Qualcomm 1999 Annual Report Download - page 58

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QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During fiscal 1999, 1998 and 1997, QPE sales to Sony Electronics
amounted to $249 million, $684 million and $57 million, respectively.
Purchases of inventory and capital equipment from Sony Electronics
and other Sony affiliates amounted to $79 million and $1 million,
respectively during fiscal 1999, $69 million and $69 million, respective-
ly, during fiscal 1998 and $92 million and $6 million, respectively, during
fiscal 1997. At September 30, 1999 and 1998, outstanding accounts
receivable from Sony Electronics amounted to $26 million and $52 million,
respectively, and accounts payable to all Sony Electronics affiliated
companies amounted to $14 million and $51 million, respectively.
Globalstar L.P.
Through partnership interests held in certain intermediate limited
partnerships, the Company owns a 6.4% partnership interest in
Globalstar, a limited partnership formed to develop, own and operate
the Globalstar low-Earth-orbit satellite system utilizing CDMA technology
(“the Globalstar System”). The Company accounts for its investment
under the equity method.
As a result of the intermediate limited partnership agreements,
Globalstar profits and losses are allocated to the Company in accor-
dance with its percentage ownership interest, provided that no loss
shall be allocated to the Company if such allocation would create neg-
ative balances in the Company’s intermediate partnership adjusted
capital accounts. For financial reporting purposes, the Company’s
investment in the intermediate partnerships had no basis during each
of fiscal 1999, 1998 and 1997, and, as a result, the Company has not
recorded any equity losses during those respective fiscal years.
Subject to certain conditions, the Company, through an intermediate
partnership, may be required to purchase approximately 97,000 addi-
tional shares from another investor in Globalstar for up to $5 million, a
price discounted from the price paid by such investor. The Company is
unable to predict the likelihood of the occurrence of any of the condi-
tions which would require the additional investment.
In return for providing a guarantee under a Globalstar bank financ-
ing agreement (Note 14), the Company received warrants to purchase
734,262 shares of common stock in Globalstar Telecommunications
Limited (“GTL”), a general partner in Globalstar, at an exercise price of
$13.25 per share (shares and exercise price reflect a two-for-one stock
split of GTL common stock that occurred in May 1997). On February 12,
1997, the Company and GTL entered into an arrangement under which
GTL agreed to accelerate the vesting and exercisability of the
Company’s warrants to purchase GTL common stock. The Company
exercised such warrants in March 1997, and classified the GTL shares
as trading securities, consistent with the Company’s intent to sell the
GTL shares on a near term basis. The Company sold the GTL common
stock during the third quarter of fiscal 1997 resulting in an aggregate
realized gain of $13 million.
The Company and Globalstar have entered into a development
agreement under which Globalstar is funding the Company to design
and develop the consumer equipment and ground communications seg-
ments of the Globalstar System and production agreements to
manufacture and supply ground communication and consumer equip-
ment and to supply related services to Globalstar. Revenues resulting
from the agreements with Globalstar for fiscal 1999, 1998 and 1997 were
$435 million, $373 million and $205 million, respectively. In March 1998,
the Company agreed to defer up to $100 million of contract payments,
with interest accruing at 53/4% capitalized quarterly, as customer
financing under its development contract with Globalstar. Financed
amounts outstanding as of January 1, 2000 will be repaid in eight equal
quarterly installments commencing as of that date, with final payment
due October 1, 2001, accompanied by all then unpaid accrued interest.
The Company expects to finalize negotiations with Globalstar dur-
ing the first quarter of fiscal 2000 which could result in the deferral of
up to $400 million of current and future contract payments under the
development agreement, including $240 million in trade receivables
which were reclassified to non-current finance receivables at
September 30, 1999. Such deferrals are expected to be interest bearing
and paid by Globalstar over a period not exceeding four years from the
deferral. At September 30, 1999 and 1998, approximately $349 million
and $90 million in interest bearing financed amounts and approximately
$171 million and $141 million in accounts receivable, including $59
million and $47 million in unbilled receivables, were outstanding from
Globalstar, respectively.
The value of the Company’s investment in and future business with
Globalstar, as well as its ability to collect outstanding receivables from
Globalstar, depends on the success of Globalstar and the Globalstar
System. From its inception, Globalstar has incurred net losses and those
losses are expected to continue through the start of service. A sub-
stantial shortfall in meeting Globalstar’s capital needs could prevent
completion of the Globalstar System and could adversely affect the
Company’s results of operations, liquidity and financial position.
In addition, Globalstar can terminate its development agreement
with the Company if Globalstar abandons its efforts to develop the
Globalstar System.
The Globalstar System is exposed to the risks inherent in a large-
scale complex telecommunications system employing advanced
technologies which have never been integrated in a single system for
commercial use. The failure to develop, produce and implement the
system, or any of its diverse and dispersed elements as required, could
delay the in-service or full constellation date of the Globalstar System
or render it unable to perform at levels required for commercial success.
Globalstar may encounter various problems, delays and expenses,
many of which may be beyond Globalstar’s control.