<PAGE>
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
----------
Amendment No. 2 to 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.)
--------------------------------------------------------------------------------
<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 results of operations,
financial position and cash flows of General Instrument.
On March 23, 2000, Motorola filed a Form 8-K, subsequently amended by a Form 8-
K/A filed on March 24, 2000 (as amended, the "Amended 8-K Filing"), to present
supplemental consolidated financial statements of Motorola that gave effect to
the pooling-of-interests of Motorola and General Instrument. The Amended 8-K
Filing indicated that the supplemental consolidated financial statements would
become the historical audited financial statements of Motorola, Inc. and
subsidiaries after financial statements covering the date of consummation of the
business combination were issued. Motorola filed its quarterly report on Form
10-Q on May 16, 2000, which covered the date of consummation of the business
combination. Therefore, this Form 8-K/A amends the Amended 8-K Filing to
present the historical audited consolidated financial statements of Motorola,
Inc. and subsidiaries that give retroactive effect to the pooling-of-interests.
In addition, pursuant to this Form 8-K/A, the Amended 8-K Filing is amended such
that all references to supplemental consolidated financial statements contained
in Motorola's Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") are now references to the historical audited
consolidated financial statements included herein.
These historical audited consolidated financial statements ("Financial
Statements") speak as of March 22, 2000, the date we filed Motorola's Annual
Report on Form 10-K for the year ended December 31, 1999. We have not updated
the Financial Statements to speak to any later date. All information contained
herein is subject to updating and supplementing as provided in Motorola's
periodic reports filed with the SEC subsequent to the date of the Form 8-K.
<PAGE>
The following information replaces 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.
CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Motorola, Inc.:
We have audited the accompanying consolidated balance sheets of Motorola,
Inc. and Subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Motorola,
Inc. and Subsidiaries as of December 31, 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.
KPMG LLP
Chicago, Illinois
March 17, 2000
2
<PAGE>
Motorola, Inc. and Subsidiaries
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 consolidated financial statements.
3
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
Motorola, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
--------------------
(In millions, except per share amounts) 1999 1998
--------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
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 consolidated financial statements.
4
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
Motorola, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Non-Owner Changes To Equity
---------------------------------------
Common Fair Value
Stock and Adjustment Foreign Minimum
Additional To Certain Currency Pension
Paid-In Cost-Based Translation Liability Retained Comprehensive
Capital Investments Adjustments Adjustment Earnings Earnings (Loss)
(In millions, except per share amounts)
<S> <C> <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 consolidated financial statements.
5
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
Motorola, Inc. and Subsidiaries
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
=========================================================================================================================
Cash Flow Information
-------------------------------------------------------------------------------------------------------------------------
CASH PAID DURING THE YEAR FOR:
Interest $ 266 $ 287 $ 216
Income taxes $ 301 $ 398 $ 613
=========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO 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:
Years Ended December 31
-------------------------------
(In millions) 1999 1998 1997
------------------------------------------------------------------------------
NET SALES
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
------------------------------------------------------------------------------
Principles of Consolidation: The 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 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.
7
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO 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 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.
8
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO 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
1999 1998 1997
-------------------------------------------------------------------
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
-------------------------------------------------------------------
--------------------------------------------------------------------------------
3. Other Financial Data
Statement of Operations Information
Years ended December 31 1999 1998 1997
----------------------------------------------------------------------
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
----------------------------------------------------------------------
The following table presents a reconciliation of the numerators and
denominators of basic and diluted earnings (loss) per common share:
Years ended December 31 1999 1998 1997
---------------------------------------------------------------------
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
---------------------------------------------------------------------
9
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO 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
December 31 1999 1998
-----------------------------------------------------------------------
Inventories:
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
-----------------------------------------------------------------------
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
10
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO 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 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 15 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 16.5 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 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.
11
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
4. Debt and Credit Facilities
Long-term debt
December 31 1999 1998
------------------------------------------------------------------
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
------------------------------------------------------------------
Short-term debt
December 31 1999 1998
----------------------------------------------------------------
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%
-----------------------------------------------------------------
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.
12
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO 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.
13
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO 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:
Buy (Sell)
--------------------
December 31 1999 1998
--------------------------------------------------
Japanese Yen $(1,780) $(674)
Euro (582) (566)
Chinese Renminbi (460) (100)
British Pound 231 (133)
Taiwan Dollar (106) (49)
--------------------------------------------------
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.
14
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
6. Income Taxes
Components of earnings (loss) before income taxes
Years ended December 31 1999 1998 1997
----------------------------------------------------------------------
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
----------------------------------------------------------------------
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)
Years ended December 31 1999 1998 1997
---------------------------------------------------------------------
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
---------------------------------------------------------------------
15
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
(Dollars in millions, except as noted)
Significant components of deferred tax assets (liabilities)
December 31 1999 1998
---------------------------------------------------------------
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
---------------------------------------------------------------
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.
16
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO 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:
1999 1998
----------------------------------------------------------------
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%
----------------------------------------------------------------
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
1999 1998 1997
----------------------------------------------------------------------
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
----------------------------------------------------------------------
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.
