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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-K/A
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AMENDMENT NO. 1 TO
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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 East Algonquin Road, Schaumburg, Illinois 60196
(Address of principal executive offices)
(847) 576-5000
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of Each Exchange on
Title of Each Class Which Registered
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<S> <C>
Common Stock, $3 Par Value per Share New York Stock Exchange
Chicago Stock Exchange
Rights to Purchase Junior Participating New York Stock Exchange
Preferred Stock, Series B Chicago Stock Exchange
Liquid Yield Option Notes due 2009 New York Stock Exchange
Liquid Yield Option Notes due 2013 New York Stock Exchange
6.68% Trust Originated Preferred Securities New York Stock Exchange
(issued by Motorola Capital Trust I and
guaranteed by Motorola, Inc.)
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant as of January 31, 1999 was approximately $42.3
billion (based on closing sale price of $72.38 per share as reported for the New
York Stock Exchange-Composite Transactions).
The number of shares of the registrant's Common Stock, $3 par value per
share, outstanding as of January 31, 1999 was 601,948,574.
================================================================================
<PAGE>
LIST OF ITEMS AMENDED
---------------------
<TABLE>
<CAPTION>
Item Page
- ---- ----
<S> <C>
PART II
7. Management's Discussion and Analysis of financial Condition
and Results of Operations financial Review.................................1
8. Financial Statements and Supplementary Data...............................32
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........66
Signatures................................................................68
</TABLE>
TEXT OF AMENDMENTS
------------------
Explanatory Note:
Items 7 and 8 listed above are each hereby amended by deleting the Item in
its entirety and replacing it with the corresponding Item attached hereto and
filed herewith. Item 14 listed above is hereby amended by replacing the
specified portions indicated herein.
The purpose of this amendment is to make certain changes to Management's
Discussion and Analysis of Financial Condition and Results of Operations (Item
7) ("MD&A") and to the notes to the financial statements included in Financial
Statements and Supplementary Data (Item 8), that were incorporated by reference
into Part II of the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 that was originally filed on March 22, 1999 (the "Original
Filing").
We are filing this amended Annual Report on Form 10-K/A in response to
comments received from the Securities and Exchange Commission (the "SEC"). As
requested by the SEC, we have provided additional disclosure in the MD&A and in
the notes to the financial statements. This report continues to speak as of the
date of the Original Filing and we have not updated the disclosure in this
report to speak to any later date. While this report primarily relates to the
historical period covered, events may have taken place since the date of the
Original Filing that might have been reflected in this report if they had taken
place prior to the Original Filing.
Any items in the Original Filing not expressly changed hereby shall be as
set forth in the Original Filing. All information contained in this amendment
and the Original Filing is subject to updating and supplementing as provided in
the Company's periodic reports filed with the SEC subsequent to the date of such
reports.
<PAGE>
PART II
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
MOTOROLA, INC.
1998 COMPARED TO 1997
Sales decreased 1% to $29.4 billion from $29.8 billion in 1997. Geographic
market sales, measured by the locale of the end customer, as a percent of total
Motorola sales increased from 1997 to 1998 in Europe from 19% to 21%, in Latin
America from 7% to 8% and in Japan from 6% to 7%. Geographic market sales
declined from 1997 to 1998 in the U.S. from 42% to 41%, in China from 11% to 10%
and in Asia, excluding Japan and China, from 9% to 7%. Geographic market sales
remained constant in 1997 and 1998 in other markets at 6%.
The Company had an operating loss before tax in 1998 of $1.4 billion,
compared to an operating profit before tax in 1997 of $1.8 billion. The net loss
in 1998 was $962 million, or $1.61 per common share, compared with net income of
$1.18 billion in 1997, or $1.94 per common share. Net margin on sales was
negative 3.3%, compared with positive 4.0% during 1997. The 1998 earnings
included net special charges of $1.9 billion before tax, equivalent to $2.19 per
share after tax, resulting primarily from manufacturing consolidation, cost
reduction and restructuring programs. These programs are discussed below. The
1997 earnings included net special charges of $306 million before tax,
equivalent to 32 cents per share after tax, resulting from restructuring charges
relating to decisions to exit several unprofitable businesses that no longer had
long-term strategic value to the Company and other charges of $72 million offset
by income of $93 million from the sale of investments and favorable settlement
of patent claims. These other items are included in selling, general and
administrative expenses, in the consolidated statements of operations. Those
businesses exited in 1997 included dynamic random access memory (DRAM)
semiconductors, MacOS(R) compatible computer systems and retail analog modems.
Included in net special charges of $306 million are:
<TABLE>
<S> <C>
Restructuring and other charges...................... $327
Income from sale of investments...................... (59)
Income from favorable settlement of patent claims.... (34)
Impairment on joint venture investments.............. 31
Other charges........................................ 41
----
Net special charges.................................. $306
====
</TABLE>
Excluding special charges, earnings for all of 1998 were $347 million, or
58 cents per share after tax, compared with $1.4 billion, or $2.26 per share
after tax in 1997. This decline in earnings is attributable to increases in the
percentage of sales represented by (i) manufacturing and other costs of sales,
(ii) selling, general and administrative expenses and (iii) net interest
expense. The main businesses contributing to this decrease in earnings were the
semiconductor products, cellular subscriber equipment and messaging system
products businesses. To address these cost pressures, in the second quarter of
1998 the Company established comprehensive restructuring programs and recorded a
pre-tax charge of $1.98 billion (the "1998 Program") to cover restructuring
costs of $1.275 billion and asset impairments and other charges of $705 million
in connection with these programs.
Manufacturing cost reduction efforts include reducing the number of
employees, consolidating manufacturing operations and selling underutilized
manufacturing capacity. Selling, general and administrative cost reduction
efforts include reducing the number of employees and divesting non-strategic,
poorly performing businesses. The Company's goal is to reduce interest expense
and improve cash flows by reducing payroll and other operating expenses and by
generating cash from the sale of businesses and facilities. By the middle of
1999, the Company expects to achieve a level of profit improvement from these
programs equivalent to an annualized rate of $1.0 billion.
1
<PAGE>
The 1998 Program.
- -----------------
This table summarizes the initial restructuring charges, reclassifications
and amounts used in connection with the 1998 Program through December 31, 1998.
<TABLE>
<CAPTION>
Second Accruals at
Quarter 1998 Reclassifi- Initial Charges Amounts Dec 31,
Initial Charges cations As Adjusted Used 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidation of manufacturing
Operations $ 361 $ (35) $ 326 $ (171) $ 155
Business exits 453 (162) 291 (154) 137
Employee separations 461 197 658 (471) 187
------ ----- ------ ------- -----
Total restructuring $1,275 $ -- $1,275 $ (796) $ 479
------ ----- ------ ------- -----
Asset impairments and other
Charges 705 -- 705 (544) 161
- ---------------------------------------------------------------------------------------------------------------------------------
Totals $1,980 $ -- $1,980 $(1,340) $ 640
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Amounts in the Reclassifications column represent the reallocation of
accruals between restructuring categories and not increases in the initial
charges. These reallocations were due to the sale of, rather than the planned
closure of, two of the Company's businesses and the reclassification of employee
severance costs originally accrued for in the consolidation of manufacturing
operations and business exits. These reallocations were also offset by higher
than anticipated severance costs from special voluntary termination benefits.
In connection with its review of the continued propriety of the Company's
restructuring accrual, management determined that certain amounts previously
accrued for consolidation of manufacturing operations and business exits were no
longer necessary given the revisions to the timing and nature of disposal for
those operations. Management also had additional information in the fourth
quarter of 1998 related to the acceptance of special voluntary termination
benefits. Recognizing that additional accruals were necessary to reflect the
special voluntary termination benefits and that based upon the requirement under
Statement of Financial Accounting Standards (SFAS) No. 88 to accrue for these
benefits upon acceptance by the employees, management reclassified $142 million
of accruals from the consolidation of manufacturing operations and business
exits portion of the restructuring accrual to the employee separations portion
in the fourth quarter of 1998. In addition, management reclassified $55 million
of employee severance costs originally accrued for in the consolidation of
manufacturing operations and business exits to employee separations in the
fourth quarter of 1998.
Consolidation of Manufacturing Operations. These costs relate to the
closing of production and distribution facilities and sale or disposition of
machinery and equipment that was no longer needed and, in some cases, scrapping
of excess assets that had no net realizable value. The buildings associated with
these production facilities, in many cases, were sold to outside parties.
Severance costs incurred for terminating employees at these production
facilities were also originally included in the consolidation of manufacturing
operations line item but were subsequently reclassified to the employee
separations line item. Also included in this restructuring category were costs
related to shutting down or reducing the capacity of certain production lines.
In most cases, older facilities with older technologies or non-strategic
products were closed. Machinery and equipment write downs related to equipment
that would no longer be utilized comprised the majority of these costs.
The consolidation of manufacturing operations was primarily focused in the
Semiconductor Products (SPS) and Messaging, Information and Media Products
segments. Semiconductor facilities in North Carolina, California, Arizona and
the Philippines are being closed as planned. SPS is consolidating its production
facilities into fewer integrated factories to achieve economies of scale and
improved efficiencies and to capitalize on newer technologies that should reduce
operating costs. As a result of excess global manufacturing capacity, the paging
facility in Vega Baja, Puerto Rico was closed, and paging facilities in
Singapore were realigned. Approximately $122 million was used for these
consolidation activities. Both segments are continuing to execute their plans to
consolidate and
2
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streamline their worldwide manufacturing operations. The remaining $155 million
accrual, included in accrued liabilities in the consolidated balance sheets, at
December 31, 1998, for this category principally represents the finalization of
the plant closings in North Carolina, California, Arizona and the Philippines in
the Semiconductor Products segment and the consolidation of operations in
Northern Illinois, Massachusetts and Canada in the Company's communications
businesses. The Company anticipates these actions to be complete by the end of
1999.
Business Exits. These costs include costs associated with shutting down
businesses that did not fit with the new strategy of the Company. In many
cases, these businesses used older technologies that produced non-strategic
products. The long-term growth and margins associated with these businesses
were not in line with the Company's expectations given the level of investment
and returns. Included in these business exit costs were the costs of
terminating technology agreements, selling or liquidating interests in joint
ventures and severance costs. Severance costs were subsequently reclassified to
the employee separations line item. Similar to consolidation of manufacturing
operations, the charges in this restructuring category did not include any costs
related to the abandonment or sub-lease of facilities, moving expenses,
inventory disposals or write downs, or litigation or environmental obligations.
Business exit costs were primarily incurred in the Integrated Electronic
Systems sector (formerly the Automotive, Component, Computer and Energy Sector).
During the third quarter of 1998, the Integrated Electronic Systems Sector
(IESS) sold its printed circuit board business. The Sector also sold its non-
silicon component manufacturing business to CTS Corp in the first quarter of
1999. The loss of operating income from these exited businesses is not
significant to IESS' or the Company's results of operations.
The remaining $137 million accrual, included in accrued liabilities in the
consolidated balance sheets, at December 31, 1998, for this restructuring
category primarily relates to the Company's contract requirements and
contingencies from the sale of the printed circuit board business and the
disposal of the non-silicon component manufacturing business, the finalization
of remaining activities in the Semiconductor Products segment and the planned
exits from several small paging and multimedia businesses of the Messaging,
Information and Media segment. The Company anticipates these actions to be
complete by the end of 1999.
Employee Separations. These costs represent the costs of involuntary
severance benefits for the 20,000 positions identified as subject to severance
under the restructuring plan. Employee separation costs of $55 million were also
initially included in the consolidation of manufacturing operations and business
exits line items. These costs were subsequently reclassified to the employee
separations line item in the fourth quarter of 1998. Management also had
additional information in the fourth quarter of 1998 related to the acceptance
of special voluntary termination benefits. Recognizing that additional accruals
were necessary to reflect the special voluntary termination benefits and that
based upon the requirement under Statement of Financial Accounting Standards
(SFAS) No. 88 to accrue for these benefits upon acceptance by the employees,
management reclassified $142 million of accruals from the consolidation of
manufacturing operations and business exits portion of the restructuring accrual
to the severance portion in the fourth quarter of 1998. The special voluntary
termination program expired at the end of the fourth quarter of 1998, although
severance payments related to this program were not completed at that time.
As of December 31, 1998, approximately 13,800 employees have separated from
the Company through a combination of voluntary and involuntary severance
programs. Of the 13,800 separated employees, approximately 8,200 were direct
employees, and 5,600 were indirect employees. Direct employees are primarily
non-supervisory production employees, and indirect employees are primarily non-
production employees and production managers. Completion of the sale of the non-
silicon component manufacturing business to CTS Corp. in the first quarter of
1999 further reduced the Company's employee population by approximately 4,500
people. The Company continues to make payments under the severance programs and
expects these payments to be completed by the end of the fourth quarter of 1999.
The remaining $187 million accrual, included in accrued liabilities in the
consolidated balance sheets, at December 31, 1998 represents severance payments
for 6,200 positions related to the disposal of the non-silicon component
manufacturing business, the completion of severance payments in the cellular and
paging businesses in Illinois, Florida and Texas, and the completion of
severance payments in Japan, Asia, the U.K. and Arizona in the semiconductor
products business.
3
<PAGE>
Asset Impairments and Other Charges. As a result of current and projected
business conditions, the Company wrote down operating assets that became
impaired. All impaired asset write downs have been reflected as contra-assets in
the consolidated balance sheets at December 31, 1998. This action reduced the
carrying value of the related asset balances by $380 million. The majority of
the assets written down were primarily used manufacturing equipment and
machinery. Other assets written down were buildings and joint venture
investments. The amount of the impairment charge for the assets written down was
based upon an estimate of the future cash flows expected from the use of the
assets, as well as upon their eventual disposition. Building write downs were
based on marketability factors of the building in the particular location. The
amount of the write down assigned to joint venture investments and intangibles
was $75 million. Valuations for joint venture investments and intangibles were
based on prevailing market conditions and the Company's new strategic direction.
The intangibles were patents, communication frequencies and licenses, and
goodwill related to the Messaging, Information and Media Products segment. The
Company's remaining basis in these joint venture investments and intangibles at
December 31, 1998, was $8 million. The Company continues to evaluate its joint
venture investments and related intangibles on an ongoing basis.
The segments primarily impacted by these asset write downs were
Semiconductor Products, Messaging, Information and Media Products and Cellular
Products. Assets held for use, which aggregated $51 million at December 31, 1998
continue to be depreciated based on an evaluation of their remaining useful
lives and their ultimate values upon disposition. There are no assets held for
sale at December 31, 1998 nor were any impaired assets disposed of prior to that
date.
The other charges of $325 million are not restructuring charges but are
other costs primarily comprised of contract termination costs, losses on
cellular infrastructure contracts, and an in-process research and development
write-off of $42 million related to the NetSpeak transaction that occurred in
the second quarter of 1998. The remaining $161 million accrual, included in
accrued liabilities in the consolidated balance sheets, at December 31, 1998
represents the remainder of losses on cellular infrastructure contracts and
contract termination costs and has not been offset against any relevant impaired
assets because these amounts do not relate to impaired assets, but relate to the
other charges component of this line item.
4
<PAGE>
The 1997 Programs
During 1997, the Company recorded various restructuring charges for the
purpose of redirecting resources from businesses which had not met strategic and
profitability objectives. The related charges totalled $327 million. The
following table displays a rollforward of the accruals established by business
exited:
<TABLE>
<CAPTION>
Accruals
1997 Accruals at
Initial Adjust- Amounts at Dec. 31, Adjust- Amounts Dec. 31,
charges ments Used 1997 ments Used 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Q2 1997: Semiconductor
Products Segment
Exit from DRAM market $170 $(9) $(131) $ 30 $(12) $ (10) $ 8
- ---------------------------------------------------------------------------------------------------------------------------------
Q3 1997: Other Products
Segment
Exit from MacOS-
compatible computer
systems business 95 - (28) 67 (10) (42) 15
- ---------------------------------------------------------------------------------------------------------------------------------
Q4 1997: Messaging,
Information and
Media Segment
Exit from retail analog
modem business 62 - - 62 - (59) 3
- ---------------------------------------------------------------------------------------------------------------------------------
Grand Total $327 $(9) $(159) $159 $(22) $(111) $26
=================================================================================================================================
</TABLE>
In the second quarter of 1997, the Company's Semiconductor Products Segment
announced its decision to phase out its participation in the dynamic random
access memory (DRAM) market. The decision to exit this business was made
primarily because the business did not meet strategic and profitability
objectives, rather than to generate significant future cost savings. As a result
of this decision, the segment incurred a $170 million charge to write off
technology development costs and to provide for the write down of manufacturing
equipment which could not be retrofitted for other production. In the fourth
quarter of 1997 and in the first quarter of 1998, the segment sold some of this
manufacturing equipment to its joint venture partner and thus reversed into
income $9 million and $12 million, respectively, of accruals no longer needed.
The amounts used in 1997 reflect write-offs. The amounts used in 1998 reflect $3
million in cash payments for exit fees and $7 million in write-offs. The
remaining $8 million accrual at December 31, 1998 is expected to be used by the
end of the first quarter of 1999.
In the third quarter of 1997, the Company announced its decision to exit
the MacOS/R/-compatible computer systems business, a business included in the
Other Products Segment. This decision was made in response to a decision by
Apple Computer to limit the introduction of its new technology and phase out
future licenses, rather than to generate significant future cost savings. As a
result of this decision, the Company incurred a $95 million charge primarily for
the write down of inventory and the cost of terminating contractual commitments.
In the second quarter of 1998, the exposures on these contractual commitments
were less than anticipated, thus resulting in the reversal into income of $10
million. The amounts used in 1997 reflect $3 million in employee severance
payments and $25 million in write-offs. The amounts used in 1998 reflect $3
million in employee severance payments and $39 million in write-offs. The
remaining $15 million accrual at December 31, 1998 relates to these contractual
commitments and may extend past the 1999 year end.
In the fourth quarter of 1997, the Company's Messaging, Information and
Media Segment announced its decision to exit the retail analog modem business
based in Huntsville, AL. The decision was made primarily because the business
was not meeting the Company's strategic and profitability objectives, rather
than to generate significant future cost savings. As a result of this decision,
the segment incurred a $62 million charge for the write down of inventory and
fixed assets, severance costs and certain other costs relating to the
realignment process. The amounts
5
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used in 1998 reflect $37 million in employee severance payments and $22 million
in write-offs. The remaining $3 million accrual at December 31, 1998, is
expected to be used by the end of the first quarter of 1999.
The results of operations of each of these exited businesses were not
material to the Company's consolidated financial statements.
A discussion of the Company's restructuring and other charges is also
detailed in Note 11 to the Consolidated Financial Statements and Notes in this
Proxy Statement.
Motorola's selling, general and administrative expenses were $5.5 billion,
or 18.7% of sales, in 1998 compared to $5.2 billion, or 17.4% of sales, in 1997.
These expenses were adversely impacted by higher losses related to Motorola's
investment in Iridium LLC and certain semiconductor joint ventures. The increase
was despite significantly lower incentive compensation payments in 1998.
Depreciation expense was $2.2 billion in 1998 compared with $2.3 billion in
1997. During 1999, depreciation expense is expected to be relatively unchanged.
The effective tax rate for 1998 was 30% compared to a 35% rate in 1997 and
1996. The Company currently expects the same tax rate in 1999 as in 1998.
MOTOROLA, INC.
1997 COMPARED WITH 1996
Sales increased 7% to $29.8 billion from $28.0 billion in 1996. Geographic
market sales, measured by the locale of the end customer, as a percent of total
Motorola sales remained constant in 1997 versus 1996 in the U.S., Europe, China
and other markets at 42%, 19%, 11% and 6%, respectively. Geographic market sales
increased from 1996 to 1997 in Latin America from 5% to 7%. Geographic market
sales declined from 1996 to 1997 in Japan from 7% to 6% and in Asia, excluding
China and Japan from 10% to 9%.
Net earnings in 1997 were $1.18 billion, or $1.94 per common share,
compared with $1.15 billion in 1996, or $1.90 per common share. Net margin on
sales was 4.0%, compared with 4.1% during 1996. The 1997 earnings included net
special charges of $306 million before tax, equivalent to 32 cents per share
after tax, resulting primarily from restructuring decisions to exit several
unprofitable businesses that no longer had long-term strategic value to the
Company, primarily the Semiconductor Products segment's DRAM business. Net
special charges in 1996 totaled $136 million before tax, equivalent to 15 cents
per share after tax. Excluding the net special charges in both years, 1997
earnings would have been $1.4 billion, or $2.26 per share, compared with $1.2
billion, or $2.05 per share in 1996. The main factor contributing to the 1997
increase in earnings, excluding the net special charges, was the recovery of the
Semiconductor Products segment from the industry-wide recession of 1996. Other
contributors were the growth in sales and profits of the Cellular Products and
Land Mobile Products segments.
