Qualcomm 2002 Annual Report Download - page 46

(expense) income. During fiscal 2002, we recognized $230 million in charges related
to other-than-temporary losses on marketable and private securities. In some cases,
we make strategic investments in early stage companies which require us to consol-
idate or record our equity in the losses of those companies. The consolidation of these
losses can adversely affect our financial results until we exit from or reduce our expo-
sure to the investments.
From time to time, we may accept equity interests in a licensee as consideration
for a portion or all of the license fees payable under our CDMA license agreements.
We record license fee revenues based on the fair values of the equity instruments
received, if determinable. The measurement date for determination of fair value is the
earlier of the date on which the parties establish a commitment to perform or the
date at which the performance is complete. The evaluation procedures used to deter-
mine fair value include, but are not limited to, examining the current market price for
the shares if the licensee is publicly traded, examining recent rounds of financing and
the licensee’s business plan if not publicly traded, and performing other due diligence
procedures. We account for the equity received using APB 18 or FAS 115, as appro-
priate. This program will not affect the licensees’ obligations to pay royalties under
their CDMA license agreements. The amount of cash consideration and the timing of
revenue recognition vary depending on the terms of each agreement. As of
September 30, 2002, nine licensees have participated in this program. We recognized
$6 million and $7 million of revenue in fiscal 2002 and 2001, respectively, and no rev-
enue in fiscal 2000 related to equity received as consideration for license fees.
VELOCOM, INC.
On November 29, 2001, we forgave $119 million under our debt facility with
VeloCom, Inc. (VeloCom), an investor in Vésper Holding. We also converted our
remaining $56 million convertible promissory note into equity securities of VeloCom
(the VeloCom exchange) in conjunction with our acquisition of Vésper Holding. The
VeloCom exchange increased our equity interest in VeloCom to 49.9%. We use the
equity method to account for our investment in VeloCom. At September 30, 2002, our
investment in VeloCom was $33 million, net of our equity in VeloCom’s losses.
VÉSPER HOLDING, LTD.
In fiscal 1999, we acquired an approximate 16% ownership interest in Vésper Sao
Paulo S.A. and Vésper S.A. (the Vésper Operating Companies or collectively, Vésper).
The Vésper Operating Companies were formed by a consortium of investors
to provide fixed wireless and wireline telephone services in the northern, northeast
and eastern regions of Brazil and in the state of Sao Paulo. In addition, we extended
long-term financing to the Vésper Operating Companies related to our financing
arrangement with Ericsson. On November 13, 2001, we consummated a series of
transactions as part of an overall financial restructuring (the Restructuring) of the
Vésper Operating Companies.
Pursuant to the Restructuring, we committed to invest $266 million, and VeloCom
committed to invest $80 million, in a newly formed holding company called Vésper
Holding. Vésper Holding acquired certain liabilities of the Vésper Operating
Companies from their vendors for $135 million and the issuance of warrants to
purchase an approximate 7% interest in Vésper Holding, and the vendors released in
full any claims that they might have against us, VeloCom, the Vésper Operating
Companies and other related parties arising from or related to the acquired liabilities.
In a series of related transactions, Vésper Holding agreed to contribute the acquired
liabilities to the Vésper Operating Companies in exchange for equity securities and to
cancel the contributed liabilities. At September 30, 2002, we directly owned 72% of the
issued and outstanding equity of Vésper Holding, and we indirectly owned an addi-
tional 11.9% of Vésper Holding through our ownership interest in VeloCom, totaling
an 83.9% direct and indirect interest.
The purchase price allocation, based on the estimated fair values of acquired
assets and liabilities assumed, included $307 million for property, plant and equip-
ment, $39 million for licenses, and $31 million for other intangible assets. Property,
plant and equipment are depreciated over useful lives ranging from 2 to 18 years.
Licenses and other intangible assets are amortized over their useful lives of 18 years
and 3 to 18 years, respectively.
When we obtained the controlling interest in Vésper Holding, Accounting
Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments
in Common Stock,” required that we adjust our prior period results to account for our
original 16% ownership interest in the Vésper Operating Companies, predecessors to
Vésper Holding, using the equity method of accounting. As a result, we recorded
$6 million, $150 million and $48 million of equity in losses of the Vésper Operating
Companies for fiscal 2002 (pre-acquisition), 2001 and 2000, respectively. We recorded
a $59 million reduction in finance receivables, an $18 million reduction in other
assets and a $77 million reduction in retained earnings at September 30, 2001. We
previously recorded $121 million in asset impairment charges and other-than-
temporary losses on other investments during fiscal 2001. Because those charges did
not exceed the losses recorded as a result of using the equity method, our net loss for
fiscal 2001 increased by $29 million. We did not record any asset impairment charges
or other-than-temporary losses during fiscal 2000, and as a result of using the equity
method, the net income for fiscal 2000 decreased by $48 million.
In July 2002, a group of Brazilian mobile operators sued the Vésper Operating
Companies, claiming Vésper violated its STFC (fixed) license by allowing full mobility
on its network. The court issued an order temporarily restraining Vésper from con-
tinued sales of its limited mobility product pending the trial. This order did not impact
Vésper’s existing customers, nor sales of other types of products. Subsequently,
Anatel, the Brazilian telecommunications regulatory agency, placed a similar
administrative hold on Vésper until such time as it could determine whether Vésper
was in compliance with existing regulations. Vésper successfully appealed the court
MANAGEMENT’S DISCUSSION AND ANALYSIS continued