 |
|
|
|
91 |
|
One-time dividend |
|
|
|
|
|
|
35 |
|
|
|
|
|
Foreign income taxed at other than U.S. rates |
|
|
(525 |
) |
|
|
(290 |
) |
|
|
(215 |
) |
Valuation allowance |
|
|
(46 |
) |
|
|
(78 |
) |
|
|
(44 |
) |
Tax credits |
|
|
(46 |
) |
|
|
(66 |
) |
|
|
(49 |
) |
Other |
|
|
30 |
|
|
|
(27 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
$ |
686 |
|
|
$ |
666 |
|
|
$ |
588 |
|
|
|
|
|
|
|
|
|
|
|
The Company has not provided for United States income taxes and foreign withholding taxes
on a cumulative total of approximately $2.7 billion of undistributed earnings from certain
non-United States subsidiaries indefinitely invested outside the United States. Should the Company
repatriate foreign earnings, the Company would have to adjust the income tax provision in the
period management determined that the Company would repatriate the earnings. On October 22, 2004,
the American Jobs Creation Act of 2004 (the Jobs Creation Act) was signed into law. The Jobs
Creation Act created a temporary incentive for corporations in the United States to repatriate
accumulated income earned abroad by providing an 85 percent dividends received deduction for
certain dividends from controlled foreign corporations. In the fourth quarter of fiscal 2005, the
Company repatriated approximately $0.5 billion of foreign earnings qualifying for the special
incentive under the Jobs Creation Act and recorded a related expense of approximately $35 million
for federal and state income tax liabilities. This distribution does not change the Companys
intention to indefinitely reinvest undistributed earnings of certain of its foreign subsidiaries in
operations outside the United States.
During fiscal 2006, the Internal Revenue Service and the California Franchise Tax Board
completed audits of the Companys tax returns for fiscal 2001 and 2002, resulting in adjustments to
the Companys net operating loss and credit carryover amounts for those years. The tax provision
was reduced by $73 million during fiscal 2006 to reflect the expected impacts of the audits on both the reviewed and open
tax years.
F-21
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company had net deferred tax assets and deferred tax liabilities as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 24, |
|
|
September 25, |
|
|
|
2006 |
|
|
2005 |
|
Accrued liabilities, reserves and other |
|
$ |
169 |
|
|
$ |
191 |
|
Share-based compensation |
|
|
164 |
|
|
|
|
|
Capitalized start-up and organizational costs |
|
|
46 |
|
|
|
|
|
Deferred revenue |
|
|
55 |
|
|
|
76 |
|
Unrealized losses on marketable securities |
|
|
43 |
|
|
|
5 |
|
Unused net operating losses |
|
|
59 |
|
|
|
13 |
|
Capital loss carryover |
|
|
82 |
|
|
|
161 |
|
Tax credits |
|
|
129 |
|
|
|
346 |
|
Unrealized losses on investments |
|
|
145 |
|
|
|
137 |
|
Property, plant and equipment |
|
|
|
|
|
|
8 |
|
Other basis differences |
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred assets |
|
|
914 |
|
|
|
937 |
|
Valuation allowance |
|
|
(22 |
) |
|
|
(69 |
) |
|
|
|
|
|
|
|
Total net deferred assets |
|
$ |
892 |
|
|
$ |
868 |
|
|
|
|
|
|
|
|
Purchased intangible assets |
|
|
(79 |
) |
|
|
(17 |
) |
Deferred contract costs |
|
|
(6 |
) |
|
|
(18 |
) |
Unrealized gains on marketable securities |
|
|
(67 |
) |
|
|
(50 |
) |
Property, plant and equipment |
|
|
(10 |
) |
|
|
|
|
Other basis differences |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
Total deferred liabilities |
|
$ |
(162 |
) |
|
$ |
(86 |
) |
|
|
|
|
|
|
|
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 24, 2006, the Company has provided a valuation allowance on net capital losses of $16
million. The valuation allowance related to capital losses reflects the uncertainty surrounding the
Companys ability to generate sufficient capital gains to utilize all capital losses.
At September 24, 2006 and September 25, 2005, the Company had federal, state and foreign taxes
payable of approximately $137 million and $69 million, respectively, included in other current
liabilities.
At September 24, 2006, the Company had unused federal income tax credits of $534
million, with $522 million expiring from 2012 through 2026, and
state income tax credits of $96 million, which do not expire. The Company does
not expect its federal income tax credits to expire unused.
Cash amounts paid for income taxes, net of refunds received, were $172 million, $168 million
and $127 million for fiscal 2006, 2005 and 2004, respectively. The income taxes paid primarily
relate to foreign withholding taxes.
Note 7. Capital Stock
Preferred Stock. The Company has 8,000,000 shares of preferred stock authorized for issuance
in one or more series, at a par value of $0.0001 per share. In conjunction with the distribution of
preferred share purchase rights, 4,000,000 shares of preferred stock are designated as Series A
Junior Participating Preferred Stock and such shares are reserved for issuance upon exercise of the
preferred share purchase rights. At September 24, 2006 and September 25, 2005, 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 Companys
common stock outstanding. Pursuant to the Rights Agreement, as amended and restated on September
26, 2005, 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% or more of the Companys outstanding shares of common stock without Board
approval. Upon exercise, holders, other than an Acquiring Person, will have the right, subject to
termination, to receive the Companys 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 Companys option prior to the
time such Rights are triggered for a price of $0.001 per Right.
F-22
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Repurchase Program. On November 7, 2005, the Company authorized the repurchase of up to
$2.5 billion of the Companys common stock under a program with no expiration date. The $2.5
billion stock repurchase program replaced a $2.0 billion stock repurchase program, of which
approximately $1.0 billion remained authorized for repurchases. During fiscal 2006 and 2005, the
Company repurchased and retired 34,000,000 shares and 27,083,000 of common stock for $1.5 billion
and $953 million, respectively, excluding $5 million of premiums received related to put options
that were exercised in fiscal 2006. The Company did not repurchase any of the Companys common
stock during fiscal 2004. At September 24, 2006, approximately $0.9 billion remained authorized for
repurchases under the stock repurchase program, net of put options outstanding.
