<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
--------
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 23, 2000
Motorola, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
1-7221 36-1115800
(Commission File Number) (I.R.S. Employer Identification No.)
1303 East Algonquin Road, Schaumburg, Illinois
(Address of principal executive offices)
Registrant's telephone number, including area code: (847) 576-5000
Not applicable
(Former name or former address, if changed since last report.)
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<PAGE>
Item 5. Other Events.
COMBINED CONSOLIDATED FINANCIAL STATEMENTS OF MOTOROLA, INC. AND GENERAL
INSTRUMENT CORPORATION
On January 5, 2000, Motorola, Inc. ("Motorola") completed its previously-
announced merger with General Instrument Corporation ("General Instrument") by
exchanging 100.6 million shares of its common stock for all of the common stock
of General Instrument. Each share of General Instrument was exchanged for 0.575
shares of Motorola's common stock. Motorola has accounted for the merger as a
pooling-of-interests and, accordingly, all prior period consolidated financial
statements of Motorola have been restated to include the combined results of
operations, financial position and cash flows of General Instrument. The
restated consolidated financial statements will become the historical
consolidated financial statements of Motorola, Inc. and subsidiaries after
financial statements covering the date of consummation of the business
combination are issued.
This Form 8-K reflects the changes to Motorola's Management's Discussion
and Analysis of Financial Condition and Results of Operations ("MD&A") and
Financial Statements and Supplementary Data ("Financial Statements") (as
incorporated by reference into Part II of Motorola's Annual Report on Form 10-K
for the year ended December 31, 1999 that was originally filed on March 22, 2000
(the "Original Filing")) that result from combining General Instrument with
Motorola.
The MD&A and Financial Statements speak as of the date of the Original
Filing and we have not updated the disclosure in the MD&A and Financial
Statements to speak to any later date. While the MD&A and Financial Statements
primarily relate to the historical period covered, events may have taken place
since the date of the Original Filing that might have been reflected in this
Form 8-K if they had taken place prior to the Original Filing. All information
contained in this Form 8-K is subject to updating and supplementing as provided
in Motorola's periodic reports filed with the SEC subsequent to the date of this
Form 8-K.
1
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The following information supplements Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, as incorporated by
reference into Part II of Motorola's Annual Report on Form 10-K for the year
ended December 31, 1999 that was originally filed on March 22, 2000, to reflect
the combination of General Instrument with Motorola.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
REFLECTING THE MERGER OF
MOTOROLA, INC. AND GENERAL
INSTRUMENT CORPORATION
This commentary should be read in conjunction with the Supplemental
Consolidated Financial Statements and Notes, presented on pages 37-74, for a
full understanding of Motorola's financial position and results of operations
after considering the merger with General Instrument Corporation completed on
January 5, 2000, which has been accounted for as a pooling of interests. All
references to Motorola, Inc. or the Company, herein, reflect the pooling of
interests.
MOTOROLA, INC.
1999 COMPARED TO 1998
Results of Operations
1999 vs 1998
<TABLE>
<CAPTION>
Motorola
Year Ended December 31, % of December 31, % of
($ in Millions except per share amounts) 1999 Sales 1998 Sales
------------------- -------------------
<S> <C> <C> <C> <C>
Net sales $33,075 $31,340
Percent change from prior year 6% -1%
Costs and expenses
Manufacturing and other costs of sales 20,631 62.4% 19,396 61.9%
Selling, general and administrative expenses 5,446 16.5% 5,656 18.0%
Restructuring and other charges (226) -0.7% 1,980 6.3%
Research and development expenditures 3,560 10.8% 3,118 9.9%
Depreciation expense 2,243 6.8% 2,255 7.2%
Interest expense, net 138 0.4% 215 0.7%
------- -------
Total costs and expenses 31,792 32,620
------- -------
Earnings (loss) before income taxes 1,283 3.9% (1,280) -4.1%
Income tax provision (benefit) 392 (373)
------- -------
Net earnings (loss) $ 891 2.7% $ (907) -2.9%
======= =======
Diluted earnings (loss) per common share $ 1.22 $ (1.31)
- -----------------------------------------------------------------------------------------------
</TABLE>
Sales increased 6% to $33.1 billion from $31.3 billion in 1998. Sales
growth is attributed primarily to the digital wireless telephone business. Sales
are expected to grow at a rate higher than the 1999 growth rates due primarily
to strong demand for wireless telephones. Geographic market sales, measured by
the locale of the end customer, as a percent of total sales changed from 1998 to
1999 as follows:
2
<PAGE>
<TABLE>
<CAPTION>
Geographic Market Sales
by Locale of End Customer
1999 1998
----------------
<S> <C> <C>
United States 40% 44%
Europe 20% 20%
China 10% 9%
Latin America 8% 8%
Asia, excluding China and Japan 9% 7%
Japan 7% 7%
Other Markets 6% 5%
----------------
100% 100%
</TABLE>
Earnings before income taxes were $1.3 billion, compared with a loss before
income taxes of $1.3 billion in 1998. Net earnings were $891 million, or $1.22
per share, compared with a net loss of $907 million, or $1.31 per share in
1998. Net margin on sales improved to 2.7%, compared with negative 2.9% margin
on sales in 1998. The increase in earnings in 1999 compared to 1998 is
attributed to: (i) lower net special items including a significant restructuring
charge in 1998, a portion of which was returned as income in 1999, (ii) margin
generated from higher sales volume, and (iii) decrease in the percentage of
sales represented by selling, general and administrative expenses. These
improvements were partially offset by an increase in research and development
expenditures. The main businesses contributing to this improvement in earnings
were the wireless telephone and semiconductor businesses.
Manufacturing and other costs of sales were $20.6 billion or 62.4% of sales
in 1999 compared to $19.4 billion or 61.9% of sales in 1998. Manufacturing and
other costs of sales for 1999 include special charges of $820 million including
$806 million for inventory charges related to the Iridium project and $14
million primarily for inventory write-downs in the Broadband Communications
Segment (BCS), related to the loss of a significant customer in the satellite
business and the continued transition from analog to digital products.
Manufacturing and other costs of sales for 1998 include a special charge of $27
million primarily for inventory write-downs in BCS related to the decline of the
satellite business. Excluding special items, manufacturing and other costs of
sales were $19.8 billion or 59.9% of sales compared to $19.4 billion or 61.8% of
sales in 1998. The improvement in manufacturing margin is due to the wireless
telephone and semiconductor products businesses. Manufacturing and other costs
of sales as a percent of sales is expected to increase in 2000 compared to 1999
as the Company anticipates a faster rate of growth in its Personal
Communications Segment (PCS) than is its other segments. PCS has the lowest
manufacturing margin of any of the segments in the Company.
Selling, general and administrative expenses were $5.4 billion, or 16.5% of
sales in 1999 compared to $5.7 billion, or 18.0% of sales, in 1998. Selling,
general and administrative costs for 1999 include net special charges of $238
million which includes $1,176 million for Iridium related charges, $67 million
for in-process research and development charges and $175 million of other
charges including $105 million of compensation-related charges associated with
the initial public offering of Next Level Communications, Inc., a $58 million
charge for costs related to an unfavorable arbitration ruling with respect to a
license agreement and $12 million of other charges primarily related to the loss
of a significant customer in the BCS satellite business. These charges are
offset by $1,180 million of income from sales of investments and businesses.
Selling, general and administrative costs for 1998 include net special income
items of $101 million which includes a $109 million charge for in-process
research and development and $ 50 million of other charges offset by $260
million of income from sales of investments and businesses. Excluding net
special items, selling, general and administrative costs were $5.2 billion or
15.7% of sales in 1999 compared to $5.8 billion or 18.4% of sales in 1998. This
decline is primarily attributable to benefits from the Company's manufacturing
consolidation, cost reduction and restructuring programs and lower losses
related to Motorola's investment in Iridium LLC. Selling, general and
administrative costs are expected to increase below the expected rate of sales
growth as the Company continues to invest in new businesses.
Restructuring and other charges reflect the Company's comprehensive
manufacturing consolidation, cost reduction and restructuring programs initiated
in 1998 ("1998 Program"). In the second quarter of 1998, the Company recorded,
as a separate line in the supplemental 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. The 1998 Program
reached its planned completion at December 31, 1999. At that time, the Company
reversed into income $226 million, shown as a separate line in the supplemental
consolidated statements of operations, for accruals no longer required. In 1999
$387 million of accruals were used including approximately $189 million in cash
payments and $198 million in write-offs. In 1998 $1.34 billion of accruals
were used reflecting approximately $600 million in cash payments and $740
million in write-offs. At December 31, 1999 $27 million in accruals remain which
represent cash payments to be made by the end of the first quarter of 2000.
3
<PAGE>
The Company achieved its goal of an approximately $1 billion annual rate of
profit improvement from these programs. The Company's restructuring and other
charges are described further in the section titled, 1998 Compared to 1997 that
follows and is also detailed in Note 12 to the supplemental consolidated
financial statements.
Research and development expenditures increased to $3.6 billion, or 10.8%
of sales, in 1999 from $3.1 billion, or 9.9% of sales, in 1998. Research and
development expenditures for 1998 include a special charge of $76 million
including a charge of $75 million to reserve a cash advance made to Next Level
Communications (NLC). Since repayment of the advance was solely dependent upon
the results of NLC's research and development activities and commercial success
of its product development, the Company recorded the reserve as a charge to
research and development. Excluding this special charge from 1998, research and
development expenditures were $3.0 billion or 9.7% of sales. Over the past three
years, the Company has been increasing the percentage of its sales that is spent
on research and development; and continues to believe that a strong commitment
to research and development is required to drive long-term growth. Research and
development spending in 2000 is expected to increase at a rate similar to or
slightly higher than the rate of sales growth.
Depreciation expense was $2.2 billion, or 6.8% of sales, in 1999 compared
to $2.3 billion or 7.2% of sales in 1998. Fixed asset expenditures were $2.9
billion in 1999 versus $3.3 billion in 1998. Of the total fixed asset
expenditures, $1.5 billion occurred in the semiconductor business, a reduction
of $277 million from the amount spent in this business in 1998. During 2000,
fixed asset expenditures are expected to increase to $4.9 billion, of which $2.3
billion is expected to be spent in the semiconductor business. The Company
estimates that worldwide semiconductor industry growth in the years 2000 and
2001 will be in the 20% - 25% range and expects to increase its fixed asset
expenditures in line with that anticipated growth. As a result of the increased
fixed asset expenditures, depreciation expense is expected to increase in 2000
compared to 1999.
Net interest expense was $138 million versus $215 million a year ago. The
decrease in interest expense is attributed to utilizing cash both from
operations and from the sale of investments and businesses to pay down debt.
Interest expense in 2000 is expected to increase, because of anticipated
increases in interest rates in the United States.
The effective income tax rate was 31% in 1999 and 29% in 1998. The Company
currently expects a 30% tax rate in 2000.
Special Items and Results of Operations Excluding Special Items
The 1999 earnings include net special charges of $832 million before income
taxes, equivalent to 78 cents per share after income taxes. The 1998 earnings
include net special charges of $2.0 billion before income taxes, equivalent to
$2.04 per share after income taxes.
Summarized in the following two tables are the special items included in
the Company's results for the years ended December 31, 1999 and 1998 and the
corresponding line on the supplemental consolidated statements of operations
where these items are recorded.
4
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1999 Special Charges
$ in Millions
(Income) Charge Cost of Restructuring
SG&A Sales and Other Total
------------------------------------------------
<S> <C> <C> <C> <C>
Iridium related charge $ 1,176 $806 $ - $ 1,982
In-Process research and -
development write-off 67 - - 67
Gains from the sale of -
investments and businesses (1,180) - - (1,180)
Restructuring & other charges - (226) (226)
Other Charges 175 14 189
------------------------------------------------
Net special charge $ 238 $820 $(226) $ 832
================================================
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1998 Special Charges
$ in Millions
(Income) Charge Cost of Restructuring Research &
SG&A Sales and Other Development Total
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
In-Process research and
development write-off $ 109 $ - $ - $ - $ 109
Gains from the sale of
investments and businesses (260) - - - (260)
Restructuring & other charges 1,980 1,980
Other Charges 50 27 76 153
--------------------------------------------------
Net special charge $(101) $27 $1,980 $76 $1,982
==================================================
- --------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
Summarized in the table below are the results of operations, excluding
special items, for the years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Motorola, Excluding Special Items
Year Ended December 31, % of December 31, % of
($ in Millions except per share amounts) 1999 Sales 1998 Sales
-------------------- ----------------------
<S> <C> <C> <C> <C>
Net sales $33,075 $31,340
Percent change from prior year 6% -1%
Costs and expenses
Manufacturing and other costs of sales 19,811 59.9% 19,369 61.8%
Selling, general and administrative expenses 5,208 15.7% 5,757 18.4%
Restructuring and other charges - 0.0% - 0.0%
Research and development expenditures 3,560 10.8% 3,042 9.7%
Depreciation expense 2,243 6.8% 2,255 7.2%
Interest expense, net 138 0.4% 215 0.7%
------- -------
Total costs and expenses 30,960 30,638
------- -------
Earnings (loss) before income taxes 2,115 6.4% 702 2.2%
Income tax provision (benefit) 650 201
------- -------
Net earnings $ 1,465 4.4% $ 501 1.6%
======= =======
Diluted earnings per common share $2.00 $0.73
- -------------------------------------------------------------------------------------------------
</TABLE>
Excluding net special items, earnings before income taxes were $2.1 billion
compared to $702 million in 1998. Net earnings were $1.5 billion, or $2.00 per
share after income taxes, compared with $501 million, or 73 cents per share
after income taxes, in 1998. Net margin on sales improved to 4.4% compared to
1.6% in 1998. The increase in earnings compared to 1998 is attributed to: (i)
margin generated from higher sales volume, and (ii) decreases in the percentage
of sales represented by both manufacturing and other costs of sales and selling,
general and administrative expenses. These improvements were partially offset by
an increase in research and development expenditures. The main businesses
contributing to this improvement in earnings were the wireless telephone and
semiconductor businesses.
Results of Operations for Ongoing Businesses Excluding Special Items
Several Motorola businesses have been sold since the beginning of 1998
including the Semiconductor Components Group, the North American Antenna Sites
business and the non-silicon component manufacturing business.
Summarized below are the Company's sales and earnings before income taxes
that were generated during each year by businesses sold since the beginning of
1998.
- ----------------------------------------------------------------------------
Impact of businesses sold
Year Ended Dec. 31, Dec. 31,
($ in Millions) 1999 1998
-------- --------
Net Sales $927 $1,763
Earnings before income taxes $126 $ 42
- ----------------------------------------------------------------------------
6
<PAGE>
Summarized below are the results of operations for the Company for the
years ended December 31, 1999 and 1998 for ongoing business only, excluding net
special items discussed above.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Motorola Ongoing Businesses, Excluding Special Items
Year Ended December 31, % of December 31, % of
($ in Millions except per share amounts) 1999 Sales 1998 Sales
-------------------- ----------------------
<S> <C> <C> <C> <C>
Net sales $32,148 $29,577
Percent change from prior year 9% -6%
Costs and expenses
Manufacturing and other costs of sales 19,172 59.6% 18,149 61.4%
Selling, general and administrative expenses 5,076 15.8% 5,360 18.1%
Restructuring and other charges - 0.0% - 0.0%
Research and development expenditures 3,537 11.0% 2,999 10.1%
Depreciation expense 2,240 7.0% 2,203 7.4%
Interest expense, net 134 0.4% 206 0.7%
-------- -------
Total costs and expenses 30,159 28,917
-------- -------
Earnings (loss) before income taxes 1,989 6.2% 660 2.2%
Income tax provision (benefit) 613 187
-------- -------
Net earnings $ 1,376 4.3% $ 473 1.6%
======== =======
Diluted earnings per common share $1.88 $0.69
- -------------------------------------------------------------------------------------------------
</TABLE>
Excluding the results of businesses sold from both 1999 and 1998, sales
increased 9% to $32.1 billion from $29.6 billion in 1998. Earnings before income
taxes were $2.0 billion compared to $660 million in 1998. Net earnings increased
to $1.4 billion, or $1.88 per share, compared to $473 million or 69 cents per
share in 1998. Net margin on sales improved to 4.3%, compared with 1.6% in 1998.
7
<PAGE>
1998 COMPARED TO 1997
Results of Operations
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Motorola Year Ended
Year Ended December 31, % of December 31, % of
($ in Millions except per share amounts) 1999 Sales 1998 Sales
-------------------- ----------------------
<S> <C> <C> <C> <C>
Net sales $31,340 $31,498
Percent change from prior year -1% 6%
Costs and expenses
Manufacturing and other costs of sales 19,396 61.9% 18,532 58.8%
Selling, general and administrative expenses 5,656 18.0% 5,373 17.1%
Restructuring and other charges 1,980 6.3% 327 1.0%
Research and development expenditures 3,118 9.9% 2,930 9.3%
Depreciation expense 2,255 7.2% 2,394 7.6%
Interest expense, net 215 0.7% 136 0.4%
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Total costs and expenses 32,620 29,692
------- -------
Earnings (loss) before income taxes (1,280) -4.1% 1,806 5.7%
Income tax provision (benefit) (373) 642
------- -------
Net earnings (loss) $ (907) -2.9% $ 1,164 3.7%
======= =======
Diluted earnings (loss) per common share $(1.31) $1.67
- -------------------------------------------------------------------------------------------------
</TABLE>
Sales decreased 1% to $31.3 billion from $31.5 billion in 1997. Geographic
market sales, measured by the locale of the end customer, as a percent of total
sales changed from 1997 to 1998 as follows:
- ------------------------------------------------------------------------------
Geographic Market Sales
by Locale of End Customer
1998 1997
------------------------
United States 44% 43%
Europe 20% 18%
China 9% 11%
Latin America 8% 7%
Asia, excluding China and Japan 7% 9%
Japan 7% 6%
Other Markets 5% 6%
------------------------
100% 100%
- ------------------------------------------------------------------------------
The Company had an operating loss before income taxes in 1998 of $1.3
billion, compared to an operating profit before income taxes in 1997 of $1.8
billion. The net loss in 1998 was $907 million, or $1.31 per share, compared
with net earnings of $1.2 billion in 1997, or $1.67 per share. Net margin on
sales was negative 2.9%, compared with positive 3.7% during 1997. The 1998
earnings included net special charges of $2.0 billion before income taxes,
equivalent to $2.04 per share after income taxes, resulting primarily from
manufacturing consolidation, cost reduction and restructuring programs. These
programs are discussed below in the section titled "1998 Program". The 1997
earnings included net special charges of $406 million before income taxes,
equivalent to 38 cents per share after income taxes, resulting from: (i) a $327
million charge, included as a separate line on the supplemental consolidated
statements of operations, for restructuring charges relating to decisions to
exit several unprofitable businesses that no longer had long-term strategic
value to the Company; those businesses exited in 1997 included dynamic random
access memory (DRAM) semiconductors, MacOS(R) compatible computer systems and
retail analog modems, (ii) an $84 million charge, included in manufacturing and
other cost of sales, for inventory and fixed asset write-downs, and other
charges and (iii) a $9 million charge to research and development for the write-
down of certain assets used in research and development activities to their
estimated fair values. These special charges were partially offset by other net
special income items of $14 million included in selling, general and
administrative expenses in the supplemental consolidated statements of
operations.
8
<PAGE>
Selling, general and administrative expenses were $5.7 billion, or 18.0% of
sales, in 1998 compared to $5.4 billion, or 17.1% 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
occurred in spite of significantly lower incentive compensation payments in
1998.
Restructuring and other charges reflect the costs for restructuring
programs initiated in 1998 and 1997. These programs are described below.
In the second quarter of 1998, the Company recorded, as a separate line in
the supplemental 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 ("1998 Program"). Restructuring
costs included 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 tables display
rollforwards of the accruals established during the second quarter of 1998 for
the year ended December 31, 1999, and from June 27, 1998, to December 31, 1998:
1998 Program
- ------------
<TABLE>
<CAPTION>
Fourth Quarter
Accruals at 1999 Amounts 1999 Reversals Into Accruals at
Dec. 31, 1998 Used Income Dec. 31, 1999
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consolidation of manufacturing
operations $155 $(143) $ -- $12
Business exits 137 (31) (102) 4
Employee separations 187 (136) (40) 11
---- ----- ----- ---
Total restructuring $479 $(310) $(142) $27
==== ===== ===== ===
Asset impairments and other charges 161 (77) (84) --
- -------------------------------------------------------------------------------------------------------------------------
Totals $640 $(387) $(226) $27
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Second 1998 Accruals at
Quarter 1998 Reclassifi- Initial Charges 1998 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>
The 1998 Program reached its planned completion at December 31, 1999. At
that time, the Company reversed into income $226 million, shown as a separate
line in the supplemental consolidated statements of operations, for accruals no
longer required. The remaining $27 million in accruals at December 31, 1999,
represent cash payments to be made by the end of the first quarter of 2000.
The 1999 amount used of $387 million reflects approximately $189 million in
cash payments and $198 million in write-offs. The 1998 amount used of $1.34
billion reflects approximately $600 million in cash payments and $740 million in
write-offs.
Amounts in the 1998 Reclassifications column represent the reallocation of
accruals in 1998 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 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 employee separations portion
in the fourth quarter of 1998. In addition,
9
<PAGE>
management reclassified $55 million of employee separations costs originally
accrued for in the consolidation of manufacturing operations and business exits
to employee separations in the fourth quarter of 1998.
In July 1998, the Company's communications-related businesses began
realigning into the Communications Enterprise, a structure intended to enable
the development of integrated communications technology solution offerings to
customers and improved responsiveness to customers' needs. This realignment
resulted in the formation of some new reportable segments. The following table
displays by category the restructuring and other charges, as adjusted, according
to the revised reportable segments and included in the segments' restated
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
------------------------------------------------- -----------------------
Asset
Consol of mfg. Business exits Employee Impair-
Segment ops. separations ments Other Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Personal Communications $113 $ 38 $149 $175 $122 $ 597
Network Systems 11 --- 44 --- 104 159
Commercial, Government and
Industrial Systems 18 --- 104 5 --- 127
Semiconductor Products 163 101 282 159 26 731
Other Products 21 152 79 41 73 366
Total $326 $291 $658 $380 $325 $1,980
========================================================================================================================
</TABLE>
Consolidation of manufacturing operations
- -----------------------------------------
Consolidation of manufacturing operations charges related 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, disposing 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. 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 and Personal Communications segments. Semiconductor
facilities in North Carolina, California, Arizona and the Philippines were
closed as planned, while in other areas, production facilities were supplemental
consolidated into fewer integrated factories to achieve economies of scale and
improved efficiencies and to capitalize on newer technologies that reduced
operating costs. As a result of excess global manufacturing capacity, the paging
facility in Vega Baja, Puerto Rico was closed. Paging facilities in Singapore
and Canada and cellular facilities in Northern Illinois were realigned. Since
1998, approximately $255 million was used for these consolidation activities.
