Qualcomm 1999 Annual Report Download - page 41

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QUALCOMM Incorporated
FINANCIAL REVIEW
Pursuant to the Agreement, Ericsson purchased certain assets
related to the Company’s terrestrial CDMA wireless infrastructure busi-
ness, including its R&D resources, located in San Diego, California
and Boulder, Colorado, and assumed selected customer commitments,
including a portion of future vendor financing obligations, related
assets and personnel. The Company recorded charges of $66 million to
reflect the difference between the carrying value of the net assets and
the consideration received from Ericsson, less costs to sell. Total con-
sideration will be based on a final determination of net assets as of the
Closing Date.
QUALCOMM has received notice from Ericsson that Ericsson intends
to dispute the determination of the purchase price under the Agreement,
pursuant to which Ericsson acquired certain assets related to the
Company’s terrestrial wireless infrastructure business in May 1999.
QUALCOMM has also received notice from Ericsson that Ericsson
intends to assert claims for indemnification under the Agreement.
QUALCOMM and Ericsson are having on-going discussions aimed at
potentially resolving these claims. In the event the parties are unable
to resolve these claims, they are subject to dispute resolution proce-
dures set forth in the Agreement. Although there can be no assurance
that the resolution of these claims will not have a material adverse
effect on the Company’s results of operations, liquidity or financial
position, the Company believes the claims are without merit and will
defend them vigorously.
Pursuant to the Agreement, the Company will extend up to $400 mil-
lion in financing for possible future sales by Ericsson of cdmaOne or
cdma2000 infrastructure equipment and related services to specific
customers in certain geographic areas, including Brazil, Chile, Russia,
and Mexico, or in other areas selected by Ericsson. Such commitments
are subject to the customers meeting certain conditions established in
the financing arrangements and, in most cases, to Ericsson also financing
a portion of such cdmaOne or cdma2000 sales. Commitments represent
the estimated amounts to be financed under these arrangements, how-
ever, actual financing may be in lesser amounts.
The Company has retained certain terrestrial CDMA wireless infra-
structure business contracts. Equipment sales and deployment
services under these contracts may be subcontracted to Ericsson. The
Company has ceased its development and manufacture of terrestrial-
based infrastructure base stations and has no present intention to
re-enter that business. Accordingly, the Company reassessed the
recoverability of the carrying value of remaining assets relating to its
terrestrial CDMA wireless infrastructure business. The Company
recorded charges of $43 million in other operating expenses during fiscal
1999 to reduce the carrying value of certain other assets to their
approximate net realizable value related to its terrestrial CDMA wire-
less infrastructure business. The Company also recorded $52 million in
non-operating charges, including $37 million in reserves provided for
financial guarantees on projects which the Company will no longer
pursue as a result of the Ericsson transaction and $15 million related to
the write-off of TOU assets.
The Company and Ericsson announced that certain compensa-
tion benefits would be provided to employees transferred to Ericsson.
The Company recorded a $74 million charge in other operating expenses
during fiscal 1999 relating to its share of the employee compensa-
tion benefits.
On September 29, 1999, Leap Wireless announced its intention to
withdraw its support for Metrosvyaz, Ltd. (“Metrosvyaz”), an investee
in Russia, and that such withdrawal would result in the write-off of its
investment in that entity. As a result of Leap Wireless’ decision, the
Company recorded a $51 million charge related to the impairment of
receivables and products and deployment services placed with
Metrosvyaz for which the Company had not yet recognized revenue,
including $17 million in other non-operating expenses related to the
impairment of non-trade receivables.
On October 11, 1999, Globalstar officially introduced its mobile
and fixed telephone service, which is expected to bring affordable,
high-quality telephony service to virtually any place on earth. The
satellite-based telecommunications system is initiating a phased roll-out
of service in regions of the world covered by its first nine operational
gateways, or ground stations. Globalstar initially will provide limited
distribution of service to selected individuals during “friendly users”
trials in the United States, Canada, Brazil, Argentina, China, Korea,
South Africa and parts of Europe, allowing service providers to make
final adjustments and refinements before launching full commercial
service over the next few months. During this period, marketing, distri-
bution and customer care systems in these locations will be tested and
adjusted based on feedback from early users, with the goal of provid-
ing high quality service when Globalstar is more broadly introduced
around the world in the coming months.
On November 22, 1999, Globalstar announced the successful launch
of an additional four LEO satellites, bringing the total number of Globalstar
satellites now in space to 48. Globalstar remains on schedule to launch
an additional four satellites to complete its planned constellation of
48 satellites and four in-orbit spares.
During fiscal 1999, the Company recorded $111 million in unrealized
gains, net of taxes, on available-for-sale securities. The gain was
recorded in other comprehensive income as a component of equity.
Fiscal 1999 Compared to Fiscal 1998
Total revenues for fiscal 1999 were $3,937 million, an increase of
$589 million over total revenues of $3,348 million for fiscal 1998.
Revenue growth for 1999 was primarily due to increased sales of CDMA
chipsets and phone products, significant growth in royalties and
deployment of commercial gateways in the Globalstar System.
Cost of revenues for fiscal 1999, which consisted primarily of cost of
sales of CDMA chipsets and phone products, was $2,485 million com-
pared to $2,333 million for fiscal 1998. The dollar increase in costs
primarily reflects increased shipments of phone products and deploy-
ment of commercial gateways. The decrease in cost of revenues as a
percentage of revenues to 63% in fiscal 1999 from 70% in fiscal 1998 pri-
marily reflects operational efficiencies, volume discounts obtained
from suppliers and increased royalty revenue. Cost of revenues as a
percentage of revenues may fluctuate in future quarters depending on
mix of products sold, competitive pricing, new product introduction
costs and other factors.