17
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO 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:
1999 1998
-------------------------------------------------------
Discount rate for obligations 7.75% 7.00%
Investment return assumptions 9.00% 9.00%
-------------------------------------------------------
18
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO 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:
1999 1998 1997
----------------------------------------------------------------------
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
----------------------------------------------------------------------
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.
1999 1998
----------------------------------------------------------------
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)
----------------------------------------------------------------
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:
1% Point 1% Point
Increase Decrease
-----------------------------------------------------------------
Effect on:
Accumulated postretirement
benefit obligation $37 $(55)
Net retiree health care expense 5 (8)
-----------------------------------------------------------------
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.
19
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO 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:
1999 1998 1997
-----------------------------------------------------------------
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
-----------------------------------------------------------------
20
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO 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:
1999 1998 1997
-----------------------------------------------------------------
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
-----------------------------------------------------------------
Stock options activity was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- ----------------------
Shares Wtd. avg. Shares Wtd. avg. Shares Wtd. avg.
(In thousands, except exercise price and subject to exercise subject to exercise subject to exercise
employee data) options price options price options price
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at January 1 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
Options Outstanding -------
--------------------------------------- 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.
21
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO 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 $2.0 billion to: (i) increase its
reserve related to its financial exposure to the Iridium project, (ii) to write-
down the value of the Iridium bonds it holds and (iii) to reserve for assets at
risk and other potential contractual obligations. These reserves and write-
downs are believed by management to be sufficient to cover the Company's current
exposure, but do not include additional special charges that may arise as a
result of litigation related to the Iridium project. There were no special
charges recorded in 1998 or 1997 related to the Iridium project.
The following table presents the Company's provisions for bond investment
write-down and development and commercialization reserves, and the Company's
share of Iridium net losses for the years ended December 31, 1999, 1998 and 1997
and where on the consolidated statements of operations these items are recorded:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Classification of Iridium Charges in Supplemental Consolidated Statements of Operations
($ 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>
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.
22
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO 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 & Maintenance 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 Commercialization 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 $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.
23
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
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 Company's activity of the development and
commercialization reserves for the years ended 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.
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
24
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
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
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.
25
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO 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
26
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO 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.
27
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO 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%
-----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Assets Capital Expenditures Depreciation Expense
-------------------------------- -------------------------------- -----------------------------
Years ended December 31 1999 1998 1997 1999 1998 1997 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
-----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Interest Income Interest Expense Net Interest
------------------------------- ------------------------------- -----------------------------
Years ended December 31 1999 1998 1997 1999 1998 1997 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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)
-----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Geographic area information
Property, Plant, and
Net Sales Assets Equipment
-------------------------------- ------------------------------ -----------------------------
Years ended December 31 1999 1998 1997 1999 1998 1997 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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>
28
<PAGE>
MOTOROLA INC, AND SUBSIDIARIES NOTES TO 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>
29
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
(Dollars in Millions, except as noted) FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 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 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 Accruals at
Dec. 31, 1998 Used Into 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 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
30
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
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, 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 Employee Impair-
Segment 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
consolidated balance sheets, as of December 31, 1999, for this restructuring
category relates to the finalization of plant closings in both of these
segments.
31
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
(Dollars in millions, except as noted) FINANCIAL STATEMENTS
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.
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 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 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 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.
32
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
(Dollars in Millions, except as noted) FINANCIAL STATEMENTS
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.
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 Adjust-ments Amounts Used Accruals at
Dec. 31, Dec. 31,
1998 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>
33
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
(Dollars in Millions, except as noted) FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1997 Accruals at Accruals at
Initial Adjust- Amounts Dec. 31, Adjust- Amounts Dec. 31,
charges ments Used 1997 ments Used 1998
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Q2 1997: Semiconductor Products
Segment
Exit from DRAM market $170 $(9) $(131) $ 30 $(12) $ (10) $ 8
-----------------------------------------------------------------------------------------------------------------------------------
Q3 1997: Other Products Segment
Exit from MacOS-compatible
computer systems business 95 - (28) 67 (10) (42) 15
-----------------------------------------------------------------------------------------------------------------------------------
Q4 1997: 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 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 consolidated financial statements.
34
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
(Dollars in Millions, except as noted) 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
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 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
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
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.
35
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
(Dollars in Millions, except as noted) FINANCIAL STATEMENTS
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 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
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 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.
36
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
(Dollars in millions, except as noted FINANCIAL STATEMENTS
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 consolidated
statements of operations. The charge for NetSpeak was recorded in restructuring
and other charges in the 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 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 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 consolidated financial statements were not material.
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
37
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
(Dollars in Millions, except as noted) FINANCIAL STATEMENTS
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 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 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
38
<PAGE>
MOTOROLA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
(Dollars in Millions, except as noted FINANCIAL STATEMENTS
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 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 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.
39
<PAGE>
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>
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.
40
<PAGE>
The following information replaces 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.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Motorola, Inc.:
Under date of March 17, 2000, we reported on the consolidated balance
sheets of Motorola, Inc. and Subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1999. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedule. The
financial statement schedule is the responsibility of Motorola's management. Our
responsibility is to express an opinion on the financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Chicago, Illinois
March 17, 2000
41
<PAGE>
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
42
<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: June 2, 2000 By: /s/ Anthony M. Knapp
----------------------
Anthony M. Knapp
Senior Vice President and Controller
43