Motorola's selling, general and administrative expenses were $5.2 billion,
or 17.4% of sales, in 1997 compared to $4.7 billion, or 16.9% of sales, in 1996.
The increase resulted from higher than normal operating expenses, and higher
incentive compensation payments to the general employee population.
MOTOROLA, INC. SEGMENTS
The following commentary should be read in conjunction with the 1998
financial results of each reporting segment as detailed in Note 9, "Information
by Segment and Geographic Region" of the Consolidated Financial Statements and
Notes in this Form 10-K/A.
6
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CELLULAR PRODUCTS
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997 1996
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(in Millions)
<S> <C> <C> <C>
Orders $12,485 $12,474 $11,506
% change -- 8%
Segment sales $12,483 $11,934 $10,804
% change 5% 10%
Operating profit (loss) before tax $ 482 $ 1,283 $ 1,162
% change (62)% 10%
Restructuring and other charges $ 380 -- --
- ---------------------------------------------------------------------------
</TABLE>
The Cellular Products segment primarily designs, manufactures, sells,
installs, and services cellular telephone subscriber units and cellular
infrastructure equipment.
In 1998, segment sales increased 5% to $12.5 billion. Increases in Cellular
Infrastructure Group sales were slightly offset by decreases in Cellular
Subscriber Sector sales. Segment geographic sales increased in Europe and Asia
and decreased in the Americas. In 1998, segment orders were unchanged.
Increased orders in the Cellular Subscriber Sector were offset by decreased
orders in the Cellular Infrastructure Group. Segment geographic orders increased
in Europe and decreased in Asia and the Americas. In 1998, digital sales
accounted for 76% of equipment sales versus 59% for 1997. Sales of CDMA phones
and infrastructure equipment increased very significantly for the full year.
Analog sales were significantly lower for the full year. Operating profits were
lower for the overall Cellular Products segment due to competitive pressures and
late product entry in certain digital technologies within the cellular telephone
market, as well as charges to cover restructuring costs, asset impairments and
other charges associated with Motorola's 1998 restructuring programs.
Cellular Subscriber Sector (CSS) sales declined and orders increased. Sales
increased in all geographic regions except the Americas, where they declined.
Orders increased in Europe and Asia, while they declined in the Americas. Demand
for digital products grew very significantly, while demand for analog products
declined significantly.
The Company believes CSS's share of the overall wireless telephone market
declined in 1998 as a result of: the continuing technology shift from analog
products, where the Company has a higher relative market share, to digital
products, where the Company has a lower relative market share; increasing
competition in the digital product market; and delays in the Company's
introduction of some digital products. The Company introduced several new
digital products in 1998 that increased its share in some digital technologies,
but this was not enough to offset losses associated with the rapid transition to
digital technology that occurred in 1998, particularly in the Americas region.
Since most of the new digital product introductions occurred in the second half
of the year, the Company's market share in the second half of the year was
higher than for the year as a whole and was at its highest in the fourth
quarter. In 1999, the Company expects continued market share gains from its
expanding portfolio of digital cellular telephones, although this could be more
than offset by the continuing market shift away from analog products and in
total result in a market share decline.
CSS introduced a variety of new and innovative digital communications
products. Early in the year, the sector announced the StarTAC(R) 130 GSM (Global
System for Mobile Communications) phone, the world's smallest and lightest
digital phone, the cd900 family of dual-band GSM phones with advanced functions
for business users, and the cd160 dual-band GSM phone aimed at first-time users
and the general consumer market. The sector also announced the D520 GSM digital
mobile phone, which offers superb battery performance and a variety of colors.
CSS also announced an integrated smart card GSM digital cellular phone which is
expected to pave the way for an impressive new range of consumer services
including mobile automated teller machine, remote ticketing, and pay-as-you-use
telephony.
7
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During the fourth quarter, CSS began shipping a broader array of new
digital phones, including the new digital StarTAC phones for CDMA (Code Division
Multiple Access) and TDMA (Time Division Multiple Access). The analog version of
the new V series phone, weighing 2.7 ounces, began shipping in November, with
the dual-band digital GSM version shipping in December. The sector also
announced the commercial availability of a new entry-level dual-mode CDMA phone,
and signed several significant contracts with carriers for digital StarTAC
phones for use in the Americas.
The Satellite Series/TM/ 9500 portable phone, designed for use on the
Iridium(R) global personal communications system, began initial shipments in
September, with volume shipments occurring in the fourth quarter.
Cellular Infrastructure Group (CIG) sales were higher, while orders
declined. Sales were higher in the Americas, Europe, and Asia. Orders were
higher in Europe and the Americas, but were lower in Asia.
The Company believes CIG's share of the cellular infrastructure equipment
market declined in 1998, resulting from increasing competition in the digital
equipment market and the Company's decision not to develop U.S. TDMA
infrastructure equipment. CIG expects to benefit from its continuing investment
in digital infrastructure technologies, including GSM and CDMA. CIG is also
actively involved in the development of third generation (3G) digital wireless
systems.
Among the GSM contracts it was awarded during 1998, CIG received a contract
in Turkey, which is one of the world's largest GSM contracts. To date CIG has
supplied contracts to deploy more than 90 GSM systems to network operators
worldwide.
CIG, a pioneer in first-generation CDMA digital cellular technology, was
named by Cahners In-Stat Group, a leading wireless industry research and
consulting firm, as the leading international provider of commercial CDMA
digital cellular systems, with commercial CDMA systems in 51 markets on four
continents. During 1998, CIG received significant contracts for CDMA systems in
Mexico, Brazil, and the U.S., and was the first to launch commercial CDMA
service in Japan and the Philippines.
CIG's WiLL(R) (Wireless Local Loop) systems have been deployed in over 25
countries worldwide. During 1998, contracts were received in China, India, and
the Dominican Republic.
LAND MOBILE PRODUCTS
<TABLE>
<CAPTION>
(in millions)
Years ended December 31 1998 1997 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
Orders $5,512 $5,154 $4,056
% change 7% 27%
Segment sales $5,397 $4,926 $4,008
% change 10% 23%
Operating profit (loss) before tax $ 729 $ 542 $ 452
% change 35% 20%
Restructuring and other charges $ 106 $ -- $ --
- ----------------------------------------------------------------
</TABLE>
The Land Mobile Products segment primarily designs, manufactures, sells,
installs and services analog and digital two-way radio voice and data products
and systems for many different commercial, governmental and industrial customers
worldwide.
Segment sales increased 10% to $5.4 billion and operating profits were
higher. Segment geographic sales were higher in Europe and the Americas while
they declined in Asia, which is presently a small market for this segment.
Orders increased 7% and were higher in the Americas, while they declined in
Europe and Asia. Growth in the segment was led by the success of the segment's
iDEN(R) technology, as well as continued growth in the two-way
8
<PAGE>
radio infrastructure business. 1998 profits include a gain of $90 million from
the sale of an interest in a shared network operation of Motorola Communications
Israel, Ltd. to AMPAL (Israel) Ltd. Operating profit was also favorably impacted
by sales growth.
The Company believes that its market share increased in both two-way radio
products and infrastructure primarily due to growth in iDEN(R) products and
systems and gains in the two-way radio infrastructure business.
The Radio Network Solutions Group's (RNSG) sales and orders increased. RNSG
continues to make significant progress in developing and deploying digital
systems that are based on recently commercialized industry standards. To date
RNSG has installed more than 100 systems that are compliant with Project 25, the
U.S. digital standard for public safety communications. During the year, RNSG
shipped its first Project 25-compliant trunking system. RNSG also has shipped 10
Dimetra/TM/ systems to date, which are based on TETRA (TErrestrial Trunked
RAdio), the European standard for digital trunked radio communications. RNSG was
also awarded its first Dimetra system contract in Asia.
Motorola and Harris Corporation announced they modified their respective
product plans to produce ASTRO(R)Seneca/TM/, a highly secure mobile radio
platform for public safety communications, with a comprehensive array of
options. RNSG also announced its first industry standard, Internet Protocol (IP)
based wireless data technology for its Private DataTAC/TM/ network.
Sales and orders for iDEN(R) products were higher. IDEN systems are now in
commercial service or becoming operational in 13 countries around the world.
Motorola began shipping the i1000/TM/, a palm-size integrated digital handset
for business professionals. The handset uniquely combines the capabilities of a
cellular phone, two-way radio and alphanumeric pager. Its small size and light
weight makes the i1000 unit the first "wearable" integrated digital handset. The
i1000 handset received a Product of the Year Award from Mobile Computing &
Communications magazine.
The Radio Products Group (RPG) had lower sales and orders due primarily to
economic weakness in Asia. Sales and orders were higher in the U.S. while lower
in Latin America, Europe and Asia. Motorola began shipping the smallest member
of its award winning line of TalkAbout(R) consumer two-way radios, the Talk
About(R) SLK. This state-of-the-art two-way radio, which weighs just 4.5 ounces
with batteries, won an Innovations 1999 Award from the International Consumer
Electronics Society. RPG also began shipping the Handie-Pro/TM/, its first
consumer radio for the European market. Consumer frequencies were approved in
Brazil and Mexico. RPG announced the Professional radio, a global series of
high-performance two-way radios, which are tailored to user needs, and
regulatory requirements in different regional markets.
MESSAGING, INFORMATION AND MEDIA PRODUCTS
<TABLE>
<CAPTION>
(in millions)
Years ended December 31 1998 1997 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
Orders $ 2,692 $3,523 $3,981
% change (24)% (12)%
Segment sales $ 2,633 $3,793 $3,958
% change (31)% (4)%
Operating profit (loss) before tax $ (699) $ 41 $ 46
% change (1805)% (11)%
Restructuring and other charges $ 507 $ 62 $ --
- ----------------------------------------------------------------
</TABLE>
The Messaging, Information and Media Products segment primarily designs,
manufactures, sells, installs and services paging subscriber, paging
infrastructure and related products, such as paging software and accessories.
9
<PAGE>
Segment sales declined 31% to $2.6 billion and orders declined 24%. The
segment had an operating loss versus a profit in 1997. The decrease in sales was
primarily attributable to economic weakness in Asia, a longer than expected
period of reorganization of the paging operators in the People's Republic of
China, and continued slow growth of the U.S. paging market. The operating loss
was primarily due to the decline in sales, charges to cover restructuring costs,
asset impairment and other charges associated with Motorola's restructuring
programs, the $109 million write-off in connection with the acquisition of
Starfish Software, Inc. and lower average selling prices.
In 1998, the Messaging Systems Products Group (MSPG), which represents the
significant majority of this segment's revenues, experienced a decline in sales
and orders largely attributable to the China market. The Company believes that
the recently completed governmental reorganization/privatization of Chinese
provincial paging companies adversely affected sales of paging infrastructure
systems and pagers.
The paging industry in the rest of Asia continues to be affected by the
poor financial health of many local paging operators. Many of these operators
were U.S. dollar debt leveraged and significantly weakened local currencies made
it difficult for them to service their debt obligations. Purchases from MSPG
were reduced and several regional customers were on credit holds or cash terms
at the end of 1998.
MSPG continues to be the market share leader in the paging market, although
market share remained flat in 1998 versus 1997. MSPG expects only a modest long-
term growth rate in the worldwide subscriber base for the one-way paging market,
which represents most of the industry today. The two-way market, which is a very
small segment of the paging market, is expected to show stronger long-term
growth rates in its subscriber base. Competition from low cost and prepaid
digital wireless telephone services around the world, which include short
messaging services, is causing paging product price declines and customers to
look more favorably at wireless phones as options for messaging needs. These
pricing pressures are likely to intensify.
Throughout 1998, MSPG continued its successful campaign to implement the
FLEX(R) family of communication products as the de facto worldwide standard for
high speed messaging technology. In the U.S., commercial service for Motorola's
PageWriter(R) pager, employing ReFLEX(R) two-way messaging technology and a
standard QWERTY-type keyboard, continued its rapid growth. U.S. operators also
introduced InFLEXion/TM/ voice-paging services in ten additional major
metropolitan centers, employing the Tenor(R) advanced voice pager, which accepts
and stores voice messages, and operates like a portable answering machine.
SEMICONDUCTOR PRODUCTS
<TABLE>
<CAPTION>
(in millions)
Years ended December 31 1998 1997 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
Orders $ 7,425 $8,416 $7,187
% change (12)% 17%
Segment sales $ 7,314 $8,003 $7,858
% change (9)% 2%
Operating profit (loss) before tax $(1,225) $ 168 $ 186
% change (829)% (10)%
Restructuring and other charges $ 731 $ 170 $ --
- ----------------------------------------------------------------
</TABLE>
The Semiconductor Products segment designs, produces and sells integrated
semiconductor solutions and components for the consumer, networking and
computing, transportation and wireless communications markets worldwide.
Segment sales decreased 9 percent to $7.3 billion, orders were down 12
percent and the segment had an operating loss versus a profit a year ago. The
operating loss is attributable to restructuring, asset impairment and other
charges associated with Motorola's restructuring programs and the fact that the
worldwide semiconductor
10
<PAGE>
industry entered a second recessionary period in three years, contrary to the
Company's expectations and those of most industry forecasters at the beginning
of 1998. Severe pricing pressures in many product lines and lower global average
selling prices resulted from the worldwide recession and contributed to the
operating loss. Worldwide semiconductor industry sales declined by approximately
9% in 1998. Segment orders were lower in all major geographic markets. Segment
sales were higher in Europe but declined in Asia and the Americas. Motorola
internal business units consumed 22% of the segment's product output in both
1998 and 1997. The Company believes it maintained its overall market share for
the year.
In the Consumer Systems Group and the Semiconductor Components Group, sales
and orders decreased due primarily to economic weakness in Asia. In the Wireless
Subscriber and Systems Group, sales and orders decreased. The majority of the
group's sales are to internal customers, primarily the cellular telephone and
paging business, each of which experienced a decline in sales in 1998. Sales and
orders increased in the Transportation Systems Group due to higher penetration
of electronics in the automotive market segment. Sales and orders increased in
the Network and Computing Systems Group as a result of sales growth of key
customers.
During the year, the business carried out numerous business and facility
consolidations and overhead cost reductions to address the current business
situation and to be prepared to move quickly to seize opportunities as the
industry recovers. These initiatives included exiting businesses that either are
unprofitable or that do not fit the business' strategic agenda for achieving
leadership in its focused end markets. Among businesses the segment exited in
1998 were optoelectronics, field programmable gate arrays and modular power
systems.
Manufacturing facilities were closed or consolidated at more than a dozen
sites, including closing major facilities in California, North Carolina, Arizona
and the Philippines. In addition, during 1998 the business began converting a
significant portion of its major manufacturing facilities located at 52nd Street
in Phoenix, Arizona from manufacturing to non-manufacturing utilization. This
conversion is expected to be completed in 1999. It also is consolidating its
production network into fewer integrated "anchor" sites for economies of scale
and improved efficiency. By increasing the use of foundry manufacturing capacity
for older or specialized technologies, the segment expects to more effectively
leverage capital investment, with the goal of moving from 14% foundry/joint
venture outsourcing in 1998 to 30% by 2000 and 50% by 2002.
In January 1999, the Semiconductor Products segment agreed to sell its
smart card integrated circuit manufacturing business in East Kilbride, Scotland,
to Atmel, a semiconductor company based in San Jose, California. The decision to
sell this business will not affect the Company's other smart card-related
businesses which will continue to provide total smart card solutions to a
diverse range of industries. The sale is expected to be completed by the end of
the second quarter in 1999.
In February 1999, the Semiconductor Products segment agreed to sell the
assets of its Chung-Li facility near Taipei, Taiwan, and its Paju plant near
Seoul, South Korea, to ASE Group Ltd. These asset sales are expected to be
completed by the end of 1999.
The loss of operating income from these exited businesses is not
significant to the segment's or the Company's results of operations.
In addition, aggressive product review has resulted in a significant
reduction of the number of semiconductor devices the segment manufactured and
sold as of year end 1998 compared with mid-1997, with the goal of achieving
reductions of 50% by the end of 1999. By focusing the reduction on non-
strategic, low volume products, this effort is not expected to have a material
impact on sales, yet is expected to generate profit improvement by reducing
overhead costs.
The segment's full range of embedded solutions includes the M-CORE/TM/ and
Power PC/TM/ microcontroller/ microprocessor architectures. The segment also
announced an agreement to supply its Streamaster/TM/ multimedia architecture for
use in Hong Kong Telecom's Interactive TV project. Streamaster combines the
functions of a broadband router, network computer and digital home theater
platform. SPS supplies the DragonBall/TM/ high-performance processor that powers
such popular products as the connected organizer from Palm Computing Inc., a
3Com company, and Motorola's PageWriter(R) 2000 two-way messaging device.
11
<PAGE>
The Microprocessor Report named the PowerPC750/TM/ the "best RISC processor
of the year," as the segment introduced new chips operating at speeds of up to
366 MHz, and at the low-power of 1.9 volts, making the PowerPC architecture
ideal for a new range of embedded mobile and desktop applications. The debut of
a new software supplement to the Microsoft Platform Builder allows developers to
more quickly produce Microsoft(R) Windows CE(R) based products using the PowerPC
based processors.
The segment announced numerous industry-leading technology and process
achievements in 1998. These included using copper interconnect processes in
conjunction with leading-edge 0.15 micron CMOS technology to achieve
breakthrough SRAM (static random access memory) performance on a device
containing 60 million transistors. Dual inlaid copper interconnect technology is
designed to bring high-end computing power to products such as cellular
telephones and personal digital assistants.
The segment announced numerous alliances. It is devoting substantial
resources to develop next-generation digital signal processor development in a
strategic alliance announced with Lucent Technologies. In partnership with
Advanced Micro Devices, the segment announced plans to cross-license patents,
and to jointly develop common process technology platforms for microprocessors
and embedded flash memory featuring copper interconnects. In partnership with
Siemens AG, it is pursuing 300-millimeter wafer technology development in
Dresden, Germany.
OTHER PRODUCTS
The Other Products segment primarily includes the Integrated Electronic
Systems Sector (IESS), (formerly the Automotive, Component, Computer and Energy
Sector), and the Space and Systems Technology Group (SSTG). The Other Products
segment recorded restructuring and other charges of $256 million and $95
million, in 1998 and 1997, respectively.
INTEGRATED ELECTRONIC SYSTEMS SECTOR
The Integrated Electronic Systems Sector designs, manufactures and sells
automotive and industrial electronics products, energy storage products and
systems, electronic fluorescent ballasts and multi-function embedded board and
computer system products.
The Sector has restructured to sharpen its focus on the growing
opportunities in the embedded electronic systems market. Intelligent electronic
capability is being integrated into many consumer products and, as a result, the
market for embedded technologies and systems is projected by industry analysts
to grow dramatically.
For the year, Sector sales decreased 5% and orders were 4% lower. The
Sector had an operating loss versus a profit in 1997. Sales decreased due to
lower demand for ceramic and quartz components and rechargeable batteries for
cellular telephones. The operating loss was primarily due to charges associated
with the Company's restructuring programs and the decline in sales.
Automotive and Industrial Electronics Group (AIEG) sales and orders
increased compared with a year ago due to the higher penetration of electronics
in the automotive market segment. During the year, AIEG received contracts for:
new engine control module programs; sensor business for truck applications;
powertrain control module business from major engine and automotive
manufacturers; automotive body electronics and sensor business from major
European automotive manufacturers; and mapped ignition module business from an
Asian automotive manufacturer.
The Energy Systems Group (ESG) experienced lower sales and orders. The
majority of ESG's sales are to the Company's cellular telephone business that
had lower sales for the year. ESG won rechargable battery contracts from two
laptop computer manufacturers for worldwide distribution and incremental
business from two cellular telephone manufacturers.
The Component Products Group (CPG) had lower sales and orders. The majority
of CPG's sales and orders are to internal customers, primarily the cellular
telephone and paging businesses, each of which experienced a decline in
12
<PAGE>
sales in 1998. During 1998, CPG sold its printed circuit board operations based
in Singapore. In the first quarter 1999, the Component Products Division
business was sold. As a result of these sales, the group ceased to exist.
The Motorola Computer Group (MCG) designs, manufactures, sells and services
multi-function computer systems and board-level products, together with
operating systems and system enablers based on the Motorola 68000, 88000,
PowerPC/TM/ series and Intel(R) Pentium(R) microprocessors. MCG sales and orders
decreased for the year. Excluding operating results from the MacOS(R) compatible
computer systems business exited in the second half of 1997, sales and orders
were higher. MCG announced a range of CompactPCI(R) systems that set new low
price points in the market.
The Telematics Communications Group (TCG) was formed during the year to
focus on the growing worldwide opportunity in the emerging automotive
communications industry. The Group focuses on creating products designed to
provide security, information, convenience and entertainment services from a
central service center to drivers and their passengers via a communication
gateway in the automobile. The group's sales were not material to the Sector.
SPACE AND SYSTEMS TECHNOLOGY GROUP
The Space and Systems Technology Group (SSTG) is engaged in the design,
production and integration of advanced electronic communication systems and
products for a variety of commercial and government customers around the world.
