UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ending July 1, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to _________
Commission file number: 1-7221
MOTOROLA, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-1115800
(State of Incorporation) (I.R.S. Employer Identification No.)
1303 E. Algonquin Road, Schaumburg, Illinois 60196
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 576-5000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of each of the issuer's classes of
common stock as of the close of business on July 1, 2000:
Class Number of Shares
Common Stock; $3 Par Value 2,180,619,024
Motorola, Inc. and Subsidiaries
Index
Part I
Financial Information Page
Item 1 Financial Statements
Condensed Consolidated Statements of Earnings for the
Three-Month and Six-Month Periods Ended July 1, 2000
and July 3, 1999 3
Condensed Consolidated Balance Sheets as of
July 1, 2000 and December 31, 1999 4
Condensed Consolidated Statement of Stockholders'
Equity for the Six-Month Period Ended July 1, 2000 5
Condensed Consolidated Statements of Cash Flows for
the Six-Month Periods Ended July 1, 2000 and
July 3, 1999 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 19
Part II
Other Information
Item 1 Legal Proceedings 39
Item 2 Changes in Securities 40
Item 3 Defaults Upon Senior Securities 40
Item 4 Submission of Matters to a Vote of Security Holders 40
Item 5 Other Information 40
Item 6 Exhibits and Reports on Form 8-K 40
Part I - Financial Information
Motorola, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(Unaudited)
(In millions, except per share amounts)
Three Months Ended Six Months Ended
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
Net sales $ 9,255 $ 8,030 $18,023 $15,766
Costs and expenses
Manufacturing and other
costs of sales 5,508 4,730 10,708 9,331
Selling, general and
administrative expenses 1,598 1,460 2,906 2,931
Research & development
expenditures 1,107 842 2,122 1,615
Depreciation expense 568 579 1,126 1,143
Interest expense, net 54 47 101 85
Total costs and expenses 8,835 7,658 16,963 15,105
Earnings before income taxes 420 372 1,060 661
Income tax provision 216 117 408 207
Net earnings $ 204 $ 255 $ 652 $ 454
Net earnings per common share
Basic $ .09 $ .12 $ .30 $ .22
Diluted $ .09 $ .12 $ .29 $ .21
Weighted average common shares
outstanding
Basic 2,165.0 2,112.4 2,156.0 2,110.5
Diluted 2,249.7 2,191.8 2,254.2 2,185.2
Dividends paid per share (1) $ .04 $ .04 $ .08 $ .08
(1) Dividends per share for 1999 represent dividends on Motorola shares
outstanding prior to the General Instrument merger.
See accompanying notes to condensed consolidated financial statements.
Motorola, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In millions, except per share amounts)
(Unaudited)
July 1, Dec. 31,
2000 1999
Assets
Cash and cash equivalents $ 3,083 $ 3,537
Short-term investments 614 699
Accounts receivable, net 6,268 5,627
Inventories, net 5,446 3,707
Deferred income taxes 2,655 3,247
Other current assets 1,935 768
Total current assets 20,001 17,585
Property, plant and equipment, net 10,214 9,591
Investments 11,133 9,039
Other assets 4,293 4,274
Total assets $45,641 $40,489
Liabilities and Stockholders' Equity
Notes payable and current portion of
long-term debt $ 4,869 $ 2,504
Accounts payable 3,801 3,285
Accrued liabilities 6,111 7,117
Total current liabilities 14,781 12,906
Long-term debt 3,086 3,089
Deferred income taxes 4,529 3,719
Other liabilities 1,288 1,598
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely company-guaranteed debentures 484 484
Stockholders' Equity
Preferred stock, $100 par value issuable
in series --- ---
Common stock, $3 par value 6,542 6,418
Additional paid-in capital 871 ---
Retained earnings 9,236 8,757
Non-owner changes to equity 4,824 3,518
Total stockholders' equity 21,473 18,693
Total liabilities and stockholders' equity $45,641 $40,489
See accompanying notes to condensed consolidated financial statements.
Motorola, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
(In millions)
Non-Owner Changes To Equity
Common
Stock Fair Value
and Adjustment Foreign Minimum
Additional to Available Currency Pension
Paid-In for Sale Translation Liability Retained
Capital Securities Adjustments Adjustment Earnings
BALANCES AT
12/31/99 $6,418 $3,830 ($239) ($73) $8,757
Net earnings 652
Conversion of
zero coupon
notes 4
Fair value
adjustment to
available for
sale securities 1,500
Change in foreign
currency
translation
adjustments (194)
Issuance of
common stock 609
Stock options
exercised and
other 382
Dividends declared (173)
BALANCES AT 7/1/00 $7,413 $5,330 ($433) ($73) $9,236
See accompanying notes to condensed consolidated financial statements.
Motorola, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In millions)
Six Months Ended
July 1, July 3,
2000 1999
Operating
Net earnings $ 652 $ 454
Adjustments to reconcile net earnings to net
cash (used for) provided by operating activities:
Depreciation 1,126 1,143
Deferred income taxes 570 (29)
Gain on disposition of investments and businesses (105) (60)
Acquired in-process research and development
charges 315 ---
Change in assets and liabilities, net of
effects of acquisitions and dispositions:
Accounts receivable (647) (238)
Inventories (1,770) (3)
Other current assets (1,164) (34)
Accounts payable and accrued liabilities (519) 231
Other assets and liabilities 610 585
Net cash (used for) provided by operating activities $ (932) $2,049
Investing
Acquisitions and advances to affiliates $ (627) $ (251)
Proceeds from dispositions of investments
and businesses 370 237
Capital expenditures (1,734) (988)
Proceeds from dispositions of property, plant and
equipment 14 151
Sales (purchases) of short-term investments 85 (79)
Net cash used for investing activities $(1,892) $ (929)
Financing
Net proceeds from commercial paper and short-term
borrowings $2,363 $1,032
Proceeds from issuance of debt --- 500
Repayment of debt (4) (17)
Issuance of common stock 378 306
Issuance of preferred securities of subsidiary
trust --- 484
Payment of dividends (173) (144)
Net cash provided by financing activities $2,564 $ 97
Effect of exchange rate changes on cash and
cash equivalents $ (194) $ (96)
Net (decrease)increase in cash and cash equivalents $ (454) $1,121
Cash and cash equivalents, beginning of period $3,537 $1,602
Cash and cash equivalents, end of period $3,083 $2,723
See accompanying notes to condensed consolidated financial statements.
Motorola, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
On January 5, 2000, Motorola, Inc. ("Motorola") completed its previously
announced merger with General Instrument Corporation ("General Instrument")
by exchanging 301 million shares (reflecting adjustment for the 3-for-1
common stock split described below) of its common stock for all of the
common stock of General Instrument. Each share of General Instrument was
exchanged for 1.725 shares (reflecting adjustment for the 3-for-1 common
stock split described below) 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. The effects of conforming General
Instrument's accounting policies to those of Motorola were not material.
For the three-month period ended July 3, 1999, net sales for Motorola and
General Instrument were $7.5 billion and $527 million, respectively. Net
earnings for Motorola and General Instrument were $206 million and $49
million, respectively. For the six-month period ended July 3, 1999, net
sales for Motorola and General Instrument were $14.7 billion and $1.0
billion, respectively. Net earnings for Motorola and General Instrument
were $377 million and $77 million, respectively. Results of operations for
the three-month and six-month periods ended July 1, 2000, already reflect
the pooling-of-interests. From this point onward, all references to
Motorola, Inc. or the Company reflect the pooling-of-interests.
On February 29, 2000, the Company's Board of Directors declared a 3-for-1
common stock split in the form of a 200% stock dividend, contingent upon
stockholder approval of an increase in the authorized shares of the
Company's common stock from 1.4 billion to 4.2 billion. At their Annual
Meeting on May 1, 2000, the Company's stockholders approved this increase
in authorized shares of common stock. Accordingly, on June 1, 2000, the
Company distributed 1.4 billion common shares to common stockholders of
record on May 15, 2000 in the form of a stock dividend. The par value of
the common stock remained at $3 per share.
The effect of the stock split has been recognized retroactively in the
stockholders' equity accounts as of December 31, 1999, and in all share and
per share data in the accompanying condensed consolidated financial
statements and the notes to condensed consolidated financial statements.
The stockholders' equity accounts have been restated to reflect the
reclassification of an amount equal to the par value of the increase in
issued common shares from additional paid-in capital and retained earnings
to common stock.
