UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ending July 3, 1999
------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to _________
Commission file number: 1-7221
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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 3, 1999:
Class Number of Shares
----- ----------------
Common Stock; $3 Par Value 607,196,695
Motorola, Inc. and Subsidiaries
Index
Part I
Financial Information Page
Item 1 Financial Statements
Condensed Consolidated Statements of Operations for the
Three-Month and Six-Month Periods Ended
July 3, 1999 and June 27, 1998 2
Condensed Consolidated Balance Sheets as of
July 3, 1999 and December 31, 1998 3
Condensed Consolidated Statement of Stockholders'
Equity for the Six-Month Period Ended July 3, 1999 4
Condensed Consolidated Statements of Cash Flows for the
Six-Month Periods Ended July 3, 1999 and
June 27, 1998 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 22
i
TEXT OF AMENDMENTS
------------------
Explanatory Note:
Each of the above listed Items is hereby amended by deleting the Item
in its entirety and replacing it with the corresponding Item attached hereto and
filed herewith.
The purpose of this amendment is to amend the Company's 10-Q for the
period ending July 3, 1999, (the "Original Filing") make certain changes to the
Notes to Condensed Consolidated Financial Statements (included in Item 1) and
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Item 2) ("MD&A").
We are filing this amended Quarterly Report on Form 10-Q/A in response
to comments received from the Securities and Exchange Commission (the "SEC"). As
requested by the SEC, we have provided additional disclosure in the MD&A and in
the notes to the financial statements. This report continues to speak as of the
date of the Original Filing and we have not updated the disclosure in this
report to speak to any later date. While this report primarily relates to the
historical period covered, events may have taken place since the date of the
Original Filing that might have been reflected in this report if they had taken
place prior to the Original Filing.
Any items in the Original Filing not expressly changed hereby shall be
as set forth in the Original Filing. All information contained in this amendment
and the Original Filing is subject to updating and supplementing as provided in
the Company's periodic reports filed with the SEC subsequent to the date of such
reports.
1
Part I - Financial Information
Motorola, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(In millions, except per share amounts)
Three Months Ended Six Months Ended
------------------ ----------------
July 3, June 27, July 3, June 27,
1999 1998 1999 1998
------- ------- ------- -------
Net sales $ 7,513 $ 7,023 $14,745 $13,909
------- ------- ------- -------
Costs and expenses
Manufacturing and other
costs of sales 4,389 4,318 8,641 8,445
Selling, general and
administrative expenses 1,403 1,329 2,803 2,550
Restructuring and other charges --- 1,980 --- 1,980
Research & development
expenditures 811 722 1,555 1,425
Depreciation expense 564 518 1,114 1,058
Interest expense, net 51 53 93 91
------ ------- ------- -------
Total costs and expenses 7,218 8,920 14,206 15,549
------ ------- ------- -------
Earnings (loss) before income taxes 295 (1,897) 539 (1,640)
Income tax provision (benefit) 89 (569) 162 (492)
------ ------- ------- -------
Net earnings (loss) $ 206 $(1,328) $ 377 $(1,148)
====== ======= ======= =======
Net earnings (loss) per common share
- ------------------------------------
Basic $ .35 $ (2.22) $ .63 $ (1.92)
====== ======= ======= =======
Diluted $ .33 $ (2.22) $ .61 $ (1.92)
====== ======= ======= =======
Weighted average common shares
- ------------------------------
outstanding
- -----------
Basic 604.6 597.9 603.4 597.6
====== ======= ======= =======
Diluted 622.4 597.9 619.8 597.6
====== ======= ======= =======
Dividends paid per share $ .12 $ .12 $ .24 $ .24
====== ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
2
Motorola, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In millions)
(Unaudited)
July 3, December 31,
1999 1998
------- -------
Assets
Cash and cash equivalents $ 2,358 $ 1,453
Short-term investments 291 171
Accounts receivable, net 5,338 5,057
Inventories 3,765 3,745
Deferred income taxes 2,519 2,362
Other current assets 787 743
------- -------
Total current assets 15,058 13,531
------- -------
Property, plant and equipment, net 9,613 10,049
Other assets 7,076 5,148
------- -------
Total assets $31,747 $28,728
======= =======
Liabilities and Stockholders' Equity
Notes payable and current portion of
long-term debt $ 1,877 $ 2,909
Accounts payable 2,484 2,305
Accrued liabilities 6,365 6,226
------- -------
Total current liabilities 10,726 11,440
------- -------
Long-term debt 3,119 2,633
Deferred income taxes 2,011 1,188
Other liabilities 1,729 1,245
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely company-guaranteed debentures 484 -----
Stockholders' Equity
Preferred stock, $100 par value issuable
in series ----- -----
Common Stock, $3 par value 1,822 1,804
Additional paid-in capital 2,107 1,894
Retained earnings 8,487 8,254
Non-owner changes to equity 1,262 270
------- -------
Total stockholders' equity 13,678 12,222
------- -------
Total liabilities and stockholders' equity $31,747 $28,728
======= =======
See accompanying notes to condensed consolidated financial statements.
3
Motorola, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
(In millions)
Non-Owner Changes To Equity
---------------------------
Common
Stock Fair Value
and Adjustment Foreign
Additional to Certain Currency
Paid-In Cost-Based Translation Retained
Capital Investments Adjustments Earnings
- ----------------------------------------------------------------------------------------------
BALANCES AT 12/31/98 $3,698 $ 476 ($206) $8,254
- ----------------------------------------------------------------------------------------------
Net earnings 377
Conversion of zero coupon notes 2
Fair value adjustment to certain cost-based
investments:
Reversal of prior period
adjustment (476)
Recognition of current period
unrecognized gain 1,564
Change in foreign currency
translation adjustments (96)
Stock options exercised
and other 229
Dividends declared (144)
- ----------------------------------------------------------------------------------------------
BALANCES AT 7/3/99 $3,929 $1,564 ($302) $8,487
- ----------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
4
Motorola, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In millions)
Six Months Ended
----------------
July 3, June 27,
1999 1998
------- -------
Operating
Net earnings (loss) $ 377 $(1,148)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used for) operating activities:
Restructuring and other charges --- 1,980
Depreciation 1,114 1,058
Deferred income taxes (45) (430)
Amortization of debt discount and issue costs 3 5
Gain on disposition of investments in
affiliates (59) (168)
Change in assets and liabilities, net of
effects of acquisitions and dispositions:
Accounts receivable (281) (64)
Inventories (43) (314)
Other current assets (44) (40)
Accounts payable and accrued liabilities 274 (848)
Other assets and liabilities 538 (298)
------- -------
Net cash provided by (used for) operating activities $ 1,834 $ (267)
Investing
Acquisitions and advances to affiliates $ (195) $ (320)
Proceeds from dispositions of investments
in affiliates 225 184
Capital expenditures (957) (1,688)
Proceeds from dispositions of property, plant and
equipment 151 246
(Purchases) sales of short-term investments (79) 67
------- -------
Net cash used for investing activities $ (855) $(1,511)
Financing
(Repayment of) proceeds from commercial paper and
short-term borrowings $(1,032) $ 1,691
Proceeds from issuance of debt 500 8
Repayment of debt (17) (27)
Issuance of common stock 231 18
Issuance of preferred securities of subsidiary
trust 484 ---
Payment of dividends (144) (144)
------- -------
Net cash provided by financing activities $ 22 $ 1,546
Effect of exchange rate changes on cash and
cash equivalents $ (96) $ (36)
------- -------
Net increase(decrease) in cash and cash equivalents $ 905 $ (268)
Cash and cash equivalents, beginning of period $ 1,453 $ 1,445
------- -------
Cash and cash equivalents, end of period $ 2,358 $ 1,177
======== =======
See accompanying notes to condensed consolidated financial statements.
