Qualcomm 2002 Annual Report Download - page 56

Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate No
There- Single Fair
(Dollars in millions) 2003 2004 2005 2006 2007 after Maturity Total Value
Fixed income securities $295 $ 548 $ 209 $ 61 $ 51 $230 $ 296 $1,690 $1,692
Interest rate 4.1% 3.6% 3.7% 4.8% 6.4% 9.3% 4.0%
Finance receivables:
Fixed rate $392 $ 2 $ 1 $ — $ — $148 $ — $ 543 $ 533
Interest rate 0.5% 8.9% 8.0% 0.3%
Variable rate (LIBOR) $ — $ — $ — $ 85 $ 113 $141 $ — $ 339 $ 293
Margin over LIBOR 5.9% 6.1% 5.6%
Notes receivable in
other assets:
Fixed rate $ 12 $ 27 $ — $ — $ — $4 $ — $ 43 $ 41
Interest rate 7.8% 7.5% 0.0%
Variable rate (LIBOR) $ 24 $ — $ — $ — $ 1 $25 $ — $ 50 $ 9
Margin over LIBOR 12.8% 1.9% 0.0%
We consolidate all assets and liabilities of the Vésper Operating Companies,
including bank loans and capital lease obligations. Bank loans totaled $66 million at
September 30, 2002, of which $16 million is payable in fiscal 2005 and $50 million is
payable in fiscal 2006. The bank loans bear interest at variable rates, based on the
Certificate of Deposit Inter Bank (CDI) rate (the LIBOR rate equivalent in Brazil) plus
1.5%. Capital lease obligations totaled $42 million at September 30, 2002. The aggre-
gate maturities on the capital lease obligations over the next three years from fiscal
2003 through 2005 are $14 million, $22 million and $6 million, respectively. The cap-
ital lease obligations bear interest at fixed interest rates, ranging from 11.25% to
14.5%. The fair values of bank loans and capital lease obligations will change as
interest rates change. Interest expense will be affected by changes in the CDI.
Equity Price Market Risk. We hold marketable securities and derivative instru-
ments subject to equity price risk. Available-for-sale equity securities and derivative
instruments recorded at fair value under FAS 115 and FAS 133, respectively, subject
us to equity price risk. The recorded values of marketable equity securities increased
to $155 million at September 30, 2002 from $122 million at September 30, 2001. As
of September 30, 2002, one equity position constituted approximately 71% of the fair
value of the marketable securities portfolio. The recorded value of derivative instru-
ments subject to FAS 133 at September 30, 2002 was $1 million. We generally invest
in companies in the high-technology industry, and typically do not attempt to reduce
or eliminate our market exposure on these securities. The portfolio’s concentrations
in specific companies and industry segments may vary over time, and changes in con-
centrations may affect the portfolio’s price volatility.
We received a warrant in connection with the Leap Wireless spin-off to purchase
Leap Wireless common stock at $6.11 per share. At September 30, 2002, we were
entitled to purchase 3,375,000 shares of Leap Wireless common stock (see Note 1 to
the Consolidated Financial Statements for a description of our accounting policy for
this instrument). The warrant’s remaining value at September 30, 2002 was insignif-
icant, as compared to the $49 million value at September 2001. The estimated fair
value of the warrant is directly correlated to movements in the price of the Leap
Wireless common stock. The warrant is held for purposes other than trading. During
fiscal 2002, we recorded $59 million in losses on derivative instruments, primarily
related to this warrant.
We strategically invest in companies in the high-technology industry, and typically do
not attempt to reduce or eliminate our market exposure on these securities. During
fiscal 2002 and 2001, many high-technology stocks experienced significant decreases
in value, negatively affecting the fair values of our available-for-sale equity securities
and derivative instruments. Investment concentrations in specific companies and
industry segments may vary over time, and changes in concentrations may affect the
overall price volatility. A 10% decrease in the market price of our marketable equity
securities at September 30, 2002 would cause a corresponding 10% decrease in the
carrying amounts of these securities.
Our strategic investments in other entities consist substantially of investments
accounted for under the equity and cost methods that are predominantly closely held
and not publicly traded. These investments are held for purposes other than trading.
Accordingly, we believe that our exposure to market risk from these investments is
not material. Additionally, we do not anticipate any near-term changes in the nature
of our market risk exposures or in management’s objectives and strategies with
respect to managing such exposures.
Foreign Exchange Market Risk. See Note 1 to the Consolidated Financial
Statements for a description of our foreign currency accounting policies. We manage
our exposure to foreign exchange market risks, when deemed appropriate, through
the use of derivative financial instruments, consisting primarily of forward contracts.
Derivative financial instruments are viewed as risk management tools and are not
used for speculative or trading purposes. At September 30, 2002, no foreign currency
forward contracts were outstanding.
Financial instruments held by consolidated subsidiaries and equity method
investees which are not denominated in the functional currency of those entities are
subject to the effects of currency fluctuations, which may affect reported earnings. As
a global concern, we face exposure to adverse movements in foreign currency
exchange rates. We may hedge currency exposures associated with certain assets
and liabilities denominated in nonfunctional currencies and certain anticipated non-
functional currency transactions. As a result, we could experience unanticipated
gains or losses on anticipated foreign currency cash flows, as well as economic loss
MANAGEMENT’S DISCUSSION AND ANALYSIS continued