Qualcomm 2006 Annual Report Download - page 58

44 qualcomm 2006
Management’s Discussion and Analysis continued
Our QSI segment maintains strategic investments in marketable
equity securities classied as available-for-sale. We strategically
invest in companies in the high-technology industry and typically
do not attempt to reduce or eliminate our exposure to market risks
in these investments. The fair values of these strategic investments
are subject to substantial quarterly and annual uctuations and to
signicant market price volatility. Our strategic investments in
specic companies and industry segments may vary over time, and
changes in concentrations may affect price volatility. Downward
uctuations and market trends could adversely affect our operating
results. In addition, the realizable value of these securities and
derivative instruments is subject to market and other conditions.
QSI also makes strategic investments in privately held companies,
including early-stage companies and venture funds. These invest-
ments are comprised of equity investments, recorded at cost or
under the equity method, and warrants that are recorded at fair
value or at cost. The recorded values of these investments may
be written down due to changes in the companies’ conditions or
prospects. These strategic investments are inherently risky
as the market for the technologies or products the investees are
developing may never materialize. As a result, we could lose all or
a portion of our investments in these companies, which could neg-
atively affect our nancial position and operating results. Most of
these strategic investments will not become liquid until more than
one year from the date of investment, if at all. To the extent such
investments become liquid and meet strategic and price objectives,
we may sell the investments and recognize the realized gain (loss)
in investment income (expense).
We regularly monitor and evaluate the realizable value of our
investments in both marketable and private securities. If events
and circumstances indicate that a decline in the value of these assets
has occurred and is other than temporary, we will record a charge
to investment income (expense). In some cases, we make strategic
investments that require us to consolidate or record our equity in
the losses of early-stage companies. The consolidation of these
losses can adversely affect our nancial results until we exit from
or reduce our exposure to the investments.
Key developments in our strategic investments during scal 2006
included our ongoing investment in our MediaFLO USA subsidiary,
a slow down in the rate of strategic investment, including our invest-
ment in Inquam, and realized gains on certain strategic investments.
Investment in Inquam Limited. We and another investor (the
Other Investor) own minority interests in Inquam Limited (Inquam),
a wireless CDMA-based operator in Romania, and in Inquam’s former
subsidiaries in Portugal (the Portugal Companies). We recorded
$20 million, $33 million and $59 million in equity in losses of
Inquam during scal 2006, 2005 and 2004, respectively, including
a $12 million loss resulting from Inquam’s restructuring during scal
2006. At September 24, 2006, our equity and debt investments
in Inquam and the Portugal Companies totaled $5 million, net of
equity in losses. We and the Other Investor have each guaranteed
50% of a portion of amounts owed under certain of Inquam’s long-
term nancing arrangements, up to a combined maximum of
$53 million. The guarantee expires and the facilities mature on
December 25, 2011.
Acquisitions
On January 18, 2006, we completed our acquisition of all of the
outstanding capital stock of Flarion Technologies, Inc. (Flarion),
a privately held developer of Orthogonal Frequency Division
Multiplexing Access (OFDMA) technology for approximately $613
million in consideration, consisting of approximately $349 million
in shares of QUALCOMM stock, $229 million in cash, and the
exchange of Flarion’s existing vested options and warrants with an
estimated aggregate fair value of approximately $35 million. In
addition, we assumed Flarion’s existing unvested options with an
estimated aggregate fair value of $63 million, which is recorded as
share-based compensation over the requisite service period pur-
suant to FAS 123R. Upon achievement of certain agreed upon
milestones during the third quarter of scal 2006, we incurred
additional aggregate consideration of $197 million, consisting of
approximately $185 million in cash (of which $75 million will be
payable in July 2007), $8 million in shares of QUALCOMM stock
(of which $3 million is issuable in March 2007), and the modica-
tion of Flarion’s existing vested options and warrants with an
estimated incremental fair value of approximately $4 million. The
additional amounts payable in cash and shares on the milestone
date were treated as additional consideration and recorded
as goodwill. In addition, the modication of Flarion’s existing
unvested options resulted in an estimated incremental fair value
of $7 million, which will be recorded as share-based compensation
over the requisite service period pursuant to FAS 123R. The acquisi-
tion of Flarion is intended to broaden our ability to effectively
support operators who may prefer an OFDMA or a hybrid OFDM/
CDMA/WCDMA network alternative. The addition of Flarion’s
intellectual property and engineering resources also supplements
the resources that we have already dedicated over the years
towards the development of OFDM/OFDMA technologies.
Strategic Investments in Our QSI Segment
Our QSI segment makes strategic investments to promote the
worldwide adoption of CDMA products and services. QSI segment
assets totaled $660 million at September 24, 2006, compared
to $442 million at September 25, 2005. Our MediaFLO USA
subsidiary, a wireless multimedia operator, is expected to begin
commercial operations in 2007. QSI’s assets related to MediaFLO
USA totaled $329 million and $98 million at September 24, 2006
and September 25, 2005, respectively. We also enter into strategic
relationships with CDMA wireless operators and developers of
innovative technologies or products for the wireless communica-
tions industry. Due to nancial and competitive challenges facing
wireless operators, we cannot assure you that our investments in
or loans to these operators will generate nancial returns or that
they will result in increased adoption or continued use of CDMA
technologies. CDMA wireless operators to whom we have provided
funding have limited operating histories, are faced with signicant
capital requirements and are highly leveraged and/or have limited
nancial resources. If these CDMA wireless operators are not
successful, we may have to write down our investments in or loans
to these operators.