5
Motorola, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The condensed consolidated financial statements as of July 3, 1999 and for the
three-month and six-month periods ended July 3, 1999 and June 27, 1998, include,
in the opinion of management, all adjustments (consisting of normal recurring
adjustments and reclassifications) necessary to present fairly the financial
position, results of operations and cash flows at July 3, 1999 and for all
periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto incorporated by reference in the
Company's Form 10-K for the year ended December 31, 1998. The results of
operations for the three-month and six-month periods ended July 3, 1999 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 1999 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. Supplemental Balance Sheet Information
Inventories consist of the following (in millions):
July 3, Dec. 31,
1999 1998
------- -------
Finished goods $ 1,126 $ 1,033
Work in process and production materials 2,639 2,712
------- -------
$ 3,765 $ 3,745
======= =======
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", requires the carrying value
of certain investments to be adjusted to fair value. The Company recorded an
increase to stockholders' equity, other assets and deferred income taxes of $1.6
billion, $2.6 billion and $1.0 billion as of July 3, 1999; compared to an
increase of $476 million, $787 million and $311 million as of December 31, 1998.
3. Supplemental Cash Flow Information
Cash paid for interest during the first six months of 1999 and 1998 was $86
million and $146 million, respectively. Cash paid for income taxes during the
first six months of 1999 and 1998 was $89 million and $307 million,
respectively.
6
4. Earnings (Loss) Per Common Share
The following table presents a reconciliation of the numerators and denominators
of basic and diluted earnings (loss) per common share:
Three Months Ended
------------------
July 3, June 27,
(In millions, except per share amounts) 1999 1998
---- ----
Basic earnings (loss) per common share:
Net earnings (loss) $ 206 $(1,328)
Weighted average common shares
outstanding 604.6 597.9
------ -------
Per share amount $ .35 $ (2.22)
====== =======
Diluted earnings (loss) per common share:
Net earnings (loss) $ 206 $(1,328)
Add: Interest on zero coupon
notes, net 1 ---
------ -------
Net earnings (loss) as adjusted $ 207 $(1,328)
------ -------
Weighted average common shares
outstanding 604.6 597.9
Add: Effect of dilutive securities
Stock options 15.8 ---
Zero coupon notes 2.0 ---
------ -------
Diluted weighted average common
shares outstanding 622.4 597.9
------ -------
Per share amount $ .33 $ (2.22)
====== =======
Six Months Ended
----------------
July 3, June 27,
(In millions, except per share amounts) 1999 1998
---- ----
Basic earnings (loss) per common share:
Net earnings (loss) $ 377 $(1,148)
Weighted average common shares
outstanding 603.4 597.6
------ -------
Per share amount $ .63 $ (1.92)
====== =======
Diluted earnings (loss) per common share:
Net earnings (loss) $ 377 $(1,148)
Add: Interest on zero coupon
notes, net 1 ---
------ -----
Net earnings (loss) as adjusted $ 378 $(1,148)
------ -------
Weighted average common shares
outstanding 603.4 597.6
Add: Effect of dilutive securities
Stock options 14.4 ---
Zero coupon notes 2.0 ---
------ -----
Diluted weighted average common
shares outstanding 619.8 597.6
------ -------
Per share amount $ .61 $ (1.92)
====== =======
7
5. Reorganization of Businesses
In the second quarter of 1998, the Company recorded, as a separate line in the
consolidated statements of operations, a pre-tax charge of $1.98 billion to
cover restructuring costs of $1.275 billion and asset impairments and other
charges of $705 million. Restructuring costs include costs to consolidate
manufacturing operations throughout the Company; to exit non-strategic,
poorly-performing businesses; and to reduce worldwide employment by 20,000
employees. The following tables display rollforwards from December 31, 1998, to
July 3, 1999, and from June 27, 1998, to December 31, 1998, of the accruals
established during the second quarter of 1998:
1998 Program
- ------------
Accruals Accruals
At 1999 At
Dec. 31, Amounts July 3,
1998 Used 1999
- --------------------------------------------------------------------------------
Consolidation of
manufacturing
operations $ 155 $ (81) $ 74
Business exits 137 46 183
Employee separations 187 (76) 111
----- ----- -----
Total restructuring $ 479 $ (111) $ 368
- --------------------------------------------------
Asset impairments and
- --------------------------------------------------------------------------------
other charges 161 (12) 149
- --------------------------------------------------
Totals $ 640 $ (123) $ 517
Second
Quarter Accruals
1998 1998 Initial 1998 At
Initial Reclassifi- Charges Amounts Dec. 31,
Charges cations As Adjusted Used 1998
- --------------------------------------------------------------------------------
Consolidation of
manufacturing
operations $ 361 $ (35) $ 326 $ (171) $ 155
Business exits 453 (162) 291 (154) 137
Employee separations 461 197 658 (471) 187
------ ------- ------ ------- ------
Total restructuring $1,275 $ --- $1,275 $ (796) 479
- -------------------------------------------------------------------------
Asset impairments and
- --------------------------------------------------------------------------------
other charges 705 --- 705 (544) 161
- -------------------------------------------------------------------------
Totals $1,980 $ --- $1,980 $(1,340) $ 640
Amounts in the 1998 Reclassifications column represent the reallocation of
accruals in 1998 between restructuring categories and not increases in the
initial charges. These reallocations were due to the sale of, rather than the
planned closure of, two of the Company's businesses and the reclassification of
employee severance costs originally accrued for in the consolidation of
manufacturing operations and business exits. These reallocations were also
offset by higher than anticipated severance costs from special voluntary
termination benefits.
The total 1999 amount used of $123 million through July 3, 1999, reflects
approximately $111 million in cash payments and $12 million in write-offs. The
total 1998 amount used of $1.34 billion through December 31, 1998, reflects
8
approximately $600 million in cash payments and $740 million in write-offs. Of
the remaining $517 million accrual balance at July 3, 1999, the Company expects
to make approximately $182 million in cash payments and $335 million in
write-offs.
In July 1998, the Company's communications-related businesses began realigning
into the Communications Enterprise, a structure intended to enable integrated
solutions and improved responsiveness to customers' needs. This realignment
resulted in the formation of new reportable segments. The following table
displays by category the restructuring and other charges, as adjusted, recorded
by each new reportable segment and included in the segment's restated operating
profit (loss) before tax for the three-month period ended June 27, 1998. The
segment amounts also include the allocation of $55 million in restructuring and
other charges recorded at the corporate level.
Restructuring Charges Other Charges
- -------------------------------------------------------------------------------------------------------------------
Asset
Consol of Business Employee Impair- Other
Segment mfg. Ops. exits separations ments Charges Total
- -------------------------------------------------------------------------------------------------------------------
Personal Communications $113 $38 $149 $175 $122 $597
Network Systems 11 --- 44 --- 104 159
Commercial, Government
and Industrial
Systems 18 --- 104 5 --- 127
Semiconductor Products 163 101 282 159 26 731
Other Products 21 152 79 41 73 366
- -------------------------------------------------------------------------------------------------------------------
Total $326 $291 $658 $380 $325 $1,980
- -------------------------------------------------------------------------------------------------------------------
Consolidation of manufacturing operations relates to the closing of production
and distribution facilities, selling or disposing of the machinery and equipment
that was no longer needed and, in some cases, scrapping excess assets that had
no realizable value. The remaining $74 million accrual, included in accrued
liabilities in the consolidated balance sheets, at July 3, 1999, for this
restructuring category primarily relates to the finalization of plant closings
in the Semiconductor Products and Personal Communications segments.
Business exit costs include costs associated with shutting down businesses that
did not fit with the Company's new strategy. In many cases, these businesses
used older technologies that produced non-strategic products. Year-to-date
utilization was $25 million, offset by $71 million of favorable adjustments
related to a Semiconductor Products segment technology agreement and the sale of
the Integrated Electronic Systems Sector's non-silicon component manufacturing
business to CTS Corp. The remaining $183 million accrual, included in accrued
liabilities in the consolidated balance sheets, at July 3, 1999, for this
restructuring category primarily relates to contract requirements and
contingencies as part of the sales of the Company's printed circuit board
business in the third quarter of 1998 and non-silicon component manufacturing
business in the first quarter of 1999 and the finalization of remaining
activities in the Semiconductor Products segment.
