Qualcomm 1999 Annual Report Download - page 62

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QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Leap Wireless Commitments
QUALCOMM has a funding commitment to Leap Wireless in the form
of a $265 million secured credit facility, which consists of two sub-
facilities. The first sub-facility enables Leap Wireless to borrow up to
$35 million from QUALCOMM, solely to meet the normal working capital
and operating expenses of Leap Wireless, including salaries, overhead
and credit facility fees, but excluding, among other things, strategic
capital investments in wireless operators, substantial acquisitions
of capital products, and/or the acquisition of telecommunications licens-
es. The other sub-facility enables Leap Wireless to borrow up to $230
million from QUALCOMM, solely to use as investment capital to make
certain identified portfolio investments. Amounts borrowed under
the credit facility will be due and payable on September 23, 2006.
QUALCOMM has a first priority security interest in, subject to minor
exceptions, substantially all of the assets of Leap Wireless for so long
as any amounts are outstanding under the credit facility. Amounts bor-
rowed under the credit facility bear interest at a variable rate equal to
LIBOR plus 5.25% per annum. Interest is payable quarterly beginning
September 30, 2001; prior to such time, accrued interest shall be added
to the principal amount outstanding. At September 30, 1999 and 1998,
$126 million and $5 million were outstanding under this facility, respec-
tively. At September 30, 1999 and 1998, the fair value of the credit
facility approximated the recorded value. The Company estimates fair
value by discounting the future cash flows using current interest rates
at which similar financing would be provided to similar companies for
the same remaining maturities.
Operating Leases
QPE has entered into an operating lease agreement, under which
manufacturing equipment may be leased under separate schedules,
each with approximately five-year terms. The lease agreement is non-
recourse to the Company and the minority interest holder in QPE.
Equipment under lease has both early and end-of-term purchase
options. If the purchase options have not been exercised by the end of
the lease term and if proceeds from the sale of the equipment fall
below specified amounts, QPE may be required to pay certain contin-
gent payments. The maximum amount of contingent payments for
equipment leased as of September 30, 1999 is approximately $55 mil-
lion. Rental expense under this lease, including an accrual for such
contingent payments, amounted to $16 million, $13 million and $13 mil-
lion during fiscal 1999, 1998 and 1997, respectively. As of September 30,
1999 and 1998, the Company had accrued $33 million and $21 million,
respectively, in other liabilities for such contingent payments. As of
September 30, 1999, future rental payments under the lease, excluding
contingent payments, are $4 million in each of 2000 and 2001 and $1 mil-
lion in 2002.
The Company leases certain of its other facilities and equipment
under noncancelable operating leases, with terms ranging from two to
ten years and with provisions for cost-of-living increases. Rental
expense for these facilities and equipment for fiscal 1999, 1998 and
1997 was $17 million, $11 million and $7 million, respectively. Future
minimum lease payments in each of the next five years from fiscal 2000
through 2004 are $16 million, $14 million, $12 million, $8 million and $5
million, respectively, and $4 million thereafter.
Purchase Obligations
The Company has agreements with certain suppliers to purchase
certain components, and estimates its noncancelable obligations
under these agreements to be approximately $34 million through fiscal
2002. The Company also has a commitment to purchase communica-
tions services for approximately $23 million annually through fiscal
2001 and $2 million in fiscal 2002.
Letters of Credit and Financial Guarantees
The Company has issued a letter of credit to support a guarantee of
up to $22.5 million of Globalstar (Note 11) borrowings under an existing
bank financing agreement. The guarantee will expire in December
2000. The letter of credit is collateralized by a commensurate amount of
the Company’s investments in debt securities. As of September 30, 1999,
Globalstar had no borrowings outstanding under the existing bank
financing agreement.
In addition to the letter of credit on behalf of Globalstar, the
Company has $21 million of letters of credit and $103 million of other
financial guarantees outstanding as of September 30, 1999, none of
which are collateralized.
Performance Guarantees
Certain of the Company’s contracts provide for performance guarantees
to protect customers against late delivery of its products or a failure to
perform. These performance guarantees generally provide for contract
offsets to the extent the products are not delivered by scheduled delivery
dates or the systems fail to meet specified performance criteria. The
Company is dependent in part on the performance of its suppliers and
strategic partners to provide products and services that are the subject
of the guarantees. Thus, the Company’s ability to deliver such products
and services in a timely manner may be outside of its control. If the
Company is unable to meet its performance obligations, the perfor-
mance guarantees could amount to a significant portion of the contract
value and would have a material adverse effect on product margins and
the Company’s results of operations, liquidity and financial position.