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 April 3, 1999
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 April 3, 1999:
Class Number of Shares
Common Stock; $3 Par Value 603,003,471
Motorola, Inc. and Subsidiaries
Index
Part I
Financial Information Page
Item 1 Financial Statements
Condensed Consolidated Statements of Earnings for
the Three-Month Periods Ended April 3, 1999 and
March 28, 1998 3
Condensed Consolidated Balance Sheets at
April 3, 1999 and December 31, 1998 4
Condensed Consolidated Statement of Stockholders'
Equity for the Three-Month Period Ended April 3, 1999 5
Condensed Consolidated Statements of Cash Flows for the
Three-Month Periods Ended April 3, 1999 and
March 28, 1998 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 28
Item 2 Changes in Securities 28
Item 3 Defaults Upon Senior Securities 28
Item 4 Submission of Matters to a Vote of Security Holders 29
Item 5 Other Information 29
Item 6 Exhibits and Reports on Form 8-K 29
Part I - Financial Information
Motorola, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(Unaudited)
(In millions, except per share amounts)
Three Months Ended
April 3, March 28,
1999 1998
Net sales $ 7,232 $ 6,886
Costs and expenses
Manufacturing and other
costs of sales 4,252 4,127
Selling, general and
administrative expenses 1,400 1,221
Research & development expenditures 744 703
Depreciation expense 550 540
Interest expense, net 42 38
Total costs and expenses 6,988 6,629
Earnings before income taxes 244 257
Income tax provision 73 77
Net earnings $ 171 $ 180
Net earnings per common share
Basic $ .28 $ .30
Diluted $ .28 $ .30
Weighted average common shares outstanding
Basic 602.1 597.4
Diluted 615.9 611.3
Dividends paid per share $ .12 $ .12
See accompanying notes to condensed consolidated financial statements.
Motorola, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In millions)
(Unaudited)
April 3, December 31,
1999 1998
Assets
Cash and cash equivalents $ 1,714 $ 1,453
Short-term investments 276 171
Accounts receivable, net 4,885 5,057
Inventories 3,636 3,745
Deferred income taxes 2,376 2,362
Other current assets 718 743
Total current assets 13,605 13,531
Property, plant and equipment, net 9,568 10,049
Other assets 6,490 5,148
Total assets $29,663 $28,728
Liabilities and Stockholders' Equity
Notes payable and current portion of
long-term debt $ 2,255 $ 2,909
Accounts payable 2,206 2,305
Accrued liabilities 5,880 6,226
Total current liabilities 10,341 11,440
Long-term debt 2,629 2,633
Deferred income taxes 1,778 1,188
Other liabilities 1,543 1,245
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely company-guaranteed debentures 484 --
Stockholders' Equity
Preferred stock, $100 par value issuable
in series --- ---
Common Stock, $3 par value 1,810 1,804
Additional paid-in capital 1,935 1,894
Retained earnings 8,353 8,254
Non-owner changes to equity 790 270
Total stockholders' equity 12,888 12,222
Total liabilities and stockholders' equity $29,663 $28,728
See accompanying notes to condensed consolidated financial statements.
Motorola, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
(In millions)
Non-Owner Changes To Equity
Common
Stock Fair Value
and Adjustment Foreign
Additional to Certain Currency
Paid-In Cost-Based Translation Retained
Capital Investments Adjustments Earnings
BALANCES AT 12/31/98 $3,698 $ 476 ($206) $8,254
Net earnings 171
Conversion of zero coupon notes 1
Fair value adjustment to
certain cost-based investments:
Reversal of prior period adjustment (476)
Recognition of current period
unrecognized gain 1,069
Change in foreign currency
translation adjustments (73)
Stock options exercised
and other 46
Dividends declared (72)
BALANCES AT 4/3/99 $3,745 $1,069 ($279) $8,353
See accompanying notes to condensed consolidated financial statements.
Motorola, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In millions)
Three Months Ended
April 3, March 28,
1999 1998
Operating
Net earnings $ 171 $ 180
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 550 540
Deferred income taxes 187 (35)
Amortization of debt discount and issue costs 2 2
Gain on disposition of investments in
affiliates (47) (90)
Change in assets and liabilities, net of
effects of acquisitions and dispositions:
Accounts receivable 172 (58)
Inventories 86 (312)
Other current assets 24 21
Accounts payable and accrued liabilities (451) (290)
Other assets and liabilities (18) 85
Net cash provided by operating activities $ 676 $ 43
Investing
Acquisitions and advances to affiliates $ (51) $ (111)
Proceeds from dispositions of investments
in affiliates 208 111
Capital expenditures (382) (684)
Proceeds from dispositions of property, plant and
equipment 148 57
(Purchases) sales of short-term investments (64) 46
Net cash used for investing activities $ (141) $ (581)
Financing
(Repayment of)proceeds from commercial paper and
short-term borrowings $ (654) $ 712
Proceeds from issuance of debt 10 5
Repayment of debt (16) (24)
Issuance of common stock 47 6
Issuance of preferred securities of subsidiary
trust 484 --
Payment of dividends (72) (72)
Net cash (used for)provided by financing activities $ (201) $ 627
Effect of exchange rate changes on cash and
cash equivalents $ (73) $ (25)
Net increase in cash and cash equivalents $ 261 $ 64
Cash and cash equivalents, beginning of period $1,453 $1,445
Cash and cash equivalents, end of period $1,714 $1,509
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 April 3, 1999 and for
the three-month periods ended April 3, 1999 and March 28, 1998, include, in
the opinion of management, all adjustments (consisting of normal recurring
adjustments and reclassifications) necessary to present fairly the
financial position, results of operations and cash flows at April 3, 1999
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, 1998.
The results of operations for the three-month period ended April 3, 1999
are not necessarily indicative of the operating results to be expected for
the full year.
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):
April 3, Dec. 31,
1999 1998
Finished goods $ 1,003 $ 1,033
Work in process and production materials 2,633 2,712
Inventories $ 3,636 $ 3,745
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 $1.1 billion, $1.8 billion and $700 million as of April 3,
1999; compared to an increase of $476 million, $787 million and $311
million as of December 31, 1998.