Employee separation costs represent the accrual of severance based upon the
headcount reductions for the involuntary severance package the Company offered
as part of its restructuring plan. At July 3, 1999, approximately 17,800
employees have separated from the Company through a combination of voluntary and
involuntary severance programs. Of these 17,800 separated
9
employees, approximately 11,200 were direct employees, and 6,600 were indirect
employees. Direct employees are primarily non-supervisory production employees,
and indirect employees are primarily non-production employees and production
managers. In addition, 4,200 employees separated from the Company with the sale
of the non-silicon component manufacturing business. These 4,200 people were not
paid any severance because the business was sold to another corporation. The
remaining $111 million accrual, included in accrued liabilities in the
consolidated balance sheets, at July 3, 1999, to cover 2,200 positions for the
employee separations restructuring category relates to severance payments still
to be completed in the cellular and paging businesses in Illinois, Florida and
Texas and in the semiconductor products business in Japan, Asia, the U.K. and
Arizona.
The asset impairment costs related to reductions in the carrying values of
assets for businesses that the Company was going to continue to operate but, in
doing an impairment analysis, the carrying values of these assets were not
recoverable from the future cash flows of the businesses. The Company reduced
the carrying values of the related asset balances by approximately $380 million.
The other charges are not restructuring charges, but rather are other costs
primarily comprised of contract termination costs related to agreements that
were associated with businesses that the Company was no longer making
investments in, losses recorded on cellular infrastructure contracts, and an
in-process research and development write-off of $42 million related to a
transaction from the second quarter of 1998. The remaining $149 million accrual
at July 3, 1999, relates entirely to these other charges.
As the Company's 1998 comprehensive manufacturing consolidation, cost reduction
and restructuring programs reach their planned completion, management continues
to assess the estimated costs to complete these programs. Management anticipates
completing these programs by December 31, 1999, and believes the remaining
accruals are adequate to cover these costs.
1997 Programs
- -------------
During 1997, the Company established various restructuring accruals for the
purpose of redirecting resources from businesses which have not met
profitability objectives. The related charges totaled $327 million. The
following tables display rollforwards of the accruals established by business
exit:
10
Accruals at Accruals at
Dec. 31, Amounts July 3,
1998 Adjustments Used 1999
- -----------------------------------------------------------------------------------------------------------------------
Q2 1997: Semiconductor Products Segment
Exit from DRAM market $ 8 $ - $ (5) $ 3
- -----------------------------------------------------------------------------------------------------------------------
Q3 1997: Other Products Segment
Exit from MacOS-compatible computer
systems business 15 - (1) 14
- -----------------------------------------------------------------------------------------------------------------------
Q4 1997: Messaging, Information and Media Segment
Exit from retail analog modem business 3 (3) - -
- -----------------------------------------------------------------------------------------------------------------------
Grand total $ 26 $ (3) $ (6) $ 17
- -----------------------------------------------------------------------------------------------------------------------
Accruals at
1997 Initial Amounts Dec. 31,
Charges Adjustments Used 1997
- -----------------------------------------------------------------------------------------------------------------------
Q2 1997: Semiconductor Products Segment
Exit from DRAM market $ 170 $ (9) $ (131) $ 30
- -----------------------------------------------------------------------------------------------------------------------
Q3 1997: Other Products Segment
Exit from MacOS-compatible computer
systems business 95 - (28) 67
- -----------------------------------------------------------------------------------------------------------------------
Q4 1997: Other Products Segment
Exit from retail analog modem business 62 - - 62
- -----------------------------------------------------------------------------------------------------------------------
Grand total $ 327 $ (9) $ (159) $ 159
- -----------------------------------------------------------------------------------------------------------------------
Accruals at
Amounts Dec. 31,
Adjustments Used 1998
- -------------------------------------------------------------------------------------------------
Q2 1997: Semiconductor Products Segment
Exit from DRAM market $ (12) $ (10) $ 8
- -------------------------------------------------------------------------------------------------
Q3 1997: Other Products Segment
Exit from MacOS-compatible computer
systems business (10) (42) 15
- -------------------------------------------------------------------------------------------------
Q4 1997: Other Products Segment
Exit from retail analog modem business - (59) 3
- -------------------------------------------------------------------------------------------------
Grand total $ (22) $ (111) $ 26
- -------------------------------------------------------------------------------------------------
In the second quarter of 1997, the Company's Semiconductor Products segment
announced its decision to phase out its participation in the dynamic random
access memory (DRAM) market. The decision to exit this business was made
primarily because the business did not meet strategic and profitability
objectives, rather than to generate significant future cost savings. As a result
of this decision, the segment incurred a $170 million charge to write off
technology development costs and to provide for the write down of manufacturing
equipment which could not be retrofitted for other production. In the fourth
quarter of 1997 and in the first quarter of 1998, the segment sold some of this
manufacturing equipment to its joint venture partner and thus reversed into
income $9 million and $12 million, respectively, of accruals no longer needed.
The amounts used in 1997 reflect write-offs. The amounts used in 1998 reflect $3
million in cash payments for exit fees and $7 million in write-offs. The amounts
used in 1999 reflect $4 million in cash payments for exit fees and $1 million in
write-offs. The remaining $3 million accrual at July 3, 1999, is expected to be
used by the end of the third quarter of 1999.
In the third quarter of 1997, the Company announced its decision to exit the
MacOS(R)-compatible computer systems business, a business included in the Other
Products Segment. The decision was made in response to a decision by Apple
Computer to limit the introduction of its new technology and phase out future
licenses, rather than to generate significant future cost savings. As a result
of this decision, the Company incurred a $95 million charge primarily for the
write down of inventory and the cost of terminating contractual commitments. In
the second quarter of 1998, the exposures on these contractual commitments were
less than anticipated, thus resulting in the reversal into income of $10
million. The amounts used in 1997 reflect $3 million in employee severance
payments and $25 million in
11
write-offs. The amounts used in 1999 reflect $1 million in write-offs. The
remaining $14 million accrual at July 3, 1999, relates to these contractual
commitments and may extend past the 1999 year end.
In the fourth quarter of 1997, the Company announced its decision to exit the
retail analog modem business based in Huntsville, AL, and formerly part of the
Messaging, Information and Media segment. The decision was made primarily
because the business was not meeting the Company's strategic and profitability
objectives, rather than to generate significant future cost savings. As a result
of this decision, the segment incurred a $62 million charge for the write down
of inventory and fixed assets, severance costs and certain other costs relating
to the realignment process. The amounts used in 1998 reflect $37 million in
employee severance payments and $22 million in write-offs. The remaining $3
million accrual at December 31, 1998 was reversed into income in the first
quarter of 1999.
The results of operations of each of these exited businesses were not material
to the Company's consolidated financial statements.
6. Comprehensive Earnings (Loss)
Comprehensive earnings (loss) for the three-month periods ended July 3, 1999 and
June 27, 1998 were $678 million and $(1.4) billion, respectively. Comprehensive
earnings (loss) for the six-month periods ended July 3, 1999, and June 27, 1998,
were $1.4 billion and $(1.1) billion, respectively. The unrecognized gain on
cost-based investments of $1.6 billion properly excludes a reclassification
adjustment of $44.7 million, net of tax, related to the sale of securities.
7. Finance Subsidiary Debt and Trust Originated Preferred SecuritiesSM
On June 21, 1999, the Company's finance subsidiary sold an aggregate face
principal amount at maturity of $500 million of 6.75% Guaranteed Bonds due June
21, 2004, to non-U.S. persons. The Bonds were sold outside of the United States
in reliance on Regulation S under the Securities Act of 1933, as amended. The
net proceeds to the finance subsidiary from the issuance and sale of the bonds
were $497 million and were used to reduce its short-term indebtedness. Shortly
after the sale, the finance subsidiary entered into interest rate swaps to
change the characteristics of the interest rate payments on the bonds from
fixed-rate payments to short-term LIBOR based variable rate payments in order to
match the funding of its underlying assets.
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 SecuritiesSM ("TOPrS") to the public at an aggregate offering price of
$500 million. The Trust used the proceeds from this sale, together with the
proceeds from its 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 asset of the Trust is 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.