The remaining $12 million accrual, included in accrued liabilities in the
supplemental consolidated balance sheets, as of December 31, 1999, for this
restructuring category relates to the finalization of plant closings in both of
these segments.
Business exits
- --------------
Business exit charges included costs associated with shutting down
businesses that no longer fit the Company's strategic direction. In many cases,
these businesses used older technologies that produced non-strategic products.
Included in these business exit costs were the costs for terminating technology
agreements and for selling or liquidating interests in joint ventures. Severance
costs included in this category were 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.
Business exit costs were primarily focused in the Integrated Electronic
Systems sector. During the third quarter of 1998, the Integrated Electronic
Systems Sector 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 businesses was not significant to
the Company's results of operations.
10
<PAGE>
The Company reversed into income in the fourth quarter of 1999
approximately $102 million for accruals no longer required for the contract
requirements and contingencies related to the sales of its printed circuit board
business and non-silicon component manufacturing business and the business
pruning activities of the Semiconductor Products segment. The remaining $4
million accrual, included in accrued liabilities in the supplemental
consolidated balance sheets, as of December 31, 1999, for this restructuring
category relates to the payment of final shut down costs for these actions,
expected to occur early in 2000.
Employee separations
- --------------------
Employee separation charges 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 accepted special voluntary
termination benefits in future periods, additional accruals, under a new
program, would be necessary and recognized in expense at the date of acceptance
by the employees. No new programs were implemented during 1999.
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.
The Company's successful redeployment efforts reduced the severance
requirement in the fourth quarter of 1999. Therefore, the Company reversed into
income in the fourth quarter of 1999 approximately $40 million of accruals no
longer required for a cancelled separation plan involving approximately 500
employees. As of December 31, 1999, approximately 19,400 employees have
separated from the Company through a combination of voluntary and involuntary
severance programs. Of these 19,400 separated employees, approximately 12,400
were direct employees, and 7,000 were indirect employees. Direct employees are
primarily non-supervisory production employees, and indirect employees are
primarily non-production employees and production managers. In addition, 4,200
employees separated from the Company with the sale of the non-silicon component
manufacturing business. These 4,200 people were not paid any severance because
the business was sold to another corporation. The remaining $11 million accrual,
included in accrued liabilities in the supplemental consolidated balance sheets,
as of December 31, 1999, relates to severance payments still to be completed in
the Semiconductor Products Segment, Integrated Electronic Systems Sector, and
Internet and Networking Group bringing the total employees separated to 19,500.
Asset impairments and other charges
- -----------------------------------
As a result of then current and projected business conditions, the Company
wrote down operating assets that became impaired. All impaired asset write downs
were reflected as contra-assets in the supplemental 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 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
Personal Communications segment.
11
<PAGE>
The segments primarily impacted by these asset writedowns were Personal
Communications, Network Systems and Semiconductor Products. Assets held for use
continue to be depreciated based on an evaluation of their remaining useful
lives and their ultimate values upon disposition. There were 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 were not restructuring charges, but
rather were primarily comprised of contract termination costs related to
agreements that were associated with businesses in which the Company was no
longer making investments, 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
Company reversed into income in the fourth quarter of 1999 approximately $84
million of accruals no longer required for contract termination costs previously
deemed probable to occur.
1997 Programs
- -------------
During 1997, the Company recorded restructuring charges of $327 million
resulting from decisions to exit several unprofitable businesses that no longer
had long-term strategic value to the Company. The following tables display
rollforwards of the accruals established by business exit for the years ended
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Accruals at Accruals at
Dec. 31, Dec. 31,
1998 Adjustments Amounts Used 1999
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Q2 1997: Semiconductor Products
Segment
Exit from DRAM market $ 8 $(3) $(5) $--
- --------------------------------------------------------------------------------------------------
Q3 1997: Other Products Segment
Exit from MacOS-compatible
computer systems business 15 - (2) 13
- --------------------------------------------------------------------------------------------------
Q4 1997: Former Messaging,
Information and Media
Products Segment
Exit from retail analog
modem business 3 (3) - --
- --------------------------------------------------------------------------------------------------
Grand Total $26 $(6) $(7) $13
==================================================================================================
</TABLE>
<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>
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: Former Messaging,
Information and Media
Products 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
12
<PAGE>
amounts used in 1999 reflect $4 million in cash payments for exit fees and $1
million in write-offs. The remaining $3 million was reversed into income in the
third 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. The decision was made in response to a decision by Apple
Computer to limit the introduction of its new technology and phase out future
licenses and 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 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
determined to be less than previously 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 amounts used in 1999 reflect $2 million in write-offs. The
remaining $13 million accrual as of December 31, 1999, relates to contractual
commitments and warranty liability and may extend past the 2000 year end.
In the fourth quarter of 1997, the Company announced its decision to exit
the retail analog modem business based in Huntsville, AL. This business was
formerly part of the Messaging, Information and Media segment. 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 as of December 31, 1998, was
reversed into income in the first quarter of 1999.
The results of operations of each of these exited businesses were not
material to the Company's supplemental consolidated financial statements.
A discussion of the Company's restructuring and other charges is also
detailed in Note 12 to the supplemental consolidated financial statements and
Notes.
Research and development expenditures increased to $3.1 billion, or 9.9% of
sales in 1998 from $2.9 billion or 9.3% of sales in 1998. Over the past two
years, the Company has been increasing the percentage of its sales that is spent
on research and development and continues to believe that a strong commitment to
research and development is required to drive long-term growth.
Depreciation expense was $2.3 billion, or 7.2% of sales in 1998 compared
with $2.4 billion, or 7.6% of sales in 1997. Net interest expense was $215
million compared to $136 million in 1997. The increase in interest expense was
due to increased borrowings by the Company due to lower operating cash flow and
significantly increased customer financing. The effective income tax rate for
1998 was 29% compared to a 36% rate for 1997.
13
<PAGE>
Special Items and Results of Operations Excluding Special Items
The 1998 earnings include net special charges of $2.0 billion before income
taxes, equivalent to $2.04 per share after income taxes. The 1997 earnings
include net special charges of $406 million before income taxes, equivalent to
38 cents per share after income taxes.
Summarized in the following two tables are the special items included in
the Company's results for the years ended December 31, 1998 and 1997 and the
corresponding line on the supplemental consolidated statements of operations
where these items are recorded.
<TABLE>
<CAPTION>
1998 Special Charges
$ in Millions
(Income) Charge Cost of Restructuring Research &
SG&A Sales and Other Development Total
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
In-Process research and
development write-off $ 109 $ - $ - $ - $ 109
Gains from the sale of
investments and businesses (260) - - - (260)
Restructuring & other charges 1,980 1,980
Other Charges 50 27 76 153
-------------------------------------------------
Net special charge $(101) $27 $1,980 $76 $1,982
=================================================
</TABLE>
<TABLE>
<CAPTION>
1997 Special Charges
$ in Millions
(Income) Charge Cost of Restructuring Research &
SG&A Sales and Other Development Total
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income from favorable
settlement of patent claims $(34) $ - $ - $- $(34)
Impairment on joint venture
investments 31 - - - 31
Restructuring & other charges - - 327 - 327
Gains from the sale of
investments and businesses (70) - - - (70)
Other charges 59 84 - 9 152
-------------------------------------------------
Net special charge $(14) $84 $327 $9 $406
=================================================
</TABLE>
14
<PAGE>
Summarized in the table below are the results of operations, excluding net
special items, for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Motorola, Excluding Special Items
Year Ended December 31, % of December 31, % of
($ in Millions except per share amounts) 1998 Sales 1997 Sales
------------------- -------------------
<S> <C> <C> <C> <C>
Net sales $31,340 $31,498
Percent change from prior year -1% 6%
Costs and expenses
Manufacturing and other costs of sales 19,369 61.8% 18,448 58.6%
Selling, general and administrative expenses 5,757 18.4% 5,387 17.1%
Restructuring and other charges - 0.0% - 0.0%
Research and development expenditures 3,042 9.7% 2,921 9.3%
Depreciation expense 2,255 7.2% 2,394 7.6%
Interest expense, net 215 0.7% 136 0.4%
------- -------
Total costs and expenses 30,638 29,286
------- -------
Earnings (loss) before income taxes 702 2.2% 2,212 7.0%
Income tax provision (benefit) 201 785
------- -------
Net earnings (loss) $ 501 1.6% $ 1,427 4.5%
======= =======
Diluted earnings per common share $0.73 $2.05
- ---------------------------------------------------------------------------------------------
</TABLE>
Excluding net special items, earnings before income taxes were $702
million, compared to $2.2 billion in 1997. Net earnings for 1998 were $501
million, or 73 cents per share after income taxes, compared with $1.4 billion,
or $2.05 per share after income taxes 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) research and development expenditures. The main businesses
contributing to this decrease in earnings were the semiconductor products,
wireless telephone 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 $705 million in connection with these
programs.
15
<PAGE>
MOTOROLA, INC. SEGMENTS
The following commentary should be read in conjunction with the 1999
financial results of each reporting segment as detailed in Note 10, "Information
by Segment and Geographic Region" of the supplemental consolidated financial
statements . Results of major operations, which include the effect of the sales
of various businesses and net special items, for the years ended December 31,
1999, 1998 and 1997 are as follows:
PERSONAL COMMUNICATIONS
($ in millions)
Years ended December 31 1999 1998 1997
- -------------------------------------------------------------------------------
Orders $13,694 $10,653 $10,406
% change from prior year 29% 2%
Segment sales $11,932 $10,132 $11,026
% change from prior year 18% -8%
Operating profit (loss) before tax $ 608 $ (373) $ 1,122
% change from prior year 263% -133%
Special Items: Income(Expense)
- ----------------------------------
Iridium Related $ (97) $ - $ -
Restructuring & Other 112 (597) -
Sale of Investments/Businesses 10 118 24
In-Process Research & Development (7) - -
Other Charges - - (44)
---------------------------------------
Net Special Items $ 18 $ (479) $ (20)
---------------------------------------
Operating profit (loss) excluding
special items $ 590 $ 106 $ 1,142
% change from prior year 457% -91%
The Personal Communications Segment (PCS) primarily designs, manufactures,
sells and services wireless subscriber equipment including wireless telephones,
iDEN(R), integrated digital enhanced network digital radio-telephones, satellite
radio-telephones, paging and advanced messaging devices and personal two-way
radios, with related software and accessory products.
Segment sales rose 18% to $11.9 billion and orders increased 29% to $13.7
billion. Operating profits were $608 million compared to an operating loss of
$373 million a year ago.
Segment sales rose entirely due to increased unit sales of digital wireless
telephones and personal two-way radios, as consumer demand for both product
categories grew rapidly in 1999 versus 1998. Sales of paging products were
significantly lower than a year ago, as fewer units were sold and prices
declined. The market for paging products experienced significant competitive
pressure from digital wireless telephones, which offer similar messaging
capability along with their telephony capability and which experienced declining
costs of service making them more affordable to consumers worldwide.
Sales of digital telephones increased very significantly, while analog
telephone sales declined significantly. The sales mix shift from analog to
digital products is an industry trend that has continued for several years and
is expected to continue in the future. Digital products have increasingly been
preferred by consumers as the number of features offered which are not available
on analog telephones has increased and the geographic coverage of digital
wireless infrastructure systems has rapidly increased. Digital telephone sales,
including iDEN telephones represented 88% of all wireless telephone sales in
1999 versus 72% of all wireless telephone sales in 1998. The overall average
selling price for digital telephones declined, but at a lower rate than in prior
years, because demand was strong. The overall average selling price for analog
telephones declined at a faster rate than prior years because demand continued
to weaken.
On a geographic basis, the most rapid growth of digital phones were for
Global System for Mobile (GSM) phones in Asia and Europe, Code Division Multiple
Access (CDMA) phones in Asia and the Americas and iDEN telephones in the
Americas.
Operating profits were $608 million compared with a loss of $373 million a
year ago. Operating profits include $18 million of net special items comprised
of $97 million for Iridium related charges, a $7 million charge for in-process
research and development charges related to the acquisition of Digianswer A/S,
offset by $112 million of income for the reversal of accruals
16
<PAGE>
related to the 1998 Program and a $10 million gain from the sale of investments.
The 1998 operating loss includes net special items of $479 million, comprised of
$597 million of charges for restructuring and other charges offset by a $118
million gain from the sale of businesses.
Excluding net special items from both years, operating profits increased to
$590 million compared to $106 million in 1998. Higher sales combined with
improved gross margins for wireless telephones and personal two-way radios more
than offset declining sales and lower gross margins for paging products and
increased investment in research and development and advertising focused on
digital wireless telephones.
For ongoing businesses, which exclude the results of businesses sold, sales
increased 20% to $11.9 billion and orders grew 29% to $13.7 billion. Operating
profit for ongoing businesses, excluding net special items, increased to $591
million compared to $103 in 1998.
Worldwide demand and production of wireless telephones during 1999 was
greater than manufacturers and component suppliers had anticipated at the
beginning of the year. As a result, there were shortages of certain types of
components used in manufacturing wireless telephones, including those used by
Motorola. These component shortages may have impacted customer order patterns,
as customers now appear to have ordered some of their fourth quarter needs in
the third quarter, when orders were very significantly higher than usual.
Component shortages are expected to continue in first and in the second quarters
of 2000.
PCS introduced a variety of new, innovative voice and data digital
communications products around the world. Among the products introduced were
multi-frequency band wireless telephones for each of the digital technologies in
use around the world. These telephones are offered in a variety of designs
including the extremely popular StarTAC(R) telephone. The functionality of the
StarTAC telephone was significantly enhanced with the introduction of the
StarTAC ClipOn Organizer, which attaches to the back of a StarTAC telephone and
enables one-touch dialing and the ability to synchronize information with web
calendars, desk-top organizers and personal digital assistants. Also
introduced, in the latter part of 1999, were a variety of Internet-capable
digital wireless telephones. This new category of product is expected to see
rapid growth beginning in 2000, as an increasing number of wireless
communications service providers around the world upgrade their infrastructure
systems to make wireless Internet access available to the consumer. PCS
established relationships with America Online, Inc., Yahoo, Inc. and Oracle
Corp. intended to make Internet content and services available on Motorola
wireless devices.
The Company believes PCS's share of the overall wireless telephone market
declined in 1999 as a result of: the continuing transition from analog products,
where the Company has a higher relative market share, to digital products, where
the Company has a lower relative market share; increased competition in the
digital product market; and timing in the introduction and availability by PCS
of a full portfolio of digital products. The Company introduced many new
digital products in 1999, with some significant introductions in the fourth
quarter that have enhanced the portfolio of digital product offerings in the
Americas region. Further product introductions are planned for 2000 to
continue to enhance the portfolio of digital products in all regions. In 2000,
the Company expects market share gains from its growing portfolio of digital
telephones that offer expanded features and functionality, and that its digital
and analog product mix will be comparable to that of the industry as a whole.
17
<PAGE>
NETWORK SYSTEMS
($ in millions)
Years ended December 31 1999 1998 1997
- -------------------------------------------------------------------------------
Orders $ 6,510 $6,403 $7,800
% change from prior year 2% -18%
Segment sales $ 6,544 $7,064 $6,061
% change from prior year -7% 17%
Operating profit (loss) before tax $ (479) $ 819 $ 618
% change from prior year -158% 33%
Special Items: Income(Expense)
- ----------------------------------
Iridium Related $(1,325) $ - $ -
Restructuring & Other 67 (159) -
In-Process Research & Development (14) - -
Miscellaneous - (8) -
---------------------------------------
Net Special Items $(1,272) $ (167) $ -
---------------------------------------
Operating profit (loss) excluding
special items $ 793 $ 986 $ 618
% change from prior year -20% 60%
The Network Systems Segment (NSS) is comprised of the terrestrial, or land-
based, wireless infrastructure business and the satellite infrastructure
business. The terrestrial infrastructure business designs, manufactures, sells,
installs, and services cellular and fixed digital wireless infrastructure
equipment primarily for the CDMA (Code Division Multiple Access), GSM (Global
System for Mobile), and iDEN(R) technologies. The satellite communications
business markets, designs, builds and operates and maintains space-based
telecommunications systems.
Segment sales decreased 7% to $6.5 billion and orders increased 2% to $6.5
billion. The segment had an operating loss of $479 million in 1999 compared to
operating income of $819 million in 1998.
The decrease in sales was almost entirely due to lower satellite equipment
sales. Terrestrial wireless infrastructure sales increased in Europe, were flat
in Asia and decreased in the Americas. Sales of GSM and CDMA infrastructure
equipment increased, while iDEN sales declined and analog sales declined
significantly.
Order growth was due to increases in terrestrial wireless infrastructure
orders offset by significant decreases in satellite communications orders
resulting from the bankruptcy of Iridium LLC. No orders relating to the Iridium
operations and maintenance contract exist at December 31, 1999 as a result of
the Iridium bankruptcy proceedings. If orders related to the Iridium operations
and maintenance contract were removed from orders at December 31, 1998, that
number would decrease from $6.4 billion to $5.9 billion. Orders increased in
Europe, Asia and Latin America while North America was flat. IDEN technology
orders increased in North America and declined in all other regions.
The segment had an operating loss of $479 million compared to an operating
profit a year earlier of $819 million. The operating loss was due to $1.3
billion of net special items consisting of: $1.3 billion of charges related to
the Iridium project $14 million for in-process research and development charges
related to the acquisition of SpectraPoint Wireless LLC, offset by the $67
million reversal of accruals related to the 1998 Program. The Iridium related
charge and the Company's exposure related to Iridium are discussed further in
Note 8, Commitments and Contingencies. The 1998 operating profit includes net
special items of $167 million, including $159 million for restructuring and
other charges and $8 million of miscellaneous charges.
Excluding net special items, operating profits decreased 20% to $793
million compared to $986 million in 1998. Operating profits for the terrestrial
wireless infrastructure business decreased as investments in research and
development were made. The satellite communications business had an operating
loss compared to an operating profit in 1998 primarily because the business
stopped recognizing revenue on the operations and maintenance contract with
Iridium after the second quarter of 1999, and continued to perform its services
under that contract throughout 1999. This segment was not impacted by
discontinued businesses.
18
<PAGE>
NSS's market share of terrestrial wireless infrastructure sales declined in
1999. The decline is largely attributable to a lack of participation in the
market for TDMA infrastructure equipment, the lack of its own mobile switch
product offering and the lack of presence in some of the large GSM operators.
Strategic relationships and third generation wireless technology development
efforts, some of which are discussed in the following paragraphs, are underway
to address the factors that have caused the segment's decline in market share.
Motorola plays a key role in the wireless communications industry's efforts
to develop common standards for third generation (3G) technology, with Motorola
executives chairing key positions in 3G standards bodies worldwide. NSS is a
leader in the deployment of new data services over Global Packet Radio Switch
(GPRS) and CDMA. NSS is participating in several major trials and enabled BT
Cellnet of the United Kingdom to place the world's first GPRS data transfer call
over a GSM system. Motorola was awarded a contract from RadioMobil of the Czech
Republic to deploy a GPRS system. In addition, high-speed wireless Internet
access was launched commercially in January 2000 on the NSS CDMA system in
Japan. These data services are transitional technologies that are expected to
lead to the commercial deployment of 3G services.
NSS received several major contracts in all of its key technologies. Among
these were GSM expansion contracts for Germany's T-Mobil and contracts to
upgrade and expand GSM digital communications system in China. NSS was awarded a
new three-year CDMA equipment supply contract in North America from Sprint PCS
and received a contract to expand its trial CDMA system in China. NSS was also
awarded a five-year extension to the iDEN infrastructure supply agreement with
Nextel as well as iDEN system expansions in Argentina, Brazil, Colombia, Mexico,
Singapore, and Japan.
NSS launched several major programs and alliances in 1999 and substantially
increased investments in future technology development. One key area is to
develop and deliver a complete, integrated, end-to-end Internet Protocol (IP)-
based communications architecture. To enable the shift to IP, Motorola and
Cisco Systems, Inc. announced an alliance to develop and deliver the first all-
IP platform for the wireless industry, which will unite different standards for
wireless services worldwide, and introduced an open Internet-based platform for
integrated data, voice and video services over wireless networks. Other
enabling IP alliances include an agreement with Sun Microsystems, Inc. for high-
availability platforms and a memorandum of understanding with Telcordia
Technologies, Inc. for wireless call agent software.
Motorola and Cisco Systems, Inc. purchased the fixed wireless assets of
Bosch Telecom, Inc. and created a jointly owned company called SpectraPoint
Wireless LLC, which focuses on delivering high-speed data, voice and video
capabilities to businesses over a fixed wireless infrastructure. SpectraPoint
Wireless has already been awarded three contracts.
Motorola and Alcatel announced they will provide new functionality and
features to the CDMA platform for the EMX(R) switch. This also allows Motorola
the ability to offer customers Alcatel's S12 switching platform for CDMA
networks. In addition, Motorola and Alcatel will work together to develop
integrated 3G CDMA technology based on mobile-switched networks.
Motorola's contract with Teledesic LLC for design and construction of a
satellite communications network continues to be contingent upon Teledesic's
approval following a technical review period. This technical review period was
originally scheduled to end on Sept. 11, 1999, but Teledesic has extended the
period several times. Currently the review period is scheduled to end on March
24, 2000. Approval of the contract is in the sole discretion of Teledesic, and
there can be no assurances that Teledesic will provide this approval.
19
<PAGE>
COMMERCIAL, GOVERNMENT AND INDUSTRIAL SYSTEMS
($ in millions)
Years ended December 31 1999 1998 1997
- -------------------------------------------------------------------------------
Orders $4,733 $4,009 $4,147
% change from prior year 18% -3%
Segment sales $4,068 $4,079 $4,037
% change from prior year 0% 1%
Operating profit (loss) before tax $ 609 $ 412 345
% change from prior year 48% 19%
Special Items: Income(Expense)
- ----------------------------------
Iridium Related $ (8) $ - $ -
Restructuring & Other - (127) -
Sale of Investments/Businesses 198 90 10
In-Process Research & Development (4) - -
Miscellaneous - (9) -
--------------------------------------
Net Special Items $ 186 $ (46) $ 10
--------------------------------------
Operating profit (loss) excluding
special items $ 423 $ 458 $ 335
% change from prior year -8% 37%
The Commercial, Government and Industrial Solutions Segment (CGISS)
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 were flat at $4.1 billion and orders increased 18% to $4.7
billion. Operating profits increased 48% to $609 million.
Orders were higher in all regions and significantly higher in Europe and
Asia. The significant order increase in Europe is largely based on TETRA
contracts received in 1999. TETRA (TErrestrial Trunked RAdio) is the European
standard for both private and public digital trunked radio communications
products. The significant order increase in Asia is believed to be due to the
economic recovery from the 1998 recession in the region.
Segment geographic sales were higher in the Americas and Asia while they
declined in Europe, due mainly to customers scheduling of installation of TETRA-
based equipment beyond 1999.