3. Supplemental Cash Flows Information
Cash paid for interest during the first quarters of 1999 and 1998 was $71
million and $60 million, respectively. Cash paid for income taxes during
the first quarters of 1999 and 1998 was $55 million and $158 million,
respectively.
4. Earnings Per Common Share
The following table presents a reconciliation of the numerators and
denominators of basic and diluted earnings per common share:
Three Months Ended
April 3, March 28,
(In millions, except per share amounts) 1999 1998
Basic earnings per common share:
Net earnings $ 171 $ 180
Weighted average common shares
outstanding 602.1 597.4
Per share amount $ .28 $ .30
Diluted earnings per common share:
Net earnings $ 171 $ 180
Add: Interest on zero coupon
notes, net $ -- $ 1
Net earnings as adjusted $ 171 $ 181
Weighted average common shares
outstanding 602.1 597.4
Add: Effect of dilutive securities
Stock options 12.5 7.7
Zero coupon notes 1.3 6.2
Diluted weighted average common
shares outstanding 615.9 611.3
Per share amount $ .28 $ .30
In the computation of diluted earnings per common share for the three
months ended April 3, 1999, the assumed conversion of the zero coupon notes
due 2009 was excluded because their inclusion would have been antidilutive.
5. Reorganization of Businesses
In the second quarter of 1998, the Company recorded a pre-tax charge of
$1.98 billion to cover restructuring costs of $1.275 billion and asset
impairments and other charges of $705 million. Restructuring costs include
costs to consolidate manufacturing operations throughout the Company; to
exit non-strategic, poorly-performing businesses; and to reduce employment
by a minimum of 15,000 from the approximately 150,000 employees worldwide
at the beginning of the second quarter of 1998. The following table
displays a rollforward to April 3, 1999, of the accruals established during
the second quarter of 1998:
Second Accruals at
Quarter 1998 Amounts April 3,
Initial Charges Used Reclassifications 1999
Consolidation of
manufacturing
operations $ 361 $ (177) $ (35) $ 149
Business exits 453 (101) (162) 190
Employee separations 461 (512) 197 146
Total restructuring $1,275 $ (790) $ --- 485
Asset impairments and
other charges 705 (544) --- 161
Totals $1,980 $(1,334) $ --- $ 646
Amounts in the Reclassifications column represent the reallocation of
accruals between categories and not increases in the initial charges.
These reallocations were due to reductions in the cost estimates for
consolidating manufacturing operations and exiting certain businesses
offset by higher than anticipated severance costs.
For the business exits category, inception-to-date utilization was $172
million, offset by $71 million of favorable adjustments related to: a
Semiconductor Products Segment technology agreement and the sale of the
Integrated Electronic Systems Sector's non-silicon component manufacturing
business to CTS Corp.
As of April 3, 1999, the Company has reduced employment by approximately
24,000 employees since the middle of 1998. Approximately 20,300 employees
have separated from the Company through a combination of voluntary and
involuntary severance programs and business exits related to these charges.
This includes a reduction of the Company's employee population by
approximately 4,200 people in connection with the sale of the non-silicon
component manufacturing business in the first quarter of 1999. Of the
20,300 separated employees, approximately 13,400 were direct employees, and
6,900 were indirect employees. Direct employees are primarily non-
supervisory production employees, and indirect employees are primarily non-
production employees and production managers. Remaining employee
reductions resulting from severance programs still to be completed will
more than likely be offset by expected additions to the Company's
engineering, marketing and other critical functions.
As the Company's 1998 comprehensive manufacturing consolidation, cost
reduction and restructuring programs reach their planned completion,
management continues to assess the estimated costs to complete these
programs. Management believes the remaining accruals are adequate to cover
these costs.
In 1997, the Company established restructuring accruals totaling $327
million to exit its retail analog modem business in Huntsville, AL, to exit
the MacOS(R)-compatible computer systems business, and to phase out
participation in the dynamic random access memory (DRAM) market. Through
April 3, 1999, $271 million of the accruals had been utilized, and $34
million had been reversed into income. Of the remaining $22 million,
approximately $8 million is expected to be used by the end of the second
quarter of 1999. The remaining $14 million relates to contract
contingencies arising from the Company's exit from the MacOS-compatible
computer systems business. Management believes the remaining accrual is
adequate to cover these matters.
6. Comprehensive Earnings
Comprehensive earnings for the three-month periods ended April 3, 1999 and
March 28, 1998 were $691 million and $321 million, respectively. The
current period unrecognized gain on cost-based investments of $1.1 billion
properly excludes a reclassification adjustment of $41.8 million, net of
tax, related to the sale of securities.
7. Trust Originated Preferred Securities(SM)
In February 1999, Motorola Capital Trust I, a Delaware statutory business
trust and wholly-owned subsidiary of the Company, sold 20 million Trust
Originated Preferred Securities(SM) ("TOPrS") to the public at an aggregate
offering price of $500 million. The Trust used the proceeds from this
sale, together with the proceeds from its sale of common stock to the
Company, to buy a series of 6.68% Deferrable Interest Junior Subordinated
Debentures due March 31, 2039 ("Subordinated Debentures") from the Company
with the same payment terms as the TOPrS. The Company, in turn, used the
$484 million of net proceeds from the sale of the Subordinated Debentures
to reduce short-term indebtedness.
(SM) "Trust Originated Preferred Securities" and "TOPrS" are service marks
of Merrill Lynch & Co., Inc.
8. Segment Information
Beginning in the first quarter of 1999, the Company changed the operating
segments it uses for financial reporting purposes as a result of
organizational changes implemented in its communications equipment
businesses. Historical segment data has been reworked to reflect these
changes. Summarized below are the Company's segment sales and operating
profit (loss) before taxes as defined by new reportable segment for the
three months ended April 3, 1999 and March 28, 1998.
