QCOM could be sued for fraudulent accounting...except for politics...
In the early 1990s, Qualcomm Corp. thought GlobalStar Telecommunications Ltd. was engaged in a risky but promising endeavor with its effort to erect a world-wide satellite-telephone network. Qualcomm took a stake in the venture, holding as much as 6.5% of the company's equity.
From fiscal years 1995 to 2000, GlobalStar in any given year accounted for 7% to 19% of Qualcomm's annual revenue. Qualcomm, however, received cash for only about half of its GlobalStar sales. Qualcomm financed the rest, according to its SEC filings, and booked the revenue from the loan-generated sales -- about $667 million from 1995 through 2000.
As sales throughout its businesses took off, Qualcomm's stock soared. The San Diego-based telecommunications company's shares rose more than 27-fold in 1999, the best performance by any stock that year. For the fiscal year that ended in September 2000, its profits nearly tripled to $670 million. That capped a remarkable five-year run, during which Qualcomm's net income grew by a compounded annual rate of 67%.
Or did it? GlobalStar failed to attract many customers, and in January it defaulted on its Qualcomm loans. That prompted Qualcomm to take a $595 million write-off for the loans for its fiscal first quarter ended Dec. 31, in effect saying that some or all of the sales made possible by those loans never generated any cash and that the profit associated with those sales existed on paper only.
Qualcomm still beat the analysts' consensus earnings estimate by a penny a share, reporting pro forma earnings of 28 cents a share for its fiscal first quarter ended Dec. 31. How? It excluded the GlobalStar loan losses, among other expenses, from its pro forma results, despite having included the profits generated by those loans in earlier quarters' pro forma results.
Qualcomm's treasurer, Dick Grannis, says the exclusion of the GlobalStar losses from the pro forma figures is sensible because "GlobalStar is not really relevant anymore to our ongoing business. The purpose of pro forma results is to show investors the ongoing recurring operating results of the company." Mr. Grannis adds that the company used generally accepted accounting principles in deciding to record the GlobalStar revenue, and disclosed the loans' risks to investors in its SEC filings.
It's impossible to know precisely how much money Qualcomm has made since the mid-1990s without a formal earnings restatement, which Qualcomm says is unnecessary under GAAP. But since the beginning of 1996, on a pro forma basis excluding unusual charges, Qualcomm reported pretax income of $2.02 billion, according to Multex. Including all unusual charges, its pretax income was $1.44 billion over the same period, making it nearly 30% less profitable.
Lynn Turner, the SEC's chief accountant, says the recent spate of write-offs of vendor-financed receivables raises troubling questions, though he declines to comment on specific companies. "I get very concerned when the accounting rules turn out an answer that just doesn't reflect the economics," Mr. Turner says.
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