12
(SM) "Trust Originated Preferred Securities" and "TOPrS" are service marks of
Merrill Lynch & Co., Inc.
13
8. Segment Information
Beginning in the first quarter of 1999, the Company changed the operating
segments it uses for financial reporting purposes as a result of organizational
changes implemented in its communications businesses. 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 3, 1999 and June 28, 1998.
Three Months Ended
July 3, June 27, %
1999 1998 Change
------ ------ ------
Segment Sales:
- -------------
Personal Communications Segment $2,788 $2,386 17
Network Systems Segment 1,587 1,590 --
Commercial, Govt. and Industrial
Systems Segment 955 1,020 (6)
Semiconductor Products Segment 1,979 1,808 9
Other Products Segment 884 890 (1)
Adjustments & Eliminations (680) (671) 1
------ ------
Segment Totals $7,513 $7,023 7
====== ======
% Of % Of
Sales Sales
----- -----
Segment Operating Profit
(Loss) Before Taxes:
- -------------------
Personal Communications Segment $ 125 4 $ (501) (21)
Network Systems Segment 169 11 57 4
Commercial, Govt. and Industrial
Systems Segment 94 10 (24) (2)
Semiconductor Products Segment 80 4 (899) (50)
Other Products Segment (171) (19) (466) (52)
Adjustments & Eliminations 1 -- 2 --
------- ---------
Segment Totals 298 4 (1,831) (26)
General Corporate (3) -- (66) --
------- --------
Earnings (Loss) Before Income Taxes $ 295 4 $(1,897) (27)
======= ========
14
Summarized below are the Company's segment sales and operating profit (loss)
before taxes by new reportable segment for the six months ended July 3, 1999 and
June 27, 1998.
Six Months Ended
July 3, June 27, %
1999 1998 Change
------ ------ ------
Segment Sales:
- -------------
Personal Communications Segment $5,390 $4,798 12
Network Systems Segment 3,210 3,133 2
Commercial, Govt. and Industrial
Systems Segment 1,840 1,950 (6)
Semiconductor Products Segment 3,886 3,641 7
Other Products Segment 1,757 1,767 (1)
Adjustments & Eliminations (1,338) (1,380) (3)
------- -------
Segment Totals $14,745 $13,909 6
======= =======
% Of % Of
Sales Sales
----- -----
Segment Operating Profit
(Loss) Before Taxes:
- -------------------
Personal Communications Segment $ 208 4 $ (434) (9)
Network Systems Segment 362 11 206 7
Commercial, Govt. and Industrial
Systems Segment 146 8 131 7
Semiconductor Products Segment 127 3 (957) (26)
Other Products Segment (262) (15) (525) (30)
Adjustments & Eliminations (7) -- (7) --
------ ------
Segment Totals 574 4 (1,586) (11)
General Corporate (35) -- (54) --
------ --------
Earnings (Loss) Before Income Taxes $ 539 4 $(1,640) (12)
====== ========
15
9. Commitments and Contingencies
Iridium
- -------
At July 3, 1999, the Company owned, directly and indirectly, approximately 18%
of the equity interests in Iridium LLC (Iridium LLC and its operating
subsidiary, Iridium Operating LLC, are collectively referred to as Iridium) as
well as Iridium bonds with a face value of approximately $157 million. The
Company also holds equity investments and notes receivables with a book value of
approximately $32 million in several Iridium gateway companies. the Company's
equity investment in Iridium, as reflected in its financial statements, is zero
as a result of the Company recording its share of Iridium losses. The Company
recorded a special charge in the second quarter of 1999 of $126 million to write
down the value of its Iridium bonds to a level which reflects the decline in
value of Iridium's public high-yield debt. The Company's investment in Iridium
bonds and its equity investments in several Iridium gateway companies are
included in Other Assets. The Company accounts for its investment in Iridium
under the equity method of accounting due to its financial influence on Iridium
in the form of guarantees of Iridium's indebtedness, its contract with Iridium
for the operation and maintenance of the global personal communications system
and other financial commitments as more fully discussed below. The following
table summarizes the Company's equity and bond investments in Iridium and
investments in the Iridium gateway companies as of July 3, 1999, and the amounts
owed to the Company by Iridium under several contracts as of July 3, 1999:
- -----------------------------------------------------------------
Investments:
Equity investment in Iridium $ ---
Bond investment in Iridium at:
Original carrying value 157
Less: second quarter 1999 write down (126)
-----
Adjusted carrying value 31
Investments in and notes receivables
from Iridium gateway companies 32
-----
Total $ 63
=====
Accounts Receivable:
Operations & Maintenance contract $ 400
Other contracts 95
-----
Total $ 495
=====
- -----------------------------------------------------------------
The following table summarizes as of July 3, 1999 the Company's bank guarantees
and other financial commitments for which it is obligated should certain
conditions or events occur and the contractual commitments to Iridium and other
obligations:
16
- ---------------------------------------------------------------------
Bank Guarantees and Other Financial
Commitments:
Senior Secured Credit Agreement capital call $ 50
Senior Guaranteed Credit Agreement $750
Conditional Guarantee See Below
Contractual Commitments and Other Obligations:
Operations & Maintenance contract maximum
deferrable commitment $400
Amount deferred as of July 3, 1999 400
----
Remaining deferrable commitment $---
====
Obligations to subcontractors $ 66
====
Assets at risk and other estimated potential
contractual obligations $696
====
- ---------------------------------------------------------------------
Iridium's bank facilities are (1) an $800 million Senior Secured Credit
Agreement (the "Secured Credit Agreement") and (2) a $750 million Senior
Guaranteed Credit Agreement (the "Guaranteed Credit Agreement"). The Guaranteed
Credit Agreement is guaranteed by the Company. As of July 3, 1999, Iridium had
borrowed all of the funds available under the Guaranteed Credit Agreement. The
majority of this facility is scheduled to mature on December 31, 2000 and the
remainder is scheduled to mature on December 31, 2001.
The Secured Credit Agreement contains covenants that require Iridium to satisfy
certain minimum revenue and customer levels as of various dates. On March 29,
1999, Iridium announced that it would not meet its first quarter 1999 revenue
and customer requirements, and that it had received a sixty-day waiver, until
May 31, 1999, from the lenders under the Secured Credit Agreement. On May 13,
1999, Iridium announced that it did not expect to meet, on May 31, 1999, the
first quarter 1999 revenue and customer requirements previously waived. Iridium
announced on May 28, 1999, that it received a 30-day waiver, until June 30,
1999, of its revenue and customer requirements. On June 30, 1999, Iridium
announced that it received a further waiver through August 11, 1999 of these
requirements. However this waiver could terminate earlier if Iridium pays or
asks to borrow funds to pay interest on its public debt.
The Company had also agreed under a Memorandum of Understanding to grant a
guarantee of up to an additional $350 million of Iridium debt for Iridium's use,
subject to certain conditions. Motorola believes such conditions have not been
met. 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 have recently asserted that Iridium failed to have the Company provide
such guarantee as required, and that a default under the Secured Credit
Agreement occurred because of such failure. The lenders have also asserted that
the Company is obligated to provide them with this $300 million guarantee. The
Company believes that it is not obligated to provide this $300 million guarantee
to these lenders because it believes the conditions to this obligation have not
been met. Iridium has also stated that it believes it is not obligated to have
the Company provide this $300 million guarantee to these lenders. If Iridium
17
and the Company are correct, then no default has occurred under the Secured
Credit Agreement as a result of such failure.
The Company has also agreed to permit Iridium to defer up to $400 million of
amounts owed under its operations and maintenance contracts with the Company. As
of July 3, 1999, Iridium had deferred $400 million of such payments. The
repayment by Iridium of these deferred payments is subordinated to repayment of
Iridium's Secured Credit Agreement, as is the repayment to the Company by
Iridium of any amounts the Company may pay to the lenders under its guarantees
and certain other obligations owed to the Company. Apart from the deferred
payments described above, approximately $95 million is owed to the Company by
Iridium, as of July 3, 1999.