Three Months Ended
Apr. 3, Mar. 28, %
1999 1998 Change
Segment Sales:
Personal Communications Segment $2,602 $2,412 8
Network Systems Segment 1,623 1,543 5
Commercial, Govt. and Industrial
Systems Segment 885 930 (5)
Semiconductor Products Segment 1,907 1,833 4
Other Products Segment 873 877 (1)
Adjustments & Eliminations (658) (709) (7)
Segment Totals $7,232 $6,886 5
% Of % Of
Sales Sales
Segment Operating Profit
(Loss) Before Taxes:
Personal Communications Segment $ 83 3 $ 67 3
Network Systems Segment 193 12 149 10
Commercial, Govt. and Industrial
Systems Segment 52 6 155 17
Semiconductor Products Segment 47 2 (58) (3)
Other Products Segment (91) (10) (59) (7)
Adjustments & Eliminations (8) 1 (9) 1
Segment Totals 276 4 245 4
General Corporate (32) -- 12 --
Earnings Before Income Taxes $ 244 3 $ 257 4
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, 1998.
Results of Operations:
Sales were $7.2 billion in the first quarter of 1999, up 5 percent from
$6.9 billion a year earlier. Earnings were $171 million, or 28 cents per
share in 1999, compared with $180 million, or 30 cents per share in the
year-ago quarter.
First-quarter net margin on sales was 2.4 percent in 1999, compared with
2.6 percent a year ago.
Personal Communications Segment sales rose 8 percent to $2.6 billion and
orders were 16 percent higher. Operating profits increased 23 percent to
$83 million, as last year's results included a charge relating to exiting a
product line. Excluding that charge, operating profits were lower than a
year ago, due to the performance of the paging business.
Sales of digital wireless telephones increased very significantly, while
sales of analog wireless telephones were significantly lower, as the
wireless industry's transition to digital technology continues. Digital
wireless telephone sales represented more than 80 percent of wireless
telephone sales in the quarter. Growth was particularly strong for CDMA
(Code Division Multiple Access) telephones, but increased in all digital
technology categories. Paging product sales were significantly lower,
while consumer two-way radio product sales were significantly higher.
Sales were higher in all geographic markets, led by Asia.
Network Systems Segment sales increased 5 percent to $1.6 billion and
orders were up 5 percent. Operating profits rose 29 percent to $193
million.
Sales of GSM (Global System for Mobile Communications) and CDMA systems
increased very significantly. Sales were higher in Japan for PDC (Personal
Digital Cellular) systems, lower for iDEN(R) systems and very significantly
lower for analog systems. Digital infrastructure sales now comprise over
95 percent of terrestrial systems revenue. Sales also increased for
satellite communications infrastructure equipment. By geographic market,
sales were up very significantly in Europe, significantly higher in Japan
and lower in Asia and the Americas.
Commercial, Government and Industrial Systems Segment sales declined 5
percent to $885 million and orders were 26 percent higher. Operating
profits decreased to $52 million, as last year's operating profits included
a gain on the sale of a one-third interest in the shared network operation
of Motorola Communication Israel Ltd. Excluding that gain, operating
profits would still have been lower.
Two-way radio sales increased in North America, were lower in Europe and
Asia, and declined significantly in Latin America. Systems Solutions Group
sales also were lower, due in part to lower revenue on U.S. government
contracts.
Semiconductor Products Segment sales increased 4 percent to $1.9 billion
and orders were 11 percent higher. The segment recorded an operating
profit of $47 million compared with an operating loss of $58 million a year
ago.
Orders increased in Asia, the Americas and Japan, and declined in Europe.
Orders were higher in all major market segments, led by wireless
communications, networking and computing, transportation and semiconductor
components.
On May 11, 1999, the Company announced that Texas Pacific Group has agreed
to lead a management buyout of the segment's Semiconductor Components
Group. Under the terms of the proposed transaction, the Company would
receive total proceeds valued at approximately $1.6 billion, comprised of
cash, notes and approximately 10% of the stock of the new company. The
transaction is expected to be completed in the second half of 1999, subject
to regulatory and other approvals.
Integrated Electronic Systems Sector sales were flat and orders were 4
percent lower. Operating profits were flat. These results include
businesses that the sector has exited. For continuing businesses, sales
were up 10 percent, orders were up 5 percent and operating profits were
lower, due to increased investment in Telematics automotive communications.
The Telematics Communications Group had higher sales and orders, as its
products were more widely accepted by the automotive market. The
previously announced sale of the sector's non-silicon component
manufacturing business was completed in the quarter. The sector's results
are reported as part of the "Other Products" segment.
Internet and Networking Group sales increased 18 percent and orders were 30
percent higher. The group had an operating profit compared with a loss a
year ago, due to a gain from the sale of securities. Sales of cable modems
and cable telephony products were significantly higher. The group's results
are reported as part of the "Other Products" segment.
Selling, general and administrative expenses were 19 percent of sales
compared with 18 percent in the year-earlier period. The increase in
selling, general and administrative expenses compared to a year ago is due
to recording an additional financing reserve related to the Company's
financial support of Iridium, writedowns of certain Corporate fixed assets,
higher foreign exchange losses and higher incentive compensation accruals
necessitated by the Company's expected improvement in financial
performance. These higher expenses were partially offset by income from
the sale of securities. Depreciation expense decreased slightly as a
percent of sales. Depreciation expense for 1999 is presently expected to be
relatively unchanged for the year compared to 1998. Interest expense was
flat as a percent of sales. Assuming stable interest rates in 1999,
interest expense is expected to be lower than a year ago in the remaining
quarters and the full year of 1999. The tax rate for the first quarter was
30 percent, the same as a year ago. The Company currently expects the tax
rate to remain at 30 percent for 1999.
Liquidity and Capital Resources:
Net cash provided by operations increased to $676 million for the three-
month period ended April 3, 1999, as compared to $43 million for the three-
month period ended March 28, 1998. The increase in 1999 compared to 1998
was primarily due to improved collections of accounts receivable balances
and lower inventory balances resulting from programs focused on accounts
receivable collections and inventory control programs.
Net cash used in investing activities was $141 million for the three-month
period ended April 3, 1999 as compared to $581 million used for the three-
month period ended March 28, 1998. The majority of the decrease is due to
fixed asset expenditures decreasing by $302 million in 1999 as compared to
1998. Two thirds of this reduction, or $200 million, occurred in
semiconductor fixed asset expenditures. For the full year of 1999, the
Company's capital expenditures are expected to be approximately $3.0
billion down from $3.2 billion in 1998. Semiconductor capital expenditures
are expected to be $900 million in 1999 compared to $1.8 billion in 1998.
