UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ending September 26, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to _________
Commission file number: 1-7221
MOTOROLA, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-1115800
(State of Incorporation) (I.R.S. Employer Identification No.)
1303 E. Algonquin Road, Schaumburg, Illinois 60196
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 576-5000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of each of the issuer's classes of
common stock as of the close of business on September 26, 1998:
Class Number of Shares
Common Stock; $3 Par Value 600,177,725
Motorola, Inc. and Subsidiaries
Index
Part I
Financial Information Page
Item 1 Financial Statements
Condensed Consolidated Statements of Operations for
the Three-Month and Nine-Month Periods Ended
September 26, 1998 and September 27, 1997 3
Condensed Consolidated Balance Sheets at
September 26, 1998 and December 31, 1997 4
Condensed Consolidated Statement of Stockholders'
Equity for the Nine-Month Period Ended September 26, 1998 5
Condensed Consolidated Statements of Cash Flows for the
Nine-Month Periods Ended September 26, 1998 and
September 27, 1997 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II
Other Information
Item 1 Legal Proceedings 27
Item 2 Changes in Securities 27
Item 3 Defaults Upon Senior Securities 28
Item 4 Submission of Matters to a Vote of Security Holders 28
Item 5 Other Information 28
Item 6 Exhibits and Reports on Form 8-K 28
Part I - Financial Information
Motorola, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(In millions, except per share amounts)
Three Months Ended Nine Months Ended
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1998 1997 1998 1997
Net sales $ 7,152 $ 7,353 $21,061 $21,516
Costs and expenses
Manufacturing and other
costs of sales 5,155 4,986 14,987 14,389
Selling, general and
administrative expenses 1,359 1,237 3,947 3,710
Restructuring charges --- 95 1,980 265
Depreciation expense 537 595 1,595 1,732
Interest expense, net 62 30 153 98
Total costs and expenses 7,113 6,943 22,662 20,194
Earnings(loss) before income taxes 39 410 (1,601) 1,322
Income tax provision(benefit) 12 144 (480) 463
Net earnings(loss) $ 27 $ 266 $(1,121) $ 859
Net earnings(loss) per share
Basic $ .05 $ .44 $ (1.87) $ 1.44
Diluted $ .04 $ .44 $ (1.87) $ 1.41
Weighted average common shares
outstanding
Basic 598.7 596.4 598.0 595.0
Diluted 604.5 612.3 598.0 613.3
Dividends paid per share $ .12 $ .12 $ .36 $ .36
See accompanying notes to condensed consolidated financial statements.
Motorola, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in millions)
(Unaudited)
Sept. 26, December 31,
1998 1997
Assets
Cash and cash equivalents $ 1,257 $ 1,445
Short-term investments 250 335
Accounts receivable, net 5,023 4,847
Inventories 4,290 4,096
Deferred income taxes 2,550 1,726
Other current assets 850 787
Total current assets 14,220 13,236
Property, plant and equipment, net 9,957 9,856
Other assets 4,753 4,186
Total Assets $28,930 $27,278
Liabilities and Stockholders' Equity
Notes payable and current portion of
long-term debt $ 3,598 $ 1,282
Accounts payable 2,056 2,297
Accrued liabilities 6,631 5,476
Total current liabilities 12,285 9,055
Long-term debt 2,133 2,144
Deferred income taxes 1,409 1,522
Other liabilities 1,213 1,285
Stockholders' Equity
Common Stock, $3 par value 1,801 1,793
Preferred stock, $100 par value issuable
in series --- ---
Additional paid-in capital 1,855 1,720
Retained earnings 8,167 9,504
Non-owner changes to equity 67 255
Total stockholders' equity 11,890 13,272
Total liabilities and stockholders' equity $28,930 $27,278
See accompanying notes to condensed consolidated financial statements.
Motorola, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
(Dollars in millions)
Non-Owner Changes To Equity
Common
Stock Fair Value
and Adjustment Foreign Minimum
Additional to Certain Currency Pension
Paid-In Cost-Based Translation Liability Retained
Capital Investments Adjustments Adjustment Earnings
BALANCES AT
12/31/97 $3,513 $533 ($240) ($38) $9,504
Net loss (1,121)
Conversion of
zero coupon
notes 2
Fair value
adjustments
to certain
cost-based
investments:
Reversal of
prior period
adjustment (533)
Recognition of
current period
unrecognized
gain 344
Change in foreign
currency translation
adjustments (1)
Stock options
exercised and
other 141
Dividends declared (216)
BALANCES AT
9/26/98 $3,656 $344 ($239) ($38) $8,167
See accompanying notes to condensed consolidated financial statements.
Motorola, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in millions)
Nine Months Ended
Sept. 26, Sept. 27,
1998 1997
Operating
Net earnings(loss) $(1,121) $ 859
Adjustments to reconcile net earnings (loss)
to net cash from operating activities:
Restructuring charges 1,980 265
Depreciation 1,595 1,732
Deferred income taxes (814) 203
Amortization of debt discount and issue costs 7 7
Gain on disposition of investments in
affiliates net of acquisition charges (160) (94)
Change in assets and liabilities, net of
effects of acquisitions and dispositions:
Accounts receivable, net (203) (512)
Inventories (290) (759)
Other current assets (77) (48)
Accounts payable and accrued liabilities (545) 394
Other assets and liabilities (509) (117)
Net cash (used for)provided by operating activities $ (137) $1,930
Investing
Acquisitions and advances to affiliates $ (562) $ (117)
Proceeds from the dispositions of investments
and affiliates 339 195
Capital expenditures (2,395) (1,883)
Proceeds from dispositions of property, plant and
equipment and other changes 376 374
Sales of short-term investments 85 6
Net cash used for investing activities $(2,157) $(1,425)
Financing
Proceeds from commercial paper and short-term
borrowings $2,316 $ (3)
Proceeds from issuance of debt 12 1
Repayment of debt (28) (21)
Issuance of common stock 21 96
Payment of dividends (216) (214)
Net cash provided by(used for) financing activities $2,105 $ (141)
Effect of exchange rate changes on cash and
cash equivalents 1 (109)
Net (decrease)increase in cash and cash equivalents $ (188) $ 255
Cash and cash equivalents, beginning of period $1,445 $1,513
Cash and cash equivalents, end of period $1,257 $1,768
See accompanying notes to condensed consolidated financial statements.
Motorola, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The condensed consolidated financial statements as of September 26, 1998
and for the three-month and nine-month periods ended September 26, 1998 and
September 27, 1997, include, in the opinion of management, all adjustments
(consisting of normal recurring adjustments, reclassifications, and
restructuring charges) necessary to present fairly the financial position,
results of operations and cash flows at September 26, 1998 and for all
periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto incorporated by
reference in the Company's Form 10-K for the year ended December 31, 1997.
The results of operations for the three-month and nine-month periods ended
September 26, 1998 are not necessarily indicative of the operating results
to be expected for the full year. Certain amounts have been reclassified
in the 1997 financial statements to conform to the 1998 presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2. Supplemental Balance Sheet Information
Inventories consist of the following (in millions):
Sept. 26, Dec. 31,
1998 1997
Finished goods $ 1,113 $ 1,078
Work in process and production materials 3,177 3,018
Inventories $ 4,290 $ 4,096
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", requires the carrying
value of certain investments to be adjusted to fair value. The Company
recorded an increase to stockholders' equity, other assets and deferred
income taxes of $344 million, $569 million and $225 million as of September
26, 1998; compared to an increase of $533 million, $881 million and $348
million as of December 31, 1997.
3. Supplemental Cash Flows Information
Cash paid for interest during the first nine months of 1998 and 1997 was
$203 million and $180 million, respectively. Cash paid for income taxes
during the first nine months of 1998 and 1997 was $315 million and $425
million, respectively.