There can be no assurance that (1) the lenders under the Secured Credit
Agreement will waive any default under that agreement or (2) such lenders will
revise the revenue and customer requirements for future periods so that Iridium
will remain in compliance with that agreement. If a default occurs under the
Secured Credit Agreement, the lenders could accelerate Iridium's obligations
under the Secured Credit Agreement and seek to foreclose on their security
interests in substantially all of Iridium's assets and require certain investors
in Iridium to comply with their capital call requirements. In the Company's
case, this would require an additional equity investment of approximately $50
million. If this investment were required, it would be subject to the same
accounting treatment as applied to the Company's prior equity investment in
Iridium.
If Iridium defaults under its Secured Credit Agreement, it will also be in
default under the Guaranteed Credit Agreement. If Iridium were to default under
the Guaranteed Credit Agreement, the banks providing loans under the Guaranteed
Credit Agreement could accelerate all the outstanding obligations under that
agreement and require the Company to satisfy its guarantee obligations as to
amounts previously drawn.On July 15, 1999, Iridium announced that it would
invoke, for a $90 million interest payment due that day, a 30-day grace period
permitted under the indentures for its approximately $1.4 billion public high-
yield debt. Iridium's failure to make that interest payment by August 15, 1999
would result in a default under the indentures relating to the public high-yield
debt, the Secured Credit Agreement and the Guaranteed Credit Agreement. These
defaults could result in defaults under other agreements.
The Company has several contracts with Iridium, primarily for the operation and
maintenance of the global personal communications system, under which aggregate
payments are scheduled to be approximately $3.2 billion. Through July 3, 1999,
the Company had earned and received payments of approximately $259 million under
these contracts. The Company has significant subcontracts for portions of the
system, for which it will generally remain obligated in the amount of $66
million as of July 3, 1999 even if Iridium is unable to satisfy the terms of
such contracts with the Company. In addition, the Company has investments in
assets related to these contracts, such as inventory, manufacturing equipment,
buildings and other potential obligations in connection with these contracts,
the value of which the Company estimates to be $696 million as of July 3, 1999.
While the Company expects to be able to use a portion of these assets in
connection with other programs, the Company would still incur substantial costs
in winding down operations related to the Iridium program if Iridium were to
cease to perform under such agreements.
18
As Iridium continues its transition from a developmental stage company to an
operating company, it will require significant amounts of cash to fund its
operations. Iridium disclosed in its Form 10-Q for the quarter-ended March 31,
1999, that it expected that its aggregate cash requirements for 1999 would be
approximately $1.65 billion. If Iridium defaults under its credit agreements its
lenders may not waive such defaults. This could subject the entire amount
outstanding under its credit agreements to acceleration by the lenders and
pursuit of other remedies, including enforcement of security interests in
substantially all of the assets of Iridium. This could result in Iridium's
bankruptcy. If Iridium is not able to repay amounts due to lenders under
facilities guaranteed by the Company, the Company would be required to pay such
guaranteed amounts. Finally, if such events occur, Iridium would likely not be
able to repay in full the Company amounts theretofore deferred under its various
contracts with the Company and might be unable to pay amounts becoming due under
such contracts in the future.
In the context of an Iridium bankruptcy, it is possible that creditors and other
stakeholders in Iridium may seek to bring various claims against the Company,
with respect to payments previously made by Iridium to the Company, and
otherwise. As described herein under 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 and the
Company as defendants.
The following tables provide summary financial information about Iridium, as
provided by Iridium in its latest Form 10-Q:
Summary Balance Sheet Information for Iridium
(as provided by Iridium in its 1st Quarter 1999 10-Q)
March 31, December 31,
1999 1998
- -----------------------------------------------------------
Current assets $ 219 $ 57
Property and equipment, net 3,413 3,584
Other assets 88 98
------------------------
Total assets $3,720 $3,739
- -----------------------------------------------------------
Current liabilities $3,242 $ 297
Long-term debt and other
liabilities 263 2,965
------------------------
Total liabilities $3,505 $3,262
- -----------------------------------------------------------
Total equity $ 215 $ 477
- -----------------------------------------------------------
Summary Results of Operations for Iridium
Three-months ended March 31 1999 1998
- -------------------------------------------------------
Revenue $ 1 $ --
Operating Loss 386 168
Net loss (505) (204)
Net loss applicable to Class 1
Interests (507) (205)
19
The following table presents the Company's equity losses and development and
commercialization provisions related to Iridium for the three months ended July
3, 1999, April 3, 1999 and twelve months ended December 31, 1998 and ending
balances for the development and commercialization reserves as of July 3, 1999,
April 3, 1999 and December 31, 1998:
July 3, April 3, December 31,
Period Ended 1999 1999 1998
- ------------------------------------------------------------------------------
Company's share of Iridium's net loss
applicable to Class 1 Interests $ --- $ 50 $ 265
Bond Investment write down $ 126 $ --- $ ---
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Development and Commercialization
provisions $ 36 $ 159 $ 95
Development and Commercialization
reserves $ 844 $ 808 $ 649
- ------------------------------------------------------------------------------
The Company's share of Iridium's net loss is included in selling, general and
administrative expenses in the consolidated statements of operations.
The development and commercialization provision for the three months ended July
3, 1999 was $36 million of which $31 million was included in cost of sales and
$5 million was included in selling, general and administrative expenses on the
consolidated statements of operations. The related provision for the three
months ended April 3, 1999 was $159 million which was included in selling,
general and administrative expenses in the consolidated statements of
operations. The provision for the twelve months ended December 31, 1998 was $95
million of which $81 million was included in cost of sales and $14 million was
included in selling, general and administrative expenses in the consolidated
statements of operations.
The development and commercialization reserve as of July 3, 1999, was $844
million, of which $482 million was included in accrued liabilities and $362
million was included in other liabilities in the consolidated balance sheets.
The reserve as of April 3, 1999 was $808 million of which $506 million was
included in accrued liabilities and $302 million was included in other
liabilities on the consolidated balance sheets. The reserve as of December 31,
1998 was $649 million of which $529 million was included in accrued liabilities
and $120 million was included in other liabilities on the consolidated balance
sheets.
Additionally in the second quarter of 1999, the Company wrote down its
investment in Iridium bonds by $126 million which was reflected in selling,
general and administrative expenses in the consolidated statements of operations
and as a contra-asset, in other assets, in the consolidated balance sheets.
The loss of the value of its investment in Iridium and Iridium gateway
companies, any default by Iridium under its credit agreements and debt
instruments which results in the acceleration of Iridium debt or the Company
having to perform under its Iridium guarantee obligations, the failure of
Iridium to make contractual payments to the Company and other costs or liability
related to the Company's relationship with Iridium, collectively, would have a
material negative impact on the Company's consolidated financial position and
results of operations.
20
Nextel
- ------
At July 3, 1999, the Company's off-balance sheet commitment to Nextel
Communications, Inc. ("Nextel") for equipment financing aggregated $542 million,
of which $259 million was outstanding. The Company's other off-balance sheet
third party financial guarantees, excluding the Iridium LLC guarantee which is
separately discussed above, aggregated $362 million, of which $314 million was
outstanding. The aggregate off-balance sheet amounts represent the maximum
available and may not be completely utilized.
21
Motorola, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations
This commentary should be read in conjunction with the Company's consolidated
financial statements and related notes thereto and management's discussion and
analysis of financial condition and results of operations incorporated by
reference in the Company's Form 10-K/A for the year ended December 31, 1998. 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:
- ----------------------
Sales were $7.5 billion in the second quarter of 1999, up 7 percent from $7.0
billion a year earlier. Sales were $14.7 billion in the first half of 1999, up 6
percent from $13.9 billion in the first half of 1998. These comparisons are
affected by actions taken to exit various businesses and product lines. On the
basis of a comparison of continuing business operations, sales would have
increased by 10 percent in the second quarter of 1999 and 8 percent in the first
half of 1999.
Second-quarter 1999 earnings were $206 million, or 33 cents per share, compared
with a loss of $1.3 billion, or $2.22 per share in the second quarter of 1998.