In connection with the Companys stock repurchase program, the Company sold put options on its
own stock during fiscal 2006, 2005 and 2004. At September 24, 2006, the Company had two outstanding
put options enabling holders to sell 2,000,000 shares of the Companys common stock to the Company
for approximately $89 million (net of the put option premiums received), and the recorded values of
the put option liabilities totaled $19 million. In October 2006, one of the put options was
exercised, and the Company repurchased and retired 1,000,000 shares of its common stock for
approximately $45 million (net of the put option premium received). Upon repurchase, the shares
were retired. The remaining put option, with an expiration date in November 2006, may require the
Company to repurchase 1,000,000 shares of its common stock for approximately $45 million (net of
the put option premium received). Any shares purchased upon the exercise of the put option will be
retired. During fiscal 2006, the Company recognized $29 million in investment losses due to net
increases in the fair values of put options, net of premiums received of $11 million. During fiscal
2005 and 2004, the Company recognized gains of $31 million and $5 million, respectively, in
investment income due to decreases in the fair values of put options, including premiums received
of $15 million and $5 million, respectively.
Dividends. The Company announced increases in its quarterly dividend per share of common stock
from $0.035 to $0.05 on March 2, 2004, from $0.05 to $0.07 on July 13, 2004, from $0.07 to $0.09 on
March 8, 2005, and from $0.09 to $0.12 on March 7, 2006. Cash dividends announced in fiscal 2006,
2005 and 2004 were as follows (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
Per Share |
|
|
Total |
|
|
Per Share |
|
|
Total |
|
|
Per Share |
|
|
Total |
|
First quarter |
|
$ |
0.09 |
|
|
$ |
148 |
|
|
$ |
0.07 |
|
|
$ |
115 |
|
|
$ |
0.07 |
(a) |
|
$ |
112 |
|
Second quarter |
|
|
0.09 |
|
|
|
150 |
|
|
|
0.07 |
|
|
|
115 |
|
|
|
0.05 |
|
|
|
81 |
|
Third quarter |
|
|
0.12 |
|
|
|
202 |
|
|
|
0.09 |
|
|
|
147 |
|
|
|
|
(b) |
|
|
|
|
Fourth quarter |
|
|
0.12 |
|
|
|
198 |
|
|
|
0.09 |
|
|
|
147 |
|
|
|
0.07 |
|
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0.42 |
|
|
$ |
698 |
|
|
$ |
0.32 |
|
|
$ |
524 |
|
|
$ |
0.19 |
|
|
$ |
307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In the first quarter of fiscal 2004, the Company announced two dividends
of $0.035 per share which were paid in the first and second quarters of fiscal 2004. |
|
(b) |
|
The Company paid a dividend of $0.05 per share in the third quarter
of fiscal 2004 that had been announced in the second quarter of fiscal 2004. |
On October 5, 2006, the Company announced a cash dividend of $0.12 per share on the
Companys common stock, payable on January 4, 2007 to stockholders of record as of December 7,
2006, which will be reflected in the consolidated financial statements in the first quarter of
fiscal 2007.
Note 8. Employee Stock 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 Companys contribution expense for fiscal 2006, 2005 and 2004 was $33 million, $27
million and $21 million, respectively.
Equity Compensation Plans. The Board of Directors may grant options to selected employees,
directors and consultants to the Company to purchase shares of the Companys common stock at a
price not less than the fair market value of the stock at the date of grant. The 2006 Long-Term
Incentive Plan (the 2006 Plan) was adopted
F-23
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
during the second quarter of fiscal 2006 and replaced
the 2001 Stock Option Plan and the 2001 Non-Employee Director Stock Option Plan and their
predecessor plans (the Prior 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 Executive Retirement Matching Contribution Plan (ERMCP). The share reserve under
the 2006 Plan is equal to the shares available for future grant under the combined plans on the
date the 2006 Plan was approved by the Companys stockholders, plus an additional 65,000,000 shares
for a total of approximately 280,192,000 shares reserved. This share amount is automatically
increased by the amount equal to the number of shares subject to any outstanding option under a
Prior Plan that is terminated or cancelled (but not an option under a Prior Plan that expires)
following the date that the 2006 Plan was approved by stockholders. Shares that are subject to an
award under the ERMCP and are returned to the Company because they fail to vest will again become
available for grant under the 2006 Plan. The Board of Directors of the Company may amend or
terminate the 2006 Plan at any time. Generally, options outstanding vest over periods not exceeding
five years and are exercisable for up to ten years from the grant date.
During fiscal 2006, the Company assumed a total of approximately 3,530,000 outstanding stock
options under the Flarion Technologies, Inc. 2000 Stock Option and Restricted Stock Purchase Plan,
the Berkana Wireless Inc. 2002 Stock Plan and 2002 Executive Stock Plan and under the Qualphone
Inc. 2004 Equity Incentive Plan (the Assumed Plans), as amended, as a result of the acquisitions
(Note 11). The Assumed Plans were suspended on the dates of acquisition, and no additional shares
may be granted under those plans. The Assumed Plans provided for the grant of both incentive stock
options and non-qualified stock options. Generally, options outstanding vest over periods not
exceeding four years and are exercisable for up to ten years from the grant date.
