e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 25, 2005
OR
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o |
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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
(State or other jurisdiction of
incorporation or organization)
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95-3685934
(I.R.S. Employer
Identification No.) |
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5775 Morehouse Dr., San Diego, California
(Address of principal executive offices)
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92121-1714
(Zip Code) |
(858) 587-1121
(Registrants telephone number, including area code)
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 twelve
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 ninety days. Yes þ No 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
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
The number of shares outstanding of each of the issuers classes of common stock, as of the
close of business on January 23, 2006, were as follows:
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Class
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Number of Shares |
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Common Stock, $0.0001 per share par value
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1,656,288,929 |
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
QUALCOMM Incorporated
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
(Unaudited)
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December 25, |
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September 25, |
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2005 |
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2005 |
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ASSETS
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Current assets: |
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Cash and cash equivalents |
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$ |
1,577 |
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$ |
2,070 |
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Marketable securities |
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5,407 |
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4,478 |
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Accounts receivable, net |
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728 |
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544 |
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Inventories |
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195 |
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177 |
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Deferred tax assets |
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351 |
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343 |
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Other current assets |
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141 |
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179 |
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Total current assets |
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8,399 |
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7,791 |
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Marketable securities |
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2,414 |
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2,133 |
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Property, plant and equipment, net |
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1,154 |
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1,022 |
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Goodwill |
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571 |
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571 |
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Deferred tax assets |
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405 |
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444 |
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Other assets |
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486 |
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518 |
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Total assets |
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$ |
13,429 |
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$ |
12,479 |
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities: |
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Trade accounts payable |
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$ |
431 |
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$ |
376 |
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Payroll and other benefits related liabilities |
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179 |
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196 |
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Dividends payable |
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148 |
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Unearned revenue |
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149 |
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163 |
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Other current liabilities |
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253 |
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335 |
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Total current liabilities |
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1,160 |
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1,070 |
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Unearned revenue |
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141 |
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146 |
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Other liabilities |
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156 |
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144 |
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Total liabilities |
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1,457 |
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1,360 |
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Commitments and contingencies (Notes 3 and 8) |
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Stockholders equity: |
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Preferred stock, $0.0001 par value; issuable in series;
8 shares authorized; none outstanding at
December 25, 2005 and September 25, 2005 |
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Common stock, $0.0001 par value; 6,000 shares authorized;
1,650 and 1,640 shares issued and outstanding at
December 25, 2005 and September 25, 2005, respectively |
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Paid-in capital |
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7,134 |
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6,753 |
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Retained earnings |
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4,800 |
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4,328 |
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Accumulated other comprehensive income |
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38 |
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38 |
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Total stockholders equity |
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11,972 |
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11,119 |
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Total liabilities and stockholders equity |
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$ |
13,429 |
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$ |
12,479 |
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See Notes to Condensed Consolidated Financial Statements.
3
QUALCOMM Incorporated
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)
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Three Months Ended |
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December 25, |
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December 26, |
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2005 |
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2004 |
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Revenues: |
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Equipment and services |
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$ |
1,150 |
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$ |
978 |
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Licensing and royalty fees |
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591 |
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412 |
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1,741 |
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1,390 |
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Operating expenses: |
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Cost of equipment and services revenues |
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517 |
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430 |
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Research and development |
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340 |
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228 |
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Selling, general and administrative |
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239 |
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148 |
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Total operating expenses |
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1,096 |
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806 |
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Operating income |
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645 |
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584 |
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Investment income, net (Note 4) |
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91 |
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120 |
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Income before income taxes |
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736 |
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704 |
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Income tax expense |
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(116 |
) |
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(191 |
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Net income |
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$ |
620 |
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$ |
513 |
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Basic earnings per common share |
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$ |
0.38 |
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$ |
0.31 |
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Diluted earnings per common share |
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$ |
0.36 |
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$ |
0.30 |
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Shares used in per share calculations: |
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Basic |
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1,645 |
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1,639 |
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Diluted |
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1,702 |
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1,704 |
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Dividends per share announced |
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$ |
0.09 |
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$ |
0.07 |
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See Notes to Condensed Consolidated Financial Statements.
4
QUALCOMM Incorporated
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
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Three Months Ended |
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December 25, |
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December 26, |
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2005 |
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2004 |
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Operating Activities: |
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Net income |
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$ |
620 |
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$ |
513 |
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Non-cash items: |
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Depreciation and amortization |
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58 |
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45 |
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Net realized gains on marketable securities and other investments |
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(20 |
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(64 |
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Gains on derivative instruments |
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(4 |
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(3 |
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Other-than-temporary losses on marketable securities and
other investments |
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3 |
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Equity in losses of investees |
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20 |
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Share-based compensation expense |
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122 |
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Incremental tax benefits from stock options exercised |
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(101 |
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Non-cash income tax expense |
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104 |
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185 |
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Other non-cash credits |
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(15 |
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(1 |
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Increase (decrease) in cash resulting from changes in: |
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Accounts receivable, net |
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(171 |
) |
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(113 |
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Inventories |
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(18 |
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(2 |
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Other assets |
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16 |
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(71 |
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Trade accounts payable |
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87 |
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(23 |
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Payroll, benefits and other liabilities |
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(86 |
) |
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(49 |
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Unearned revenue |
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(19 |
) |
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(20 |
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Net cash provided by operating activities |
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596 |
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397 |
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Investing Activities: |
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Capital expenditures |
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(213 |
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(188 |
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Purchases of available-for-sale securities |
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(3,318 |
) |
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(1,865 |
) |
Proceeds from sale of available-for-sale securities |
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2,160 |
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1,663 |
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Other investments and acquisitions, net of cash acquired |
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(6 |
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(179 |
) |
Other items, net |
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4 |
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(1 |
) |
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Net cash used by investing activities |
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(1,373 |
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(570 |
) |
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Financing Activities: |
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Proceeds from issuance of common stock |
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181 |
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96 |
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Incremental tax benefits from stock options exercised |
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101 |
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Other items, net |
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(2 |
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Net cash provided by financing activities |
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282 |
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94 |
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Effect of exchange rate changes on cash |
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2 |
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Net decrease in cash and cash equivalents |
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(493 |
) |
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(79 |
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Cash and cash equivalents at beginning of period |
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2,070 |
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1,214 |
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Cash and cash equivalents at end of period |
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$ |
1,577 |
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$ |
1,135 |
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See Notes to Condensed Consolidated Financial Statements.
5
QUALCOMM
Incorporated
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 Basis of Presentation
Financial Statement Preparation. The accompanying interim condensed consolidated financial
statements have been prepared by QUALCOMM Incorporated (the Company or QUALCOMM), without audit, in
accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all
information and footnotes necessary for a fair presentation of its consolidated financial position,
results of operations and cash flows in accordance with accounting principles generally accepted in
the United States. The condensed consolidated balance sheet at September 25, 2005 is derived from
the audited consolidated balance sheet at that date which is not presented herein. The Company
operates and reports using a 52-53 week fiscal year ending on the last Sunday in September. The
three month periods ended December 25, 2005 and December 26, 2004 both included 13 weeks.
In the opinion of management, the unaudited financial information for the interim periods
presented reflects all adjustments, which are only normal and recurring, necessary for a fair
statement of results of operations, financial position and cash flows. These condensed consolidated
financial statements should be read in conjunction with the consolidated financial statements
included in the Companys Annual Report on Form 10-K for the fiscal year ended September 25, 2005.
Operating results for interim periods are not necessarily indicative of operating results for an
entire fiscal year.
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 financial statements and
the accompanying notes. Actual results could differ from those estimates. Certain prior year
amounts have been reclassified to conform to the current year presentation.
Principles of Consolidation. The Companys Condensed 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 Condensed 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.
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 benefits that would be recorded in additional 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
the three months ended December 25, 2005 and December 26, 2004 were 56,798,000 and 64,904,000,
respectively.
Employee stock options to purchase approximately 40,053,000 and 27,708,000 shares of common
stock during the three months ended December 25, 2005 and December 26, 2004, respectively, were
outstanding but not included in the computation of diluted earnings per common share because the
option exercise price was greater than the average market price of the common stock, and therefore,
the effect on diluted earnings per share would be anti-dilutive. A put option outstanding at
December 25, 2005 to purchase 5,750,000 shares of common stock was not included in the diluted
earnings per common share computation because the put options exercise price was less than the
average market price of the common stock while it was outstanding, and therefore, the effect on
diluted earnings per common share would be anti-dilutive. There were no put options outstanding at
December 26, 2004 (Note 6).
6
QUALCOMM
Incorporated
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Comprehensive Income. Total comprehensive income consisted of the following (in
millions):
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Three Months Ended |
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December 25, |
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December 26, |
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2005 |
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|
2004 |
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Net income |
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$ |
620 |
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$ |
513 |
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Other comprehensive income: |
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Foreign currency translation |
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(6 |
) |
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10 |
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Unrealized net gains on securities, net of income taxes |
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23 |
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100 |
|
Unrealized net losses on derivative instruments,
net of income taxes |
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(3 |
) |
Reclassification adjustment for net realized gains on
securities included in net income, net of income taxes |
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(12 |
) |
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(34 |
) |
Reclassification adjustment for other-than-temporary
losses on marketable securities included in net income,
net of income taxes |
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2 |
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Reclassification adjustment for gains on derivative
instruments included in net income, net of income taxes |
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(7 |
) |
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Total other comprehensive income |
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|
73 |
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|
|
|
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Total comprehensive income |
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$ |
620 |
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$ |
586 |
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|
|
|
|
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|
Components of accumulated other comprehensive income consisted of the following (in
millions):
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December 25, |
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September 25, |
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|
|
2005 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
$ |
(28 |
) |
|
$ |
(22 |
) |
Unrealized net gain on marketable securities and derivative
instruments, net of income taxes |
|
|
66 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
$ |
38 |
|
|
$ |
38 |
|
|
|
|
|
|
|
|
Share-Based Payments. In December 2004, the Financial Accounting Standards Board (FASB)
revised Statement of Financial Accounting Standards No. 123 (FAS 123R), Share-Based Payment,
which establishes accounting for share-based awards exchanged for employee services and requires
companies to expense the estimated fair value of these awards over the requisite employee service
period. On April 14, 2005, the U.S. Securities and Exchange Commission adopted a new rule amending
the effective dates for FAS 123R. In accordance with the new rule, the accounting provisions of FAS
123R are effective for the Company beginning in the quarter ended December 25, 2005.
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 on September 26, 2005, the first day of the Companys fiscal
year 2006, using a modified prospective application, which provides for certain changes to the
method for valuing share-based compensation. Under the modified prospective application, prior
periods are not revised for comparative purposes. The valuation provisions of FAS 123R apply to new
awards and to awards that are outstanding on the effective date and 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
recognized subsequent to the adoption of FAS 123R.
7
QUALCOMM
Incorporated
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Share-Based Compensation Information under FAS 123R
Upon adoption of FAS 123R, the Company also changed its method of valuation for share-based
awards 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.