In addition to the decrease in fixed asset expenditures, cash was generated
from the sale of fixed assets and inventory upon completion of the
previously announced sale of the non-silicon component manufacturing
business.
Net cash used in financing activities was $201 million for the three-month
period ended April 3, 1999 as compared to cash provided by financing
activities of $627 million in the three-month period ended March 28, 1998.
The use of cash in 1999 was driven primarily by the Company paying down
commercial paper and short-term borrowings as compared to increasing notes
payable and current portion of long term debt in the same period last year
in order to finance operations. The Company was able to pay down short-
term borrowings in 1999 due to improved cash flow from operations and
investing activities, which were primarily driven by lower accounts
receivable and inventory balances and lower capital expenditures.
Additionally, $484 million in net proceeds was generated from the sale of
the Subordinated Debentures, as described in footnote 7 to the financial
statements.
Net debt to net debt plus equity decreased to 20.8 percent at April 3, 1999
from 26.8 percent at December 31, 1998. The Company's total domestic and
foreign credit facilities aggregated $4.6 billion at April 3, 1999, none of
which was used but was all available to back up outstanding commercial
paper which totaled $2.0 billion.
The Company is an equity investor in, a creditor of, and a supplier to,
Iridium LLC and its subsidiaries (collectively "Iridium"). Iridium is the
first global wireless telecommunications business using a low-earth orbit
satellite communications network. Commercial voice service on the Iridium
system began November 1, 1998. Iridium is currently transitioning from a
developmental stage company to an operating company and, accordingly, has
no meaningful operating history. This transition requires that Iridium
attract a sufficient number of customers that use Iridium's services at
levels that will generate enough revenue for Iridium to meet its financial
obligations to a variety of parties, including the Company. Iridium has
experienced significant difficulties in making this transition, including
that the number of subscribers for the service and revenue generated by
Iridium have been substantially below Iridium's expectations. Iridium
operates in an essentially new market for wireless communications services
and there can be no assurance that Iridium will be successful.
At April 3, 1999, the Company owned, directly and indirectly, approximately
18% of the equity interests in Iridium and Iridium bonds with a face value
of approximately $157 million. The Company also holds equity investments
and receivables with a book value of approximately $70 million in several
Iridium gateway companies. During the first quarter of 1999, the Company
recorded, as its share of Iridium's net loss for the first quarter, a loss
of approximately $50 million. As a result, the Company's equity investment
in Iridium, as reflected in its financial statements, is now zero. The
Company's bond investment in Iridium and its equity investments in several
Iridium gateway companies are included in Other Assets.
Iridium's bank facilities include an $800 million Senior Secured Credit
Agreement (the "Secured Credit Agreement"). That agreement contains
covenants that require Iridium to satisfy certain minimum revenue and
customer levels as of various dates. On March 29, 1999, Iridium announced
that it would not meet its first quarter 1999 revenue and customer
requirements, and that it had received a sixty-day waiver, until May 31,
1999, from the lenders under the Secured Credit Agreement. The waiver
requires Iridium's compliance with the March 31, 1999 minimum revenue and
customer requirements set forth in the covenants by May 31, 1999. Iridium
announced on May 13, 1999, that it did not expect to meet these minimum
revenue and customer requirements by May 31, 1999, and that it was in
discussions with its lenders under the Secured Credit Agreement to reduce
these requirements. There can be no assurance that (1) that the lenders
under the Secured Credit Agreement will further revise those targets for
future periods so that Iridium will remain in compliance with such
covenants or (2) that such lenders will waive any future default, under
such covenants or otherwise, should it occur. If a default occurs under
the Secured Credit Agreement, the lenders could accelerate Iridium's
obligations under the Secured Credit Agreement and seek to foreclose on
their security interests in substantially all of Iridium's assets and
require certain investors in Iridium to comply with their capital call
requirements. In the Company's case, this would require an additional
equity investment of approximately $50 million. If this investment were
required, it would be subject to the same accounting treatment as applied
to the Company's prior equity investment in Iridium.
If Iridium defaults under its Secured Credit Agreement, it will also be in
default under a $750 million Senior Guaranteed Credit Agreement which the
Company has directly guaranteed (the "Guaranteed Credit Agreement"). As of
April 3, 1999, Iridium had borrowed $480 million of the $750 million
available under the Guaranteed Credit Agreement. The majority of this
facility is scheduled to mature on December 31, 2000 and the remainder is
scheduled to mature on December 31, 2001. If Iridium were to default under
the Guaranteed Credit Agreement, the banks providing loans under the
Guaranteed Credit Agreement could terminate Iridium's ability to borrow
under that agreement, accelerate all the outstanding obligations under that
agreement and require the Company to satisfy its guarantee obligations as
to amounts theretofore drawn.
The Company has also agreed under a Memorandum of Understanding to grant a
guarantee of up to an additional $350 million of Iridium debt, subject to
the satisfaction of certain conditions. As of May 14, 1999, Iridium had
not requested that any portion of the guarantee be applied in favor of
either a new bank credit facility or the Secured Credit Agreement.
A default by Iridium under its Secured Credit Agreement and Guaranteed
Credit Agreement could result in defaults under other agreements,
including, without limitation, the indentures relating to approximately
$1.4 billion in public debt of Iridium.
The Company has also agreed to permit Iridium to defer up to $400 million
of amounts owed under its operations and maintenance contracts with the
Company. As of April 30, 1999, Iridium had deferred $265 million of such
payments and Iridium has indicated that it expects to request to defer an
aggregate of $400 million of such payments prior to September 1, 1999. The
repayment by Iridium of these deferred payments is subordinated to
repayment of Iridium's Secured Credit Agreement, as is the repayment to the
Company by Iridium of any amounts the Company may pay to the lenders under
its guarantees and certain other obligations owed to the Company. Apart
from the deferred payments described above, approximately $70 million is
owed to the Company by Iridium, as of April 30, 1999.