In the second quarter of 1999, the Company reported special charges of $94
million pre-tax, or 11 cents per share after-tax. The Company recorded a special
charge of $126 million to write down the carrying value of its investment in
Iridium LLC bonds to an amount which reflects the decline in market value of
Iridium LLC's public high-yield debt. Offsetting this charge were a $12 million
gain from the sale of securities and a $20 million gain from an exchange of
securities. In the second quarter of 1998, the Company recorded special charges
of $1.91 billion pre-tax, or $2.23 per share after-tax, which included $1.98
billion of charges from manufacturing consolidation, cost reduction and
restructuring programs (the "1998 Program"), partially offset by gains on the
sale of assets.
The following tables display rollforwards from December 31, 1998 to July 3, 1999
and from June 27, 1998 to December 31, 1998 of the accruals established during
the second quarter of 1998 for the restructuring and other charges:
Accruals Accruals
At 1999 At
Dec. 31, Amounts July 3,
1998 Used 1999
- ---------------------------------------------------------
Consolidation of
manufacturing
operations $ 155 $ (81) $ 74
Business exits 137 46 183
Employee separations 187 (76) 111
----- ----- -----
Total restructuring $ 479 $(111) $ 368
- --------------------------------------------------------
Asset impairments and
other charges 161 (12) 149
- --------------------------------------------------------
Totals $ 640 $(123) $ 517
- --------------------------------------------------------
22
Second
Quarter Accruals
1998 1998 Initial 1998 At
Initial Reclassifi- Charges Amounts Dec. 31,
Charges cations As Adjusted Used 1998
- --------------------------------------------------------------------------------
Consolidation of
manufacturing
operations $ 361 $ (35) $ 326 $ (171) $ 155
Business exits 453 (162) 291 (154) 137
Employee separations 461 197 658 (471) 187
---- ----- ---- ----- ----
Total restructuring $1,275 $ --- $1,275 $ (796) 479
- --------------------------------------------------------------------------------
Asset impairments and
other charges 705 --- 705 (544) 161
- --------------------------------------------------------------------------------
Totals $1,980 $ --- $1,980 $ (1,340) $ 640
- --------------------------------------------------------------------------------
Consolidation of manufacturing operations relates to the closing of production
and distribution facilities, selling or disposing of the machinery and equipment
that was no longer needed and, in some cases, scrapping excess assets that had
no realizable value. The remaining $74 million accrual, included in accrued
liabilities in the consolidated balance sheets, at July 3, 1999, for this
restructuring category primarily relates to the finalization of plant closings
in the Semiconductor Products and Personal Communications segments. During the
quarter the Company substantially finalized closure of its semiconductor
facility in California and took additional steps towards finalization of
semiconductor plant closings in North Carolina, Arizona and the Philippines and
consolidation of operations in Northern Illinois, Massachusetts and Canada
related to the Company's communications businesses.
Business exit costs include costs associated with shutting down businesses that
did not fit with the Company's new strategy. In many cases, these businesses
used older technologies that produced non-strategic products. Year-to-date
utilization was $25 million, offset by $71 million of favorable adjustments
related to: a Semiconductor Products Segment technology agreement and the sale
of the Integrated Electronic Systems Sector's non-silicon component
manufacturing business to CTS Corp. The remaining $183 million accrual, included
in accrued liabilities in the consolidated balance sheets, at July 3, 1999, for
this restructuring category primarily relates to: (1) contract requirements and
contingencies as part of the sales of the Company's printed circuit board
business in the third quarter of 1998 and non-silicon component manufacturing
business in the first quarter of 1999; and (2) the finalization of remaining
activities in the Semiconductor Products segment.
Employee separation costs represent the accrual of severance based upon the
headcount reductions for the involuntary severance package the Company offered
as part of its restructuring plan. At July 3, 1999, approximately 17,800
employees have separated from the Company through a combination of voluntary and
involuntary severance programs. Of these 17,800 separated employees,
approximately 11,200 were direct employees, and 6,600 were indirect employees.
Direct employees are primarily non-supervisory production employees, and
indirect employees are primarily non-production employees and production
managers. In addition, 4,200 employees separated from the Company with the sale
of the non-silicon component manufacturing business. These 4,200 people were not
paid any severance because the business was sold to another corporation. The
remaining $111 million
23
accrual, included in accrued liabilities in the consolidated balance sheets, at
July 3, 1999, to cover 2,200 positions for the employee separations
restructuring category relates to severance payments still to be completed in
the cellular and paging businesses in Illinois, Florida and Texas and in the
semiconductor products business in Japan, Asia, the U.K. and Arizona.
The asset impairment costs related to reductions in the carrying values of
assets for businesses that the Company was going to continue to operate but, in
doing an impairment analysis, the carrying values of these assets were not
recoverable from the future cash flows of the businesses. The Company reduced
the carrying values of the related asset balances by approximately $380 million.
The other charges are not restructuring charges, but are other costs primarily
comprised of contract termination costs related to agreements that were
associated with businesses that the Company was no longer making investments in,
losses recorded on cellular infrastructure contracts, and an in-process research
and development write-off of $42 million related to a transaction from the
second quarter of 1998. The remaining $149 million accrual at July 3, 1999,
relates entirely to these other charges.
As the Company's 1998 comprehensive manufacturing consolidation, cost reduction
and restructuring programs reach their planned completion, the Company achieved
its goal of an approximately $1 billion annual rate of profit improvement.
Manufacturing cost reduction programs included reducing the number of employees,
consolidating manufacturing operations and selling underutilized manufacturing
capacity. Selling, general and administrative cost reduction efforts included
reducing the number of employees and divesting non-strategic, poorly performing
businesses. The Company reduced interest expense and improved cash flows by
reducing payroll and other operating expenses and by generating cash from the
sale of businesses and facilities. Management continues to assess the estimated
costs to complete these programs. Management anticipates completing these
programs by December 31, 1999, and believes the remaining accruals are adequate
to cover these costs.
During 1997, the Company established various restructuring accruals for the
purpose of redirecting resources from businesses which have not met
profitability objectives. The related charges totaled $327 million. The
following tables display rollforwards of the accruals established by business
exit:
24
Accruals at Accruals at
Dec. 31, Amounts July 3,
1998 Adjustments Used 1999
- -----------------------------------------------------------------------------------------------------------------------
Q2 1997: Semiconductor Products Segment
Exit from DRAM market $ 8 $ - $ (5) $ 3
- -----------------------------------------------------------------------------------------------------------------------
Q3 1997: Other Products Segment
Exit from MacOS-compatible computer
systems business 15 - (1) 14
- -----------------------------------------------------------------------------------------------------------------------
Q4 1997: Messaging, Information and Media Segment
Exit from retail analog modem business 3 (3) - -
- -----------------------------------------------------------------------------------------------------------------------
Grand total $ 26 $ (3) $ (6) $ 17
- -----------------------------------------------------------------------------------------------------------------------
Accruals at
1997 Initial Amounts Dec. 31,
Charges Adjustments Used 1997
- ----------------------------------------------------------------------------------------------------------------------
Q2 1997: Semiconductor Products Segment
Exit from DRAM market $ 170 $ (9) $ (131) $ 30
- ----------------------------------------------------------------------------------------------------------------------
Q3 1997: Other Products Segment
Exit from MacOS-compatible computer
systems business 95 - (28) 67
- ----------------------------------------------------------------------------------------------------------------------
Q4 1997: Other Products Segment
Exit from retail analog modem business 62 - - 62
- ----------------------------------------------------------------------------------------------------------------------
Grand total $ 327 $ (9) $ (159) $ 159
- ----------------------------------------------------------------------------------------------------------------------
Accruals at
Amounts Dec. 31,
Adjustments Used 1998
- ----------------------------------------------------------------------------------------------
Q2 1997: Semiconductor Products Segment
Exit from DRAM market $ (12) $ (10) $ 8
- ----------------------------------------------------------------------------------------------
Q3 1997: Other Products Segment
Exit from MacOS-compatible computer
systems business (10) (42) 15
- ----------------------------------------------------------------------------------------------
Q4 1997: Other Products Segment
Exit from retail analog modem business - (59) 3
- ----------------------------------------------------------------------------------------------
Grand total $ (22) $ (111) $ 26
- ----------------------------------------------------------------------------------------------
In the second quarter of 1997, the Company's Semiconductor Products Segment
announced its decision to phase out its participation in the dynamic random
access memory (DRAM) market. The decision to exit this business was made
primarily because the business did not meet strategic and profitability
objectives, rather than to generate significant future cost savings. As a result
of this decision, the segment incurred a $170 million charge to write off
technology development costs and to provide for the write down of manufacturing
equipment which could not be retrofitted for other production. In the fourth
quarter of 1997 and in the first quarter of 1998, the segment sold some of this
manufacturing equipment to its joint venture partner and thus reversed into
income $9 million and $12 million, respectively, of accruals no longer needed.