The weighted-average estimated fair value of employee stock options granted during the three
months ended December 25, 2005 was $14.29 per share using the binomial model with the following
weighted-average assumptions (annualized percentages):
|
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|
|
|
|
|
Three Months Ended |
|
|
|
December 25, 2005 |
|
|
|
|
|
|
Volatility |
|
|
30.8 |
% |
Risk-free interest rate |
|
|
4.39 |
% |
Dividend yield |
|
|
1.0 |
% |
Post-vesting forfeiture rate |
|
|
6.0 |
% |
Suboptimal exercise factor |
|
|
1.67 |
|
The Company used the implied volatility of market-traded options in the Companys stock
for the expected volatility assumption input to the binomial model, 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 the first quarter of 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 term 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. Option-pricing theory generally holds
that the optimal (or profit-maximizing) time to exercise an option is at the end of the options
term; therefore, if an option is exercised prior to the end of its term, that exercise is referred
to as suboptimal. The degree to which the Company expects options to be exercised before their
expiration is represented by the suboptimal exercise factor.
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 on past option grants made by the
Company. The expected life for options granted during the three months ended December 25, 2005
derived from the binomial model was 5.5 years.
8
QUALCOMM
Incorporated
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As share-based compensation expense recognized in the Condensed Consolidated Statement of
Operations for the first quarter of 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 first quarter
of fiscal 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 benefit related to such forfeitures as the forfeitures occur. In the Companys pro forma
information required under FAS 123 for the periods prior to fiscal 2006, the Company also accounted
for forfeitures as they occurred.
Total estimated share-based compensation expense, related to all of the Companys share-based
awards, recognized for the three months ended December 25, 2005 was comprised as follows (in
millions, except per share data):
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
December 25, 2005 |
|
|
|
|
|
|
Cost of equipment and services revenues |
|
$ |
12 |
|
Research and development |
|
|
52 |
|
Selling, general and administrative |
|
|
58 |
|
|
|
|
|
Share-based compensation expense before taxes |
|
|
122 |
|
Related income tax benefits |
|
|
(40 |
) |
|
|
|
|
|
Share-based compensation expense, net of taxes |
|
$ |
82 |
|
|
|
|
|
|
|
|
|
|
Net share-based compensation expense, per common share: |
|
|
|
|
Basic |
|
$ |
0.05 |
|
|
|
|
|
Diluted |
|
$ |
0.05 |
|
|
|
|
|
The Company recorded $9 million in share-based compensation expense during the three
months ended December 25, 2005 related to share-based awards granted during fiscal 2006. In
addition, for the three months ended December 25, 2005, the adoption of FAS 123R resulted in a
reclassification to reduce net cash provided by operating activities with an offsetting increase in
net cash provided by financing activities of $101 million 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.
9
QUALCOMM
Incorporated
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For purposes of pro forma disclosures under FAS 123 for the three months ended December 26,
2004, the estimated fair value of the stock options was assumed to be amortized to expense over the
stock options vesting periods. The pro forma effects of recognizing estimated compensation expense
under the fair value method on net income and earnings per common share for the three months ended
December 26, 2004 were as follows (in millions, except per share data):
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
December 26, 2004 |
|
|
|
|
|
|
Net income, as reported |
|
$ |
513 |
|
Deduct: Share-based employee compensation
expense determined under the fair value based
method for all awards, net of related tax effects |
|
|
(75 |
) |
|
|
|
|
|
Pro forma net income |
|
$ |
438 |
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
0.31 |
|
|
|
|
|
Basic pro forma |
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
0.30 |
|
|
|
|
|
Diluted pro forma |
|
$ |
0.26 |
|
|
|
|
|
The pro forma effects of estimated share-based compensation expense on net income and
earnings per common share for the three months ended December 26, 2004 were estimated at the date
of grant using the Black-Scholes option-pricing model based on the following assumptions
(annualized percentages):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
December 26, 2004 |
|
|
|
Stock Option |
|
|
Purchase Plans |
|
|
|
|
|
|
|
|
|
|
Volatility |
|
|
38.0 |
% |
|
|
30.9 |
% |
Risk-free interest rate |
|
|
3.7 |
% |
|
|
1.6 |
% |
Dividend yield |
|
|
0.6 |
% |
|
|
0.7 |
% |
Expected life (years) |
|
|
6.0 |
|
|
|
0.5 |
|
The assumptions related to volatility, risk free interest rate and dividend yield used
for the stock option plans differ from those used for the purchase plans primarily due to the
difference in their respective expected lives. The Black-Scholes weighted average estimated fair
value of stock options granted during the three months ended December 26, 2004 was $17.06 per
share.
Note 2 Composition of Certain Financial Statement Items
Accounts Receivable.
|
|
|
|
|
|
|
|
|
|
|
December 25, |
|
|
September 25, |
|
|
|
2005 |
|
|
2005 |
|
|
|
(In millions) |
|
Trade, net of allowance for doubtful accounts
of $2 and $2, respectively |
|
$ |
685 |
|
|
$ |
506 |
|
Long-term contracts |
|
|
21 |
|
|
|
26 |
|
Other |
|
|
22 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
$ |
728 |
|
|
$ |
544 |
|
|
|
|
|
|
|
|
10
QUALCOMM
Incorporated
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Marketable Securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
Noncurrent |
|
|
|
December 25, |
|
|
September 25, |
|
|
December 25, |
|
|
September 25, |
|
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
|
|
(In millions) |
|
|
|
(In millions) |
|
Held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprise
securities |
|
$ |
61 |
|
|
$ |
60 |
|
|
$ |
|
|
|
$ |
|
|
Corporate bonds and notes |
|
|
70 |
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131 |
|
|
|
130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
|
107 |
|
|
|
151 |
|
|
|
|
|
|
|
|
|
Government-sponsored enterprise
securities |
|
|
1,208 |
|
|
|
704 |
|
|
|
|
|
|
|
|
|
Municipal bonds |
|
|
10 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
Foreign government bonds |
|
|
17 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
Corporate bonds and notes |
|
|
3,122 |
|
|
|
2,645 |
|
|
|
21 |
|
|
|
14 |
|
Mortgage and asset-backed securities |
|
|
757 |
|
|
|
767 |
|
|
|
|
|
|
|
|
|
Non-investment grade debt securities |
|
|
22 |
|
|
|
24 |
|
|
|
900 |
|
|
|
694 |
|
Equity mutual funds |
|
|
|
|
|
|
|
|
|
|
309 |
|
|
|
293 |
|
Equity securities |
|
|
33 |
|
|
|
30 |
|
|
|
1,184 |
|
|
|
1,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,276 |
|
|
|
4,348 |
|
|
|
2,414 |
|
|
|
2,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,407 |
|
|
$ |
4,478 |
|
|
$ |
2,414 |
|
|
$ |
2,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment.
|
|
|
|
|
|
|
|
|
|
|
December 25, |
|
|
September 25, |
|
|
|
2005 |
|
|
2005 |
|
|
|
(In millions) |
|
Land |
|
$ |
76 |
|
|
$ |
65 |
|
Buildings and improvements |
|
|
655 |
|
|
|
614 |
|
Computer equipment |
|
|
555 |
|
|
|
520 |
|
Machinery and equipment |
|
|
599 |
|
|
|
544 |
|
Furniture and office equipment |
|
|
33 |
|
|
|
33 |
|
Leasehold improvements |
|
|
137 |
|
|
|
107 |
|
Property under capital leases |
|
|
11 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2,066 |
|
|
|
1,885 |
|
Less accumulated depreciation
and amortization |
|
|
(912 |
) |
|
|
(863 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,154 |
|
|
$ |
1,022 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to property, plant and equipment for the three
months ended December 25, 2005 and December 26, 2004 was $52 million and $39 million, respectively.
Note 3 Investments in Other Entities
The Company 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). The Company recorded $20 million and $10 million in equity in
losses of Inquam during the three months ended December 25, 2005 and December 26, 2004,
respectively, including a $12 million loss resulting from Inquams restructuring during the three
months ended December 25, 2005. At December 25, 2005, the Companys equity and debt investments in
Inquam and the Portugal Companies totaled $6 million, 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 $54 million. The
guarantee expires and the facilities mature on December 25, 2011. The Company had no other
funding commitments at December 25, 2005 and does not anticipate providing any further funding to
Inquam or to the Portugal Companies.
11
QUALCOMM
Incorporated
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 Investment Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
December 25, |
|
|
December 26, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(In millions) |
|
Interest and dividend income |
|
$ |
91 |
|
|
$ |
53 |
|
Interest expense |
|
|
(1 |
) |
|
|
|
|
Net realized gains on marketable securities |
|
|
20 |
|
|
|
56 |
|
Net realized gains on other investments |
|
|
|
|
|
|
8 |
|
Other-than-temporary losses on marketable
securities |
|
|
(3 |
) |
|
|
|
|
Gains on derivative instruments |
|
|
4 |
|
|
|
3 |
|
Equity in losses of investees |
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
91 |
|
|
$ |
120 |
|
|
|
|
|
|
|
|
Note 5 Income Taxes
The Company currently estimates its annual effective income tax rate to be approximately 22%
for fiscal 2006 as compared to the 24% effective income tax rate in
fiscal 2005. During the first quarter of fiscal 2006, the IRS
completed audits of the Companys tax returns for fiscal 2001
through 2002, resulting in adjustments to the Companys net
operating loss and credit carryover amounts from those years. The tax
provision was reduced by $56 million in the first quarter of
fiscal 2006 to reflect the expected impact of the audit on both the
reviewed and open tax years. The 16% effective
tax rate for the first quarter of fiscal 2006 is lower than the expected annual effective rate
due to this reduction.
The
estimated annual effective tax rate for fiscal 2006 is 13% lower than the United States federal
statutory rate primarily due to benefits of approximately 15% related to foreign earnings taxed at
less than the United States federal rate, 2% related to the impact of tax audits and 1% related
to research and development tax credits, partially offset by state taxes of approximately 5%. The
prior fiscal year rate was lower than the United States federal statutory rate as a result of
foreign earnings taxed at less than the United States federal rate, an increase in the forecast of
our ability to use capital loss carryforwards and the generation of research and development
credits, partially offset by state taxes and tax expense related to a one-time dividend paid under
the American Jobs Creation Act of 2004.
The Company has not provided United States income taxes and foreign withholding taxes on a
cumulative total of approximately $1.7 billion of undistributed earnings of certain non-United
States subsidiaries indefinitely invested outside the United States. Should the Company decide to
repatriate foreign earnings, the Company would have to adjust the income tax provision in the
period management determined that the earnings will no longer be indefinitely invested outside the
United States.
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 December
25, 2005, the Company has provided a valuation allowance of $57 million related to previously
incurred capital losses. This valuation allowance reflects the uncertainty surrounding the
Companys ability to generate sufficient capital gains to utilize all capital losses. In addition,
the Company has provided a valuation allowance of $13 million related to foreign tax credits that
are expected to expire unutilized and $6 million related to foreign net operating loss
carryforwards. Deferred tax assets, net of valuation allowance, decreased by approximately $31
million from September 25, 2005 to December 25, 2005 primarily due the use of tax credits as a
result of continued profitable operations, partially offset by tax benefits from stock option
expense.
12
QUALCOMM
Incorporated
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 Stockholders Equity
Changes in stockholders equity for the three months ended December 25, 2005 were as follows
(in millions):
|
|
|
|
|
Balance at September 25, 2005 |
|
$ |
11,119 |
|
Net income |
|
|
620 |
|
Other comprehensive income |
|
|
|
|
Net proceeds from the issuance of common stock |
|
|
165 |
|
Share-based compensation |
|
|
122 |
|
Tax benefits from exercise of stock options |
|
|
101 |
|
Net increase in the valuation allowance on certain deferred
tax assets |
|
|
(7 |
) |
Dividends |
|
|
(148 |
) |
|
|
|
|
Balance at December 25, 2005 |
|
$ |
11,972 |
|
|
|
|
|
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. While the Company did not
repurchase any of the Companys common stock under these programs during the three months ended
December 25, 2005, the Company continues to evaluate repurchases under this program.