The condensed consolidated financial statements as of July 1, 2000 and for
the three-month and six-month periods ended July 1, 2000 and July 3, 1999,
include, in the opinion of management, all adjustments (consisting of
normal recurring adjustments and reclassifications) necessary to present
fairly the financial position, results of operations and cash flows as of
July 1, 2000 and for all periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto incorporated by reference in the
Company's Form 10-K for the year ended December 31, 1999, as supplemented
by Form 8-K/As filed on March 24, 2000 and on June 2, 2000. The results of
operations for the three-month and six-month periods ended July 1, 2000 are
not necessarily indicative of the operating results to be expected for the
full year. Certain amounts in prior years' financial statements and
related notes have been reclassified to conform to the 2000 presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2. Other Financial Data
Statement of Earnings Information
The following table presents a reconciliation of the numerators and
denominators of basic and diluted earnings per common share:
Three Months Ended
July 1, July 3,
(In millions, except per share amounts) 2000 1999
Basic earnings per common share:
Net earnings $ 204 $ 255
Weighted average common shares
outstanding 2,165.0 2,112.4
Per share amount $ .09 $ .12
Diluted earnings per common share:
Net earnings $ 204 $ 255
Add: Interest on zero coupon
notes, net -- 1
Net earnings as adjusted $ 204 $ 256
Weighted average common shares
outstanding 2,165.0 2,112.4
Add: Effect of dilutive securities
Stock options 53.8 54.2
Warrants 27.4 19.3
Zero coupon notes 3.5 5.9
Diluted weighted average common
shares outstanding 2,249.7 2,191.8
Per share amount $ .09 $ .12
Six Months Ended
July 1, July 3,
(In millions, except per share amounts) 2000 1999
Basic earnings per common share:
Net earnings $ 652 $ 454
Weighted average common shares
outstanding 2,156.0 2,110.5
Per share amount $ .30 $ .22
Diluted earnings per common share:
Net earnings $ 652 $ 454
Add: Interest on zero coupon
notes, net 1 1
Net earnings as adjusted $ 653 $ 455
Weighted average common shares
outstanding 2,156.0 2,110.5
Add: Effect of dilutive securities
Stock options 64.2 50.2
Warrants 28.8 18.6
Zero coupon notes 5.2 5.9
Diluted weighted average common
shares outstanding 2,254.2 2,185.2
Per share amount $ .29 $ .21
In the computation of diluted earnings per common share for the three-month
period ended July 1, 2000, the assumed conversion of the zero coupon notes
due 2009 and approximately 59.8 million stock options with exercise prices
greater than the average market price of the underlying common stock were
excluded because their inclusion would have been antidilutive.
In the computation of diluted earnings per common share for the six-month
period ended July 1, 2000, approximately 56.5 million stock options with
exercise prices greater than the average market price of the underlying
common stock were excluded because their inclusion would have been
antidilutive.
Balance Sheet Information
Inventories, net of reserves, consist of the following (in millions):
July 1, Dec. 31,
2000 1999
Finished goods $ 1,669 $ 1,199
Work-in-process and production materials 3,777 2,508
$ 5,446 $ 3,707
Investments include available for sale securities at fair value and
investments under the cost and equity methods of accounting. The following
table displays the Company's available for sale securities (in millions):
At At
July 1, 2000 Dec. 31, 1999
Fair Cost Unrealized| Fair Cost Unrealized
Value Basis Gain | Value Basis Gain
Nextel Communica |
tions, Inc. $ 6,223 $ 807 $5,416 | $5,170 $ 807 $4,363
Broadcom Corporation 1,887 22 1,865 | 22 22 -
Other securities 1,954 601 1,353 | 2,416 457 1,959
Totals $10,064 $1,430 $8,634 | $7,608 $1,286 $6,322
Statement of Financial Accounting Standards (SFAS) 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. As
such, the Company recorded an increase to investments, deferred income
taxes and stockholders' equity of $2.3 billion, $808 million and $1.5
billion, respectively, as of July 1, 2000; and an increase to investments,
deferred income taxes and stockholders' equity of $5.5 billion, $2.2
billion and $3.3 billion, respectively, as of December 31, 1999.
At December 31, 1999, the Company's investment in Broadcom Corporation
carried certain restrictions related to the sale of the securities. Such
restrictions did not lapse until April 2000. Accordingly, at December 31,
1999, the Company carried this investment at its cost of $22 million and
did not record a fair value adjustment at that time.
Stockholders' Equity Information
Comprehensive Earnings
Comprehensive earnings for the three-month periods ended July 1, 2000 and
July 3, 1999 were $253 million and $763 million, respectively, and exclude
reclassification adjustments, net of tax, of $18 million and $7 million,
respectively, related to the sale of securities. Comprehensive earnings
for the six-month periods ended July 1, 2000 and July 3, 1999 were $2.0
billion and $1.5 billion, respectively, and exclude reclassification
adjustments, net of tax, of $46 million and $52 million, respectively,
related to the sale of securities.
Cash Flow Information
Cash paid for interest during the first six months of 2000 and 1999 was
$206 million and $85 million, respectively. Cash paid for income taxes
during the first six months of 2000 and 1999 was $60 million and $97
million, respectively.
3. Reorganization of Businesses - 1997 Programs
During 1997, the Company recorded restructuring charges of $327 million
resulting from decisions to exit three unprofitable businesses that no
longer had long-term strategic value to the Company. As of December 31,
1999, the business exits from the dynamic random access memory market and
from the retail analog modem business had been completed. For the exit
from the MacOS (Registered)-compatible computer systems business, $2
million was utilized during the first six months of 2000 for contractual
and warranty payments. The remaining $11 million accrual as of July 1,
2000, relates to contractual commitments and warranty liability and may
extend past the 2000 year end.
4. Segment Information
Beginning with the first quarter of 2000, the Company added two operating
segments for financial reporting purposes. The Broadband Communications
Segment combines the operations of General Instrument Corporation with the
existing cable modem and telephony business of the Company's Internet and
Networking Group, which is part of the Other Products Segment. The
Integrated Electronic Systems Sector, which has been included in the Other
Products Segment, is now reported as a separate segment. Historical
segment data has been restated to reflect these changes.
Summarized below are the Company's segment sales and operating profit
(loss) before taxes by new reportable segment for the three months ended
July 1, 2000, and July 3, 1999.
Three Months Ended
July 1, July 3, %
2000 1999 Change
Segment Sales:
Personal Communications Segment $3,332 $2,788 20
Network Systems Segment 1,957 1,587 23
Commercial, Govt. and Industrial
Systems Segment 1,137 955 19
Broadband Communications Segment 768 625 23
Semiconductor Products Segment 2,000 1,979 1
Integrated Electronic Systems Segment 678 604 12
Other Products Segment 245 182 35
Adjustments & Eliminations (862) (690) 25
Segment Totals $9,255 $8,030 15
% Of % Of
Sales Sales
Segment Operating Profit
(Loss) Before Taxes:
Personal Communications Segment $ 132 4 $ 125 4
Network Systems Segment 258 13 169 11
Commercial, Govt. and Industrial
Systems Segment 108 9 94 10
Broadband Communications Segment 124 16 103 16
Semiconductor Products Segment (55) (3) 80 4
Integrated Electronic Systems Segment 38 6 42 7
Other Products Segment (169) (69) (239) (131)
Adjustments & Eliminations 3 -- 1 --
Segment Totals 439 5 375 5
General Corporate (19) (3)
Earnings Before Income Taxes $ 420 5 $ 372 5
Summarized below are the Company's segment sales and operating profit
(loss) before taxes by new reportable segment for the six months ended July
1, 2000, and July 3, 1999:
Six Months Ended
July 1, July 3, %
2000 1999 Change
Segment Sales:
Personal Communications Segment $6,568 $5,390 22
Network Systems Segment 3,766 3,210 17
Commercial, Govt. and Industrial
Systems Segment 2,135 1,840 16
Broadband Communications Segment 1,446 1,215 19
Semiconductor Products Segment 3,900 3,886 --
Integrated Electronic Systems Segment 1,368 1,195 14
Other Products Segment 504 393 28
Adjustments & Eliminations (1,664) (1,363) 22
Segment Totals $18,023 $15,766 14
% Of % Of
Sales Sales
Segment Operating Profit
(Loss) Before Taxes:
Personal Communications Segment $ 244 4 $ 208 4
Network Systems Segment 538 14 362 11
Commercial, Govt. and Industrial
Systems Segment 198 9 146 8
Broadband Communications Segment 215 15 154 13
Semiconductor Products Segment 68 2 127 3
Integrated Electronic Systems Segment 117 9 77 6
Other Products Segment (207) (41) (400) (102)
Adjustments & Eliminations 1 -- (7) --
Segment Totals 1,174 7 667 4
General Corporate (114) (6)
Earnings Before Income Taxes $1,060 6 $ 661 4
5. Commitments and Contingencies
Iridium Program
At July 1, 2000, 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 has operated as debtors-in-possession under Chapter 11
of the U.S. Federal Bankruptcy Code. On March 17, 2000, Iridium began the
process of winding down and liquidating its operations because no qualified
bid to purchase the Iridium satellites was timely received. At the same
time, the Company began the process of finalizing a plan for the
decommissioning of the Iridium constellation and continued with the process
of shutting down its Iridium-related operations.
As part of the liquidation process, Iridium has been authorized by the New
York bankruptcy court to implement a letter of intent with a potential
purchaser of its assets and to adopt a procedure to solicit and evaluate
other bids for its assets. In connection with this process, Iridium has
filed a motion requesting the bankruptcy court to stay the provisions of an
earlier order authorizing Motorola to implement the decommissioning of the
Iridium satellites. A hearing has been scheduled for July 31, 2000 for the
bankruptcy court to hear this motion.
At December 31, 1999 the Company had $1.8 billion of reserves related to
the Iridium program. There were no charges recorded in the second quarter
of 2000 related to the Iridium program. During the second quarter of 1999,
the Company recorded $162 million of charges related to the Iridium
program. Included in this charge was a $126 million special charge to
write down the value of its Iridium bonds and $36 million of other charges
to reserve for assets at risk and other potential contractual obligations.