SSTG's Satellite Communications Group (SCG) designs, manufactures, operates and
maintains space-based telecommunications systems.
Group sales increased 9% in 1998 due in part to the completion of several
terrestrial gateways associated with the deployment of the Iridium(R) system.
Communications are relayed via satellite and through these terrestrial gateways,
where billing information and user location data is stored. Orders were lower
than a year ago primarily due to the fact that orders related to the completion
of the Iridium Space System Contract and the deployment of the twelve regional
gateways associated with the Iridium system were recorded in 1997. Operating
profits were lower compared to a year ago primarily due to charges associated
with the Company's restructuring programs.
On November 1, 1998, the Satellite Communications Group successfully
completed the terms of the Space System Contract with Iridium LLC to build and
deploy the Iridium(R) satellite communications network, the first low-earth
orbit, worldwide satellite-based communications network for general public use.
On that same date, voice service on the system began and SCG began fulfilling
the terms of the five-year Operations and Maintenance Contract to operate and
continue to manufacture and deploy satellites for the maintenance of the Iridium
system. A discussion of the Company's commitments and contingencies related to
the Iridium project is in Note 8 to the Consolidated Financial Statements and
Notes in this Proxy Statement.
SCG has been designated by Teledesic LLC, an entity in which Motorola has a
minority ownership interest, as the prime contractor for the Teledesic(R)
System. The Teledesic System is conceived as a global, broadband "Internet-in-
the-Sky" satellite communications system. The network is planned to provide
high speed data connections to businesses, institutions and individuals
worldwide. The system would be composed of a constellation of low-Earth-orbit
satellites, designed to provide affordable, worldwide, "fiber-like" access to
telecommunications services, including broadband Internet access, video
conferencing, high quality voice and other digital data needs to fixed
locations.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations was $1.0 billion in 1998 compared with $2.6
billion in 1997 and $4.2 billion in 1996. The decrease in 1998 compared to 1997
was primarily due to a net loss of $962 million in 1998 compared to net earnings
of $1.2 billion in 1997. The 1998 net loss includes a charge of $1.98 billion
for restructuring and other charges. The restructuring programs are expected to
result in an annualized profit improvement of approximately $1.0 billion.
13
<PAGE>
Through December 31, 1998, the Company's 1998 comprehensive restructuring
programs used $1.34 billion of the $1.98 billion charge recorded in the second
quarter. Of the $1.34 billion utilization, approximately $600 million were cash
payments and $740 million were write-offs. At December 31, 1998, the remaining
accrual balance is $640 million, of which the Company expects to make
approximately $293 million in cash payments and $347 million in write-offs
throughout 1999.
Through December 31, 1998, the Company's 1997 restructuring programs used
$270 million of the $327 million charge recorded throughout 1997. Of the $270
million inception-to-date utilization, approximately $46 million were cash
payments and $224 million were write-offs. At December 31, 1998, the remaining
accrual balance is $26 million, of which approximately $7 million relates to
write-offs and $4 million relates to cash payments that will be made by the end
of the first quarter of 1999 and approximately $15 million in contractual
commitments that could result in cash payments in 1999 and beyond.
The Company anticipates that the cost savings generated by the 1998 and
1997 programs will provide adequate cash resources to fund, in addition to other
corporate needs, the remaining cash requirements under both programs.
Net cash used in investing activities was $3.0 billion in 1998 compared
with $2.5 billion in 1997 and $2.9 billion in 1996. The increase in investing
activities in 1998 compared with 1997 was primarily due to the acquisitions of
Starfish Software, Inc. and Appeal Telecom Company, Ltd., the investments in
NetSpeak Corporation and Teledesic LLC and advances to joint venture affiliated
companies. Capital expenditures continue to represent the single largest use of
the Company's cash. In 1998 capital expenditures increased to $3.2 billion from
$2.9 billion in 1997 and $3.0 billion in 1996. The 1998 increase resulted from
increased expenditures in the Semiconductor Products segment. The Semiconductor
Products segment continued to comprise the largest portion of capital
expenditures, with approximately 56% of all such investments in 1998. Capital
expenditures for 1999 are expected to be $3.0 billion, of which $900 million are
expected to be in the Semiconductor Products segment.
Net cash provided by financing activities was $1.9 billion in 1998 compared
with a use of cash of $39 million in 1997 and a use of cash of $496 million in
1996. Financing activities consisted primarily of commercial paper and short-
term borrowings, long-term debt issuance's and retirements and dividend payments
to stockholders. The increase in 1998 was primarily from commercial paper and
short-term borrowings of $1.6 billion and net proceeds from the issuance of
long-term debt of $773 million. Increased financing needs were driven primarily
by lower operating cash flow, significantly increased customer financing and net
cash used in investing activities.
The Company's ratio of net debt to net debt plus equity was 26.8% at
December 31, 1998 compared with 12.4% in 1997 and 13.4% in 1996. The Company's
increased debt levels were necessary to finance the Company's operations, to
provide for customer financing, for investing activities and for capital
expenditures.
The number of weeks that accounts receivable was outstanding worsened to
8.3 in 1998 from 7.5 in 1997 and from 6.7 in 1996. The increase in accounts
receivable weeks partially resulted from growth in large system sales that
traditionally have longer customer payment terms. Inventory turns, using the
cost-of-sales calculation method, improved to 5.1 in 1998 from 4.9 in 1997 and
5.2 in 1996.
The Company and its consolidated finance subsidiary have revolving domestic
credit agreements of one and five years with a group of banks for $2.5 billion.
These agreements are scheduled to terminate in September 1999 and September
2002, respectively. They contain various conditions, covenants and
representations with which the Company was in compliance at December 31, 1998.
At December 31, 1998, the Company's total U.S. and non-U.S. credit facilities
aggregated $4.6 billion, of which $187 million were used and the remaining $4.4
billion were available to back up outstanding commercial paper, which totaled
$2.7 billion.
In February 1999, Motorola Capital Trust I, a recently-created Delaware
statutory business trust and wholly-owned subsidiary of Motorola, 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 Motorola,
to buy a series of 6.68% Deferrable Interest Junior Subordinated Debentures, due
March 31, 2039 ("Subordinated Debentures") from Motorola with the same payment
terms as the
14
<PAGE>
TOPrS. Motorola, in turn, used the $484 million of net proceeds from the sale of
the Subordinated Debentures to reduce short-term indebtedness.
The Company believes that it can continue to access the capital markets in
1999, if necessary, on terms and conditions acceptable to it despite increased
long-term financing activities in 1998 and early 1999. However, there are many
factors that affect the Company's ability to access the capital markets, many of
which are outside the control of the Company, such as the Company's credit
ratings and liquidity of the capital markets. There can be no assurances that
the Company will continue to have access to the capital markets on favorable
terms.
Purchasers of the Company's infrastructure equipment are increasingly
requiring suppliers to provide long-term financing in connection with equipment
purchases. Financing may include all or a portion of the purchase price and
working capital and can be sizeable as in the case of the Iridium(R) system
discussed below. The Company also may assist customers in getting financing from
banks and other sources. During 1998 the Company significantly increased the
amount of customer financing directly from the Company and through its
consolidated financing subsidiary. As a result of increased demand for customer
financing, the Company and its consolidated financing subsidiary borrowed more
money in 1998, in part to fund these financings. The Company expects that the
need to provide this financing or arrange financing for its customers will
continue, and could increase, and that the Company will have to manage the level
of its customer financings. This may include selling customer financings to
other financial institutions.
At December 31, 1998, the Company owned, directly and indirectly,
approximately 19% of Iridium LLC (Iridium LLC and its operating subsidiary,
Iridium Operating LLC, are collectively referred to as Iridium). The Company
continues to provide financial support to Iridium in connection with the
deployment of the Iridium system communications network. Commercial voice
service on the Iridium system began November 1, 1998 and Iridium is currently
transitioning from a developmental stage company to an operating company with 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 Motorola. Iridium operates in an essentially new
market for wireless communications services and there can be no assurances that
Iridium will be successful.
The Company accounts for its investment in Iridium under the equity method
of accounting due to its financial influence on Iridium in the form of
guarantees of Iridium's indebtedness, its contract with Iridium for the
operation and maintenance of the global personal communications system and other
financial commitments as more fully discussed below. The following table
summarizes the Company's equity and bond investments in Iridium and investments
in the Iridium gateway companies as of December 31, 1998, and the amounts owed
to the Company by Iridium under several contracts as of February 27, 1999:
<TABLE>
<S> <C>
- ------------------------------------------------------------------
Investments:
Equity investment in Iridium $ 50
Bond investment in Iridium 157
Investments in Iridium gateway companies 56
----
Total $263
====
Accounts Receivable:
Operations & maintenance contract $176
Other contracts 88
----
Total $264
====
- ------------------------------------------------------------------
</TABLE>
The Company's equity and bond investment in Iridium and its equity
investments in several Iridium gateway companies aggregated approximately $263
million at December 31, 1998, and are included in the consolidated balance sheet
in Other Assets. The Company's remaining equity investment in Iridium was
approximately $50 million at December 31, 1998. The Company expects to record
losses equal to this remaining equity investment by the end of the first quarter
of 1999. The Company's bond investment in Iridium consisted of $157 million face
principal amount of senior subordinated discount notes. The Company's
investments in Iridium gateway companies was approximately $56 million. The
Company's ownership percentages in these gateway companies ranged from
approximately 20% to 100%.
15
<PAGE>
Unless otherwise indicated, the following table summarizes as of December
31, 1998, the Company's bank guarantees and other financial commitments for
which it is obligated should certain conditions or events occur and contractual
commitments to Iridium and other obligations:
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
Bank Guarantees and Other Financial Commitments:
Senior Secured Credit Agreement capital call $ 50
Senior Guaranteed Credit Agreement $750
Conditional Guarantee See Below
Contractual Commitments and Other Obligations:
Operations & Maintenance contract maximum
deferrable commitment $400
Amount deferred as of February 27, 1999 176
----
Remaining deferrable commitment $224
====
Obligations to subcontractors $109
====
Assets at risk and other estimated potential
contractual obligations $791
====
- ----------------------------------------------------------------------
</TABLE>
Iridium's bank facilities include an $800 million Senior Secured Credit
Agreement. That agreement contains subscriber and revenue targets and other
conditions that Iridium must meet to avoid default. On March 1, 1999, Iridium
announced that it was likely that it would not meet its first quarter 1999
subscriber and revenue targets. There can be no assurances that the lenders
under this credit agreement will revise those targets so that Iridium does not
default or that they will waive such default. If a default occurs under the
Senior Secured Credit Agreement, those lenders could execute on their security
interest in substantially all of Iridium's assets and require certain investors
in Iridium LLC to comply with their capital call requirements, which in
Motorola's case would be approximately $50 million. If this investment was
required, it would be subject to the same accounting treatment applied to the
Company's prior equity investment in Iridium.
In addition, if Iridium defaults under its Senior Secured Credit Agreement
it will be in default under a $750 million Senior Guaranteed Credit Agreement
which Motorola has directly guaranteed. The majority of this facility is
scheduled to mature on December 31, 2000 and the remainder is scheduled to
mature on December 31, 2001. Iridium has used and is using the proceeds of this
senior guaranteed facility generally to make payments to the Company for the
Iridium system. If Iridium were to default under the $750 million Senior
Guaranteed Credit Agreement, the banks providing loans under the Senior
Guaranteed Credit Agreement could terminate Iridium's ability to make further
draws under that agreement, accelerate all the outstanding obligations under
that agreement and require Motorola to satisfy its guarantee obligations.
Also, although Motorola has not directly guaranteed the Senior Secured
Credit Agreement, it has agreed to guarantee an additional $350 million of
Iridium debt upon Iridium's request, subject to certain conditions, most
significantly non-payment by Iridium of certain obligations owed to Motorola and
compliance with the terms of the Agreement Regarding Guarantee between Motorola
and Iridium LLC. If Iridium requests that Motorola provide this additional
guarantee, it may be used by Iridium to guarantee or reduce the amount
outstanding under the Senior Secured Credit Agreement. Motorola believes it is
likely that Iridium will ask Motorola to make this additional $350 million
guarantee available in the near future, either for working capital or in some
manner related to the Senior Secured Credit Agreement.
Motorola also has provided up to $400 million of financial support directly
to Iridium by deferring amounts owed under a contract with Motorola. As of
February 27, 1999, Iridium has deferred $176 million of payments and the Company
expects that Iridium will continue to defer payments. The repayment of these
deferred payments is subordinated to repayment of Iridium's senior secured bank
loans, as is the repayment to Motorola by Iridium of any
16
<PAGE>
amounts Motorola pays to banks under its guarantees and some other obligations
owed to Motorola. Approximately $88 million is owed to the Company by Iridium,
apart from the deferred payments described above, as of February 27, 1999.
The Company has several contracts valued at $3.2 billion with Iridium for
the operation and maintenance of the global personal communications system.
Through the end of 1998, the Company has earned and received payments
approximating $242 million under these contracts. The Company has significant
subcontracts for portions of the system, for which it will generally remain
obligated in the amount of $109 million as of December 31, 1998 even if Iridium
is unable to satisfy the terms of the contracts with the Company. In addition,
the Company has substantial investments in assets related to these contracts,
such as inventory, manufacturing equipment, buildings and other potential
obligations in connection with these contracts, the value of which the Company
estimated to be $791 million as of December 31, 1998.
The loss of the value of its investment in Iridium and Iridium gateway
companies, the failure of Iridium to make contractual payments to Motorola or
any default by Iridium under its credit agreements and debt instruments which
results in the acceleration of Iridium debt or Motorola having to perform under
its Iridium guarantee obligations would have a material adverse effect on the
Company's consolidated financial position, liquidity and results of operations.
A discussion of the Company's commitments and contingencies is detailed in
Note 8 to the Consolidated Financial Statements and Notes in this Proxy
Statement.
The Company believes that it has adequate internal and external resources
available to fund expected working capital and capital expenditure requirements
through fiscal 1999.
OTHER MATTERS
Environmental Matters
A discussion of the Company's environmental matters is detailed in Note 8
to the Consolidated Financial Statements and Notes in this Proxy Statement.
Research and Development
Research and development expenditures increased to $2.9 billion in 1998, up
from $2.7 billion in 1997 and $2.4 billion in 1996. Over the past three years,
the Company has invested 8% to 10% of sales in product development and
technological advances, and continues to believe that a strong commitment to
research and development is required to drive long-term growth. A more rapid
rate of increase in research and development expenditures is expected in 1999.
Acquired In-Process Research & Development
A discussion of the Company's Acquired In-Process Research and Development
costs is discussed in Note 12 to the Consolidated Financial Statements and Notes
in this Proxy Statement.
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 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"
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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 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, and all but three of the Company's groups also have substantially completed
Phases 5 and 6. These three groups still expect to complete the Six-Phase
program during 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 being developed and those plans are focusing on
matters not resolved in 1998 that may have a material negative impact on
Motorola's final "year 2000 readiness" and are expected to be completed by
March 31, 1999. A discussion of the Company's contingency plans is 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 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.
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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 websites.
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
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 December 31, 1998 were approximately
$120 million, of which approximately $80 million were for external costs. Of the
remaining costs, the majority relate to installation of software upgrades of
certain infrastructure equipment and installing software upgrades to internal
semiconductor manufacturing systems. 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 problems. 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. 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's
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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 and other matters. The plans are expected to be
completed by March 31, 1999. The Company has provided training seminars to
assist the businesses in developing contingency plans and to create a forum to
share solutions throughout the Company's many businesses. The Company has
operations around the world and is considering shifting operations to different
facilities if there are 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. By the end of the first quarter of 1999, CIG will make 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. CIG
sells systems throughout the world and trained technicians in many countries are
in the process of installing these upgrades. CIG 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 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 customers with outdated
systems. Additionally, a CIG 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. CIG is now in the process of sending out
second notices and asking for confirmations back from these customers.
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.
Substantially all of CIG's vendors have responded to CIG's Year 2000
questionnaires. As a result, vendors identified as critical to business or
manufacturing processes will be audited for Year 2000 compliance in 1999.
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, system performance could be affected and 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
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selling products in an emerging consumer two-way radio market. This segment also
sells iDEN(R) 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 or are 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 was made in late December 1998.
Regular customer installations will continue through the end of third quarter
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 customers
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. MSPG 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 June 1999. MSPG 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 a website.
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 should reduce the likelihood of this occurring.
All data communications equipment and modems sold by MIMS are Year 2000
Ready. Older data communications and modem 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.
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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 for which 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, 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 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.
The satellite business management believes that the most reasonably likely
worst case scenario related to the Year 2000 problem 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.
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. Of those products identified with date-sensitive
functions, all are now confirmed Year 2000 Ready either through replacement with
a compliant part or upgrades to existing parts. Information is being shared with
customers via the Motorola Year 2000 website. 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.
With all products Year 2000 Ready and all exceptions with documented action
plans as of year-end, the business is focusing on external suppliers, especially
utilities and installing upgrades to its manufacturing 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.
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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 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.
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.
IESS has deferred a number of small projects from the second half of 1998
to early 1999 in an effort to reduce overall Year 2000 project costs. All
projects will be completed by August 1999. The sector does not believe this
delay will impact Year 2000 Readiness of the sector.
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 in 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, the euro was created and eleven of the fifteen member
countries of the European Union (EU) established fixed conversion rates between
their existing national currencies and the euro. The participating
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countries adopted 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 or about
January 1, 2002, euro-denominated notes and coins will begin to be issued and
national currencies will start to be withdrawn from circulation.
The Company formed a joint European-United States task force to assess the
potential impact to the Company that may result from the introduction of the
euro. In addition to tax and accounting considerations, the Company continues to
assess 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 product in
different countries; (3) the impact on currency exchange costs and currency
exchange rate risk; and (4) the impact on existing contracts.
The Company has established a euro project plan with two phases. Each
business segment is responsible for following this plan and internal audit is
reviewing progress against established milestones. Phase I of the plan was to
enable the Company to be "euro-capable," meaning able to process euro
transactions and comply with all relevant EU and national regulations. This was
accomplished by January 1, 1999 by all business segments. Phase II of the plan
is intended to enable various businesses in Motorola Europe to become "euro-
functional," meaning that the functional currency used by the businesses in
relevant countries will be the euro. Phase II is targeted to be completed by
January 1, 2001.
(1) Technical Challenges: As of January 1, 1999, the Company's information
systems are "euro-capable." The costs to migrate systems and equipment to "euro-
capability" were not significant, as many of the Company's systems were already
multi-currency capable. Project plans for becoming "euro-functional" in Phase II
are still under development. Cost estimates have not yet been completed for this
phase, but the costs are not expected to be material to the Company.
(2) Competitive Impacts: The Company believes that it will not experience a
significant competitive impact as a result of the cross-border price
transparency that will result from the euro conversion. Motorola is already a
multi-currency company operating in a global market with a presence in most
countries within the EU. A number of contracts are negotiated on a world-wide
basis with the U.S. Dollar as the basis for price negotiations. As a result,
price transparency already exists. Additionally, in the European sales
environment, the presence of the same major customers in various consortia means
that comparison of prices by large customers is already well established.
Accordingly, the Company does not anticipate a material impact to our business
due to the elimination of currency barriers that will result from the euro
conversion.
(3) Continuity of Material Contracts: European legislation has been written
specifying that contracts may not be terminated or frustrated by the
introduction of the euro unless this event is specifically provided for as being
an event of termination, force majeure or frustration. In addition, a number of
U.S. states, including California, Illinois and New York, have adopted
legislation to confirm that the introduction of the euro will not by itself
allow parties to avoid or alter their contractual obligations, unless the
parties have otherwise agreed. Further, the Company's business units have
reviewed, and will continue to review, all relevant contracts and work together
with customers to try to ensure that contractual matters affected by the euro
conversion are addressed. Although the Company will continue to evaluate
contractual issues that may result from the euro conversion, we currently
believe that these issues are unlikely to have a material impact on our
business.
(4) Currency Exchange Costs and Exchange Rate Risk: The Company's currency
risk and risk management for operations in participating EU countries may be
reduced as a result of the euro conversion. The Company expects overall currency
management costs to decrease, as there will be fewer currencies to manage.
Motorola has already established plans for each business segment to manage any
impact caused by changes in billing practices for either customers or vendors as
a result of the euro conversion. Motorola is unable to predict how rapidly these
changes may occur.
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The Company will continue to evaluate the issues relating to the euro
conversion. However, based on our work to date, the Company believes that the
introduction of the euro and the phasing out of national currencies is unlikely
to have a material adverse effect on our consolidated financial position,
liquidity or results of operations.
Recent Accounting Pronouncements
During 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," which will be
effective for the Company's fiscal year 2000. The Company is currently assessing
the impact of this new statement, but does not expect any material effect on its
consolidated financial position, liquidity, or results of operations.