4. Earnings(Loss) Per Share
The following tables present a reconciliation of the numerators and
denominators of basic and diluted earnings(loss) per share for the periods
specified:
Three Months Ended
Sept. 26, Sept. 27,
(In millions, except per share amounts) 1998 1997
Basic earnings per share:
Net earnings $ 27 $ 266
Weighted average common shares
outstanding 598.7 596.4
Per share amount $. 05 $ .44
Diluted earnings per share:
Net earnings $ 27 $ 266
Add: Interest on zero coupon
notes, net of taxes, and
effect of executive
incentive and employee
profit sharing plans --- $ 1
Net earnings as adjusted $ 27 $ 267
Weighted average common shares
outstanding 598.7 596.4
Add: Effect of dilutive securities
Stock options 5.8 9.0
Zero coupon notes --- 6.9
Diluted weighted average common
shares outstanding 604.5 612.3
Per share amount $ .04 $ .44
Nine Months Ended
Sept. 26, Sept. 27,
(In millions, except per share amounts) 1998 1997
Basic earnings(loss) per share:
Net earnings(loss) $(1,121) $ 859
Weighted average common shares
outstanding 598.0 595.0
Per share amount $ (1.87) $ 1.44
Diluted earnings(loss) per share:
Net earnings(loss) $(1,121) $ 859
Add: Interest on zero coupon
notes, net of taxes, and
effect of executive
incentive and employee
profit sharing plans --- 4
Net earnings(loss), as adjusted $(1,121) $ 863
Weighted average common shares
outstanding 598.0 595.0
Add: Effect of dilutive securities
Stock options --- 12.0
Zero coupon notes --- 6.3
Diluted weighted average common
shares outstanding 598.0 613.3
Per share amount $ (1.87) $ 1.41
5. Reorganization and Acquisition of Businesses
In the second quarter of 1998, the Company recorded a pre-tax restructuring
charge of $1.98 billion for the following types of costs: the consolidation
of manufacturing operations throughout the Company with emphasis on the
Semiconductor Products and Messaging, Information and Media segments; the
exit of additional non-strategic, poorly-performing businesses; the
writedown of assets which have become impaired either as a result of
current business conditions or business portfolio decisions; and a
reduction in employment by approximately 15,000 by the second quarter of
1999 from the approximately 150,000 employees worldwide at the beginning of
the second quarter of 1998. The following table displays a rollforward of
the restructuring accruals to September 26, 1998, by category:
===========================================================================
(in millions) Pre-June
27, 1998 Accruals Accruals at
Initial Amounts at June Amounts Sept. 26,
Accruals by Category: Accrual Used 27, 1998 Used 1998
- -----------------------------------------------------------------------------
Consolidation of
manufacturing
operations $ 361 $ 9 $ 352 $ 67 $ 285
Business exits and
asset impairments 819 130 689 358 331
Employee separations 461 4 457 112 345
Other 339 81 258 17 241
Totals $1,980 $ 224 $1,756 $ 554 $1,202
==========================================================================
During the third quarter of 1998, the Company sold its printed circuit
board business and exited several semiconductor product lines. In
addition, the Company signed a memorandum of understanding to sell its non-
silicon component manufacturing business to CTS Corp. The business
includes ceramics, quartz oscillator, piezoelectric technology and surface
acoustic wave operations.
In 1997, the Company established restructuring accruals totaling $327
million to exit its modem business in Huntsville, AL, to exit the
MacOS(Registered)-compatible computer systems business, and to phase out
participation in the dynamic random access memory (DRAM) market. Through
September 26, 1998, $262 million of the accruals had been utilized, $31
million had been reversed into income over the last several quarters, and
the remaining $34 million is expected to be used by the end of 1998.
As of September 26, 1998, approximately 5,500 direct and 2,300 indirect
employees have separated from the Company through a combination of
voluntary and involuntary severance programs. Direct employees are
primarily non-supervisory production employees, and indirect employees are
primarily non-production employees and production managers.
During the third quarter of 1998, the Company acquired the remaining
outstanding shares of Starfish Software, Inc., a supplier of
synchronization technology for wireless and wireline connected information
devices. The total acquisition cost was $253 million, consisting of cash,
stock, assumed stock options and assumed liabilities. In connection with
this transaction, the Company recorded an in-process research and
development charge of $109 million, which was included in the pre-tax net
special charge of $18 million for the quarter as it was partially offset by
gains on business and asset sales. Pro forma effects of the acquisition
are not material.
6. Comprehensive Earnings(Loss)
SFAS No. 130 "Reporting Comprehensive Income", which is solely a financial
statement presentation standard, requires the Company to disclose non-owner
changes included in equity but not included in net earnings(loss). These
changes include the fair value adjustments to certain cost-based
investments, the foreign currency translation adjustments, and the minimum
pension liability adjustment. Comprehensive earnings(loss) for the three-
month periods ended September 26, 1998, and September 27, 1997, were ($234)
million and $568 million, respectively. Comprehensive earnings(loss) for
the nine-month periods ended September 26, 1998, and September 27, 1997,
were ($1.3) billion and $1.4 billion, respectively.
Motorola, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations
This commentary should be read in conjunction with the Company's
consolidated financial statements and related notes thereto and
management's discussion and analysis of financial condition and
results of operations incorporated by reference in the Company's Form
10-K for the year ended December 31, 1997.
Results of Operations:
Sales were $7.2 billion in the third quarter of 1998, down 3 percent from
$7.4 billion a year earlier. In the first nine months, sales decreased 2
percent to $21.1 billion from $21.5 billion in the first nine months of
1997.
Excluding special charges, third-quarter earnings were $40 million, or 7
cents per share after-tax in 1998, compared with $308 million, or 51 cents
per share after-tax in the third quarter of 1997. Excluding special
charges, earnings for the nine months were $188 million, or 31 cents per
share after-tax, compared with $986 million, or $1.62 per share after-tax a
year earlier.
The third-quarter results reflect the continuing impact of adverse business
conditions in Asia and weakness in semiconductors and paging products on a
worldwide basis. These negative factors were partially offset by some
early benefits from Motorola's manufacturing consolidation, cost reduction
and restructuring programs.
The Company recorded special charges of $18 million pre-tax, or 3 cents per
share after-tax, in the third quarter of 1998. These charges include a
write-off in connection with the acquisition of Starfish Software, Inc.,
partially offset by gains on business and asset sales. Including the
special charges, third-quarter earnings were $27 million, or 4 cents per
share after-tax, compared with $266 million, or 44 cents per share after-
tax, in the third quarter a year ago. The year-earlier quarter included
special charges against pre-tax earnings of $65 million, or 7 cents per
share after-tax, largely from the decision to exit the MacOS (Registered)
compatible computer systems business.
In the first nine months of 1998, the loss, including special charges, was
$1.1 billion, or $1.87 per share after-tax, compared with earnings of $859
million, or $1.41 per share after-tax, in last year's first nine months.
This year's loss includes special charges of $1.9 billion pre-tax, or $2.18
per share after-tax, largely as a result of charges associated with a
comprehensive series of manufacturing consolidations, cost reductions and
restructuring steps intended to improve financial performance. The year-
earlier period also includes special charges against pre-tax earnings of
$196 million, or 21 cents per share after-tax, largely from the phase-out
of the dynamic random access memory (DRAM) business and the decision to
exit the MacOs(Registered)-compatible computer systems business.
In July, the Company's communications-related businesses were
realigned into the Communications Enterprise, a structure intended to
enable integrated solutions and improved responsiveness to the needs
of distinct customer segments, including consumers,
telecommunications network operators, and commercial, government and
industrial users of telecommunications equipment. For this quarter's
financial reporting purposes, the Company continues to use the
previous segments, pending a restatement at a later date.
Cellular Products Segment sales increased 9 percent to $3 billion and
orders were down 2 percent. Operating profits were higher due to gains on
business and asset sales. Excluding those gains, operating profits would
have declined, largely due to increased research and development investment
in digital cellular technologies.
Cellular Subscriber Sector (CSS) sales and orders declined. However, sales
and orders of digital products increased significantly versus last year.
This was offset by a very significant decline in sales of analog products,
caused by a continuing trend of demand shift to digital products. In Asia,
sales and orders were significantly higher, while they were significantly
lower in Pan America and slightly lower in Europe. GSM phone sales showed
a strong sequential increase due to rapid acceptance of new products
announced earlier in 1998, including the cd900 series phones.
Cellular Infrastructure Group (CIG) sales increased significantly and
orders were higher. In Japan and Europe both sales and orders were
significantly higher, while they were lower in Pan America and
significantly lower in Asia. The cellular infrastructure business has been
historically characterized by large orders and irregular purchasing
patterns which can cause volatility in quarterly growth rates.
Land Mobile Products Segment sales increased 3 percent to $1.3 billion,
orders increased 20 percent and operating profits were higher. Orders for
iDEN (Registered) equipment for integrated digital enhanced networks were
significantly higher. New iDEN systems began operations in the greater
Tokyo area, Rio de Janeiro, Manila and Singapore.
Messaging, Information and Media Segment sales decreased 38 percent to $552
million and orders were 10 percent lower. The segment had an operating
loss versus a profit a year ago, due to the decline in sales and the write-
off related to the acquisition of Starfish Software, Inc., a supplier of
synchronization technology for wireless and wireline connected information
devices. Paging Group orders were lower than a year ago due to a
significant decline in Asia, only partly offset by higher orders in Pan
America. Paging Group sales were significantly lower than a year ago in
all regions.