The following table displays a rollforward by category from December 31,
1999 to July 1, 2000, of the remaining accrual balances:
Q1 2000 Q2 2000
Accruals at Amounts Amounts Accruals at
Dec. 31, 1999 Used Used Jul. 1, 2000
Accounts Receivable $ 661 $ (661) $ - $ -
Bank Guarantees and Other $ 50 $ - $ - $ 50
Commitments
Investments, Contractual $ 1,087 $ (623) $ (63) $ 401
Commitments and Other
Obligations
Totals $ 1,798 $(1,284) $ (63) $ 451
Through July 1, 2000 the Company utilized $1.3 billion of reserves
including $661 million for accounts receivable write-offs and $686 million
primarily for inventory and other asset write-offs. The total amount used
through July 1, 2000 of $1.3 billion reflects approximately $112 million in
cash payments and $1.2 billion in write-offs. The cash payments were
primarily for costs associated with the wind-down of Iridium operations and
Iridium gateway debt guarantees. Of the remaining $451 million accrual
balance as of July 1, 2000, the Company expects to make approximately $362
million in cash payments and $89 million in write-offs. There were no
reserves used in the first or second quarters of 1999.
The reserve related to the Iridium program as of July 1, 2000 was $451
million, of which $322 million was included in accrued liabilities, $54
million was included as a contra asset, in inventories, $50 million was
included as a contra asset, in property, plant and equipment, and $25
million was included as a contra asset, in other assets. 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 condensed
consolidated balance sheets. These reserves are believed by management to
be sufficient to cover the Company's Iridium exposures. These reserves do
not include additional special charges that may arise as a result of
litigation related to the Iridium project.
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. Although
not contractually required to do so, the Company is continuing to operate
the Iridium system without compensation while a plan to decommission the
Iridium constellation is finalized. The Company currently expects to
continue to perform some services without compensation during the
decommissioning, although it has not waived its right to seek compensation.
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. On June 9,
2000, the Chase Manhattan Bank, the agent under the Secured Credit
Agreement, filed a complaint in the Supreme Court of the State of New York,
New York County, demanding that Motorola pay this $300 million to Chase
plus interest and legal fees. 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. On June 9, 2000, the Chase
Manhattan Bank also filed a complaint in the U.S. District Court in the
District of Delaware demanding that Motorola and other investors in Iridium
LLC pay their capital call requirements, plus interest and legal fees.
Creditors and other stakeholders in Iridium may seek to bring various other
claims against the Company, with respect to payments previously made by
Iridium to the Company, and otherwise. As described in "Legal
Proceedings," a number of purported class action lawsuits alleging
securities law violations have been filed naming Iridium, certain current
and former officers of Iridium, other entities and the Company as
defendants.
Other
At July 1, 2000, the Company's commitment to Nextel Communications, Inc.
for equipment financing aggregated $457 million, of which $365 million had
been utilized.
At July 1, 2000, the Company's commitment for off-balance sheet third-party
financial guarantees aggregated $772 million, of which $583 million had
been utilized.
The Company's aggregate commitment amounts represent the maximum available
and may not be completely utilized.
6. Acquisitions and Disposition of Businesses
The following table summarizes the major acquisitions, involving acquired
in-process research and development charges, and the business disposition
that the Company made during the first and second quarters of 2000:
In-Process
Quarter Form of Research and
Acquired/ Consider- Consider- Development
(in millions) Disposed ation ation Charge
Acquisitions:
C-Port Corporation Q2 $430 Common stock $214
Assumed stock
options
Clinical Micro Sensors,
Inc. Q2 $280 Cash $ 80
Assumed stock
options
WaveMark Technologies, Inc. Q2 $ 30 Cash $ 6
Communication Systems
Technology, Inc. Q2 $ 22 Cash $ 6
Intec, Ltd. Q1 $ 31 Cash $ 9
Disposition:
Motorola Lighting, Inc. Q1 $110 Cash Not Applicable
For the three-month period ended July 1, 2000, the Company recorded a total
of approximately $306 million in acquired in-process research and
development charges for the acquisitions of C-Port Corporation, Clinical
Micro Sensors, Inc., WaveMark Technologies, Inc., and the assets and
intellectual property rights of Communication Systems Technology, Inc. For
the six-month period ended July 1, 2000, the Company recorded a total of
approximately $315 million in acquired in-process research and development
charges. These charges were recorded in selling, general and
administrative expenses in the Company's condensed consolidated statements
of earnings. The Company did not incur any acquired in-process research
and development charges during the three-month and six-month periods ended
July 3, 1999.
For each acquisition, the in-process research and development will have no
alternative future uses if the products are not feasible. Historical
pricing, margins and expense levels, where applicable, 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 reflecting both
technological and market risk as well as the time value of money.
In addition to the acquired in-process research and development charges,
the Company recorded a total of approximately $414 million in goodwill and
other intangibles which are to be amortized over periods ranging from 3 to
10 years on a straight-line basis. The goodwill and other intangibles were
recorded in other assets in the Company's condensed consolidated balance
sheets.
The acquisitions of C-Port Corporation, Clinical Micro Sensors, Inc. and
WaveMark Technologies, Inc. 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 pro forma effects of these acquisitions on the
Company's financial statements were not significant.
C-Port Corporation
In May 2000, the Company acquired C-Port Corporation (C-Port) in exchange
for 8.7 million shares of the Company's common stock which, together with
assumed stock options, were valued at approximately $430 million. In
connection with this transaction, the Company recorded an acquired in-
process research and development charge of $214 million and goodwill and
other intangibles of $212 million which are to be amortized over periods
ranging from 3 to 10 years on a straight-line basis.
Headquartered in North Andover, MA, C-Port is a start-up company developing
programmable digital communication processors for high-speed networks. At
the acquisition date, a total of 2 projects were in process. One project
was 73% complete, and the other project was 22% complete. The average risk
adjusted rates used to value the two projects were 20% and 25%,
respectively. Revenues from these in-process products are estimated
primarily beginning in the second quarter of 2001, with projected research
and development costs to complete of approximately $6 million.
Clinical Micro Sensors, Inc.
In June 2000, the Company acquired Clinical Micro Sensors, Inc. (CMS) for
approximately $280 million in cash and assumed stock options. In
connection with this transaction, the Company recorded an acquired in-
process research and development charge of $80 million and goodwill and
other intangibles of $145 million which are to be amortized over periods
ranging from 3 to 7 years on a straight-line basis.
CMS is a genomics instrumentation company developing and manufacturing
disposable DNA biochips and electronic biochip readers. At the acquisition
date, one project, which was 60% complete, was in process. The average
risk adjusted rate used to value the project was 30%. Revenues from this
in-process product are estimated primarily beginning in the second quarter
of 2001, with projected research and development costs to complete of
approximately $10 million.
WaveMark Technologies, Inc.
In June 2000, the Company acquired WaveMark Technologies, Inc. (WaveMark)
for approximately $30 million in cash. In connection with this
transaction, the Company recorded an acquired in-process research and
development charge of $6 million and goodwill and other intangibles of $23
million which are to be amortized over periods ranging from 3 to 5 years on
a straight-line basis.
WaveMark is a company developing technology for controllers that increase
the speed and quality of laser and ink jet printers. Its embedded solution
is based on a combination of application-specific integrated circuit chips
and printer software. At the acquisition date, three projects were in
process and were approximately 50% complete. The average risk adjusted
rate used to value these projects was 25%. Revenues from these in-process
products are estimated primarily beginning in the third quarter of 2000,
with projected research and development costs to complete of approximately
$1 million.
Communication Systems Technology, Inc. - Intellectual Property Acquisition
In April 2000, the Company purchased the assets and the intellectual
property rights of Communication Systems Technology, Inc. (CSTI), a
Columbia, Maryland-based communication system provider, for approximately
$22 million in cash. In connection with this transaction, the Company
recorded an acquired in-process research and development charge of $6
million and goodwill and other intangibles of $14 million which are to be
amortized over a period of five years on a straight-line basis.
At the acquisition date, a total of 7 projects were in process and were, on
average, approximately 59% complete. These projects were related to the
development of telephony-based command and control software and hardware
products. The average risk adjusted rates used to value these projects
ranged from 16% to 23%. Revenues from these in-process products are
estimated beginning in the fourth quarter of 2000, with projected research
and development costs-to-complete of less than $1 million.
Intec, Ltd. - Intellectual Property Acquisition
In January 2000, the Company purchased the assets and the intellectual
property rights of Intec, Ltd., a Korean-based smartcard system provider,
for approximately $31 million in cash. In connection with this
transaction, the Company recorded an acquired in-process research and
development charge of approximately $9 million and goodwill and other
intangibles of approximately $20 million which are to be amortized over a
period of five years on a straight-line basis.
At the acquisition date, a total of 6 projects were in process and were
approximately 75% complete. These projects were related to the development
of multi-application smartcard software and hardware. The average risk
adjusted rates used to value the projects was 22%. Revenues from in-
process products are estimated primarily beginning in the first quarter of
2001, with projected research and development costs-to-complete of
approximately $2 million.
Motorola Lighting, Inc.
In March 2000, the Company completed the sale of Motorola Lighting, Inc.
(MLI) to Osram Sylvania, the North American operation of Osram GmbH of
Germany, for approximately $110 million in cash. The sale resulted in a
$33 million gain included in selling, general and administrative expenses
in the condensed consolidated statements of earnings. Through the date of
disposition, MLI's first quarter 2000 results of operations were not
significant.
Propel - Pending Transaction
In June 2000, Propel, Inc., a wholly-owned subsidiary of the Company and
part of the Network Management business, filed a registration statement
with the Securities & Exchange Commission (SEC) for the initial public
offering (IPO) of up to 20% of its common stock. The process for the IPO
is expected to take several months to complete and requires SEC approval.
