Qualcomm 2002 Annual Report Download - page 77

QUALCOMM 2002 ANNUAL REPORT PAGE 75
Purchase Plan) was adopted and replaces the 1991 Employee Stock Purchase Plan,
which expired in August 2001. The 2001 Purchase Plan authorizes up to 12,155,000
shares to be granted until the Board of Directors of the Company terminates the 2001
Purchase Plan. The 1996 Non-Qualified Employee Stock Purchase Plan authorizes up
to 200,000 shares to be granted at anytime. During fiscal 2002, 2001 and 2000, shares
totaling 1,150,000, 758,000 and 749,000 were issued under the plans at an average
price of $31.45, $50.16 and $37.75 per share, respectively. At September 30, 2002,
11,090,000 shares were reserved for future issuance.
EXECUTIVE RETIREMENT PLANS
The Company has voluntary retirement plans that allow eligible executives to defer
up to 100% of their income on a pre-tax basis. On a quarterly basis, the Company
matches up to 10% of the participants’ deferral in Company common stock based on
the then-current market price, to be distributed to the participant upon eligible retire-
ment. The income deferred and the Company match held in trust are unsecured and
subject to the claims of general creditors of the Company. Company contributions
begin vesting based on certain minimum participation or service requirements,
and are fully vested at age 65. Participants who terminate employment forfeit
their unvested shares. All shares forfeited are used to reduce the Company’s future
matching contributions. The plans authorize up to 800,000 shares to be allocated
to participants at anytime. During fiscal 2002, 2001 and 2000, 44,000, 33,000, and
no shares were issued under the plans respectively. The Company’s matching
contribution net of amounts forfeited during fiscal 2002, 2001 and 2000 amounted to
$2 million, $3 million and $2 million, respectively. At September 30, 2002, 264,000
shares, including 85,000 issued and unallocated forfeited shares, were reserved for
future allocation.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company records compensation expense for employee stock options based
upon their intrinsic value on the date of grant pursuant to Accounting Principles
Board Opinion 25 (APB 25), “Accounting for Stock Issued to Employees.” Because the
Company establishes the exercise price based on the fair market value of the
Company’s stock at the date of grant, the options have no intrinsic value upon grant,
and therefore no expense is recorded. Each quarter, the Company reports the potential
dilutive impact of stock options in its diluted earnings per share using the treasury-
stock method. Out-of-the-money stock options (i.e., the average stock price during
the period is below the strike price of the option) are not included in diluted earnings
per share.
As required under Financial Accounting Standards Board Statement 123 (FAS
123), “Accounting for Stock-Based Compensation,” the pro forma effects of stock-
based compensation on net income and net earnings per common share have been
estimated at the date of grant using the Black-Scholes option-pricing model based
on the following assumptions:
QUALCOMM Employee Stock
Stock Option Plans Purchase Plans
2002 2001 2000 2002 2001 2000
Risk-free interest rate 4.4% 5.0% 6.3% 2.3% 4.4% 5.7%
Volatility 58.0% 63.0% 57.0% 69.0% 78.0% 72.0%
Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Expected life (years) 6.0 6.0 5.5 0.5 0.5 0.5
The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options that have no restrictions and are fully transferable and
negotiable in a free trading market. Black-Scholes does not consider the employ-
ment, transfer or vesting restrictions that are inherent in the Company’s employee
options. FAS 123 requires the use of an option valuation model using highly subjec-
tive assumptions based on long-term predictions, including the expected stock price
volatility and average life of each option grant. Because the Company’s employee
options have characteristics significantly different from those of freely traded options,
and because changes in the subjective input assumptions can materially affect the
fair value estimate, in our opinion, the existing models, including Black-Scholes, are
not reliable single measures and may misstate the fair value of the Company’s
employee options. Notwithstanding the foregoing, the Black-Scholes weighted aver-
age estimated fair values of stock options granted during fiscal 2002, 2001 and 2000
were $28.20, $44.25 and $48.62 per share, respectively. The weighted average
estimated fair values of shares granted under the Employee Stock Purchase Plans
during fiscal 2002, 2001 and 2000 were $14.57, $24.20 and $31.95, respectively.
For purposes of pro forma disclosures, the estimated fair value of the options is
assumed to be amortized to expense over the options’ vesting periods. The pro forma
effects of recognizing compensation expense under the fair value method on net
income and net earnings per common share for the years ended September 30 were
as follows (in thousands, except for net earnings per share):
2002 2001* 2000*
As Pro As Pro As Pro
reported forma reported forma reported forma
Net income (loss) $359,677 $125,763 $(578,078) $(745,202) $622,146 $521,979
Net earnings (loss) per
common share:
Basic $ 0.47 $ 0.16 $ (0.76) $ (0.99) $ 0.87 $ 0.73
Diluted $ 0.44 $ 0.16 $ (0.76) $ (0.99) $ 0.79 $ 0.66
* As adjusted (Note 13)