Space and Systems Technology Group Sales increased 12 percent, orders were
down 87 percent, and operating profits increased. The decline in orders is
related to the timing of contractual milestones on the Iridium(Registered)
program. The results are reported as part of the "Other Products" segment.
Operational and voice quality testing of the Iridium system continued
during the quarter. Gateway operators have now conditionally accepted 12
Iridium gateways around the world. Commercial voice service began on
November 1.
As previously reported, Iridium Operating LLC and/or Iridium LLC
(collectively "Iridium") may require additional financing, possibly before
the end of 1998, to continue to make contractual payments to the Company.
As reported by Iridium, it has a senior secured bank facility which matures
on December 31, 1998. Iridium will need to refinance this facility and seek
additional financing in order to meet its funding requirements. Given the
current strain on liquidity in worldwide capital markets, it may be more
difficult for Iridium to raise all of the additional financing it needs.
The Company has provided and continues to provide financial support to
Iridium. As of early 1997, the Company had agreed to guarantee $750
million of Iridium bank financing and had conditionally offered to
guarantee an additional $350 million of Iridium bank financing. Currently,
the conditional offer to guarantee an additional $350 million remains in
place. However, the Company's existing guarantee has been reduced to $275
million, although that amount could significantly increase depending on
Iridium's financing needs and the outcome of current negotiations between
the Company and Iridium and between Iridium and its lenders.
The Company has contracts with Iridium under which it constructed and
deployed the satellite constellation and is to maintain the performance of
the satellite constellation and to provide certain computer systems,
functionality and software for the system. In connection with these
relationships, the Company has accounts receivables from Iridium which, as
of September 26, 1998, totaled $283 million.
The Company has also agreed to conditionally guarantee up to $175 million
of additional Iridium bank financing, the proceeds of which are to be used
to purchase subscriber equipment for the Iridium system from the Company.
This guarantee may be called upon if the Iridium gateway operators do not
purchase minimum amounts of subscriber equipment from the Company, and
Iridium, per its agreement with the Company, purchases or finances the
purchase of such equipment from the Company. Based on gateway operators'
early purchases as the system begins commercial service, the Company
anticipates that these minimum orders will be met or substantially met.
At September 26, 1998, the Company also held, at an original value of $156
million, Iridium Operating LLC's 14-1/2% Senior Subordinated Discount Notes
due 2006. The Notes accrete in value until as late as July 10, 2001, at
which time the accreted value of all Notes currently held by the Company
will be $315 million. When the Notes reach their full accreted value,
interest begins to accrue at 14-1/2% per annum payable semi-annually in
cash, with the first interest payment on the Notes scheduled to occur on
September 1, 2001.
Semiconductor Products Segment sales decreased 14 percent to $1.8 billion
and orders were 10 percent lower. The sector had an operating loss versus
a profit a year ago, due to the decline in sales and lower average selling
prices resulting from a worldwide industry recession. Orders were higher
in the Networking & Computing and Transportation Systems groups, down
slightly in Wireless Subscriber Systems and down significantly in the
Consumer Systems and Semiconductor Components groups. By region, orders
grew slightly in Europe and Asia-Pacific, were down in the Americas, and
were down significantly in Japan.
Automotive, Component, Computer and Energy Sector Sales declined 12 percent
and orders were down 10 percent. The sector had an operating profit versus
a loss a year ago, when a charge was taken to exit the MacOS(Registered)-
compatible computer systems business. Excluding that charge, operating
profits would have been lower than a year ago, largely due to the decline
in sales. The sector's results are reported as part of the "Other
Products" segment.
The Company sold its printed circuit board business, which included two
manufacturing operations in Singapore. The Company also signed a
memorandum of understanding to sell its non-silicon component products
division to CTS Corp. The businesses in the division include ceramics,
quartz oscillator, piezoelectric technology and surface acoustic wave
operations.
Selling, general and administrative expenses were 20 percent of sales
compared with 17 percent in the year-earlier period. The increase as a
percent of sales was due entirely to a write-off related to the acquisition
of Starfish Software, Inc. and a larger Iridium equity loss. Depreciation
expense decreased slightly as a percent of sales. Interest expense
increased slightly as a percent of sales. The tax rate for the third
quarter was 30 percent versus a 35 percent tax rate a year ago.
Liquidity and Capital Resources:
Operating activities used $137 million in cash for the nine-month
period ended September 26, 1998, as compared to providing $1.9
billion in cash for the nine-month period ended September 27, 1997.
The change in cash flow was due primarily to lower earnings.
Inventories at September 26, 1998 increased by 5 percent or $194
million, compared to inventories at December 31, 1997. Property,
plant and equipment, less accumulated depreciation, increased $101
million since December 31, 1997.
The Company's notes payable and current portion of its long-term debt
increased to $3.6 billion at September 26, 1998, from $1.3 billion at
December 31, 1997. Net debt (notes payable and current portion of
long-term debt plus long-term debt less short-term investments and
cash equivalents) to net debt plus equity increased to 28.4 percent
at September 26, 1998 from 12.4 percent at December 31, 1997. The
Company's total domestic and foreign credit facilities aggregated
$4.7 billion at September 26, 1998, of which $313 million were used
and the remaining $4.4 billion were available to back up outstanding
commercial paper which totaled $3.3 billion.
The significant increase in the Company's short-term borrowings can
be attributed, generally, to the Company's need to finance its
operations during a period of lower profitability. Among other
things, the additional cash has been necessary to provide for
increased long-term customer financing, higher inventory levels,
increased accounts receivable and, although diminishing, the
Company's high level of capital expenditures.
At September 26, 1998, the off-balance sheet commitment to Nextel
Communications, Inc. for equipment financing remained at $485
million. This amount represents the maximum available commitment and
may not be completely used.
On September 28, 1998, the Company redeemed $368 million principal
amount at maturity of its outstanding LYONs(Trademark) due 2013 at
the election of the holders thereof. The Company made a total
payment of $263 million to redeem these LYONs. The proceeds used for
this redemption were obtained entirely from the issuance of
commercial paper. As of October 15, 1998, approximately $110 million
principal amount at maturity of the Company's LYONs due 2013 remains
outstanding.
On October 20, 1998, the Company sold an aggregate face principal
amount at maturity of $325 million of 5.80% Notes due October 15,
2008. The net proceeds to the Company from the issuance and sale of
the Notes were $322 million. The Company intends to use the proceeds
to reduce short-term indebtedness and for other general corporate
purposes.
As a multinational company, the Company's transactions are
denominated in a variety of currencies. The Company uses financial
instruments to hedge, and therefore attempts to reduce its overall
exposure to the effects of currency fluctuations on cash flows. The
Company's policy is not to speculate in financial instruments for
profit on the exchange rate price fluctuation, trade in currencies
for which there are no underlying exposures, or enter into trades for
any currency to intentionally increase the underlying exposure.
Instruments used as hedges must be effective at reducing the risk
associated with the exposure being hedged and must be designated as a
hedge at the inception of the contract. Accordingly, changes in
market values of hedge instruments must be highly correlated with
changes in market values of underlying hedged items both at inception
of the hedge and over the life of the hedge contract.
The Company's strategy in foreign exchange exposure issues is to
offset the gains or losses of the financial instruments against
losses or gains on the underlying operational cash flows or
investments based on the operating business units' assessment of
risk. Currently, the Company primarily hedges firm commitments,
including assets and liabilities currently on the balance sheet. The
Company expects that it may hedge anticipated transactions,
forecasted transactions or investments in foreign subsidiaries in the
future.
Almost all of the Company's non-functional currency receivables and
payables which are denominated in major currencies that can be traded
on open markets are hedged. The Company uses forward contracts and
options to hedge these currency exposures. A portion of the
Company's exposure is to currencies which are not traded on open
markets, such as those in Latin America and China, and these are
addressed, to the extent reasonably possible, through managing net
asset positions, product pricing, and other means, such as component
sourcing.
At September 26, 1998 and September 27, 1997, the Company had net
outstanding foreign exchange contracts totaling $1.9 billion and $1.7
billion, respectively. The following schedule shows the five largest
foreign exchange hedge positions as of September 26, 1998 and the
corresponding positions at September 27, 1997:
Dollars in millions
Buy (Sell) Sept. 26, Sept. 27,
1998 1997
Japanese Yen (596) (359)
German Mark (224) (224)
British Pound Sterling (210) (496)
Italian Lira (174) (163)
Taiwan Dollar (74) (83)
At September 26, 1998 and September 27, 1997, outstanding foreign
exchange contracts primarily consisted of short-term forward
contracts. Net deferred gains at September 26, 1998, and net
deferred losses at September 27, 1997, on these forward contracts
which hedge designated firm commitments were immaterial.