Information under FAS 123R for Fiscal 2006
A summary of stock option transactions for all stock option plans follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Average |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Exercise |
|
|
Term |
|
|
Value |
|
|
|
(In thousands) |
|
|
Price |
|
|
(Years) |
|
|
(In billions) |
|
Outstanding at September 25, 2005 |
|
|
202,794 |
|
|
$ |
24.35 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
34,977 |
|
|
|
45.69 |
|
|
|
|
|
|
|
|
|
Options assumed (1) |
|
|
3,530 |
|
|
|
21.15 |
|
|
|
|
|
|
|
|
|
Options cancelled/forfeited/expired |
|
|
(3,057 |
) |
|
|
35.08 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(36,389 |
) |
|
|
16.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 24, 2006 |
|
|
201,855 |
|
|
$ |
29.20 |
|
|
|
6.15 |
|
|
$ |
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 24, 2006 |
|
|
121,872 |
|
|
$ |
24.42 |
|
|
|
4.76 |
|
|
$ |
1.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents activity related to options that were assumed as a result of acquisitions (Note 11). |
Net stock options, after forfeitures and cancellations, granted during fiscal 2006, 2005 and
2004 represented 1.9%, 1.8% and 1.7% of outstanding shares as of the beginning of each fiscal year,
respectively. Total stock options granted during fiscal 2006, 2005 and 2004 represented 2.1%, 2.1%
and 1.9%, respectively, of outstanding shares as of the end of each fiscal year.
The Companys determination of fair value of share-based payment awards on the date of grant
using an option-pricing model is affected by the Companys stock price as well as assumptions
regarding a number of highly complex and subjective variables. At September 24, 2006, total
unrecognized estimated compensation cost related to
non-vested stock options granted prior to that date was $1.2 billion, which is expected to be
recognized over a weighted-average period of 1.7 years. Total share-based compensation cost
capitalized as part of inventory and fixed assets was $1 million during fiscal 2006. The total
intrinsic value of stock options exercised during fiscal 2006 was $1.1 billion. The Company
recorded cash received from the exercise of stock options of $608 million and related tax benefits
of $421 million during fiscal 2006. Upon option exercise, the Company issues new shares of stock.
F-24
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additional information about stock options outstanding at September 24, 2006 with exercise
prices less than or above $37.86 per share, the closing price at September 24, 2006, follows
(number of shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable |
|
|
Unexercisable |
|
|
Total |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Number |
|
|
Exercise |
|
|
Number |
|
|
Exercise |
|
|
Number |
|
|
Exercise |
|
Stock Options |
|
of Shares |
|
|
Price |
|
|
of Shares |
|
|
Price |
|
|
of Shares |
|
|
Price |
|
Less than $37.86 |
|
|
98,804 |
|
|
$ |
19.59 |
|
|
|
37,751 |
|
|
$ |
26.57 |
|
|
|
136,555 |
|
|
$ |
21.52 |
|
Above $37.86 |
|
|
23,068 |
|
|
|
45.10 |
|
|
|
42,232 |
|
|
|
45.36 |
|
|
|
65,300 |
|
|
|
45.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total outstanding |
|
|
121,872 |
|
|
$ |
24.42 |
|
|
|
79,983 |
|
|
$ |
36.49 |
|
|
|
201,855 |
|
|
$ |
29.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information under FAS 123 for Periods Prior to Fiscal 2006
A summary of stock option transactions for all stock option plans follows (number of shares in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
|
Shares |
|
|
|
|
|
|
Exercise Price Per Share |
|
|
|
Available |
|
|
Number |
|
|
|
|
|
|
Weighted |
|
|
|
for Grant |
|
|
of Shares |
|
|
Range |
|
|
Average |
|
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
(1) |
|
|
765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
assumed (1) |
|
|
(765 |
) |
|
|
765 |
|
|
|
0.09 to 38.48 |
|
|
|
24.32 |
|
Plan shares
expired (2) |
|
|
(57 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(34,434 |
) |
|
|
34,434 |
|
|
|
33.01 to 44.55 |
|
|
|
38.51 |
|
Options cancelled |
|
|
5,821 |
|
|
|
(5,821 |
) |
|
|
1.60 to 70.00 |
|
|
|
31.16 |
|
Options exercised |
|
|
|
|
|
|
(30,168 |
) |
|
|
0.07 to 43.00 |
|
|
|
11.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 25, 2005 |
|
|
32,244 |
|
|
|
202,794 |
|
|
$0.09 to $86.19 |
|
$ |
24.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents activity related to options that were assumed as a result of
acquisitions (Note 11). |
|
(2) |
|
Represents shares available for future grant cancelled pursuant to the Iridigm and
Spike acquisitions. |
There were approximately 124,491,000 options exercisable with a weighted average exercise
price of $21.11 per share at September 25, 2005. There were approximately 124,650,000 options
exercisable with a weighted average exercise price of $17.41 per share at September 26, 2004.
Employee Stock Purchase Plans. The Company has two employee stock purchase plans for all
eligible employees to purchase shares of common stock at 85% of the lower of the fair market value
on the first or the last day of each six-month offering period. Employees may authorize the Company
to withhold up to 15% of their
compensation during any offering period, subject to certain limitations. The 2001 Employee
Stock Purchase Plan authorizes up to approximately 24,309,000 shares to be granted. The 1996
Non-Qualified Employee Stock Purchase Plan authorizes up to 400,000 shares to be granted. During
fiscal 2006, 2005 and 2004, approximately 2,220,000, 1,786,000 and 2,205,000 shares were issued
under the plans at an average price of $31.10, $29.63 and $18.60 per share, respectively. At
September 24, 2006, approximately 13,226,000 shares were reserved for future issuance.
At September 24, 2006, total unrecognized estimated compensation cost related to non-vested
purchase rights granted prior to that date was $7 million. The Company recorded cash received from
the exercise of purchase rights of $69 million during fiscal 2006.