The Company has several contracts with Iridium, primarily for the operation
and maintenance of the global personal communications system, under which
aggregate payments are scheduled to be approximately $3.2 billion. Through
the end of April 1999, the Company had earned and received payments of
approximately $259 million under these contracts. The Company has
significant subcontracts for portions of the system, for which it will
generally remain obligated even if Iridium is unable to satisfy the terms
of such contracts with the Company. In addition, the Company has
investments in assets related to these contracts, such as inventory,
manufacturing equipment, buildings and potential obligations to the
employees employed in connection with these contracts. While the Company
expects to be able to use a portion of these assets and some of these
employees in connection with other programs, the Company would still incur
substantial costs in winding down operations related to the Iridium program
if Iridium were to cease to perform under such agreements.
As Iridium continues its transition from a developmental stage company to
an operating company, it will require significant amounts of cash to fund
its operations. Iridium disclosed in its Form 10-K for the year-end
December 31, 1998, that it expected that its aggregate cash requirements
for 1999 would be approximately $1.65 billion. If Iridium defaults under
its credit agreements its lenders may not waive such defaults. This could
subject the entire amount outstanding under its credit agreements to
acceleration by the lenders and pursuit of other remedies, including
enforcement of security interests in substantially all of the assets of
Iridium. This could result in Iridium's bankruptcy. If Iridium is not
able to repay amounts due to lenders under facilities guaranteed by the
Company, the Company would be required to pay such guaranteed amounts.
Finally, if such events occur, Iridium would likely not be able to repay in
full the Company amounts theretofore deferred under its various contracts
with the Company and might be unable to pay amounts becoming due under such
contracts in the future.
In the context of an Iridium bankruptcy, it is possible that creditors and
other stakeholders in Iridium may seek to bring various claims against the
Company, with respect to payments previously made by Iridium to the
Company, and otherwise. As described herein under "Legal Proceedings," a
number of purported class action lawsuits alleging securities law
violations have been filed naming Iridium, certain current and former
officers of Iridium and the Company as defendants.
The loss of the value of its investment in Iridium and Iridium gateway
companies, any default by Iridium under its credit agreements and debt
instruments which results in the acceleration of Iridium debt or the
Company having to perform under its Iridium guarantee obligations and the
failure of Iridium to make contractual payments to the Company,
collectively, would have a material negative impact on the Company's
consolidated financial position and results of operations.
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 April 3, 1999 and March 28, 1998, the Company had net outstanding
foreign exchange contracts totaling $2.0 billion and $2.3 billion,
respectively. The following schedule shows the five largest foreign
exchange hedge positions as of April 3, 1999 and the corresponding
positions at March 28, 1998:
In millions
Buy (Sell) April 3, March 28,
1999 1998
Japanese Yen (798) (831)
Euro (547) (337)
Korean Won (161) (13)
Chinese Renminbi (110) (20)
British Pound (106) (535)
At April 3, 1999 and March 28, 1998, outstanding foreign exchange contracts
primarily consisted of short-term forward contracts. Net deferred gains at
April 3, 1999, and net deferred losses at March 28, 1998, 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 April 3, 1999, and March 28, 1998, were $744 million and $703
million, respectively. The Company continues to believe that a strong
commitment to research and development drives long-term growth. Research
and development expenditures are expected to increase as a percentage of
sales in 1999 versus 1998.
Return on average invested capital, based on the performance of the four
preceding fiscal quarters ending April 3, 1999, was (6.2) percent, compared
with 7.2 percent based on the performance of the four preceding fiscal
quarters ending March 28, 1998. The Company's current ratio was 1.32 at
April 3, 1999, compared to 1.18 at December 31, 1998.
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 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 Audit and Legal Committee of the Board of
Directors. The Board of Directors also receives periodic updates on the
Company's Year 2000 program.
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 issue across the Company.
The Program summarizes the tasks to be completed while leaving each
business to tailor actions specifically to its environment, to identify the
goals of each phase, and to schedule 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 Review (deploy program and software changes, evaluate and
apply lessons learned).
The Company's Readiness
All of the Company's sectors and groups have substantially completed Phases
1-4, all but one of the groups also have substantially completed Phase 5
and all but three of the Company's groups also have substantially completed
Phase 6. All of the Company's sectors and groups are expected to complete
the Six-Phase Program by at least the third quarter of 1999. The work being
completed in 1999 is being separately monitored and tracked with
appropriate target completion dates.
Contingency plans are substantially complete for all sectors and groups,
and those plans are focusing on matters not resolved through the Six-Phase
Program at this time that may have a material negative impact on Motorola's
final "year 2000 readiness". Discussion of contingency planning is included
below.
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 website and are 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 its 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 to date 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 or by using alternate sources of supplies. 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, procurement, human
resources/payroll, factory applications, customer service, and revenue, and
does not expect any significant Year 2000 issues 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 issues with its facilities or
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 websites. If a supplier is determined to entail a
"high risk" of Year 2000 non-readiness, the Company is developing
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
are 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 $250 million
to $300 million. These costs do not include estimates for potential
litigation. Approximately $150 million of the total estimated costs relate
to internal resources. Total costs incurred through April 3, 1999 were
approximately $140 million, of which approximately $89 million were for
external costs. Of the remaining costs, the majority relate to installation
of software upgrades of certain infrastructure equipment, installing
software upgrades to internal semiconductor manufacturing equipment and
assessing the Company's critical suppliers. The Company does not believe
the cost of addressing Year 2000 issues will have a material adverse effect
on the Company's consolidated results of operations, liquidity or capital
resources.
The Company reviews and updates data for costs incurred and forecasted
costs each quarter. 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 of 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 issues. Further,
there can be no assurances that the Company's assessment of suppliers and
vendors will be accurate. Customers of Motorola could be impacted by Year
2000 issues causing them to reduce purchases from the Company. In addition,
many commentators believe that there will be a significant amount of
litigation arising out of "year 2000 readiness" issues, especially for
product liability. 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
and potential litigation, 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's contingency plans focus on customers, products, supplies and
internal operations. Each sector is establishing emergency operations
centers at key locations. These centers will be staffed ahead of the Year
2000 rollover and well into the Year 2000. During critical times they will
be staffed 24-hours a day. The first priority of these centers is to
ensure the performance of a customer's network or system.