As of the end of the reporting period, the Company had no outstanding
interest rate swaps, commodity derivatives, currency swaps or options
relating to either its debt instruments or investments. The Company
does not have any derivatives to hedge the value of its equity
investments in affiliated companies.
The Company's research and development expenditures for the three-month
periods ended September 26, 1998, and September 27, 1997, were $732 million
and $695 million, respectively. Research and development expenditures for
the nine-month periods ended September 26, 1998, and September 27, 1997,
were $2.2 billion and $2.0 billion, respectively. The Company continues to
believe that a strong commitment to research and development drives long-
term growth. The Company's capital expenditures for the three-month
periods ended September 26, 1998, and September 27, 1997, were $708 million
and $831 million, respectively. Capital expenditures for the nine-month
periods ended September 26, 1998, and September 27, 1997, were $2.4 billion
and $1.8 billion, respectively. For the full year of 1998, the Company's
capital expenditures are now expected to total approximately $2.9 billion.
The Company has reduced its capital expenditures forecast compared to
original projections due in part to the continued weakness in the Company's
semiconductor business as a result of the ongoing worldwide semiconductor
industry recession.
Return on average invested capital (net earnings divided by the sum
of stockholders' equity, long-term debt, notes payable and the
current portion of long-term debt, less short-term investments and
cash equivalents) was (5.3) percent based on the performance of the
four preceding fiscal quarters ending September 26, 1998, compared
with 7.8 percent based on the performance of the four preceding
fiscal quarters ending September 27, 1997. The Company's current
ratio (the ratio of current assets to current liabilities) was 1.16
at September 26, 1998, compared to 1.46 at December 31, 1997.
Year 2000:
Motorola has been actively addressing Year 2000 issues since 1997. A Year
2000 Enterprise Council was formed and is responsible for coordinating and
facilitating of activities across the Company. The Year 2000 Enterprise
Council reports to the Company's President and Chief Operating Officer and
its progress is reported to the Management Board of the Company (which is
comprised of the Company's most senior management) and the Audit and Legal
Committee of the Board of Directors.
The Year 2000 issue refers to the risk that systems, products and equipment
having date-sensitive components will not recognize the Year 2000.
Throughout this disclosure the Company uses the generic phrase "year 2000
ready" to mean that a system, product or piece of equipment will perform
its intended functions on or after January 1, 2000 the same as it did
before January 1, 2000. The Company also has a specific definition of Year
2000 Ready for Motorola products described below.
The Six-Phase Year 2000 Program
Motorola developed the Six-Phase Year 2000 Program to ensure a thorough and
standard approach to addressing the Year 2000 problem across the Company.
The Program summarizes the tasks to be completed while leaving each
business to tailor actions specifically to their environments, the goals of
each phase, and their targeted completion dates. The six-phases are
Preliminary (identify the issues, create awareness, and dedicate
resources); Discovery/Charter (inventory, categorize, and make initial cost
estimates); Scope (refine inventory and assess business impacts and risks);
Conversion Planning (determine specific implementation solutions through
analysis, formulate strategies, and develop project and test plans);
Conversion (make program changes, perform applications and acceptance
testing and certification); and Deployment and Post Implementation (deploy
program and software changes, evaluate and apply lessons learned).
The Company's Readiness
As of September 26, 1998, all of the Company's sectors and groups have
substantially completed Phases 1-4, have partially completed Phase 5, and
expect to complete a substantial portion of the work under the 6 phases by
December 31, 1998. However, certain of the work will continue well into
1999. This work will be separately monitored and tracked with appropriate
target completion dates. Contingency plans will be developed for any
matter not resolved in 1998 that may have a material negative impact on
Motorola's final "year 2000 readiness".
As part of the Company's overall program and to ensure adequate means to
measure progress, Motorola has established five functional categories to be
reviewed by each business as follows:
Products. While addressing all five functional categories, the Company has
placed a high priority on ensuring that Motorola products are Year 2000
Ready and is completing a comprehensive review of the Year 2000 Readiness
of Motorola products. The results of these reviews are being made
available to Motorola customers and third parties through the use of a
Motorola Year 2000 web-site and is supplemented with additional written
communications. The Motorola definition of "Year 2000 Ready", which is the
standard Motorola uses to determine the Year 2000 Readiness of Motorola
products, is as follows:
Year 2000 Ready means the capability of a Motorola Product, when
used in accordance with it's associated documentation, to
correctly process, provide and/or receive date-data in and
between the years 1999 and 2000, including leap year
calculations, provided that all other products and systems (for
example, hardware, software and firmware) used with the Motorola
Product properly exchange accurate date-data with it.
Manufacturing. Some of the tools and equipment (hardware and software)
used to develop and manufacture Motorola products are date-sensitive. The
Company believes, based on the results of the Six-Phase Program and based
on assurances from its suppliers, that the critical tools and equipment
used by it to manufacture products will be "year 2000 ready" or will be
made ready through upgrades by the suppliers of the tools or equipment. As
a result the Company does not expect significant interruption to its
manufacturing capabilities because of the failure of tools and/or
equipment.
Non-Manufacturing Business Applications. Throughout the business the Company is
fixing and testing all non-manufacturing business applications such as core
financial information and reporting systems, procurement, human
resources/payroll, factory applications, customer service systems, and revenue
systems, and does not expect any significant Year 2000 problems in this area.
Facilities and Infrastructure. The Company also is fixing and testing its
facilities and infrastructure (health, safety and environment systems,
buildings, security/alarms/doors, desktop computers, networks) to ensure
they are "year 2000 ready" and does not expect significant interruption to
its operations because of Year 2000 problems with its facilities and
infrastructure.
Logistics. The Company has devoted significant resources to ensure that
its operations are not disrupted because of services or products supplied
to the Company. In addition, the Company has requested assurances from its
joint venture partners and alliance partners of their "year 2000
readiness".
Of critical importance to the Company's Year 2000 Readiness is the
readiness of suppliers and the products the Company procures from
suppliers. Motorola has many thousands of suppliers and has a
comprehensive program to identify and obtain Year 2000 information from its
critical suppliers. The program includes awareness letters, site visits,
questionnaires, compliance agreements and warranties as well as a review of
suppliers' Year 2000 web-sites. If a supplier is determined to entail a
"high risk" of non-year 2000 readiness, the Company will develop
contingency and alternate sourcing plans to minimize the Year 2000 risk.
As described in the Company's discussion of most reasonably likely worst
case scenarios, the Company is particularly concerned about energy and
transportation suppliers. Many of these suppliers are unwilling to provide
assurances that they will be "year 2000 ready".
Unique issues related to the readiness of the Company's major businesses is
discussed in more detail below.
Year 2000 Costs
Motorola estimates that the expected total aggregate costs for its Year
2000 activities from 1997 through 2000 will be in the range of $290 million
$340 million. Approximately $150 million of total estimated future costs
relate to internal resources. External costs incurred through September
26, 1998 were approximately $70 million. These costs do not include
estimates for potential litigation. The Company does not believe that the
incremental costs of addressing Year 2000 issues will have a material
adverse effect on the Company's consolidated results of operations,
liquidity and capital resources.
The Company reviews and updates data for costs incurred and forecasted
costs each quarter. Historically most businesses within the Company did
not estimate internal costs (salaries, fringe benefits, travel, etc.) in
becoming Year 2000 Ready. All estimated future costs include internal
costs. As the Company continues to assess the last phases of the Year 2000
Program, estimated costs may change.
These costs are based on management's estimates, which were determined
based on assumptions of future events, some within the Company's control,
but many outside the Company's control. There can be no guarantee that
these estimates will be correct, and if actual costs increased by a
sizeable amount, the Company's actual results could be materially adversely
impacted.
Most Reasonably Likely Worst Case Scenarios for the Company
and Company Contingency Plans
The Company has and will continue to devote substantial resources to
address its Year 2000 issues. However, there can be no assurances that the
Company's products do not contain undetected Year 2000 problems. Further,
there can be no assurances that the Company's assessment of suppliers and
vendors will be accurate. In addition, many commentators believe that
there will be a significant amount of litigation arising out of "year 2000
readiness" issues. Because of the unprecedented nature of this litigation,
it is impossible for the Company to predict the impact of such litigation
although it could be significant to the Company. In addition to the unique
reasonably likely worst case scenarios described by the specific
businesses, the Company believes its scenarios include: (i) corruption of
data contained in the Company's internal information systems; (ii) hardware
failures; (iii) the failure of infrastructure services provided by
government agencies and other third-party suppliers (including energy,
water, and transport); and (iv) health, environmental and safety issues
relating to its facilities. If any of these were to occur, the Company'
operations could be interrupted, in some cases for a sustained period of
time. These interruptions could be more severe in countries outside the
U.S. where the Company does sizeable business.