Propel is an international provider of wireless communication services. It
develops, operates and owns interests in wireless communications businesses
in targeted markets throughout the world. Its operating companies
currently offer wireless services in Mexico, Israel, Hong Kong, Egypt,
Argentina, Brazil, Lithuania, Jordan, Chile, the Dominican Republic,
Pakistan, Uruguay and Azerbaijan.
7. Trust Originated Preferred Securities (SM)
In February 1999, Motorola Capital Trust I, a Delaware statutory business
trust and wholly-owned subsidiary of the Company (the "Trust"), sold Trust
Originated Preferred Securities (SM) ("TOPrS") to the public at an
aggregate offering price of $500 million. The Trust used the proceeds from
this sale, together with the proceeds from its sale of common stock to the
Company, to buy a series of 6.68% Deferrable Interest Junior Subordinated
Debentures due March 31, 2039 ("Subordinated Debentures") from the Company
with the same payment terms as the TOPrS. The sole assets of the Trust are
the Subordinated Debentures. The TOPrS are shown as "Company-obligated
mandatorily redeemable preferred securities of subsidiary trust holding
solely company-guaranteed debentures" in the Company's consolidated
financial statements.
The Company's obligations relating to the TOPrS include obligations to make
payments on the Subordinated Debentures and obligations under the related
Indenture, Trust Guarantee and Declaration of Trust. Taken together, these
obligations represent a full and unconditional guarantee of amounts due
under the TOPrS.
(SM) "Trust Originated Preferred Securities" and "TOPrS" are service marks
of Merrill Lynch & Co., Inc.
Motorola, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations
On January 5, 2000, Motorola, Inc. ("Motorola") completed its previously
announced merger with General Instrument Corporation ("General Instrument")
by exchanging 301 million shares (reflecting adjustment for the 3-for-1
common stock split described below) of its common stock for all of the
common stock of General Instrument. Each share of General Instrument was
exchanged for 1.725 shares (reflecting adjustment for the 3-for-1 common
stock split described below) 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. From this point onward, all references to
Motorola, Inc. or the Company reflect the pooling-of-interests.
On February 29, 2000, the Company's Board of Directors declared a 3-for-1
common stock split in the form of a 200% stock dividend, contingent upon
stockholder approval of an increase in the authorized shares of the
Company's common stock from 1.4 billion to 4.2 billion. At their Annual
Meeting on May 1, 2000, the Company's stockholders approved this increase
in authorized shares of common stock. Accordingly, on June 1, 2000, the
Company distributed 1.4 billion common shares to common stockholders of
record on May 15, 2000 in the form of a stock dividend. The par value of
the common stock remained at $3 per share. All historical information has
been restated to reflect the stock split.
This commentary should be read in conjunction with the Company's
consolidated financial statements and related notes thereto and
management's discussion and analysis of financial condition and results of
operations incorporated by reference in the Company's Form 10-K for the
year ended December 31, 1999, as supplemented by Form 8-K/As filed on March
24, 2000 and on June 2, 2000.
The order information as of any particular date may not be an accurate
indicator of future results as orders are subject to revision or
cancellation to reflect changes in customer needs.
Results of Operations:
Motorola, Inc.
Three Months Ended July 1, % of July 3, % of
(in millions except per share amounts) 2000 Sales 1999 Sales
Net sales $ 9,255 $ 8,030
Percent change from prior year 15%
Costs and expenses
Manufacturing and other costs of sales 5,508 60% 4,730 59%
Selling, general and administrative
expenses 1,598 17% 1,460 18%
Research and development expenditures 1,107 12% 842 10%
Depreciation expense 568 6% 579 7%
Interest expense, net 54 1% 47 1%
Total costs and expenses 8,835 7,658
Earnings before income taxes 420 5% 372 5%
Income tax provision 216 117
Net earnings $ 204 2% $ 255 3%
Diluted earnings per common share $ 0.09 $ 0.12
Sales were $9.3 billion in the second quarter of 2000, up 15 percent from
$8.0 billion a year earlier. Sales growth was attributed primarily to an
increase in sales from the digital wireless telephone business resulting
from strong market acceptance and demand for the Company's new digital
products, an increase in sales of terrestrial infrastructure equipment and
an increase in sales of internet protocol network and digital network
systems.
Second-quarter 2000 earnings were $204 million, or 9 cents per share,
compared with second-quarter 1999 earnings of $255 million, or 12 cents per
share. Net margin on sales was 2 percent in the second quarter of 2000
compared with 3 percent a year earlier. This decrease in earnings is
primarily attributable to an increase in special items versus the year
earlier quarter. The increase in special items is primarily from acquired
in-process research and development charges relating to acquisitions
completed during the quarter. These charges were principally incurred by
the semiconductor business.
Manufacturing margin in the second quarter of 2000 decreased to 40 percent
from 41 percent a year ago.
Selling, general and administrative expenses decreased to 17 percent of
sales compared to 18 percent a year earlier.
Research and development expenditures increased 31 percent to $1.1 billion,
or 12 percent of sales, in the second quarter of 2000 compared to $842
million, or 10 percent of sales, a year earlier. Over the past three
years, the Company has been increasing the percentage of its sales that is
spent on research and development. The Company continues to believe that a
strong commitment to research and development is required to drive long-
term growth. Research and development spending in 2000 is expected to
continue to increase at a rate higher than the rate of sales growth.
Depreciation expense in the second quarter of 2000 as a percentage of sales
decreased to 6 percent from 7 percent a year earlier. This decline was
attributable to the increase in sales, while depreciation expense remained
fairly constant. Depreciation expense for 2000 is expected to increase,
but at a rate below the expected rate of sales growth.
Interest expense increased versus a year ago to $54 million from $47
million due to increased commercial paper and short-term borrowings.
Interest expense for the full year of 2000 is expected to increase at a
rate greater than the expected rate of sales growth.
The tax rate for the second quarter 2000 increased to 51 percent from 31
percent a year earlier. The increased tax rate reflects the impact of
significant non-deductible charges for acquired in-process research and
development (IPR&D) from acquisitions completed during the second quarter.
Excluding the impact of significant non-deductible charges for IPR&D, the
Company's effective income tax rate for the second quarter of 2000 was 30
percent. There were no significant non-deductible charges in the second
quarter of 1999. The Company currently expects the annual tax rate for
2000, excluding the impact of significant non-deductible charges, from both
prior and potential future acquisitions, to be 30 percent. This estimate
is based on current tax law, the current estimate of earnings and the
expected distribution of income among various tax jurisdictions.
Motorola, Inc.
Six Months Ended July 1, % of July 3, % of
(in millions except per share amounts) 2000 Sales 1999 Sales
Net sales $ 18,023 $ 15,766
Percent change from prior year 14%
Costs and expenses
Manufacturing and other costs of sales 10,708 59% 9,331 59%
Selling, general and administrative
expenses 2,906 16% 2,931 19%
Research and development expenditures 2,122 12% 1,615 10%
Depreciation expense 1,126 6% 1,143 7%
Interest expense, net 101 1% 85 1%
Total costs and expenses 16,963 15,105
Earnings before income taxes 1,060 6% 661 4%
Income tax provision 408 207
Net earnings $ 652 4% $ 454 3%
Diluted earnings per common share $ 0.29 $ 0.21
Sales were $18.0 billion in the first half of 2000, up 14 percent from
$15.8 billion a year earlier. Sales growth was attributed primarily to an
increase in sales from the digital wireless phone business resulting from
strong market acceptance and demand for the Company's new digital products,
an increase in sales of terrestrial infrastructure equipment, and an
increase in sales of internet protocol network and digital network systems.
Earnings for the first half of 2000 were $652 million, or 29 cents per
share, compared with earnings for the first half of 1999 of $454 million,
or 21 cents per share. Net margin on sales was 4 percent in the first half
of 2000 compared with 3 percent for the first half of 1999. The increase
in earnings for the first half of 2000 compared to the first half of 1999
was attributed to: (i) increased sales, (ii) higher manufacturing margins
in the semiconductor business, (iii) higher operating margins in the
network systems and broadband communications businesses, and (iv) lower
selling, general and administrative expenses. These improvements were
partially offset by an increase in research and development expenditures,
an increase in special items, and an increase in the effective tax rate.
The main businesses contributing to this improvement in earnings were
network systems and broadband communications.
Manufacturing margin for the first half of 2000 remained constant at 41
percent compared to the first half of 1999.
Selling, general and administrative expenses decreased to 16 percent of
sales compared to 19 percent a year earlier. This decline was primarily
attributable to higher sales.
Research and development expenditures increased 31 percent to $2.1 billion,
or 12 percent of sales, in the first half of 2000 compared to $1.6 billion,
or 10 percent of sales, a year earlier.
Depreciation expense in the first half of 2000 as a percentage of sales
decreased to 6 percent from 7 percent a year earlier. This decline was
attributable to the increase in sales, while depreciation expense remained
fairly constant.
Interest expense increased in the first half of 2000 versus a year ago to
$101 million from $85 million due to increased commercial paper and short-
term borrowings.
The tax rate for the six months ended July 1, 2000 increased to 38 percent
from 31 percent for the six months ended July 3, 1999. The increased tax
rate reflects the impact of significant non-deductible charges for acquired
in-process research and development (IPR&D) from acquisitions completed
during the second quarter. Excluding the impact of significant non-
deductible charges for IPR&D, the Company's effective income tax rate for
the first half of 2000 was 30 percent. There were no significant non-
deductible charges in the first half of 1999.
Results of Operations Excluding Net Special Items
Motorola, Inc.