Critical facilities have been identified and the Company's plans prioritize
their continued operations. These sites will be supported by generators
capable of maintaining health, safety, communications and environmental
operations if locally provided power sources fail. These sites will have a
number of means of communicating including Intranet, pagers, cellular
phones, and satellite phones.
The businesses are identifying key individuals in a variety of functions to
be on-site at the Company's facilities to monitor the rollover to the Year
2000. Additionally, the Company is establishing rapid response teams that
can be sent to major customer locations when and if needed in connection
with the rollover. There are also plans to shift operations to different
facilities if there are interruptions to operations in particular areas,
countries or regions.
The plans also include procedures to maintain and recover business
operations such as stockpiling critical supplies, identifying alternate
supply sources, inspecting critical functions, reporting operational
status, communicating with interdependent operations, and operating in
contingency mode until a return to normal.
The sectors and groups continue to perform various tests, including on
manufacturing production lines and internal networks. Each business will
also be testing its contingency plans during the third quarter of 1999. In
addition, the Company has planned a test of its overall contingency plans
for the third quarter of 1999.
Personal Communications Segment
The Personal Communications Segment includes both the Personal
Communications Sector (PCS) and the iDEN(R) subscriber business. PCS, which
designs, develops, manufactures and sells Motorola cellular telephones,
paging subscriber products, and paging infrastructure equipment 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, PCS has systems in place to ensure that future cellular
telephones sold by the Company will be Year 2000 Ready.
Paging products currently being shipped are Year 2000 Ready. Paging has
identified customer system upgrades required to enable certain
infrastructure equipment in Asia to be Year 2000 Ready. These upgrades are
scheduled to be complete by August 1999. Paging has posted on its website
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 the website.
Paging'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 paging
customers the potential for such failures should reduce the likelihood of
this occurring.
Network Solutions Segment
The Network Solutions segment includes the cellular infrastructure
business, the satellite communications business and iDEN infrastructure
products.
The cellular infrastructure business designs and develops, manufactures,
installs and services wireless infrastructure equipment for cellular and
personal communications networks. Certain cellular infrastructure products
operate with date sensitivity. The business is developing appropriate
hardware modifications and new versions of software to address the Year
2000 issue. The business has made upgrades (i.e., hardware modifications
and/or new software versions, as appropriate) available to most of its
operator customers. The remaining upgrades for certain unique systems will
be available by the end of the second quarter of 1999. The business sells
systems throughout the world and trained technicians are in the process of
installing these upgrades.
The cellular infrastructure business has communicated to customers and
company customer contacts "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 it is likely that the system will not
recognize certain dates properly, affecting the accuracy of certain data.
The business has concluded that some of its systems are too old to either
upgrade or provide a work-around for Year 2000 issues. It has notified
customers with outdated systems. Additionally, a website provides Year 2000
information on discontinued products. Some customers of discontinued
products have been notified that their system will not work and information
has been provided on needed upgrades and/or replacements. The business is
now in the process of sending out second notices and asking for
confirmations back from these customers.
Management believes that its most reasonably likely worst case scenario
related to the Year 2000 issue is its inability to upgrade all systems
before January 1, 2000 due to the significant number of customer locations
to be visited and to delays by customers in scheduling upgrades. As a
result, system performance could be affected and certain data routinely
available from those systems could be inaccurate on and after January 1,
2000 until upgraded. As a result, the business could incur cost, and
potentially be sued as the supplier of those systems, although its efforts
to identify its customers and provide software solutions should reduce
these risks.
The satellite business designs, develops, manufactures, 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(R) System. This system contains date-
sensitive functions. The business expects to make any necessary hardware
and/or software upgrades available to customers by July 1, 1999. The
business anticipates that it will need to supply technicians to install any
such upgrades, and does not presently anticipate any difficulty in meeting
any potential installation needs.
Management believes that the most reasonably likely worst case scenario
related to the Year 2000 issue is a temporary interruption of the Iridium
System due to the inability of the ground segment to communicate with the
satellite constellation. As a result, the satellite business would incur
costs in correcting such a failure. Management believes adequate efforts
are in place to identify potential hardware/software problems and to
implement and test solutions.
Some iDEN(R) infrastructure products operate with date sensitivity. The
iDEN system is expected to be Year 2000 Ready when a new system release is
completed by June 30, 1999. While the business expects to deploy this
release in a timely matter, it will confront the same resource and
installation issues facing the Company's infrastructure businesses.
Commercial, Government and Industrial Solutions Segment
The segment, consisting of the Commercial, Government and Industrial
Solutions Sector ("CGISS"), 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. Additionally, CGISS
includes the System Solutions Group (SSG), excluding its satellite
business, that is engaged in the design, development, and production of
advanced electronic communications systems and products.
All two-way products currently shipping from factories are Year 2000 Ready
with a few minor exceptions. All customers buying exceptions are fully
informed that these products are not Year 2000 Ready before purchases are
made and products shipped. Some older products operate with date
sensitivity, including legacy Special Products (SPs) and "911 Systems."
CGISS has notified or is in the process of notifying 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 were available in
December 1998 and a test installation of such software was made in late
December 1998. Regular customer installations will continue through the end
of third quarter 1999. SPs are communication systems designed specifically
for particular customers. CGISS cannot assess whether those systems are
Year 2000 Ready because the systems must be tested where they are located.
CGISS is contacting customers and developing solutions, usually software
upgrades, 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, the two-way radio business 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.
SSG 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 SSG's products
or systems contain date-sensitive functions that are expected to be
adversely affected by the Year 2000 issue. SSG is addressing each of the
few products or systems affected in one of four ways. First, SSG has
developed, or is in the process of developing, fixes for some of the Year
2000 issues discovered and is offering those fixes to its customers.
Second, in some cases, SSG 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 SSG. 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, SSG has
concluded that some of its products and systems are too old to either fix
or provide a work-around for Year 2000 Readiness. SSG has notified (or made
reasonable efforts to notify) customers of those products or systems for
which fixes or work-arounds will not be available.