The Company and its businesses are preparing contingency plans to deal with
these worst case scenarios. The Company has operations around the world
and is considering shifting operations to different facilities if there
were interruptions to operations in particular areas, countries or regions.
Cellular Subscriber Sector (CSS)
CSS, which designs and develops, manufactures and sells Motorola cellular
telephones, has completed its Year 2000 product review. All Motorola cellular
telephones currently on the market either: (i) do not contain internal date
storage, processing, or display capabilities and thus are not impacted by the
Year 2000 date change; or (ii) contain internal date storage, processing, or
display capabilities that are Year 2000 Ready. In addition, CSS has systems in
place to ensure that future cellular telephones sold by the Company will be Year
2000 Ready.
Cellular Infrastructure Group (CIG)
CIG designs and develops, manufactures, installs and services wireless
infrastructure equipment for cellular and personal communications networks.
Certain CIG products operate with date sensitivity. CIG is developing
appropriate hardware modifications and new versions of software to address
the Year 2000 issue. CIG expects to make upgrades (i.e., hardware
modifications and/or new software versions, as appropriate) available to
its operator customers by December 31, 1998. As CIG sells systems
throughout the world, trained technicians will be required in many
countries to install these upgrades. CIG is also developing "work-arounds"
for certain systems that will not be upgraded. A work-around gives the
operator necessary procedures to keep the system operating on and after
January 1, 2000. If a customer does not follow the recommended procedures,
in all probability, the system would not recognize certain dates properly,
which would affect the accuracy of the billing information. CIG has
concluded that some of its systems are too old to either upgrade or provide
a work-around for Year 2000 problems. CIG has notified (or made reasonable
efforts to notify) customers of those systems that conversions or work-
arounds will not be available, and is working with those customers to
provide alternate solutions.
Because outside vendors supply certain components and some portion of the
software for CIG-supplied wireless systems, an intensive plan to inventory
and have all such components and software tested was developed. The plan
includes conversion and deployment, where necessary, consistent with the
above timetable. Further, vendors whose parts are not Year 2000 compliant
will be replaced.
Management believes that its most reasonably likely worst case scenario
related to the Year 2000 problem is the inability of CIG to upgrade all
systems before January 1, 2000 due to the significant number of customer
locations to be visited. As a result, certain data routinely available
from those systems could be inaccurate on and after January 1, 2000 (i.e.,
until upgraded). As a result, CIG could potentially be sued as the
supplier of those systems, although its efforts to identify its customers
and provide software solutions should reduce these risks.
Land Mobile Products Sector (LMPS)
LMPS manufactures and sells two-way voice and data products and systems for
a variety of worldwide applications. Principal customers for two-way
products include public safety agencies (police, fire, etc.), utilities,
diverse industrial companies, transportation companies and companies in
various other industries. LMPS is also selling products in an emerging
consumer two-way radio market. This segment also sells iDEN(Registered)
products around the world.
All products currently shipping from LMPS factories are "year 2000 ready"
with a few minor exceptions, and all customers buying exceptions are fully
informed of what they are purchasing before shipments are made. Some older
products operate with date sensitivity. These include legacy Special
Products (SP's), "911 Systems" and the iDEN system. The iDEN system is
expected to be Year 2000 Ready when a new system release is made in May
1999. The customers involved with this product line are being informed of
these product developments. LMPS has notified customers of certain of its
"911 Systems" in the U.S. that their systems are not fully Year 2000 Ready.
New software for these systems and the code is expected to be available in
January 1999 and installations of such software will continue through the
end the third quarter of 1999. SP's are communication systems designed
specifically for particular customers. LMPS cannot assess whether those
systems are Year 2000 Ready because the systems must be tested where they
are located. LMPS is contacting the customer and developing solutions,
usually software updates, to make these systems Year 2000 Ready.
Management believes that the most reasonably likely worst case scenario
involving its business is the failure of a public safety system on January
1, 2000 (or thereafter). As a result, LMPS could potentially be sued as
the supplier of those systems. Management believes that its efforts to
identify the customers of these systems and provide software solutions
should reduce these risks.
Messaging, Information and Media Sector (MIMS)
MIMS, through its Messaging Systems Products Group (MSPG), manufactures and
sells paging and wireless subscriber products and paging and wireless data
infrastructure equipment. MIMS also manufactures and sells modems, data
communication devices and equipment that enables voice video and high-speed
data communications over cable networks.
MSPG products currently being shipped are Year 2000 Ready with the
exception of certain infrastructure products being sold in Asian markets.
MSPG has identified such infrastructure products to purchasers and has a
plan to make such products Year 2000 Ready. MSPG has posted on its web-
site and sent in printed form to inquiring customers lists of all its
products that have no internal calendars or clocks and are not materially
impacted by the Year 2000, all products that have such clocks and calendars
and are Year 2000 Ready, and a third group of products that have reached
the end of their supported life and, therefore, have not been tested for
Year 2000 Readiness. Certain infrastructure products that require an
upgrade to be Year 2000 Ready have been listed on a web-site. Customers
have been encouraged to contact MSPG to obtain upgrades to achieve Year
2000 Readiness for certain products.
MSPG's management believes the worst case scenario is that a mission
critical page may not be sent or received as a result of lack of Year 2000
Readiness of messaging software, infrastructure or pagers and the Company
is sued. Management believes that its efforts at communicating to MSPG
customers the potential for such failures will reduce the likelihood of
occurrence.
All data communications equipment and modems sold by MIMS are Year 2000
ready. Older data communications and modems products can be made Year 2000
ready by currently available software upgrades. Management does not
believe that any of its critical suppliers are at risk because of Year 2000
readiness issues based on assurances from those suppliers.
Space and Systems Technology Group (SSTG)
SSTG is engaged in the design, development and production of advanced
electronic communications systems and products. This discussion refers to
SSTG, other than its satellite business. SSTG has conducted a
comprehensive review of all products and systems sold under contracts and
purchase orders executed since January 1, 1990. Through that process it
has been determined that relatively few of SSTG's products or systems
contain date-sensitive functions that are expected to be adversely affected
by the Year 2000 issue. SSTG is addressing each of the few products or
systems with problems in one of four ways. First, SSTG has developed, or
is in the process of developing, fixes for some of the Year 2000 problems
discovered and is offering those fixes to its customers. Second, in some
cases, SSTG is working directly with customers who have funded specific
testing and corrective actions to products or systems they purchased or are
purchasing under contracts with SSTG. Some of these customer-funded fixes
are not expected to be complete until the middle of 1999. Third, "work-
arounds" have been communicated to certain customers when a more elaborate
fix is not necessary for them to keep their products or systems operating
on and after January 1, 2000. Finally, SSTG has concluded that some of its
products and systems are too old to either fix or provide a work-around for
Year 2000 problems. SSTG has notified (or made reasonable efforts to
notify) customers of those products or systems that fixes or work-arounds
will not be available.
SSTG believes the most reasonably likely worst case scenario related to the
Year 2000 problem is the failure of a few products or systems to operate
for a short period of time after January 1, 2000. As a result, SSTG may be
sued as a manufacturer of products or systems that failed. Many of these
products or systems were sold to government customers. Management believes
it generally does not have legal liability to these customers.
The satellite business designs, develops, manufacturers, integrates,
deploys, operates and maintains space-based telecommunication systems and
related ground system components. At present, the business consists of one
operating system known as the Iridium System. This system contains date-
sensitive functions. The satellite business is still actively involved in
the assessment stage of the Year 2000 issue, and is not yet prepared to
comment on the Year 2000 readiness of the system. The assessment effort is
expected to be completed by December 31, 1998. The satellite business
expects to make any necessary hardware and/or software upgrades available
to customers by July 1, 1999. The satellite business anticipates that it
would need to supply technicians to install any such upgrades, and does not
anticipate any difficulty in meeting any potential installation needs. The
satellite business is keeping its customers aware of the status of its
assessment efforts.
Semiconductor Products Sector (SPS)
SPS manufactures various types of semiconductors. SPS has reviewed these
semiconductors to determine if they are Year 2000 Ready. Most of the SPS
products do not have Year 2000 Readiness issues because they do not contain
date-sensitive functions. SPS has identified approximately 70
semiconductors that contain a real-time clock-function that utilize a two-
digit date field to track "years". SPS is making information on these real
time clocks available to its customers, including the posting of
information on the Motorola Year 2000 web-site. In addition, it is
possible that a semiconductor may experience "year 2000 readiness" issues
due to the manner in which a customer has programmed the semiconductor or
due to the manner in which the semiconductor is incorporated into a
customer system or product. SPS is also making information available to
its customers on this potential Year 2000 readiness issue.