MARKET RISK FACTORS
Interest Rate Market Risk
The Company has fixed-income investments consisting of cash equivalents,
short-term investments, and long-term finance receivables. See Note 2 to the
Consolidated Financial Statements and Notes in this Proxy Statement for
information about the long-term finance receivables.
The majority of the long-term finance receivables are floating rate notes
subject to periodic interest rate adjustments. The Company's practice is to fund
these receivables with commercial paper to minimize the effects of interest rate
changes. Management does not expect gains or losses on short-term investments
and short-term debt to have a material effect on the Company's financial
position, liquidity or results of operations.
Foreign Exchange Market Risk
See Note 1 to the Consolidated Financial Statements and Notes in this Proxy
Statement for a description of the Company's currency translation and
transaction accounting policies, and Note 5 for information about the Company's
currency exposure management policy and strategy.
Foreign exchange financial instruments that are subject to the effects of
currency fluctuations which may affect reported earnings include derivative
financial instruments and other financial instruments, which are not denominated
in the currency of the legal entity holding the instrument. Derivative financial
instruments consist primarily of forward contracts. Other financial instruments,
which are not denominated in the currency of the legal entity holding the
instrument, consist primarily of cash, short-term deposits, long-term financing
receivables, equity investments, and notes as well as accounts payable and
receivable. Accounts payable and receivable are reflected at fair value in the
financial statements. The fair value of the remainder of the foreign exchange
financial instruments would hypothetically decrease by $22 million as of year-
end 1998 if the U.S. dollar were to depreciate against all other currencies by
10%. This hypothetical amount is suggestive of the effect on future cash flows
under the following conditions: a) all current payables and receivables that are
hedged were not realized, b) all hedged commitments and anticipated transactions
were not realized or canceled, and c) hedges of these amounts were not canceled
or offset. The Company does not expect that any of these conditions will be
realized. The Company expects that gains and losses on the derivative financial
instruments should offset gains and losses on the assets, liabilities and future
transactions being hedged; if the hedged transactions were included in the
sensitivity analysis, the hypothetical change in fair value would be immaterial.
The foreign exchange financial instruments are held for purposes other than
trading.
Equity Price Market Risk
The value of the cost-based equity investments, as defined by Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities," would change by $190 million as of year-end 1998
if the price of the stock in each of the publicly-traded companies were to
change by 10%. These equity securities are held for purposes other than trading.
25
<PAGE>
The analysis methods used by the Company to assess and mitigate risk
discussed above should not be considered projections of future events.
OUTLOOK
The Company believes that there will be strong long-term demand for
wireless communications throughout the world. Approximately 70 percent of the
Company's 1998 sales were in this market. Motorola expects the installed base of
wireless telephone subscribers to reach between 415 and 430 million at year-end
1999, up from 300 million at year-end 1998. By the year 2004 the Company
projects that there will be a billion subscribers worldwide. The transition to
digital systems is expected to continue at a significant pace through 1999.
Motorola plans to continue to expand its portfolio of digital cellular
telephones to continue to gain share in the digital market.
The Company also is making investments to strengthen its position in the
market for digital wireless infrastructure equipment as evidenced by the recent
announcements of strategic relationships with Alcatel S.A. and Cisco Systems,
Inc. Alcatel and Motorola are working together to develop, market and deliver
total, integrated Code Division Multiple Access (CDMA) digital network
infrastructure to customers worldwide. The companies also have agreed to jointly
develop third generation Mobile Switching Center (MSC)-based Universal Mobile
Telecommunications System (UMTS) mobile communications networks. Cisco and
Motorola announced the first phase of a strategic alliance to develop and
deliver a framework for Internet-based, wireless networks. The terms of the
collaboration are not final, but the companies' goal is to deliver the first
all-Internet Protocol (IP) platform for the wireless industry, uniting different
standards for wireless service worldwide and introducing an open Internet-based
platform for integrated data, voice and video services over wireless networks.
The Company also believes that there are substantial opportunities for
advanced two-way radio based communications systems for commercial, governmental
and industrial customers. Advanced messaging applications that apply Internet-
based interconnectivity to paging services and the shift to Internet-based
communications also will continue at a rapid pace.
The semiconductor industry is showing early signs of recovery from its
worldwide recession. The Company still faces intense competitive pricing
pressure for semiconductor products primarily due to excess industry
manufacturing capacity and continued weak economic conditions in Asia, where
many semiconductor manufacturers are located. The Company's semiconductor
business has responded to the recession with a series of restructuring actions
that will continue through 1999. The business plans to continue to reduce the
number of semiconductor products it manufactures, consolidate or close already
announced facilities, increase its use of foundry manufacturing for out-sourcing
and increase strategic focus on embedded semiconductor solutions for the
wireless, transportation, and networking and computing end markets.
Economic uncertainty in parts of Asia and Latin America may continue to
affect the Company's worldwide business. In the 1980's Motorola recognized the
potential of wireless communications for emerging markets and invested heavily
in Asia. The recent economic downturn in Asia adversely impacted Motorola.
China, which is the Company's largest market in Asia, has largely avoided the
economic problems of the rest of Asia and the Company expects continued growth
in its China sales during 1999. However, should China be drawn into the economic
turmoil of the rest of Asia, the Company's business could be materially
impacted. The Company remains confident of the long-term growth potential in
Asia, but will continue to adjust its operations in the region to respond to
economic conditions.
Recently, certain countries in Latin America have faced economic
difficulties. Most notably Brazil devalued its currency. Motorola continues to
recognize the long-term potential in Latin America but is monitoring its
investments in the region. The Company believes that its new manufacturing
presence in Brazil will help its competitive position in Brazil by reducing the
amount of foreign costs the Company would have otherwise had without a
manufacturing presence.
The Company has implemented significant programs designed to return it to
substantially improved profitability and sales growth. The comprehensive series
of manufacturing consolidations, cost reductions and restructuring steps begun
in mid-1998 are expected to achieve an annualized rate of $1.0 billion of profit
improvement by mid-1999.
26
<PAGE>
Other key programs include maintaining global leadership in core businesses and
strengthening the Company's marketing to enhance brand equity; providing the
Company's customers with total communications solutions; developing new
technology platforms for future leadership; and improving quality and reducing
cycle time in manufacturing and other activities.
Management remains committed to achieving the Company's long-term financial
goals of 15% sales growth and a return on equity of 16% to 18%.
The Company plans to increase its investment in research and development at
a greater rate in 1999 as compared to 1998. The goal is to focus the Company's
research and development resources on the areas with the greatest potential for
return.
This Outlook Section contains a number of forward-looking statements, all
of which are based on current expectations. These statements are not intended to
be forecasts of future financial performance. Actual results may differ
materially from those in the forward-looking statements. See the section titled
Business Risks to review some of the factors that might cause actual results to
differ.
1999 Segment Realignment
Beginning in 1999 the Company changed its segment reporting.
. The Personal Communications Products segment will focus on delivering
integrated voice, video and data communications solutions to consumers.
This segment includes subscriber products and accessories for cellular,
iDEN(R) radios, paging, and satellite and consumer two-way radio markets.
. The Network Solutions Products segment will focus on providing total
system solutions for telecommunications carriers and operators. This
segment includes the Company's cellular infrastructure, iDEN
infrastructure and Satellite Communications Group infrastructure
businesses.
. The Commercial, Government and Industrial Solutions Products segment will
focus on the commercial, governmental and industrial markets, providing
integrated communications solutions, including infrastructure and non-
consumer two-way radio products.
. The Semiconductor Products segment focus will remain the same--the
design, manufacture and distribution of integrated semiconductor
solutions and components.
. The Other Products segment will be comprised primarily of: the Integrated
Electronic Systems Sector; the Internet and Networking Group, which will
focus on the development of servers, applications and internet solutions;
the Network Management Group which will continue to hold and manage
investments in terrestrial and satellite-based network operators and
other corporate programs.
For the 1998 year-end reporting, the Company used its 1998 segments because
management continued to make operating decisions and assess performance based on
these segments. Restated historical segment data is being reworked and will be
available for the first quarter 1999 results.
BUSINESS RISK FACTORS
With the exception of historical facts, the statements in Management's
Discussion and Analysis of Financial Condition and Results of Operations are
forward-looking statements based on current expectations that involve risks and
uncertainties. Forward-looking statements include, but are not limited to,
statements about Motorola's manufacturing consolidation, cost reduction and
restructuring programs and the impact of such programs, depreciation expense,
tax rate, digital market share growth rate, paging and messaging industry growth
rate, pricing pressures in the paging and messaging markets, outsourcing in the
semiconductor business, expected sales of businesses, product reduction goals
and their impact, growth of embedded technologies and systems, 1999 capital
expenditures, the Company's access to capital markets, future events regarding
Iridium and the impact on the
27
<PAGE>
Company, research and development expenditures, the Company's Year 2000
readiness, the euro conversion, the effect of market risk factors, and
statements in the section titled Outlook.
We wish to caution the reader that the following important business risks
and factors, and those business risks and factors described elsewhere in the
commentary or our other Securities and Exchange Commission filings, could cause
our actual results to differ materially from those stated in the forward-looking
statements.
General
Completion and Impact of Restructuring Programs
. The ability of Motorola to complete the implementation of its
manufacturing consolidation, cost reduction and restructuring programs
and the impact of those programs on the Company's ability to effectively
compete and return to profitability. Because the programs involve many
aspects of the Company's business, the programs could adversely impact
productivity to an extent the Company did not anticipate. Even if the
Company fully implements the programs and generates the anticipated cost
savings, there may be other factors that adversely impact the Company's
profitably.
Integration of Businesses
. The ability of the Company to integrate its businesses, particularly its
communications businesses, to successfully reduce costs and create
efficiencies.
Recruitment and Retention of Employees
. The ability of the Company to recruit and retain engineers and other
highly skilled personnel needed to compete in an intensely competitive
market and develop successful new products.
Economic Conditions in China
. During 1998, 10% of the Company's sales were in China and it has
significant operations in China. If China responds to the economic
downturn in Asia by devaluing its currency, the Company could be
materially adversely impacted. While it is difficult to predict the
extent of the adverse impact, the Company's sales in China, particularly
sales in the local currency, and other assets in the country could be
materially adversely impacted. While the Company does not expect China
to devalue its currency in the short-term, there can be no assurances
that China will not do so.
The success of various efforts to stabilize economic conditions in parts of
Asia, including Japan.
. In 1998, the Company's performance was adversely impacted by the
economic recession in parts of Asia. During 1998, 14% of the Company's
sales were in Japan and Asia-Pacific (excluding China). If the economic
recession being experienced in some Asian countries worsens, or spreads
to other parts of Asia, the Company's performance will likely continue
to be adversely impacted.
Economic Conditions in Other Foreign Markets
. Because more than half of the Company's sales are outside the U.S., the
Company's results could be materially adversely affected by weak
economic conditions in countries in which it does sizable business and
emerging markets (in which there tend to be significant growth) and by
changes in foreign currency exchange rates which can introduce
significant volatility to rates of growth.
Changes in Government Policy or Economic Conditions
28
<PAGE>
. The effect of, and change in, trade, monetary and fiscal policies, laws
and regulations, other activities of U.S. and non-U.S. governments,
agencies and similar organizations, and social and economic conditions,
affecting the Company's operations, including in emerging markets in
Asia and Latin America.
Strategic Partnerships
. Motorola's success in partnering with other industry leaders to meet
customer product and service requirements.
Year 2000 Issues
. Motorola's ability to manufacture and deliver products and the level of
purchases made by customers may be affected by the unanticipated adverse
impact from Year 2000 issues, particularly the failure of products and
services from major suppliers to function properly in the Year 2000.
. Motorola's ability to accurately estimate the cost of its Year 2000
activities, especially in light of the many factors outside its control.
Euro Conversion
. Risks related to the introduction of the euro currency in Europe,
including the ability of the Company to successfully compete in Europe.
Development of Acquired Technologies
. During 1998, the Company acquired controlling and non-controlling
interests in several businesses that had technology that was not fully
developed. If the technology is not fully developed in a timely manner
the Company's investments in such companies could be materially
adversely impacted.
Sale of Businesses
. The timely sale of businesses announced by the Company.
Outcome of Litigation
. The outcome of pending and future litigation and the protection and
validity of patents and other intellectual property rights. Patent and
other intellectual property rights of the Company are important
competitive tools and many generate income under license agreements.
There can be no assurances as to the favorable outcome of litigation or
that intellectual property rights will not be challenged, invalidated or
circumvented in one or more countries.
Actual Adverse Market Conditions
. The risk that the actual adverse market conditions differ from the
assumed adverse market conditions that are used in the market risk
factors discussion, causing actual future results to differ materially
from projected results.
Communications Businesses
Pricing Pressures
. Continued pricing pressure on cellular telephones, cellular
infrastructure equipment, paging and messaging products and
infrastructure, and the adverse impact on gross margins for those
products, especially because of
29
<PAGE>
economic conditions in Asia and Latin America that have resulted in
significant pressure to reduce the cost of the Company's products in
order to compete with manufacturers in Asia.
Transition from Analog to Digital
. The ability of the Company's cellular businesses to continue their
transition to digital technologies and successfully compete in those
businesses and retain or gain market share. The Company faces intense
competition in these markets from both established companies and new
entrants. Product life cycles can be short and new products are
expensive to develop and bring to market.
Development of New Products
. The risks related to the Company's significant investment in developing
and introducing new products such as digital wireless telephones, two-
way and voice paging, CDMA for cellular and PCS systems and third
generation wireless, wireless local loop products, flat panel display
products, products for transmission of telephony and high-speed data
over hybrid fiber coaxial cable systems, integrated digital radios, and
semiconductor products. These risks include: difficulties and delays in
the development, production, testing and marketing of products; customer
acceptance of products, particularly as the Company's focus on the
consumer market increases; the significant amount of resources the
Company must devote to the development of new technology; and the
ability of the Company to differentiate its products and compete with
other companies in the same market.
Demand for Paging Products
. The impact of continued or increased weak demand for paging products in
North America and China, the two largest markets for these products. The
paging business has been adversely impacted by the recently completed
Chinese government's reorganization/ privatization of paging service
providers in China, lower demand for paging products by paging operators
in North America and increased competition from wireless phones.
Risks Related to the Iridium(R) System
. The success of the Iridium project and its impact on Motorola. Factors
that could adversely impact Motorola are: the ability of Iridium and its
gateway operators to market the Iridium service, to timely receive and,
as appropriate, operate and sell telecommunications equipment, including
phones and pagers made by the Company, and to otherwise timely finance
and operate a successful telecommunications business and generate
income; the ability of Iridium to meet its financing needs during at
least the next few years to continue to make contractual payments to
Motorola and to make debt payments and otherwise operate; the risks
associated with the large Iridium system operations and maintenance
contract with Motorola and the financial risk to Motorola under that
contract, including the difficulty in projecting costs associated with
that contract and Motorola's obligations to subcontractors related to
that contract; the market acceptance (both on its own and when compared
to possible competitors) of the first worldwide global satellite-based
communication service and of the related equipment; and the significant
technological and other risks associated with the commercial operation
of the project, including any software and support systems-related
risks.
Demand for Customer Financing
. Increasing demand for customer financing of equipment sales,
particularly infrastructure equipment sold by CIG, LMPS, SSTG and MSPG,
and the ability of these businesses to provide financing on competitive
terms with other companies.
Risks From Large System Contracts
30
<PAGE>
. Risks related to the trend towards increasingly large system contracts
for CIG, LMPS and SSTG infrastructure equipment and the resulting
reliance on large customers, the technological risks of such contracts,
especially when the contracts involve new technology, and financial
risks to Motorola under these contracts, including the difficulty of
projecting costs associated with large contracts.
Demand for Wireless Communications Equipment
. The need for continued significant demand for wireless communications
equipment, including of the type the Company manufactures or is
developing.
Semiconductor Businesses
End of Semiconductor Market Recession
. The timing of the end of the worldwide semiconductor market recession
and the impact of such recovery on the Company's future performance.
While the Company believes that there are signs that the industry is
beginning to recover, there can be no assurances that the recovery will
continue, or how quickly it will recover. The recovery is dependent in
part on the economic recovery in Asia where many of the manufacturers of
semiconductors are located.
Ability to Compete in Semiconductor Market
. The ability of Motorola's semiconductor business to compete in the
highly competitive semiconductor market. Factors that could adversely
affect Motorola's ability to compete are: production inefficiencies and
higher costs related to underutilized facilities, both wholly-owned and
joint venture facilities; shortage of manufacturing capacity for some
products; competitive factors, such as rival chip architectures, mix of
products, acceptance of new products and price pressures; risk of
inventory obsolescence due to shifts in market demand; the continued
growth of embedded technologies and systems and the Company's ability to
compete in that market; and the effect of orders from Motorola's
equipment businesses.
Success and Impact of Increased Use of Foundry Manufacturing Capacity
The ability of Motorola's semiconductor business to increase its
utilization of foundry manufacturing capacity and the impact of such
efforts on capital expenditures, production costs and ability to satisfy
delivery requirements.
MacOS(R) is a registered trademark of Apple Computer, Inc.
Iridium(R) is a registered trademark and service mark of Iridium IP, LLC.
PowerPC(R) is a registered trademark of IBM Corporation.
Microsoft(R) and Windows(R) are registered trademarks of Microsoft Corporation.
All other brand names mentioned are registered trademarks or trademarks of their
respective holders.
MOTOROLA, (M),(R) Reg. U.S. Patent and Trademark
31
<PAGE>
FINANCIAL HIGHLIGHTS
Item 8: Financial Statements and Supplementary Data
FINANCIAL HIGHLIGHTS
(Dollars in millions, except as noted)
Motorola, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years ended December 31 1998(1) 1997(2)
<S> <C> <C>
Net sales $29,398 $29,794
Earnings (loss) before income taxes (1,374) 1,816
% to sales (4.7)% 6.1%
Net earnings (loss) (962) 1,180
% to sales (3.3)% 4.0%
Diluted earnings (loss) per common share (in dollars) (1.61) 1.94
Research and development expenditures 2,893 2,748
Capital expenditures 3,221 2,874
Working capital 2,091 4,181
Current ratio 1.18 1.46
Return on average invested capital (6.2)% 8.4%
Return on average stockholders' equity (7.6)% 9.4%
% of net debt to net debt plus equity 26.8% 12.4%
Book value per common share (in dollars) 20.33 22.21
Year-end employment (in thousands) 133 150
</TABLE>
(1) The loss before income taxes, net loss and diluted loss per common share
include special charges of $1.9 billion pre-tax, or $2.19 per share after-
tax, resulting primarily from manufacturing consolidation, cost reduction
and restructuring programs.
(2) Earnings before income taxes, net earnings and diluted earnings per common
share include special charges of $306 million pre-tax, or 32 cents per share
after-tax, resulting primarily from restructuring decisions to exit several
unprofitable businesses.
32
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation, integrity and objectivity of
the consolidated financial statements and other financial information presented
in this report. The accompanying consolidated financial statements were prepared
in accordance with generally accepted accounting principles, applying certain
estimates and judgments as required.
Motorola's internal controls are designed to provide reasonable assurance as
to the integrity and reliability of the financial statements and to adequately
safeguard, verify and maintain accountability of assets. Such controls are based
on established written policies and procedures, are implemented by trained,
skilled personnel with an appropriate segregation of duties and are monitored
through a comprehensive internal audit program. These policies and procedures
prescribe that the Company and all its employees are to maintain the highest
ethical standards and that its business practices throughout the world are to be
conducted in a manner which is above reproach.
KPMG LLP, independent auditors, are retained to audit Motorola's financial
statements. Their accompanying report is based on audits conducted in accordance
with generally accepted auditing standards, which include the consideration of
the Company's internal controls to establish a basis for reliance thereon in
determining the nature, timing and extent of audit tests to be applied.
The Board of Directors exercises its responsibility for these financial
statements through its Audit and Legal Committee, which consists entirely of
independent non-management Board members. The Audit and Legal Committee meets
periodically with the independent auditors and with the Company's internal
auditors, both privately and with management present, to review accounting,
auditing, internal controls and financial reporting matters.