The increase in CGISS operating profit was due entirely to a gain of $198
million on the sale of its North American Antenna Site business. The segment
also recognized other special items of $8 million for Iridium related charges
and $4 million for in-process research and development charges related to the
acquisition of Software Corporation of America, Inc. 1998 operating profits
included a net special charge of $46 million comprised of $127 million for
restructuring and other charges and $9 million of other charges, partially
offset by $90 million of income related to the sale of businesses.
Excluding net special items, operating profits declined 8% to $423 million
from $458 million the prior year. The decline in profit is attributable to
increased operating expenses related to new business development.
Sales and orders for ongoing businesses were flat. Operating profit for
ongoing businesses, excluding net special items, declined 7% to $416 million
from $447 million in 1998. The decline in profits is attributable to increased
operating expenses related to new business development.
Market share data for the segment's primary business, providing two-way
radio voice and data products and systems, is very difficult to obtain on a
reliable basis. The segment believes that its market share in 1999 was
comparable to its market share in 1998.
20
<PAGE>
The Radio Solutions business within CGISS continued to make significant
progress in developing and deploying digital two-way radio communications based
on industry standards. CGISS has installed more than 325 ASTRO(R) digital
systems worldwide, including more than 170 systems that are compliant with
Project 25, the U.S. digital standard for public-safety communications. CGISS
also has been awarded more than 15 contracts to date for Dimetra(TM) equipment,
which is based on the TETRA standard. CGISS was also awarded a contract for a
private iDEN communications system from Consolidated Edison of New York and
delivered the first phase of the first private iDEN system in China.
CGISS is expanding its portfolio of advanced, integrated communications and
information system solutions for commercial, government and industrial customers
worldwide. CGISS was awarded a contract from the Warsaw, Poland police force
for a command and control computer system that provides the commander with a
complete picture of the law enforcement landscape. The system solution
includes advanced digital radio-communications based on the European TETRA
standard. CGISS also introduced the PowerCom(TM) system, which enables electric
utilities to offer pre-pay services to customers. The service is planned to be
deployed by Salt River Project in Arizona. Integration of gate-control,
baggage, ticketing, passenger check-in and docking control information systems
was completed for the new terminal at Beijing Capital Airport.
CGISS announced the XTS 3500, the newest addition to its ASTRO XTS family
of digital portable radios. The XTS 3500 radio offers enhanced portable
performance and better protection against radio frequency interference from
other wireless radio systems and is one of the first digital portable radios
scheduled to be Type 1 encryption certified. The Company also announced a new
advanced key management system, the first compliant with the Project 25
standard's OTAR(TM), Over-The-Air-Rekeying, suite, for use with its ASTRO
Project 25-compliant integrated voice and data radio systems.
The Company acquired Software Corporation of America, Inc. (SCA), a
provider of wireless applications and middleware for public safety and other
markets. CGISS announced the release of TxMessenger(TM), a new mobile messaging
application that supports customers currently using Motorola's TX(TM) and
WaveSoft(R)-Link mobile messaging applications.
The Systems Solution business within CGISS is a supplier to the government
market for defense and space electronics. Awards from the U.S. Department of
Defense included contracts for Tactical Airspace Integration Systems, Tactical
Operations Centers, Common Ground Stations, Joint Services Workstations and
Theatre Deployable-Integrated Communications Access Packages. In addition, a
team from Raytheon and Motorola was selected to work on the U.K. Ministry of
Defense Airbourne Stand-Off Radar program. The business also provided deep-
space transponders for the U.S. National Aeronautics and Space Administration's
STARDUST mission spacecraft to collect comet dust samples.
The Worldwide Smartcard Solutions Division of CGISS announced multiyear
contracts valued in excess of $500 million during the year for its smartcard
automated fare collection systems to be implemented in Germany, Singapore,
Australia, Italy, the Netherlands, China and the United States. The division
also introduced BiStatix(TM) systems, a powerful new technology that allows the
creation of cost-effective "smart" labels. The technology allows RFID (radio
frequency identification) antennas to be printed on materials, including paper,
with conductive non-metallic ink. The division established agreements with
leading business forms providers Moore Corp. and Toppan Forms to jointly develop
and market BiStatix smart label solutions. During the year, the division
introduced three new RFID card reader solutions and shipped its 60 millionth
wireless RFID card to date for the physical access control market.
21
<PAGE>
BROADBAND COMMUNICATIONS
($ in millions)
Years ended December 31 1999 1998 1997
- -------------------------------------------------------------------------------
Orders $2,693 $2,435 $1,971
% change from prior year 11% 24%
Segment sales $2,532 $2,177 $1,855
% change from prior year 16% 17%
Operating profit (loss) before tax $ 294 $ 168 $ (57)
% change from prior year 75% 394%
Special Items: Income(Expense)
- ----------------------------------
Sale of Investments/Businesses $ 67 $ 11 $ 11
Miscellaneous (84) (41) (111)
--------------------------------------
Net Special Items $ (17) $ (30) $ (100)
--------------------------------------
Operating profit (loss) excluding
special items $ 311 $ 198 $ 43
% change from prior year 57% 362%
The Broadband Communications Segment (BCS) designs, manufactures and sells
digital and analog set top terminals and systems for wired and wireless cable
television networks, high speed data products, as well as hybrid fiber/coaxial
network transmission systems used by cable television operators, and is a
provider of digital satellite television systems for programmers, direct-to-home
(DTH) satellite networks and private networks for business communications.
Segment sales rose 16% to $2.5 billion and orders increased 11% to $2.7
billion. Operating profits increased 75% to $294 million compared to $168
million a year ago.
Segment sales and orders increased primarily due to increased sales and
orders of digital cable systems, transmission network systems and high-speed
data products, partially offset by lower sales of analog cable and satellite
products. The increased sales reflect the commitment of cable television
operators to deploy interactive digital systems in order to offer advanced
entertainment, interactive services and Internet access to their customers. On a
geographic basis, the mix of sales and orders by region were relatively flat.
The majority of the segment's sales, approximately 90%, were in the Americas in
1999 and 1998.
Operating profits were $294 million, compared with $168 million a year ago.
Operating profits increased due to higher sales and reduced period overhead
spending as a result of the cost reduction actions taken in the latter part of
1998 and early in 1999. Operating profits in 1999 include $17 million of net
special charges comprised of a $58 million litigation charge related to an
unfavorable arbitration ruling with respect to a license agreement and $26
million of inventory write-downs and other charges primarily related to the loss
of a significant customer in the satellite business and the continued transition
from analog to digital products, offset by $67 million of income, primarily from
the sale of investments. The 1998 operating profit includes net special charges
of $30 million, comprised of a $41 million charge primarily related to inventory
and other asset write-downs and other charges related to the decline of the
satellite business, offset by $11 million of income from the sale of
investments.
Excluding special items operating profit increased 57% to $311 million from
$198 million in 1998. The increase in operating profits is due primarily to
reasons discussed above.
22
<PAGE>
SEMICONDUCTOR PRODUCTS
($ in millions)
Years ended December 31 1999 1998 1997
- -------------------------------------------------------------------------------
Orders $8,077 $ 7,425 $ 8,416
% change from prior year 9% -12%
Segment sales $7,370 $ 7,314 $ 8,003
% change from prior year 1% -9%
Operating profit (loss) before tax $ 619 $(1,225) $ 168
% change from prior year 151% -829%
Special Items: Income(Expense)
- ----------------------------------
Restructuring & Other $ - (731) (170)
Sale of Investments/Businesses 373 - 23
In-Process Research & Development (42) - -
Miscellaneous - (21) (27)
--------------------------------------
Net Special Items $ 331 $ (752) $ (174)
--------------------------------------
Operating profit (loss) excluding
special items $ 288 $ (473) $ 342
% change from prior year 161% 238%
The Semiconductor Products Segment (SPS) designs, produces and sells
integrated semiconductor solutions for the networking and computing,
transportation, wireless communications and imaging/entertainment equipment
markets worldwide.
Segment sales increased 1% to $7.4 billion and orders rose 9% to $8.1
billion. The segment had an operating profit of $619 million compared to an
operating loss of $1.2 billion a year ago.
In the Networking and Computing Systems Group sales and orders increased as
a result of the sales growth of key customers. In the Wireless Subscriber
Systems Group sales increased and orders were significantly higher due to the
rapid growth of the wireless telephone market, including sales growth within the
Company's PCS segment, which is the group's largest customer. In the
Transportation Systems Group sales and orders increased due to the higher
penetration of electronics in automotive production. In the Semiconductor
Components Group sales and orders declined significantly due to the fact that
the Group was sold in the third quarter 1999.
Geographic sales and orders increased in Asia, Japan, the Americas and
Europe. By end market, orders increased significantly in the Wireless Subscriber
Systems Group, and increased in the Network and Computing Systems Group and
Transportation Systems Group, and decreased in the Imaging and Entertainment
Group. By end market, sales grew in the Imaging and Entertainment Group, the
Wireless Subscriber Systems Group, Networking and Computing Systems Group and
the Transportation Systems Group. Sales to Motorola internal business units
consumed 22% of the segment's product output in both 1999 and 1998.
A robust and continuing semiconductor industry recovery in 1999, following
a three-year recessionary period, positively impacted the segment's financial
performance. In 1999, according to the Semiconductor Industry Association,
worldwide industry sales increased 18.9%, following an 8.4% decline in 1998,
4.0% growth in 1997, and an 8.6% decline in 1996. The Company estimates that
worldwide semiconductor industry growth in the years 2000 and 2001 will be in
the 20-25% range.
The segment had an operating profit of $619 million compared to an
operating loss of $1.2 billion a year ago. Operating profit for 1999 includes
$331 million of net special items comprised of a $360 million gain from the sale
of the Semiconductor Components Group and a $13 million gain from the sale of
investments, partially offset by a $35 million charge for the write-off of
acquired in-process research and development related to the acquisition of
Metrowerks, Inc., and a $7 million charge for the write-off of acquired in-
process research and development related to the acquisition of Digianswer A/S.
The 1998 operating loss includes $752 million of net special items comprised of
$731 million for restructuring, asset impairment and other charges associated
with the 1998 restructuring programs and $21 million of miscellaneous charges.
23
<PAGE>
Excluding net special items, operating profits were $288 million compared
to an operating loss of $473 million in 1998. This improvement in operating
profits reflects several factors. The profit improvement is the result of the
impact of restructuring programs, including the exit of low-growth or
unprofitable businesses, the consolidation of manufacturing facilities and the
reduction of headcount. These restructuring programs included the strategic
decision to focus the business on the specific high-growth end markets mentioned
earlier and to emphasize systems-on-chip solutions, providing opportunities to
reap the benefits of higher gross margins from value-added hardware, software
and services.
For ongoing businesses, which exclude the results the Semiconductor
Components Group business that was sold in 1999, sales increased 11% to $6.5
billion and orders increased 20% to $7.1 billion. This growth was driven by
recovery of the semiconductor industry from its recessionary period. Operating
profits for ongoing businesses, excluding net special items were $175 million
versus an operating loss of $528 million in 1998. This growth was due to margin
generated from higher sales. Although the increases in sales and orders are
attributable to the worldwide semiconductor industry recovery mentioned earlier,
the segment believes it experienced some market share loss in 1999.
SPS has been involved in a major restructuring of its business since the
middle of 1997. That restructuring effort was substantially completed at the end
of 1999. One large element of that restructuring process involved the sale of
the Semiconductor Components Group. This business accounted for approximately
25% of the segment's annual sales. Because a comparison of the segment's results
versus a year ago have been so significantly affected by the sale of this
business, a clearer view of comparative performance can be seen when results are
compared on an ongoing business basis. In addition to the sale of the
Semiconductor Components Group mentioned above, the segment sold factories in
Taiwan and South Korea.
In mid-1998, the segment launched an initiative to increase the use of
foundry manufacturing, with the goal of achieving 30% outsourcing by the end of
2000 and 50% outsourcing by year-end 2002. Improving the return on net assets,
more effectively leveraging a smaller capital investment and increasing
flexibility are key reasons for the foundry strategy. By year-end 1999, the
segment was ahead of the timetable, having outsourced 25% of production for the
year and over 33% during the fourth quarter. The segment also exceeded the goal
of reducing the number of devices it manufactured and sold by 50% by the end of
1999, compared with mid-1997 levels. In addition to the divestiture of the
components business, non-strategic, low-volume products were trimmed from the
portfolio to reduce overhead costs and generate profit improvements, without
creating a material impact on sales going forward.
Capital expenditures in 1999 decreased 16% compared to 1998. Capital
expenditures are estimated to increase in 2000, in response to industry growth
expectations. Emphasis will continue to be on expanding and increasing capacity
for leading-edge technologies, including RFBiCMOS, GaAS, SmarTMOS and HiPERMOS.
The Company purchased all of the outstanding shares of Metrowerks, Inc. for
approximately $98 million. This acquisition, added the CodeWarrior(R) product
line to the segment's software development tools portfolio. In the fourth
quarter the Company acquired Digianswer A/S for approximately $45 million. This
acquisition enables new opportunities for SPS to embed Digianswer's version of
the Bluetooth short-range personal area wireless networking standard into its
DigitalDNA(TM) product portfolio for wireless connectivity, portable computing
and home networking platforms.
SPS technology innovations during 1999 included announcement of the world's
thinnest functional transistor using a new class of semiconductor materials
called perovskites. It will enable future chips to be faster and more powerful
while consuming far less power. Process technology breakthroughs included
shipment of the world's first products using 300 millimeter wafers from
Semiconductor300, the segment's research and development joint venture in
Dresden, Germany, with Infineon Technologies. The segment announced a
breakthrough to integrate copper with porous low-k dielectric films, once
thought unachievable, and a breakthrough enabling next-generation lithography
targeted at below 0.1 micron feature sizes.
For the wireless subscriber equipment market, SPS announced the world's
first baseband processor that can execute all existing major, wireless
standards, allowing manufacturers to incorporate one standard processor across
product lines.
The MPC7400 PowerPC(TM) microprocessor debuted with copper interconnect and
AltiVec(TM) technologies. In addition to powering Apple Computer Inc.'s
PowerMac(TM)G4 series, the MPC7400 is being used by customers in embedded
applications markets including real-time interactive video communications, array
processing, high-end scientific and high definition television (HDTV).
For performance-intensive applications of wireless and wireline
infrastructure customers that provide Internet telephony gateways and next-
generation digital cellular systems, SPS announced the industry's most powerful
digital signal processor (DSP), the MSC8101, for packet switched networks. It is
the first DSP chip developed by the StarCore alliance formed last year with
Lucent Technologies, and the first Motorola DSP to use 0.13 micron copper
interconnect technology. Also developed by the StarCore alliance, SPS announced
the SC140 DSP core for telecom applications, which can reduce development time
for communications electronic products by 50%.
Many innovations were developed for networking customers, some to enhance
delivery and speed of Internet services. Among them was the new CopperGold(TM)
Lite chip set for modem manufacturers, offering an analog solution for accessing
the
24
<PAGE>
Internet today and a digital subscriber line (DSL) connection for high-bandwidth
Internet access when offered in the future by local service providers.
Innovations for transportation customers included an advanced driver
information system that customers can tailor to specific platforms. The
MobileGT(TM) platform is being developed as an open Java-centric offering in
partnership with IBM, Embedded Planet and QNX Software Systems.
The segment's Imaging and Entertainment Systems business partnered with
Identix Inc. and introduced an optical reader that sets new standards in
biometric fingerprint security for small size, low cost and high reliability.
Target markets include e-commerce, personal computing, auto, wireless
communications and financial services. Innovations for entertainment end-markets
included development of an M-DTV(TM) module that allows consumers to receive
digital TV (DTV) or HDTV broadcasts affordably, using current analog TV sets.
The MCT2100 is a new digital receiver technology developed for DTV and HDTV that
solves reception problems broadcasters have due to reflected signals from
obstacles or buildings. Working with Sarnoff Corp. and DirecTV, a new digital TV
set-top-box was announced that allows TVs to receive digital signals from both
land-based stations and from DirecTV satellite.
OTHER PRODUCTS
The Other Products segment primarily includes the Integrated Electronic
Systems Sector (IESS), the Internet and Networking Group (ING), the Network
Management Group (NMG), which holds and manages investments in terrestrial and
satellite-based network operators, and other corporate programs. The Other
Products Segment recorded restructuring and other charges of $366 million and
$95 million, in 1998 and 1997, respectively.
INTEGRATED ELECTRONIC SYSTEMS SECTOR
The Integrated Electronic Systems Sector (IESS) designs, manufactures and
sells automotive and industrial electronics products and solutions, energy
storage products and systems, and multi-function embedded board and computer
system products and telematics products and solutions. Telematics products and
solutions successfully blend innovative wireless communications and automotive
technologies to provide security, information, convenience and entertainment
services from a central service center to drivers and passengers. Both sales and
orders increased significantly compared to last year.
Sales increased 3% and orders increased 5%. The Sector experienced
increases in sales and orders for each of its market segments in 1999. The
Sector had an operating profit versus a loss in 1998. Operating profit increased
due to a restructuring charge in 1998 that was partially returned as income in
1999 and higher sales in the energy systems and computer systems businesses. The
operating loss in 1998 was primarily due to charges associated with
restructuring programs, which included exiting non-strategic businesses that
were not meeting their financial performance objectives. During the year the
Company sold its non-silicon component manufacturing business to CTS Corp.
Operating profit includes net special items, representing reversal into
income of restructuring and other accruals related to the 1998 restructuring
program offset by charges related to the sale of businesses. The 1998 operating
profit includes net special items representing restructuring and other charges
offset by income from the sale of businesses. Excluding net special items from
both years operating profit increased due to higher sales in the energy systems
and computer systems businesses.
For ongoing businesses, sales increased 17% and orders were 18% higher.
Sales for ongoing businesses increased due to higher demand for
telecommunication products and battery packs and power supplies for cellular
telephones. The operating profit improvement was primarily due to higher sales
in energy systems and computer systems.
The Sector is focused on growing opportunities in the embedded electronic
systems market. The market for embedded technologies and systems is projected by
industry analysts to experience strong growth in 2000 and beyond.
INTERNET AND NETWORKING GROUP
The Internet and Networking Group (ING) manufactures and sells cable access
units, analog and digital transmission devices and other data communication
devices, as well as wireline networking products that carry converged voice and
data traffic.
ING sales decreased 14% and orders decreased 7%. The Group had an operating
profit in 1999 compared to an operating loss a year ago. Included in the 1999
operating profit are net special items representing gains from the sale of
investments. Included in the 1998 operating loss are net special items
representing restructuring and other charges and in-process research and
development costs related to the acquisition of Starfish Software, Inc.
Excluding net special items from both years, the Group had a larger
operating loss, resulting from decreased sales in 1999 compared to 1998.
25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents aggregated $3.5 billion at the end of 1999,
compared to $1.6 billion at the end of 1998. A significant source of cash for
the Company was $2.6 billion from the sale of investments and businesses as well
as $2.1billion generated from operations.
Cash provided by operations increased 65% or $845 million to $2.1 billion
in 1999 compared with $1.3 billion in 1998 and $2.6 billion in 1997. The
increased cash flow from operations in 1999 versus 1998 was primarily due to an
increase in net earnings, adjusted for non-cash items, of $916 million year over
year. Operating cash flow includes cash paid for the Company's restructuring
programs. The cash outflows for these programs in 2000 and beyond is expected to
be significantly less than in 1999 and 1998 as the programs had nearly reached
their completion as of December 31, 1999. Through December 31, 1999, the
Company's 1998 Program utilized approximately $789 million in cash payments
including $189 million in 1999 and $600 million in 1998. At December 31, 1999,
the remaining accrual balance for the 1998 Program is $27 million, which the
Company expects to pay in cash by the end of the first quarter 2000. During 1999
the Company's 1998 Program reached its planned completion. Through December 31,
1999, the Company's 1997 Program utilized approximately $50 million in cash
payments including $4 million in 1999, $43 million in 1998 and $3 million in
1997. At December 31, 1999, the remaining accrual balance is $13 million, which
relates to contractual commitments and warranty liability and may extend past
the 2000 year end. Operating cash flow includes cash payments of $758 million
for Iridium related charges in 1999. At December 31, 1999 development and
commercialization reserves for the Iridium project were $1.8 billion, of which
the Company expects to make approximately $430 million in cash payments and $1.4
billion in write-offs.
Net cash used in investing activities was $960 million in 1999 compared
with $3.1 billion in 1998 and $2.6 billion in 1997. The decrease in use of cash
from investing activities in 1999 compared with 1998 was primarily due to lower
capital expenditures and increased proceeds from dispositions of investments and
businesses. Capital expenditures continue to represent the single largest use of
the Company's cash. In 1999 capital expenditures were $2.9 billion compared to
$3.3 billion in 1998 and $3.0 billion in 1997. Of this total, $1.5 billion
occurred in semiconductor fixed asset expenditures, a reduction of $277 million
from the amount spent in this segment in 1998. The Semiconductor Products
segment continued to comprise the largest portion of capital expenditures, with
approximately 53% of all such investments in 1999. For 2000, total fixed asset
expenditures are expected to be $4.9 billion, of which $2.3 billion is expected
to be spent in the Semiconductor Products segment and $120 million in the
Broadband Communications Segment. The Company also used cash to increase its
investments in short-term investments. Offsetting these uses of cash, $2.6
billion of cash was generated from the sales of investments and businesses
including the sale of the Semiconductor Components Group, the North American
Antenna Site business, the non-silicon component manufacturing business and chip
processing facilities in Taiwan and Korea.
Net cash provided by financing activities was $788 million in 1999 compared
to $1.9 billion in 1998 and $95 million in 1997. Improved cash flow from
operations resulted in reduced external financing requirements. As discussed
below, the Company generated $981 million in net proceeds from the sale of
subordinated debentures and bonds in February and June 1999. These proceeds were
used to reduce short-term indebtedness. Additionally the Company received $544
million from the issuance of common stock, related to the exercise of stock
options. Increased financing needs in 1998 were driven primarily by lower
operating cash flow, significantly increased customer financing and net cash
used in investing activities. Cash provided from financing activities 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. The
Company's ratio of net debt to net debt plus equity was 8.2% at December 31,
1999 compared with 23.8% at December 31, 1998 and 11.3% at December 31, 1997.
In February 1999, Motorola Capital Trust I, a 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
TOPrS. Motorola, in turn, used the $484 million of net proceeds from the sale of
the Subordinated Debentures to reduce short-term indebtedness.
On June 21, 1999, the Company's finance subsidiary sold an aggregate face
principal amount at maturity of $500 million of 6.75% Guaranteed Bonds due June
21, 2004, to non-U.S. persons. The Bonds were sold outside of the United States
in reliance on Regulation S under the Securities Act of 1933, as amended. The
net proceeds to the finance subsidiary from the issuance and sale of the bonds
were $497 million and were used to reduce its short-term indebtedness. Shortly
after the sale, the finance subsidiary entered into interest rate swaps to
change the characteristics of the interest rate payments on the bonds from
fixed-rate payments to short-term LIBOR based variable rate payments in order to
match the funding of its underlying assets.