Three Months Ended July 1, % of July 3, % of
(in millions except per share amounts) 2000 Sales 1999 Sales
Net sales $ 9,255 $ 8,030
Percent change from prior year 15%
Costs and expenses
Manufacturing and other costs of sales 5,508 60% 4,736 59%
Selling, general and administrative
expenses 1,282 14% 1,373 17%
Research and development expenditures 1,107 12% 842 10%
Depreciation expense 568 6% 579 7%
Interest expense, net 54 1% 47 1%
Total costs and expenses 8,519 7,577
Earnings before income taxes 736 8% 453 6%
Income tax provision 221 142
Net earnings $ 515 6% $ 311 4%
Diluted earnings per common share $ 0.23 $ 0.15
Excluding net special items, second-quarter 2000 earnings were $515
million, or 23 cents per share, compared with second-quarter 1999 earnings
of $311 million, or 15 cents per share.
Excluding net special items, net margin on sales was 6 percent for the
second quarter of 2000 compared with 4 percent for the second quarter of
1999.
In the second quarter of 2000, the Company recorded in selling, general and
administrative expenses in the condensed consolidated statements of
earnings a net special charge of $316 million pre-tax, or 14 cents per
share after tax. Included in this net special charge were the following
items (in millions):
Merger and integration costs related
to the General Instrument merger $ 5
Acquired in-process research and
development write-offs 306
Plant consolidation costs 24
Gains from the sales of investments ( 19)
Net special charge $ 316
In the second quarter of 1999, the Company recorded a net special charge of
$81 million pre-tax, or 3 cents per share after-tax. Included in this net
special charge were the following items (in millions):
Iridium-related charge $ 126
Other gains ( 6)
Gains from the sales of investments
and businesses ( 39)
Net special charge $ 81
Of the $81 million net special charge, an $87 million charge was included
in selling, general and administrative expenses, and a $6 million gain was
included in manufacturing and other costs of sales in the condensed
consolidated statements of earnings.
Motorola, Inc.
Six Months Ended July 1, % of July 3, % of
(in millions except per share amounts) 2000 Sales 1999 Sales
Net sales $18,023 $15,766
Percent change from prior year 14%
Costs and expenses
Manufacturing and other costs of sales 10,708 59% 9,329 59%
Selling, general and administrative
expenses 2,588 14% 2,832 18%
Research and development expenditures 2,122 12% 1,615 10%
Depreciation expense 1,126 6% 1,143 7%
Interest expense, net 101 1% 85 1%
Total costs and expenses 16,645 15,004
Earnings before income taxes 1,378 8% 762 5%
Income tax provision 414 238
Net earnings $ 964 5% $ 524 3%
Diluted earnings per common share $ 0.43 $ 0.24
Excluding net special items, earnings for the six months ended July 1, 2000
were $964 million, or 43 cents per share, compared with earnings for the
six months ended July 3, 1999 of $524 million, or 24 cents per share.
Excluding net special items, net margin on sales was 5 percent for the
first half of 2000 compared with 3 percent for the first half of 1999.
For the six months ended July 1, 2000, the Company recorded in selling,
general and administrative expenses in the condensed consolidated
statements of earnings a net special charge of $318 million pre-tax, or 14
cents per share after tax. Included in this net special charge were the
following items (in millions):
Merger and integration costs related
to the General Instrument merger $ 105
Acquired in-process research and
development write-offs 315
Other gains ( 6)
Plant consolidation costs 24
Gains from the sales of investments
and a business (120)
Net special charge $ 318
For the six months ended July 3, 1999, the Company recorded a net special
charge of $101 million pre-tax, or 3 cents per share after tax. Included
in this net special charge were the following items (in millions):
Iridium-related charges $ 248
Other charges 9
Gains from the sales of investments
and businesses (156)
Net special charge $ 101
Of the $101 million net special charge, a $99 million charge was included
in selling, general and administrative expenses, and a $2 million charge
was included in manufacturing and other costs of sales in the condensed
consolidated statements of earnings.
Results of Operations for Ongoing Businesses Excluding Net Special Items
Motorola, Inc.
Three Months Ended July 1, % of July 3, % of
(in millions except per share amounts) 2000 Sales 1999 Sales
Net sales $ 9,255 $ 7,595
Percent change from prior year 22%
Costs and expenses
Manufacturing and other costs of sales 5,508 60% 4,430 58%
Selling, general and administrative
expenses 1,282 14% 1,317 17%
Research and development expenditures 1,107 12% 831 11%
Depreciation expense 568 6% 579 8%
Interest expense, net 54 1% 45 1%
Total costs and expenses 8,519 7,202
Earnings before income taxes 736 8% 393 5%
Income tax provision 221 124
Net earnings $ 515 6% $ 269 4%
Diluted earnings per common share $ 0.23 $ 0.13
In March of 2000, the Company completed the sale of Motorola Lighting, Inc.
to Osram Sylvania, the North American operation of Osram GmbH of Germany.
In 1999, the Company sold several businesses, of which the sale of the
Semiconductor Components Group was the largest transaction. Sales were
$9.3 billion in the second quarter of 2000. For ongoing businesses, this
is an increase of 22 percent from $7.6 billion a year earlier. Excluding
special items, earnings from ongoing businesses in the second quarter of
2000 were $515 million, or 23 cents per share, compared with second-quarter
1999 earnings of $269 million, or 13 cents per share.
Excluding the results of these businesses and net special items, net margin
on sales was 6 percent in the second quarter of 2000 compared with 4
percent a year earlier.
Motorola, Inc.
Six Months Ended July 1, % of July 3, % of
(in millions except per share amounts) 2000 Sales 1999 Sales
Net sales $18,007 $14,905
Percent change from prior year 21%
Costs and expenses
Manufacturing and other costs of sales 10,693 59% 8,719 58%
Selling, general and administrative
expenses 2,588 14% 2,710 18%
Research and development expenditures 2,122 12% 1,595 11%
Depreciation expense 1,126 6% 1,140 8%
Interest expense, net 101 1% 81 1%
Total costs and expenses 16,630 14,245
Earnings before income taxes 1,377 8% 660 4%
Income tax provision 414 207
Net earnings $ 963 5% $ 453 3%
Diluted earnings per common share $ 0.43 $ 0.21
Excluding the results of businesses sold after the second quarter of 1999
and net special items, sales for the six months ended July 1, 2000 were
$18.0 billion, up 21 percent from $14.9 billion a year earlier. Earnings
for the first half of the year were $963 million, or 43 cents per share,
compared with $453 million, or 21 cents a share, for the first half of
1999.
Excluding the results of these businesses and net special items, net margin
on sales was 5 percent for the six months ended July 1, 2000 compared with
3 percent for the six months ended July 3, 1999.
1997 Restructuring Program
During 1997, the Company recorded restructuring charges of $327 million
resulting from decisions to exit three unprofitable businesses that no
longer had long-term strategic value to the Company. As of December 31,
1999, the business exits from the dynamic random access memory market and
from the retail analog modem business had been completed. For the exit
from the MacOS (Registered)-compatible computer systems business, $2
million was utilized during the first six months of 2000 for contractual
and warranty payments. The remaining $11 million accrual as of July 1,
2000, relates to contractual commitments and warranty liability and may
extend past the 2000 year end.
Segment Information
Results of the Company's major operations, which include the effect of the
sales of various businesses and net special items, for the second quarter
of 2000 compared with the second quarter of 1999 are as follows:
Personal Communications Segment
Three Months Ended
July 1, July 3, %
(in millions) 2000 1999 Change
Orders $3,139 $3,151 --%
Segment sales $3,332 $2,788 20%
Operating profit before tax $132 $125 6%
Net special items:
income(expense) $ -- $ --
Operating profit excluding
net special items $ 132 $125 6%
Segment sales rose 20 percent to $3.3 billion, and orders declined less
than 1 percent to $3.1 billion. Operating profits increased to $132
million from $125 million in the year earlier quarter primarily due to an
increase in sales of digital wireless telephones.
The segment's results were not impacted by net special items or sold
businesses. Therefore, sales, orders and operating profits were unchanged
from the data shown in the table above.
In the wireless telephone business, which includes iDEN (Registered)
phones, sales increased 25 percent, orders were unchanged, and operating
profits were higher although operating margin declined versus the year ago
quarter. Sales were up significantly in the Americas and Asia and flat in
Europe. Orders were up significantly in the Americas, up in Asia and down
significantly in Europe. Order growth in Europe was negatively impacted by
the Company's decision to more selectively pursue orders for lower-tier
wireless telephones and, in particular, to de-emphasize older, less
profitable models that are being discontinued. Digital wireless telephone
sales represented 97 percent of phone sales in the quarter.
Digital phone unit sales increased by approximately 70 percent in the
second quarter versus a year ago. Versus the year ago quarter, unit sales
for (i) Global System for Mobile (GSM) products increased by almost 65
percent; (ii) Code Division Multiple Access (CDMA) products increased
approximately 30 percent; (iii) Time Division Multiple Access (TDMA)
products increased by almost 200 percent; and (iv) iDEN (Registered) phones
increased approximately 100 percent. Analog wireless telephone unit sales
decreased approximately 70 percent from a year ago. Including the very
significant decline in analog wireless telephone unit sales, total unit
sales of wireless telephones increased by approximately 40 percent from a
year ago.
The overall selling price for digital phones declined between 10-15 percent
versus a year ago. The overall average selling price for analog phones
declined about 10 percent in the second quarter versus a year ago. Average
selling prices can be subject to changes in product mix and regional mix.
Sales and orders for paging products were lower than a year ago due to
fewer unit sales. Sales and orders declined significantly in all regions.