/s/ Christopher B. Galvin /s/ Carl F. Koenemann
- ------------------------- ---------------------
Christopher B. Galvin Carl F. Koenemann
Chief Executive Officer Executive Vice President
and Chief Financial Officer
33
<PAGE>
Consolidated Financial Statements
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Motorola, Inc.:
We have audited the accompanying consolidated balance sheets of Motorola, Inc.
and Subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Motorola,
Inc. and Subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
- ------------
Chicago, Illinois
January 13, 1999, except as to Note 8,
which is as of March 1, 1999
34
<PAGE>
Consolidated Financial Statements
Motorola, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31
(In millions, except per share amounts) 1998 1997 1996
<S> <C> <C> <C>
NET SALES $29,398 $29,794 $27,973
COSTS AND EXPENSES
Manufacturing and other costs of sales 20,886 20,003 18,990
Selling, general and administrative expenses 5,493 5,188 4,715
Restructuring and other charges 1,980 327 --
Depreciation expense 2,197 2,329 2,308
Interest expense, net 216 131 185
TOTAL COSTS AND EXPENSES 30,772 27,978 26,198
EARNINGS (LOSS) BEFORE INCOME TAXES (1,374) 1,816 1,775
INCOME TAX PROVISION (BENEFIT) (412) 636 621
NET EARNINGS (LOSS) $ (962) $ 1,180 $ 1,154
BASIC EARNINGS (LOSS) PER COMMON SHARE $ (1.61) $ 1.98 $ 1.95
DILUTED EARNINGS (LOSS) PER COMMON SHARE $ (1.61) $ 1.94 $ 1.90
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 598.6 612.2 609.0
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
Motorola, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
----------------------
(In millions, except per share amounts) 1998 1997
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,453 $ 1,445
Short-term investments 171 335
Accounts receivable, net 5,057 4,847
Inventories 3,745 4,096
Deferred income taxes 2,362 1,726
Other current assets 743 787
------- -------
Total current assets 13,531 13,236
------- -------
Property, plant and equipment, net 10,049 9,856
Other assets 5,148 4,186
------- -------
TOTAL ASSETS $28,728 $27,278
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable and current portion of long-term debt $ 2,909 $ 1,282
Accounts payable 2,305 2,297
Accrued liabilities 6,226 5,476
------- -------
Total current liabilities 11,440 9,055
------- -------
Long-term debt 2,633 2,144
Deferred income taxes 1,188 1,522
Other liabilities 1,245 1,285
------- -------
Stockholders' equity
Preferred stock, $100 par value issuable in series -- --
Authorized shares: 0.5 (none issued)
Common stock, $3 par value 1,804 1,793
Authorized shares: 1998 and 1997, 1,400
Issued and outstanding: 1998, 601.1; 1997, 597.4
Additional paid-in capital 1,894 1,720
Retained earnings 8,254 9,504
Non-owner changes to equity 270 255
------- -------
Total stockholders' equity 12,222 13,272
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $28,728 $27,278
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
Motorola, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Non-Owner Changes To Equity
---------------------------------------
Common Fair Value
Stock and Adjustment Foreign Minimum
Additional To Certain Currency Pension
Paid-In Cost-Based Translation Liability Retained Comprehensive
(In millions, except per share amounts) Capital Investments Adjustments Adjustment Earnings Earnings (Loss)
- -------------------------------------------------------------------------------------------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1996 $3,261 $ 77 $ (81) $ -- $7,728
- -------------------------------------------------------------------------------------------------------- -------------------
Net earnings 1,154 1,154
Conversion of zero coupon
notes 7
Fair value adjustment to certain
cost-based investments:
Reversal of prior period
adjustment (77) (77)
Recognition of current
period unrecognized (loss) (26) (26)
Change in foreign currency
translation adjustments (40) (40)
Stock options and other 64
Dividends declared ($.46 per
share) (272)
- -------------------------------------------------------------------------------------------------------- -------------------
Balances at December 31, 1996 $3,332 $ (26) $(121) $ -- $8,610 $1,011
- -------------------------------------------------------------------------------------------------------- ===================
Net earnings 1,180 1,180
Conversion of zero coupon
notes 7
Fair value adjustment to certain
cost-based investments:
Reversal of prior period
adjustment 26 26
Recognition of current
period unrecognized gain 533 533
Change in foreign currency
translation adjustments (119) (119)
Minimum pension liability
adjustment (38) (38)
Stock options and other 174
Dividends declared ($.48 per
share) (286)
- -------------------------------------------------------------------------------------------------------- -------------------
Balances at December 31, 1997 $3,513 $ 533 $(240) $(38) $9,504 $1,582
- -------------------------------------------------------------------------------------------------------- ===================
Net loss (962) (962)
Conversion of zero coupon
notes 3
Fair value adjustment to certain
cost-based investments:
Reversal of prior period
adjustment (533) (533)
Recognition of current
period unrecognized gain 476 476
Change in foreign currency
translation adjustments 34 34
Minimum pension liability
adjustment 38 38
Stock options and other 182
Dividends declared ($.48 per
share) (288)
- -------------------------------------------------------------------------------------------------------- -------------------
Balances at December 31, 1998 $3,698 $ 476 $(206) $ -- $8,254 $ (947)
- -------------------------------------------------------------------------------------------------------- ===================
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
Motorola, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------
(In millions) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING
<S> <C> <C> <C>
Net earnings (loss) $ (962) $ 1,180 $ 1,154
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Restructuring and other charges 1,980 327 --
Depreciation 2,197 2,329 2,308
Deferred income taxes (933) (98) (162)
Amortization of debt discount and issue costs 11 10 8
Gain on disposition of investments in affiliates, net of acquisition charges (146) (116) (78)
Change in assets and liabilities, net of effects of acquisitions and dispositions:
Accounts receivable (238) (812) 101
Inventories 254 (880) 308
Other current assets 31 (114) (69)
Accounts payable and accrued liabilities (658) 830 398
Other assets and liabilities (515) (60) 220
------- ------- -------
Net cash provided by operating activities 1,021 2,596 4,188
- -----------------------------------------------------------------------------------------------------------------------------
INVESTING
Acquisitions and advances to affiliates (786) (286) (346)
Proceeds from dispositions of investments in affiliates 371 248 121
Capital expenditures (3,221) (2,874) (2,973)
Proceeds from dispositions of property, plant and equipment 507 443 282
Sales (purchases) of short-term investments 164 (37) 52
------- ------- -------
Net cash used for investing activities (2,965) (2,506) (2,864)
- -----------------------------------------------------------------------------------------------------------------------------
FINANCING
Proceeds from (repayment of) commercial paper and short-term borrowings 1,627 (100) (260)
Proceeds from issuance of debt 773 312 55
Repayment of debt (293) (102) (37)
Issuance of common stock 99 137 7
Payment of dividends (288) (286) (261)
------- ------- -------
Net cash provided by (used for) financing activities 1,918 (39) (496)
- -----------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 34 (119) (40)
- -----------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 8 $ (68) $ 788
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $ 1,445 $ 1,513 $ 725
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,453 $ 1,445 $ 1,513
==============================================================================================================================
Supplemental Cash Flow Information
- ------------------------------------------------------------------------------------------------------------------------------
CASH PAID DURING THE YEAR FOR:
Interest $ 286 $ 211 $ 237
Income taxes $ 388 $ 611 $ 506
=============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
NOTES TO MOTOROLA, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except as noted)
1. Summary of Significant Accounting Policies
Consolidation and Investments: The consolidated financial statements
include the accounts of Motorola, Inc. and all majority-owned subsidiaries (the
Company) in which it has control. The Company's investments in non-controlled
entities in which it has the ability to exercise significant influence over
operating and financial policies are accounted for by the equity method. The
Company's investments in other entities are carried at their historical cost.
Certain of these cost-based investments are marked-to-market at the balance
sheet date to reflect their fair value with the unrealized gains and losses, net
of tax, included in a separate component of stockholders' equity.
Cash Equivalents: The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
Revenue Recognition: The Company uses the percentage-of-completion method
to recognize revenues and costs associated with most long-term contracts. For
contracts involving certain new technologies, revenues and profits or parts
thereof are deferred until technological feasibility is established, customer
acceptance is obtained and other contract-specific factors have been completed.
For other product sales, revenue is recognized at the time of shipment, and
reserves are established for price protection and cooperative marketing programs
with distributors.
Inventories: Inventories are valued at the lower of average cost (which
approximates computation on a first-in, first-out basis) or market (net
realizable value or replacement cost).
Property, Plant and Equipment: Property, plant and equipment are stated at
cost less accumulated depreciation. Depreciation is recorded principally using
the declining-balance method, based on the estimated useful lives of the assets
(buildings and building equipment, 5-40 years; machinery and equipment, 2-12
years).
Fair Values of Financial Instruments: The fair values of financial
instruments are determined based on quoted market prices and market interest
rates as of the end of the reporting period.
Foreign Currency Translation: The Company's European and Japanese
operations and certain non-consolidated affiliates use the respective local
currencies as the functional currency. For all other operations, the Company
uses the U.S. dollar as the functional currency. The effects of translating the
financial position and results of operations of local functional currency
operations into U.S. dollars are included in a separate component of
stockholders' equity.
Foreign Currency Transactions: The effects of remeasuring the non-
functional currency assets or liabilities into the functional currency as well
as gains and losses on hedges of existing assets or liabilities are marked-to-
market, and the result is recorded within selling, general and administrative
expenses in the statement of operations. Gains and losses on financial
instruments which hedge firm future commitments are deferred until such time as
the underlying transactions are recognized or recorded immediately when the
transaction is no longer expected to occur. Foreign exchange financial
instruments which hedge investments in foreign subsidiaries are marked-to-
market, and the results are included in stockholders' equity. Other gains or
losses on financial instruments which do not qualify as hedges are recognized
immediately as income or expense.
Use of Estimates: 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.
Reclassifications: Certain amounts in prior years' financial statements and
related notes have been reclassified to conform to the 1998 presentation.
Recent Accounting Pronouncements: As of January 1, 1998, the Company
implemented Statement of Financial Accounting Standards (SFAS) No. 130
"Reporting Comprehensive Income," SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information" and SFAS No. 132 "Employers'
Disclosures about Pensions and Other Postretirement Benefits."
39
<PAGE>
SFAS No. 130, 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 or loss. These changes include the fair value
adjustment to certain cost-based investments, the foreign currency translation
adjustments and the minimum pension liability adjustment.
40
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO
(Dollars in millions, except as noted) CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 131 establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
in interim financial reports issued to shareholders. The Company has restated
the previously reported annual segment operating results to conform to the
Statement's management approach.
SFAS No. 132 only modifies the financial statement presentation of the
Company's pension and postretirement benefit obligations and does not impact the
measurement of such obligations.
During 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," which will be
effective for the Company's fiscal year 2000. The Company is currently assessing
the impact of this new statement but does not expect any material effect on its
consolidated financial position, liquidity or results of operations.
2. Finance Subsidiary
The Company's finance subsidiary purchases customer obligations under long-
term contracts from the Company.
The finance subsidiary's interest revenue is included in the Company's
consolidated net sales. Interest expense totaled $37 million in 1998, $13
million in 1997 and $14 million in 1996, and is included in manufacturing and
other costs of sales. In addition, long-term finance receivables of $1.1 billion
and $353 million at December 31, 1998 and 1997 are included in other assets.
Summary Financial Data of Consolidated Finance Subsidiary
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Total revenue $ 72 $ 29 $ 36
------- ----- -----
Net earnings 21 11 14
------- ----- -----
Total assets 1,330 457 341
------- ----- -----
Total debt (1,155) (366) (261)
------- ----- -----
Stockholder's investments and
advances $ 175 $ 91 $ 80
</TABLE>
3. Other Financial Data
Statement of Operations Information
<TABLE>
<CAPTION>
Years ended December 31 1998 1997 1996
<S> <C> <C> <C>
Research and development $2,893 $2,748 $2,394
------ ------ ------
Foreign currency (gains)/losses 20 2 (8)
------ ------ ------
Interest expense, net:
Interest expense 301 216 249
Interest income (85) (85) (64)
------ ------ ------
Interest expense, net $ 216 $ 131 $ 185
</TABLE>
41
<PAGE>
NOTES TO MOTOROLA, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except as noted)
The following table presents a reconciliation of the numerators and
denominators of basic and diluted earnings (loss) per common share:
<TABLE>
<CAPTION>
Years ended December 31 1998 1997 1996
<S> <C> <C> <C>
Basic earnings (loss) per
common share
Net earnings (loss) $ (962) $1,180 $1,154
Weighted average common
shares outstanding 598.6 595.5 592.5
------- ------ ------
Per share amount $ (1.61) $ 1.98 $ 1.95
======= ====== ======
Diluted earnings (loss) per
common share
Net earnings (loss) $ (962) $1,180 $1,154
Add: Interest on zero coupon
notes, net -- 5 4
------- ------ ------
Net earnings (loss), as adjusted $ (962) $1,185 $1,158
------- ------ ------
Weighted average common
shares outstanding 598.6 595.5 592.5
Add: Effect of dilutive
securities
Stock options -- 10.4 9.9
Zero coupon notes -- 6.3 6.6
------- ------ ------
Diluted wtd. average common
shares outstanding 598.6 612.2 609.0
------- ------ ------
Per share amount $ (1.61) $ 1.94 $ 1.90
</TABLE>
42
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO
(Dollars in millions, except as noted) CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet Information
<TABLE>
<CAPTION>
December 31 1998 1997
Inventories:
<S> <C> <C>
Finished goods $ 1,033 $ 1,078
Work-in-process and production
materials 2,712 3,018
--------- --------
Total $ 3,745 $ 4,096
--------- --------
Property, plant and equipment:
Land $ 284 $ 264
Buildings 6,288 5,831
Machinery and equipment 16,316 15,285
--------- --------
22,888 21,380
Less accumulated depreciation (12,839) (11,524)
--------- --------
Total $ 10,049 $ 9,856
--------- --------
Other assets:
Equity-based investments in
affiliated companies $ 931 $ 848
Cost-based investments in
affiliated companies 1,431 1,208
Fair value adjustment of certain
cost-based investments 787 881
Long-term finance receivables 1,062 353
Other 937 896
--------- --------
Total $ 5,148 $ 4,186
--------- --------
Accrued liabilities:
Dividends payable $ 72 $ 72
Contribution to employees' profit
sharing funds 78 115
Income taxes payable 84 175
Taxes other than income taxes 302 223
Deferred revenue 378 231
Accrued warranties 333 337
Compensation 548 683
Restructuring and other accruals 666 159
Contract reserves 1,057 1,160
Other 2,708 2,321
--------- --------
Total $ 6,226 $ 5,476
</TABLE>
Contract field inventories, which are included in finished goods, are
inventories held by customers for which no sales have yet been recorded. At
December 31, 1998 and 1997, contract field inventories were $125 million and
$136 million, respectively.
Unbilled receivables which are included in accounts receivable but not yet
billed to the customers were $600 million and $525 million at December 31, 1998
and 1997, respectively.
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", requires the carrying value
of certain cost-based investments to be adjusted to fair value. The Company
recorded an increase to stockholders' equity, other assets and deferred income
taxes of $476 million, $787 million and $311 million as of December 31, 1998;
and an increase to stockholders' equity, other assets and deferred income taxes
of $533 million, $881 million and $348 million as of December 31, 1997.
43
<PAGE>
NOTES TO MOTOROLA, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except as noted)
Leases
The Company owns most of its major facilities, but does lease certain
office, factory and warehouse space, land, and data processing and other
equipment under principally noncancelable operating leases. Rental expense, net
of sublease income, was $320 million in 1998, $308 million in 1997 and $279
million in 1996. At December 31, 1998, future minimum lease obligations, net of
minimum sublease rentals, for the next five years and beyond, in millions, are
as follows: 1999, $135; 2000, $98; 2001, $69; 2002, $43; 2003, $34; beyond, $86.
4. Debt and Credit Facilities
Long-term debt
<TABLE>
<CAPTION>
December 31 1998 1997
<S> <C> <C>
7.5% debentures due 2025 $ 398 $ 398
6.5% debentures due 2025 (redeemable
at the holders' option in 2005) 397 397
7.6% notes due 2007 300 300
5.8% debentures due 2008 322 --
6.5% debentures due 2008 199 199
6.5% debentures due 2028 439 --
5.22% debentures due 2097 225 225
Zero coupon notes due 2009 24 24
Zero coupon notes due 2013 80 337
8.4% debentures due 2031 (redeemable
at the holders' option in 2001) 200 200
Other long-term debt 57 84
------ ------
2,641 2,164
Less current maturities 8 20
------ ------
Long-term debt $2,633 $2,144
Short-term debt
December 31 1998 1997
Notes to banks $ 157 $ 268
Commercial paper 2,739 989
Other short-term debt 5 5
------ ------
2,901 1,262
Add current maturities of long-term
debt 8 20
------ ------
Notes payable and current portion of
long-term debt $2,909 $1,282
Weighted average interest rates on
short-term borrowings
Commercial paper 5.4% 5.5%
Other short-term debt 8.0% 7.3%
</TABLE>
44
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO
(Dollars in millions, except as noted) CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1998, the outstanding zero coupon notes due 2009, referred
to as Liquid Yield Option/TM/ Notes (LYONs/TM/), had a face value at maturity
and net carrying value of $43 million and $24 million, respectively. The 2009
LYONs were originally priced at a 6% yield to maturity and are convertible into
18.268 shares of the Company's common stock for each $1,000 note. The Company
can redeem these notes at any time at their accreted values. In addition, on
September 7, 1999, and September 7, 2004, the Company will become obligated at
the election of the holders thereof to purchase those notes for which written
notice requesting redemption has been received. Purchase prices are $533.68 and
$744.10 per $1,000 principal amount at September 7, 1999, and September 7, 2004,
respectively, plus accrued original issue discount calculated to each such date.
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.
At December 31, 1998, the LYONs due 2013 had a face value at maturity and
net carrying value of $111 million and $80 million, respectively. The 2013 LYONs
were originally priced at a 2.25% yield to maturity and are convertible into
11.178 shares of the Company's common stock for each $1,000 note. The Company
can redeem these notes at any time at their accreted values. In addition, on
September 27, 2003, and September 27, 2008, the Company will become obligated at
the election of the holders thereof to purchase those notes for which written
notice requesting redemption has been received. Purchase prices are $799.52 and
$894.16 per $1,000 principal amount at September 27, 2003, and September 27,
2008, respectively, plus accrued original issue discount calculated to each such
date.
The LYONs issues are subordinated to all existing and future senior
indebtedness of the Company and rank on a parity with each other.
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. On
November 23, 1998, the Company sold an aggregate face principal amount at
maturity of $445 million of 6.50% Debentures due November 15, 2028. The net
proceeds to the Company from the issuance and sale of the Debentures were $439
million. The Company used the proceeds from both debt issuances to reduce short
term indebtedness and for other general corporate purposes.
Aggregate requirements for debt maturities, in millions, during the next
five years are as follows: 1999, $8; 2000, $7; 2001, $3; 2002, $1; 2003, $1.
The Company and its finance subsidiary have revolving domestic credit
agreements of one and five years with a group of banks for $2.5 billion. The one
year and five year revolving domestic credit agreements expire in September of
1999 and September of 2002, respectively. Commitment fees assessed against the
daily average amounts unused range from 4 to 5 basis points. These domestic
credit agreements contain various conditions, covenants and representations with
which the Company was in compliance at December 31, 1998. The Company also has
non-U.S. credit facilities with interest rates on borrowings varying from
country to country depending upon local market conditions. Commitment fees
against unused amounts are 25 basis points. At December 31, 1998, the Company's
total domestic and non-U.S. credit facilities aggregated $4.6 billion, of which
$187 million were used and the remaining $4.4 billion were available to back up
outstanding commercial paper which totaled $2.7 billion.
Outstanding letters of credit aggregated approximately $193 million and
$172 million at December 31, 1998 and 1997, respectively.
LYONs is a trademark of Merrill Lynch & Co., Inc.
45
<PAGE>
NOTES TO MOTOROLA, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except as noted)
5. Risk Management
Derivative Financial Instruments
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 to not 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 December 31, 1998 and 1997, the Company had net outstanding foreign
exchange contracts totaling $1.8 billion and $2.1 billion, respectively. Most of
the hedge contracts, which are over-the-counter instruments, mature within three
months with the longest maturity extending out four years. Management believes
that these financial instruments should not subject the Company to undue risk
due to foreign exchange movements because gains and losses on these contracts
should offset losses and gains on the assets, liabilities and transactions being
hedged. At December 31, 1998, deferred gains totaled $3.5 million and deferred
losses totaled $4.3 million. At December 31, 1997, deferred gains totaled $9.7
million and deferred losses totaled $2.1 million. The following schedule shows
the five largest net foreign exchange hedge positions as of December 31, 1998
and 1997:
<TABLE>
<CAPTION>
Buy (Sell)
-----------------
<S> <C> <C>
December 31 1998 1997
Japanese Yen $(674) $(795)
Italian Lira (194) (227)
German Mark (184) (91)
European Currency Unit (105) --
Chinese Renminbi (100) --
</TABLE>
The Company is exposed to credit-related losses if counterparties to
financial instruments fail to perform their obligations. However, it does not
expect any counterparties, which presently have high credit ratings, to fail to
meet their obligations.
At December 31, 1998 and 1997, 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.
Fair Value of Financial Instruments
The Company's financial instruments include cash equivalents, short-term
investments, accounts receivable, long-term finance receivables, accounts
payable, notes payable, long-term debt, foreign currency contracts and other
financing commitments.
46
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO
(Dollars in millions, except as noted) CONSOLIDATED FINANCIAL STATEMENTS
Using available market information, the Company determined that the fair
value of long-term debt at December 31, 1998 was $2.8 billion compared to a
carrying value of $2.6 billion. Since considerable judgment is required in
interpreting market information, the fair value of the long-term debt is not
necessarily indicative of the amount which could be realized in a current market
exchange.