In connection with the Companys stock repurchase program, the Company had a put option
outstanding at December 25, 2005, with an expiration date of March 21, 2006, that may require the
Company to purchase 5,750,000 shares of the Companys common stock upon exercise for $216 million
(net of the option premiums received). Any shares repurchased upon exercise of the put option will
be retired. A put option to purchase 5,750,000 shares of the Companys common stock expired on
December 7, 2005 unexercised. The recorded values of put option liabilities totaled $3 million and
$7 million at December 25, 2005 and September 25, 2005, respectively. During the three months ended
December 25, 2005, the Company recognized $3 million in investment income due to a decrease in the
fair value of the put option that remains outstanding at December 25, 2005, and $1 million in
investment income from the put option that expired unexercised. There were no put options
outstanding during the three months ended December 26, 2004. At December 25, 2005, $2.3 billion
remains authorized for repurchases under the stock purchase program.
Dividends. On March 8, 2005, the Company announced an increase in its quarterly dividend from
$0.07 to $0.09 per share on common stock. Cash dividends announced during the three months ended
December 25, 2005 and December 26, 2004 were $0.09 and $0.07 per share, respectively. During the
three months ended December 25, 2005 and December 26, 2004, dividends charged to retained earnings
were $148 million and $115 million, respectively. On January 12, 2006, the Company announced a cash
dividend of $0.09 per share on the Companys common stock, payable on March 24, 2006 to
stockholders of record as of February 24, 2006, which will be recorded in the second fiscal
quarter.
Note 7 Employee Stock Benefit Plans
Stock Option Plans. The Company 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 2001 Stock Option Plan (the 2001
Plan) was adopted and replaced the 1991 Stock Option Plan (the 1991 Plan), which expired in August
2001. Options granted under the 1991 Plan remain outstanding until exercised or cancelled. The
shares reserved under the 2001 Plan were equal to the number of shares available for future grant
under the 1991 Plan on the date the 2001 Plan was approved by the Companys stockholders. At that
date, approximately 101,083,000 shares were available for future grants under the 2001 Plan. In
fiscal 2004, the Company reserved another 64,000,000 shares for future grants under the 2001 Plan.
The Company may terminate the 2001 Plan at any time. The 2001 Plan provides for the grant of both
incentive stock options and non-qualified stock options. Generally, options granted vest over a
service period of five years and are exercisable for up to 10 years from the grant date.
The 2001 Non-Employee Directors Stock Option Plan (the 2001 Directors Plan) was adopted and
replaced the 1998 Non-Employee Directors Stock Option Plan (the 1998 Directors Plan). Options
granted under the 1998 Directors Plan remain outstanding until exercised or cancelled. The shares
reserved under the 2001 Directors Plan are equal to the number of shares available for future
grant under the 1998 Directors Plan on the date the 2001 Directors Plan was approved by the
Companys stockholders. At that date, 4,100,000 shares were available for
13
QUALCOMM
Incorporated
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
future grants under the 2001 Directors Plan. The Company may terminate the 2001 Directors
Plan at any time. This plan provides for non-qualified stock options to be granted to non-employee
directors at fair market value, vesting over periods not exceeding five years and are exercisable
for up to 10 years from the grant date.
A summary of stock option transactions for all stock option plans follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number |
|
|
Average |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
of Shares |
|
|
Exercise |
|
|
Term |
|
|
Value |
|
|
|
(in thousands) |
|
|
Price |
|
|
(years) |
|
|
(in billions) |
|
Outstanding at September 25, 2005 |
|
|
202,794 |
|
|
$ |
24.35 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
17,149 |
|
|
$ |
42.47 |
|
|
|
|
|
|
|
|
|
Options cancelled/forfeited/expired |
|
|
(441 |
) |
|
$ |
34.29 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(9,464 |
) |
|
$ |
17.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 25, 2005 |
|
|
210,038 |
|
|
$ |
26.12 |
|
|
|
6.28 |
|
|
$ |
3.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 25, 2005 |
|
|
123,778 |
|
|
$ |
21.93 |
|
|
|
4.83 |
|
|
$ |
2.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net stock options, after forfeitures and cancellations, granted during each of the three
months ended December 25, 2005 and December 26, 2004 represented 1.0% of outstanding shares as of
the beginning of each fiscal quarter. Total stock options granted during the three months ended
December 25, 2005 and December 26, 2004 represented 1.0% and 1.1% of outstanding shares as of the
end of each fiscal quarter, respectively.
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. The total estimated grant date fair
value of stock options that vested during the three months ended December 25, 2005 was $118
million, which approximates the share-based compensation expense before taxes due to the monthly
vesting for the majority of the Companys stock option plans. At December 25, 2005, total
unrecognized estimated compensation cost related to non-vested stock options granted prior to that
date was $1.15 billion, which is expected to be recognized over a weighted average period of 2.4
years. The total share-based compensation cost of stock options capitalized as part of inventory
and fixed assets was negligible during the three months ended December 25, 2005. The total
intrinsic value of stock options exercised during the three months ended December 25, 2005 was $261
million. The Company recorded cash received from the exercise of stock options of $164 million and
related tax benefits of $101 million during the three months ended December 25, 2005. Upon option
exercise, the Company issues new shares of stock.
Additional information about stock options outstanding at December 25, 2005 with exercise
prices less than or above $44.39 per share, the closing price at December 25, 2005, follows (number
of shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable |
|
|
Unexercisable |
|
|
Total |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Number |
|
|
Exercise |
|
|
Number |
|
|
Exercise |
|
|
Number |
|
|
Exercise |
|
Exercise Prices |
|
of Shares |
|
|
Price |
|
|
of Shares |
|
|
Price |
|
|
of Shares |
|
|
Price |
|
Less than $44.39 |
|
|
119,800 |
|
|
$ |
20.70 |
|
|
|
85,653 |
|
|
$ |
32.04 |
|
|
|
205,453 |
|
|
$ |
25.43 |
|
Above $44.39 |
|
|
3,978 |
|
|
$ |
58.83 |
|
|
|
607 |
|
|
$ |
45.46 |
|
|
|
4,585 |
|
|
$ |
57.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total outstanding |
|
|
123,778 |
|
|
$ |
21.93 |
|
|
|
86,260 |
|
|
$ |
32.13 |
|
|
|
210,038 |
|
|
$ |
26.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
14
QUALCOMM
Incorporated
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 the three months ended December 25, 2005 and December 26, 2004, the Company
issued no shares under the purchase plans. At December 25, 2005, approximately 15,446,000 shares
were reserved for future issuance. The total estimated fair value of purchase rights outstanding
under the Employee Stock Purchase Plans that vested during the three months ended December 25, 2005
was $4 million.
Note 8 Commitments and Contingencies
Litigation. Zoltar Satellite Alarm Systems, Inc. v. QUALCOMM, Inc. and SnapTrack, Inc.: On
March 30, 2001, Zoltar Satellite Alarm Systems, Inc. filed suit against QUALCOMM and its subsidiary
SnapTrack, Inc. in the United States District Court for the Northern District of California seeking
monetary damages and injunctive relief based on the alleged infringement of three patents.
Following a verdict and finding of no infringement of 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, and the Company and SnapTrack filed
a responsive notice and motion to dismiss. Zoltars appeal was dismissed and the issue of reaching
a final judgment on issues aside from non-infringement is pending before the district court.
QUALCOMM Incorporated v. Maxim Integrated Products, Inc.: On November 9, 2005, the case was
dismissed pursuant to a settlement between the parties and a consent decree entered into by Maxim.
Whale Telecom Ltd. v. QUALCOMM Incorporated: On November 15, 2004, Whale Telecom Ltd. sued the
Company in the New York State Supreme Court, County of New York, seeking monetary damages based on
the claim that the Company fraudulently induced it to enter into certain infrastructure services
agreements in 1999 and later interfered with their performance of those agreements.
Broadcom Corporation v. QUALCOMM Incorporated: On May 18, 2005, Broadcom filed two actions in
the United States District Court for the Central District of California against the Company
alleging infringement of ten patents and seeking monetary damages and injunctive relief based
thereon. On the same date, Broadcom also filed a complaint in the United States International Trade
Commission (ITC) alleging infringement of five of the same patents at issue in the Central District
Court cases seeking a determination and relief under Section 337
of the Tariff Act of 1930. A three-week trial in the ITC is scheduled
to start on February 15, 2006. On July
1, 2005, Broadcom filed an action in the United States District Court for the District of New
Jersey against the Company alleging violations of state and federal antitrust and unfair
competition laws as well as common law claims, generally relating to licensing and chip sales
activities, seeking monetary damages and injunctive relief based thereon. Discovery has commenced
in the actions. On December 12, 2005, the Central District Court ordered two of the Broadcom patent
claims filed in the Central District to be transferred to the Southern District of California to be
considered in the case filed by the Company on August 22, 2005.
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.
Discovery is underway. 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. Discovery has yet to
commence.
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.
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 Maryland, New York,
Pennsylvania, Washington D.C., Georgia 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.
15
QUALCOMM
Incorporated
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. To date, the
Company has not received all of 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.
Long-Term Financing. The Company agreed to provide certain CDMA customers of
Telefonaktiebolaget LM Ericsson (Ericsson) with long-term interest bearing debt financing for the
purchase of cdmaOne base station equipment, CDMA2000 base station equipment and related
infrastructure equipment and/or associated services. At December 25, 2005, the Company had a
commitment to extend up to $118 million in long-term financing to certain CDMA customers of
Ericsson. The funding of this commitment, if it occurs, is not subject to a fixed expiration date
and is subject to the CDMA customers meeting conditions prescribed in the financing arrangement
and, in certain cases, to Ericsson also financing a portion of such sales and services. Financing
under this arrangement is generally collateralized by the related equipment. The commitment
represents the maximum amount to be financed; actual financing may be in lesser amounts.
Operating Leases. The Company leases certain of its facilities and equipment under
noncancelable operating leases, with terms ranging from less than 1 year to 27 years and with
provisions for cost-of-living increases for certain leases. Future minimum lease payments for the
remainder of fiscal 2006 and each of the subsequent four years from fiscal 2007 through 2010 are
$50 million, $55 million, $29 million, $21 million and $18 million, respectively, and $55 million
thereafter.
Purchase Obligations. The Company has agreements with suppliers and other parties to purchase
inventory, other goods and services and long-lived assets and estimates its noncancelable
obligations under these agreements for the remainder of fiscal 2006 and for each of the subsequent
four years from fiscal 2007 through 2010 to be $631 million, $210 million, $73 million, $27 million
and $18 million, respectively, and $35 million thereafter. Of the totals for the remainder of
fiscal 2006 and for each of the subsequent three years from fiscal 2007 through 2009, commitments
to purchase integrated circuit product inventories comprised $537 million, $149 million, $44
million and $5 million, respectively.
Note 9 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 CDMA-based products, including, without limitation, products
implementing cdmaOne, CDMA2000, WCDMA and/or the CDMA TDD standards and their
derivatives, and collects license fees and royalties in partial consideration for such
licenses;
|
16
QUALCOMM
Incorporated
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
QUALCOMM Wireless & Internet (QWI) comprised of: |
|
° |
|
QUALCOMM Internet Services (QIS) provides technology to support
and accelerate the convergence of the wireless data market, including its BREW
product and services, QChat and QPoint; |
|
|
° |
|
QUALCOMM Government Technologies (QGOV) provides development,
hardware and analytical expertise to United States government agencies involving
wireless communications technologies; and |
|
|
° |
|
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. |
The Company evaluates the performance of its segments based on earnings (loss) before income
taxes (EBT), excluding certain impairment and other charges that are not allocated to the segments
for management reporting purposes. EBT includes the allocation of certain corporate expenses to the
segments, including depreciation and amortization expense related to unallocated corporate assets.