The amounts used in 1997 reflect write-offs. The amounts used in 1998 reflect $3
million in cash payments for exit fees and $7 million in write-offs. The amounts
used in 1999 reflect $4 million in cash payments for exit fees and $1 million in
write-offs. The remaining $3 million accrual at July 3, 1999, is expected to be
used by the end of the third quarter of 1999.
In the third quarter of 1997, the Company announced its decision to exit the
MacOS(R)-compatible computer systems business, a business included in the Other
Products Segment. This decision was made in response to a decision by Apple
Computer to limit the introduction of its new technology and phase out future
licenses, rather than to generate significant future cost savings. As a result
of this decision, the Company incurred a $95 million charge primarily for the
write down of inventory and the cost of terminating contractual commitments. In
the second quarter of 1998, the exposures on these contractual commitments were
less than anticipated, thus resulting in the reversal into income of $10
million. The amounts used in 1997 reflect $3 million in employee severance
payments and $25 million in
25
write-offs. The amounts used in 1998 reflect $3 million in employee severance
payments and $39 million in write-offs. The amounts used in 1999 reflect $1
million in write-offs. The remaining $14 million accrual at July 3, 1999,
relates to these contractual commitments and may extend past the 1999 year end.
In the fourth quarter of 1997, the Company announced its decision to exit the
retail analog modem business based in Huntsville, AL, and formerly part of the
Messaging, Information and Media segment. The decision was made primarily
because the business was not meeting the Company's strategic and profitability
objectives, rather than to generate significant future cost savings. As a result
of this decision, the segment incurred a $62 million charge for the write down
of inventory and fixed assets, severance costs and certain other costs relating
to the realignment process. The amounts used in 1998 reflect $37 million in
employee severance payments and $22 million in write-offs. The remaining $3
million accrual at December 31, 1998, was reversed into income in the first
quarter of 1999.
The results of operations of each of these exited businesses were not material
to the Company's consolidated financial statements.
A discussion of the Company's restructuring and other charges is detailed in
Note 5 to the condensed consolidated financial statements.
Earnings for the first six months of 1999 were $377 million, or 61 cents per
share, compared with a loss of $1.15 billion, or $1.92 per share, in the first
half of 1998.
Net margin on sales was 2.7 percent in the second quarter of 1999 compared with
a negative 18.9 percent in the year-ago quarter, and 2.6 percent in this year's
first half compared with a negative 8.3 percent in the first six months of 1998.
Results of the Company's major operations for the second quarter of 1999
compared with the second quarter of 1998 are as follows:
26
Personal Communications Segment
- -------------------------------
Three Months Ended
July 3, June 27, %
(in millions) 1999 1998 Change
-------------------------------------------------------
Orders $3,151 $2,607 21%
Segment sales $2,788 $2,386 17%
Operating profit (loss)
before tax $ 125 $ (501) NMF*
Restructuring and other
charges $ --- $ 597
* NMF = not a meaningful figure
Segment sales rose 17 percent to $2.8 billion, and orders increased 21 percent
to $3.2 billion. Operating profits were $125 million, compared with a $501
million loss a year ago, which included a large restructuring charge. Excluding
all special items included in last year's results, operating profits increased
$102 million over last year, as higher sales and gross margins more than offset
an increased investment in advertising and engineering resources devoted to
delivering new digital wireless phones.
Sales and orders of wireless phones increased very significantly, led by Asia
and Europe. Sales and orders of wireless phones were also higher in the
Americas. While analog phone sales declined significantly, sales of digital
phones increased very significantly. These sales represented 87 percent of all
wireless phone sales in the quarter versus 84 percent of all wireless phone
sales in the first quarter of 1999. The most rapid growth of digital phones were
for Global System for Mobile (GSM) phones in Asia and Europe, Code Division
Multiple Access (CDMA) phones in Asia and the Americas and integrated digital
enhanced network (iDEN) phones in the Americas. For the full year of 1998,
digital phones accounted for approximately 72 percent of wireless phone sales.
The number of digital phones sold in the quarter increased approximately 115
percent versus the year ago quarter as follows: the number of GSM phones sold
increased by approximately 100 percent; the number of CDMA phones sold increased
by approximately 2,000 percent and now represent 20 percent of all digital phone
sales; the number of Time Division Multiple Access (TDMA) phones sold increased
by approximately 5 percent; and the number of iDEN phones sold increased by
approximately 30 percent.
The overall average selling price for digital phone products declined within a
normal range versus the first quarter of 1999 and declined less than the normal
historical range versus a year ago. The overall average selling price for analog
products continued to decline more quickly than the historical range versus both
the first quarter of 1999 and a year ago. Average selling prices can be subject
to changes in product mix and regional mix.
Sales and orders of paging products were very significantly lower than a year
ago due to a combination of fewer products being sold and declining prices.
Sales were lower in the Americas, but down very significantly in Europe and in
Asia. Orders were down significantly in the Americas and down very significantly
in Europe and Asia.
27
Network Systems Segment
- -----------------------
Three Months Ended
July 3, June 27, %
(in millions) 1999 1998 Change
- ----------------------------------------------------------------
Orders $1,551 $1,676 (7)%
Segment sales $1,587 $1,590 ---
Operating profit before tax $ 169 $ 57 196 %
Restructuring and other charges $ --- $ 159
Segment sales were flat at $1.6 billion, and orders declined 7 percent to $1.6
billion. Operating profits increased to $169 million. Excluding the large
restructuring charge included in last year's results, operating profits were $47
million lower than a year ago, primarily due to an increased investment in
engineering resources working to develop digital solutions for network operators
and larger losses in the satellite communications business.
Digital infrastructure equipment, including iDEN(R) infrastructure equipment,
represented approximately 95 percent of sales dollars in the second quarter
versus 98 percent in the first quarter of 1999. For the full year of 1998,
digital infrastructure equipment represented 88 percent of sales dollars.
Cellular and personal communications systems infrastructure equipment orders
were higher and sales were flat. Orders were significantly higher in the
Americas and Japan, higher in Europe, but were significantly lower in Asia.
Sales were higher in Europe, Japan, and Asia, but were significantly lower in
the Americas. Sales grew significantly in CDMA and GSM but were offset by very
significant declines in analog and PDC digital for Japan.
Orders and sales were lower for iDEN infrastructure equipment. Orders for iDEN
system expansions were received for Argentina, Brazil, Colombia, Mexico and
Singapore. A five-year extension to the iDEN infrastructure supply agreement
with Nextel was executed which could represent in excess of $3 billion in sales
over the period.
The Company and Cisco Systems, Inc. agreed to purchase the fixed wireless assets
of Bosch Telecom, Inc. and create a jointly owned company called SpectraPoint
Wireless. This new company will focus on delivering high-speed data, voice and
video capabilities to businesses over a fixed wireless infrastructure. This
transaction is expected to be completed in the third quarter, subject to certain
regulatory approvals and other conditions.