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 2000 and September of 2002, respectively. Commitment fees assessed against
the daily average amounts unused range from 5 to 6.25 basis points. These
domestic credit agreements contain various conditions, covenants and
representations with which the Company was in compliance at December 31, 1999.
The Company also has non-U.S. credit facilities with interest rates on
26
<PAGE>
borrowings varying from country to country depending upon local market
conditions. Commitment fees against unused amounts are 25 basis points. At
December 31, 1999, the Company's total available domestic and non-U.S. credit
facilities aggregated $5.3 billion, of which $275 million was used and the
remaining $5.1 billion was available to back up outstanding commercial paper
which totaled $2.3 billion.
The Company believes that it can continue to access the capital markets in
2000, if necessary, on terms and conditions acceptable to it, despite increased
long-term financing activities in 1999 and late 1998. 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 continue to require
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. The Company also may assist customers in getting financing from banks
and other sources. During 1999 the Company significantly increased the amount of
customer financing provided by its consolidated financing subsidiary. As a
result of increased demand for customer financing, the Company's consolidated
financing subsidiary borrowed more money in 1999. The Company expects that the
need to provide this type of financing or to arrange financing for its customers
will continue and may increase in the future.
The number of weeks that accounts receivable was outstanding improved to
7.7 weeks from 8.2 in 1998 and 7.6 in 1997. The decrease in accounts receivable
weeks partially resulted from continued focus on accounts receivable management,
including offering cash discounts for early payment, and collections of extended
term financing. Inventory turns, using the cost-of-sales calculation method,
improved to 5.9 in 1999 from 5.1 in 1998 and 4.9 in 1997.
Iridium Program
- ---------------
At December 31, 1999, the Company owned, directly and indirectly,
approximately 18% of the equity interests in Iridium LLC and its operating
subsidiaries (Iridium LLC and its operating subsidiaries are collectively
referred to as "Iridium") and a significant portion of a series of Iridium
bonds. Since August 1999, Iridium operated as debtors-in-possession under
Chapter 11 of the U.S. Federal Bankruptcy Code. On March 17, 2000, Iridium began
winding down and liquidating its operations because no qualified bid to purchase
the Iridium satellites was received.
The Company recorded $2.1 billion, $360 million and $178 million of charges
in 1999, 1998 and 1997 respectively, related to the Iridium program. The Company
recorded a special charge during 1999 of $2.0 billion to: (i) increase its
reserve related to its financial exposure to the Iridium project, (ii) to write-
down the value of the Iridium bonds it holds and (iii) to reserve for assets at
risk and other potential contractual obligations. These reserves and write-downs
are believed by management to be sufficient to cover the Company's current
exposure, but do not include additional special charges that may arise as a
result of litigation related to the Iridium project. There were no special
charges recorded in 1998 or 1997 related to the Iridium project.
The following table presents the Company's provisions for bond investment
write-down and development and commercialization reserves, and the Company's
share of Iridium net losses for the years ended December 31, 1999, 1998 and 1997
and where on the consolidated statements of operations these items are recorded:
<TABLE>
<CAPTION>
Classification of Iridium Charges in Statements of Operations
($ in Millions)
----------------------------- ------------------------------ -------------------------------
1999 1998 1997
----------------------------- ------------------------------ -------------------------------
Cost of 1999 Cost of 1998 Cost of 1997
Special Charges: SG&A Sales Total SG&A Sales Total SG&A Sales Total
----------------------------- ------------------------------ -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Bond Investment write-down $ 157 $ - $ 157 $ - $ - $ - $ - $ - $ -
Development & Commercialization
provisions 1,019 806 1,825 - - - - - -
----------------------------- ----------------------------- -------------------------------
Total Special Charges $ 1,176 $ 806 $ 1,982 $ - $ - $ - $ - $ - $ -
----------------------------- ------------------------------ -------------------------------
Other Charges:
Development & Commercialization
Provisions $ 56 $ 31 $ 87 $ 14 $ 81 $ 95 $ - $ 132 $ 132
Company's share of Iridium
net losses 50 - 50 265 - 265 46 - 46
----------------------------- ----------------------------- -------------------------------
Total Other Charges $ 106 $ 31 $ 137 $ 279 $ 81 $ 360 $ 46 $ 132 $ 178
----------------------------- ------------------------------ -------------------------------
Total Charges $ 1,282 $ 837 $ 2,119 $ 279 $ 81 $ 360 $ 46 $ 132 $ 178
============================= ============================== ===============================
</TABLE>
27
<PAGE>
The Company had equity investments and notes receivable in several Iridium
gateway companies, accounts receivable from Iridium, capital call obligations
and contractual commitments and other obligations in the amount of $1.8 billion
all of which had been reserved or written-off as of December 31, 1999. The
amounts are detailed in the tables that follow.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Company Assets: Dec. 31, Dec. 31,
Investments: 1999 1998
--------- ---------
<S> <C> <C>
Equity investment in Iridium $ - $ 50
Bond investment in Iridium - 157
Investments in and notes receivable
from Iridium gateway companies 39 56
--------- ---------
Total $ 39 $ 263
--------- ---------
Accounts Receivable:
Operations & Maintentance contract
Deferred amount due to Company $ 400 $ -
Other amounts due to Company 179 176
--------- ---------
$ 579 $ 176
Other contracts 82 88
--------- ---------
Total $ 661 $ 264
--------- ---------
Company Guarantees and Other:
Bank Guarantees and Other Financial Commitments:
Senior Secured Credit Agreement Capital Call $ 50 $ 50
Senior Guaranteed Credit Agreement - 750
Conditional Commitment to Provide Guarantee See Below See Below
--------- ---------
Total $ 50 $ 800
--------- ---------
Contractual Commitments and Other Obligations:
Obligations to subcontractors $ 85 $ 109
Assets at risk and other estimated potential
contractual obligations 963 791
--------- ---------
Total $1,048 $ 900
--------- ---------
Total Company Assets and Guarantees $1,798 $2,227
========= =========
Company Development and Commercialzation
Reserves (See table that follows) $1,798 $ 649
========= =========
- ------------------------------------------------------------------------------
</TABLE>
The Company accounted 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 communications system and the other
financial commitments more fully discussed below. The Company's equity
investment in Iridium reached zero due to recording its share of Iridium net
losses in the first quarter of 1999 but the Company continued to record
provisions to establish reserves related to its financial commitments and debt
guarantees to Iridium. The Company's equity investments in several Iridium
gateway companies as well as the contra asset related to a valuation reserve was
included in other assets in the consolidated balance sheets. The Company's
portion of Iridium bonds was included in other assets and the bond write-down
was included as a contra-asset in other assets, in the consolidated balance
sheets.
The Company had several contracts with Iridium, primarily for the operation
and maintenance of the global personal communications system. The Company
stopped recognizing revenue on the operations and maintenance contract with
Iridium after the second quarter of 1999, and continued to perform its services
under that contract throughout 1999 without being paid
28
<PAGE>
currently, although the Company has not waived its right to receive payment. The
Company had previously agreed to permit Iridium to defer up to $400 million of
amounts owed under its operations and maintenance contract with the Company. As
of December 31, 1999, the Company had accounts receivable from Iridium relating
to the operations and maintenance contract of $579 million and accounts
receivable for other contracts with Iridium of $82 million. All of these amounts
have been reserved as of December 31, 1999.
The repayment by Iridium of the contractually deferred amounts owed under
the operations and maintenance contract with the Company and the amount of
borrowings by Iridium under the Guaranteed Credit Agreement were subordinated to
repayment of Iridium's Secured Credit Agreement, as was the repayment to the
Company by Iridium of any other amounts the Company paid to the lenders under
its guarantees and certain other obligations owed to the Company. As a result of
the Chapter 11 filing, Iridium was believed unlikely to be able to repay in full
to the Company amounts previously deferred under its various contracts with the
Company and was unlikely to be able to pay amounts which accrued after the
filing and which had not been paid.
The Company has subcontracts for portions of the system, for which it
generally remained obligated in the amount of $85 million as of December 31,
1999. In addition, the Company had investments in assets related to these
contracts which were at risk, such as inventory, manufacturing equipment and
buildings, as well as other potential obligations in connection with these
contracts, the value of which the Company estimated to be approximately $963
million as of December 31, 1999. The Company will incur substantial costs in
winding down operations related to the Iridium program, therefore these
obligations and assets were written down or reserved to zero as of December 31,
1999.
The following table presents the activity of the Company's development and
commercialization reserves for the years December 31, 1999, 1998 and 1997
related to the Iridium project:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Dec. 31, Dec. 31, Dec. 31,
Development and Commercialization Reserves 1999 1998 1997
--------------------------------
<S> <C> <C> <C>
Provisions:
Special Charges $1,825 $ - $ -
Other Charges 87 95 132
--------------------------------
Total Provisions $1,912 $ 95 $ 132
Amounts Used
Payments under Guaranteed Credit Agreement (743) - -
Interim Funding to Iridium (20) - -
--------------------------------
Development and Commercialization Reserves $1,798 $ 649 $ 554
- ------------------------------------------------------------------------------
</TABLE>
The development and commercialization provisions for the years ended
December 31, 1999, 1998 and 1997 are shown in the above table. During 1999 the
Company used $763 million of the development and commercialization reserve
including payment by the Company of $743 million to the banks as payment of
guaranteed amounts under the Senior Guaranteed Credit Agreement and $20 million
in additional funding to Iridium while Iridium sought to attract additional
investment and achieve its financial restructuring.
The development and commercialization reserve as of December 31, 1999 was
$1.8 billion of which $869 million was included in accrued liabilities, $734
million was included as a contra asset, in inventories, $79 million was included
as a contra asset, in property, plant and equipment, $72 million was included as
a contra asset, in other assets, $39 million was included in other liabilities,
$4 million was included in accounts payable, and $1 million was included as a
contra asset, in accounts receivable, in the consolidated balance sheets. The
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 in the consolidated balance sheets. The related reserves for 1997
were $554 million and were included in accrued liabilities in the consolidated
balance sheets.
Additionally in 1999, the Company wrote down its investment in Iridium
bonds. The bond write-down of $157 million is reflected in selling, general and
administrative expenses in the consolidated statements of operations. The bond
write-down of $157 million is reflected as a contra-asset, in other assets, in
the consolidated balance sheets as of December 31, 1999.
Iridium's only outstanding bank facility as of December 31, 1999 was an
$800 million Senior Secured Credit Agreement (the "Secured Credit Agreement").
Iridium was in default under the Secured Credit Agreement and on approximately
$1.4 billion of public debt.
29
<PAGE>
During most of 1999, Iridium had outstanding a $750 million Senior
Guaranteed Credit Agreement (the "Guaranteed Credit Agreement"). The Guaranteed
Credit Agreement was guaranteed by the Company and Iridium had borrowed all of
the funds available. On November 15, 1999, the Company paid the banks
approximately $743 million to satisfy its guarantee under the Guaranteed Credit
Agreement. With that payment, the Company believes it satisfied all of its
guarantee obligations under this Agreement. By satisfying its guarantee
obligations, the Company avoided paying additional interest and substantial
monthly fees to the banks.
Subject to the automatic stay provisions of Chapter 11, the lenders under
the Secured Credit Agreement could have accelerated Iridium's obligations under
the Secured Credit Agreement and sought to foreclose on their security interests
in substantially all of Iridium's assets. Iridium was subject to a court order
(the "Court Order") which permitted it to make only a limited use of some of the
assets subject to these security interests. The Court Order generally permitted
Iridium, during the term of the Court Order, to pay only specified budgeted
amounts and prohibited Iridium from making any payments to Motorola. The Court
Order was effective through March 17, 2000. In addition, under the Court Order,
Motorola has no obligation to continue providing those services to Iridium after
March 17, 2000 since it is not being paid for those services. Although not
required to do so, Motorola expects to maintain the Iridium system for a limited
time, while a deorbiting plan is finalized.
The Company had agreed under a Memorandum of Understanding to provide a
guarantee of up to an additional $350 million of Iridium debt for Iridium's use,
subject to certain conditions. Iridium requested Motorola to provide this
guarantee during the third quarter of 1999, however, Motorola believes it was
not obligated to do so. In certain circumstances and subject to certain
conditions, $300 million of such guarantee could have been required to be used
to guarantee amounts borrowed under the Secured Credit Agreement. The lenders
under the Secured Credit Agreement asserted that Iridium failed to have the
Company provide such guarantee as required, and that the Company was obligated
to provide them with this $300 million guarantee. The Company believes that it
was not obligated to do so. Iridium has also stated that it believed it was not
obligated to have the Company provide this $300 million guarantee to these
lenders. The lenders under the Secured Credit Agreement have also demanded that
the investors in Iridium comply with their capital call requirements. In the
Company's case, this could require an additional equity investment of $50
million.
During the fourth quarter of 1999, Motorola led a group of investors in
providing a $20 million funding commitment to Iridium. It was used by Iridium
to fund its on-going operations through February 15, 2000 while it sought to
attract additional investment and achieve its financial restructuring. Iridium
continued discussions with its lenders and creditors regarding plans to
restructure its debt and Motorola worked with Iridium and its other investors to
find viable restructuring options.
Creditors and other stakeholders in Iridium may seek to bring various
claims against the Company, with respect to payments previously made by Iridium
to the Company, and otherwise. As described in "Legal Proceedings," a number of
purported class action lawsuits alleging securities law violations have been
filed naming Iridium, certain current and former officers of Iridium, other
entities and the Company as defendants.
On February 17, 2000, Motorola and Eagle River Investments, LLC provided an
additional $5 million of funding which Iridium used to fund its on-going
operations through March 6, 2000 while Eagle River Investments, LLC developed a
follow-up financing plan for submission to the bankruptcy court. Eagle River
Investments, LLC subsequently did not submit that plan and, on March 6, 2000,
the lenders under the Secured Credit Facility allowed Iridium to use $3 million
of funds for permitted expenses while Iridium sought a qualified bid for their
assets.
A discussion of the Company's commitments and contingencies are detailed in
Notes 8 and 9 to the consolidated financial statements.
The Company believes that it has adequate internal and external resources
available to fund expected working capital and capital expenditure requirements
through fiscal 2000.
OTHER MATTERS
Environmental Matters
A discussion of the Company's environmental matters is detailed in Note 9
to the supplemental consolidated financial statements.
Acquired In-Process Research & Development
A discussion of the Company's Acquired In-Process Research and Development
costs is discussed in Note 13 to the supplemental consolidated financial
statements.
30
<PAGE>
Year 2000
Motorola has not experienced any significant Year 2000 related issues. The
Company's success in dealing with the Year 2000 rollover was the culmination of
three years of preparation The Company plans to continue to monitor date-related
product and system performance issues through the end of March, 2000 to account
for any possible leap year-related or residual Year 2000 issues, and will
continue to handle these issues thereafter in the normal course of its
commercial operations.
Motorola estimates that the expected total aggregate cost of its Year 2000
activities from 1997 to 2000 were $212 million. Of this amount, approximately
$104 million was for external costs and $108 million for internal costs. While
the Company does not expect to be sued in connection with the Year 2000
rollover, because of the success of its Year 2000 program, there can be no
assurances there will not be lawsuits or other unforeseen costs associated with
the rollover. These costs are not included in the aggregate cost described
above. In addition, it is possible that date-related issues involving the
products, services or operations of customers, suppliers or other third parties
could arise in the future, which could adversely affect Motorola.
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 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 before 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 Motorola businesses in 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 completed and the project has been initiated. 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, it currently
believes that these issues are unlikely to have a material impact on its
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.
Company has already established plans for each
31
<PAGE>
business segment to manage any impact caused by changes in billing practices for
either customers or vendors as a result of the euro conversion. The Company is
unable to predict how rapidly these changes may occur.
The Company will continue to evaluate the issues relating to the euro
conversion. However, based on its 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 its consolidated financial position,
liquidity or results of operations.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities", subsequently amended by SFAS
No. 137, which the Company is required to adopt in the first quarter of 2001.
SFAS 133 will require the Company to record all derivatives on the balance sheet
at fair value. Changes in derivative fair values will either be recognized in
earnings as offsets to the changes in fair value of related hedged assets,
liabilities and firm commitments or, for forecasted transactions, deferred and
recorded as a component of non-owner changes to equity until the hedged
transactions occur and are recognized in earnings. The impact of SFAS 133 on
the Company's consolidated financial position, liquidity and results of
operations will depend upon a variety of factors, including future interpretive
guidance from the FASB and the extent of the Company's hedging activities.
However, the Company does not expect the adoption of SFAS 133 will materially
affect its consolidated financial position, liquidity or results of operations.
2000 Segment Realignment
Beginning in the first quarter of 2000 the Company intends to change its
segment reporting by adding the following new segment:
. The Integrated Electronics Systems Sector, IESS, which has been included in
the Other Products segment, will be reported as a separate segment.
Management believes that growth prospects for IESS are strong, particularly
for Telematics products and systems solutions, which blend innovative
wireless communications and automotive technologies to provide security,
information, convenience and entertainment services from a central service
center to drivers and passengers.
Restated historical segment data will be available for the first quarter 2000.
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
supplemental consolidated financial statements 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.
In June 1999, the Company's finance subsidiary entered into interest rate
swaps to change the characteristics of the interest rate payments on its $500
million 6.75% Guaranteed Bonds due 2004 from fixed-rate payments to short-term
LIBOR based variable rate payments in order to match the funding with its
underlying assets. The fair value of these interest rate swaps would
hypothetically increase by $12.7 million as of year end 1999 if LIBOR rates were
to increase by a hypothetical 10%.
Foreign Exchange Market Risk
See Note 1 to the supplemental consolidated financial statements 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
32
<PAGE>
foreign exchange financial instruments would hypothetically decrease by $187
million as of year-end 1999 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. 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 approximately $762 million as of
year-end 1999 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.
The analysis methods used by the Company to assess and mitigate risk
discussed above should not be considered projections of future events.
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 selling, general and administrative costs, research and
development spending, depreciation expense, interest expense, tax rate, growth
in the digital telephone market, component shortages for, wireless telephones,
product introductions in 2000 and the impact on the Company, the Company's role
in 3G, the impact of various alliances on the Network Systems Segment, the
introduction of new infrastructure products and technology, worldwide
semiconductor industry growth, outsourcing in the semiconductor business,
semiconductor capital expenditures, the impact of technology innovations in the
semiconductor business, the market for embedded technologies and systems, the
Company's access to capital markets, customer financing, future events regarding
Iridium and the impact on the Company, Year 2000 costs, the euro conversion, the
growth of the Integrated Electronics System Sector, 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
Impact of Restructuring Programs
. The impact of manufacturing consolidation, cost reduction and restructuring
programs on the Company's ability to effectively compete and to continue to
grow.
Integration of New Businesses
. The ability of the Company to integrate its newly acquired businesses, and
to achieve strategic objectives, cost savings and other benefits.
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 1999, 10% of the Company's sales were in China and it has
significant operations in China. An economic downturn in China's economy
could materially adversely impact the Company.
33
<PAGE>
The Success of Various Efforts to Stabilize Economic Conditions in Parts of
Asia, Including Japan
. During 1999, 16% of the Company's sales were in Japan and Asia-Pacific
(excluding China). If the economic recession being experienced in some
Asian countries fails to improve, or spreads to other parts of Asia, the
Company's performance will likely 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
. 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 Alliances
. Motorola's success in partnering with other industry leaders to meet
customer product and service requirements, particularly in its
communications businesses.
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 and 1999, the Company acquired controlling and non-controlling
interests in several businesses that had technology that was not fully
developed. If these technologies are not fully developed in a timely
manner, the Company's investments in such companies could be materially
adversely impacted.
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
Component Shortage
. The Company's ability to meet customer demands depends in part on our
ability to obtain timely delivery of parts and components from our
suppliers. We have experienced component shortages in the past, including
components for wireless telephones, that have adversely affected our
operations. Although we work closely with our suppliers to avoid these
types of shortages, there can be no assurances that we will not continue to
encounter these problems in the future.
34
<PAGE>
Pricing Pressures
. Continued pricing pressure on wireless telephones, infrastructure
equipment, paging and messaging products and infrastructure, and the
adverse impact on gross margins for those products, especially because of
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 wireless telephone business to continue its
transition to digital technologies and successfully compete in that
business 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 and Technologies
. 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 and other technologies for third generation (3G)
wireless, 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 development of industry standards; 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
particularly in North America and China, the two largest markets for these
products.
Risks Related to the Iridium(R) System
. Unfavorable outcomes to any currently pending or future litigation
involving the Iridium project.
. Difficulties, delays and unexpected liabilities or expenses encountered in
connection with the implementation of Iridium's liquidation proceedings,
including those encountered in finalizing and implementing the deorbiting
process and in resolving any remaining obligations Motorola has under its
agreements related to the Iridium project.
. Difficulties, delays and unexpected liabilities or expenses incurred in
effectively reallocating resources that were previously dedicated to the
Iridium project.
Demand for Customer Financing
. Increasing demand for customer financing of equipment sales, particularly
infrastructure equipment, and the ability of the Company to provide
financing on competitive terms with other companies.
Risks from Large System Contracts
. Risks related to the trend towards increasingly large system contracts for
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.
35
<PAGE>
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.
Growth in the Cable Industry
. Continued growth in the cable industry and that industry's ability to
compete with other entertainment providers.
Semiconductor Businesses
Continued Recovery of Semiconductor Market Recession
. The impact of the continued recovery in the semiconductor market and the
Company's participation in that recovery. The semiconductor business has
restructured itself to participate in some of the semiconductor markets
with the best growth potential. There can be no assurances that this
strategy will be successful.
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 include: production inefficiencies and higher
costs related to underutilized facilities, including 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.
Electronic Content in Cars and Trucks
. Continued significant increases in electronic cars and trucks and consumer
demand for the related products and services.
iDEN, StarTAC, EMX, ASTRO, Dimetra, PowerCom, OTAR, TxMessenger, TX, WaveSoft,
BiStatix, CodeWarrior, DigitalDNA, CopperGold, MobileGT and M-DTV are trademarks
or registered trademarks of Motorola, Inc. All other product names and other
trademarks or service marks used herein are the property of their respective
owners.
36
<PAGE>
The following information supplements Item 6, Selected Financial Data, and
Item 8, Financial Statements and Supplementary Data, as incorporated by
reference into Part II of Motorola's Annual Report on Form 10-K for the year
ended December 31, 1999 that was originally filed on March 22, 2000, to reflect
the combination of General Instrument with Motorola.
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Motorola, Inc.:
We have audited the accompanying supplemental consolidated balance sheets
of Motorola, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
related supplemental consolidated statements of operations, stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1999. These supplemental consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these supplemental 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.
The supplemental consolidated financial statements give retroactive effect
to the merger of Motorola, Inc. and General Instrument Corporation on January 5,
2000, which has been accounted for as a pooling-of-interests as described in
Note 1 to the supplemental consolidated financial statements. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation. However, they will
become the historical consolidated financial statements of Motorola, Inc. and
Subsidiaries after financial statements covering the date of consummation of the
business combination are issued.