Segment data includes intersegment revenues.
The table below presents revenues and EBT for reportable segments (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling |
|
|
|
|
|
|
QCT |
|
|
QTL |
|
|
QWI |
|
|
QSI |
|
|
Items |
|
|
Total |
|
For the three months ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,033 |
|
|
$ |
564 |
|
|
$ |
166 |
|
|
$ |
|
|
|
$ |
(22 |
) |
|
$ |
1,741 |
|
EBT |
|
|
300 |
|
|
|
517 |
|
|
|
17 |
|
|
|
(48 |
) |
|
|
(50 |
) |
|
|
736 |
|
December 26, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
865 |
|
|
$ |
400 |
|
|
$ |
159 |
|
|
$ |
|
|
|
$ |
(34 |
) |
|
$ |
1,390 |
|
EBT |
|
|
242 |
|
|
|
358 |
|
|
|
16 |
|
|
|
40 |
|
|
|
48 |
|
|
|
704 |
|
Reconciling items in the previous table were comprised as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
December 25, |
|
|
December 26, |
|
|
|
2005 |
|
|
2004 |
|
Revenues |
|
|
|
|
|
|
|
|
Elimination of intersegment revenue |
|
$ |
(43 |
) |
|
$ |
(39 |
) |
Other nonreportable segments |
|
|
21 |
|
|
|
5 |
|
|
|
|
|
|
|
|
Reconciling items |
|
$ |
(22 |
) |
|
$ |
(34 |
) |
|
|
|
|
|
|
|
Earnings (loss) before income taxes |
|
|
|
|
|
|
|
|
Unallocated research and development expenses |
|
|
(70 |
) |
|
|
(7 |
) |
(Un)overallocated selling, general and |
|
|
|
|
|
|
|
|
administrative expenses |
|
|
(61 |
) |
|
|
2 |
|
Unallocated cost of equipment and services revenues |
|
|
(12 |
) |
|
|
|
|
Other nonreportable segments |
|
|
(14 |
) |
|
|
(11 |
) |
Unallocated investment income, net |
|
|
108 |
|
|
|
63 |
|
Intracompany eliminations |
|
|
(1 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
Reconciling items |
|
$ |
(50 |
) |
|
$ |
48 |
|
|
|
|
|
|
|
|
17
QUALCOMM
Incorporated
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Generally, revenues between segments are based on prevailing market rates for
substantially similar products and services or an approximation thereof. Certain charges are
allocated to the corporate functional department in the Companys management reports based on the
decision that those charges should not be used to evaluate the segments operating performance.
Unallocated charges include certain investment income and research and development expenses and
marketing expenses related to the development of the CDMA-based market that were not deemed to be
directly related to the businesses of the segments. During the three months ended December 25,
2005, unallocated research and development expenses and selling, general and administrative
expenses included $52 million and $58 million of share-based compensation expense, respectively,
and unallocated cost of revenues was comprised entirely of share-based compensation expense.
Revenues from external customers and intersegment revenues were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QCT |
|
QTL |
|
QWI |
For the three months ended: |
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
1,031 |
|
|
$ |
525 |
|
|
$ |
164 |
|
Intersegment revenues |
|
|
2 |
|
|
|
39 |
|
|
|
2 |
|
December 25, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
864 |
|
|
$ |
365 |
|
|
$ |
156 |
|
Intersegment revenues |
|
|
1 |
|
|
|
35 |
|
|
|
3 |
|
Segment assets are comprised of accounts receivable and inventories for QCT, QTL and QWI.
The QSI segment assets include certain marketable securities, accounts receivable, finance
receivables, notes receivable, wireless licenses, other investments and all assets of consolidated
investees. 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 and capitalized share-based compensation. Segment assets were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
December 25, |
|
|
September 25, |
|
|
|
2005 |
|
|
2005 |
|
QCT |
|
$ |
549 |
|
|
$ |
518 |
|
QTL |
|
|
186 |
|
|
|
16 |
|
QWI |
|
|
150 |
|
|
|
153 |
|
QSI |
|
|
461 |
|
|
|
442 |
|
Reconciling items |
|
|
12,083 |
|
|
|
11,350 |
|
|
|
|
|
|
|
|
Total consolidated assets |
|
$ |
13,429 |
|
|
$ |
12,479 |
|
|
|
|
|
|
|
|
The increase in QTLs segment assets resulted from an increase in accounts receivable
from licensees that report royalties quarterly and make payments on a semi-annual basis.
Note 10 Subsequent Events
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 Orthogonal Frequency
Division Multiplexing Access
(OFDMA) technology for approximately $608 million in consideration, consisting of
approximately $348 million in shares of QUALCOMM stock, $229 million in cash, and the exchange of
Flarions existing vested options and warrants with a preliminary estimated aggregate fair value of
approximately $31 million. In addition, the Company assumed Flarions existing unvested options
with a preliminary estimated aggregate fair value of $67 million, which will be recorded as
share-based compensation over the remaining vesting period pursuant to FAS 123R. Upon achievement
of certain agreed upon milestones on or prior to the eighth anniversary of the close of this
transaction, the Company may issue additional aggregate consideration of $205 million, consisting
of approximately $185 million payable in cash to Flarion stockholders and $20 million in shares of
QUALCOMM stock, which will be issued to Flarion option holders and warrant holders upon or
following the exercise of such options and warrants. The acquisition of Flarion is intended to
broaden the Companys ability to effectively support operators who may prefer an OFDMA or a hybrid
OFDM/CDMA/WCDMA network alternative for differentiating their services. The addition of 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.
On December 30, 2005, the Company acquired Berkana Wireless, Inc. (Berkana), a provider of
complementary metal oxide semiconductor (CMOS) radio frequency integrated circuits (RFICs), for
approximately $56 million in cash and the exchange of stock options with a preliminary estimated
aggregate fair value of approximately $7 million, substantially all of which will be recorded as
share-based compensation.
18
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This information should be read in conjunction with the condensed consolidated financial
statements and the notes thereto included in Item 1 of Part I of this Quarterly Report and the
audited consolidated financial statements and notes thereto and Managements Discussion and
Analysis of Financial Condition and Results of Operations for the year ended September 25, 2005
contained in our 2005 Annual Report on Form 10-K.
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 Quarterly Report.
Overview
Recent Highlights
Revenues for the first quarter of fiscal 2006 were $1.74 billion, with net income of $620
million. The following recent developments occurred with respect to key elements of our business or
our industry:
|
|
|
The wireless industry continues to grow at a rapid pace, with worldwide wireless
subscribers growing by nearly 6% in the fourth calendar quarter of 2005 to reach
approximately 2.1 billion.1 CDMA-based subscribers, including both 2G
(cdmaOne) and 3G (CDMA2000, 1xEV-DO and WCDMA), represent approximately 15%1
of total worldwide wireless subscribers to date. |
|
|
|
|
CDMA-based 3G subscribers to wireless operators services grew to at least 233
million worldwide through December 2005, including at least 19 million 1xEV-DO
subscribers and at least 44 million WCDMA subscribers.2 |
|
|
|
|
CDMA-based handset shipments by manufacturers to wireless operators totaled
approximately 52 million units at an average selling price of $215 during the period
July 2005 through September 2005 based on reports in the first quarter of fiscal 2006 by
our licensees. These shipments represent an estimated 25% of total worldwide handset
shipments for the same period based on the 208 million worldwide handset
shipments.3 |
|
|
|
|
The ratio of WCDMA reported royalties to total reported royalties grew from
approximately 32% reported in the first quarter of fiscal 2005 to approximately 40%
reported in the first quarter of fiscal 2006. |
|
|
|
|
We continue to see a highly competitive market in CDMA2000 and WCDMA handsets. As
reported by our licensees in the first quarter of fiscal 2006 for their sales in the
fourth quarter of fiscal 2005: |
|
o |
|
22 handset suppliers actively supplied WCDMA products, compared
to 17 reported in the fourth quarter of fiscal 2005. |
|
|
o |
|
48 handset suppliers actively supplied CDMA2000 1x and 1xEV-DO
products, compared to 46 reported in the fourth quarter of fiscal 2005. |
|
|
|
During the first quarter of fiscal 2006, we shipped approximately 47 million Mobile
Station Modem (MSM) integrated circuits for CDMA-based phones and data modules (nearly
all of which were 3G, including CDMA2000 1X, 1xEV-DO and WCDMA), compared to
approximately 39 million MSM integrated circuits in the first quarter of fiscal 2005.
This brings the cumulative integrated circuits shipped to more than 2 billion since the
first CDMA integrated circuit shipped in 1996. |
|
|
|
|
In December 2005, we announced plans to work with Verizon Wireless to bring its
customers mobile video over the MediaFLO USA network. Verizon Wireless is expected to be
the first wireless service provider to use the MediaFLO USA network to deliver mobile
video services. We successfully demonstrated the MediaFLO service on handsets from both
LG and Samsung at the Consumer Electronics Show in early January 2006. |
19
|
|
|
We actively supported the worlds first widespread High-Speed Downlink Packet Access
(HSDPA) deployment recently launched by Cingular Wireless in the United States in
December 2005. We worked with several leading device manufacturers to develop and
validate multiple mobile devices for the HSDPA network, including certain models based
on our MSM 6275 integrated circuit. |
|
|
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|
We continue to invest in new emerging technologies through acquisitions and research
and development. In the second quarter of fiscal 2006, we completed the acquisitions of
Flarion Technologies, Inc., a developer of Orthogonal Frequency Division Multiplexing
Access (OFDMA) technology, and Berkana Wireless, Inc., a fabless semiconductor company
that provides complementary metal oxide semiconductor (CMOS) radio frequency integrated
circuits (RFICs). |
|
(1) |
|
According to EMC World Cellular Information Service, a researcher and publisher of
wireless industry market intelligence. |
|
|
(2) |
|
According to inputs from a large portion of operators around the world. |
|
|
(3) |
|
As reported by Strategy Analytics, a global research and consulting firm in their
November 2005, Global Handset Market Share Update. |
Our Business and Operating Segments
We design, manufacture 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.
We conduct business through four operating 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 integrated circuits and system software for
wireless voice and data communications, multimedia functions and global positioning. 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 baseband MSM, Radio Frequency (RF) and Power Management (PM) devices. These integrated
circuits for wireless phones and the related 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. QCT software
products are the operating systems that control the wireless phones and the functionality imbedded
in our integrated circuit products. 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 59% and 62% of total
consolidated revenues for the first quarter of fiscal 2006 and 2005, respectively.
QTL grants licenses to use portions of our intellectual property portfolio, which includes
certain patent rights essential to and/or useful in the manufacture and sale of CDMA, including,
without limitation, products implementing cdmaOne, CDMA2000, WCDMA and/or the CDMA TDD 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 net selling price of licensed products. QTL revenues comprised 32% and 29% of
total consolidated revenues for the first quarter of fiscal 2006 and 2005, respectively.