Literature on the Year 2000 problem references what is referred to as the
"embedded chip" Year 2000 problem or the "embedded systems" Year 2000
problem. (The word "chip" is a short-hand reference for a semiconductor
product.) Many common electronic products contain "chips" or "systems"
that are incorporated or "embedded" into the product. If these "chips" or
"systems" experience Year 2000 Readiness issues, due to the manner in which
they are programmed, the product may malfunction. Because this programming
is customer defined, the extent to which the malfunctioning of these
products may occur due to a Year 2000 Readiness issue with an SPS
semiconductor is unknown at this time.
Automotive, Component, Computer and Energy Sector (ACCES)
ACCES manufactures and sells automotive and industrial electronics; energy
storage products and systems; ceramic and quartz electronic components;
electronic fluorescent ballasts; and multifunction embedded board and
system products. ACCES continues to assess the "year 2000 readiness" of
its products manufactured within the last eight years and its manufacturing
facilities. Other than embedded board and system products, and Global
Positioning System receivers, these products do not contain date-sensitive
functions, excluding customer provided software incorporated in such
products, for which ACCES' does not have sufficient information in most
cases to conduct an evaluation of whether such functions are included.
Motorola has advised its customers that responsibility for evaluating this
software is that of the customer.
In the case of Global Positioning System receivers, engineering analysis is
complete, and the products are Year 2000 Ready. The operation of such
receivers are dependent on the proper functioning of the Global Positioning
satellite system maintained and operated by the Federal government, and is
outside of the control of Motorola. There is a second date related issue
for these products, relating to the "1024 weeks" method of date calculation
used in the satellites, which will potentially impact the GPS in August
1999. While the products are believed compliant, full evaluation of the
products for this date rollover phenomenon remains underway at this time.
In the case of embedded boards, systems and software products that are
manufactured by the Motorola Computer Group (MCG), some of the older
products have failed to meet Motorola's definition of Year 2000 Ready. In
many of these cases, MCG has made fixes available to its customers to cure
the problem. Although it is difficult to measure any potential liability
from non-Year 2000 Ready products, MCG believes the risks are relatively
small based on the following. Since October 1, 1998, MCG has ceased
shipping any products that are not Year 2000 Ready without a waiver from
the customer. Fixes have been made available for products that may remain
under warranty after 1999. There is some risk that customers could claim
damages for products which are outside the warranty period, but MCG
believes the risk of liability is low since many of these products have
been updated over the years with products that are Year 2000 Ready. The
other potential liability lies in the fact that in many cases it is not
known in what applications the products are being used. There is always
the possibility that some products have been incorporated into critical use
applications, but all of the known cases are being evaluated.
MCG has deferred a number of small projects until the Year 2000 Assessment
Program is complete. While it intends to reinstate these projects in 1999,
the delay could impact the efficiencies at MCG that the projects were
intended to address.
The Company has made forward-looking statements regarding its Year 2000
Program. Those statements include: the Company's expectations about when
it will be "year 2000 ready"; the Company's expectations about the impact
of the Year 2000 problem on its ability to continue to operate on and after
January 1, 2000; the readiness of its suppliers; the costs associated with
the Year 2000 Program; and worst case scenarios. The Company has described
many of the risks associated with those forward-looking statements above.
However, the Company wishes to caution the reader that there are many
factors that could cause its actual results to differ materially from those
stated in the forward-looking statements. This is especially the case
because many aspects of its Year 2000 Program are outside its control such
as the performance of many thousands of third-party suppliers and of
customers and end users. As a global company it operates it many different
countries, some of which may not be addressing the Year 2000 problem to the
same extent as in the United States. As a result, there may be unforeseen
problems in different parts of the world. All of these factors make it
impossible for the Company to ensure that it will be able to resolve all
year 2000 problems in a timely manner to avoid materially adversely
affecting its operations or business or exposing the Company to third-party
liability.
Euro Conversion:
On January 1, 1999, eleven of the fifteen member countries of the European
Union are scheduled to establish fixed conversion rates between their
existing national currencies and the euro. The participating countries
have agreed to adopt the euro as their common legal currency on that date.
Until January 1, 2002, either the euro or a participating country's present
currency (a "national currency") will be accepted as legal currency. On
January 1, 2002, euro-denominated bills and coins will be issued and
national currencies will be withdrawn from circulation.
The Company has formed a task force to assess the potential impact to the
Company that may result from the euro conversion. In addition to tax and
accounting considerations, the Company is assessing the potential impact
from the euro conversion in a number of areas, including the following: (1)
the technical challenges to adapt information technology and other systems
to accommodate euro-denominated transactions; (2) the competitive impact of
cross-border price transparency, which may make it more difficult for
businesses to charge different prices for the same products on a country-
by-country basis; (3) the impact on currency exchange costs and currency
exchange rate risk; and (4) the impact on existing contracts.
Since the task force is still in its assessment phase, the Company cannot
yet predict the anticipated impact of the euro conversion on the Company.
Outlook:
The Company believes that the manufacturing consolidation, cost reduction
and restructuring programs initiated in the second quarter, which generated
an estimated $140 million in savings during the third quarter, are on track
to achieve the goal of an annualized savings rate of at least $750 million
by mid-1999. The Company also expects to benefit from its broadening
portfolio of digital cellular phones, new efficiencies resulting from the
Communications Enterprise and its focus on integrated customer solutions
and the refocusing of the Company's semiconductor business.
The Company continues to be affected by the weak economic conditions in
Asia and the slowing of global economic growth. If these adverse economic
conditions persist or deteriorate, Motorola's financial performance may be
negatively impacted.
Business Risks:
Statements that are not historical facts are forward-looking and involve
risks and uncertainties. These include the statements in "Outlook" and
statements about Motorola's manufacturing consolidation, cost reduction and
restructuring programs and the impact of such programs, Iridium's financing
needs, Motorola's guarantee of Iridium bank financing, deployment and
commercialization of Iridium (Registered) products and services, the
Company's 1998 fixed asset expenditures, the impact of Year 2000 issues,
and the impact of euro conversion issues. Motorola wishes to caution the
reader that the factors below and those in Motorola's 1998 Proxy Statement
on pages F-8 and F-9 and in its other SEC filings could cause Motorola's
results to differ materially from those stated in the forward-looking
statements. These factors include: (i) the ability of Motorola to
implement manufacturing consolidations, cost reductions and restructuring
actions in a timely manner and the success of those efforts; (ii) the
ability of the Company to integrate its businesses to reduce costs and
increase efficiencies; (iii) unanticipated impact of the manufacturing
consolidation, cost reduction and restructuring programs on productivity
and the ability of the company to retain, and where necessary recruit,
employees; (iv) the timing of the end of the worldwide semiconductor
industry recession; (v) the success of ongoing efforts to stabilize
economic conditions in Asia and other emerging markets; (vi) pricing
pressures and demand for the company's products, particularly semiconductor
and messaging products, especially in light of the current economic
conditions in Asia and other emerging markets; (vii) the potential that the
impact of weakened currencies in Southeast Asia could further impact
countries where Motorola does a sizable amount of business, including China
and Japan; (viii) the potential that deteriorating economic conditions in
Japan could continue or worsen; (ix) the ability of Motorola's cellular
businesses to continue to transition to digital products and gain market
share; (x) product and technology development and commercialization risks,
including for newer digital products, Iridium(Registered) satellite
deployment and software development and Iridium products and services; (xi)
the uncertainty of steady growth in emerging markets; (xii) the success of
the Iridium project and the impact on Motorola's financial
performance;(xiii) unanticipated changes in demand for products; (xiv)
continued weak demand for paging products in North America and China; (xv)
unanticipated impact of Year 2000 issues, particularly the failure of
products of major suppliers to function properly in the Year 2000; and
(xvi) unanticipated impact of euro conversion issues.
IRIDIUM(Registered) is a registered trademark and service mark of
Iridium LLC.
MacOS(Registered) is a registered trademark of Apple Computer, Inc.
LYONs(Trademark) is a trademark of Merrill Lynch & Co.
All other brand names mentioned are registered trademarks of their
respective holders and are herein acknowledged.
Motorola, Inc. and Subsidiaries
Information by Industry Segment
(Unaudited)
(Dollars In millions)
Summarized below are the Company's segment sales as defined by industry
segment for the three-month and nine-month periods ended September 26, 1998
and September 27, 1997:
Segment Sales
for the three months ended
Sept. 26, Sept. 27,
1998 1997 % Change
Cellular Products $3,027 $2,778 9
Semiconductor Products 1,773 2,074 (14)
Land Mobile Products 1,323 1,280 3
Messaging, Information and
Media Products 552 885 (38)
Other Products 1,118 1,120 ---
Adjustments and eliminations (641) (784) (18)
Industry segment totals $7,152 $7,353 (3)
Nine months ended
Sept. 26, Sept. 27,
1998 1997 % Change
Cellular Products $8,619 $8,315 4
Semiconductor Products 5,414 5,914 (8)
Land Mobile Products 3,936 3,417 15
Messaging, Information and
Media Products 2,015 2,944 (32)
Other Products 3,095 3,162 (2)
Adjustments and eliminations (2,018) (2,236) (10)
Industry segment totals $21,061 $21,516 (2)
Part II - Other Information
Item 1 - Legal Proceedings.