Executive Retirement 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
F-25
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
minimum
participation or service requirements and are fully vested at age 65. Participants who terminate
employment forfeit their unvested shares. During fiscal 2006, 2005 and 2004, approximately 47,000,
92,000 and 108,000 shares, respectively, were allocated under the plans. The Company recorded $2
million, $3 million and $5 million in compensation expense during fiscal 2006, 2005 and 2004,
respectively, related to its net matching contributions to the plans.
Note 9. Commitments and Contingencies
Litigation. Zoltar Satellite Alarm Systems, Inc. v. QUALCOMM Incorporated 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 Zoltars patent claims, the
Court entered a judgment in favor of the Company and SnapTrack on Zoltars complaint and awarded
the Company and SnapTrack their costs of suit. Zoltar filed a notice of appeal that was dismissed
as premature. While the Company has already obtained a verdict of non-infringement of Zoltars
patents, the Companys additional affirmative claims seeking declarations of the non-enforceability
and invalidity of those patents were set to be retried in the same Court on October 10, 2006.
However, Zoltar has informed the Court that it will covenant not to sue the Company or SnapTrack on
the patents. The final form of dismissal and judgment in favor of the Company and SnapTrack remains
to be determined.
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. On March 15,
2006, the Court dismissed all claims against the Company. The plaintiff has filed a notice of
appeal.
Broadcom Corporation v. QUALCOMM Incorporated: On May 18, 2005, Broadcom filed two actions in
the United States District Court for the Central District of California against the Company
alleging infringement of ten patents and seeking monetary damages and injunctive relief based
thereon. On the same date, Broadcom also filed a complaint in the United States International Trade
Commission (ITC) alleging infringement of five of the same patents at issue in the Central District
Court cases seeking a determination and relief under Section 337 of the Tariff Act of 1930. On July
1, 2005, Broadcom filed an action in 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. On September 1, 2006, the
New Jersey District Court dismissed the complaint; Broadcom has filed notice of appeal. Discovery
is underway in one of the Central District Court patent actions, with trial scheduled for May 2007.
On December 12, 2005, the Central District Court ordered two of the Broadcom patent claims filed in
the other Central District patent action (which is stayed pending completion of the ITC action) to
be transferred to the Southern District of California to be considered in the case filed by the
Company on August 22, 2005. That case now contains additional related claims filed by the Company
and Broadcom. On February 14, 2006, the ITC hearing commenced as to three of the patents alleged.
On October 10, 2006, the Administrative Law Judge (ALJ) issued an interim decision in which he
recommended against any downstream remedies, and found no infringement by the Company 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 Company will petition
the Commission for review of at least the limited infringement findings and patent validity
findings.
QUALCOMM Incorporated v. 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 essential 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. On
October 14, 2005, the Company filed another action in the United States District Court for the
Southern District of California against Broadcom alleging infringement of two patents, each of
which relates to video encoding and decoding for high-end multimedia processing, and seeking
monetary damages and injunctive relief based thereon. That action is scheduled for trial in January
2007. On March 24, 2006, the Company filed another action in the United States District Court for
the Southern District of California, alleging that Broadcom, during the period in which it has been
attempting to bring to market a WCDMA baseband solution, misappropriated QUALCOMM confidential and
trade secret information relating to QUALCOMMs WCDMA
F-26
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
baseband chips, and relating to the Companys
multimedia capabilities for such chips. The complaint also asserts another patent claim against
Broadcoms wireless local area network products, including such capability bundled with Broadcoms
WCDMA product offerings. Broadcom counterclaimed with the assertion of two patents. On October 27,
2006, the Court issued a preliminary injunction against Broadcom, prohibiting the future use or
solicitation of certain of the Companys confidential business and technical documents and
information.
QUALCOMM Incorporated and SnapTrack, Inc. v. Nokia Corporation and Nokia Inc.: On November 4,
2005, the Company, along with its wholly-owned subsidiary, SnapTrack, filed an action in the United
States District Court for the Southern District of California against Nokia alleging infringement
of eleven QUALCOMM patents and one SnapTrack patent relating to GSM/GPRS/EDGE and position location
and seeking monetary damages and injunctive relief. The case is currently stayed pending a decision
by the Federal Circuit regarding Nokias arbitration demand. On May 24, 2006, the Company filed an
action in the Chancery Division of the High Court of Justice for England and Wales against Nokia
alleging infringement of two QUALCOMM patents relating to GSM/GPRS/EDGE technology seeking monetary
damages and injunctive relief. On June 9, 2006, the Company filed a complaint with the ITC against
Nokia alleging importation of products that infringe six QUALCOMM patents relating to power
control, video encoding and decoding, and power conservation mode technologies and seeking an
exclusionary order and a cease and desist order. On July 7, 2006, the ITC commenced an
investigation. On August 9, 2006, the Company filed an action in the District Court of Dusseldorf,
Federal Republic of Germany, against Nokia alleging infringement of two QUALCOMM patents relating
to GSM/GPRS/EDGE technology seeking monetary damages and injunctive relief. On October 9, 2006, the
Company filed an action in the High Court of Paris, France against Nokia alleging infringement of
two patents relating to GSM/GPRS/EDGE technology seeking monetary damages and injunctive relief. On
October 9, 2006, the Company filed an action in the Milan Court, Italy against Nokia alleging
infringement of two patents relating to GSM/GPRS/EDGE technology seeking monetary damages and
injunctive relief.
Nokia Corporation and Nokia Inc. v. QUALCOMM Incorporated: On August 9, 2006, Nokia
Corporation and Nokia, Inc. filed a complaint in Delaware Chancery Court seeking declaratory and
injunctive relief relating to alleged commitments made by the Company to wireless industry
standards setting organizations. The Company has moved to dismiss the complaint.