Network Systems Segment
Three Months Ended
July 1, July 3, %
(in millions) 2000 1999 Change
Orders $2,130 $1,551 37%
Segment sales $1,957 $1,587 23%
Operating profit before tax $258 $169 53%
Net special items:
income(expense) $ 2 $ --
Operating profit excluding
net special items $256 $169 51%
Segment sales rose 23 percent to $2.0 billion, and orders increased 37
percent to $2.1 billion. Operating profits increased to $258 million from
$169 million in the year earlier quarter due to a continuing increase in
sales of terrestrial infrastructure equipment. Included in operating
profits for the three months ended July 1, 2000 is a $2 million gain from
the sale of investments. This special item is reflected in selling,
general and administrative expenses in the condensed consolidated
statements of earnings.
Excluding net special items, operating profits increased 51 percent to $256
million, compared to $169 million a year ago due primarily to the increase
in terrestrial infrastructure equipment sales.
The segment's results were not impacted by sold businesses. Therefore, for
ongoing businesses, sales, orders and operating profits excluding net
special items were unchanged from the data shown in the table above.
Excluding the sales of satellite communications equipment from the second
quarter of 1999, segment sales would have increased 36 percent. By region,
sales were up very significantly in the Americas, up significantly in
Europe and Asia, and up in Japan. Orders were up very significantly in
Asia and Japan, and up in Europe and the Americas. Sales of iDEN
(Registered) infrastructure equipment were up very significantly versus a
year ago. Sales of GSM and CDMA infrastructure equipment increased
significantly. PDC sales in Japan were significantly higher, while analog
sales were almost zero.
The Company's contract with Teledesic LLC for design and construction of a
satellite communications network continues to be contingent upon
Teledesic's approval following a technical review period. This technical
review period was originally scheduled to end on September 11, 1999, but
Teledesic has extended the period several times. Since approval of the
contract is in the sole discretion of Teledesic, there can be no assurances
that Teledesic will provide this approval. The technical review period is
currently scheduled to expire on September 5, 2000. Teledesic has
indicated in its public filings that it is probable that it will not extend
this period and that it will exercise its right to terminate the agreement.
Commercial, Government and Industrial Systems Segment
Three Months Ended
July 1, July 3, %
(in millions) 2000 1999 Change
Orders $1,221 $1,182 3 %
Segment sales $1,137 $ 955 19 %
Operating profit before tax $ 108 $ 94 15 %
Net special items:
income(expense) $ (6) $ --
Operating profit excluding
net special items $ 114 $ 94 21 %
Segment sales rose 19 percent to $1.1 billion, and orders increased 3
percent to $1.2 billion. Operating profits increased to $108 million from
$94 million in the year earlier quarter primarily due to higher two-way
radio equipment sales in all geographic regions. Included in operating
profits for the three months ended July 1, 2000 is a special item
consisting of a $6 million acquired in-process research and development
charge related to the acquisition of Communication Systems Technology,
Inc.'s assets and intellectual property rights. This special item is
included in selling, general and administrative expenses in the condensed
consolidated statements of earnings.
Excluding net special items, operating profits rose to $114 million,
compared to $94 million a year ago primarily due to the increase in sales.
For ongoing businesses, sales rose 22 percent to $1.1 billion from $934
million, and orders increased 5 percent to $1.2 billion. Operating profits
for ongoing businesses excluding net special items rose to $114 million
compared to $91 million a year ago.
Two-way radio equipment sales were higher in all regions, with very
significant growth in Europe. Orders were higher in all regions, with
significant growth in Asia.
The Company purchased the assets and intellectual property rights of
Communication Systems Technology, Inc., a Columbia, Maryland-based
communication system provider, in April 2000.
Broadband Communications Segment
Three Months Ended
July 1, July 3, %
(in millions) 2000 1999 Change
Orders $ 900 $ 701 28%
Segment sales $ 768 $ 625 23%
Operating profit before tax $ 124 $ 103 20%
Net special items:
income(expense) $ (5) $ 25 (120)%
Operating profit excluding
net special items $ 129 $ 78 65%
Segment sales rose 23 percent to $768 million, and orders increased 28
percent to $900 million. Operating profits increased to $124 million from
$103 million in the year earlier quarter due to increases in sales,
primarily in IP (Internet Protocol) Network Systems and Digital Network
Systems businesses, and from benefits resulting from the synergies achieved
through the merger with General Instrument. Included in operating profits
for the three months ended July 1, 2000, is a special charge of $5 million
relating to merger integration costs from the General Instrument merger.
Included in operating profits for the three months ended July 3, 1999 are
net special items of $25 million. This gain resulted primarily from the
sale of investments. These special items are included in selling, general
and administrative expenses in the condensed consolidated statements of
earnings.
Excluding net special items, operating profits rose 65 percent to $129
million, compared to $78 million a year ago primarily due to the increase
in sales and the benefits described above.
The segment's results were not impacted by sold businesses. Therefore, for
ongoing businesses, sales, orders and operating profits excluding net
special items were unchanged from the data shown in the table above.
Sales were up very significantly in the IP Network Systems business. They
were up significantly in the Digital Network Systems business, higher in
the Transmission Network Systems and the Satellite Broadcast Network
Systems businesses and were significantly lower in the Analog Network
Systems business.
Orders were up very significantly in the IP Network Systems business. They
were up significantly in the Digital Network Systems and Satellite
Broadcast Network Systems businesses, and lower in both the Transmission
Network Systems and the Analog Network Systems businesses.
By region, North America accounted for approximately 80 percent of the
segment's total sales and orders. However, order growth in international
markets grew at a higher rate compared to North American order growth.
Semiconductor Products Segment
Three Months Ended
July 1, July 3, %
(in millions) 2000 1999 Change
Orders $2,155 $2,086 3 %
Segment sales $2,000 $1,979 1 %
Operating profits(loss)
before tax $ (55) $ 80 (169)%
Net special items:
income(expense) $ (221) $ --
Operating profit excluding
net special items $ 166 $ 80 108%
Segment sales increased 1 percent to $2.0 billion, and orders increased 3
percent to $2.2 billion. Operating results decreased to a loss of $55
million from profits of $80 million in the year earlier quarter.
The decrease in operating results was entirely due to net special charges of
$221 million included in the operating loss for the three months ended July
1, 2000. This net special charge is comprised of $220 million in acquired
in-process research and development charges related to the acquisitions of
C-Port Corporation and WaveMark Technologies, Inc., a $17 million gain from
the sale of investments, and an $18 million charge for plant consolidation
costs. The net special items are included in selling, general and
administrative expenses in the condensed consolidated statements of earnings.
Excluding net special items, operating profits rose 108 percent to $166 million
compared to $80 million a year ago primarily due to an increase in operating
margin resulting from the impact of restructuring programs undertaken over the
past few years, including the exit of low growth or unprofitable businesses,
the consolidation of manufacturing facilities and the reduction of employees.
These restructuring programs included the strategic decision to focus the
business on high-growth end markets and to emphasize systems-on-chip
solutions, providing opportunities to reap the benefits of higher gross
margins from value-added hardware, software and services.
For ongoing businesses, sales rose 27 percent to $2.0 billion from $1.6
billion, and orders increased 31 percent to $2.2 billion. Operating
profits for ongoing businesses excluding net special items increased to
$166 million from $24 million in the year earlier quarter. The increase in
profits for ongoing businesses excluding net special items is primarily the
result of the factors discussed above and an increase in sales driven
partially by the growth of worldwide semiconductor demand.
By region, orders were up significantly in Asia-Pacific and higher in
Europe, the Americas and Japan. Orders, which increased in all end
markets, were up significantly in networking and computing, wireless, and
imaging and entertainment, and higher for standard embedded solutions and
transportation.
The Company completed its acquisitions of C-Port Corporation, a developer
of high-end programmable network processors for optical networks and high-
speed Internet switching and routing, and WaveMark Technologies, Inc., a
systems provider in imaging markets for web-enabled printing.
Integrated Electronic Systems Segment
Three Months Ended
July 1, July 3, %
(in millions) 2000 1999 Change
Orders $ 704 $ 630 12 %
Segment sales $ 678 $ 604 12 %
Operating profit before tax $ 38 $ 42 (10)%
Net special items:
income(expense) $ (6) $ --
Operating profit excluding
net special items $ 44 $ 42 5 %
Segment sales rose 12 percent to $678 million, and orders increased 12
percent to $704 million. Operating profits decreased to $38 million from
$42 million in the year earlier quarter primarily due to a special charge
of $6 million resulting from plant consolidation costs. This special item
is included in selling, general and administrative expenses in the
condensed consolidated statements of earnings.
Excluding net special items, operating profits rose to $44 million,
compared to $42 million a year ago due to very significantly higher
telematics communications sales and significantly higher sales in the
computer business. However, these increases were partially offset by flat
sales in energy systems, lower sales in automotive and industrial
electronics, and increased research and development expenses within the
telematics business.
For ongoing businesses, sales increased 19 percent to $678 million compared
to $571 million in the year earlier quarter. Orders increased 19 percent
to $704 million. Operating profits for ongoing businesses excluding net
special items increased 2 percent from $43 million in the year earlier
quarter.
Other Products
In the second quarter of 2000, the Company incurred a special charge of $80
million in acquired in-process research and development related to the
acquisition of Clinical Micro Sensors, Inc. (CMS). CMS is a genomics
instrumentation company developing and manufacturing disposable DNA
biochips and electronic biochip readers. In the second quarter of 1999,
the Company incurred a special charge of $126 million for Iridium-related
reserves. These special items were included in selling, general and
administrative expenses in the condensed consolidated statements of
earnings.