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 the BREW
(Binary Runtime Environment for Wireless) product and services, including the uiOne customizable
user-interface product and the deliveryOne content distribution system,
for the development and over-the-air deployment of data services on wireless devices. QIS also
provides QChat and QPoint products and
20
services. QChat enables virtually instantaneous push-to-chat
functionality on CDMA-based wireless devices while QPoint enables operators to offer E-911 and
location-based applications and services. The QGOV division provides development, hardware and
analytical expertise to United States government agencies involving wireless communications
technologies. QWI revenues comprised 10% and 11% of total consolidated revenues in the first
quarter of fiscal 2006 and 2005, respectively.
QSI 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 mediacast network based on our FLO (Forward Link Only)
technology and MediaFLO Media Distribution System (MDS), initially targeting 100 top domestic
markets, with the eventual capability for broader nationwide coverage. 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 network and service will
be determined by our wireless operator partners. 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 USA plans to use nationwide 700 MHz spectrum for which we hold licenses and is procuring
and will be distributing content on a wholesale basis to our wireless operator customers.
Distribution, marketing, billing and customer relationships are expected to remain services
provided by our wireless operator partners. We are evaluating a number of corporate structuring
options, including distributing 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 display
technology based on micro-electro-mechanical-system (MEMS) structure combined with thin film
optics, and other product initiatives.
Looking Forward
We expect continued growth in demand for CDMA2000 and WCDMA products and services around the
world:
|
|
|
Operators on the CDMA2000 technology path are deploying 1xEV-DO and are preparing to
deploy EV-DO Revision A. Many GSM operators are migrating their networks to WCDMA and
are preparing to deploy HSDPA. The deployment of these 3G networks enables higher voice
capacity and data rates, thereby supporting more minutes of use and data intensive
applications like multimedia. |
|
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|
As of December 2005, 100 WCDMA networks have launched, and as of January 2006, 272
devices are commercially available (compared to 108 a year ago).1 We expect
that the demand for WCDMA products and services will continue to expand as operators
transition their subscribers to WCDMA devices on these WCDMA networks. |
|
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|
We expect that volume increases and growing competition among WCDMA phone
manufacturers and WCDMA integrated circuit suppliers will continue to help decrease
WCDMA phone prices significantly and drive growth of WCDMA phone sales worldwide. |
|
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|
We expect that growing demand for advanced 3G phones and devices at above average
price points will continue to drive the need for increased multimedia MSM functionality.
To meet this market need, we intend to continue to invest significant resources toward
the development of multimedia products, software and services for the wireless industry. |
|
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|
We expect growing demand for low-end phones to continue and have invested resources
for single chip solutions which combine the baseband, radio frequency and power
management chips into one package. We believe lower component counts and further
integration will drive costs down and enable faster time to market to meet the
increasing demand for low-end phones. While we are moving
aggressively to address the low-end market more effectively with CDMA-based products, we
still face significant competition from GSM-based products in this market. |
21
|
|
|
We will continue our development efforts with respect to our BREW applications
development platform, our new MediaFLO Multimedia Distribution System (MDS) and FLO
technology for low cost delivery of multimedia content to multiple subscribers
simultaneously and our iMoD display technology. |
|
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|
We will continue to invest in the advancement of CDMA and a broad range of other
wireless technologies as evidenced by our recently announced DO Multicarrier Multilink
eXtensions (DMMX) and HSDPA Multicarrier Multilink eXtensions (HMMX) platforms. These
platforms will enable continued improvement in the performance of CDMA and WCDMA
technologies and are part of our vision to enable a range of technologies, each
optimized for specific services and integrated into our integrated circuit products. |
|
|
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|
We will continue to invest in the development of OFDM- and OFDMA-based technologies. We have
proposed and/or intend to propose these technologies to various standards bodies,
including Institute for Electrical Engineers (IEEE) 802, 3rd Generation
Partnership Project (3GPP), and 3rd Generation Partnership Project 2 (3GPP2). |
|
(1) |
|
As reported by the Global Mobile Suppliers Association, an international organization of
WCDMA and GSM (Global System for Mobile Communications) suppliers. |
Since our founding in 1985, we have focused heavily on technology development and
innovation. These efforts have resulted in the worlds leading intellectual property portfolio
related to wireless technology. Because all forms of CDMA and its
derivatives require the use of our patents, our patent portfolio is the most widely and extensively licensed portfolio in
the industry with over 130 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 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
licensing our technology to all interested companies on terms that are fair, reasonable and free
from unfair discrimination. 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
solution, and focusing on improving the efficiency of the airlink for operators, we have helped 3G CDMA evolve and grow at a faster pace than
the second-generation technologies that preceded it.
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, some 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. 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 recently filed complaints with the European
Commission, and (iv) behind the scenes lobbying with governmental regulators and elected officials
for the purpose of seeking the imposition of some form of compulsory
licensing and/or to weaken a patent holder's ability to enforce its
rights or obtain a fair return for such rights.
Given our enormous investment in technology innovation, the demonstrable benefits provided by
our intellectual property, and long-standing license agreements with more than 130 licensees
including many of the worlds foremost wireless equipment manufacturers, we believe that the
royalties we charge are reasonable and fair to the companies paying such royalties, as well as
providing significant incentives for others to invest in CDMA applications, as evidenced by the
enormous 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. Regrettably, we assume, as should
investors, that challenges of this nature will continue into the foreseeable future and will
require the investment of substantial time and financial resources to explain and defend our
position.
22
Although there can be no guarantees as to the ultimate outcome of these challenges, we intend
to expend appropriate resources to properly educate governmental authorities, elected officials,
courts of law, our licensees, wireless carriers and the general public as to the true nature of
these disputes. We believe that when such information is fairly evaluated by such parties, that
these matters 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. You should also refer to the Risk Factors included in this
Quarterly Report for further discussion of these and other risks related to our business.
Revenue Concentrations
Revenues from customers in South Korea, Japan, China and the United States comprised 35%, 20%,
16% and 12%, respectively, of total consolidated revenues in the first quarter of fiscal 2006 as
compared to 37%, 22%, 10% and 19%, respectively, in the first quarter of fiscal 2005. We
distinguish revenue from external customers by geographic areas based on customer location. The
increase in revenues from customers in China from 10% of total revenues to 16% is primarily
attributable to the maturing of CDMA-based manufacturers in China that are experiencing wider
adoption of their products in international markets for lower priced phones and WCDMA phones.
Combined revenues from customers in South Korea, Japan and the United States decreased as a
percentage of total revenues, from 78% to 67%, due primarily to increases in revenues from WCDMA
manufacturers in Western Europe and increased activity by manufacturers in China. Revenues from
customers in the United States also decreased as a result of a shift in manufacturing locations by
certain customers from the United States to other international locations.
Critical Accounting Policies and Estimates
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 valuing share-based compensation. The valuation
provisions of FAS 123R apply to new awards and to awards that are outstanding on the effective date
and subsequently modified or cancelled. Under the modified prospective application, prior periods
are not revised for comparative purposes. Share-based compensation expense recognized under FAS
123R for the three months ended December 25, 2005 was $122 million. At December 25, 2005, total
unrecognized estimated compensation expense related to non-vested stock options granted prior to
that date was $1.15 billion, which is expected to be recognized over a weighted average period of
2.4 years. Net stock options, after forfeitures and cancellations, granted during each of the three
months ended December 25, 2005 and December 26, 2004 represented 1.0% of outstanding shares as of
the beginning of each fiscal quarter. Total stock options granted during the three months ended
December 25, 2005 and December 26, 2004 represented 1.0% and 1.1% of outstanding shares as of the
end of each fiscal quarter, respectively.
Upon adoption of FAS 123R, we began estimating the value of share-based 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 each share-based award 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.
23
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. 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 financial
statements. Alternatively, value may be realized from these instruments that is significantly in
excess of the fair values originally estimated on the grant date and reported in our financial
statements. There is currently no 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 financial statements,
but these expenses are based on the aforementioned option valuation model 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 the three months
ended December 25, 2005 using the binomial model, we have made a subjective estimate regarding our
stock price volatility (weighted average of 30.8%). 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. If our stock price
volatility assumption were increased to 35%, the weighted average estimated fair value of stock
options granted during the three months ended December 25, 2005 would increase by $0.96 per share,
or 7%. The volatility percentage assumed in the three months ended December 25, 2005 was based on
the implied volatility of traded options, as compared to the blend of implied and historical
volatility data used in prior quarters. 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.
24
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
(weighted average of 4.39% for the three months ended December 25, 2005) which, if increased to 5%,
would increase the weighted average estimated fair value of stock options granted during the three
months ended December 25, 2005 by $0.39 per share, or 3%.
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 (weighted
average of 1.0% for the three months ended December 25, 2005)
which, if decreased to 0.5%, would increase the weighted
average estimated fair value of stock options granted during the three months ended December 25,
2005 by $0.56 per share, or 4%. 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
(weighted average of 6.0% for the three months ended December 25, 2005) which, if decreased to
3.1%, would increase the weighted average estimated fair value of stock options granted during the
three months ended December 25, 2005 by $0.40 per share, or 3%.
The suboptimal exercise factor is estimated using historical option exercise information
(weighted average of 1.67 for the three months ended
December 25, 2005) which, if increased to 1.80,
would increase the weighted average estimated fair value of stock options granted during the three
months ended December 25, 2005 by $0.51 per share, or 4%.
First Quarter of Fiscal 2006 Compared to First Quarter of Fiscal 2005
Revenues. Total revenues for the first quarter of fiscal 2006 were $1.74 billion, compared to
$1.39 billion for the first quarter of fiscal 2005. Revenues from LG Electronics, Samsung and
Motorola, customers of our QCT, QTL and QWI segments, comprised an aggregate of 14%, 14% and 11% of
total consolidated revenues, respectively, in the first quarter of fiscal 2006, compared to 15%,
12% and 12% of total consolidated revenues, respectively, in the first quarter of fiscal 2005.
Revenues from sales of equipment and services for the first quarter of fiscal 2006 were $1.15
billion, compared to $978 million for the first quarter of fiscal 2005. Revenues from sales of
integrated circuit products increased $151 million, resulting primarily from an increase of $279
million related to higher unit shipments of MSM and accompanying RF integrated circuits, partially
offset by a decrease of $128 million related to the net effects of reductions in average sales
prices and changes in product mix.
Revenues from licensing and royalty fees for the first quarter of fiscal 2006 were $591
million, compared to $412 million for the first quarter of fiscal 2005. Revenues from licensing and
royalty fees increased primarily as a result of a $165 million increase in royalties reported to us
by our external licensees, resulting from an increase in sales of CDMA-based products by licensees
at higher average selling prices and the impact of the expiration of one of our royalty sharing
obligations. Worldwide demand for CDMA-based products and average selling prices have increased
primarily as a result of the growth in sales of high-end WCDMA products and shifts in the
geographic distribution of sales of CDMA2000 products.
Cost of Equipment and Services. Cost of equipment and services revenues for the first quarter
of fiscal 2006 was $517 million, compared to $430 million for the first quarter of fiscal 2005.
Cost of equipment and services revenues as a percentage of equipment and services revenues was 45%
for the first quarter of fiscal 2006, compared to 44% in the first quarter of fiscal 2005. The
decline in margin percentage in the first quarter of fiscal 2006 compared to the first quarter of
fiscal 2005 was primarily due to the effect of $12 million in share-based compensation. 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.
25
Research and Development Expenses. For the first quarter of fiscal 2006, research and
development expenses were $340 million or 20% of revenues, compared to $228 million or 16% of
revenues for the first quarter of fiscal 2005. The dollar and percentage increases in research and
development expenses primarily resulted from $52 million in share-based compensation and a $56
million increase in costs related to 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, 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. We expect that research and development costs will continue to
increase in fiscal 2006 as we continue our active support of CDMA-based technologies, products and
network operations and other product initiatives.