Other: The Company has been named, along with many other manufacturers of wireless phones,
wireless operators and industry-related organizations, as a defendant in several purported class
action lawsuits, and several individually filed actions pending in Pennsylvania, Washington D.C.,
and Louisiana, seeking monetary damages arising out of its sale of cellular phones. The courts that
have reviewed similar claims against other companies to date have held that there was insufficient
scientific basis for the plaintiffs claims in those cases.
On October 28, 2005, it was reported that six companies (Broadcom, Nokia, Texas Instruments,
NEC, Panasonic and Ericsson) filed complaints with the European Commission, alleging that the
Company violated European Union competition law in its WCDMA licensing practices. The Company has
received the complaints and has submitted a reply.
It
has been reported that two U.S. companies (Texas Instruments and
Broadcom) and two South Korean
companies (Nextreaming Corp. and THINmultimedia Inc.) have filed complaints with the Korean Fair
Trade Commission
alleging that the Companys business practices are, in some way, a violation of South Korean
anti-trust regulations. To date, the Company has not received the complaints.
Although there can be no assurance that unfavorable outcomes in any of the foregoing matters
would not have a material adverse effect on the Companys operating results, liquidity or financial
position, the Company believes the claims made by other parties are without merit and will
vigorously defend the actions. The Company has not recorded any accrual for contingent liability
associated with the legal proceedings described above based on the Companys belief that a
liability, while possible, is not probable. Further, any possible range of loss cannot be estimated
at this time. The Company is engaged in numerous other legal actions arising in the ordinary course
of its business and believes that the ultimate outcome of these actions will not have a material
adverse effect on its operating results, liquidity or financial position. In addition, some matters
that have previously been disclosed may no longer be described in this Note because of rulings in
the case, settlements, changes in the Companys business or other developments rendering them, in
the Companys judgment, no longer material to the Companys operating results, liquidity or
financial position.
F-27
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2007 to 2011 to be approximately $663 million, $79
million, $31 million, $20 million and $18 million, respectively, and $18 million thereafter. Of
these amounts, commitments to purchase integrated circuit product inventories for fiscal 2007 to
2009 comprised $540 million, $48 million and $5 million, respectively.
Leases. The Company leases certain of its facilities and equipment under noncancelable
operating leases, with terms ranging from less than one year to 28 years and with provisions for
cost-of-living increases with certain leases. Rental expense for fiscal 2006, 2005 and 2004 was $47
million, $39 million and $31 million, respectively. The Company leases certain property under
capital lease agreements which expire at various dates through 2036. Capital lease obligations are
included in other liabilities. The future minimum lease payments for all capital leases and
operating leases as of September 24, 2006 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
Operating |
|
|
|
|
|
|
Leases |
|
|
Leases |
|
|
Total |
|
2007 |
|
$ |
3 |
|
|
$ |
71 |
|
|
$ |
74 |
|
2008 |
|
|
3 |
|
|
|
42 |
|
|
|
45 |
|
2009 |
|
|
3 |
|
|
|
32 |
|
|
|
35 |
|
2010 |
|
|
4 |
|
|
|
28 |
|
|
|
32 |
|
2011 |
|
|
4 |
|
|
|
21 |
|
|
|
25 |
|
Thereafter |
|
|
108 |
|
|
|
97 |
|
|
|
205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
$ |
125 |
|
|
$ |
291 |
|
|
$ |
416 |
|
|
|
|
|
|
|
|
|
|
|
|
Deduct: Amounts representing interest |
|
|
(67 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments |
|
|
58 |
|
|
|
|
|
|
|
|
|
Deduct: Current portion of capital lease obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of capital lease obligations |
|
$ |
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10. Segment Information
The Company is organized on the basis of products and services. The Company aggregates three
of its divisions into the QUALCOMM Wireless & Internet segment. Reportable segments are as follows:
|
|
|
QUALCOMM CDMA Technologies (QCT) develops and supplies CDMA-based integrated
circuits and system software for wireless voice and data communications, multimedia
functions and global positioning system products; |
|
|
|
|
QUALCOMM Technology Licensing (QTL) grants licenses to use portions of the
Companys intellectual property portfolio, which includes certain patent rights
essential to and/or useful in the manufacture and sale of certain wireless products,
including, without limitation, products implementing
cdmaOne, CDMA2000, WCDMA, CDMA TDD and/or OFDMA standards and their derivatives, and
collects license fees and royalties in partial consideration for such licenses; |
|
|
|
|
QUALCOMM Wireless & Internet (QWI) comprised of: |
|
o |
|
QUALCOMM Internet Services (QIS) provides technology to support
and accelerate the convergence of the wireless data market, including its BREW,
QChat and QPoint products and services; |
|
|
o |
|
QUALCOMM Government Technologies (QGOV) provides development,
hardware and analytical expertise to United States government agencies involving
wireless communications technologies; and |
|
|
o |
|
QUALCOMM Wireless Business Solutions (QWBS) provides satellite
and terrestrial-based two-way data messaging, position reporting and wireless
application services to transportation companies, private fleets, construction
equipment fleets and other enterprise companies. |
|
|
|
QUALCOMM Strategic Initiatives (QSI) manages the Companys strategic investment
activities, including MediaFLO USA, Inc. (MediaFLO USA), the Companys wholly-owned
wireless multimedia operator subsidiary. QSI makes strategic investments to promote the
worldwide adoption of CDMA-based products and services. |
F-28
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company evaluates the performance of its segments based on earnings (loss) before income
taxes (EBT). EBT includes the allocation of certain corporate expenses to the segments, including