SSG believes the most reasonably likely worst case scenario related to the
Year 2000 issue is the failure of a product or system to operate for a
short period of time after January 1, 2000. As a result, SSG 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.
Semiconductor Products Segment
The segment, consisting of the Semiconductor Product Sector ("SPS"), has
completed an extensive review of its products to determine if they are Year
2000 Ready. The vast majority of these products are Year 2000 Ready. A
limited number of products that contain a real-time clock function are
identified as having a potential Year 2000 issue with the manner in which
years are tracked. In addition, it is possible that an SPS 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 these potential Year
2000 readiness issues.
Literature on the Year 2000 issue references what is referred to as the
"embedded chip" Year 2000 issue or the "embedded systems" Year 2000 issue.
(The word "chip" is a short-hand reference for a semiconductor product.)
Many common electronic products contain "chips" or "systems" containing
chips 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 a SPS semiconductor is unknown at this time.
With relatively few internal items from the global multi-phase approach
remaining to be fixed, validated, and solutions deployed throughout the
organization, SPS, in conjunction with the newly formed High Tech
Consortium - Year 2000 and Beyond, is focusing on assessing external
critical suppliers, including utilities and critical transportation. This
effort is global in scope. In addition, SPS is taking actions to make
information available on the potential Year 2000 issues with the real time
clocks and the customer programming of SPS semiconductor products.
Finally, the business is reconfirming the readiness of its environmental
health and safety systems.
Integrated Electronic Systems Sector (IESS)
The Integrated Electronic Systems Sector (IESS) manufactures and sells
automotive and industrial electronics, energy storage products and systems,
electronic fluorescent ballasts and computer system products.
IESS has completed formal assessment of "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 IESS 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. The sector is substantially complete with the Six-
Phase Program. The remaining projects relate to internal systems of a
handful of suppliers that the sector is working with to ensure that they
will be ready.
In the case of Global Positioning System receivers, engineering analysis is
complete on the most current version, and the products are Year 2000 Ready.
The operation of such receivers is 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 to be Year
2000 Ready, full evaluation of the products for this date rollover
phenomenon continues 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 do not 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. Many products which are outside the warranty period, have been
updated over the years with products that are Year 2000 Ready. Other
potential liability may arise in cases where it is not known in what
applications the products are being used. There is always the possibility
that some products have been incorporated by customers into critical use
applications. All of the known cases are being evaluated but Motorola
believes that this is the customer's responsibility.
The business has reviewed the year 2000 readiness of its key suppliers.
Suppliers that are considered "high-risk" vendors because of Year 2000
issues have been identified. The sector continues to assess these suppliers
and has developed contingency plans that may include the use of alternate
suppliers to minimize any potential risk.
Internet and Networking Group (ING)
ING manufactures and sells modems, data communication devices and equipment
that enables voice, video and data communications over private and public
networks. All data communications equipment and modems currently sold by
ING are Year 2000 Ready. Some of the older products, including some network
management and router software products, do not meet Motorola's definition
of Year 2000 Ready. In many of these cases, ING has made fixes available
to its customers. Some products have also reached the end of their
supported life and, therefore, have not been tested for Year 2000
Readiness.
Management believes that the most reasonably likely worst case scenario
involving its business is the failure of a mission critical or financial
communications system on January 1, 2000 (or thereafter). As a result, ING
could potentially be sued as the supplier of the communications equipment.
Management believes that its efforts to notify its customers of products
with issues and provide software solutions should reduce these risks.
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 issue 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, customers
and end-users. As a global company it operates in many different countries,
some of which may not be addressing the Year 2000 issues to the same extent
as in the United States. As a result, there may be unforeseen issues 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 issues
in a timely manner to avoid materially adversely affecting its operations
or business or exposing the Company to third-party liability.
Euro Conversion:
For disclosure regarding the impact to the Company from the introduction of
the euro, see the information contained under the caption "Euro Conversion"
on pages F-13 and F-14 of the Company's Proxy Statement for its 1999 annual
meeting of stockholders.
Outlook:
The Company is benefiting in the near term from having accomplished the
solutions-focused reorganization and significant cost reduction faster than
anticipated, as well as improving market positions in both the integrated
communications solutions and embedded electronic solutions arenas.
Weak economic conditions in some regions of the world will continue to
affect the Company's rate of growth, as will the market adjustments still
taking place in analog wireless telephones and paging. However, the
Company is beginning to see signs of regional recovery in certain parts of
Asia, and the U.S. economy remains strong.
The Company's changes in structure and strategy, as well as improved
consumer and customer focus and better cost management are all increasing
the Company's ability to improve financial results. The Company's
management team is committed to investing in brand marketing, advanced
digital technology, software, and continuous business model modification in
order to make it more globally competitive. The Company will continue to
pursue a rigorous focus on improving its financial results, balanced with
the necessary business and technology investments to earn leadership in
market segments.
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 Iridium, Motorola's 1999 depreciation expenses, interest
expense, tax rate, fixed asset expenditures, research and development
expenditures, the sale of the Semiconductor Components Group and the impact
of Year 2000 issues. Motorola wishes to caution the reader that the
factors below and those in Motorola's 1999 Proxy Statement on pages F-16
through F-18 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 complete the
manufacturing consolidations, cost reductions and restructuring actions in
a timely manner and the continued success of those efforts; (ii) the
ability of Motorola to integrate its businesses to reduce costs and
increase efficiencies; (iii) unanticipated impact of the renewal plan on
productivity and the ability of Motorola to retain and where necessary
recruit employees; (iv) continued gains in the digital wireless telephone
market and market acceptance of new products; (v) continued improvement in
the semiconductor industry; (vi) economic conditions in China and its
response to the economic downturn in parts of Asia; (vii) the success of
efforts to stabilize economic conditions in parts of Asia, Latin America
and other emerging markets; (viii) pricing pressures and demand for
Motorola's products especially in light of the current economic conditions
in parts of Asia, Latin America and other emerging markets; (ix) the
weakening of currencies in parts of Asia, Latin America and other emerging
markets compared to the U.S. dollar; (x) the potential that deteriorating
economic conditions in Japan could continue or worsen; (xi) the success of
the Iridium(R) project and the impact on Motorola; (xii) Iridium's ability
to meet its financing needs in order to make contractual payments,
including to Motorola, to make debt payments and to otherwise operate;
(xiii) the success of alliances and agreements with other companies to
develop new products and services; (xiv) product and technology development
and commercialization risks, including for newer digital products and
Iridium products and services; (xv) unexpected delays or developments in
connection with the sale of the Semiconductor Components Group; and (xvi)
unanticipated impact of Year 2000 issues, particularly the failure of
products or services of major suppliers to function properly in the Year
2000 and reduced purchases by customers because of the adverse impact of
Year 2000 issues on their businesses.
