Qualcomm 1999 Annual Report Download - page 42

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QUALCOMM Incorporated
FINANCIAL REVIEW
For fiscal 1999 research and development expenses were $381 million
or 10% of revenues, compared to $349 million or 10% of revenues for
fiscal 1998. The dollar increase was primarily due to new chipset product
initiatives and software development efforts, offset by a decrease in
terrestrial CDMA wireless infrastructure product research and develop-
ment as a result of the sale of the business in May 1999.
For fiscal 1999, selling, general and administrative expenses were
$426 million or 11% of revenues, compared to $410 million or 12% of
revenues for fiscal 1998. The dollar increase for fiscal 1999 was
primarily attributable to continued growth in personnel and associated
overhead expenses necessary to support the overall growth in the
Company’s operations and increased patent and information technolo-
gy expenses, offset by a decrease in marketing expense for terrestrial
CDMA wireless infrastructure products, including reduced headcount
and proposal activity.
During fiscal 1999, other operating expenses were $240 million,
compared to $12 million for fiscal 1998. In May 1999, the Company sold
certain assets related to its terrestrial CDMA wireless infrastructure
business to Ericsson. Other operating expenses during fiscal 1999 were
comprised primarily of $74 million in compensation benefits provided
to employees transferred to Ericsson, $66 million in charges to reflect
the difference between the carrying value of the net assets to be sold
and the net consideration received and various license and settlement
agreements in connection therewith, $43 million in charges to reduce
the carrying value of certain other assets related to its terrestrial CDMA
wireless infrastructure business, $34 million related to the impairment
of receivables and other assets in connection with Leap Wireless’
decision to withdraw its support for Metrosvyaz, and $15 million in
restructuring charges.
During fiscal 1998, the Company acquired substantially all of the
assets of Now Software, Inc. for $10 million. In connection with this
asset purchase, acquired in-process research and development of
$7 million, representing the fair value of software products still in the
development stage that had not yet reached technological feasibility,
was expensed at the acquisition date. This expense was included in
other operating expenses. Also during the same period, the Company
recorded a $5 million non-cash charge to operations relating to the
impairment of leased manufacturing equipment that is no longer used
in the manufacturing process. The $5 million charge represented the
estimated total cost of related lease obligations, net of estimated
recoveries.
For fiscal 1999, interest expense was $15 million compared to
$8 million for fiscal 1998. This increase is the result of increased bank
borrowings during fiscal 1999.
Investment income, net was $25 million in fiscal 1999 compared to
investment expense, net of $47 million for fiscal 1998. During fiscal
1999, the Company recognized interest income of $50 million, minority
interest in income of consolidated subsidiaries of $13 million, and $15
million equity in losses of investees as compared to interest income of
$39 million, minority interest in income of consolidated subsidiaries of
$48 million, and $21 million in equity in losses of investees in fiscal
1998. The minority interest represents other parties’ or stockholders’
share of the income or losses of consolidated subsidiaries, including
QPE, a joint venture with Sony. Minority interest for fiscal 1998 includes
the impact of restructuring QPE. Equity in losses of investees for all
periods indicated relates to the Company’s ownership interests in
domestic and international CDMA based wireless telecommunications
businesses and joint ventures. The majority of these investments were
transferred to Leap Wireless as part of the spin-off. The Company also
recorded a $20 million non-cash charge to write-off its investment in
NextWave Telecom Inc. during fiscal 1998 as a result of subsidiaries of
NextWave Telecom, Inc. filing for bankruptcy protection under Chapter
11 of the U.S. Bankruptcy Code in June 1998.
Distributions on Trust Convertible Preferred Securities of $39 million
in each of fiscal 1999 and fiscal 1998 relate to the private placement
of $660 million of 53/4% Trust Convertible Preferred Securities by
QUALCOMM in February 1997.
During fiscal 1999, the Company recorded $69 million in non-operat-
ing 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, $17 million related to the impairment
of non-trade receivables from Metrosvyaz, and $15 million related to
the write off of TOU assets.
Income tax expense was $106 million for fiscal 1999 compared
to $40 million for fiscal 1998, resulting primarily from higher pretax
earnings and a higher effective tax rate for fiscal 1999 as compared to
fiscal 1998. The annual effective tax rate for fiscal 1999 was 35%,
excluding the effect of the reinstatement of the 1998 R&D tax credit
recorded in fiscal 1999, compared to 30% for fiscal 1998. The higher
tax rate was a result of higher earnings relative to the growth of R&D
tax credits.