The fair value of the other financing commitments could not be reasonably
estimated at December 31, 1998. The fair values of the other financial
instruments were not materially different from their carrying or contract values
at December 31, 1998.
6. Income Taxes
Components of earnings (loss) before income taxes
<TABLE>
<CAPTION>
Years ended December 31 1998 1997 1996
<S> <C> <C> <C>
United States $(2,262) $ 307 $ 433
Other nations 888 1,509 1,342
-------- ------ ------
Total $(1,374) $1,816 $1,775
Components of income tax
provision (benefit)
Years ended December 31 1998 1997 1996
Current:
United States $ 40 $ 416 $ 416
Other nations 472 234 245
State (U.S.) 9 89 90
-------- ------- -------
521 739 751
Deferred (933) (103) (130)
-------- ------- -------
Income tax provision (benefit) $ (412) $ 636 $ 621
</TABLE>
Tax adjustments to stockholders' equity, which resulted primarily from fair
value adjustments related to cost-based investments, were ($37) million, $365
million and ($68) million for the years ended December 31, 1998, 1997 and 1996,
respectively. Except for certain earnings that the Company intends to reinvest
indefinitely, provisions have been made for the estimated U.S. federal income
taxes applicable to undistributed earnings of subsidiaries and affiliated
companies. Undistributed earnings for which no U.S. income tax has been provided
aggregated $4.8 billion, $4.3 billion and $4.0 billion at December 31, 1998,
1997 and 1996, respectively. Should these earnings be distributed, foreign tax
credits may reduce the additional U.S. income tax which would be payable. In
cases where taxes are provided on such undistributed earnings, those taxes have
been included in U.S. income taxes.
At December 31, 1998, certain non-U.S. subsidiaries had loss carryforwards
for income tax reporting purposes of $188 million, with expiration dates
starting in 1999.
Differences between income tax expense (benefit) computed at the U.S. federal
statutory tax rate of 35% and income tax provision (benefit)
<TABLE>
<CAPTION>
Years ended December 31 1998 1997 1996
<S> <C> <C> <C>
Income tax expense (benefit) at
statutory rate $(481) $ 636 $ 621
Taxes on non-U.S. earnings 186 67 92
State income taxes (122) (1) 7
Foreign Sales Corporation (80) (65) (73)
Non-deductible acquisition charges 67 -- --
Other 18 (1) (26)
------ ----- -----
Income tax provision (benefit) $(412) $ 636 $ 621
</TABLE>
47
<PAGE>
NOTES TO MOTOROLA, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except as noted)
Significant deferred tax assets (liabilities)
<TABLE>
<CAPTION>
December 31 1998 1997
<S> <C> <C>
Inventory reserves $ 612 $ 488
Contract accounting methods 226 282
Employee benefits 179 260
Capitalized items 223 142
Tax basis differences on investments (83) (176)
Depreciation (277) (209)
Undistributed non-U.S. earnings (636) (673)
Restructuring reserves 271 --
Net operating loss 397 --
Other 262 90
------ -----
Net deferred tax asset $1,174 $ 204
</TABLE>
Gross deferred tax assets were $4.2 billion and $2.8 billion at December
31, 1998 and 1997, respectively. Gross deferred tax liabilities were $3.0
billion and $2.6 billion at December 31, 1998 and 1997, respectively. The
deferred tax asset is considered realizable given past income and estimates of
future income. These considerations include, but are not limited to, net
operating losses, earnings trends and tax planning strategies.
The Internal Revenue Service (IRS) has examined the federal income tax
returns for the Company through 1991 and has settled the respective returns
through 1987. The IRS has proposed certain adjustments to the Company's income
and tax credits for the years 1988 through 1991 which would result in additional
tax. The Company disagrees with most of the proposed adjustments and is
contesting them at the Appeals level of the IRS. The IRS is currently performing
the field level examination of the 1992 through 1995 tax returns and has
proposed income adjustments. In the opinion of the Company's management, the
final disposition of these matters, and proposed adjustments from other tax
authorities, will not have a material adverse effect on the consolidated
financial position, liquidity or results of operations of the Company.
7. Employee Benefit and Incentive Plans
Pension Benefits
The Company's noncontributory pension plan (the Regular Pension Plan)
covers most U.S. employees after one year of service. The benefit formula is
dependent upon employee earnings and years of service. The Company's policy is
to fund the accrued pension cost or the amount allowable based on the full
funding limitations of the Internal Revenue Code, if less. The Company has a
noncontributory supplemental retirement benefit plan for its elected officers.
The plan contains provisions for funding the participants' expected retirement
benefits when the participants meet the minimum age and years of service
requirements. The Company has an additional noncontributory supplemental
retirement benefit plan (the Motorola Supplemental Pension Plan--MSPP) which
provides supplemental benefits in excess of the limitations imposed by the
Internal Revenue Code on the Regular Pension Plan for U.S. employees (excluding
elected officers).
Certain non-U.S. subsidiaries have varying types of retirement plans
providing benefits for substantially all of their employees. Amounts charged to
earnings for all non-U.S. plans were $95 million in 1998, $106 million in 1997
and $103 million in 1996.
The Company uses a five-year (three years for 1992 through 1997), market-
related asset value method of amortizing asset-related gains and losses. Net
transition amounts and prior service costs are being amortized over periods
ranging from 9 to 15 years.
48
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO
(Dollars in millions, except as noted) CONSOLIDATED FINANCIAL STATEMENTS
Benefits under all U.S. pension plans are valued based upon the projected
unit credit cost method. The assumptions used to develop the projected benefit
obligations for the plans for the years ended December 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Discount rate for obligations 7.00% 7.75%
Future compensation increase rate 4.00% 4.50%
Investment return assumption (regular) 9.00% 9.00%
Investment return assumption (elected
officers) 6.00% 6.00%
</TABLE>
Accounting literature requires discount rates to be established based on
prevailing market rates for high-quality fixed-income instruments that, if the
pension benefit obligation was settled at the measurement date, would provide
the necessary future cash flows to pay the benefit obligation when due. At
December 31, 1998, the investment portfolio was predominantly equity
investments, which have historically realized annual returns at or significantly
above the assumed investment return rate. The Company believes short-term
changes in interest rates should not affect the measurement of the Company's
long-term obligation.
The net U.S. periodic pension cost for the years ended December 31, 1998,
1997 and 1996 for the regular pension plan and the elected officers'
supplemental retirement benefit plan was as follows:
Regular Pension Plan
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Service cost $ 176 $ 157 $ 147
Interest cost 174 146 124
Expected return on plan assets (205) (166) (134)
Amortization of:
Unrecognized net loss -- -- 3
Unrecognized net asset (11) (11) (11)
----- ----- -----
Net periodic pension cost $ 134 $ 126 $ 129
</TABLE>
Elected Officers' Supplemental Retirement Benefit Plan
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Service cost $ 22 $ 22 $ 22
Interest cost 11 11 8
Expected return on plan assets (5) (3) (3)
Amortization of:
Unrecognized net loss 8 5 2
Unrecognized prior service cost 6 6 6
Unrecognized net obligation 1 1 1
Settlement expense 7 4 3
----- ----- -----
Net periodic pension cost $ 50 $ 46 $ 39
</TABLE>
The net periodic pension cost for the Motorola Supplemental Pension Plan
was $3 million in 1998 and $2 million in 1997 and 1996.
49
<PAGE>
NOTES TO MOTOROLA, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except as noted)
The status of the Company's plans at December 31 are shown in the following
table.
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
Elected Elected
Officers Officers
and and
Regular MSPP Regular MSPP
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at January 1 $2,165 $156 $1,863 $140
Service cost 176 23 157 23
Interest cost 174 12 146 12
Actuarial (gain) loss 398 26 35 40
Benefit payments (45) (43) (36) (59)
Benefit obligation at December 31 $2,868 $174 $2,165 $156
Change in plan assets
Fair value at January 1 $2,493 $113 $1,927 $ 76
Actual return on plan assets 508 9 418 7
Company contributions 130 63 184 89
Benefit payments (45) (43) (36) (59)
Fair value at December 31 $3,086 $142 $2,493 $113
Funded status of the plan 218 (32) 328 (43)
Unrecognized net (gain) loss (193) 99 (286) 94
Unrecognized prior service cost -- 12 -- 19
Unrecognized net transition (asset) liability -- 2 (11) 3
Net pension asset recognized in balance sheet $ 25 $ 81 $ 31 $ 73
</TABLE>
<TABLE>
<CAPTION>
1998 1997
------------------- ------------------
Elected Elected
Officers Officers
and and
Regular MSPP Regular MSPP
<S> <C> <C> <C> <C>
Components of net pension asset recognized in balance sheet:
Prepaid benefit cost $25 $ 90 $31 $ --
Intangible asset -- 4 -- 19
Accrued benefit liability -- (13) -- (20)
Deferred income taxes -- -- -- 36
Non-owner changes to equity -- -- -- 38
Total recognized net pension asset $25 $ 81 $31 $ 73
</TABLE>
Postretirement Health Care Benefits
In addition to providing pension benefits, the Company provides certain
health care benefits to its retired employees. The majority of its domestic
employees may become eligible for these benefits if they meet age and service
requirements upon termination of employment. The Company's policy is to fund the
maximum amount allowable based on funding limitations of the Internal Revenue
Code.
The assumptions used to develop the accumulated postretirement benefit
obligation for the retiree health care plan for the years ended December 31,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Discount rate for obligations 7.00% 7.75%
Investment return assumptions 9.00% 9.00%
</TABLE>
50
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO
(Dollars in millions, except as noted) CONSOLIDATED FINANCIAL STATEMENTS
Net retiree health care expenses for the years ended December 31, 1998,
1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Service cost $ 14 $ 13 $ 12
Interest cost 32 29 27
Expected return on plan assets (22) (16) (11)
Amortization of unrecognized net
loss 2 3 4
Net retiree health care expense $ 26 $ 29 $ 32
</TABLE>
The funded status of the plan at December 31 is shown in the following
table. Plan assets are comprised primarily of equity securities, bonds and cash
equivalents.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Change in benefit obligation
Benefit obligation at January 1 $ 413 $ 385
Service cost 14 13
Interest cost 32 29
Actuarial (gain) loss 49 (1)
Benefit payments (15) (13)
----- -----
Benefit obligation at December 31 $ 493 $ 413
Change in plan assets
Fair value at January 1 $ 263 $ 185
Actual return on plan assets 54 42
Company contributions 26 49
Benefit payments (15) (13)
----- -----
Fair value at December 31 $ 328 $ 263
Funded status of the plan (165) (150)
Unrecognized net loss 55 41
Unrecognized prior service cost (1) (1)
----- -----
Pension liability recognized in balance
sheet $(111) $(110)
</TABLE>
The health care trend rate used to determine the pre-age 65 accumulated
postretirement benefit obligation was 7.11% for 1998, decreasing to 6.00% or
5.00% for medical benefits, depending on the option chosen, by the year 2002 and
beyond. A flat 5% rate per year is used for the post-age 65 obligation. Changing
the health care trend rate by one percentage point would change the accumulated
postretirement benefit obligation and the net retiree health care expense as
follows:
<TABLE>
<CAPTION>
1% Point 1% Point
Increase Decrease
Effect on:
<S> <C> <C>
Accumulated postretirement
benefit obligation $43 $(54)
Net retiree health care expense 5 (6)
</TABLE>
The Company has no significant postretirement health care benefit plans
outside of the United States.
Other Benefits
Profit Sharing Plans: The Company and certain subsidiaries have profit
sharing plans, principally contributory, in which all eligible employees
participate. The Company makes contributions to profit sharing plans in the
United States and other nations, which are generally based upon percentages of
pretax earnings, as defined, from those operations. Company contributions during
1998, 1997 and 1996 were $71 million, $108 million and $105 million,
respectively.
51
<PAGE>
NOTES TO MOTOROLA, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except as noted)
Motorola Executive Incentive Plan: The Company may provide up to 7% of its
annual consolidated pretax earnings after deducting 5% of capital employed, each
defined in the Motorola Executive Incentive Plan, for the payment of cash
incentive awards to key employees. During 1998, there was no provision for
incentive awards. Provisions for incentive awards in 1997 and 1996 were $56
million and $55 million, respectively.
Long Range Incentive Program: The Company has a Long Range Incentive
Program to reward participating elected officers for the Company's achievement
of outstanding long-range performance, based on four performance objectives
measured over four-year cycles. These objectives are benchmarked and evaluated
against both similar-industry companies and internal Motorola objectives. During
both 1998 and 1997, $21 million was provided for long-range incentive awards as
compared to $22 million in 1996.
Stakeholders Plan: This program is available to eligible Motorola employees
who are not participating in the Motorola Executive Incentive Plan or certain
other incentive plans. Stakeholders awards are earned and paid annually to
participants and depend, first, on the Company and, in most cases, the major
business unit in which the participant works, exceeding a minimum return on net
assets percentage (as determined by the Company) during the calendar year and,
second, the extent to which such minimum was exceeded. Payments are made 50% in
cash and 50% in the Company's common stock where legally permitted or
practicable, otherwise all in cash. The Company will acquire shares for the
program through open market cash purchases and will not issue new shares. During
1998, there was no provision for stakeholders awards. Provisions for the
stakeholders awards in 1997 and for the RONA incentive plan award (a predecessor
plan) in 1996 were $188 million and $32 million, respectively.
Stock Options: Under the Company's stock option plan, options to acquire
shares of common stock have been made available for grant to certain employees
and non-employee directors. Each option granted has an exercise price of 100% of
the market value of the common stock on the date of grant. The contractual life
of each option is 10 years. Substantially all of the options vest in one year.
Pursuant to Statement of Financial Accounting Standards No. 123 "Accounting
for Stock-Based Compensation", the Company has elected to account for its stock
option plan under the provisions of APB Opinion No. 25 "Accounting for Stock
Issued to Employees". Accordingly, no compensation cost has been recognized for
the stock option plan. The Company has evaluated the pro forma effects of
Statement 123 and as such, net earnings (loss), basic earnings (loss) per common
share and diluted earnings (loss) per common share would have been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
Net earnings (loss)
<S> <C> <C> <C>
As reported $ (962) $1,180 $1,154
Pro forma $(1,072) $1,114 $1,087
Basic earnings (loss) per
common share
As reported $ (1.61) $ 1.98 $ 1.95
Pro forma $ (1.79) $ 1.87 $ 1.84
Diluted earnings (loss) per
common share
As reported $ (1.61) $ 1.94 $ 1.90
Pro forma $ (1.79) $ 1.83 $ 1.79
</TABLE>
The fair value of each option was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Risk-free interest rate 4.52% 5.71% 6.25%
Dividend yield 0.80% 0.77% 0.73%
Expected volatility 31.33% 29.83% 26.30%
Expected life in years 5 5 5
Per option fair value $ 18 $ 16 $ 18
</TABLE>
52
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO
(Dollars in millions, except as noted) CONSOLIDATED FINANCIAL STATEMENTS
The plan has approximately 20,100 current stock option holders. Stock option
activity was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
Shares Wtd. avg. Shares Wtd. avg. Shares Wtd. avg.
(In thousands, except exercise price and subject to exercise subject to exercise subject to exercise
employee data) options price options price options price
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at January 1 33,273 $46 30,646 $39 26,385 $34
Additional options granted 10,380 $54 6,862 $65 6,295 $54
Options exercised (1,703) $24 (3,867) $27 (1,846) $17
Options terminated, cancelled or expired (300) $59 (368) $49 (188) $68
Options outstanding at December 31 41,650 $49 33,273 $46 30,646 $39
Options exercisable at December 31 30,778 $47 26,131 $41 24,337 $35
Approx. number of employees granted options 16,100 14,800 13,800
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- ----------------------
Wtd. avg. Wtd. avg. Wtd. avg.
No. of exercise contractual No. of exercise
Exercise price range: options price life (in yrs.) options price
<S> <C> <C> <C> <C> <C>
$ 9--$15 4,979 $14 2.2 4,979 $14
$16--$30 3,748 $26 3.9 3,748 $26
$31--$45 2,549 $44 4.9 2,549 $44
$46--$60 23,723 $55 8.4 13,037 $56
$61--$75 6,249 $65 8.8 6,147 $65
$76--$83 402 $80 8.3 318 $79
------ ------
41,650 30,778
------ ------
</TABLE>
8. Commitments and Contingencies
Financial: At December 31, 1998, the Company owned, directly and
indirectly, approximately 19% of Iridium LLC (Iridium LLC and its operating
subsidiary, Iridium Operating LLC, are collectively referred to as Iridium). The
Company accounts for its investment in Iridium under the equity method of
accounting due to its financial influence on Iridium in the form of guarantees
of Iridium's indebtedness, its contract with Iridium for the operation and
maintenance of the global personal communications system and other financial
commitments as more fully discussed below.
The following table summarizes the Company's equity and bond investments in
Iridium and investments in the Iridium gateway companies as of December 31,
1998, and the amounts owed to the Company by Iridium under several contracts as
of February 27, 1999:
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------
Investments:
Equity investment in Iridium $ 50
Bond investment in Iridium 157
Investments in Iridium Gateway companies 56
----
Total $263
====
Accounts Receivable:
Operations & maintenance contract $176
Other contracts 88
----
Total $264
====
- ---------------------------------------------------------------------------------
</TABLE>
53
<PAGE>
NOTES TO MOTOROLA, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except as noted)
The Company's equity and bond investment in Iridium and its equity investments
in several Iridium gateway companies aggregated approximately $263 million at
December 31, 1998, and are included in the consolidated balance sheet in Other
Assets. The Company's remaining equity investment in Iridium was approximately
$50 million at December 31, 1998. The Company expects to record losses equal to
this remaining equity investment by the end of the first quarter of 1999. The
Company's bond investment in Iridium consisted of $157 million face principal
amount of senior subordinated discount notes. The notes mature on March 1, 2006,
and accrue cash interest at a rate of 14 1/2% per annum payable semi-annually
commencing on September 1, 2001. The notes will be subject to redemption at the
option of Iridium at any time on or after March 1, 2001. The Company's
investments in Iridium gateway companies was approximately $56 million. The
Company's ownership percentages in these gateway companies ranged from
approximately 20% to 100%.
Unless otherwise indicated, the following table summarizes as of December
31, 1998, the Company's bank guarantees and other financial commitments for
which it is obligated should certain conditions or events occur and contractual
commitments to Iridium and other obligations:
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------
Bank Guarantees and Other Financial Commitments:
Senior Secured Credit Agreement capital call $ 50
Senior Guaranteed Credit Agreement $750
Conditional Guarantee See Below
Contractual Commitments and Other Obligations:
Operations & Maintenance contract maximum
deferrable commitment $400
Amount deferred as of February 27, 1999 176
----
Remaining deferrable commitment $224
====
Obligations to subcontractors $109
====
Assets at risk and other estimated potential
Contractual obligations $791
====
- -----------------------------------------------------------------------------------
</TABLE>
Iridium's bank facilities include an $800 million Senior Secured Credit
Agreement. That agreement contains subscriber and revenue targets and other
conditions that Iridium must meet to avoid default. On March 1, 1999, Iridium
announced that it was likely that it would not meet its first quarter 1999
subscriber and revenue targets. There can be no assurances that the lenders
under this credit agreement will revise those targets so that Iridium does not
default or that they will waive such default. If a default occurs under the
Senior Secured Credit Agreement, those lenders could execute on their security
interest in substantially all of Iridium's assets and require certain investors
in Iridium to comply with their capital call requirements, which in the
Company's case would be approximately $50 million. If this investment was
required, it would be subject to the same accounting treatment applied to the
Company's prior equity investment in Iridium.
In addition, if Iridium defaults under its Senior Secured Credit Agreement
it will be in default under a $750 million Senior Guaranteed Credit Agreement
which the Company has directly guaranteed. The majority of this facility is
scheduled to mature on December 31, 2000 and the remainder is scheduled to
mature on December 31, 2001. Iridium has used and is using the proceeds of this
senior guaranteed facility generally to make payments to the Company for the
Iridium system. If Iridium were to default under the $750 million Senior
Guaranteed Credit Agreement, the banks providing loans under the Senior
Guaranteed Credit Agreement could terminate Iridium's ability to make further
draws under that agreement, accelerate all the outstanding obligations under
that agreement and require the Company to satisfy its guarantee obligations.
Also, although the Company has not directly guaranteed the Senior Secured
Credit Agreement, it has agreed to guarantee an additional $350 million of
Iridium debt upon Iridium's request, subject to certain conditions, most
significantly non-payment by Iridium of certain obligations owed to Motorola and
compliance with the terms of the Agreement Regarding Guarantee between Motorola
and Iridium LLC. If Iridium requests that the Company provide this additional
guarantee, it may be used by Iridium to guarantee or reduce the amount
outstanding under the Senior Secured Credit Agreement. The Company believes it
is likely that Iridium will ask the Company to make this additional $350 million
guarantee available in the near future, either for working capital or in some
manner related to the Senior Secured Credit Agreement.