Motorola has been a defendant in several cases arising out of its
manufacture and sale of portable cellular telephones. On October 6, 1998,
the Illinois Supreme Court denied plaintiff's petition for leave to appeal
in Schiffner v. Motorola, a purported class action by purchasers of
portable cellular phones alleging economic losses, and thereby left
standing the lower court judgment in Motorola's favor.
On October 16, 1998, Pennsylvania Bancshares, Inc. et al. v. Motorola,
Inc., et al., a purported class action filed on October 10, 1995 in the
Court of Common Pleas, Montgomery County, Pennsylvania, was dismissed with
prejudice as to all claims for monetary relief and without prejudice as to
all claims for equitable relief. Plaintiffs alleged that Motorola
systematically engages in deceptive trade practices, including without
limitation, intentionally misrepresenting the quality of certain types of
cellular telephones.
See Item 3 of the Company's Form 10-K for the fiscal year ended December
31, 1997 and Item 1 of Part II of the Company's Form 10-Q for the periods
ended March 28, 1998 and June 27, 1998 for additional disclosures regarding
pending matters.
In the opinion of management, the ultimate disposition of these matters
will not have a material adverse effect on the consolidated financial
position, liquidity or results of operations of Motorola.
Item 2 - Changes in Securities.
Adoption of New Preferred Share Purchase Rights Agreement
On November 5, 1998, the Company announced that its Board of Directors
adopted a new Preferred Share Purchase Rights Agreement to replace the
existing plan that expired November 20, 1998. Under the plan, rights will
attach to existing shares of common stock, $3 par value, of the Company at
the rate of one right for each share of common stock held by shareholders
of record November 20, 1998. The rights will expire in November 2008.
The plan is designed to help ensure that all Motorola shareholders receive
fair treatment in the event of an unsolicited attempt to gain control of
the Company. The new plan has not been adopted in response to any specific
takeover threat, and the Board of Directors is unaware of any effort by a
third party to acquire control of the Company.
Each right will entitle a shareholder to buy, under certain circumstances,
one unit of a share of preferred stock for $200. The rights generally will
be exercisable only if a person or group acquires 10 percent or more of the
Company's common stock or begins a tender or exchange offer for 10 percent
or more of the Company's common stock. If a person acquires beneficial
ownership of 10% or more of the Company's common stock, all holders of
rights other than the acquiring person, will be entitled to purchase the
Company's common stock (or, in certain cases, common equivalent shares) at
a 50% discount. Motorola may redeem the new rights at a price of one cent
per right. A summary of the new rights plan will be mailed to
shareholders.
Item 3 - Defaults Upon Senior Securities.
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5 - Other Information.
Redemption of $368 million of LYONs due 2013
On September 28, 1998, the Company redeemed $368 million principal amount
at maturity of its outstanding LYONs due 2013 at the election of the
holders thereof. The Company made a total payment of $263 million to
redeem these LYONs. The proceeds used for this redemption were obtained
entirely from the issuance of commercial paper. As of October 15, 1998,
approximately $110 million principal amount at maturity of the Company's
LYONs due 2013 remained outstanding.
Sale of 5.80% Notes due October 15, 2008
On October 20, 1998, the Company sold an aggregate face principal amount at
maturity of $325 million of 5.80% Notes due October 15, 2008. The net
proceeds to the Company from the issuance and sale of the Notes were $322
million. The Company intends to use the proceeds to reduce short-term
indebtedness and for other general corporate purposes.
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits
4 Specimen of 5.80% Note due October 15, 2008
12 Calculation of Ratio of Earnings to Fixed Charges of the Company
27 Financial Data Schedule (filed only electronically with the SEC)
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated
November 5, 1998.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOTOROLA, INC.
(Registrant)
Date: November 10, 1998 By: /s/ Anthony Knapp
Anthony Knapp
Corporate Vice President and Controller
(Chief Accounting Officer and Duly
Authorized Officer of the Registrant)
EXHIBIT INDEX
Number Description of Exhibits
4 Specimen of 5.80% Note due October 15, 2008
12 Calculation of Ratio of Earnings to Fixed Charges of the Company
27 Financial Data Schedule (filed only electronically with the SEC)
Exhibit 4
FORM OF NOTE
MOTOROLA, INC.
5.80 percent Note Due October 15, 2008
Unless and until this certificate is exchanged in whole or in part for
Notes in definitive registered form, this Note may not be transferred
except as a whole by The Depository Trust Company, a New York corporation
("DTC" or the "Depositary"), to its nominee or by its nominee to DTC or
another nominee of DTC or by DTC or any such nominee to a successor
depository or a nominee of such successor depository. Any certificate
issued in exchange herefor shall be registered in the name of Cede & Co. or
in such other name as is requested by an authorized representative of DTC
(and any payment in respect hereof shall be made to Cede & Co. or to such
other entity as is requested by an authorized representative of DTC).
MOTOROLA, INC., a Delaware corporation (the "Issuer", which term
includes any successor corporation under the Senior Indenture hereafter
referred to), for value received, hereby promises to pay to Cede & Co. or
registered assigns, at the office or agency of the Issuer in the Borough of
Manhattan, The City of New York, or at such other locations as the Issuer
may from time to time designate, the principal sum of THREE HUNDRED TWENTY-
FIVE MILLION DOLLARS on October 15, 2008, in such coin or currency of the
United States of America as at the time of payment shall be legal tender
for the payment of public and private debts, and to pay interest, semi-
annually on April 15 and October 15 of each year, commencing April 15,
1999, on the original principal amount hereof at said office or agency, in
like coin or currency, at the rate per annum specified in the title of this
Note, from the April 15 or the October 15, as the case may be, next
preceding the date of this Note to which interest has been paid or duly
provided for, unless the date hereof is a date to which interest has been
paid or duly provided for, in which case from the date of this Note, or
unless no interest has been paid on the Notes (as defined below) or duly
provided for, in which case from October 20, 1998, until payment of the
principal amount hereof has been made or duly provided for; provided, that
payment of interest may be made at the option of the Issuer by check mailed
by first class mail to the address of the person entitled thereto as such
address shall appear on the Security register. Notwithstanding the
foregoing, if the date hereof is after April 1 or October 1 as the case may
be, and before the following April 15 or October 15, this Note shall bear
interest from such April 15 or October 15; provided, that if the Issuer
shall default in the payment of interest due on such April 15 or October
15, then this Note shall bear interest from the next preceding April 15 or
October 15, to which interest has been paid or duly provided for or, if no
interest has been paid on the Notes or duly provided, for, from October 20,
1998. The interest so payable on any April 15 or October 15, will, subject
to certain exceptions provided in the Senior Indenture referred to on the
reverse hereof, be paid to the person in whose name this Note (or one or
more predecessor Notes) is registered at the close of business on the April
1 or October 1 (whether or not a Business Day), as the case may be, next
preceding such April 15 or October 15. Interest will be computed on the
basis of a 360-day year of twelve 30-day months.
Reference is made to the further provisions of this Note set forth on
the reverse hereof. Such further provisions shall for all purposes have
the same effect as though fully set forth at this place.
This Note shall not be valid or become obligatory for any purpose
until the certificate of authentication hereon shall have been executed by
the Trustee under the Senior Indenture referred to on the reverse hereof by
manual signature.
IN WITNESS WHEREOF, Motorola, Inc. has caused this instrument to be
signed by one of its duly authorized officers and has caused a facsimile of
its corporate seal to be affixed hereunto or imprinted hereon.
MOTOROLA, INC.
By: _______________
Its: _______________
ATTEST:
____________________
Its: _______________
TRUSTEE'S CERTIFICATE
OF AUTHENTICATION
This is one of the Securities referred to in
the within-mentioned Senior Indenture.
HARRIS TRUST AND SAVINGS BANK,
as Trustee
By: ______________
Its: ______________
[REVERSE OF NOTE]
MOTOROLA, INC.