Iridium(R) is a registered trademark and service mark of Iridium LLC.
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. Schiffner v.
Motorola, Inc., filed on March 3, 1995 in the Circuit Court of Cook County,
Illinois, was a purported class action by purchasers of portable cellular
phones alleging economic losses. On March 22, 1999, the United States
Supreme Court denied the plaintiffs' petition for writ of certiorari,
thereby terminating the litigation in favor of Motorola. Jerald P. Busse,
et al. v. Motorola, Inc. et al., filed on October 26, 1995 in the Circuit
Court of Cook County, Illinois, Chancery Division, is a purported class
action alleging that defendants have failed to adequately warn consumers of
the alleged dangers of cellular telephones and challenging ongoing safety
studies as invasions of privacy. All claims have been dismissed on
defendants' motions. Plaintiffs have moved for reconsideration of the
Court's decision. Silber, et al. v. Motorola, Inc., et al., filed on
August 1, 1995 in the Supreme Court of the State of New York, County of
Suffolk, is an action wherein it is alleged that a traffic accident was
caused by the use of a cellular phone. On April 27, 1999, the Court
granted defendants' motion for summary judgment and dismissed the suit.
Plaintiffs may appeal.
Motorola has been named as one of several defendants in Freeland v. Iridium
World Communications, LTD, et al., Yong v. Iridium World Communications,
LTD, et al., Kleinman v. Iridium World Communications, LTD, et al.,
Marshall v. Iridium World Communications, LTD, et al., Ackerman v. Iridium
World Communications, LTD, et al., Hargrove v. Iridium World
Communications, LTD, et al., and Turner v. Iridium World Communications et
al., a series of nearly identical putative class action securities lawsuits
filed beginning April 22, 1999 in the U.S. District Court for the District
of Columbia. All of these lawsuits allege violations of the Federal
securities laws arising from alleged material misrepresentations or
omissions regarding difficulties in the satellite communications business
of Iridium World Communications, LTD, Iridium LLC and Iridium Operating
LLC. The alleged classes consist of purchasers of all Iridium securities
during the period from September 9, 1998 to March 29, 1999.
See Item 3 of the Company's Form 10-K for the fiscal year ended December
31, 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 and Use of Proceeds.
Not applicable.
Item 3 - Defaults Upon Senior Securities.
Not applicable.
Item 4 - Submission of Matters to Vote of Security Holders.
The Company held its annual meeting of stockholders on May 3, 1999 and the
following matters were voted on at that meeting:
1. The election of the following directors, who will serve until
their respective successors are elected and qualified or until their
earlier death or resignation:
BROKER
DIRECTOR FOR WITHHELD NON-VOTES
Ronnie C. Chan 493,125,875 40,083,593 0
H. Laurance Fuller 493,133,166 40,076,302 0
Christopher B. Galvin 492,752,489 40,456,979 0
Robert W. Galvin 493,023,446 40,186,022 0
Robert L. Growney 493,036,010 40,173,458 0
Anne P. Jones 493,126,958 40,082,510 0
Donald R. Jones 493,109,496 40,099,972 0
Judy C. Lewent 493,193,129 40,016,339 0
Walter E. Massey 493,194,631 40,014,837 0
Nicholas Negroponte 493,243,649 39,965,819 0
John E. Pepper, Jr. 493,227,476 39,981,992 0
Samuel C. Scott III 493,199,065 40,010,403 0
Gary L. Tooker 493,089,808 40,119,660 0
B. Kenneth West 493,156,725 40,052,743 0
John A. White 493,219,133 39,990,335 0
2. The adoption of the Motorola, Inc. Employee Stock Purchase Plan of
1999 was approved by the following vote: For, 503,899,996; Against,
26,828,113; Abstain, 2,446,375; and Broker Non-Votes, 34,984.
Item 5 - Other Information.
Not applicable.
Item 6 - Exhibits and Reports on Form 8-K.
Exhibits
27 Financial Data Schedule (filed only electronically with the
SEC).
(a) Reports on Form 8-K
No reports on form 8-K were filed during the first quarter
of 1999.
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: May 17, 1999 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
27 Financial Data Schedule (filed only electronically with the SEC)
3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated Balance Sheet as of 04/03/99 and the Consolidated Statement of
Earnings for the three months ended 04/03/99 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> APR-03-1999
<CASH> 1,714
<SECURITIES> 276
<RECEIVABLES> 5,109
<ALLOWANCES> (224)
<INVENTORY> 3,636
<CURRENT-ASSETS> 13,605
<PP&E> 22,562
<DEPRECIATION> (12,994)
<TOTAL-ASSETS> 29,663
<CURRENT-LIABILITIES> 10,341
<BONDS> 2,629
484
0
<COMMON> 1,810
<OTHER-SE> 11,078
<TOTAL-LIABILITY-AND-EQUITY> 29,663
<SALES> 7,232
<TOTAL-REVENUES> 0
<CGS> 4,252
<TOTAL-COSTS> 6,396<F1>
<OTHER-EXPENSES> 550<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42
<INCOME-PRETAX> 244
<INCOME-TAX> 73
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 171
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
<FN>
<F1>Total cost includes: Cost of goods sold, selling & admin expense, total exch
(gain)/loss.
<F2>Other expense includes: Depreciations expenses.
</FN>
</TABLE>