Selling, General and Administrative Expenses. For the first quarter of fiscal 2006, selling,
general and administrative expenses were $239 million or 14% of revenues, compared to $148 million
or 11% of revenues for the first quarter of fiscal 2005. The dollar and percentage increases
primarily resulted from $58 million in share-based compensation, a $16 million increase in employee
related expenses and a $10 million increase in professional fees.
Net Investment Income. Net investment income was $91 million for the first quarter of fiscal
2006, compared to $120 million for the first quarter of fiscal 2005. The net increase was primarily
comprised as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
December 25, |
|
|
December 26, |
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
Change |
|
Interest and dividend income: |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other segments |
|
$ |
90 |
|
|
$ |
53 |
|
|
$ |
37 |
|
QSI |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Interest expense |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
Net realized gains on investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
20 |
|
|
|
13 |
|
|
|
7 |
|
QSI |
|
|
|
|
|
|
51 |
|
|
|
(51 |
) |
Other-than-temporary losses on investments |
|
|
(3 |
) |
|
|
|
|
|
|
(3 |
) |
Gains on derivative instruments |
|
|
4 |
|
|
|
3 |
|
|
|
1 |
|
Equity in losses of investees |
|
|
(20 |
) |
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
91 |
|
|
$ |
120 |
|
|
$ |
(29 |
) |
|
|
|
|
|
|
|
|
|
|
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 and dividends earned on interest-bearing securities. Net realized gains
on corporate investments in the first quarter of fiscal 2006 resulted primarily from the sale of
equity mutual funds, the proceeds from which were reinvested in non-investment grade debt
securities. Net realized gains on QSI investments in the first quarter of fiscal 2005 resulted
primarily from a $41 million net realized gain on the sale of an equity investment in NextWave
Telecom Inc. Gains on derivative instruments in the first quarter of both fiscal 2006 and 2005
related primarily to changes in the fair values of put options sold in connection with our stock
repurchase program. Equity in losses of investees increased in the first quarter of fiscal 2006
primarily due to a loss resulting from the Inquam restructuring, of which our share was $12
million, as compared to the effect of investment gains recognized by a venture fund investee in the
first quarter of fiscal 2005, of which our share was $10 million.
Income Tax Expense. Income tax expense was $116 million for the first quarter of fiscal 2006,
compared to $191 million for the first quarter of fiscal 2005. The annual effective tax rate is
estimated to be 22% for fiscal 2006, compared to the 28% estimated annual effective tax rate
recorded during the first quarter of fiscal 2005, and the annual effective tax rate of 24% for
fiscal 2005.
The estimated annual effective tax rate for fiscal 2006 is 13% lower than the United States
federal statutory rate primarily due to benefits of approximately 15% related to foreign earnings
taxed at less than the United States federal rate, 2% related to the
impact of tax audits and
1% related to research and development tax credits, partially offset by state taxes of
approximately 5%. The estimated annual effective tax rate for fiscal 2006 of 22% is lower than the
annual effective tax rate for fiscal 2005 of 24% primarily because of
the projected increased impact of
foreign earnings taxed as rates lower than the United States federal statutory rate.
26
During the first quarter of fiscal 2006, the IRS completed audits of our tax returns for
fiscal 2001 through 2002 resulting in adjustments to our net operating loss and
credit carryover amounts from those years. The tax provision was reduced by $56 million in the first
quarter of fiscal to reflect the expected impact of the audit on both
the reviewed and open tax years.
As of December 25, 2005, we had a valuation allowance of approximately $57 million on
previously incurred capital losses. We also had a valuation allowance of $13 million related to
foreign tax credits that are expected to expire unutilized and $6 million related to foreign net
operating loss carryforwards. We will continue to assess the realizability of the related deferred
tax assets and adjust the amount of the valuation allowance as our ability to utilize the deferred
tax assets changes. A change in the valuation allowance may impact the provision for income taxes
in the period the change occurs.
Our Segment Results for the First Quarter of Fiscal 2006 Compared to the First Quarter of Fiscal
2005
The following should be read in conjunction with the first quarter financial results of fiscal
2006 for each reporting segment. See Notes to Condensed Consolidated Financial Statements Note 9
Segment Information.
QCT Segment. QCT revenues for the first quarter of fiscal 2006 were $1.03 billion, compared to
$865 million for the first quarter of fiscal 2005. Equipment and services revenues, primarily from
MSM and accompanying RF integrated circuits, were $999 million for the first quarter of fiscal
2006, compared to $848 million for the first quarter of fiscal 2005. The increase in MSM and
accompanying RF integrated circuits revenue was comprised of $279 million related to higher unit
shipments, partially offset by a decrease of $128 million related to the net effects of reductions
in average sales prices and changes in product mix. Approximately 47 million MSM integrated
circuits were sold during the first quarter of fiscal 2006, compared to approximately 39 million
for the first quarter of fiscal 2005.
QCTs earnings before taxes for the first quarter of fiscal 2006 were $300 million, compared
to $242 million for the first quarter of fiscal 2005. QCTs operating income as a percentage of its
revenues (operating margin percentage) was 29% in the first quarter of fiscal 2006, compared to 28%
in the first quarter of fiscal 2005. The improvement in operating margin percentage in the first
quarter of fiscal 2006 as compared to the first quarter of fiscal 2005 is primarily due to an
improvement in QCT gross margin percentage. QCT gross margin percentage increased primarily due to
an increase of 1.8% related to the combined effect of reductions in inventory costs and sales
prices and an increase of 1.5% related to a decrease in reserves for excess and obsolete inventory.
These increases were partially offset by a reduction of 2.4% related to an increase in product
support costs.
QTL Segment. QTL revenues for the first quarter of fiscal 2006 were $564 million, compared to
$400 million for the first quarter of fiscal 2005. QTLs earnings before taxes for the first
quarter of fiscal 2006 were $517 million, compared to $358 million for the first quarter of fiscal
2005. QTLs operating margin percentage was 91% in the first quarter of fiscal 2006, compared to
89% in the first quarter of fiscal 2005. The increase in both revenues and earnings before taxes
primarily resulted from a $165 million increase in royalties reported to us by our external
licensees, which were $514 million in the first quarter of fiscal 2006, compared to $349 million in
the first quarter of fiscal 2005. In the first quarter of fiscal 2006, our licensees reported sales
of CDMA-based products for the fourth quarter of fiscal 2005 of approximately 52 million units,
compared to 40 million units reported in the first quarter of fiscal 2005 for sales during the
fourth quarter of fiscal 2004. Revenues from license fees were $11 million in the first quarter of
fiscal 2006, compared to $16 million in the first quarter of fiscal 2005. Other revenues were
comprised of intersegment royalties.
QWI Segment. QWI revenues for the first quarter of fiscal 2006 were $166 million, compared to
$159 million for the first quarter of fiscal 2005. Revenues increased primarily due to a $5 million
increase in QIS revenue. The increase in QIS revenue is primarily attributed to a $9 million
increase in fees related to our expanded BREW customer base and products, partially offset by a $4
million combined decrease in QChat and QPoint revenue. QWBS shipped approximately 11,800
satellite-based systems and 15,100 terrestrial-based systems during the first quarter of fiscal
2006, compared to approximately 13,300 satellite-based systems and 11,600 terrestrial-based systems
in the first quarter of fiscal 2005.
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QWIs earnings before taxes for the first quarter of fiscal 2006 were $17 million, compared to
$16 million for the first quarter of fiscal 2005. QWIs operating margin was 10% in the first
quarter of both fiscal 2006 and 2005. The increase in QWI earnings before taxes was primarily due
to a $6 million increase in QIS gross margin largely
resulting from the increase in revenues related to our expanded BREW customer base and
products, partially offset by a $4 million increase in QWI research and development and selling,
general and administrative expenses. QWIs operating margin percentage remained flat in the first
quarter of fiscal 2006 as compared to the first quarter of fiscal 2005 primarily due to an
improvement in QIS gross margin percentage, offset by a decline in QWBS gross margin percentage.
The improvement in QIS gross margin percentage is primarily attributable to the increase in
revenues related to our expanded BREW customer base and products. The decline in QWBS gross margin
percentage is primarily attributable to the decrease in amortization of deferred revenues and cost
of revenues related to historical equipment sales, with margins that were higher than the margins
on current equipment sales, as a percentage of total QWBS revenue.
QSI Segment. QSIs losses before taxes for the first quarter of fiscal 2006 were $48 million,
compared to earnings before taxes of $40 million for the first quarter of fiscal 2005. During the
first quarter of fiscal 2006, QSI recorded no realized gains on marketable securities and other
investments as compared to $51 million for the first quarter of fiscal 2005. Equity in losses of
investees increased by $20 million primarily due to a loss resulting from the Inquam restructuring,
of which our share was $12 million, and the effect of investment gains recognized by a venture fund
investee in the first quarter of fiscal 2005, of which our share was $10 million. QSIs losses
before taxes included a $14 million increase in our MediaFLO USA subsidiarys 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, cash equivalents and marketable securities
were $9.4 billion at December 25, 2005, an increase of $0.7 billion from September 25, 2005. Cash
provided by operating activities was $596 million during the three months ended December 25, 2005,
compared to $397 million during the three months ended December 26, 2004. The increase was
primarily attributable to higher net income (net of non-cash share-based compensation expense) in
the three months ended December 25, 2005. Net proceeds from the issuance of common stock under our
stock option plans was $181 million during the three months ended
December 25, 2005, compared to $96 million during the three months ended December 26, 2004.
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. 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. While we did not repurchase any of our common stock under
these programs during the three months ended December 25, 2005, we continue to evaluate repurchases
under this program. In connection with this stock repurchase program, we have one put option
outstanding, with an expiration date of March 21, 2006, that may require us to repurchase 5,750,000
shares of our common stock upon exercise for $216 million (net of the option premiums received).
Any shares repurchased upon exercise of the put option will be retired. At January 25, 2006, $2.3
billion remains authorized for repurchases under our stock repurchase program. We announced
dividends totaling $148 million, or $0.09 per share, during the three months ended December 25,
2005, which were paid on January 4, 2006. Dividends announced during fiscal 2005 totaled $524
million, or $0.32 per share. On January 12, 2006, we announced a cash dividend of $0.09 per share
on our common stock, payable on March 24, 2006 to stockholders of record as of February 24, 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 34% during the first quarter of fiscal 2006. Days sales
outstanding, on a consolidated basis, were 36 days at December 25, 2005, compared to 30 days at
September 25, 2005. The increases in accounts receivable and days sales outstanding were primarily
due to the contractual timing of cash receipts for royalty receivables, some of which are paid
semi-annually. We started construction of two facilities in San Diego, California in fiscal 2003,
totaling approximately one million additional square feet, to meet the requirements projected in
our business plan. The remaining cost of these new facilities is expected to be approximately $109
million through fiscal 2007.
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On January 18, 2006, we completed our acquisition of Flarion, a developer of OFDMA technology,
for approximately $608 million in consideration, including approximately $229 million in cash. Upon
achievement of certain agreed upon milestones on or prior to the eighth anniversary of the close of
this transaction, we may issue additional aggregate consideration of $205 million, including
approximately $185 million payable in cash, to Flarion stockholders.