54
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO
(Dollars in millions, except as noted) CONSOLIDATED FINANCIAL STATEMENTS
The Company has also provided up to $400 million of financial support
directly to Iridium by deferring amounts owed under a contract with the Company.
As of February 27, 1999, Iridium has deferred $176 million of payments and the
Company expects that Iridium will continue to defer payments. The repayment of
these deferred payments is subordinated to repayment of Iridium's senior secured
bank loans, as is the repayment to the Company by Iridium of any amounts the
Company pays to banks under its guarantees and some other obligations owed to
the Company. Approximately $88 million is owed to the Company by Iridium, apart
from the deferred payments described above, as of February 27, 1999.
The Company has several contracts valued at $3.2 billion with Iridium for
the operation and maintenance of the global personal communications system.
Through the end of 1998, the Company has earned and received payments
approximating $242 million under these contracts. The Company has significant
subcontracts for portions of the system, for which it will generally remain
obligated in the amount of $109 million as of December 31, 1998 even if Iridium
is unable to satisfy the terms of the contracts with the Company. In addition,
the Company has substantial investments in assets related to these contracts,
such as inventory, manufacturing equipment, buildings and other potential
obligations in connection with these contracts, the value of which the Company
estimated to be $791 million as of December 31, 1998.
The following tables provide summary financial information about Iridium,
as provided by Iridium in its 1998 Annual Report:
Summary Balance Sheet Information for Iridium
<TABLE>
<CAPTION>
December 31 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 57 $ 379
Property and equipment, net 3,584 1,526
Other assets 98 1,741
------------------------------------
Total assets $3,739 $3,646
- -----------------------------------------------------------------------------------
Current liabilities $ 297 $ 467
Long-term debt and other liabilities 2,965 1,544
------------------------------------
Total liabilities $3,262 $2,011
- -----------------------------------------------------------------------------------
Total equity $ 477 $1,635
- -----------------------------------------------------------------------------------
</TABLE>
Summary Results of Operations for Iridium
<TABLE>
<CAPTION>
Years ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ --- $ --- $ ---
Operating Loss 988 297 71
Net Loss 1,253 294 74
Net Loss applicable to Class 1 Interests $1,259 $ 299 $ 77
- ------------------------------------------------------------------------------------------------------
</TABLE>
The following table presents the Company's equity losses and development
and commercialization provisions related to Iridium for the years ended December
31, 1998, 1997 and 1996, and the ending balances for the development and
commercialization reserves as of December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Years ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Company's share of Iridium's net loss
applicable to Class 1 Interests $ 265 $ 48 $ 17
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Development and Commercialization provisions $ 95 $ 132 $ 145
Development and Commercialization reserves $ 649 $ 554 $ 422
- -------------------------------------------------------------------------------------------------------
</TABLE>
The Company's share of Iridium's net loss is included in selling, general
and administrative expenses in the consolidated statements of operations.
The development and commercialization provision for 1998 was $95 million of
which $81 million was included in cost of sales and $14 million was included in
selling, general and administrative expenses in the consolidated statements of
operations. The related provisions for 1997 and 1996 were $132 million and $145
million, respectively, and were included in cost of sales in
55
<PAGE>
the consolidated statements of operations. Prior to 1996, the Company provided
$277 million related to development and commercialization risks associated with
the Iridium program through cost of sales.
The development and commercialization reserve as of December 31, 1998 was
$649 million of which $529 million was included in accrued liabilities and $120
million was included in other liabilities on the consolidated balance sheets.
The related reserves for 1997 and 1996 were $554 million and $422 million,
respectively, and are included in accrued liabilities in the consolidated
balance sheets.
The loss of the value of its investment in Iridium and Iridium gateway
companies, the failure of Iridium to make contractual payments to the Company or
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 would have a material adverse effect on
the Company's consolidated financial position, liquidity and results of
operations.
At December 31, 1998, the Company's percentage interest in Nextel
Communications, Inc. (Nextel) was approximately 20%. The cost basis and fair
value of the Nextel investment were $837 million and $1.3 billion, respectively,
at December 31, 1998. The investment is included in Other Assets.
The off-balance sheet commitment to Nextel for equipment financing
aggregated $485 million at December 31, 1998. This amount represents the maximum
available commitment and may not be completely utilized by Nextel. At December
31, 1998, approximately $160 million of this commitment was outstanding.
Excluding Iridium and Nextel, the Company has an off-balance sheet
commitment at December 31, 1998, to guarantee approximately $440 million of debt
of affiliates.
Except as noted above, the Company had no other significant concentrations
of credit risk as of December 31, 1998.
Environmental and Legal: Under the Comprehensive Environmental Response
Compensation and Liability Act of 1980, as amended (CERCLA, or Superfund) and
equivalent state law, the Company has been designated as a potentially
responsible party by the United States Environmental Protection Agency with
respect to certain waste sites with which the Company may have had direct or
indirect involvement. Such designations are made regardless of the extent of the
Company's involvement. These claims are in various stages of administrative or
judicial proceedings. They include demands for recovery of past governmental
costs and for future investigations or remedial actions. In many cases, the
dollar amounts of the claims have not been specified and have been asserted
against a number of other entities for the same cost recovery or other relief as
was asserted against the Company. The Company accrues costs associated with
environmental matters when they become probable and reasonably estimable, and
these totaled $86 million and $87 million at December 31, 1998 and 1997,
respectively. The amount of such charges to earnings was $12 million, $36
million and $29 million in 1998, 1997 and 1996, respectively. However, due to
their uncertain nature, the amounts accrued could differ, perhaps significantly,
from the actual costs that will be incurred. These amounts assume no substantial
recovery of costs from any insurer. The remedial efforts include environmental
cleanup costs and communication programs. These liabilities represent only the
Company's share of any possible costs incurred in environmental cleanup sites,
since in most cases, potentially responsible parties other than the Company may
exist.
The Company is a defendant in various suits, including environmental and
product-related suits, and is subject to various claims which arise in the
normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, liquidity or results of operations.
9. Information by Segment and Geographic Region
The Company implemented Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" as of
January 1, 1998. This Statement establishes standards for the way public
business enterprises report information about operating segments in annual
financial statements and in interim financial reports issued to shareholders.
This Statement is not required to be applied to interim financial statements in
the initial year of application. The Company has restated the previously
reported annual segment operating results to conform to the Statement's
management approach.
The Company's operations are predominantly in the wireless communication,
semiconductor technology and advanced electronics industries and involve the
design, manufacture and sale of a diversified line of products. The Company's
reportable segments have been determined based on the nature of the products
offered to customers, which include, but are not limited to, cellular phones and
systems; semiconductors (including discrete semiconductors and integrated
circuits); two-way radios and
56
<PAGE>
personal communications equipment and systems; and pagers and data
communications equipment and systems. Automotive, defense and space electronic
products are part of the Other Products segment.
The accounting policies of the segments are the same as those described in
Note 1 Summary of Significant Accounting Policies. Segment operating results are
measured based on profit (loss) before tax adjusted, if necessary, for certain
segment specific items. Intersegment and intergeographic sales are accounted for
on an arm's length pricing basis. Intersegment sales included in adjustments and
eliminations were $2.8 billion, $3.2 billion and $2.7 billion for the years
ended December 31, 1998, 1997 and 1996, respectively. These sales were primarily
from the Semiconductor Products segment and the Integrated Electronic Systems
Sector (formerly the Automotive, Component, Computer and Energy Sector) included
in the Other Products segment. Intersegment sales from the Semiconductor
Products segment were $1.6 billion, $1.8 billion and $1.6 billion for the years
ended December 31, 1998, 1997 and 1996, respectively. For these same periods,
intersegment sales from the Integrated Electronic Systems Sector were $0.9
billion, $1.0 billion and $0.9 billion, respectively. Net sales by geographic
region are measured by the location of the revenue-producing operations.
Identifiable assets (excluding intersegment receivables) are the Company's
assets that are identified with classes of similar products or operations in
each geographic region. Corporate assets primarily include cash, marketable
securities, equity investments and the administrative headquarters of the
Company.
In 1998, 1997 and 1996, no single customer or group under common control
represented 10% or more of the Company's sales.
In July 1998, the Company's communications-related businesses began
realigning into the Communications Enterprise, a structure intended to enable
integrated solutions and improved responsiveness to the needs of distinct
customer segments. For this year-end reporting, the Company continues to use the
previous segments because the Company's management continued to make operating
decisions and assess performance based on these segments.
57
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO
(Dollars in millions, except as noted) CONSOLIDATED FINANCIAL STATEMENTS
Segment information
<TABLE>
<CAPTION>
Net Sales Operating Profit (Loss) Before Tax
------------------------------- ---------------------------------------------------------------
Years ended December 31 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cellular Products $12,483 $ 11,934 $10,804 $ 482 3.9% $ 1,283 10.8% $1,162 10.8%
Semiconductor Products 7,314 8,003 7,858 (1,225) (16.8%) 168 2.1% 186 2.4%
Land Mobile Products 5,397 4,926 4,008 729 13.5% 542 11.0% 452 11.3%
Messaging, Information and
Media Products 2,633 3,793 3,958 (699) (26.5%) 41 1.1% 46 1.2%
Other Products 4,385 4,326 4,061 (544) (12.4%) (85) (2.0%) 30 0.7%
Adjustments and
eliminations (2,814) (3,188) (2,716) 14 (0.5%) (48) 1.5% (29) 1.1%
------- -------- ------- ------- ------- ------
Segment totals $29,398 $ 29,794 $27,973 (1,243) (4.2%) 1,901 6.4% 1,847 6.6%
------- -------- -------
General corporate (131) (85) (72)
------- ------- ------
Earnings (loss) before
income taxes $(1,374) (4.7%) $ 1,816 6.1% $1,775 6.3%
</TABLE>
<TABLE>
<CAPTION>
Assets Capital Expenditures Depreciation Expense
------------------------------ ------------------------------ ---------------------------
Years ended December 31 1998 1997 1996 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cellular Products $ 9,282 $ 8,021 $ 6,314 $ 607 $ 900 $ 673 $ 411 $ 534 $ 474
Semiconductor Products 8,232 7,947 7,889 1,783 1,153 1,416 1,178 1,169 1,160
Land Mobile Products 2,720 2,538 2,130 270 228 159 183 168 162
Messaging, Information and
Media Products 2,043 2,391 2,506 97 149 275 164 219 243
Other Products 3,111 2,974 2,256 199 178 196 216 191 221
Adjustments and
eliminations (420) (458) (262) -- -- -- -- -- --
------- -------- ------- ------- ------- ------- ------ ------ ------
Segment totals 24,968 23,413 20,833 2,956 2,608 2,719 2,152 2,281 2,260
General corporate 3,760 3,865 3,243 265 266 254 45 48 48
------- -------- ------- ------- ------- ------- ------ ------ ------
Consolidated totals $28,728 $ 27,278 $24,076 $ 3,221 $ 2,874 $ 2,973 $2,197 $2,329 $2,308
</TABLE>
<TABLE>
<CAPTION>
Interest Income Interest Expense Net Interest
------------------------------ ------------------------------ ---------------------------
Years ended December 31 1998 1997 1996 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cellular Products $ 7 $ 2 $ 1 $ 90 $ 41 $ 57 $ (83) $ (39) $ (56)
Semiconductor Products 12 12 15 116 71 103 (104) (59) (88)
Land Mobile Products 2 5 2 20 14 16 (18) (9) (14)
Messaging, Information and
Media Products 15 18 22 22 28 36 (7) (10) (14)
Other Products 5 2 2 21 5 -- (16) (3) 2
------- -------- ------- ------- ------- ------- ------ ------ ------
Segment totals 41 39 42 269 159 212 (228) (120) (170)
General corporate 44 46 22 32 57 37 12 (11) (15)
------- -------- ------- ------- ------- ------- ------ ------ ------
Consolidated totals $ 85 $ 85 $ 64 $ 301 $ 216 $ 249 $ (216) $ (131) $ (185)
Geographic area information
Net Sales Assets
------------------------------ ------------------------------
Years ended December 31 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
United States $20,397 $ 21,809 $20,614 $14,932 $14,000 $12,797
United Kingdom 5,709 5,254 4,571 2,083 2,098 1,816
Other nations 12,812 12,778 12,312 8,804 7,966 6,788
Adjustments and
eliminations (9,520) (10,047) (9,524) (851) (651) (568)
------- -------- ------- ------- ------- -------
Geographic totals $29,398 $ 29,794 $27,973 24,968 23,413 20,833
------- -------- -------
General corporate 3,760 3,865 3,243
------- ------- -------
Consolidated totals $28,728 $27,278 $24,076
</TABLE>
58
<PAGE>
NOTES TO MOTOROLA, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except as noted)
10. Stockholder Rights Plan
On November 5, 1998, the Company's Board of Directors adopted a new Preferred
Share Purchase Rights Agreement to replace the existing stockholder rights plan
that expired November 20, 1998. Under the new 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. The rights will expire on November 20,
2008.
Each right entitles 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. The Company may
redeem the new rights at a price of one cent per right.
11. Reorganization of Businesses
In the second quarter of 1998, the Company recorded, as a separate line item
in the consolidated statements of operations, 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 worldwide employment by 20,000 employees.
The following table displays a rollforward to December 31, 1998, of the accruals
established during the second quarter of 1998:
<TABLE>
<CAPTION>
Second
Quarter 1998 Initial Charges Accruals at
Initial Charges Reclassifi- As Adjusted Amounts Dec 31,
cations Used 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidation of manufacturing
operations $ 361 $ (35) $ 326 $ (171) $ 155
Business exits 453 (162) 291 (154) 137
Employee separations 461 197 658 (471) 187
------ ----- ------ ------- -----
Total restructuring $1,275 $ -- $1,275 $ (796) $ 479
------ ----- ------ ------- -----
Asset impairments and other charges 705 -- 705 (544) 161
- ---------------------------------------------------------------------------------------------------------------------
Totals $1,980 $ -- $1,980 $(1,340) $ 640
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Amounts in the Reclassifications column represent the reallocation of
accruals between restructuring categories and not increases in the initial
charges. These reallocations were due to the sale of, rather than the planned
closure of, two of the Company's businesses and the reclassification of employee
severance costs originally accrued for in the consolidation of manufacturing
operations and business exits. These reallocations were also offset by higher
than anticipated severance costs from special voluntary termination benefits.
In connection with its review of the continued propriety of the Company's
restructuring accrual, management determined that certain amounts previously
accrued for consolidation of manufacturing operations and business exits were no
longer necessary given the revisions to the timing and nature of disposal for
those operations. Similarly, management had additional information in the fourth
quarter of 1998 related to the acceptance of special voluntary termination
benefits. Recognizing that additional accruals were necessary to reflect the
special voluntary termination benefits and that based upon the requirement under
Statement of Financial Accounting Standards (SFAS) No. 88 to accrue for these
benefits upon acceptance by the employees, management reclassified $142 million
of accruals from the consolidation of manufacturing operations and business
exits portion of the restructuring accrual to the severance portion in the
fourth quarter of 1998. In addition, management reclassified $55 million of
employee severance costs originally accrued for in the consolidation of
manufacturing operations and business exits to employee separations in the
fourth quarter of 1998.
The total amount used of $1.34 billion through December 31, 1998 reflects
approximately $600 million in cash payments and $740 million in write-offs. Of
the remaining $640 million accrual balance at December 31, 1998, the Company
expects to make approximately $293 million in cash payments and $347 million in
write-offs.
59
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO
(Dollars in millions, except as noted) CONSOLIDATED FINANCIAL STATEMENTS
The following table displays by category the total restructuring and other
charges, as adjusted, recorded by each segment and included in the segment's
operating profit (loss) before tax for the year ended December 31, 1998. The
segment amounts also include the allocation of $55 million in restructuring and
other charges recorded at the corporate level.
<TABLE>
<CAPTION>
Restructuring Charges Other Charges
- ---------------------------------------------------------------------------------------------------------------------------
Segment Consol. of Business Employee Asset Other Total
mfg. ops. exits separations Impair- Charges
ments
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cellular Products $ 39 $ 24 $ 58 $ 74 $185 $ 380
Land Mobile Products 18 --- 88 --- --- 106
Messaging, Information and Media 97 32 158 133 87 507
Products
Semiconductor Products 163 101 282 159 26 731
Other Products 9 134 72 14 27 256
- --------------------------------------------------------------------------------------------------------------------------
Total $326 $291 $658 $380 $325 $1,980
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Consolidation of manufacturing operations
- -----------------------------------------
Consolidation of manufacturing operations relates to the closing of
production and distribution facilities and selling or disposing of the machinery
and equipment that was no longer needed and, in some cases, scrapping excess
assets that had no net realizable value. The buildings associated with these
production facilities, in many cases, were sold to outside parties. Severance
costs incurred for terminating employees at these production facilities were
also originally included in the consolidation of manufacturing operations line
item but were subsequently reclassified to the employee separations line item.
Also included in this restructuring category were costs related to shutting down
or reducing the capacity of certain production lines. In most cases, older
facilities with older technologies or non-strategic products were closed.
Machinery and equipment write downs related to equipment that would no longer be
utilized comprised the majority of these costs. These assets have been deemed to
be held for use until such time as they are removed from service and, therefore,
no longer utilized in manufacturing products. An assessment was made as to
whether or not there was an asset impairment related to the valuation of these
assets in determining what the amount of the write down included in the
restructuring charge should be for this machinery and equipment. This assessment
utilized the anticipated future undiscounted cash flows generated by the
equipment as well as its ultimate value upon disposition.
The charges in this restructuring category do not include any costs related
to the abandonment or sub-lease of facilities, moving expenses, inventory
disposals or write downs, or litigation or environmental obligations.
The consolidation of manufacturing operations was primarily focused in the
Semiconductor Products (SPS) and Messaging, Information and Media Products
segments. Semiconductor facilities in North Carolina, California, Arizona and
the Philippines are being closed as planned. SPS is consolidating its production
facilities into fewer integrated factories to achieve economies of scale and
improved efficiencies and to capitalize on newer technologies that should reduce
operating costs. As a result of excess global manufacturing capacity, the paging
facility in Vega Baja, Puerto Rico was closed, and paging facilities in
Singapore were realigned. Approximately $122 million was used for these
consolidation activities. Both segments are continuing to execute their plans to
consolidate and streamline their worldwide manufacturing operations. The
remaining $155 million accrual, included in accrued liabilities in the
consolidated balance sheets, at December 31, 1998, for this category principally
represents the finalization of the plant closings in North Carolina, California,
Arizona and the Philippines in the Semiconductor Products segment and the
consolidation of operations in Northern Illinois, Massachusetts and Canada in
the Company's communications businesses. The Company anticipates these actions
to be complete by the end of 1999.
Business exits
- --------------
Business exit costs include costs associated with shutting down businesses
that did not fit with the new strategy of the Company. In many cases, these
businesses used older technologies that produced non-strategic products. The
long-term growth and margins associated with these businesses were not in line
with the Company's expectations given the level of investment and returns.
Included in these business exit costs were the costs of terminating technology
agreements, selling or liquidating interests in joint ventures that did not fit
with the new strategy of the Company and severance costs. Severance costs were
subsequently reclassified to the employee separations line item in the fourth
quarter of 1998. Similar to consolidation of manufacturing operations, the
charges in this restructuring category did not include any costs related to the
abandonment or sub-lease of facilities, moving expenses, inventory disposals or
write downs, or litigation or environmental obligations.
60
<PAGE>
NOTES TO MOTOROLA, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except as noted)
Business exit costs were primarily focused in the Integrated Electronic
Systems sector (formerly the Automotive, Component, Computer and Energy Sector).
During the third quarter of 1998, the Integrated Electronic Systems Sector
(IESS) sold its printed circuit board business. The Sector also sold its non-
silicon component manufacturing business to CTS Corp in the first quarter of
1999. The loss of operating income from these exited businesses is not
significant to IESS' or the Company's results of operations.
The remaining $137 million accrual, included in accrued liabilities in the
consolidated balance sheets, at December 31, 1998, for this restructuring
category primarily relates to the Company's contract requirements and
contingencies from the sale of the printed circuit board business and the
disposal of the non-silicon component manufacturing business, the finalization
of remaining activities in the Semiconductor Products segment and the planned
exits from several small paging and multimedia businesses of the Messaging,
Information and Media segment. The Company anticipates these actions to be
complete by the end of 1999.
Employee separations
- --------------------
Employee separation costs represent the costs of involuntary severance
benefits for the 20,000 positions identified as subject to severance under the
restructuring plan. Employee separation costs of $55 million were also included
in the consolidation of manufacturing operations and business exits line items.