In our opinion, the supplemental consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Motorola, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles applicable after financial statements are issued for a
period which includes the date of consummation of the business combination.
/s/ KPMG LLP
Chicago, Illinois
March 17, 2000
37
<PAGE>
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Motorola, Inc. and Subsidiaries
Supplemental Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------
(In millions, except per share amounts) 1999 1998 1997
<S> <C> <C> <C>
NET SALES $33,075 $31,340 $31,498
- -------------------------------------------------------------------------------
COSTS AND EXPENSES
Manufacturing and other costs of sales 20,631 19,396 18,532
Selling, general and administrative expenses 5,446 5,656 5,373
Restructuring and other charges (226) 1,980 327
Research and development expenditures 3,560 3,118 2,930
Depreciation expense 2,243 2,255 2,394
Interest expense, net 138 215 136
TOTAL COSTS AND EXPENSES 31,792 32,620 29,692
EARNINGS (LOSS) BEFORE INCOME TAXES 1,283 (1,280) 1,806
- -------------------------------------------------------------------------------
INCOME TAX PROVISION (BENEFIT) 392 (373) 642
NET EARNINGS (LOSS) $ 891 $ (907) $ 1,164
- -------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER COMMON SHARE $ 1.26 $ (1.31) $ 1.71
DILUTED EARNINGS (LOSS) PER COMMON SHARE $ 1.22 $ (1.31) $ 1.67
- -------------------------------------------------------------------------------
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 706.5 690.3 680.3
- -------------------------------------------------------------------------------
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 734.0 690.3 697.6
- -------------------------------------------------------------------------------
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
38
<PAGE>
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Motorola, Inc. and Subsidiaries
Supplemental Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
-------------------
(In millions, except per share amounts) 1999 1998
- -----------------------------------------------------------------------------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 3,537 $ 1,602
Short-term investments 699 171
Accounts receivable, net 5,627 5,393
Inventories 3,707 4,026
Deferred income taxes 3,247 2,463
Other current assets 768 766
------- -------
Total current assets 17,585 14,421
------- -------
Property, plant and equipment, net 9,591 10,286
Other assets 13,313 6,244
------- -------
TOTAL ASSETS $40,489 $30,951
- -----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable and current portion of long-term debt $ 2,504 $ 2,909
Accounts payable 3,285 2,568
Accrued liabilities 7,117 6,412
------- -------
Total current liabilities 12,906 11,889
------- -------
Long-term debt 3,089 2,633
Deferred income taxes 3,719 1,203
Other liabilities 1,598 1,313
------- -------
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely company-
guaranteed debentures 484 --
Stockholders' equity
Preferred stock, $100 par value issuable in series
Authorized shares: 0.5 (none issued) -- --
Common stock, $3 par value
Authorized shares: 1999 and 1998, 1,400
Issued and outstanding: 1999, 713.1; 1998, 698.1 2,140 2,095
Additional paid-in capital 4,145 3,255
Retained earnings 8,890 8,290
Non-owner changes to equity 3,518 273
------- -------
Total stockholders' equity 18,693 13,913
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $40,489 $30,951
=============================================================================
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
39
<PAGE>
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Motorola, Inc. and Subsidiaries
Supplemental 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, 1997 $ 4,383 $ (26) $ (121) $ -- $ 8,607
- --------------------------------------------------------------------------------------------------------------- ------------------
Net earnings 1,164 1,164
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 552 552
Change in foreign currency
translation adjustments (119) (119)
Minimum pension liability adjustment (38) (38)
Stock options and other 338
Dividends declared (286)
- --------------------------------------------------------------------------------------------------------------- ------------------
Balances at December 31, 1997 $ 4,728 $ 552 $ (240) $ (38) $ 9,485 $ 1,585
- --------------------------------------------------------------------------------------------------------------- ==================
Net loss (907) (907)
Conversion of zero coupon notes 3
Fair value adjustment to certain
cost-based investments:
Reversal of prior period adjustment (552) (552)
Recognition of current
period unrecognized gain 479 479
Change in foreign currency
translation adjustments 34 34
Minimum pension liability adjustment 38 38
Issuance of common stock 443
Stock options and other 176
Dividends declared (288)
- --------------------------------------------------------------------------------------------------------------- ------------------
Balances at December 31, 1998 $ 5,350 $ 479 $ (206) $ --- $ 8,290 $ (908)
- --------------------------------------------------------------------------------------------------------------- ==================
Net earnings 891 891
Conversion of zero coupon notes 9
Fair value adjustment to certain
cost-based investments:
Reversal of prior period
adjustment (479) (479)
Recognition of current
period unrecognized gain 3,830 3,830
Change in foreign currency
translation adjustments (33) (33)
Minimum pension liability adjustment (73) (73)
Issuance of common stock 188
Gain on sale of subsidiary stock 82
Stock options and other 656
Dividends declared (291)
- -------------------------------------------------------------------------------------------------------------- -------------------
Balances at December 31, 1999 $ 6,285 $ 3,830 $ (239) $ (73) $ 8,890 $ 4,136
- -------------------------------------------------------------------------------------------------------------- ===================
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
40
<PAGE>
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Motorola, Inc. and Subsidiaries
Supplemental Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------
(In millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING
<S> <C> <C> <C>
Net earnings (loss) $ 891 $ (907) $ 1,164
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Restructuring and other charges (226) 1,980 327
Iridium charges 2,119 360 178
Depreciation 2,243 2,255 2,394
Deferred income taxes (443) (933) (93)
Amortization of debt discount and issue costs 11 11 10
Warrant costs related to customer purchases 26 22 -----
Gain on disposition of investments and businesses, net of acquisition charges (1,054) (137) (107)
Change in assets and liabilities, net of effects of acquisitions and dispositions:
Accounts receivable (135) (243) (754)
Inventories (678) 249 (903)
Other current assets (16) 35 (106)
Accounts payable and accrued liabilities 361 (669) 546
Other assets and liabilities (959) (728) (60)
-------------------------------
Net cash provided by operating activities 2,140 1,295 2,596
- -----------------------------------------------------------------------------------------------------------------------------
INVESTING
Acquisitions and advances to affiliates (632) (820) (326)
Proceeds from dispositions of investments and businesses 2,556 383 258
Capital expenditures (2,856) (3,313) (2,954)
Proceeds from dispositions of property, plant and equipment 468 507 454
(Purchases) sales of short-term investments (496) 164 (37)
-------------------------------
Net cash used for investing activities (960) (3,079) (2,605)
- -----------------------------------------------------------------------------------------------------------------------------
FINANCING
(Repayment of) proceeds from commercial paper and short-term borrowings (403) 1,627 (100)
Proceeds from issuance of debt 501 773 312
Repayment of debt (47) (293) (102)
Issuance of common stock 544 53 146
Issuance of preferred securities of subsidiary trust 484 ----- -----
Payment of dividends (291) (288) (286)
Other financing activities, net ----- ----- 125
-------------------------------
Net cash provided by financing activities 788 1,872 95
- -----------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (33) 34 (119)
- -----------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 1,935 $ 122 $ (33)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $ 1,602 $ 1,480 $ 1,513
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,537 $ 1,602 $ 1,480
=============================================================================================================================
Supplemental Cash Flow Information
- -----------------------------------------------------------------------------------------------------------------------------
CASH PAID DURING THE YEAR FOR:
Interest $ 266 $ 287 $ 216
Income taxes $ 301 $ 398 $ 613
=============================================================================================================================
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
41
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
1. Company Background and Summary of Significant Accounting Policies
Company Background: On January 5, 2000, Motorola, Inc. completed its
previously announced merger with General Instrument Corporation (General
Instrument) by exchanging 100.6 million shares of its common stock for all of
the common stock of General Instrument. Each share of General Instrument was
exchanged for 0.575 share of Motorola, Inc.'s common stock. Motorola, Inc. has
accounted for the merger as a pooling-of-interests, and accordingly, all prior
period consolidated financial statements have been restated to include the
combined results of operations, financial position and cash flows of Motorola,
Inc. and General Instrument (collectively referred to as the "Company"). The
effects of conforming General Instrument's accounting policies to those of
Motorola, Inc. were not material.
The following table presents details of the results of operations for the
separate companies for the years ended December 31, 1999, 1998 and 1997,
preceding the merger:
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------
(In millions) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
NET SALES
<S> <C> <C> <C>
Motorola, Inc. $30,931 $29,398 $29,794
General Instrument Corporation 2,192 1,988 1,764
Eliminations (48) (46) (60)
--------------------------------
$33,075 $31,340 $31,498
- ----------------------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS)
Motorola, Inc. $ 817 $ (962) $ 1,180
General Instrument Corporation 74 55 (16)
--------------------------------
$ 891 $ (907) $ 1,164
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Principles of Consolidation: The supplemental consolidated financial
statements include the accounts of the Company and all majority-owned
subsidiaries 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.
Advertising and Sales Promotion Costs: Advertising and sales promotion
costs are expensed as incurred and are included in selling, general and
administrative expenses in the supplemental consolidated statements of
operations.
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).
Intangible Assets: Goodwill and other intangible assets are recorded at
cost and amortized primarily on a straight-line basis over periods ranging from
3 to 40 years.
Investments: Marketable equity securities held by the Company are
classified as "available-for-sale" securities and reported at fair value. Any
unrealized holding gains and losses, net of deferred taxes, are excluded from
operating results and are recognized as a separate component of stockholders'
equity until realized. The fair values of the securities are determined based on
market prices, and realized gains and losses are determined using the
securities' cost.
42
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
Long-Lived Assets: Long-lived assets held and used by the Company are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of assets may not be recoverable. The Company evaluates
recoverability of assets to be held and used by comparing the amount of an asset
to future net undiscounted cash flows to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
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 supplemental consolidated statements of operations. Gains and
losses on financial instruments that 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 that hedge investments in foreign subsidiaries
are marked-to-market, and the results are included in stockholders' equity.
Other gains or losses on financial instruments that 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 1999 presentation.
Recent Accounting Pronouncements: In June 1998, the Financial Accounting
Standards Board (the FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities",
subsequently amended by SFAS No. 137, which the Company is required to adopt in
the first quarter of 2001. SFAS 133 will require the Company to record all
derivatives on the balance sheet at fair value. Changes in derivative fair
values will either be recognized in earnings as offsets to the changes in fair
value of related hedged assets, liabilities and firm commitments or, for
forecasted transactions, deferred and recorded as a component of non-owner
changes to equity until the hedged transactions occur and are recognized in
earnings. The impact of SFAS 133 on the Company's consolidated financial
position, liquidity and results of operations will depend upon a variety of
factors, including future interpretive guidance from the FASB and the extent of
the Company's hedging activities. However, the Company does not expect the
adoption of SFAS 133 to materially affect its consolidated financial position,
liquidity or results of operations.
43
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. Motorola Credit Corporation
Motorola Credit Corporation (MCC), the Company's wholly owned finance
subsidiary, is engaged principally in financing long-term commercial receivables
arising out of equipment sales made by the Company to customers throughout the
United States and internationally.
MCC's interest revenue is included in the Company's consolidated net sales.
Interest expense totaled $72 million in 1999, $37 million in 1998 and $13
million in 1997, and is included in manufacturing and other costs of sales. In
addition, long-term finance receivables of $1.7 billion and $1.1 billion (net of
allowance for losses on commercial receivables of $292 million and $167 million,
respectively) at December 31, 1999 and 1998 are included in other assets.
Summary Financial Data of Motorola Credit Corporation
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Total revenue $ 159 $ 72 $ 29
------ ------ -----
Net earnings 53 21 11
------ ------ -----
Total assets 2,015 1,152 458
------ ------ -----
Total liabilities 1,768 977 367
------ ------ -----
Total stockholder's equity $ 247 $ 175 $ 91
- ----------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
3. Other Financial Data
Statement of Operations Information
<TABLE>
<CAPTION>
Years ended December 31 1999 1998 1997
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Research and development $3,560 $3,118 $2,930
------ ------ ------
Foreign currency losses 19 22 --
------ ------ ------
Interest expense, net:
Interest expense 307 304 226
Interest income (169) (89) (90)
------ ------ ------
Interest expense, net $ 138 $ 215 $ 136
- ----------------------------------------------------------------------
</TABLE>
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 1999 1998 1997
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings (loss) per
common share
Net earnings (loss) $ 891 $ (907) $1,164
Weighted average common
shares outstanding 706.5 690.3 680.3
------ ------ ------
Per share amount $ 1.26 $(1.31) $ 1.71
====== ====== ======
Diluted earnings (loss) per
common share
Net earnings (loss) $ 891 $ (907) $1,164
Add: Interest on zero coupon
notes, net 2 -- 5
------ ------ ------
Net earnings (loss), as adjusted $ 893 $ (907) $1,169
------ ------ ------
Weighted average common
shares outstanding 706.5 690.3 680.3
Add: Effect of dilutive
securities
Stock options 18.8 --- 11.0
Warrants 6.8 --- ---
Zero coupon notes 1.9 --- 6.3
------ ------ ------
Diluted wtd. average common
shares outstanding 734.0 690.3 697.6
------ ------ ------
Per share amount $ 1.22 $(1.31) $ 1.67
- ----------------------------------------------------------------------
</TABLE>
44
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
In the computation of diluted loss per common share for the year ended
December 31, 1998, the assumed conversions of the zero coupon notes due 2009 and
2013, warrants and options outstanding were excluded because their inclusion
would have been antidilutive.
Balance Sheet Information
<TABLE>
<CAPTION>
December 31 1999 1998
- ----------------------------------------------------------------------
Inventories:
<S> <C> <C>
Finished goods $ 1,199 $ 1,191
Work-in-process and production
materials 2,508 2,835
-------- --------
Total $ 3,707 $ 4,026
-------- --------
Property, plant and equipment:
Land $ 288 $ 302
Buildings 6,103 6,321
Machinery and equipment 16,124 16,778
-------- --------
22,515 23,401
Less accumulated depreciation (12,924) (13,115)
-------- --------
Total $ 9,591 $ 10,286
-------- --------
Other assets:
Equity-based investments in
affiliated companies $ 1,212 $ 968
Cost-based investments in
affiliated companies 1,506 1,476
Fair value adjustment of certain
cost-based investments 6,321 791
Long-term finance receivables 1,679 1,062
-------- --------
Goodwill and intangibles 2,005 1,878
Less accumulated amortization (460) (339)
-------- --------
1,545 1,539
Other 1,050 408
-------- --------
Total $ 13,313 $ 6,244
-------- --------
Accrued liabilities:
Dividends payable $ 74 $ 72
Contribution to employees' profit
sharing funds 173 78
Income taxes payable 11 91
Taxes other than income taxes 359 313
Deferred revenue 586 382
Accrued warranties 379 382
Compensation 710 586
Restructuring and other accruals 40 666
Customer reserves 410 422
Iridium reserves 869 529
Other 3,506 2,891
-------- --------
Total $ 7,117 $ 6,412
- ----------------------------------------------------------------------
</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, 1999 and 1998, contract field inventories were $190 million and
$127 million, respectively.
Unbilled receivables which are included in accounts receivable but not yet
billed to the customers were $737 million and $600 million at December 31, 1999
and 1998, respectively.
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", requires the carrying value
of available for sale securities to be adjusted to fair value. The Company
classifies certain of its cost-based investments as available for sale
securities. As such, the Company recorded an increase to stockholders' equity,
other assets and deferred income taxes of $3.8 billion, $6.3 billion and $2.5
billion as of December 31, 1999; and an increase to
45
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
stockholders' equity, other assets and deferred income taxes of $479 million,
$791 million and $312 million as of December 31, 1998.
The Company has an investment in equity securities of a publicly traded
company which have certain restrictions and which may, under certain
circumstances, cause the investment to be redeemed at cost. Such restrictions
do not lapse until April 2000. Therefore, the Company has not reflected this
investment at its fair value at December 31, 1999. Accordingly, the Company is
carrying this investment at its cost of $21 million, which is included in other
assets in the supplemental consolidated balance sheets. When such restrictions
expire, the investment will be classified as available-for-sale with any
unrealized gain or loss recorded through stockholders' equity. At December 31,
1999, the fair value of this investment were it not restricted would have been
approximately $1.1 billion.
Stockholders' Equity Information
Comprehensive Earnings (Loss)
- -----------------------------
Comprehensive earnings (loss) for the years ended December 31, 1999, 1998 and
1997, were $4.1 billion, ($908) million and $1.6 billion, respectively. The
unrecognized gains on certain cost-based investments of $3.8 billion, $479
million and $552 million as of December 31, 1999, 1998 and 1997, respectively,
exclude reclassification adjustments of $74 million, $11 million and $16
million, net of tax, related to the sale of securities.
Warrants Issued in Conjunction With Selling Products
- ----------------------------------------------------
In December 1997, the Company entered into agreements to supply an aggregate
of 16.5 million of its two-way, interactive digital cable terminals to nine of
the leading North American cable television multiple system operators ("MSOs")
over a three to five year period, beginning in 1998. In connection with these
legally binding supply agreements, the Company issued warrants to the MSOs to
purchase approximately 15.7 million shares of the Company's common stock.
Warrants aggregating 4.1 million shares and 4.2 million shares vested and became
exercisable on December 31, 1998 and 1999, respectively. Warrants aggregating
8.2 million shares will vest and become exercisable on December 31, 2000
provided each such MSO fulfills its obligation to purchase a threshold number of
digital terminals from the Company. Each warrant is exercisable for one share
of the Company's common stock for a period of 18 months after it vests at an
exercise price of $24.78.
During 1999 and 1998, the Company recorded $26 million and $22 million,
respectively, to manufacturing and other costs of sales in the supplemental
consolidated statements of operations related to these warrants. On a quarterly
basis, management assesses the Company's ability to deliver the threshold number
of units and to the extent it believes the Company will not be able to deliver
the committed number of units, a charge reflecting the fair value of warrants
for the undeliverable units for that year would be recorded.
Stock Split
- -----------
On February 29, 2000, the Company's Board of Directors approved a 3-for-1
common stock split in the form of a stock dividend, subject to approval by
stockholders of an increase in the Company's authorized common shares. If the
Company's stockholders approve the increase of authorized common shares from 1.4
billion to 4.2 billion at their Annual Meeting on May 1, 2000, the stock
dividend will be distributed on June 1, 2000, to common stockholders of record
on May 15, 2000.
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 $346 million in 1999, $335 million in 1998 and $324 million in 1997.
At December 31, 1999, future minimum lease obligations, net of minimum sublease
rentals, for the next five years and beyond, in millions, are as follows: 2000,
$120; 2001, $73; 2002, $61; 2003, $52; 2004, $50; beyond, $66.
46
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. Debt and Credit Facilities
Long-term debt
<TABLE>
<CAPTION>
December 31 1999 1998
- ------------------------------------------------------------------
<S> <C> <C>
7.5% debentures due 2025 $ 398 $ 398
6.75% debentures due 2004 497 --
6.5% debentures due 2025 (redeemable
at the holders' option in 2005) 398 397
7.6% notes due 2007 300 300
5.8% debentures due 2008 323 322
6.5% debentures due 2008 199 199
6.5% debentures due 2028 439 439
5.22% debentures due 2097 226 225
Zero coupon notes due 2009 17 24
Zero coupon notes due 2013 80 80
8.4% debentures due 2031 (redeemable
at the holders' option in 2001) 200 200
Other long-term debt 34 57
------ ------
3,111 2,641
Less: Current maturities 22 8
------ ------
Long-term debt $3,089 $2,633
- ------------------------------------------------------------------
</TABLE>
Short-term debt
<TABLE>
<CAPTION>
December 31 1999 1998
- ------------------------------------------------------------------
<S> <C> <C>
Notes to banks $ 142 $ 157
Commercial paper 2,335 2,739
Other short-term debt 5 5
------ ------
2,482 2,901
Add: Current maturities 22 8
------ ------
Notes payable and current portion of
long-term debt $2,504 $2,909
- ------------------------------------------------------------------
Weighted average interest rates on
short-term borrowings
- ------------------------------------------------------------------
Commercial paper 5.2% 5.4%
Other short-term debt 6.3% 8.0%
- ------------------------------------------------------------------
</TABLE>
At December 31, 1999, 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 $30 million and $17 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, 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. The purchase price is $744.10 per $1,000 principal
amount at September 7, 2004, plus accrued original issue discount calculated to
that date.
At December 31, 1999, the LYONs due 2013 had a face value at maturity and
net carrying value of $109 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. On September 28, 1998, the Company redeemed $368
million principal amount at maturity of its outstanding LYONs due 2013 at the
election of the holders thereof. The Company made a total payment of $263
million to redeem these LYONs.
The LYONs issues are subordinated to all existing and future senior
indebtedness of the Company and rank on a parity with each other.
47
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
On June 21, 1999, the Company's finance subsidiary sold an aggregate face
principal amount at maturity of $500 million of 6.75% Guaranteed Bonds due June
21, 2004, to non-U.S. persons. The Bonds were sold outside of the United States
in reliance on Regulation S under the Securities Act of 1933, as amended. The
net proceeds to the finance subsidiary from the issuance and sale of the bonds
were $497 million and were used to reduce its short-term indebtedness. Shortly
after the sales, the finance subsidiary entered into interest rate swaps to
change the characteristics of the interest rate payments on the bonds from
fixed-rate payments to short-term LIBOR based variable rate payments in order to
match the funding of its underlying assets.
On February 3, 1999, Motorola Capital Trust I, a Delaware statutory
business trust and wholly-owned subsidiary of the Company, sold 20 million Trust
Originated Preferred SecuritiesSM ("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 sales of common stock to the Company, to buy
a series of 6.68% Deferrable Interest Junior Subordinated Debentures due March
31, 2039 ("Subordinated Debentures") from the Company with the same payment
terms as the TOPrS. The Company, in turn, used the $484 million of net proceeds
from the sale of the Subordinated Debentures to reduce short-term indebtedness.
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: 2000, $22; 2001, $2; 2002, $0; 2003, $0; 2004, $497.
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 2000 and September of 2002, respectively. Commitment fees assessed against
the daily average amounts unused range from 5 to 6.25 basis points. These
domestic credit agreements contain various conditions, covenants and
representations with which the Company was in compliance at December 31, 1999.
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, 1999, the Company's total available domestic and non-U.S. credit
facilities aggregated $5.3 billion, of which $275 million was used and the
remaining $5.1 billion was available to back up outstanding commercial paper
which totaled $2.3 billion.
Outstanding letters of credit aggregated approximately $312 million and
$302 million at December 31, 1999 and 1998, respectively.
LYONs is a trademark of Merrill Lynch & Co., Inc.
SM "Trust Originated Preferred Securities" and "TOPrS" are service marks of
Merrill Lynch & Co Inc.
- --------------------------------------------------------------------------------
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.
48
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
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 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, 1999 and 1998, the Company had net outstanding foreign
exchange contracts totaling $3.6 billion and $1.8 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, 1999, deferred gains totaled $1.4
million and deferred losses totaled $20.9 million. At December 31, 1998,
deferred gains totaled $3.5 million and deferred losses totaled $4.3 million.