We intend to continue our strategic investment activities to promote the worldwide adoption of
CDMA-based products and the growth of CDMA-based wireless data and wireless Internet products. As
part of these investment activities, we may provide financing to facilitate the marketing and sale
of CDMA equipment by authorized suppliers. In the event additional needs or uses for cash arise, we
may raise additional funds from a combination of sources including potential debt and equity
issuance.
We believe our current cash and cash equivalents, marketable securities and cash generated
from operations will satisfy our expected working and other capital requirements for the
foreseeable future based on current business plans, including acquisitions, investments in other
companies and other assets to support the growth of our business, financing and other commitments,
the payment of dividends and possible additional stock repurchases.
Contractual Obligations / Off-Balance Sheet Arrangements
We have no significant contractual obligations not fully recorded on our Condensed Balance
Sheets or fully disclosed in the Notes to our Condensed Consolidated Financial Statements. We have
no material off-balance sheet arrangements as defined in S-K 303(a)(4)(ii).
Additional information regarding our financial commitments at December 25, 2005 is provided in
the Notes to our Condensed Consolidated Financial Statements. See Notes to Condensed Consolidated
Financial Statements, Note 3 Investments in Other Entities and Note 8
Commitments and Contingencies.
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RISK FACTORS
You should consider each of the following factors as well as the other information in this
Quarterly 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 Quarterly Report and in our Annual Report on Form 10-K for the fiscal
year ended September 25, 2005, 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 recently completed acquisition
of Flarion, there will be 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 OFDMA/OFDM intellectual property, technology and products, if CDMA
technology does not become the preferred wireless communications industry standard in the countries
where our products and those of our customers and licensees are sold, 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. Further, if OFDMA technology is not adopted and deployed commercially, our
investment in Flarion and OFDMA technology may not provide us a significant return on 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 of CDMA2000, WCDMA or other CDMA systems. If
existing deployments are not commercially successful, or if new commercial deployments of CDMA2000,
WCDMA or other CDMA-based systems are delayed or unsuccessful, our business and financial results
may be harmed. In addition, our business could be harmed if wireless network operators deploy
competing technologies or switch existing networks from CDMA to GSM or if wireless network
operators introduce new technologies. 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.
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 may incur lower operating margins on products based
on our technologies than on products using alternative technologies due to greater competition in
the relevant market or other factors. If 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 as of December 25, 2005, accounted for 39% of consolidated revenues in
the first quarter of both fiscal 2006 and 2005, and 39% and 40% of consolidated revenues in fiscal
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. The loss of any one of our QCT segments significant customers or the delay, even
if only temporary, or cancellation of significant orders from any of these customers would reduce
our revenues in the period of the cancellation or deferral and could harm our ability to achieve or
sustain desired levels of profitability.
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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 these customers; |
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the financial and operational success of these customers; |
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the success of these 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. |
QTL Segment. Our QTL segment derives royalty revenues from sales of CDMA products by our
licensees. Although we have more than 130 licensees, we derive a significant portion of our royalty
revenue from a limited number of licensees. Our future success depends upon the ability of our
licensees to develop, introduce and deliver high volume products that achieve and sustain market
acceptance. We have little or no control over the sales efforts of our licensees, and we cannot
assure you that our licensees will be successful or that the demand for wireless communications
devices and services offered by our licensees will continue to increase. Any reduction in the
demand for or any delay in the development, introduction or delivery of wireless communications
devices utilizing our CDMA technology could have a material adverse effect on our business.
Reductions in the average selling price of wireless communications devices utilizing our CDMA
technology, without a comparable increase in the volumes of such devices sold, could have a
material adverse effect on our business. Weakness in the value of foreign currencies in which our
customers products are sold may reduce the amount of royalties payable to us in U.S. dollars.
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.
There can be no assurance that our patent portfolio in other technologies, such as GPRS, EDGE,
OFDM, OFDMA and MIMO, will generate licensing income or be as valuable in generating licensing
income as our CDMA patent portfolio.
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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. 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 CDMA digital wireless
communications technology and much of the remainder of our patents and patent applications relate
to our other technologies and products. Litigation may be required to enforce our intellectual
property rights, protect our trade secrets or determine the validity and scope of proprietary
rights of others. As a result of any such litigation, we could lose our proprietary rights or incur
substantial unexpected operating costs. Any action we take to enforce our intellectual property
rights could be costly and could absorb significant management time and attention, 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 may 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 may result in our involvement in litigation. We may not prevail in such
litigation given the complex technical issues and inherent uncertainties in intellectual property
litigation. If any of our products were found to infringe on 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 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.
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.
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We have been notified by the Competition Directorate of the European Commission (EC) that six
companies (Nokia, Ericsson, Panasonic, Texas Instruments, Broadcom and NEC) have 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. 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 depend upon a limited number of third party manufacturers to provide component parts,
subassemblies and finished goods for our products. We are expanding our manufacturing model to
purchase silicon wafers from foundries and to contract directly with third party manufacturers for
assembly and test services. Any disruptions in the operations of, or the loss of, any of these
third parties could harm our ability to meet our delivery obligations to our customers and increase
our cost of sales.
Our ability to meet customer demands 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 component supply, an inability of our partners to react to rapid
shifts in demand or a significant 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 our customers demand for our products. Any
such shipment delays or declines in demand could reduce our revenues and harm our ability to
achieve or sustain desired levels of profitability. Additionally, failure to meet customer demand
in a timely manner could damage our reputation and harm our customer relationships potentially
resulting in reduced market share.
QCT Segment. Die, cut from silicon wafers, are the essential components for all of our
integrated circuits and a significant portion of the total integrated circuit cost. We do not own
or operate foundries for the production of silicon wafers from which our integrated circuits are
made. Instead, we utilize a fabless model whereby we rely on a limited number of independent third
party manufacturers 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 partners are responsible for
supplying fully assembled and tested integrated circuits. IBM, Taiwan Semiconductor Manufacturing
Co. and United Microelectronics are the primary foundry partners for our family of baseband
integrated circuits. Atmel, Freescale (formerly Motorola Semiconductor) and IBM are the primary
foundry partners for our family of radio frequency and analog 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. 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. To the extent that we do not have firm commitments from our
manufacturers over a specific time period or in any specific quantity, our manufacturers may
allocate, and in the past have allocated, capacity to the production of products for their other
customers while reducing deliveries to us on short notice.
Some of our integrated circuits products are only available from single sources, with which we
do not have long-term contracts. Our reliance on a sole-source vendor primarily occurs during the
start-up phase of a new product. Once a product reaches a significant volume level, we typically
establish alternate suppliers for technologies that we consider critical. Our reliance on sole or
limited-source vendors involves risks. These risks include possible shortages of capacity, product
performance shortfalls and reduced controls over delivery schedules, manufacturing capability,
quality assurance, quantity and costs. During fiscal 2004 and the first quarter of fiscal 2005, we
experienced supply constraints which resulted in our inability to meet certain customer demands.
These constraints substantially diminished during the second quarter of fiscal 2005 and were
alleviated in the third quarter of fiscal 2005, with improvements to supply more closely aligning
with our then current customer demand profile. To improve the supply and delivery of integrated
circuits from our suppliers, we worked with our existing suppliers to increase available
manufacturing capacity and increased and extended our firm orders to our suppliers.
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To further enable flexibility of supply and access to potential new foundry suppliers, and in
response to the complexity of our product roadmap, we began to expand our manufacturing model in
fiscal 2005 to include purchasing silicon wafers directly from semiconductor manufacturing
foundries. Under our expanded manufacturing model, we contract directly with third party
manufacturers for assembly and test services, and we ship the completed integrated circuits to our
customers. We expect to increase the volume of our silicon wafer purchases directly from our
foundry suppliers and to continue to purchase products on a turnkey basis. We do not have a history
working with these third parties under this expanded manufacturing model, and their services and
volume of activity may not be completely reliable during the ramp-up 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.
In addition to the expansion of our manufacturing model, our operations may also be harmed by
lengthy or recurring disruptions at any of the facilities of our manufacturers and may be harmed by
disruptions in the distribution channels from our suppliers and to our customers. These disruptions
may include labor strikes, work stoppages, widespread illness, terrorism, war, 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. The loss of a significant third party manufacturer or the inability of a
third party manufacturer to meet performance and quality specifications or delivery schedules could
harm our ability to meet our delivery obligations to our customers.
In addition, one or more of our manufacturers may obtain licenses from us to manufacture
CDMA-based integrated circuits that compete with our products. In this event, the manufacturer
could elect to allocate scarce components and manufacturing capacity to their own products and
reduce deliveries to us. In the event of a loss of or a decision to change a key third party
manufacturer, qualifying a new manufacturer and commencing volume production or testing could
involve delay and expense, resulting in lost revenues, reduced operating margins and possible loss
of customers.
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, 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 88% and 81% in the first quarter of
fiscal 2006 and 2005, respectively, and 82% and 79% in fiscal 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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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 be 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
the first quarter of fiscal 2006, 35% and 20% of our revenues were from customers and licensees
based in South Korea and Japan, respectively, as compared to 37% and 22%, respectively, during the
first quarter of fiscal 2005. During fiscal 2005, 37% and 21% of our revenues were from customers
and licensees based in South Korea and Japan, respectively, as compared to 43% and 18% during
fiscal 2004. These customers based in South Korea and Japan sell their products to markets
worldwide, including Japan, South Korea, North America, South America and Europe. A significant
downturn in the economies of Asian countries where many of our customers and licensees are located,
particularly the economies of South Korea and Japan, or the economies of the major markets they
serve would materially harm our business.
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.
35
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 charges 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 assure you 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 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 which
could require significant product recalls, reworks and/or repairs which are not covered by warranty
reserves and which could consume a substantial portion of the capacity of our third-party
manufacturers or those of our customers or licensees. Resolving any defect or failure related
issues could consume financial and/or engineering resources that could affect future product
release schedules. Additionally, a defect or failure in our products or the products of our
customers or licensees could harm our reputation and/or adversely affect the growth of 3G wireless
markets.
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 may 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.
37
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. |
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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 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.
Our business and operating results will be harmed if we are unable to manage growth in our
business.
Certain of our businesses have experienced periods of rapid growth and/or increased their
international activities, placing significant demands on our managerial, operational and financial
resources. In order to manage growth and geographic expansion, we must continue to improve and
develop our management, operational and financial systems and controls, including quality control
and delivery and service capabilities. We also need to continue to expand, train and manage our
employee base. We must carefully manage research and development capabilities and production and
inventory levels to meet product demand, new product introductions and product and technology
transitions. We cannot assure you that we will be able to timely and effectively meet that demand
and maintain the quality standards required by our existing and potential customers and licensees.
In addition, inaccuracies in our demand forecasts, or failure of the systems used to develop
the forecasts, could quickly result in either insufficient or excessive inventories and
disproportionate overhead expenses. If we ineffectively manage our growth or are unsuccessful in
recruiting and retaining personnel, our business and operating results will be harmed.
Our operating results are subject to substantial quarterly and annual fluctuations and to market
downturns.
Our revenues, earnings and other operating results have fluctuated significantly in the past
and may fluctuate significantly in the future. General economic or other conditions causing a
downturn in the market for our products or technology, and in turn affecting the timing of customer
orders or causing cancellations or rescheduling of orders, could also adversely affect our
operating results. Moreover, our customers may change delivery schedules or cancel or reduce orders
without incurring significant penalties and generally are not subject to minimum purchase
requirements.