These costs were subsequently reclassified to the employee separations line item
in the fourth quarter of 1998. In implementing the restructuring plan, the
Company offered, beginning in the third quarter of 1998, special voluntary
termination benefits in addition to the planned involuntary termination benefits
previously communicated to employees pursuant to the plan. The special voluntary
termination benefits provided for one week of pay for each year of service
between years 1-10, two weeks of pay for each year of service between years 11-
19, and three weeks of pay for each year of service for year 20 and greater.
The special voluntary termination program expired at the end of the fourth
quarter of 1998, although severance payments related to this program were not
completed at that time. To the extent that employees accept special voluntary
termination benefits in future periods, additional accruals, under a new
program, will be necessary and recognized in expense at the date of acceptance
by the employees. Management had additional information in the fourth quarter of
1998 related to the acceptance of special voluntary termination benefits.
Recognizing that additional accruals were necessary to reflect the special
voluntary termination benefits and that based upon the requirement under
Statement of Financial Accounting Standards (SFAS) No. 88 to accrue for these
benefits upon acceptance by the employees, management reclassified $142 million
of accruals from the consolidation of manufacturing operations and
business exits portion of the restructuring accrual to the employee separations
portion in the fourth quarter of 1998.
As of December 31, 1998, approximately 13,800 employees have separated from
the Company through a combination of voluntary and involuntary severance
programs. Of the 13,800 separated employees, approximately 8,200 were direct
employees, and 5,600 were indirect employees. Direct employees are primarily
non-supervisory production employees, and indirect employees are primarily non-
production employees and production managers. Completion of the sale of the non-
silicon component manufacturing business to CTS Corp. in the first quarter of
1999 further reduced the Company's employee population by approximately 4,500
people. The Company continues to make payments under the severance programs and
expects these payments to be completed by the end of the fourth quarter of 1999.
The remaining $187 million accrual, included in accrued liabilities in the
consolidated balance sheets, at December 31, 1998, represents severance payments
for 6,200 positions related to the disposal of the non-silicon component
manufacturing business, the completion of severance payments in the cellular and
paging businesses in Illinois, Florida and Texas, and the completion of
severance payments in Japan, Asia, the U.K. and Arizona in the semiconductor
products business.
Asset impairments and other charges
- -----------------------------------
As a result of current and projected business conditions, the Company wrote
down operating assets that became impaired. All impaired asset write downs have
been reflected as contra-assets in the consolidated balance sheets at December
31, 1998. This action reduced the carrying value of the related asset balances
by $380 million. The assets written down were primarily used manufacturing
equipment and machinery. Other assets written down were buildings and joint
venture investments.
The amount of the impairment charge for the assets written down was based
upon an estimate of the future cash flows expected from the use of the assets,
as well as upon their eventual disposition. These undiscounted cash flows were
then compared to the net book value of the equipment, and impairment was
determined based on that comparison. Cash flows were determined at the facility
level for certain production facilities based upon the anticipated sales value
of the products to be produced and the costs of producing the products at those
facilities. In cases in which sufficient cash flows were not going to be
generated by the equipment at those facilities, the assets were written down to
their estimated fair value. These estimated fair values were based upon what the
assets could be sold for in a transaction with an unrelated third party. Since
the majority of these assets were machinery and equipment, the Company was able
to utilize current market prices for comparable equipment in
61
<PAGE>
the marketplace in assessing what would be the fair value upon sale of the
equipment. Building writedowns were based on marketability factors of the
building in the particular location. The amount of the write down assigned to
joint venture investments and intangibles was $75 million. Valuations for joint
venture investments and intangibles were based on prevailing market conditions.
The intangibles were patents, communication frequencies and licenses, and
goodwill related to the Messaging, Information and Media Products segment. The
Company's remaining basis in these joint venture investments and intangibles at
December 31, 1998 was $8 million. The Company continues to evaluate its joint
venture investments and related intangibles on an ongoing basis.
The segments primarily impacted by these asset writedowns were
Semiconductor Products, Messaging, Information and Media Products and Cellular
Products. Assets held for use, which aggregated $51 million at December 31,
1998, continue to be depreciated based on an evaluation of their remaining
useful lives and their ultimate values upon disposition. There are no assets
held for sale at December 31, 1998 nor were any impaired assets disposed of
prior to that date.
The other charges of $325 million are not restructuring charges but are
other costs primarily comprised of contract termination costs related to
agreements that were associated with businesses in which the Company was
terminating contractual commitments, losses recorded on cellular infrastructure
contracts, and an in-process research and development write-off of $42 million
related to the NetSpeak transaction that occurred in the second quarter of 1998.
The remaining $161 million accrual, included in accrued liabilities in the
consolidated balance sheets, at December 31, 1998 represents the remainder of
losses on cellular infrastructure contracts and contract termination costs and
has not been offset against any relevant impaired assets because these amounts
do not relate to impaired assets, but relate to the other charges component of
this line item.
1997 Programs
- -------------
During 1997, the Company recorded various restructuring charges for the
purpose of redirecting resources from businesses which had not met strategic and
profitability objectives. The related charges totalled $327 million. The
following table displays a rollforward of the accruals established by business
exited:
<TABLE>
<CAPTION>
1997 Accruals Accruals
Initial Adjust- Amounts at Dec. Adjust- Amounts at Dec.
charges ments Used 31, 1997 ments Used 31, 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Q2 1997: Semiconductor Products
Segment
Exit from DRAM market $170 $(9) $(131) $ 30 $(12) $ (10) $ 8
- -----------------------------------------------------------------------------------------------------------------
Q3 1997: Other Products Segment
Exit from MacOS-compatible
computer systems business 95 - (28) 67 (10) (42) 15
- -----------------------------------------------------------------------------------------------------------------
Q4 1997: Messaging, Information and
Media Segment
Exit from retail analog
modem business 62 - - 62 - (59) 3
- -----------------------------------------------------------------------------------------------------------------
Grand Total $327 $(9) $(159) $159 $(22) $(111) $26
=================================================================================================================
</TABLE>
In the second quarter of 1997, the Company's Semiconductor Products Segment
announced its decision to phase out its participation in the dynamic random
access memory (DRAM) market. The decision to exit this business was made
primarily because the business did not meet strategic and profitability
objectives, rather than to generate significant future cost savings. As a
result of this decision, the segment incurred a $170 million charge to write off
technology development costs and to provide for the write down of manufacturing
equipment which could not be retrofitted for other production. In the fourth
quarter of 1997 and in the first quarter of 1998, the segment sold some of this
manufacturing equipment to its joint venture partner and thus reversed into
income $9 million and $12 million, respectively, of accruals no longer needed.
The amounts used in 1997 reflect write-offs. The amounts used in 1998 reflect $3
million in cash payments for exit fees and $7 million in write-offs. The
remaining $8 million accrual at December 31, 1998 is expected to be used by the
end of the first quarter of 1999.
62
<PAGE>
NOTES TO MOTOROLA, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except as noted)
In the third quarter of 1997, the Company announced its decision to exit
the MacOS(R)-compatible computer systems business, a business included in the
Other Products Segment. This decision was made in response to a decision by
Apple Computer to limit the introduction of its new technology and phase out
future licenses, rather than to generate significant future cost savings. As a
result of this decision, the Company incurred a $95 million charge primarily for
the write down of inventory and the cost of terminating contractual commitments.
In the second quarter of 1998, the exposures on these contractual commitments
were less than anticipated, thus resulting in the reversal into income of $10
million. The amounts used in 1997 reflect $3 million in employee severance
payments and $25 million in write-offs. The amounts used in 1998 reflect $3
million in employee severance payments and $39 million in write-offs. The
remaining $15 million accrual at December 31, 1998 relates to these contractual
commitments and may extend past the 1999 year end.
In the fourth quarter of 1997, the Company's Messaging, Information and
Media Segment announced its decision to exit the retail analog modem business
based in Huntsville, AL. The decision was made primarily because the business
was not meeting the Company's strategic and profitability objectives, rather
than to generate significant future cost savings. As a result of this decision,
the segment incurred a $62 million charge for the write down of inventory and
fixed assets, severance costs and certain other costs relating to the
realignment process. The amounts used in 1998 reflect $37 million in employee
severance payments and $22 million in write-offs. The remaining $3 million
accrual at December 31, 1998 is expected to be used by the end of the first
quarter of 1999.
The results of operations of each of these exited businesses were not
material to the Company's consolidated financial statements.
12. Acquisition of Businesses
The following table summarizes the major business acquisitions the
Company made during 1998:
<TABLE>
<CAPTION>
In-Process Research
Quarter and Development
Entity Name Consideration Acquired Charge Form of Consideration
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Starfish Software, Inc $253 Q3 1998 $109 Cash, common stock, and assumed
options and liabilities
NetSpeak Corp. $ 82 Q2 1998 $ 42 Cash
Appeal Telecom Comp., Ltd. $ 49 Q4 1998 $ 16 Cash
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
During the third quarter of 1998, the Company acquired all the outstanding
shares of Starfish Software, Inc. (Starfish). The total acquisition cost was
$253 million consisting of cash, 1.8 million shares of the Company's common
stock, and the assumption of Starfish stock options and other liabilities.
During the second quarter of 1998, the Company announced a cash tender offer for
3 million shares of NetSpeak Corporation (NetSpeak) at a price of $30 per share.
On April 22, 1998, the Company consummated its tender offer by acquiring 2.7
million shares, increasing its ownership percentage from approximately 8.3% to
31.7%. The Company also purchased 35,000 shares from two officers of NetSpeak at
the tender offer price upon the consummation of the transaction. During the
fourth quarter of 1998, the Company acquired a 51% ownership interest in Appeal
Telecom Company, Ltd. (Appeal) for $48.9 million in cash.
63
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO
(Dollars in millions, except as noted) CONSOLIDATED FINANCIAL STATEMENTS
In connection with these transactions, the Company recorded a total of $167
million in acquired in-process research and development charges. The charges for
Starfish, NetSpeak and Appeal were $109 million, $42 million and $16 million,
respectively. The charges for Starfish and Appeal were recorded in the statement
of operations in the selling, general and administrative expenses line. The
charge for NetSpeak was recorded in the restructuring and other charges line as
it represented a charge arising from an investment in an equity investee as
opposed to a consolidated subsidiary. The acquisitions of Appeal and Starfish
have been accounted for under the purchase method and accordingly, the results
of operations for Appeal and Starfish have been included in the Company's
consolidated financial statements since the dates of acquisition. The Company
applies the equity method of accounting for its investment in NetSpeak. The pro
forma effects of these acquisitions on the Company's consolidated financial
statements were not material.
Starfish's technology for the Connected Information Device market involves
synchronization for cellular, paging and telecommunications devices. Starfish is
involved in development of a portfolio of in-process projects for this market. A
total of fifteen different projects were in progress at the acquisition date.
These projects were at different stages of completion. Those projects included
developing personal information manager capability for certain of the Company's
wireless phones; REX technology for mobile devices; synchronization for pagers;
PC-based synchronization for the Company's products; over-the-air
synchronization; Internet connect to mobile devices; Telematics server
platforms; short-messaging technology; web-based application using server
technology; and wireless information devices. One project was estimated to be
70% complete, and all other projects were less than 50% complete. This in-
process research will have no alternative future uses if the planned products
are not feasible. No major product completion for these developmental products
is estimated until 2000, with projected research and development costs-to-
complete of approximately $34 million.
Historical pricing, margins, and expense levels were used in the valuation
of in-process products. The allocation of value to in-process research and
development was determined independently using discounted cash flows based on an
average risk adjusted rate of 22%. This rate reflects both technological and
market risk as well as the time value of money and is higher than the market-
derived rate for similar companies.
NetSpeak's technology enables interactive voice, video, and data
transmission over networks such as the Internet and local area/wide area
networks. Developmental products were not in commercial distribution at the date
of acquisition, and uncertainty existed as to final product configuration, cost,
and timing. There are no alternative future uses for the in-process work if
planned products are not feasible. Revenues from in-process products are
estimated primarily beginning in 2000, with projected research and development
costs-to-complete for NetSpeak of approximately $8 million.
Historical pricing, margins, and expense levels were used in the valuation
of in-process products for NetSpeak. Market and technological risks are
reflected in the 18% discount rate applied to cash flows to value in-process
research and development which was determined independently. This rate is higher
than the market-derived rate for similar companies.
Appeal's technology focuses on small size/low cost product for the Code
Division Multiple Access (CDMA) market. A variety of developmental CDMA phones
and accessories were in progress at the date of acquisition, and none of them
were completed at that time. At the acquisition date, developmental products in
Appeal's in-process portfolio were not technologically feasible, and there were
no identifiable future uses for the related research and development. Completion
of in-process projects is targeted throughout 1999, with projected research and
development costs-to-complete of approximately $1.4 million.
Pricing for Appeal's in-process products assumes rapidly declining average
selling prices for the products, resulting in a decreasing profit margin over
time. The risks relating to the in-process portfolio, including market and
technological risks, were considered in the 18% rate used to discount future
cash flows, which is higher than the market-derived rate for similar companies.
Developmental products for Starfish, NetSpeak and Appeal have varying
degrees of timing, technology, costs-to-complete and market risks throughout
final development. If the products fail to become viable, it is unlikely that
the Company would be able to realize any value from the sale of incomplete
technology to another party or through internal re-use. There are also risks of
market acceptance for the products under development, as well as potential
reductions in projected sales volumes and related profits in the event of
delayed market availability for any of the products. Efforts to complete all
development products for these companies continue, and there are no known delays
to company-forecasted plans.
64
<PAGE>
FIVE YEAR FINANCIAL SUMMARY
(Dollars in millions, except as noted)
Motorola, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years ended December 31 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Operating Net sales $29,398 $29,794 $27,973 $27,037 $22,245
Results Manufacturing and other costs of sales 20,886 20,003 18,990 17,545 13,760
Selling, general and administrative expenses 5,493 5,188 4,715 4,642 4,381
Restructuring and other charges 1,980 327 -- -- --
Depreciation expense 2,197 2,329 2,308 1,919 1,525
Interest expense, net 216 131 185 149 142
Total costs and expenses 30,772 27,978 26,198 24,255 19,808
Net gain on Nextel asset exchange -- -- -- 443 --
Earnings (loss) before income taxes (1,374) 1,816 1,775 3,225 2,437
Income tax provision (benefit) (412) 636 621 1,177 877
Net earnings (loss) $ (962) $ 1,180 $ 1,154 $ 2,048 $ 1,560
Net earnings (loss) as a percent of sales (3.3)% 4.0% 4.1% 7.6% 7.0%
Per Share Diluted earnings (loss) per common share $ (1.61) $ 1.94 $ 1.90 $ 3.37 $ 2.66
Data Diluted weighted average common shares
outstanding 598.6 612.2 609.0 609.7 591.7
Dividends declared $ 0.480 $ 0.480 $ 0.460 $ 0.400 $ 0.310
Balance Total assets $28,728 $27,278 $24,076 $22,738 $17,495
Sheet Working capital 2,091 4,181 3,324 2,717 3,008
Long-term debt 2,633 2,144 1,931 1,949 1,127
Total debt 5,542 3,426 3,313 3,554 2,043
Total stockholders' equity $12,222 $13,272 $11,795 $10,985 $ 9,055
Other Data Current ratio 1.18 1.46 1.42 1.35 1.51
Return on average invested capital (6.2)% 8.4% 8.4% 16.7% 17.5%
Return on average stockholders' equity (7.6)% 9.4% 10.0% 20.2% 21.1%
Capital expenditures $ 3,221 $ 2,874 $ 2,973 $ 4,225 $ 3,322
% to sales 11.0% 9.6% 10.6% 15.6% 14.9%
Research and development expenditures $ 2,893 $ 2,748 $ 2,394 $ 2,197 $ 1,860
% to sales 9.8% 9.2% 8.6% 8.1% 8.4%
Year-end employment (in thousands) 133 150 139 142 132
</TABLE>
QUARTERLY AND OTHER FINANCIAL DATA
(Dollars in millions, except per share amounts; unaudited)
Motorola, Inc. and Subsidiaries
<TABLE>
<CAPTION>
1998 1997
1st 2nd 3rd 4th 1st 2nd 3rd 4th
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Net sales $6,886 $ 7,023 $7,152 $8,337 $6,642 $7,521 $7,353 $8,278
Results Gross profit 2,072 2,005 1,997 2,438 2,258 2,502 2,367 2,664
Net earnings (loss) 180 (1,328) 27 159 325 268 266 321
Net earnings (loss) as a
percent of sales 2.6% (18.9)% 0.4% 1.9% 4.9% 3.6% 3.6% 3.9%
Per Share Basic earnings (loss) per $ 0.30 $ (2.22) $ 0.05 $ 0.26
common share $ 0.55 $ 0.45 $ 0.44 $ 0.54
Data Diluted earnings (loss) per $ 0.30 $ (2.22) $ 0.04 $ 0.26
(in dollars) common share $ 0.53 $ 0.44 $ 0.44 $ 0.53
Dividends declared $0.120 $ 0.120 $0.120 $0.120 $0.120 $0.120 $0.120 $0.120
Dividends paid $0.120 $ 0.120 $0.120 $0.120 $0.120 $0.120 $0.120 $0.120
Stock prices
High $65.88 $ 61.63 $55.00 $64.31 $69.75 $78.94 $90.44 $75.19
Low $52.00 $ 48.19 $39.88 $38.38 $54.00 $54.88 $66.00 $54.13
</TABLE>
The number of stockholders of record of Motorola common stock on January
31, 1999 was 57,775.
65
<PAGE>
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
See Part II, Item 8 hereof.
3. Exhibits
The list of Exhibits is amended by substituting Exhibit 23, as listed in
the Exhibit Index attached hereto, for the previous Exhibit 23. All other
information pertaining to this subsection is as set forth in the Original
Filing.
(c) Exhibits:
See Item 14(a)3 above.
66
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Motorola, Inc.:
We consent to incorporation by reference in the registration statements on
Form S-8 (Nos. 33-59285, 333-03681, 333-12817, 333-51847 and 333-65941) and Form
S-3 (Nos. 333-76041 and 333-76637) of Motorola, Inc. of our reports dated
January 13, 1999, except as to Note 8, which is as of March 1, 1999, relating to
the consolidated balance sheets of Motorola, Inc. and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows and related financial statement
schedule for each of the years in the three-year period ended December 31, 1998,
which reports appear in or are incorporated by reference in the annual report on
Form 10-K/A of Motorola, Inc. for the year ended December 31, 1998.
/s/ KPMG LLP
Chicago, Illinois
October 28, 1999
67
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Motorola, Inc. has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MOTOROLA, INC.
By: /s/ CHRISTOPHER B. GALVIN
----------------------------
Christopher B. Galvin
Chairman of the Board and
Chief Executive Officer
October 28, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amended report has been signed below by the following persons on behalf of
Motorola, Inc. and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ CHRISTOPHER B. GALVIN Chairman of the Board and 10/26/99
- ------------------------------------------------ Chief Executive Officer
Christopher B. Galvin (Principal Executive Officer)
/s/ CARL F. KOENEMANN Executive Vice President and 10/22/99
- ------------------------------------------------ Chief Financial Officer
Carl F. Koenemann (Principal Financial Officer)
/s/ ANTHONY M. KNAPP Senior Vice President and Controller 10/22/99
- ------------------------------------------------ (Principal Accounting Officer)
Anthony M. Knapp
/s/ RONNIE C. CHAN Director 10/26/99
- ------------------------------------------------
Ronnie C. Chan
/s/ H. LAURANCE FULLER Director 10/26/99
- ------------------------------------------------
H. Laurance Fuller
/s/ ROBERT W. GALVIN Director 10/26/99
- ------------------------------------------------
Robert W. Galvin
/s/ ROBERT L. GROWNEY Director 10/26/99
- ------------------------------------------------
Robert L. Growney
/s/ ANNE P. JONES Director 10/26/99
- ------------------------------------------------
Anne P. Jones
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ DONALD R. JONES Director 10/26/99
- ------------------------------------------------
Donald R. Jones
/s/ JUDY C. LEWENT Director 10/26/99
- ------------------------------------------------
Judy C. Lewent
/s/ WALTER E. MASSEY Director 10/26/99
- ------------------------------------------------
Dr. Walter E. Massey
/s/ NICHOLAS NEGROPONTE Director 10/26/99
- ------------------------------------------------
Nicholas Negroponte
/s/ JOHN E. PEPPER, JR. Director 10/26/99
- ------------------------------------------------
John E. Pepper, Jr.
/s/ SAMUEL C. SCOTT III Director 10/26/99
- ------------------------------------------------
Samuel C. Scott III
/s/ GARY L. TOOKER Director 10/26/99
- ------------------------------------------------
Gary L. Tooker
/s/ B. KENNETH WEST Director 10/26/99
- ------------------------------------------------
B. Kenneth West
/s/ JOHN A. WHITE Director 10/26/99
- ------------------------------------------------
Dr. John A. White
</TABLE>
69
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
23 Consent of KPMG LLP. See page 67 of the Annual Report on Form
10-K/A of which this Exhibit Index is a part.
70