depreciation and amortization expense related to unallocated corporate assets. Certain income and
charges are not allocated to segments in the Companys management reports because they are not
considered in evaluating the segments operating performance. Unallocated income and charges
include certain investment income, share-based compensation and certain research and development
expenses and marketing expenses that were not deemed to be directly related to the businesses of
the segments. The table below presents revenues, EBT and total assets for reportable segments (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling |
|
|
|
|
QCT |
|
QTL |
|
QWI |
|
QSI |
|
Items |
|
Total |
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
4,332 |
|
|
$ |
2,631 |
|
|
$ |
670 |
|
|
$ |
|
|
|
$ |
(107 |
) |
|
$ |
7,526 |
|
EBT |
|
|
1,134 |
|
|
|
2,397 |
|
|
|
80 |
|
|
|
(133 |
) |
|
|
(322 |
) |
|
|
3,156 |
|
Total assets |
|
|
651 |
|
|
|
60 |
|
|
|
196 |
|
|
|
660 |
|
|
|
13,641 |
|
|
|
15,208 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
3,290 |
|
|
$ |
1,839 |
|
|
$ |
644 |
|
|
$ |
|
|
|
$ |
(100 |
) |
|
$ |
5,673 |
|
EBT |
|
|
852 |
|
|
|
1,663 |
|
|
|
57 |
|
|
|
10 |
|
|
|
227 |
|
|
|
2,809 |
|
Total assets |
|
|
518 |
|
|
|
16 |
|
|
|
153 |
|
|
|
442 |
|
|
|
11,350 |
|
|
|
12,479 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
3,111 |
|
|
$ |
1,331 |
|
|
$ |
571 |
|
|
$ |
|
|
|
$ |
(133 |
) |
|
$ |
4,880 |
|
EBT |
|
|
1,048 |
|
|
|
1,195 |
|
|
|
19 |
|
|
|
(31 |
) |
|
|
82 |
|
|
|
2,313 |
|
Total assets |
|
|
564 |
|
|
|
8 |
|
|
|
117 |
|
|
|
400 |
|
|
|
9,731 |
|
|
|
10,820 |
|
Segment assets are comprised of accounts receivable and inventories for QCT, QTL and QWI. The
QSI segment assets include certain marketable securities, notes receivable, wireless licenses,
other investments and all assets of QSIs consolidated subsidiary, MediaFLO USA, including
property, plant and equipment. QSIs assets related to the MediaFLO USA business totaled $329
million and $98 million at September 24, 2006 and September 25, 2005, respectively. QSIs assets
also included $19 million, $61 million and $106 million related to investments in equity method
investees at September 24, 2006, September 25, 2005 and September 26, 2004, respectively. Total
segment assets differ from total assets on a consolidated basis as a result of unallocated
corporate assets primarily comprised of cash, cash equivalents, certain marketable securities,
property, plant and equipment, deferred tax assets, goodwill, certain other intangible assets of
nonreportable segments and capitalized share-based compensation. The net book value of long-lived
assets located outside of the United States was $69 million, $44 million and $21 million at
September 24, 2006, September 25, 2005 and September 26, 2004, respectively. The net book value of
long-lived assets located in the United States was $1.4 billion, $978 million and $654 million at
September 24, 2006,
September 25, 2005 and September 26, 2004, respectively. Reconciling items included $228 million
and $188 million at September 24, 2006 and September 25, 2005, respectively, of goodwill and other
assets related to the QUALCOMM MEMS Technologies division (QMT), a nonreportable segment developing
display technology for mobile devices and other applications.
Revenues from each of the Companys divisions aggregated into the QWI reportable segment were
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
QWBS |
|
QGOV |
|
QIS |
2006 |
|
$ |
429 |
|
|
$ |
47 |
|
|
$ |
194 |
|
2005 |
|
|
441 |
|
|
|
50 |
|
|
|
153 |
|
2004 |
|
|
414 |
|
|
|
41 |
|
|
|
116 |
|
F-29
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other reconciling items were comprised as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
September 24, |
|
|
September 25, |
|
|
September 26, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Elimination of intersegment revenue |
|
$ |
(222 |
) |
|
$ |
(148 |
) |
|
$ |
(153 |
) |
Other nonreportable segments |
|
|
115 |
|
|
|
48 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
Reconciling items |
|
$ |
(107 |
) |
|
$ |
(100 |
) |
|
$ |
(133 |
) |
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated research and development expenses |
|
$ |
(305 |
) |
|
$ |
(45 |
) |
|
$ |
(23 |
) |
Unallocated selling, general, and administrative
expenses |
|
|
(290 |
) |
|
|
(17 |
) |
|
|
(41 |
) |
Unallocated cost of equipment and services revenues |
|
|
(41 |
) |
|
|
|
|
|
|
|
|
Unallocated investment income, net |
|
|
455 |
|
|
|
339 |
|
|
|
192 |
|
Other nonreportable segments |
|
|
(98 |
) |
|
|
(45 |
) |
|
|
(39 |
) |
Intracompany eliminations |
|
|
(43 |
) |
|
|
(5 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
Reconciling items |
|
$ |
(322 |
) |
|
$ |
227 |
|
|
$ |
82 |
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2006, share-based compensation expense included in unallocated research and
development expenses and unallocated selling, general and administrative expenses totaled $216
million and $238 million, respectively. Unallocated cost of equipment and services revenues was
comprised entirely of share-based compensation expense.
Segment data includes intersegment revenues. Generally, revenues between segments are based on
prevailing market rates for substantially similar products and services or an approximation
thereof. Specified items included in segment EBT were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QCT |
|
QTL |
|
QWI |
|
QSI |
Fiscal 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
4,314 |
|
|
$ |
2,465 |
|
|
$ |
662 |
|
|
$ |
|
|
Intersegment revenues |
|
|
18 |
|
|
|
166 |
|
|
|
8 |
|
|
|
|
|
Interest income |
|
|
1 |
|
|
|
5 |
|
|
|
3 |
|
|
|
6 |
|
Interest expense |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
2 |
|
Fiscal 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
3,281 |
|
|
$ |
1,710 |
|
|
$ |
634 |
|
|
$ |
|
|
Intersegment revenues |
|
|
9 |
|
|
|
129 |
|
|
|
10 |
|
|
|
|
|
Interest income |
|
|
|
|
|
|
5 |
|
|
|
2 |
|
|
|
4 |
|
Interest expense |
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
Fiscal 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
3,107 |
|
|
$ |
1,200 |
|
|
$ |
553 |
|
|
$ |
|
|
Intersegment revenues |
|
|
4 |
|
|
|
131 |
|
|
|
18 |
|
|
|
|
|
Interest income |
|
|
|
|
|
|
3 |
|
|
|
1 |
|
|
|
14 |
|
Effectively all equity in losses of investees (Note 5) was recorded in QSI in fiscal
2006, 2005 and 2004.