Our future operating results will be affected by many factors, including, but not limited to:
our ability to retain existing or secure anticipated customers or licensees, both domestically and
internationally; our ability to develop, introduce and market new technology, products and services
on a timely basis; management of inventory by us and our customers and their customers in response
to shifts in market demand; changes in the mix of technology and products developed, licensed,
produced and sold; seasonal
customer demand; the Flarion acquisition; and other factors described elsewhere in this 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 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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government regulations, including stock option 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.
From time to time, we may repurchase our common stock at prices that may later be higher than
the market value of the stock on the repurchase date. This could result in a loss of value for
stockholders if new shares are issued at lower prices.
In the past, securities class action litigation has often been brought against a company
following periods of volatility in the market price of its securities. Due to changes in the
volatility of our stock price, we may be the target of securities litigation in the future.
Securities litigation could result in substantial costs and divert managements attention and
resources. In addition, stock volatility may be precipitated by failure to meet earnings
expectations or other factors, such as the potential uncertainty in future reported earnings
created by the adoption of option expensing and the related valuation models used to determine such
expense.
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 a significant return on 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.
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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 123R (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 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 entails the risk of product liability. 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 licensees,
our customers, or us could harm our reputation and result in decreased demand for our products.
41
The high amount of capital required to obtain radio frequency licenses and deploy and expand
wireless networks could slow the growth of the wireless communications industry and adversely
affect our business.
Our growth is dependent upon the increased use of wireless communications services that
utilize our technology. In order to provide wireless communications services, wireless operators
must obtain rights to use specific radio frequencies. The allocation of frequencies is regulated in
the United States and other countries throughout the world and limited spectrum space is allocated
to wireless communications services. Industry growth may be affected by the amount of capital
required to: obtain licenses to use new frequencies; deploy wireless networks to offer voice and
data services; and expand wireless networks to grow voice and data services. The significant cost
of licenses and wireless networks 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 system currently operates 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 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
or non-compliance with environmental and safety regulations.
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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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 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. Key employees represent a
significant asset, and the competition for these employees is intense in the wireless
communications industry. We continue to anticipate significant increases in human resources,
particularly in engineering, through fiscal 2006. 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 of one or more of our key employees or our
inability to attract, retain and motivate qualified personnel could negatively impact our ability
to design, develop and commercialize our products and technology.
Since our inception, we have used stock options and other long-term equity incentives as a
fundamental component of our employee compensation packages. We believe that stock options and
other long-term equity incentives directly motivate our employees to maximize long-term stockholder
value and, through the use of 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 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.
43
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 may also be harmed. In addition, it has become more difficult and more
expensive for us to obtain director and officer liability insurance, and we have purchased reduced
coverage at substantially higher cost than in the past. Further, our board members, chief executive
officer and chief financial officer could face an increased risk of personal liability in
connection with the performance of their duties. As a result, we may have difficulty attracting and
retaining qualified board members and executive officers, which could harm our business.
Our stockholder rights plan, certificate of incorporation and Delaware law could adversely affect
the performance of our stock.
Our certificate of incorporation provides for cumulative voting in the election of directors.
In addition, our certificate of incorporation provides for a classified board of directors and
includes a provision that requires the approval of holders of at least 66 2/3% of our voting stock
as a condition to a merger or certain other business transactions with, or proposed by, a holder of
15% or more of our voting stock. This approval is not required in cases where certain of our
directors approve the transaction or where certain minimum price criteria and other procedural
requirements are met. Our certificate of incorporation also requires the approval of holders of at
least 66 2/3% of our voting stock to amend or change the provisions mentioned relating to the
classified board, cumulative voting or the transaction approval. Under our bylaws, stockholders are
not permitted to call special meetings of our stockholders. Finally, our certificate of
incorporation provides that any action required or permitted by our stockholders must be effected
at a duly called annual or special meeting rather than by any consent in writing.
The classified board, transaction approval, special meeting and other charter provisions may
discourage certain types of transactions involving an actual or potential change in our control.
These provisions may also discourage certain types of transactions in which our stockholders might
otherwise receive a premium for their shares over then current market prices and may limit our
stockholders ability to approve transactions that they may deem to be in their best interests.
Further, we have distributed a dividend of one right for each outstanding share of our common
stock pursuant to the terms of our preferred share purchase rights agreement. These rights will
cause substantial dilution to the ownership of a person or group that attempts to acquire us on
terms not approved by our board of directors and may have the effect of deterring hostile takeover
attempts. In addition, our board of directors has the authority to fix the rights and preferences
of and issue shares of preferred stock. This right may have the effect of delaying or preventing a
change in our control without action by our stockholders.
44
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial market risks related to interest rates, foreign currency exchange rates and equity
prices are described in our 2005 Annual Report on Form 10-K. At December 25, 2005, there have been
no other material changes to the market risks described at September 25, 2005 except as described
below. Additionally, we do not anticipate any other near-term changes in the nature of our market
risk exposures or in managements objectives and strategies with respect to managing such
exposures.
Interest Rate Risk. We invest most of our cash in a number of diversified investment and
non-investment grade fixed and floating rate securities, consisting of cash equivalents and
marketable securities. Changes in the general level of United States interest rates can affect the
principal values and yields of fixed income investments. The following table provides information
about our financial instruments that are sensitive to changes in interest rates, including
principal cash flows, weighted average yield at cost and contractual maturity dates.
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rates
(Dollars in millions)
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Remainder |
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No Single |
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Fair |
December 25, 2005: |
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of 2006 |
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2007 |
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2008 |
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2009 |
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2010 |
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Thereafter |
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Maturity |
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Total |
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Value |
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Fixed interest-bearing securities: |
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Cash and cash equivalents |
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$ |
787 |
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$ |
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$ |
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$ |
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|
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$ |
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$ |
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|
|
$ |
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$ |
787 |
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|
$ |
787 |
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Interest rate |
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4.2 |
% |
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Held-to-maturity securities |
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$ |
61 |
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$ |
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$ |
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$ |
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|
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$ |
|
|
|
$ |
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|
|
$ |
|
|
|
$ |
61 |
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|
$ |
61 |
|
Interest rate |
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|
2.1 |
% |
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Available-for-sale securities: |
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Investment grade |
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$ |
2,990 |
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$ |
436 |
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$ |
279 |
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$ |
22 |
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|
$ |
35 |
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$ |
13 |
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|
$ |
192 |
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|
$ |
3,967 |
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|
$ |
3,967 |
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Interest rate |
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|
4.1 |
% |
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3.8 |
% |
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4.1 |
% |
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4.5 |
% |
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4.3 |
% |
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7.0 |
% |
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4.0 |
% |
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Non-investment grade |
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$ |
2 |
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$ |
1 |
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$ |
23 |
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$ |
68 |
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$ |
48 |
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$ |
629 |
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$ |
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$ |
771 |
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$ |
771 |
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Interest rate |
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6.1 |
% |
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7.8 |
% |
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7.3 |
% |
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7.0 |
% |
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8.0 |
% |
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7.8 |
% |
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|
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|
|
|
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|
Floating interest-bearing
securities: |
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|
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Cash and cash equivalents |
|
$ |
681 |
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|
$ |
|
|
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$ |
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|
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$ |
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|
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$ |
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$ |
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$ |
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$ |
681 |
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|
$ |
681 |
|
Interest rate |
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|
4.2 |
% |
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Held-to-maturity securities |
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$ |
70 |
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|
$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
70 |
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$ |
70 |
|
Interest rate |
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|
1.4 |
% |
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Available-for-sale securities: |
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|
Investment grade |
|
$ |
148 |
|
|
$ |
239 |
|
|
$ |
153 |
|
|
$ |
74 |
|
|
$ |
24 |
|
|
$ |
74 |
|
|
$ |
563 |
|
|
$ |
1,275 |
|
|
$ |
1,275 |
|
Interest rate |
|
|
3.9 |
% |
|
|
4.2 |
% |
|
|
4.4 |
% |
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4.4 |
% |
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4.5 |
% |
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4.8 |
% |
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4.4 |
% |
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|
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|
Non-investment grade |
|
$ |
|
|
|
$ |
6 |
|
|
$ |
|
|
|
$ |
8 |
|
|
$ |
6 |
|
|
$ |
31 |
|
|
$ |
100 |
|
|
$ |
151 |
|
|
$ |
151 |
|
Interest rate |
|
|
|
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5.3 |
% |
|
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4.2 |
% |
|
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2.8 |
% |
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5.4 |
% |
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5.8 |
% |
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|
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 $1.22 billion at December 25, 2005 from $1.16 billion at September 25, 2005. The
recorded value of equity mutual fund shares increased to $309 million at December 25, 2005 from
$293 million at September 25, 2005. Our diversified investments in specific companies and industry
segments may vary over time, and changes in 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 December 25, 2005 would cause a corresponding 10%
decrease in the carrying amounts of these securities, or $153 million.
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 December 25, 2005, one put option was outstanding, which expires on March 21, 2006, that may require us to
repurchase 5,750,000 shares of our common stock upon exercise for $216 million (net of the option
premiums received). The put option liability, with a fair value of $3 million at December 25, 2005,
was included in other current liabilities. If the fair value of our common stock at December 25,
2005 decreased by 15%, the put option would expire unexercised resulting in $3 million in
investment income. If the fair value of our common stock at December 25, 2005 decreased by 20%, the
amount required to physically settle the put option would exceed the fair value of the shares
repurchased by approximately $12 million, net of the $8 million in premiums received.
45
ITEM 4. 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 quarterly
report.
46
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A review of our current litigation is disclosed in the Notes to Condensed Consolidated
Financial Statements. See Notes to Condensed Consolidated Financial Statements Note 8
Commitments and Contingencies. We are also engaged in other legal actions arising in the ordinary
course of our business and believe that the ultimate outcome of these actions will not have a
material adverse effect on our results of operations, liquidity or financial position.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On November 7, 2005, we authorized the repurchase of up to $2.5 billion of our 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. In connection with this new stock repurchase program, we have one put option
outstanding at December 25, 2005, with an expiration date of March 21, 2006, that may require us to
repurchase 5,570,000 shares of our common stock upon exercise for $216 million (net of the premiums
received). While we did not repurchase any of our common stock under these programs during the
three months ended December 25, 2005, we continue to evaluate repurchases under this program. At
December 25, 2005, $2.3 billion remains authorized for repurchases under this new program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
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Exhibits |
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|
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
|
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Restated Certificate of Incorporation. (2) |
|
|
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3.2
|
|
Certificate of Amendment of Certificate of Designation. (3) |
|
|
|
3.4
|
|
Amended and Restated Bylaws. (2) |
|
|
|
10.70
|
|
Amended and Restated Rights Agreement dated September 26, 2005 between the Company and
Computershare Investor Services LLC, as Rights Agent. (3) |
|
|
|
10.71
|
|
Voluntary Executive Retirement Contribution Plan, as amended. (4) |
|
|
|
10.72
|
|
2005 Bonuses and 2006 Annual Base Salary for Named Executive Officers and Summary of 2006
Annual Bonus Program. (5) |
|
|
|
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 11,
2005. |
|
(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 October 26,
2005. |
|
(5) |
|
Filed under item 1.01 of the Registrants Current Report on Form 8-K filed on November
8, 2005. |
47
SIGNATURES
Pursuant to the requirements 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.
|
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QUALCOMM Incorporated |
|
|
|
|
|
/s/ William E. Keitel |
|
|
|
|
|
William E. Keitel |
|
|
Executive Vice President and |
|
|
Chief Financial Officer |
|
|
|
Dated: January 25, 2006 |
|
|
48