Liquidity and Capital Resources:
Cash and cash equivalents aggregated $3.1 billion as of July 1, 2000,
compared to $2.7 billion as of July 3, 1999.
Net cash used by operations was $932 million for the six-month period ended
July 1, 2000, as compared to $2.0 billion in cash provided by operations
for the six-month period ended July 3, 1999. The net cash used by
operations of $932 million was primarily due to an increase in accounts
receivable in the Personal Communications and Network Systems segments and
an increase in inventory in the Personal Communications Segment.
Net cash used by investing activities was $1.9 billion for the six-month
period ended July 1, 2000, as compared to $929 million for the six-month
period ended July 3, 1999. The increase in cash used by investing
activities for the first half of 2000 compared to the first half of 1999
was primarily due to increased capital expenditures. Capital expenditures
for the first half of 2000 aggregated $1.7 billion, as compared to $1.0
billion for the first half of 1999. Of these expenditures, approximately
$1.0 billion and $516 million, respectively, were spent in the
Semiconductor Products Segment. For 2000, total capital expenditures are
expected to be $4.9 billion, of which $2.6 billion is expected to be spent
in the Semiconductor Products Segment, compared to $2.9 billion in 1999.
Net cash provided by financing activities was $2.6 billion for the six-
month period ended July 1, 2000, as compared to $97 million for the six-
month period ended July 3, 1999. The increase in cash from financing
activities for the first half of 2000 compared to the first half of 1999
was primarily due to $2.4 billion in proceeds from commercial paper and
short-term borrowings to meet the increase in cash needs from operations
primarily related to working capital. The Company's ratio of net debt to
net debt plus equity was 18.0 percent at July 1, 2000 compared to 8.2
percent at December 31, 1999.
The Company's total domestic and non-U.S. credit facilities aggregated $6.1
billion at July 1, 2000, of which $275 million was used and the remaining
$5.8 billion was available to back up outstanding commercial paper which
totaled $4.7 billion.
Purchasers of the Company's infrastructure equipment continue to require
suppliers to provide long-term financing in connection with equipment
purchases. Financing may include all or a portion of the purchase price
and working capital. The Company may also assist customers in obtaining
financing from banks and other sources.
At July 1, 2000, the Company's commitment to Nextel Communications, Inc.
for equipment financing aggregated $457 million, of which $365 million had
been utilized.
At July 1, 2000, the Company's commitment for off-balance sheet third-party
financial guarantees aggregated $772 million, of which $583 million had
been utilized.
The Company's aggregate commitment amounts represent the maximum available
and may not be completely utilized.
The Company believes that it can continue to access the capital markets in
2000, if necessary, on acceptable terms and conditions. However, factors
outside of the Company's control, such as the liquidity of the capital
markets, may affect the Company's ability to access the capital markets on
favorable terms.
Return on average invested capital, based on the performance of the four
preceding quarters ending with July 1, 2000, was 6.1 percent, compared with
4.2 percent based on the performance of the four preceding quarters ending
July 3, 1999. The Company's current ratio, weeks receivable, and inventory
turns (using the cost-of-sales calculation method) were 1.35, 8.0, and 4.6,
respectively, at July 1, 2000, compared to 1.36, 7.7, and 5.9,
respectively, at December 31, 1999.
Iridium Program
At July 1, 2000, 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 has operated as debtors-in-possession under Chapter 11
of the U.S. Federal Bankruptcy Code. On March 17, 2000, Iridium began the
process of winding down and liquidating its operations because no qualified
bid to purchase the Iridium satellites was timely received. At the same
time, the Company began the process of finalizing a plan for the
decommissioning of the Iridium constellation and continued with the process
of shutting down its Iridium-related operations.
As part of the liquidation process, Iridium has been authorized by the New
York bankruptcy court to implement a letter of intent with a potential
purchaser of its assets and to adopt a procedure to solicit and evaluate
other bids for its assets. In connection with this process, Iridium has
filed a motion requesting the bankruptcy court to stay the provisions of an
earlier order authorizing Motorola to implement the decommissioning of the
Iridium satellites. A hearing has been scheduled for July 31, 2000 for the
bankruptcy court to hear this motion.
At December 31, 1999 the Company had $1.8 billion of reserves related to
the Iridium program. There were no charges recorded in the second quarter
of 2000 related to the Iridium program. During the second quarter of 1999,
the Company recorded $162 million of charges related to the Iridium
program. Included in this charge was a $126 million special charge to
write down the value of its Iridium bonds and $36 million of other charges
to reserve for assets at risk and other potential contractual obligations.
The following table displays a rollforward by category from December 31,
1999 to July 1, 2000, of the remaining accrual balances:
Q1 2000 Q2 2000
Accruals at Amounts Amounts Accruals at
Dec. 31, 1999 Used Used July 1, 2000
Accounts Receivable $ 661 $ (661) $ - $ -
Bank Guarantees and Other
Financial Commitments $ 50 $ - $ - $ 50
Investments, Contractual
Commitments and Other
Obligations $ 1,087 $ (623) $ (63) $ 401
Totals $ 1,798 $(1,284) $ (63) $ 451
Through July 1, 2000 the Company utilized $1.3 billion of reserves
including $661 million for accounts receivable write-offs and $686 million
primarily for inventory and other asset write-offs. The total amount used
through July 1, 2000 of $1.3 billion reflects approximately $112 million in
cash payments and $1.2 billion in write-offs. The cash payments were
primarily for costs associated with the wind-down of Iridium operations and
Iridium gateway debt guarantees. Of the remaining $451 million accrual
balance as of July 1, 2000, the Company expects to make approximately $362
million in cash payments and $89 million in write-offs. There were no
reserves used in the first or second quarters of 1999.
The reserve related to the Iridium program as of July 1, 2000 was $451
million, of which $322 million was included in accrued liabilities, $54
million was included as a contra asset, in inventories, $50 million was
included as a contra asset, in property, plant and equipment, and $25
million was included as a contra asset, in other assets. 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 condensed
consolidated balance sheets. These reserves are believed by management to
be sufficient to cover the Company's Iridium exposures. These reserves do
not include additional special charges that may arise as a result of
litigation related to the Iridium project.
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. Although
not contractually required to do so, the Company is continuing to operate
the Iridium system without compensation while a plan to decommission the
Iridium constellation is finalized. The Company currently expects to
continue to perform some services without compensation during the
decommissioning, although it has not waived its right to seek compensation.
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. On June 9,
2000, the Chase Manhattan Bank, the agent under the Secured Credit
Agreement, filed a complaint in the Supreme Court of the State of New York,
New York County, demanding that Motorola pay this $300 million to Chase
plus interest and legal fees. 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. On June 9, 2000, the Chase
Manhattan Bank also filed a complaint in the U.S. District Court in the
District of Delaware demanding that Motorola and other investors in Iridium
LLC pay their capital call requirements, plus interest and legal fees.
Creditors and other stakeholders in Iridium may seek to bring various other
claims against the Company, with respect to payments previously made by
Iridium to the Company, and otherwise. As described in "Legal
Proceedings," a number of purported class action lawsuits alleging
securities law violations have been filed naming Iridium, certain current
and former officers of Iridium, other entities and the Company as
defendants.
A discussion of the Company's commitments and contingencies are detailed in
Note 5 to the condensed consolidated financial statements.
Risk Management
As a multinational company, the Company's transactions are denominated in a
variety of currencies. The Company uses financial instruments to hedge,
and therefore attempts to reduce its overall exposure to the effects of
currency fluctuations on cash flows. The Company's policy is not to
speculate in financial instruments for profit on the exchange rate price
fluctuation, trade in currencies for which there are no underlying
exposures, or enter into trades for any currency to intentionally increase
the underlying exposure. Instruments used as hedges must be effective at
reducing the risk associated with the exposure being hedged and must be
designated as a hedge at the inception of the contract. Accordingly,
changes in market values of hedge instruments must be highly correlated
with changes in market values of underlying hedged items both at inception
of the hedge and over the life of the hedge contract.
The Company's strategy in foreign exchange exposure issues is to offset the
gains or losses of the financial instruments against losses or gains on the
underlying operational cash flows or investments based on the operating
business units' assessment of risk. Currently, the Company primarily
hedges firm commitments, including assets and liabilities currently on the
balance sheet. The Company expects that it may hedge anticipated
transactions, forecasted transactions or investments in foreign
subsidiaries in the future.
Almost all of the Company's non-functional currency receivables and
payables which are denominated in major currencies that can be traded on
open markets are hedged. The Company uses forward contracts and options to
hedge these currency exposures. A portion of the Company's exposure is to
currencies which are not traded on open markets, such as those in Latin
America, and these are addressed, to the extent reasonably possible,
through managing net asset positions, product pricing, and other means,
such as component sourcing.
At July 1, 2000 and July 3, 1999, the Company had net outstanding foreign
exchange contracts totaling $4.0 billion and $2.1 billion, respectively.
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 July 1, 2000, deferred
gains totaled $33.1 million, and deferred losses totaled $4.7 million. At
July 3, 1999, deferred gains totaled $3.4 million, and deferred losses
totaled $1.2 million. The following table shows, in millions, the five
largest net foreign exchange hedge positions as of July 1, 2000 and July 3,
1999:
July 1, July 3,
Buy (Sell) 2000 1999
Japanese Yen (1,435) (775)
Euro (819) (590)
Chinese Renminbi (600) (180)
British Pound (601) ( 5)
Malaysia Ringgit 135 ( 8)
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. 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.