F-30
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company distinguishes revenues from external customers by geographic areas based on
customer location. Sales information by geographic area was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
September 24, |
|
|
September 25, |
|
|
September 26, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
United States |
|
$ |
984 |
|
|
$ |
1,015 |
|
|
$ |
1,016 |
|
South Korea |
|
|
2,398 |
|
|
|
2,083 |
|
|
|
2,091 |
|
Japan |
|
|
1,573 |
|
|
|
1,210 |
|
|
|
877 |
|
China |
|
|
1,266 |
|
|
|
596 |
|
|
|
366 |
|
Other foreign |
|
|
1,305 |
|
|
|
769 |
|
|
|
530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,526 |
|
|
$ |
5,673 |
|
|
$ |
4,880 |
|
|
|
|
|
|
|
|
|
|
|
Note 11. Acquisitions
On January 18, 2006, the Company completed its acquisition of all of the outstanding capital
stock of Flarion Technologies, Inc. (Flarion), a privately held developer of OFDMA technology for
approximately $613 million in consideration, consisting of approximately $349 million in shares of
QUALCOMM stock, $229 million in cash, and the exchange of Flarions existing vested options and
warrants with an estimated aggregate fair value of approximately $35 million. In addition, the
Company assumed Flarions existing unvested options with an estimated aggregate fair value of $63
million, which is recorded as share-based compensation over the requisite service period pursuant
to FAS 123R. Upon achievement of certain agreed upon milestones during the third quarter of fiscal
2006, the Company incurred additional aggregate consideration of $197 million, consisting of
approximately $185 million in cash (of which $75 million will be payable in July 2007), $8 million
in shares of QUALCOMM stock (of which $3 million is issuable in March 2007), and the modification
of Flarions existing vested options and warrants with an estimated incremental fair value of
approximately $4 million. The additional amounts payable in cash and shares on the milestone date
were treated as additional consideration and recorded as goodwill. In addition, the modification of
Flarions existing unvested options resulted in an estimated incremental fair value of $7 million,
which will be recorded as share-based compensation over the requisite service period pursuant to
FAS 123R. The acquisition of Flarion is intended to broaden the Companys ability to effectively
support operators who may prefer an OFDMA or a hybrid OFDM/CDMA/WCDMA network alternative. The
addition of Flarions intellectual property and engineering resources will also supplement the
resources that the Company has already dedicated over the years towards the development of
OFDM/OFDMA technologies.
During fiscal 2006, the Company also acquired the following two entities for a total cost of
$69 million, which was paid primarily in cash:
|
|
|
Berkana Wireless Inc., a California-based developer of complementary metal oxide
semiconductor (CMOS) radio frequency integrated circuits (RFICs). |
|
|
|
|
Qualphone Inc., a provider of IP-based multimedia subsystems embedded client software
products for mobile devices and interoperability testing services based primarily in India
and Italy. |
An additional $4 million in consideration is payable in cash through August 2007 if certain
performance and other milestones are reached. The Company is in the final stages of accounting for
the acquisitions and does not anticipate material adjustments to the preliminary purchase price
allocations. Goodwill recognized in these transactions, no amount of which is expected to be
deductible for tax purposes, was assigned to the QTL and QCT segments in the amounts of $619
million and $38 million, respectively. Technology-based intangible assets recognized in the amount
of $165 million are being amortized on a straight-line basis over a weighted-average amortization
period of seventeen years. Purchased in-process technology in the amount of $22 million was charged
to research and development expense upon acquisition because technological feasibility had not been
established and no future alternative uses existed. The consolidated financial statements include
the operating results of these businesses from their respective dates of acquisition. Pro forma
results of operations have not been presented because the effects of the acquisitions were not
material.
During fiscal 2005, the Company acquired the following four entities for a total cost of $297
million, including $2 million paid in fiscal 2006 upon the achievement of certain milestones, which
was paid primarily in cash:
|
|
|
Iridigm Display Corporation (Iridigm), a California-based display technology company. |
F-31
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
Trigenix Limited, a United Kingdom-based developer of user interfaces for mobile phones. |
|
|
|
|
Spike Technologies, Inc., a semiconductor design services company based primarily in India. |
|
|
|
|
ELATA, Ltd., a United Kingdom-based developer of mobile content delivery and device
management software systems. |
An additional $2 million in consideration is payable in cash through November 2006 if certain
performance and other milestones are reached. Goodwill recognized in these transactions amounted to
$218 million, of which $81 million is expected to be deductible for tax purposes. Goodwill was
assigned to the QMT, QIS and QCT segments in the amounts of $128 million, $81 million and $9
million, respectively. Technology-based intangible assets recognized in the amount of $36 million
have a weighted-average useful life of seven years.