The following schedule shows the five largest net foreign exchange hedge
positions as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Buy (Sell)
------------------
December 31 1999 1998
- -------------------------------------------------
<S> <C> <C>
Japanese Yen $(1,780) $(674)
Euro (582) (566)
Chinese Renminbi (460) (100)
British Pound 231 (133)
Taiwan Dollar (106) (49)
- -------------------------------------------------
</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.
In June 1999, the Company's finance subsidiary entered into interest rate
swaps to change the characteristics of the interest rate payments on its $500
million 6.75% Guaranteed Bonds due 2004 from fixed-rate payments to short-term
LIBOR based variable rate payments in order to match the funding with its
underlying assets. The fair value of the interest rate swaps as of December 31,
1999, was $9.3 million. Except for these interest rate swaps, as of the end of
the reporting period, the Company had no outstanding 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.
Using available market information, the Company determined that the fair
value of long-term debt at December 31, 1999 was $3.0 billion compared to a
carrying value of $3.1 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 values of the other financing commitments could not be reasonably
estimated at December 31, 1999. The fair values of the other financial
instruments were not materially different from their carrying or contract values
at December 31, 1999.
49
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. Income Taxes
Components of earnings (loss) before income taxes
<TABLE>
<CAPTION>
Years ended December 31 1999 1998 1997
- ----------------------------------------------------------------------
<S> <C> <C> <C>
United States $ (462) $(2,180) $ 284
Other nations 1,745 900 1,522
------------------------------
Total $1,283 $(1,280) $1,806
- ----------------------------------------------------------------------
Components of income tax
provision (benefit)
Years ended December 31 1999 1998 1997
- ----------------------------------------------------------------------
Current:
United States $ 479 $ 60 $ 423
Other nations 257 481 238
State (U.S.) 99 19 93
------------------------------
835 560 754
Deferred (443) (933) (112)
------------------------------
Income tax provision (benefit) $ 392 $ (373) $ 642
- ----------------------------------------------------------------------
</TABLE>
Deferred tax adjustments to stockholders' equity, which resulted primarily
from fair value adjustments related to cost-based investments, were $2.3
billion, ($34) million and $384 million for the years ended December 31, 1999,
1998 and 1997, 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 $5.5 billion, $4.8 billion and $4.3 billion at
December 31, 1999, 1998 and 1997, 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, 1999, certain non-U.S. subsidiaries had loss carryforwards
for income tax reporting purposes of $187 million, with expiration dates
starting in 2000.
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 1999 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense (benefit) at
statutory rate $ 449 $(448) $ 633
Taxes on non-U.S. earnings 167 185 68
State income taxes (46) (118) 2
Foreign Sales Corporation (157) (80) (65)
Non-deductible acquisition charges 24 72 5
Other (45) 16 (1)
----- ----- -----
Income tax provision (benefit) $ 392 $(373) $ 642
- -----------------------------------------------------------------------
</TABLE>
50
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
Significant components of deferred tax assets (liabilities)
<TABLE>
<CAPTION>
December 31 1999 1998
- ---------------------------------------------------------------
<S> <C> <C>
Inventory reserves $ 763 $ 634
Contract accounting methods 86 226
Employee benefits 419 208
Capitalized items 142 162
Tax basis differences on investments (104) (82)
Depreciation (252) (277)
Undistributed non-U.S. earnings (1,071) (636)
Restructuring reserves 2 271
Tax carryforwards 397 428
Cost-based investment mark-to-market (2,488) (312)
Iridium reserves 650 257
Other 984 381
------------------
Net deferred tax asset (liability) $ (472) $1,260
- ---------------------------------------------------------------
</TABLE>
Gross deferred tax assets were $5.5 billion and $4.4 billion at December
31, 1999 and 1998, respectively. Gross deferred tax liabilities were $5.9
billion and $3.1 billion at December 31, 1999 and 1998, respectively. The
Company has U.S. tax carryforwards of approximately $397 million at December 31,
1999. These carryforwards are primarily foreign tax credit carryforwards of
which $345 million expire in 2003. The deferred tax asset is considered
realizable given past income and estimates of future income.
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 $97 million in 1999, $98 million in 1998
and $114 million in 1997.
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.
51
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) 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, 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------
<S> <C> <C>
Discount rate for obligations 7.75% 7.00%
Future compensation increase rate 4.50% 4.00%
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, 1999, 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, 1999,
1998 and 1997 for the regular pension plan and the elected officers'
supplemental retirement benefit plan was as follows:
Regular Pension Plan
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 196 $ 179 $ 160
Interest cost 199 177 148
Expected return on plan assets (242) (207) (168)
Amortization of unrecognized
net asset -- (11) (11)
---------------------------
Net periodic pension cost $ 153 $ 138 $ 129
- ----------------------------------------------------------------------
Elected Officers'
Supplemental Retirement
Benefit Plan
1999 1998 1997
- ----------------------------------------------------------------------
Service cost $ 33 $ 22 $ 22
Interest cost 15 11 11
Expected return on plan assets (5) (5) (3)
Amortization of:
Unrecognized net loss 13 8 5
Unrecognized prior service cost 2 6 6
Unrecognized net obligation 1 1 1
Settlement expense 9 7 4
---------------------------
Net periodic pension cost $ 68 $ 50 $ 46
- ----------------------------------------------------------------------
</TABLE>
The net periodic pension cost for the Motorola Supplemental Pension Plan
was $4 million in 1999, $3 million in 1998 and $2 million in 1997.
52
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
The status of the Company's plans at December 31 is shown in the following
table.
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------
Elected Elected
Officers Officers
And and
Regular MSPP Regular MSPP
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at January 1 $2,917 $176 $2,202 $157
Service cost 196 34 179 23
Interest cost 199 16 177 12
Divestitures (86) -- -- --
Actuarial (gain) loss (370) 58 405 26
Benefit payments (68) (35) (46) (43)
----------------------------------------------------
Benefit obligation at December 31 $2,788 $249 $2,917 $175
Change in plan assets
Fair value at January 1 $3,117 $142 $2,519 $113
Actual return on plan assets 509 2 511 9
Company contributions 111 50 133 63
Divestitures (76) -- -- --
Benefit payments (68) (35) (46) (43)
----------------------------------------------------
Fair value at December 31 $3,593 $159 $3,117 $142
Funded status of the plan 805 (89) 200 (33)
Unrecognized net (gain) loss (836) 158 (189) 99
Unrecognized prior service cost -- 10 (1) 12
Unrecognized net transition (asset) liability -- 1 -- 2
----------------------------------------------------
Prepaid (accrued) pension cost recognized in
balance sheet $ (31) $ 80 $ 10 $ 80
----------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------
Elected Elected
Officers Officers
And and
Regular MSPP Regular MSPP
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Components of prepaid (accrued) pension cost
recognized in balance sheet:
Prepaid benefit cost $ -- $ -- $ 25 $ 90
Intangible asset -- 9 -- 4
Accrued benefit liability (31) (51) (15) (14)
Deferred income taxes -- 49 -- --
Non-owner changes to equity -- 73 -- --
- --------------------------------------------------------------------------------------------------------
Total recognized prepaid (accrued) pension cost $ (31) $ 80 $ 10 $ 80
- --------------------------------------------------------------------------------------------------------
</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,
1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------
<S> <C> <C>
Discount rate for obligations 7.75% 7.00%
Investment return assumptions 9.00% 9.00%
- -------------------------------------------------------
</TABLE>
53
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
Net retiree health care expenses for the years ended December 31, 1999,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 19 $ 15 $ 14
Interest cost 38 32 29
Expected return on plan assets (26) (22) (16)
Amortization of unrecognized net
loss 5 2 3
--------------------------------
Net retiree health care expense $ 36 $ 27 $ 30
- ---------------------------------------------------------------------
</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>
1999 1998
- ---------------------------------------------------------------
<S> <C> <C>
Change in benefit obligation
Benefit obligation at January 1 $ 504 $ 422
Service cost 19 15
Interest cost 38 32
Plan amendments 2 ---
Divestitures (5) ---
Actuarial (gain) loss 7 50
Benefit payments (23) (15)
Other payments (5) ---
---------------------
Benefit obligation at December 31 $ 537 $ 504
Change in plan assets
Fair value at January 1 $ 328 $ 263
Actual return on plan assets 53 54
Company contributions 31 26
Benefit payments (23) (15)
---------------------
Fair value at December 31 $ 389 $ 328
Funded status of the plan (148) (176)
Unrecognized net loss 28 55
Unrecognized prior service cost --- (3)
---------------------
Liability recognized in balance
sheet $(120) $(124)
- ---------------------------------------------------------------
</TABLE>
The health care trend rate used to determine the pre-age 65 accumulated
postretirement benefit obligation was 6.56% for 1999, 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
- ----------------------------------------------------------------
<S> <C> <C>
Effect on:
Accumulated postretirement
benefit obligation $37 $(55)
Net retiree health care expense 5 (8)
- ----------------------------------------------------------------
</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
1999, 1998 and 1997 were $75 million, $74 million and $112 million,
respectively.
54
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
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. The provision for incentive awards in 1999
was $11 million. In 1998, there was no provision for incentive awards. The
provision for incentive awards in 1997 was $56 million.
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. The
provision for long-range incentive awards in 1999 was $3 million. During both
1998 and 1997, $21 million was provided for long-range incentive awards.
Stakeholders Plan and Incentive Pay Plans: The Stakeholders Plan was a
program available to eligible Motorola employees who were not participating in
the Motorola Executive Incentive Plan or certain other incentive plans. Awards
were earned and paid annually to participants in the form of 50% in cash and 50%
in the Company's common stock where legally permitted or practicable depending
upon certain performance measures. During 1999 and 1998, there were no
provisions for stakeholders awards. The provision for stakeholders awards in
1997 was $188 million. The program was retired in 1999.
In 1999, the Company introduced incentive pay plans providing eligible employees
with an annual payment, calculated as a percentage of an employee's eligible
earnings, in the year after the close of the current calendar year if specified
business goals are met. The provision for incentive pay plans in 1999 was $181
million.
Motorola Employee Stock Purchase Plan of 1999 (MOTshare): MOTshare allows
eligible participants to purchase shares of the Company's common stock through
payroll deductions of up to 10% of compensation on an after-tax basis. The price
an employee pays per share is 85% of the lower of the fair market value of the
Company's stock on the close of the first trading day or last trading day of the
purchase period. The plan has two purchase periods, the first one from October 1
through March 31 and the second one from April 1 through September 30. The plan
became effective in October of 1999 with the first share purchases to occur
after March 31, 2000.
Stock Options: Under the Company's stock option plans, 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 generally 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 plans 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 plans. 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>
1999 1998 1997
- -----------------------------------------------------------------
<S> <C> <C> <C>
Net earnings (loss)
As reported $ 891 $ (907) $1,164
Pro forma $ 867 $(1,032) $1,084
Basic earnings (loss) per
common share
As reported $1.26 $ (1.31) $ 1.71
Pro forma $1.23 $ (1.50) $ 1.59
Diluted earnings (loss) per
common share
As reported $1.22 $ (1.31) $ 1.67
Pro forma $1.18 $ (1.50) $ 1.56
- -----------------------------------------------------------------
</TABLE>
55
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
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>
1999 1998 1997
- ----------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 5.53% 4.52% 5.71%
Dividend yield 0.56% 0.80% 0.77%
Expected volatility 33.63% 31.33% 29.83%
Expected life in years 5 5 5
Per option fair value $33 $18 $16
- ----------------------------------------------------------------
</TABLE>
Stock options activity was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- ----------------------
Shares Wtd. avg. Shares Wtd. avg. Shares Wtd. avg.
subject to exercise subject to exercise subject to exercise
(In thousands, except exercise price and options price options price options price
employee data)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at January 1 49,617 $46 43,007 $42 40,223 $36
Additional options granted 1,224 $86 12,398 $51 8,627 $58
Options exercised (13,176) $40 (4,775) $25 (4,257) $27
Options terminated, cancelled or expired (685) $42 (1,013) $40 (1,586) $33
Options outstanding at December 31 36,980 $49 49,617 $46 43,007 $42
- --------------------------------------------------------------------------------------------------------------------------
Options exercisable at December 31 29,319 $48 33,786 $45 30,473 $39
Approx. number of employees granted options 1,500 17,100 16,100
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- ---------------------
Wtd. Avg. Wtd. avg. Wtd. avg.
No. of Exercise contractual No. of exercise
options Price life (in yrs.) Options price
Exercise price range:
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Under $ 9 26 $ 3 3.3 26 $ 3
$ 9 -- $ 15 2,250 $ 14 1.6 2,250 $14
$ 16 -- $ 30 5,970 $ 27 5.2 5,059 $26
$ 31 -- $ 45 3,752 $ 40 6.4 2,142 $43
$ 46 -- $ 60 18,862 $ 55 7.4 15,004 $55
$ 61 -- $ 75 4,904 $ 65 7.9 4,605 $65
$ 76 -- $ 90 982 $ 85 8.8 233 $80
$ 91 -- $105 158 $ 97 9.6 -- --
$106 -- $120 19 $115 9.9 -- --
$121 -- $135 45 $124 9.9 -- --
$136 -- $145 12 $138 10.0 -- --
------ ------
36,980 29,319
------ ------
</TABLE>
On January 31, 2000, the Company granted approximately 16.5 million options
to approximately 30,000 eligible employees. Traditionally, grants of stock
options are made in November or December of each year. The Compensation
Committee of the Company's Board of Directors elected to delay the 1999 grant
until January 31, 2000, so that it could fully assess the Company's 1999
performance.
The options, with a contractual life of 15 years, were granted at fair
market value and vest and become exercisable at 25% increments over the four
years after the grant date.
- --------------------------------------------------------------------------------
8. Commitments and Contingencies: Iridium
At December 31, 1999, the Company owned, directly and indirectly,
approximately 18% of the equity interests in Iridium LLC and its operating
subsidiaries (Iridium LLC and its operating subsidiaries are collectively
referred to as "Iridium") and a significant portion of a series of Iridium
bonds. Since August 1999, Iridium operated as debtors-in-possession under
Chapter 11 of the U.S. Federal Bankruptcy Code. On March 17, 2000, Iridium
began winding down and liquidating its operations because no qualified bid to
purchase the Iridium satellites was received.
56
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
The Company recorded $2.1 billion, $360 million and $178 million of charges
in 1999, 1998 and 1997 respectively, related to the Iridium program. The Company
recorded a special charge during 1999 of $2.0 billion to: (i) increase its
reserve related to its financial exposure to the Iridium project, (ii) to write-
down the value of the Iridium bonds it holds and (iii) to reserve for assets at
risk and other potential contractual obligations. These reserves and write-downs
are believed by management to be sufficient to cover the Company's current
exposure, but do not include additional special charges that may arise as a
result of litigation related to the Iridium project. There were no special
charges recorded in 1998 or 1997 related to the Iridium project.
The following table presents the Company's provisions for bond investment
write-down and development and commercialization reserves, and the Company's
share of Iridium net losses for the years ended December 31, 1999, 1998 and 1997
and where on the consolidated statements of operations these items are recorded:
Classification of Iridium Charges in Statements of Operations
($ in Millions)
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------ ---------------------------- -----------------------------
Cost of 1999 Cost of 1998 Cost of 1997
Special Charges: SG&A Sales Total SG&A Sales Total SG&A Sales Total
------------------------------ ---------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Bond Investment write-down $ 157 $ - $ 157 $ - $ - $ - $ - $ - $ -
Development & Commercialization
provisions 1,019 806 1,825 - - - - - -
------------------------------ ---------------------------- -----------------------------
Total Special Charges $1,176 $806 $1,982 $ - $ - $ - $ - $ - $ -
------------------------------ ---------------------------- -----------------------------
Other Charges:
Development & Commercialization
Provisions $ 56 $ 31 $ 87 $ 14 $81 $ 95 $ - $132 $ 132
Company's share of Iridium
net losses 50 - 50 265 - 265 46 - 46
------------------------------ ---------------------------- -----------------------------
Total Other Charges $ 106 $ 31 $ 137 $279 $81 $360 $46 $132 $ 178
------------------------------ ---------------------------- -----------------------------
------------------------------ ---------------------------- -----------------------------
Total Charges $1,282 $837 $2,119 $279 $81 $360 $46 $132 $ 178
============================== ============================ =============================
</TABLE>
The Company had equity investments and notes receivable in several Iridium
gateway companies, accounts receivable from Iridium, capital call obligations
and contractual commitments and other obligations in the amount of $1.8 billion
all of which had been reserved or written-off as of December 31, 1999. The
amounts are detailed in the tables that follow.
57
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Company Assets: Dec. 31, Dec. 31,
Investments: 1999 1998
--------- ---------
<S> <C> <C>
Equity investment in Iridium $ - $ 50
Bond investment in Iridium - 157
Investments in and notes receivable
from Iridium gateway companies 39 56
--------- ---------
Total $ 39 $ 263
--------- ---------
Accounts Receivable:
Operations & Maintentance contract
Deferred amount due to Company $ 400 $ -
Other amounts due to Company 179 176
--------- ---------
$ 579 $ 176
Other contracts 82 88
--------- ---------
Total $ 661 $ 264
--------- ---------
Company Guarantees and Other:
Bank Guarantees and Other Financial Commitments:
Senior Secured Credit Agreement Capital Call $ 50 $ 50
Senior Guaranteed Credit Agreement - 750
Conditional Commitment to Provide Guarantee See Below See Below
--------- ---------
Total $ 50 $ 800
--------- ---------
Contractual Commitments and Other Obligations:
Obligations to subcontractors $ 85 $ 109
Assets at risk and other estimated potential
contractual obligations 963 791
--------- ---------
Total $1,048 $ 900
--------- ---------
Total Company Assets and Guarantees $1,798 $2,227
========= =========
Company Development and Commercialzation
Reserves (See table that follows) $1,798 $ 649
========= =========
</TABLE>
The Company accounted 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 communications system and the other
financial commitments more fully discussed below. The Company's equity
investment in Iridium reached zero due to recording its share of Iridium net
losses in the first quarter of 1999 but the Company continued to record
provisions to establish reserves related to its financial commitments and debt
guarantees to Iridium. The Company's equity investments in several Iridium
gateway companies as well as the contra asset related to a valuation reserve was
included in other assets in the consolidated balance sheets. The Company's
portion of Iridium bonds was included in other assets and the bond write-down
was included as a contra-asset in other assets, in the consolidated balance
sheets.
The Company had several contracts with Iridium, primarily for the operation
and maintenance of the global personal communications system. The Company
stopped recognizing revenue on the operations and maintenance contract with
Iridium after the second quarter of 1999, and continued to perform its services
under that contract throughout 1999 without being paid currently, although the
Company has not waived its right to receive payment. The Company had previously
agreed to permit Iridium to defer up to $400 million of amounts owed under its
operations and maintenance contract with the Company. As of December 31, 1999,
the Company had accounts receivable from Iridium relating to the operations and
maintenance contract of
58
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
$579 million and accounts receivable for other contracts with Iridium of $82
million. All of these amounts have been reserved as of December 31, 1999.
The repayment by Iridium of the contractually deferred amounts owed under
the operations and maintenance contract with the Company and the amount of
borrowings by Iridium under the Guaranteed Credit Agreement were subordinated to
repayment of Iridium's Secured Credit Agreement, as was the repayment to the
Company by Iridium of any other amounts the Company paid to the lenders under
its guarantees and certain other obligations owed to the Company. As a result of
the Chapter 11 filing, Iridium was believed unlikely to be able to repay in full
to the Company amounts previously deferred under its various contracts with the
Company and was unlikely to be able to pay amounts which accrued after the
filing and which had not been paid.
The Company has subcontracts for portions of the system, for which it
generally remained obligated in the amount of $85 million as of December 31,
1999. In addition, the Company had investments in assets related to these
contracts which were at risk, such as inventory, manufacturing equipment and
buildings, as well as other potential obligations in connection with these
contracts, the value of which the Company estimated to be approximately $963
million as of December 31, 1999. The Company will incur substantial costs in
winding down operations related to the Iridium program, therefore these
obligations and assets were written down or reserved to zero as of December 31,
1999.
The following table presents the activity of the Company's development and
commercialization reserves for the years December 31, 1999, 1998 and 1997
related to the Iridium project:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Dec. 31, Dec. 31, Dec. 31,
Development and Commercialization Reserves 1999 1998 1997
--------------------------------
Provisions:
<S> <C> <C> <C>
Special Charges $1,825 $ - $ -
Other Charges 87 95 132
--------------------------------
Total Provisions $1,912 $ 95 $132
Amounts Used
Payments under Guaranteed Credit Agreement (743) - -
Interim Funding to Iridium (20) - -
--------------------------------
Development and Commercialization Reserves $1,798 $649 $554
- --------------------------------------------------------------------------------
</TABLE>
The development and commercialization provisions for the years ended
December 31, 1999, 1998 and 1997 are shown in the above table. During 1999 the
Company used $763 million of the development and commercialization reserve
including payment by the Company of $743 million to the banks as payment of
guaranteed amounts under the Senior Guaranteed Credit Agreement and $20 million
in additional funding to Iridium while Iridium sought to attract additional
investment and achieve its financial restructuring.
The development and commercialization reserve as of December 31, 1999 was
$1.8 billion of which $869 million was included in accrued liabilities, $734
million was included as a contra asset, in inventories, $79 million was included
as a contra asset, in property, plant and equipment, $72 million was included as
a contra asset, in other assets, $39 million was included in other liabilities,
$4 million was included in accounts payable, and $1 million was included as a
contra asset, in accounts receivable, in the consolidated balance sheets. The
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 in the consolidated balance sheets. The related reserves for 1997
were $554 million and were included in accrued liabilities in the consolidated
balance sheets.
Additionally in 1999, the Company wrote down its investment in Iridium
bonds. The bond write-down of $157 million is reflected in selling, general and
administrative expenses in the consolidated statements of operations. The bond
write-down of $157 million is reflected as a contra-asset, in other assets, in
the consolidated balance sheets as of December 31, 1999.
Iridium's only outstanding bank facility as of December 31, 1999 was an
$800 million Senior Secured Credit Agreement (the "Secured Credit Agreement").
Iridium was in default under the Secured Credit Agreement and on approximately
$1.4 billion of public debt.
59
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
During most of 1999, Iridium has outstanding a $750 million Senior
Guaranteed Credit Agreement (the "Guaranteed Credit Agreement"). The Guaranteed
Credit Agreement was guaranteed by the Company and Iridium had borrowed all of
the funds available. On November 15, 1999, the Company paid the banks
approximately $743 million to satisfy its guarantee under the Guaranteed Credit
Agreement. With that payment, the Company believes it satisfied all of its
guarantee obligations under this Agreement. By satisfying its guarantee
obligations, the Company avoided paying additional interest and substantial
monthly fees to the banks.
