Qualcomm 2002 Annual Report Download - page 47

PAGE 45
QUALCOMM 2002 ANNUAL REPORT
order, and the temporary restraint was lifted although the underlying court case
remains to be tried. Additionally, Vésper and Anatel reviewed the issue from a tech-
nical and regulatory standpoint, and the parties reached an agreement which allows
Vésper to resume sales of its limited mobility product once certain technical adjust-
ments to restrict broad mobility are implemented in Vésper’s network. Vésper has
commenced making such technical adjustments and expects to complete them in all
of its markets over the next few months. Sales of the affected products have resumed
in those areas in which the technical modifications have already been completed.
During September 2002, Vésper decided to replace all towers manufactured by
one of its third party contractors due to the identification of structural defects, result-
ing in an asset impairment charge of $0.5 million. This decision was made after
severe storm winds damaged and/or destroyed a number of Vésper towers manufac-
tured by that third party contractor. Overall, this replacement program impacts up to
66 Vésper towers, which carry antennae for less than 9% of Vésper base stations.
Vésper towers manufactured by other parties were also inspected during this process
and found to be in proper condition. Replacements have begun for the most critical
towers, and all affected towers are expected to be replaced by March 2003. Vésper
has not experienced and does not expect to experience any appreciable service
degradation during this replacement process. Vésper also is seeking to complete a
tower sale-leaseback of a portion of its tower sites by December 31, 2002, including
the defective towers, pursuant to which the purchasing party would assume all
further liability for the purchased towers and fulfill replacement construction obliga-
tions. Vésper expects the tower sale-leaseback arrangement, which includes the cost
of replacing the defective towers, to provide net cash inflows during calendar 2002.
In September 2002, Anatel issued Resolution 314, which modifies certain current
telecommunications regulations. As part of this resolution and prior resolutions,
Vésper will be required to vacate its current spectrum in the 1900MHz frequency
(analogous to United States Band A/D) in the coming years to enable the frequency to
be allotted to future Universal Mobile Telecommunications System (UMTS) license
holders. In return, Vésper has been assigned new 1900MHz frequencies (analogous
to United States PCS Band C). Pursuant to Resolution 314, upon completion of
up-banding of its network, Vésper would be permitted to utilize the new 1900MHz
frequencies for its primary allocation for fixed wireless services as well as to apply for
permission to use those frequencies for full mobility services offered under an SMP
(mobile) license. Such secondary use of the new 1900 MHz frequencies for SMP
(mobile) services would require Vésper to either obtain its own SMP license(s) or to
enter into an arrangement with an SMP license holder whereby CDMA mobility at
1900MHz would be offered by the license holder utilizing Vésper’s up-banded infra-
structure. Significant costs, constraints and hurdles exist with respect to
accomplishing these objectives, including Vésper’s or another party’s ability to
acquire the necessary SMP license(s), uncertainty whether and to what extent appli-
cable Brazilian telecommunications regulations would require Vésper to build out
additional infrastructure in another frequency band in order to offer SMP (mobile)
services, the cost of up-banding Vésper’s CDMA radio interface equipment, and
uncertainty whether reimbursement for such costs can be obtained from future
UMTS license holder(s).
On November 19, 2002, we won bids to acquire mobile licenses in the state of Sao
Paulo (excluding Sao Paulo metro), the state of Minas Gerais, and in the Northeast
region of Brazil (license Areas 2, 4, and 10, respectively). The new mobile licenses
cover areas with a combined population in excess of 64 million. The mobile licenses
overlap with approximately 47% of Vésper Holding’s existing Wireless Local Loop
areas. None of the mobile licenses cover an area outside of Vésper Holding’s current
coverage areas. Approximately $8 million of the approximate $83 million total pur-
chase price is payable by December 19, 2002. The remaining $75 million Brazilian
real-denominated obligation is financed by the Brazilian government at an interest
rate of 12%, plus an adjustment for inflation, payable in six equal annual installments.
The first such installment payment is due in 36 months.
Access to long-term funding sources to fund growth is a critical issue for Vésper.
We continue to seek strategic partners and/or acquirers to participate in this process.
We continue to invest in Vésper to ensure the establishment of CDMA-based systems
and to provide CDMA coverage and roaming possibilities to as many regions through-
out Brazil as possible. The investment will help us grow our revenues from royalties
and from the sale of integrated circuits to phone manufacturers. In other words, our
return on our investment in Vésper is not limited to a Vésper ownership interest, but
also includes indirect revenues, including CDMA licensing revenues and QCT inte-
grated circuit sales from third party suppliers to Vésper. Further, the Vésper business
plan, similar to other start-up wireless operators, indicates that we should receive a
return on our investment in the long-run despite losses in the initial years. The
Vésper Operating Companies expect to incur operating losses and negative cash
flows from operations through calendar 2003 as they expand operations and enter
new markets, even if and after they achieve positive cash flows from operations in the
initial operating markets. Vésper expects to commercially launch CDMA2000 1xEV-DO
services in December 2002. To date no long-term funding commitments from other
sources have been secured, and it is not clear whether future commitments from
outside parties will be available. Furthermore, important regulatory and business
issues have yet to be resolved. If these issues cannot be resolved in a prompt and
reasonable manner, risks related to Vésper may increase, and we may incur significant
losses. Specifically, if Vésper is unable to offer converged services, which includes full
mobility, either by itself and/or through other parties utilizing Vésper’s CDMA net-
work, we may need to write down Vésper’s long-lived assets. In that management
believes there is currently a regulatory path to mobility and several partnership and/or
other potential means under which Vésper could offer mobile services, we believe
that the assets are recoverable at this time.