Note 12. Discontinued Operations in the QSI Segment
On December 2, 2003, the Company sold its direct and indirect ownership interests in Vésper
São Paulo S.A. and Vésper S.A. (the Vésper Operating Companies), consolidated subsidiaries of the
Companys QSI segment, and the Vésper Operating Companies communication towers and related
interests in tower site property leases (Vésper Towers) in two separate transactions. The Company
realized a net loss of $52 million on the sale of the Vésper Operating Companies during fiscal
2004, partially offset by a $40 million net gain from the subsequent sale of the Vésper Towers. The
Company also recognized a $19 million net gain resulting from the extinguishment of debt related to
the waiver and return of personal mobile service licenses to Anatel, the telecommunications
regulatory agency in Brazil. As a result of the disposition of the remaining operations and assets
related to the Vésper Operating Companies, the Company determined that the results of operations
related to the Vésper Operating Companies, including the results related to the Vésper Towers and
the gains and losses realized on the sales transactions, should be presented as discontinued
operations in its consolidated statements of operations. At September 24, 2006 and September 25,
2005, the Company had no remaining assets or liabilities related to the Vésper Operating Companies
or the Vésper Towers recorded on its consolidated balance sheet. Revenues of $36 million were
reported in the loss from discontinued operations during fiscal 2004.
F-32
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Summarized Quarterly Data (Unaudited)
The following financial information reflects all normal recurring adjustments that are, in the
opinion of management, necessary for a fair statement of the results of the interim periods.
The table below presents quarterly data for the years ended September 24, 2006 and September
25, 2005 (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter |
|
2nd Quarter |
|
3rd Quarter |
|
4th Quarter |
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (1) |
|
$ |
1,741 |
|
|
$ |
1,834 |
|
|
$ |
1,951 |
|
|
$ |
1,999 |
|
Operating income (1) |
|
|
645 |
|
|
|
660 |
|
|
|
704 |
|
|
|
681 |
|
Net income (1) |
|
|
620 |
|
|
|
593 |
|
|
|
643 |
|
|
|
614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share (2) |
|
$ |
0.38 |
|
|
$ |
0.36 |
|
|
$ |
0.38 |
|
|
$ |
0.37 |
|
Diluted earnings per common share (2) |
|
$ |
0.36 |
|
|
$ |
0.34 |
|
|
$ |
0.37 |
|
|
$ |
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (1) |
|
$ |
1,390 |
|
|
$ |
1,365 |
|
|
$ |
1,358 |
|
|
$ |
1,560 |
|
Operating income (1) |
|
|
584 |
|
|
|
572 |
|
|
|
560 |
|
|
|
670 |
|
Net income (1) |
|
|
513 |
|
|
|
532 |
|
|
|
560 |
|
|
|
538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share (2) |
|
$ |
0.31 |
|
|
$ |
0.32 |
|
|
$ |
0.34 |
|
|
$ |
0.33 |
|
Diluted earnings per common share (2) |
|
$ |
0.30 |
|
|
$ |
0.31 |
|
|
$ |
0.33 |
|
|
$ |
0.32 |
|
|
|
|
(1) |
|
Revenues, operating income 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. |
F-33
SCHEDULE II
QUALCOMM INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Charged) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Credited to |
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
Beginning of |
|
|
Costs and |
|
|
|
|
|
|
|
|
|
|
End of |
|
|
|
Period |
|
|
Expenses |
|
|
Deductions |
|
|
Other |
|
|
Period |
|
Year ended September 26, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
trade receivables |
|
$ |
(12 |
) |
|
$ |
(3 |
) |
|
$ |
8 |
|
|
$ |
2 |
(a) |
|
$ |
(5 |
) |
finance receivables |
|
|
(18 |
) |
|
|
10 |
|
|
|
7 |
|
|
|
|
|
|
|
(1 |
) |
notes receivable |
|
|
(69 |
) |
|
|
(30 |
) |
|
|
53 |
|
|
|
|
|
|
|
(46 |
) |
Inventory reserves |
|
|
(70 |
) |
|
|
7 |
|
|
|
13 |
|
|
|
|
|
|
|
(50 |
) |
Valuation allowance on deferred tax assets |
|
|
(660 |
) |
|
|
27 |
|
|
|
20 |
|
|
|
474 |
(a) |
|
|
(139 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(829 |
) |
|
$ |
11 |
|
|
$ |
101 |
|
|
$ |
476 |
|
|
$ |
(241 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 25, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
trade receivables |
|
$ |
(5 |
) |
|
$ |
(2 |
) |
|
$ |
5 |
|
|
$ |
|
|
|
$ |
(2 |
) |
finance receivables |
|
|
(1 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
notes receivable |
|
|
(46 |
) |
|
|
(41 |
) |
|
|
24 |
|
|
|
|
|
|
|
(63 |
) |
Inventory reserves |
|
|
(50 |
) |
|
|
(10 |
) |
|
|
14 |
|
|
|
|
|
|
|
(46 |
) |
Valuation allowance on deferred tax assets |
|
|
(139 |
) |
|
|
76 |
|
|
|
|
|
|
|
(6 |
)(b) |
|
|
(69 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(241 |
) |
|
$ |
24 |
|
|
$ |
43 |
|
|
$ |
(6 |
) |
|
$ |
(180 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 24, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
trade receivables |
|
$ |
(2 |
) |
|
$ |
|
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
(1 |
) |
notes receivable |
|
|
(63 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
(78 |
) |
Inventory reserves |
|
|
(46 |
) |
|
|
(38 |
) |
|
|
15 |
|
|
|
|
|
|
|
(69 |
) |
Valuation allowance on deferred tax assets |
|
|
(69 |
) |
|
|
46 |
|
|
|
14 |
|
|
|
(13 |
)(c) |
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(180 |
) |
|
$ |
(7 |
) |
|
$ |
30 |
|
|
$ |
(13 |
) |
|
$ |
(170 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
This amount is related to the disposition of the Vésper Operating Companies
(See Note 12 to the Consolidated Financial Statements). |
|
(b) |
|
This amount is related to the acquisitions of Trigenix and ELATA (See Note 11 to
the Consolidated Financial Statements). |
|
(c) |
|
This amount was charged to paid-in capital. |
|
|
|
|
S-1