Subject to the automatic stay provisions of Chapter 11, the lenders under
the Secured Credit Agreement could have accelerated Iridium's obligations under
the Secured Credit Agreement and sought to foreclose on their security interests
in substantially all of Iridium's assets. Iridium was subject to a court order
(the "Court Order") which permitted it to make only a limited use of some of the
assets subject to these security interests. The Court Order generally permitted
Iridium, during the term of the Court Order, to pay only specified budgeted
amounts and prohibited Iridium from making any payments to Motorola. The Court
Order was effective through March 17, 2000. In addition, under the Court Order,
Motorola has no obligation to continue providing those services to Iridium after
March 17, 2000 since it is not being paid for those services.
The Company had agreed under a Memorandum of Understanding to provide a
guarantee of up to an additional $350 million of Iridium debt for Iridium's use,
subject to certain conditions. Iridium requested Motorola to provide this
guarantee during the third quarter of 1999, however, Motorola believes it was
not obligated to do so. In certain circumstances and subject to certain
conditions, $300 million of such guarantee could have been required to be used
to guarantee amounts borrowed under the Secured Credit Agreement. The lenders
under the Secured Credit Agreement asserted that Iridium failed to have the
Company provide such guarantee as required, and that the Company was obligated
to provide them with this $300 million guarantee. The Company believes that it
was not obligated to do so. Iridium has also stated that it believed it was not
obligated to have the Company provide this $300 million guarantee to these
lenders. The lenders under the Secured Credit Agreement have also demanded that
the investors in Iridium comply with their capital call requirements. In the
Company's case, this could require an additional equity investment of $50
million.
During the fourth quarter of 1999, Motorola led a group of investors in
providing a $20 million funding commitment to Iridium. It was used by Iridium
to fund its on-going operations through February 15, 2000 while it sought to
attract additional investment and achieve its financial restructuring. Iridium
continued discussions with its lenders and creditors regarding plans to
restructure its debt and Motorola worked with Iridium and its other investors to
find viable restructuring options.
On February 17, 2000, the Company and Eagle River Investments, LLC provided
an additional $5 million of funding which Iridium used to fund its on-going
operations through March 6, 2000 while Eagle River Investments, LLC developed a
follow-up financing plan for submission to the bankruptcy court. Eagle River
Investments, LLC subsequently did not submit that plan and, on March 6, 2000,
the lenders under the Secured Credit Facility allowed Iridium to use $3 million
of funds for permitted expenses while Iridium sought a qualified bid for their
assets.
Creditors and other stakeholders in Iridium may seek to bring various
claims against the Company, with respect to payments previously made by Iridium
to the Company, and otherwise. A number of purported class action lawsuits
alleging securities law violations have been filed naming Iridium, certain
current and former officers of Iridium, other entities and the Company as
defendants.
- --------------------------------------------------------------------------------
9. Commitments and Contingencies: Other
Financial
- ---------
At December 31, 1999, the Company's percentage ownership in Nextel
Communications, Inc. (Nextel) was approximately 16%. The cost basis and fair
value of the Nextel investment were $807 million and $5.2 billion, respectively,
at December 31, 1999. The investment is included in other assets in the
supplemental consolidated balance sheets. The off-balance sheet commitment to
Nextel for equipment financing aggregated $457 million at December 31, 1999.
This amount represents the maximum available commitment and may not be
completely utilized by Nextel. At December 31, 1999, approximately $254 million
of this commitment was outstanding.
Excluding Iridium and Nextel, the Company has other off-balance sheet
financial guarantees aggregating approximately $825 million of which
approximately $609 million was outstanding at December 31, 1999.
As of December 31, 1999, approximately $797 million of the $1.7 billion in
long-term finance receivables relates to one customer. Except as stated in this
Note and in Note 8, the Company has no other significant concentrations of
credit risk as of December 31, 1999.
60
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
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 $87 million and $86 million at
December 31, 1999 and 1998, respectively. The amount of such charges to earnings
was $15 million, $12 million and $36 million in 1999, 1998 and 1997,
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.
In the third quarter of 1999, the Company recorded a $43 million charge
related to an American Arbitration Association panel's interim decision in a
breach of contract dispute. Based upon a Determination of Arbitrators issued on
February 29, 2000, the Company recorded an additional charge of $15 million in
the fourth quarter of 1999.
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.
- --------------------------------------------------------------------------------
10. Information by Segment and Geographic Region
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 the 1998 year-end reporting, the Company continued to use
the previous segments because the Company's management made operating decisions
and assessed performance based on these segments. With the completion of the
realignment in 1999, the Company changed its segment reporting. On January 5,
2000, the Company and General Instrument Corporation completed their previously
announced merger. The new Broadband Communications Segment, which combines the
operations of General Instrument with the cable modem and cable telephony
businesses of the Company's Internet and Networking Group, was created.
As a result of these developments, the Company has restated previously
reported segment information to reflect the realignment and the merger with
General Instrument in conformance with the management approach of Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information", which the Company implemented as of
January 1, 1998.
The Company's new reportable segments have been determined based on the
nature of the products offered to customers. The Personal Communications Segment
focuses 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 Systems Segment focuses on providing total system solutions
for telecommunications carriers and operators. This segment includes the
Company's cellular infrastructure, iDEN infrastructure and satellite
communications infrastructure businesses. The Commercial, Government and
Industrial Systems Segment focuses on the commercial, governmental and
industrial markets, providing integrated communications solutions, including
infrastructure and non-consumer two-way radio products. The Broadband
Communications Segment will focus on solutions that deliver interactive
television, the Internet and telephone services over wired networks. The
Semiconductor Products Segment continues to focus on the design, manufacture and
distribution of integrated semiconductor solutions and components. The Other
Products segment is comprised primarily of the Integrated Electronic Systems
Sector (which primarily manufactures and sells automotive and industrial
electronics); Internet and Networking Group (which focuses on the development of
servers, applications and internet solutions); the Network Management Group
(which continues to hold and manage investments in terrestrial and satellite-
based network operators); other corporate programs; and Next Level
Communications, Inc. (a publicly traded subsidiary in which the Company acquired
an approximately 64% ownership interest on a fully diluted basis through the
merger with General Instrument).
The accounting policies of the segments are the same as those described in
Note 1 Company Background and Summary of Significant Accounting Policies.
Segment operating results are measured based on profit (loss) before income tax
adjusted, if necessary, for certain segment specific items and corporate
allocations. 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, $2.9 billion and
61
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
$3.2 billion for the years ended December 31, 1999, 1998 and 1997, respectively.
These sales were primarily from the Semiconductor Products Segment and the
Integrated Electronic Systems Sector. Intersegment sales from the Semiconductor
Products Segment were $1.7 billion for the years ended December 31, 1999 and
1998, and $1.8 billion for the year ended December 31, 1997. For these same
periods, intersegment sales from the Integrated Electronic Systems Sector were
$0.8 billion, $0.9 billion and $1.0 billion, respectively. Net sales by
geographic region are measured by the location of the revenue-producing
operations.
Domestic export sales to third parties were $2.6 billion, $3.2 billion and
$4.3 billion for the years ended December 31, 1999, 1998 and 1997, respectively.
Domestic export sales to affiliates were $6.7 billion, $5.1 billion and $7.1
billion for the years ended December 31, 1999, 1998 and 1997, respectively.
Identifiable assets (excluding intersegment receivables) are the Company's
assets that are identified with classes of similar products or operations in
each geographic region. General corporate assets primarily include cash and cash
equivalents, marketable securities, cost- and equity-based investments, the fair
value adjustment of certain cost-based investments and the administrative
headquarters of the Company.
In 1999, 1998 and 1997, no single customer or group under common control
represented 10% or more of the Company's sales.
62
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
Segment information
<TABLE>
<CAPTION>
Net Sales Operating Profit (Loss) Before Taxes
----------------------------- -----------------------------------------------------------
Years ended December 31 1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Personal Communications
Segment $ 11,932 $10,132 $ 11,026 $ 608 5.1% $ (373) (3.7%) $ 1,122 10.2%
Network Systems Segment 6,544 7,064 6,061 (479) (7.3%) 819 11.6% 618 10.2%
Commercial, Government and
Industrial Systems Segment 4,068 4,079 4,037 609 15.0% 412 10.1% 345 8.6%
Broadband Communications
Segment 2,532 2,177 1,855 294 11.6% 169 7.8% (57) (3.1%)
Semiconductor Products
Segment 7,370 7,314 8,003 619 8.4% (1,225) (16.7%) 168 2.1%
Other Products Segment 3,396 3,434 3,764 (440) (13.0%) (971) (28.3%) (271) (7.2%)
Adjustments and
Eliminations (2,767) (2,860) (3,248) (4) 0.1% 15 (0.5%) (48) 1.5%
-------- ------- -------- ------- ------- -------
Segment totals $ 33,075 $31,340 $ 31,498 1,207 3.6% (1,154) (3.7%) 1,877 6.0%
-------- ------- --------
General corporate 76 (126) (71)
------- ------- -------
Earnings (loss) before
income taxes $ 1,283 3.9% $(1,280) (4.1%) $ 1,806 5.7%
- ----------------------------------------------------------------------------------------------------------------------------------
Assets Capital Expenditures Depreciation Expense
----------------------------- ----------------------------- --------------------------
Years ended December 31 1999 1998 1997 1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Personal Communications
Segment $ 6,411 $ 5,476 $ 6,105 $ 450 $ 442 $ 749 $ 398 $ 422 $ 539
Network Systems Segment 7,414 6,177 4,655 262 345 415 260 222 249
Commercial, Government and
Industrial Systems Segment 2,509 2,110 2,102 152 224 180 170 146 161
Broadband Communications
Segment 3,346 2,191 1,643 175 92 69 76 58 61
Semiconductor Products
Segment 7,872 8,232 7,947 1,505 1,783 1,153 1,131 1,178 1,169
Other Products Segment 3,938 3,429 3,100 180 162 122 131 184 167
Adjustments and
Eliminations (1,401) (424) (463) -- -- -- -- -- --
-------- ------- -------- ------- ------- ------- ------ ------- -------
Segment totals 30,089 27,191 25,089 2,724 3,048 2,688 2,166 2,210 2,346
General corporate 10,400 3,760 3,865 132 265 266 77 45 48
-------- ------- -------- ------- ------- ------- ------ ------- -------
Consolidated totals $ 40,489 $30,951 $ 28,954 $ 2,856 $ 3,313 $ 2,954 $2,243 $ 2,255 $ 2,394
- ----------------------------------------------------------------------------------------------------------------------------------
Interest Income Interest Expense Net Interest
----------------------------- ------------------------------ -------------------------
Years ended December 31 1999 1998 1997 1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Personal Communications
Segment $ 17 $ 21 $ 21 $ 61 $ 73 $ 48 $ (44) $ (52) $ (27)
Network Systems Segment 1 -- -- 30 33 12 (29) (33) (12)
Commercial, Government and
Industrial Systems Segment -- 2 4 15 17 14 (15) (15) (10)
Broadband Communication
Segment 19 4 5 3 4 11 16 -- (6)
Semiconductor Products
Segment 6 12 12 81 116 71 (75) (104) (59)
Other Products Segment 2 6 2 32 29 13 (30) (23) (11)
-------- ------- -------- ------- ------- ------- ------ ------- -------
Segment totals 45 45 44 222 272 169 (177) (227) (125)
General corporate 124 44 46 85 32 57 39 12 (11)
-------- ------- -------- ------- ------- ------- ------ ------- -------
Consolidated totals $ 169 $ 89 $ 90 $ 307 $ 304 $ 226 $ (138) $ (215) $ (136)
- -----------------------------------------------------------------------------------------------------------------------------------
Geographic area information
Property, Plant, and
Net Sales Assets Equipment
------------------------------ ----------------------------- --------------------------
Years ended December 31 1999 1998 1997 1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
United States $ 21,937 $22,221 $ 23,364 $17,039 $16,967 $15,535 $5,391 $ 5,433 $ 5,819
United Kingdom 6,316 5,829 5,388 2,235 2,125 2,137 948 1,000 888
Other nations 20,802 12,856 12,853 13,458 8,954 8,073 2,733 3,318 2,979
Adjustments and
Eliminations (15,980) (9,566) (10,107) (2,643) (855) (656) (88) (134) (111)
-------- ------- -------- ------- ------- ------- ------ ------- -------
Geographic totals $ 33,075 $31,340 $ 31,498 30,089 27,191 25,089 8,984 9,617 9,575
-------- ------- --------
General corporate 10,400 3,760 3,865 607 669 518
------- ------- ------- ------ ------- -------
Consolidated totals $40,489 $30,951 $28,954 $9,591 $10,286 $10,093
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
63
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Special Items
---------------------------------------
Years ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (Expense)
Personal Communications Segment
Iridium Related $ (97) $ -- $ --
Restructuring & Other 112 (597) --
Sales of Investments and Businesses 10 118 15
In-Process Research and Development (7) -- --
Miscellaneous -- -- (35)
------- ------- -----
18 (479) (20)
Network Systems Segment
Iridium Related $(1,325) $ -- $ --
Restructuring & Other 67 (159) --
In-Process Research and Development (14) -- --
Miscellaneous -- (8) --
------- ------- -----
(1,272) (167) --
Commercial, Government and Industrial
Systems Segment
Iridium Related $ (8) $ -- $ --
Restructuring & Other -- (127) --
Sales of Investments and Businesses 198 90 --
In-Process Research and Development (4) -- --
Miscellaneous -- (9) 10
------- ------- -----
186 (46) 10
Broadband Communications Segment
Sales of Investments and Businesses $ 67 $ 11 $ 11
Miscellaneous (84) (41) (111)
------- ------- -----
(17) (30) (100)
Semiconductor Products Segment
Restructuring & Other $ -- $ (731) $(170)
Sales of Investments and Businesses 373 -- --
In-Process Research and Development (42) -- --
Miscellaneous -- (21) (4)
------- ------- -----
331 (752) (174)
Other Products Segment
Iridium Related $ (552) $ -- $ --
Restructuring & Other 47 (366) (157)
Sales of Investments and Businesses 384 38 44
In-Process Research and Development -- (109) --
Miscellaneous (105) (65) 19
------- ------- -----
(226) (502) (94)
Segment totals (980) (1,976) (378)
General Corporate
Sales of Investments and Businesses $ 148 $ 4 $ --
Miscellaneous -- (10) (28)
------- ------- -----
148 (6) (28)
Total special items $ (832) $(1,982) $(406)
</TABLE>
- --------------------------------------------------------------------------------
11. 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
64
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
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.
- --------------------------------------------------------------------------------
12. Reorganization of Businesses
In the second quarter of 1998, the Company recorded, as a separate line in
the supplemental 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 ("1998 Program"). Restructuring
costs included 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 tables display
rollforwards of the accruals established during the second quarter of 1998 for
the year ended December 31, 1999, and from June 27, 1998, to December 31, 1998:
1998 Program
- ------------
<TABLE>
<CAPTION>
Fourth Quarter
Accruals at 1999 Amounts 1999 Reversals Into Accruals at
Dec. 31, 1998 Used Income Dec. 31, 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consolidation of manufacturing
operations $155 $(143) $ -- $12
Business exits 137 (31) (102) 4
Employee separations 187 (136) (40) 11
---- ----- ----- ---
Total restructuring $479 $(310) $(142) $27
---- ----- ----- ---
Asset impairments and other charges 161 (77) (84) --
- ----------------------------------------------------------------------------------------------------------------------------
Totals $640 $(387) $(226) $27
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Second 1998 Accruals at
Quarter 1998 Reclassifi- Initial Charges 1998 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>
The 1998 Program reached its planned completion at December 31, 1999. At
that time, the Company reversed into income $226 million, shown as a separate
line in the supplemental consolidated statements of operations, for accruals no
longer required. The remaining $27 million in accruals at December 31, 1999,
represent cash payments to be made by the end of the first quarter of 2000.
The 1999 amount used of $387 million reflects approximately $189 million in
cash payments and $198 million in write-offs. The 1998 amount used of $1.34
billion reflects approximately $600 million in cash payments and $740 million in
write-offs.
Amounts in the 1998 Reclassifications column represent the reallocation of
accruals in 1998 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 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
65
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
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 separations costs originally
accrued for in the consolidation of manufacturing operations and business exits
to employee separations in the fourth quarter of 1998.
In July 1998, the Company's communications-related businesses began
realigning into the Communications Enterprise, a structure intended to enable
the development of integrated communications technology solution offerings to
customers and improved responsiveness to customers' needs. This realignment
resulted in the formation of some new reportable segments. The following table
displays by category the restructuring and other charges, as adjusted, according
to the revised reportable segments and included in the segments' restated
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
------------------------------ ---------------------
Asset
Consol of Business Employee Impair
Segment mfg. ops. exits separations -ments Other Total
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Personal Communications $113 $ 38 $149 $175 $122 $ 597
Network Systems 11 --- 44 --- 104 159
Commercial, Government and
Industrial Systems 18 --- 104 5 --- 127
Semiconductor Products 163 101 282 159 26 731
Other Products 21 152 79 41 73 366
Total $326 $291 $658 $380 $325 $1,980
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Consolidation of manufacturing operations
- -----------------------------------------
Consolidation of manufacturing operations charges related 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, disposing 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. 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 and Personal Communications segments. Semiconductor
facilities in North Carolina, California, Arizona and the Philippines were
closed as planned, while in other areas, production facilities were consolidated
into fewer integrated factories to achieve economies of scale and improved
efficiencies and to capitalize on newer technologies that reduced operating
costs. As a result of excess global manufacturing capacity, the paging facility
in Vega Baja, Puerto Rico was closed. Paging facilities in Singapore and Canada
and cellular facilities in Northern Illinois were realigned. Since 1998,
approximately $255 million was used for these consolidation activities. The
remaining $12 million accrual, included in accrued liabilities in the
supplemental consolidated balance sheets, as of December 31, 1999, for this
restructuring category relates to the finalization of plant closings in both of
these segments.
Business exits
- --------------
Business exit charges included costs associated with shutting down
businesses that no longer fit the Company's strategic direction. In many cases,
these businesses used older technologies that produced non-strategic products.
Included in these business exit costs were the costs for terminating technology
agreements and for selling or liquidating interests in joint ventures. Severance
costs included in this category were 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
66
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
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 focused in the Integrated Electronic
Systems sector. During the third quarter of 1998, the Integrated Electronic
Systems Sector 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 businesses was not significant to
the Company's results of operations.
The Company reversed into income in the fourth quarter of 1999
approximately $102 million for accruals no longer required for the contract
requirements and contingencies related to the sales of its printed circuit board
business and non-silicon component manufacturing business and the business
pruning activities of the Semiconductor Products segment. The remaining $4
million accrual, included in accrued liabilities in the supplemental
consolidated balance sheets, as of December 31, 1999, for this restructuring
category relates to the payment of final shut down costs for these actions,
expected to occur early in 2000.
Employee separations
- --------------------
Employee separation charges 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 accepted special voluntary
termination benefits in future periods, additional accruals, under a new
program, would be necessary and recognized in expense at the date of acceptance
by the employees. No new programs were implemented during 1999.
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.
The Company's successful redeployment efforts reduced the severance
requirement in the fourth quarter of 1999. Therefore, the Company reversed into
income in the fourth quarter of 1999 approximately $40 million of accruals no
longer required for a cancelled separation plan involving approximately 500
employees. As of December 31, 1999, approximately 19,400 employees have
separated from the Company through a combination of voluntary and involuntary
severance programs. Of these 19,400 separated employees, approximately 12,400
were direct employees, and 7,000 were indirect employees. Direct employees are
primarily non-supervisory production employees, and indirect employees are
primarily non-production employees and production managers. In addition, 4,200
employees separated from the Company with the sale of the non-silicon component
manufacturing business. These 4,200 people were not paid any severance because
the business was sold to another corporation. The remaining $11 million accrual,
included in accrued liabilities in the supplemental consolidated balance sheets,
as of December 31, 1999, relates to severance payments still to be completed in
the Semiconductor Products Segment, Integrated Electronic Systems Sector, and
Internet and Networking Group bringing the total employees separated to 19,500.
Asset impairments and other charges
- -----------------------------------
As a result of then current and projected business conditions, the Company
wrote down operating assets that became impaired. All impaired asset write downs
were reflected as contra-assets in the supplemental 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
67
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
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 Personal Communications segment.
The segments primarily impacted by these asset writedowns were Personal
Communications, Network Systems and Semiconductor Products. Assets held for use
continue to be depreciated based on an evaluation of their remaining useful
lives and their ultimate values upon disposition. There were 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 were not restructuring charges, but
rather were primarily comprised of contract termination costs related to
agreements that were associated with businesses in which the Company was no
longer making investments, 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
Company reversed into income in the fourth quarter of 1999 approximately $84
million of accruals no longer required for contract termination costs previously
deemed probable to occur.
1997 Programs
- -------------
During 1997, the Company recorded restructuring charges of $327 million
resulting from decisions to exit several unprofitable businesses that no longer
had long-term strategic value to the Company. The following tables display
rollforwards of the accruals established by business exit for the years ended
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Accruals Accruals
at Dec. Adjust Amounts at Dec.
31, 1998 -ments Used 31, 1999
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Q2 1997: Semiconductor Products
Segment
Exit from DRAM market $ 8 $(3) $(5) $ ---
- ----------------------------------------------------------------------------------------------------------
Q3 1997: Other Products Segment
Exit from MacOS-compatible
computer systems business 15 - (2) 13
- ----------------------------------------------------------------------------------------------------------
Q4 1997: Former Messaging,
Information and Media
Products Segment
Exit from retail analog
modem business 3 (3) - ---
- ----------------------------------------------------------------------------------------------------------
Grand Total $26 $(6) $(7) $13
==========================================================================================================
</TABLE>
<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 $170 $(9) $(131) $ 30 $(12) $ (10) $ 8
Segment
Exit from DRAM market
- ------------------------------------------------------------------------------------------------------------------------------------
Q3 1997: Other Products Segment
Exit from MacOS-compatible
computer systems business 95 - (28) 67 (10) (42) 15
- ------------------------------------------------------------------------------------------------------------------------------------
Q4 1997: Former Messaging,
Information and Media
Products Segment
Exit from retail analog
modem business 62 - - 62 - (59) 3
- ------------------------------------------------------------------------------------------------------------------------------------
Grand Total $327 $(9) $(159) $159 $(22) $(111) $26
====================================================================================================================================
</TABLE>
68
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
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 amounts
used in 1999 reflect $4 million in cash payments for exit fees and $1 million in
write-offs. The remaining $3 million was reversed into income in the third
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. The decision was made in response to a decision by Apple
Computer to limit the introduction of its new technology and phase out future
licenses and 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 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
determined to be less than previously 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 amounts used in 1999 reflect $2 million in write-offs. The
remaining $13 million accrual as of December 31, 1999, relates to contractual
commitments and warranty liability and may extend past the 2000 year end.
In the fourth quarter of 1997, the Company announced its decision to exit
the retail analog modem business based in Huntsville, AL. This business was
formerly part of the Messaging, Information and Media segment. 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 as of December 31, 1998, was reversed
into income in the first quarter of 1999.