5.80 percent Note due October 15, 2008
This Note is one of a duly authorized issue of debentures, notes,
bonds or other evidences of indebtedness of the Issuer (hereinafter called
the "Securities") of the series hereinafter specified, all issued or to be
issued under and pursuant to a Senior Indenture dated as of May 1, 1995
(herein called the "Senior Indenture"), duly executed and delivered by the
Issuer to Harris Trust and Savings Bank, as Trustee (herein called the
"Trustee"), to which Senior Indenture and all indentures supplemental
thereto reference is hereby made for a description of the rights,
limitations of rights, obligations, duties and immunities thereunder of the
Trustee, the Issuer and the Holders of the Securities. The Securities may
be issued in one or more series, which different series may be issued in
various aggregate principal amounts, may mature at different times, may
bear interest (if any) at different rates, may be subject to different
redemption provisions (if any) and may otherwise vary as provided in the
Senior Indenture. This Note is one of a series designated as the 5.80%
Notes due October 15, 2008 (the "Notes") of the Issuer, limited in
aggregate principal amount at maturity to $325,000,000.
Except as otherwise provided in the Senior Indenture, this Note will
be issued in global form only registered in the name of the Depositary or
its nominee. This Note will not be issued in definitive form, except as
otherwise provided in the Senior Indenture, and ownership of this Note
shall be maintained in book-entry form by the Depositary for the accounts
of participating organizations of the Depositary.
In case an Event of Default with respect to the Notes shall have
occurred and be continuing, the principal hereof may be declared, and upon
such declaration shall become, due and payable, in the manner, with the
effect and subject to the conditions provided in the Senior Indenture.
The Senior Indenture contains provisions permitting the Issuer and the
Trustee, with the consent of the Holders of not less than a majority in
aggregate principal amount of the Securities of all series issued under
such Senior Indenture then Outstanding and affected, voting as one class,
to add any provisions to, or change in any manner or eliminate any of the
provisions of, such Senior Indenture or modify in any manner the rights of
the Holders of the Securities of each series so affected; provided that the
Issuer and the Trustee may not, without the consent of the Holder of each
Security affected thereby, (i) extend the stated maturity of the principal
of any Security, or reduce the principal amount thereof or reduce the rate
or extend the time of payment of interest thereon, or reduce any amount
payable on redemption thereof or change the currency in which the principal
thereof (including any amount in respect of original issue discount),
premium, if any, or interest thereon is payable or reduce the amount of any
original issue discount security payable upon acceleration or provable in
bankruptcy or impair the right to institute suit for the enforcement of any
payment on any Security when due or (ii) reduce the aforesaid percentage in
principal amount of Securities of any series issued under such Senior
Indenture, the consent of the Holders of which is required for any such
modification. It is also provided in the Senior Indenture that, with
respect to certain defaults or Events of Default regarding the Securities
of any series, prior to any declaration accelerating the maturity of such
Securities, the Holders of a majority in aggregate principal amount
Outstanding of the Securities of such series (or, in the case of certain
defaults or Events of Default, all or certain series of the Securities) may
on behalf of the Holders of all the Securities of such series (or all or
certain series of the Securities, as the case may be) waive any such past
default or Event of Default and its consequences. The preceding sentence
shall not, however, apply to a default in the payment of the principal or
interest on any of the Securities. Any such consent or waiver by the
Holder of this Note (unless revoked as provided in the Senior Indenture)
shall be conclusive and binding upon such Holder and upon all future
Holders and owners of this Note and any Notes which may be issued in
exchange or substitution hereof or on registration of transfer hereof,
irrespective of whether or not any notation thereof is made upon this Note
or such other Notes.
No reference herein to the Senior Indenture and no provision of this
Note or of the Senior Indenture shall alter or impair the obligation of the
Issuer, which is absolute and unconditional, to pay the principal of and
interest on this Note in the manner, at the respective times, at the rate
and in the coin or currency herein prescribed.
The Notes are issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof at the office or
agency of the Issuer in the Borough of Manhattan, The City of New York, or
at such other locations as the issuer may from time to time designate, and
in the manner and subject to the limitations provided in the Senior
Indenture, but without the payment of any service charge, Notes may be
exchanged for a like aggregate principal amount of Notes of other
authorized denominations.
The Notes are not redeemable and are not entitled to any sinking fund.
Upon due presentment for registration of transfer of this Note at the
office or agency of the Issuer in the Borough of Manhattan, The City of New
York, or at such other locations as the Issuer may from time to time
designate, a new Note or Notes of authorized denominations for an equal
aggregate principal amount will be issued to the transferee in exchange
therefor, subject to the limitations provided in the Senior Indenture,
without charge except for any tax or other governmental charge imposed in
connection therewith.
The Issuer, the Trustee and any authorized agent of the Issuer or the
Trustee may deem and treat the registered Holder hereof as the absolute
owner of this Note (whether or not this Note shall be overdue and
notwithstanding any notation of ownership or other writing hereon), for the
purpose of receiving payment of, or on account of, the principal hereof and
subject to the provisions on the face hereof, interest hereon, and for all
other purposes, and none of the Issuer, the Trustee or any authorized agent
of the Issuer or the Trustee shall be affected by any notice to the
contrary.
No recourse under or upon any obligation, covenant or agreement of the
Issuer in the Senior Indenture or any indenture supplemental thereto or in
any Note, or because of the creation of any indebtedness represented
thereby, shall be had against any incorporator, stockholder, officer or
director, as such, of the Issuer or of any successor corporation, either
directly or through the Issuer or any successor corporation, under any rule
of law, statute or constitutional provision or by the enforcement of any
assessment or by any legal or equitable proceeding or otherwise, all such
liability being expressly waived and released by the acceptance hereof and
as part of the consideration or the issue hereof.
This Note shall for all purposes be governed by, and construed in
accordance with, the laws of the State of New York.
Terms used herein which are defined in the Senior Indenture shall have
the respective meanings assigned thereto in the Senior Indenture.
* * * *
FOR VALUE RECEIVED, the undesigned hereby sell(s), assign(s) and
transfer(s) unto:
(Please insert social security or other identifying number of assignee)
(Please print or type name and address including zip code of assignee)
the within Note and all rights thereunder, hereby irrevocably constituting
and appointing such person attorney to transfer such Note on the books of
the Issuer, with full power of substitution in the premises.
Dated: ____________ Signed: ________________________________________
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the within Note in every particular without
alteration or enlargement or any change whatsoever.
Signature Guarantee:
Exhibit 12
Motorola, Inc.
Ratio of Earnings to Fixed Charges
Six Months Ended Years Ended December 31,
June 27, June 28,
(In Millions) 1998 1997 1997 1996 1995 1994 1993
Pretax Income (1) ($1,699) $948 $1,796 $1,810 $3,195 $2,447 $1,481
Capitalized
interest $0 ($1) $0 $0 $0 $0 $0
Fixed charges $206 $157 $332 $357 $302 $277 $254
(as calculated below)
Earnings (2) ($1,493) $1,104 $2,128 $2,167 $3,497 $2,724 $1,735
Fixed charges:
Interest expense $160 $109 $229 $263 $228 $215 $203
Rent expense
interest factor $46 $48 $103 $94 $74 $62 $51
Total fixed
charges (3) $206 $157 $332 $357 $302 $277 $254
Ratio of earnings
to fixed charges --(4) 7.0 6.4 6.1 11.6 9.8 6.8
(1)-After adjustments required by Item 503 (d)(3)(ii),(iii) and (iv) of SEC
Regulation S-K.
(2)-As defined in Item 503 (d)(3) of SEC Regulation S-K.
(3)-As defined in Item 503 (d)(4)(i) of SEC Regulation S-K.
(4)-Earnings were inadequate to cover fixed charges by $1.7 billion.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated Balance Sheet as of 09/26/98 and the Consolidated Statement of
Operations for the nine months ended 09/26/98 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-26-1998
<CASH> 1,257
<SECURITIES> 250
<RECEIVABLES> 5,213
<ALLOWANCES> (190)
<INVENTORY> 4,290
<CURRENT-ASSETS> 14,220
<PP&E> 22,408
<DEPRECIATION> (12,451)
<TOTAL-ASSETS> 28,930
<CURRENT-LIABILITIES> 12,285
<BONDS> 2,133
0
0
<COMMON> 1,801
<OTHER-SE> 10,089
<TOTAL-LIABILITY-AND-EQUITY> 28,930
<SALES> 21,061
<TOTAL-REVENUES> 0
<CGS> 14,987
<TOTAL-COSTS> 20,914<F1>
<OTHER-EXPENSES> 1,595<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 153
<INCOME-PRETAX> (1601)
<INCOME-TAX> (480)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1121)
<EPS-PRIMARY> (1.870)
<EPS-DILUTED> (1.870)
<FN>
<F1>Total cost includes: Cost of goods sold, selling & admin expense, total exch
(gain)/loss.
<F2>Other expense includes: Depreciations expenses.
</FN>
</TABLE>
