Qualcomm 2002 Annual Report Download - page 79

The Company has been named, along with many other manufacturers of wireless
handsets, wireless carriers and industry-related organizations, as a defendant in a
purported class action lawsuit (In re Wireless Telephone Frequency Emissions
Products Liability Litigation, United States District Court for the District of Maryland),
and in several individually filed actions, seeking personal injury, economic and/or
punitive damages arising out of its sale of cellular phones. The courts that have
reviewed similar claims against other companies to date have held that there was
insufficient scientific basis for the plaintiffs’ claims in those cases, and the judge
responsible for the multi-district litigation proceedings recently made such a ruling
in another case to which the company is not a party. Although there can be no assur-
ance that an unfavorable outcome of these and other disputes would not have a material
adverse effect on the Company’s operating results, liquidity or financial position, the
Company believes the claims are without merit and will vigorously defend the actions.
The Company has not recorded any accrual for contingent liability associated with
the legal proceedings described above based on the Company’s belief that a liability,
while possible, is not probable. Further, any possible range of loss cannot be esti-
mated at this time. The Company is engaged in numerous other legal actions arising
in the ordinary course of its business and believes that the ultimate outcome of these
actions will not have a material adverse effect on its operating results, liquidity or
financial position.
OPERATING LEASES
The Company leases certain of its 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 fiscal 2002, 2001 and 2000 was
$61 million, $28 million and $19 million, respectively. Rental expense increased by
$19 million in fiscal 2002 as a result of the consolidation of Vésper Holding (Note 13).
Future minimum lease payments in each of the next five years from fiscal 2003
through 2007 are $39 million, $29 million, $20 million, $13 million and $12 million,
respectively, and $11 million thereafter.
PURCHASE OBLIGATIONS
The Company has agreements with a supplier to purchase software and estimates
its noncancelable obligations under these agreements to be approximately $3 million
through fiscal 2004. The Company also has commitments to purchase telecommuni-
cations and research and development services for approximately $17 million in
fiscal 2003 and $17 million in each of the subsequent fiscal years through 2006.
LETTERS OF CREDIT, FINANCIAL GUARANTEES AND OTHER FINANCIAL COMMITMENTS
PEGASO TELECOMUNICACIONES, S.A. DE C.V.
The Company has various financing arrangements, including a bridge loan facility,
an equipment loan facility and an interim loan facility, with Pegaso Comunicaciones y
Sistemas S.A. de C.V., a wholly owned subsidiary of Pegaso Telecomunicaciones, S.A.
de C.V., a CDMA wireless operating company in Mexico (collectively referred to
as Pegaso). On September 10, 2002, Telefónica Móviles (Telefónica) acquired a 65%
controlling interest in Pegaso (the Close).
The bridge facility was payable in full on October 31, 2001, was in default and was
subject to a forbearance agreement at September 30, 2002. At September 30, 2002,
$413 million was outstanding under the bridge loan facility, net of deferred interest
and unearned fees. The Company stopped recognizing interest on the bridge loan
facility effective at the beginning of the fourth fiscal quarter of 2001. Pegaso paid
$435 million in full satisfaction of the bridge loan facility on November 8, 2002 (the
Bridge Payment) (Note 15).
The equipment loan facility and related financing were in default and subject to a
forbearance agreement at September 30, 2002. At September 30, 2002, $318 million
was outstanding under the equipment loan facility, net of deferred interest and
unearned fees. The equipment loan facility was payable through December 31, 2007
and bears interest at LIBOR plus 4.5% (or LIBOR plus 6.5% when in default). The
Company stopped recognizing interest on the equipment loan facility and related
financing effective at the beginning of the fourth fiscal quarter of 2001. The terms of
the equipment loan facility and related financing were modified, retroactive to
September 10, 2002, upon receipt of the Bridge Payment and the satisfaction of other
conditions. The Company will be required to use approximately $139 million of the
bridge loan proceeds to purchase outstanding vendor debt owed by Pegaso to other
lenders. Financing related to the equipment loan facility in the amount of $4 million
will be payable in March 2003. The remaining equipment loan facility, including the
acquired vendor debt, will be payable quarterly starting in March 2006 through
December 2008 and will bear interest at LIBOR plus 1% for two years, LIBOR plus 3%
for the next three years and LIBOR plus 6% thereafter. The Company recognized
$0.5 million in interest income on the equipment loan facility during fiscal 2002 from
the Close through fiscal year end at LIBOR plus 1%.
During fiscal 2002, the Company provided to Pegaso $65 million of interim financ-
ing, including $5 million in capitalized fees, and $65 million of additional interim
financing. Prior to the Close, a Pegaso shareholder purchased $25 million and
$23 million participations in the interim and additional interim finance receivables,
respectively, from the Company, and at Close, converted those portions of the interim
and additional interim financings into equity in Pegaso. At September 30, 2002,
$40 million and $42 million were outstanding under the interim and additional interim
QUALCOMM 2002 ANNUAL REPORT PAGE 77