The results of operations of each of these exited businesses were not
material to the Company's supplemental consolidated financial statements.
- --------------------------------------------------------------------------------
13. Acquisitions and Dispositions of Businesses
The following table summarizes the major business dispositions and
acquisitions involving acquired in-process research and development write-offs
that the Company made during 1999:
<TABLE>
<CAPTION>
In-Process
Research and
Quarter Form of Development
(in millions) Acquired/Disposed Consideration Consideration Charge
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Acquisitions:
Digianswer A/S Q4 1999 $ 45 Cash $14
Assumed Liabilities
Software Corporation of America, Inc. Q4 1999 $ 28 Cash $ 4
Metrowerks, Inc. Q3 1999 $ 98 Cash $35
Bosch Telecom, Inc./SpectraPoint
Wireless LLC Q3 1999 $ 45 Cash $14
Dispositions:
Semiconductor Components Group Q3 1999 $1,600 Cash Not Applicable
Notes
Common Stock
North American Antenna Sites Q3 1999 $ 255 Cash Not Applicable
</TABLE>
69
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C> <C>
Common Stock
Component Products Group Q1 1999 $ 136 Cash Not Applicable
Transfer of Debt
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's acquisitions of Digianswer A/S, Software Corporation of America,
Inc., Metrowerks, Inc. and Bosch Telecom, Inc./SpectraPoint Wireless LLC in 1999
resulted in a total of approximately $67 million in acquired in-process research
and development charges. These charges were recorded in selling, general and
administrative expenses in the Company's supplemental consolidated statements of
operations. Historical pricing, margins, and expense levels were used in the
valuation of the in-process products. The allocation of value to in-process
research and development was determined using expected future cash flows
discounted at average risk adjusted rates. The rate used for Digianswer,
Software Corporation of America and Metrowerks was 22%, and the rate used for
Bosch Telecom, Inc./SpectraPoint Wireless LLC was 20%. These rates reflect
technological and market risk and the time value of money.
In addition to the acquired in-process research and development charges, the
Company recorded a total of approximately $126 million in goodwill and other
intangibles which are to be amortized over a period of five years. The goodwill
and other intangibles were recorded in other assets in the Company's
supplemental consolidated balance sheets.
Each acquisition was accounted for under the purchase method and accordingly,
the results of operations for each acquiree have been included in the Company's
supplemental consolidated financial statements since the date of acquisition or
formation in the case of Spectrapoint. The pro forma effects of the acquisitions
on the Company's financial statements were not material.
Digianswer A/S
- --------------
In December of 1999, the Company acquired from Olicom A/S an 83% ownership
interest in Digianswer A/S for approximately $45 million in cash and assumed
liabilities. Digianswer A/S specializes in developing short-range connectivity
solutions based on the Bluetooth open specification. This technology allows
users to make effortless and instant connections between a wide range of
communication devices. At the acquisition date, a total of 7 projects were in
process and were in various stages of completion ranging from 40% to 74%. The
in-process research will have no alternative future uses if the products are not
feasible. Revenues from in-process products are estimated primarily beginning in
the third quarter of 2000, with projected research and development costs-to-
complete of approximately $3 million.
Software Corporation of America, Inc.
- -------------------------------------
In October of 1999, the Company acquired Software Corporation of America, Inc.
(SCA) for approximately $28 million in cash. SCA develops and markets
application software and middleware communications tools to provide wireless
data solutions for law enforcement and other public safety personnel for real-
time access to federal, state and local databases. SCA's software enables access
to legacy host systems, integrates with various Computer Aided Dispatch (CAD)
and Records Management Systems (RMS), and provides two-way messaging between
dispatch and the vehicle, in-vehicle report writing with wireless transmission,
in-vehicle mapping, GPS and Automatic Vehicle Location (AVL) integration, and
text-to-voice capabilities. At the acquisition date, 3 projects were in process
and were in various stages of completion ranging from 20% to 65%. The in-process
research will have no alternative future uses if the products are not feasible.
Revenues from in-process products are estimated primarily beginning in the
second quarter of 2000, with projected research and development costs-to-
complete of approximately $1 million.
Metrowerks, Inc.
- ----------------
In September and October of 1999, the Company purchased all of the outstanding
common shares of Metrowerks, Inc. for approximately $98 million. Metrowerks,
Inc. designs, develops, markets, and supports professional software development
tools used by programmers to create software applications. Its flagship product
line is called CodeWarrior(R). A total of 32 projects were in process at the
acquisition date. These projects were related to the development of software
development tools for the desktop and embedded markets. This in-process research
will have no alternative future uses if the products are not feasible. Revenues
from in-process products are estimated primarily beginning in the first quarter
of 2000, with projected research and development costs-to-complete of
approximately $12 million.
Bosch Telecom, Inc./SpectraPoint Wireless LLC
- ---------------------------------------------
In July, 1999, the Company and Cisco Systems, Inc. purchased the fixed wireless
assets of Bosch Telecom, Inc. and created a new, jointly owned company called
SpectraPoint Wireless LLC. The Company paid approximately $45 million in cash
for its 81% ownership. SpectraPoint Wireless LLC is in the process of developing
a point-to-multipoint (PMP) broadband wireless access system using 28 GHz radio
frequency (RF) equipment. Combining RF equipment with advanced ATM processing
and modem technology yields a flexible system that delivers network services to
Local Multi-Point Distribution System (LMDS) customers. The system couples a
shared broadband downstream carrier with dedicated Frequency Division Multiple
Access (FDMA) carriers operating in the range of 2-10 Mbps upstream. The system
development was approximately 70% complete at the acquisition date. The in-
process research will have no alternative future uses if the products are not
feasible. Revenues from
70
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
in-process products are estimated primarily beginning in the second quarter of
2000, with projected research and development costs-to-complete of approximately
$14 million.
Semiconductor Components Group
- ------------------------------
In August, 1999, the Company completed the sale of the Semiconductor Components
Group (SCG). The Company received approximately $1.6 billion in cash, notes and
approximately 9% of the stock of the new company. The sale resulted in a $360
million gain included in selling, general and administrative expenses in the
supplemental consolidated statements of operations. Through the date of
disposition, SCG had 1999 net sales and operating profits of approximately $894
million and $113 million, respectively.
North American Antenna Sites
- ----------------------------
In August, 1999, the Company completed the sale of its North American antenna
site business to Pinnacle Towers for $245 million in cash and $10 million in
common stock of Pinnacle Holdings. The sale resulted in a $198 million gain
included in selling, general and administrative expenses in the supplemental
consolidated statements of operations. The transaction involved all the assets
and operations of the business, which included a portfolio of approximately
1,850 wireless communications facilities located throughout the U.S. and Canada
that were owned, managed or leased by the Company. Through the date of
disposition, this business had 1999 net sales and operating profits of
approximately $56 million and $8 million, respectively.
Component Products Group
- ------------------------
In February, 1999, the Company completed the sale of its non-silicon component
manufacturing business to CTS Corp. for $136 million in cash and release from a
debt obligation. The sale resulted in no gain or loss. Through the date of
disposition, this business had 1999 net sales of approximately $27 million and
no operating profit or loss.
The following table summarizes the major business acquisitions involving
acquired in-process research and development write-offs and a significant
intangible asset purchase that the Company made during 1998:
<TABLE>
<CAPTION>
In-Process
Research and
Quarter Form of Development
(in millions) Acquired Consideration Consideration Charge
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Appeal Telecom Comp., Ltd. Q4 1998 $ 49 Cash $ 16
Starfish Software, Inc. Q3 1998 $253 Cash $109
Common Stock
Assumed Options
and Liabilities
License Asset Purchase Q3 1998 $400 Common Stock Not Applicable
NetSpeak Corp. Q2 1998 $ 82 Cash $ 42
- ----------------------------------------------------------------------------------------
</TABLE>
The Company's acquisitions of Appeal Telecom Company, Ltd. (Appeal), Starfish
Software, Inc. (Starfish) and NetSpeak Corp. (NetSpeak) in 1998 resulted in a
total of approximately $167 million in acquired in-process research and
development charges. The charges for Appeal and Starfish were recorded in
selling, general and administrative expenses in the Company's supplemental
consolidated statements of operations. The charge for NetSpeak was recorded in
restructuring and other charges in the supplemental consolidated statements of
operations as it represented a charge arising from an investment in an equity
investee as opposed to a consolidated subsidiary. Historical pricing, margins,
and expense levels were used in the valuation of the in-process products. The
allocation of value to in-process research and development was determined using
expected future cash flows discounted at average risk adjusted rates. The rate
used for Appeal and Netspeak was 18%, and the rate used for Starfish was 22%.
These rates reflect technological and market risk and the time value of money.
In addition to the acquired in-process research and development charges, the
Company recorded a total of approximately $195 million in goodwill and other
intangibles which are to be amortized over a period of three years for Appeal
and five years for Starfish and NetSpeak. The goodwill and other intangibles
were recorded in other assets in the Company's supplemental consolidated balance
sheets.
The acquisitions of Appeal and Starfish were accounted for under the purchase
method and accordingly, the results of operations for each acquiree have been
included in the Company's supplemental consolidated financial statements since
the date 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 supplemental consolidated financial statements were not material.
71
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
Appeal Telecom Company, Ltd.
- ----------------------------
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. 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 was targeted throughout 1999, with projected research and
development costs-to-complete of approximately $1.4 million.
Starfish Software, Inc.
- -----------------------
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.
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.
NetSpeak Corp.
- --------------
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.
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.
License Asset Purchase
- ----------------------
On June 17, 1998, the Company entered into an Asset Purchase Agreement (the
"Agreement") with two affiliates of Tele-Communications, Inc. ("TCI", which on
March 9, 1999, was merged into a wholly-owned subsidiary of AT&T Corp.). The
transaction was consummated on July 17, 1998. In exchange for approximately
12.3 million shares of the Company's common stock, the Company acquired from TCI
certain assets, consisting primarily of a license to certain intellectual
property which will enable the Company to conduct authorization services.
The Company's provision of services under the license is intended to provide the
cable industry with a secure access control platform to support widespread
deployment of digital terminals and related systems and applications. The
Agreement provides the Company with minimum revenue guarantees from TCI over the
first nine years from the date of closing and gives the Company the right to
license the technology for a period of 20 years. The Agreement contains a
provision for TCI to pay the Company $50 million over the first five years from
the date of closing in equal monthly installments which represents a reduction
of the purchase price. The present value of the $50 million note receivable was
recorded in other current assets and other assets in the supplemental
consolidated balance sheets. The net purchase price of $400 million was
allocated to the license and the assets acquired based on their respective
estimated fair values. The fair value of assets acquired included property,
plant and equipment of $2 million, deferred tax liabilities of $30 million and a
license of $428 million.
The Company is amortizing the cost of the license over its 20-year term based on
the expected revenue stream. The revenue earned from the license is solely
dependent on the Company's deployment of digital terminals. Such deployment is
expected to rise significantly during the 20-year license term as supported by
industry data and the Company's contractual obligations with customers. The
Company believes the expected revenue stream is a reliable measure of the future
benefit of the license both in the aggregate and in terms of the periods to
which such benefit will be realized. Accordingly, the Company believes this
method of amortization is a more appropriate method than straight-line. At each
reporting date, the Company's method of amortization requires the determination
of a fraction, the numerator of which is the actual revenues for the period and
the denominator of
72
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
which is the expected revenues from the license during its 20-year term. Under
the Company's method, amortization for the year ended December 31, 1999, and the
period from July 17, 1998 to December 31, 1998 was approximately $3.3 million
and $0.7 million, respectively.
Developmental products for the companies acquired in 1999 and 1998 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.
- --------------------------------------------------------------------------------
14. The Next Level Communications Business
In January 1998, the Company transferred at historical cost the net assets
of its Next Level Communications ("NLC") subsidiary purchased in 1995, the
underlying NLC technology related to the design and marketing of a next-
generation telecommunication broadband access system for the delivery of
telephony, video and data from a telephone company central office to the home,
and the management and workforce of NLC to a newly formed Partnership in
exchange for approximately an 89% limited partnership interest (subject to
additional dilution). This transaction was accounted for at historical cost. The
operating general partner, which was formed by Spencer Trask & Co. (an unrelated
third party), acquired approximately an 11% interest in the Partnership and had
the potential to acquire up to an additional 11% in the future. Net assets
transferred to the Partnership of $45 million primarily included property, plant
and equipment, inventories and accounts receivable partially offset by accounts
payable and accrued expenses.
Pursuant to the Partnership agreement, the operating general partner
controlled the Partnership and was responsible for developing the business plan
and infrastructure necessary to position the Partnership as a stand-alone
company. The Company, as the limited partner, had certain protective rights,
including the right to approve an alteration of the legal structure of the
Partnership, the sale of the Partnership's principal assets, the sale of the
Partnership and a change in the limited partner's financial interests in the
Partnership. The Company could not remove the general partner, except for cause.
However, it had the right to approve a change in the general partner. Since the
operating general partner controlled the day-to-day operations of the
Partnership and had the ability to make decisions typical of a controlling
party, including the execution of agreements on all material matters affecting
the Partnership's business, the Partnership's operating results were not
consolidated with the operating results of the Company subsequent to the January
1998 transfer.
In addition, in January 1998, the Company advanced $75 million to the
Partnership in exchange for an 8% debt instrument (the "Note"). The Note
contained normal creditor security rights, including a prohibition against
incurring amounts of indebtedness for borrowed money in excess of $10 million.
Since the repayment of the Note was solely dependent upon the results of the
Partnership's research and development activities and the commercial success of
its product development, the Company recorded a charge to research and
development expenditures during the quarter ended March 28, 1998 to fully
reserve for the Note concurrent with the funding. The proceeds of the Note were
utilized to fund the research and development activities of the Partnership
through October 1999 to develop the aforementioned telecommunication technology
for widespread commercial deployment. The Company's share of the Partnership's
losses related to future research and development activities were offset against
the $75 million reserve discussed above. The Company eliminated its interest
income from the Note against the Partnership's related interest expense on the
Note. During 1998 and 1999, the Company made additional equity investments in
the Partnership aggregating $50 million to fund the Partnership's growth and
assist the Partnership in meeting its forecasted working capital requirements.
On November 9, 1999, Next Level Communications, Inc. ("NLCI") priced its
initial public offering ("IPO") of 8.5 million shares of common stock, 9.8
million shares including the exercise of the underwriters' over-allotment, at
$20 per share. NLCI is the corporate successor to the Partnership. In connection
with this offering, the Partnership and the Company's wholly-owned subsidiary
(the limited partner) were merged into NLCI, and the Company contributed the
Note and accrued interest thereon to NLCI in exchange for approximately 64.1
million shares of NLCI common stock. This represented approximately 80% of the
shares outstanding immediately after the offering (approximately 64% on a fully
diluted basis) after giving effect to the exercise of the underwriters' over-
allotment option. The Company deposited all of its shares into a voting trust
that limited its voting power to 49% of all outstanding shares of common stock.
Accordingly, the Company continued to account for its ownership interest as an
investment under the equity method of accounting throughout 1999. The voting
trust terminated on January 5, 2000. As such, the results of operations of NLCI
will be consolidated into the Company's results of operations from this date
forward.
In connection with the IPO, the Company's ownership interest in NLCI was
diluted from approximately 90% to 80%. In conjunction with its decrease in
ownership interest, the Company recorded a net dilution gain of $82 million
($128 million
73
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
before taxes) to additional paid-in capital. Upon completion of the IPO, NLCI
recorded a pre-tax charge of $128 million related to non-cash compensation
expense associated with outstanding employee stock options. The Company's
proportionate share in this compensation expense is included in selling, general
and administrative expenses in the supplemental consolidated statements of
operations.
For the years ended December 31, 1999 and 1998, the Company's share of the
Partnership's losses (and NLCI's losses subsequent to the IPO) were $136
million, including the Company's share of the compensation charge described
above of $105 million, and $25 million, respectively, (net of the Company's
share of research and development expenses and the interest income elimination).
The Company's net equity investment in the Partnership (NLCI subsequent to the
IPO) was $62 million and $36 million at December 31, 1999 and 1998,
respectively. The fair value of the Company's ownership interest as of December
31, 1999 was $4.8 billion.
74
<PAGE>
SUPPLEMENTAL FIVE YEAR FINANCIAL SUMMARY
(Dollars in millions, except as noted) Motorola, Inc. and Subsidiaries
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Years ended December 31 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating Net sales $33,075 $31,340 $31,498 $29,657 $28,495
Results Manufacturing and other costs of sales 20,631 19,396 18,532 17,854 16,345
Selling, general and administrative expenses 5,446 5,656 5,373 5,027 4,916
Restructuring and other charges (226) 1,980 327 -- --
Research and development expenditures 3,560 3,118 2,930 2,572 2,321
Depreciation expense 2,243 2,255 2,394 2,367 1,961
Interest expense, net 138 215 136 211 172
Total costs and expenses 31,792 32,620 29,692 28,031 25,715
Net gain on Nextel asset exchange -- -- -- -- 443
Earnings (loss) before income taxes 1,283 (1,280) 1,806 1,626 3,223
Income tax provision (benefit) 392 (373) 642 568 1,171
Net earnings (loss) $ 891 $ (907) $ 1,164 $ 1,058 $ 2,052
Net earnings (loss) as a percent of sales 2.7% (2.9)% 3.7% 3.6% 7.2%
- --------------------------------------------------------------------------------------------------------------------
Per Share Diluted earnings (loss) per common share $ 1.22 $ (1.31) $ 1.67 $ 1.52 $ 2.96
Data Diluted weighted average common shares
outstanding 734.0 690.3 697.6 694.3 694.4
Dividends declared $ 0.480 $ 0.480 $ 0.480 $ 0.460 $ 0.400
- --------------------------------------------------------------------------------------------------------------------
Balance Total assets $40,489 $30,951 $28,954 $25,665 $24,086
Sheet Working capital 4,679 2,532 4,597 3,696 2,938
Long-term debt and redeemable preferred
securities 3,573 2,633 2,144 1,931 1,949
Total debt and redeemable preferred
securities 6,077 5,542 3,426 3,328 3,554
Total stockholders' equity $18,693 $13,913 $14,487 $12,843 $11,911
- --------------------------------------------------------------------------------------------------------------------
Other Data Current ratio 1.36 1.21 1.49 1.44 1.36
Return on average invested capital 5.3% (5.4)% 7.7% 7.1% 15.6%
Return on average stockholders' equity 5.7% (6.5)% 8.5% 8.4% 18.6%
Capital expenditures $ 2,856 $ 3,313 $ 2,954 $ 3,107 $ 4,322
% to sales 8.6% 10.6% 9.4% 10.5% 15.2%
Research and development expenditures $ 3,560 $ 3,118 $ 2,930 $ 2,572 $ 2,321
% to sales 10.8% 9.9% 9.3% 8.7% 8.1%
Year-end employment (in thousands) 128 141 158 148 149
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
SUPPLEMENTAL QUARTERLY AND OTHER FINANCIAL DATA
(Dollars in millions, except per
share amounts; unaudited) Motorola, Inc. and Subsidiaries
<TABLE>
<CAPTION>
1999 1998
1st 2nd 3rd 4th 1st 2nd 3rd 4th
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Net sales $7,736 $8,030 $ 8,223 $ 9,086 $7,294 $ 7,501 $7,658 $8,887
Results Gross profit 3,135 3,300 2,942 3,067 2,859 2,853 2,881 3,351
Net earnings (loss) 199 255 114 323 120 (1,298) 66 205
Net earnings (loss) as a
percent of sales 2.6% 3.2% 1.4% 3.6% 1.6% (17.3)% 0.9% 2.3%
- ---------------------------------------------------------------------------------------------------------------------------
Per Share Basic earnings (loss) per
Data common share $ 0.28 $ 0.36 $ 0.16 $ 0.46 $ 0.18 $ (1.89) $ 0.10 $ 0.29
(in dollars) Diluted earnings (loss) per
common share $ 0.28 $ 0.35 $ 0.15 $ 0.44 $ 0.17 $ (1.89) $ 0.09 $ 0.29
---------------------------------------------------------------------------------------------------------------
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 $77.38 $99.13 $101.50 $149.50 $65.88 $ 61.63 $55.00 $64.31
Low $62.56 $73.75 $ 82.00 $ 85.00 $52.00 $ 48.19 $39.88 $38.38
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The number of stockholders of record of Motorola common stock on January 31,
2000 was 49,984.
75
<PAGE>
The following information supplements the financial statement schedule as
listed in Part IV, Item 14(a)2 of Motorola's Annual Report on Form 10-K for the
year ended December 31, 1999 that was originally filed on March 22, 2000, to
reflect the combination of General Instrument with Motorola.
Motorola, Inc. and Subsidiaries
Valuation and Qualifying Accounts
Three Years Ended December 31, 1999
(in millions)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ---------------------------------------------------------------------------------------------------------------------
Additions
------------------------
Balance at Charged to Charged Balance at
beginning costs & to other end of
of period expenses accounts (6) Deductions period
- ---------------------------------------------------------------------------------------------------------------------
1999
- ----
<S> <C> <C> <C> <C> <C>
Restructuring and Other Charges $666 $ - $(232) $ 394 (1) $ 40
Allowance for Doubtful Accounts $224 $ 200 $ - $ 129 (2) $ 295
Allowance for Losses on Commercial
Receivables $167 $ 125 $ - $ - $ 292
Product and Service Warranties $333 $ 252 $ - $ 259 (3) $ 326
Customer Reserves $422 $ 500 $ - $ 512 (4) $ 410
Iridium Reserves $649 $2,069 $ - $ 763 (5) $1,955
1998
- ----
Restructuring and Other Charges $159 $1,980 $ (22) $1,451 (1) $ 666
Allowance for Doubtful Accounts $177 $ 140 $ - $ 93 (2) $ 224
Allowance for Losses on Commercial
Receivables $ - $ 167 $ - $ - $ 167
Product and Service Warranties $337 $ 226 $ - $ 230 (3) $ 333
Customer Reserves $602 $ 306 $ - $ 486 (4) $ 422
Iridium Reserves $554 $ 95 $ - $ - $ 649
1997
- ----
Restructuring and Other Charges $ - $ 327 $ (9) $ 159 (1) $ 159
Allowance for Doubtful Accounts $150 $ 76 $ - $ 49 (2) $ 177
Product and Service Warranties $314 $ 218 $ - $ 195 (3) $ 337
Customer Reserves $385 $1,060 $ - $ 843 (4) $ 602
Iridium Reserves $422 $ 132 $ - $ - $ 554
</TABLE>
(1) Restructuring and other charges accrual usage
(2) Uncollectible accounts written off
(3) Warranty claims paid
(4) Customer claims paid/reductions in reserves
(5) Iridium reserves accrual usage
(6) Reversal into income
76
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOTOROLA, INC.
Dated: March 22, 2000 By: /s/ Anthony M. Knapp
--------------------------
Anthony M. Knapp
Senior Vice President and Controller
77