Euro Conversion:
For disclosure regarding the impact to the Company from the introduction of
the euro, see the information contained under the caption "Euro Conversion"
on page F-23 of the appendix to the Company's Proxy Statement for its 2000
annual meeting of stockholders.
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 and SFAS No. 138, 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. 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. The Company is continuing to take the necessary steps to
implement SFAS 133. The Company does not expect the adoption of SFAS 133
to materially affect its consolidated financial position, liquidity, or
results of operations.
In December 1999, the Securities & Exchange Commission issued Staff
Accounting Bulletin Number 101, "Revenue Recognition in Financial
Statements" (SAB 101). The guidelines in SAB 101 must be adopted during
the fourth quarter of 2000. The Company does not expect the adoption of
these guidelines will have a material impact on its consolidated financial
position, liquidity or results of operations.
In March 2000, the FASB issued its Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation - an interpretation of
APB Opinion No. 25" (FIN 44). FIN 44 applies prospectively to new awards,
exchanges of awards in a business combination, modifications to outstanding
awards, and changes in grantee status that occur on or after July 1, 2000,
except for the provisions related to repricings and the definition of an
employee which apply to awards issued after December 15,1998. The Company
does not expect the implementation of these guidelines will have a material
impact on its consolidated financial position, liquidity, or results of
operations.
Business Risks:
Statements that are not historical facts are forward-looking statements
based on current expectations that involve risks and uncertainties.
Forward-looking statements include, but are not limited to, statements
about research and development expenditures, depreciation expense, interest
expense, tax rate, the future of the Company's relationship with Teledesic
LLC, capital expenditures, the need to provide or arrange financing for
customers, the Company's ability to access the capital markets on
acceptable terms and conditions, the outcome of Iridium's bankruptcy
proceedings, future actions relating to the Iridium project, future hedging
activity by the Company, the ability of counterparties to financial
instruments to perform their obligations and the impact of recent
accounting pronouncements on the Company. The Company wishes to caution the
reader that the factors below and those on pages F-25 through F-28 of the
appendix to Company's Proxy Statement for its 2000 annual meeting of
stockholders and in its other SEC filings could cause the Company's results
to differ materially from those stated in the forward-looking statements.
These factors include: (i) difficulties in integrating the operations of
newly-acquired businesses and achieving strategic objectives, cost savings
and other benefits; (ii) demand for products, including those related to
new technologies such as Internet-ready phones; (iii) continued improvement
in the semiconductor industry and the Company's participation in that
improvement; (iv) continued gains in the digital wireless telephone market
and market acceptance of new products; (v) the Company's success in
participating in the lower-tier market for wireless phones; (vi)
difficulties, delays or unexpected liabilities or expenses encountered in
connection with the implementation of Iridium's liquidation proceedings,
including those encountered in finalizing and implementing the process for
decommissioning the Iridium constellation; (vii) unfavorable outcomes to
any pending or future litigation involving the Iridium project; (viii)
pricing pressures and demand for the Company's products, especially if
economic conditions worsen in Motorola's markets; (ix) the success of
alliances and agreements with other companies to develop new products and
services; (x) unexpected changes in the requirements for manufacturing
capacity, which may necessitate different levels of capital expenditures;
(xi) increasing demand for customer financing of equipment sales,
particularly infrastructure equipment; (xii) the success of the Company's
efforts to secure sufficient components for its products, including
wireless phones; (xiii) unexpected revisions or cancellations to orders for
products; and (xiv) product and technology development and
commercialization risks, including for newer digital products.
Iridium (Registered) is a registered trademark and service mark of Iridium
LLC.
Part II - Other Information
Item 1 - Legal Proceedings.
Motorola is currently a named defendant in seven cases arising out of
alleged groundwater, soil and air pollution in Phoenix and Scottsdale,
Arizona. Baker et al. v. Motorola et al., filed on February 11, 1992, is a
class action involving six representative individual named plaintiffs,
alleging that Motorola and a number of other defendants contaminated the
soil, air and groundwater in the Phoenix/Scottsdale area, diminishing
property values and exposing members of the class to possible adverse
health effects. The court has now set January 8, 2001 as the start of
trial of the Scottsdale property subclass claims in the Baker case.
A class action, In Re Nextel Communications Securities Litigation, against
Nextel Communications, Inc., certain of its officers and directors and
Motorola for alleged violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and SEC Rule 10b-5, was pending in the
United States District Court for the District of New Jersey. On June 26,
2000, the court held a public hearing, approved the Stipulation of
Settlement previously presented by the parties and dismissed the case with
prejudice.
Motorola and several of its officers and directors are named defendants in
a consolidated class action, Kaufman, et al. v. Motorola, Inc., et al., for
alleged violations of Sections 10(b) and 20(a) of the Securities Exchange
Act and SEC Rule 10b-5. The court has set a trial date of April 9, 2001.
Motorola has been a defendant in several cases arising out of its
manufacture and sale of portable cellular telephones. Kane, et al., v.
Motorola, Inc., et al., filed on December 13, 1993 in the Circuit Court of
Cook County, Illinois, alleged that plaintiffs' brain cancer was caused by
or aggravated by a prototype communication device. Plaintiffs have
appealed the summary judgment entered May 11, 2000 in Motorola's favor.
Jerald P. Busse, et al. v. Motorola, Inc. et al., filed on October 26, 1995
in the Circuit Court of Cook County, Illinois, Chancery Division, is a
class action alleging that defendants have failed to adequately warn
consumers of the alleged dangers of cellular telephones and challenging
ongoing safety studies as invasions of privacy. On July 21, 2000, the
Court entered an order certifying a nationwide class of all subscribers
whose cellular telephone carrier agreed to provide information about the
subscriber to the entity conducting the study.
On October 16, 1998, the plaintiffs in Pennsylvania Bancshares, Inc. et al.
v. Motorola, Inc., et al., a purported class action filed on October 10,
1995 in the Court of Common Pleas, Montgomery County, Pennsylvania, filed a
notice of voluntary dismissal with prejudice as to all claims for monetary
relief and without prejudice as to all claims for equitable relief.
Plaintiffs alleged that Motorola systematically engages in deceptive trade
practices, including without limitation, intentionally misrepresenting the
quality of certain types of cellular telephones. On June 19, 2000, the
Court sustained Motorola's Preliminary Objections Regarding Plaintiff's
Failure to Allege a Valid Claim and dismissed all other motions filed by
Motorola as moot.
Silber, et al. v. Motorola, Inc., et al., filed on August 1, 1995 in the
Supreme Court of The State of New York, County of Suffolk, which was
transferred from the County of New York, is an action wherein it is alleged
that a traffic accident was caused by the use of a cellular phone. On
April 27, 1999, Motorola obtained summary judgment on plaintiffs' claims.
On July 24, 2000, the Appellate Division, Second Department, affirmed the
decision finding that Motorola's actions were not a proximate cause of the
accident.
See Item 3 of the Company's Form 10-K for the fiscal year ended December
31, 1999 and Item 1 of Part II of the Company's Form 10-Q for the period
ended April 1, 2000 for additional disclosures regarding pending matters.
In the opinion of management, the ultimate disposition of these matters
will not have a material adverse effect on the consolidated financial
position, liquidity or results of operations of Motorola.
Item 2 - Changes in Securities and Use of Proceeds.
(c) Sales of Unregistered Securities
During June 2000, Motorola issued an aggregate of 11,493,243 shares of
common stock (for an aggregate sales price of approximately $95 million) to
7 holders of warrants issued by General Instrument Corporation ("GI") prior
to the merger of Motorola and GI, which was consummated on January 5, 2000.
Warrants issued by GI for an aggregate of an additional 35,570,082 shares
of Motorola common stock remain outstanding as of the date of this report.
Motorola has filed a Registration Statement on Form S-3 (File No. 333-
36320) covering the resale of all such shares of common stock by the
holders thereof. The issuances of these shares to the warrant holders were
deemed exempt from registration under the Securities Act of 1933, as
amended, by virtue of Section 4(2) thereof, as transactions not involving a
public offering.
Item 3 - Defaults Upon Senior Securities.
Not applicable.
Item 4 - Submission of Matters to Vote of Security Holders.
Not applicable.
Item 5 - Other Information.
Not applicable.
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits
3(ii) By-Laws of Motorola, Inc., as amended through May 2, 2000
(incorporated by reference to Exhibit 4.3 to Motorola's
Registration Statement on Form S-3 filed on May 5, 2000 (Reg.
No. 333-36320)).
10.1 Motorola Incentive Plan of 1998, as amended through June 2,
2000.
27 Financial Data Schedule (filed only electronically with the
SEC).
(b) Reports on Form 8-K
On June 2, 2000, the Company filed Amendment No. 2 on Form-8
K/A to a Current Report on Form 8-K filed on March 23, 2000.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOTOROLA, INC.
(Registrant)
Date: July 31, 2000 By: /s/Anthony Knapp
Anthony Knapp
Senior Vice President and Controller
(Chief Accounting Officer and Duly
Authorized Officer of the Registrant)
EXHIBIT INDEX
Number Description of Exhibits
3(ii) By-Laws of Motorola, Inc., as amended through May 2, 2000
(incorporated by reference to Exhibit 4.3 to Motorola's
Registration Statement on Form S-3 filed on May 5, 2000 (Reg.
No. 333-36320)).
10.1 Motorola Incentive Plan on 1998, as amended through June 2,
2000.
27 Financial Data Schedule (filed only electronically with the SEC)