The Satellite Communications Group had higher sales. However, orders declined 96
percent to $8 million for two reasons. First, Iridium LLC's present financial
situation is such that if it defaulted under its various credit agreements with
the lenders not waiving such defaults it may not be able to repay in full the
amounts owed to the Company under its various contracts. Therefore, the Company
determined that it was inappropriate to further record orders under those
contracts. Second, there was sharply reduced activity from Iridium gateway
operators. These operators had essentially completed the installation of their
gateway facilities and therefore no longer required equipment and services to
the same degree as in 1998.
28
After the close of the quarter, the Company signed a contract with Teledesic LLC
under which the Company will serve as prime contractor in the design and
construction of Teledesic's "Internet-in-the Sky" satellite communications
network. The contract is contingent upon Teledesic's approval following a
technical review period of about three months. The Teledesic program had no
impact to sales or orders in the second quarter.
Commercial, Government and Industrial Systems Segment
- -----------------------------------------------------
Three Months Ended
July 3, June 27, %
(in millions) 1999 1998 Change
------------------------------------------------------------
Orders $1,182 $1,063 11 %
Segment sales $ 955 $1,020 (6)%
Operating profit (loss)
before tax $ 94 $ (24) NMF*
Restructuring and other charges $ -- $ 127
* NMF = not a meaningful figure
Segment sales declined 6 percent to $955 million, while orders rose 11 percent
to $1.2 billion. Operating profits were $94 million, compared with a
restructuring-driven loss of $24 million last year. Excluding all special
charges, operating profits declined $18 million, primarily due to lower sales
volume.
Two-way radio equipment sales increased in the Americas and Asia, but were more
than offset by a decline in Europe. Two-way radio equipment orders were higher
in all regions. Systems Solutions Group sales were lower and orders were higher.
The Company signed a definitive agreement to sell its North American antenna
site business to Pinnacle Towers for a cash price of $255 million. The sale will
include all the assets and operations of the business, including a portfolio of
approximately 1,850 wireless communications facilities located throughout the
U.S. and Canada that are currently owned, managed or leased by the Company. The
sale is expected to be completed in the third quarter subject to certain
regulatory approvals and other conditions.
Semiconductor Products Segment
- ------------------------------
Three Months Ended
July 3, June 27, %
(in millions) 1999 1998 Change
------------------------------------------------------------
Orders $2,086 $1,744 20%
Segment sales $1,979 $1,808 9%
Operating profit (loss)
before tax $ 80 $ (899) NMF*
Restructuring and other charges $ -- $ 731
* NMF = not a meaningful figure
Segment sales increased 9 percent to $2.0 billion, and orders rose 20 percent to
$2.1 billion. The segment recorded an operating profit of $80 million compared
with an operating loss of $899 million a year ago, which
29
included a large restructuring charge. The segment recorded an operating loss of
$164 million last year when this charge is excluded.
Orders increased in all regions, led by Asia and Japan. Sales were higher in all
regions except Europe. Among major market segments, sales and order growth was
led by wireless communications. Components, networking and computing, and
transportation market segments sales and orders were also higher.
Lead times for product deliveries are increasing in many, but not all, product
categories, as the semiconductor industry's recovery continues. Pricing has
remained stable compared to the first quarter for most product categories,
although strong demand for networking solutions is pressuring prices upward in
that market. Orders were flat with the first quarter of 1999. Sales increased 4
percent versus the first quarter, and operating margin continues to improve
sequentially. The Company's equipment businesses consumed approximately 21
percent of the segment's production in the second quarter.
Under an agreement announced in May, Texas Pacific Group will lead a management
buyout of the segment's Semiconductor Components Group. The Company will receive
approximately $1.6 billion in cash, notes and approximately 9 percent of the
stock of the new company. The transaction is expected to be completed during the
third quarter subject to the satisfaction of certain closing conditions.
In July, the Company completed the sale of two chip-processing facilities, one
in Chung-Li, Taiwan, and the other in Paju, South Korea, to Taiwan's Advanced
Semiconductor Engineering Inc. for $290 million.
Other Products Segment
- ----------------------
Integrated Electronic Systems Sector
Sales were down 2 percent, and orders were 6 percent higher. The sector had an
operating profit versus a loss a year ago, which included a restructuring
charge. Excluding special charges, the sector had an operating profit increase.
The year-earlier results include businesses that the sector has exited. For
continuing businesses, sales were up 13 percent, orders were up 20 percent and
operating profits were higher.
Internet and Networking Group
Sales increased 16 percent, and orders were 49 percent higher. The group had a
smaller operating loss than a year ago.
General
- -------
Manufacturing margin in the second quarter of 1999 improved to 42 percent of
sales from 39 percent a year ago. Selling, general and administrative expenses
remained flat at 19 percent of sales. Excluding special charges, selling,
general and administrative expenses as a percentage of sales declined to 17
percent in the second quarter of 1999 from 20 percent a year ago. This decline
is primarily attributable to the Company's manufacturing consolidation, cost
reduction and restructuring programs. Depreciation expense increased slightly as
a percent of sales. Depreciation expense for 1999 is presently expected to be
relatively unchanged for the year compared to 1998. Interest expense decreased
slightly as a percent of sales. Assuming stable interest rates in 1999, interest
expense is expected to be
30
lower than a year ago in the remaining quarters and the full year of 1999. The
tax rate for the second quarter was 30 percent, the same as a year ago. The
Company currently expects the tax rate to remain at 30 percent for 1999.
Liquidity and Capital Resources:
- -------------------------------
Net cash provided by operations increased to $1.8 billion for the six-month
period ended July 3, 1999, as compared to $267 million cash used for operations
for the six-month period ended June 27, 1998. The increase in 1999 compared to
1998 was primarily due to increased earnings as well as increases in accounts
payable and accrued and other liabilities.
Net cash used in investing activities was $855 million for the six-month period
ended July 3, 1999 as compared to $1.5 billion for the six-month period ended
June 27,1998. The decrease was primarily due to capital asset expenditures
decreasing by $731 million in 1999 as compared to 1998. Approximately $400
million of this reduction occurred in semiconductor capital asset expenditures.
For the full year of 1999, the Company's capital expenditures are still expected
to be approximately $3.0 billion, down from $3.2 billion in 1998. Semiconductor
capital expenditures are expected to be $1.4 billion in 1999 compared to $1.8
billion in 1998. In addition to the decrease in capital asset expenditures, cash
was generated from the sale of the non-silicon component manufacturing business
in the first quarter of 1999.
Net cash provided by financing activities was $22 million for the six-month
period ended July 3, 1999 as compared to $1.5 billion in the six-month period
ended June 27, 1998. The decrease in 1999 was driven primarily by the Company
paying down $1.0 billion in commercial paper and short-term borrowings as
compared to increasing notes payable and current portion of long term debt in
the same period last year in order to finance operations. The Company was able
to pay down short-term borrowings in 1999 due to improved cash flow from
operations and investing activities and to $981 million in net proceeds
generated from the sale of bonds and subordinated debentures.
Net debt to net debt plus equity decreased to 18 percent at July 3, 1999 from 27
percent at December 31, 1998. The Company's total domestic and non-U.S. credit
facilities aggregated $4.7 billion at July 3, 1999, none of which was used but
was all available to back up outstanding commercial paper which totaled $1.8
billion.
At July 3, 1999, the Company's off-balance sheet commitment to Nextel
Communications, Inc. ("Nextel") for equipment financing aggregated $542 million,
of which $259 million was outstanding. The Company's other off-balance sheet
third party financial guarantees, excluding the Iridium LLC guarantee which is
separately discussed below, aggregated $362 million, of which $314 million was
outstanding. The aggregate off-balance sheet amounts represent the maximum
available and may not be completely utilized.
On July 20, 1999, the Company announced that it intends to sell 2.8 million
shares of Nextel common stock during the third quarter of 1999. The completion
of this sale is subject to market conditions and other factors and there can be
no assurances as to its completion or the amount of proceeds that will be
received. The Company expects that this transaction, along with the completion
of the sales of the North American antenna site
31
business, the Semiconductor Components Group and the chip-processing facilities
in Taiwan and Korea, will generate significant cash inflows in the third quarter
of 1999.
The Company is an equity investor in, a creditor of, and a supplier to, Iridium
LLC and its subsidiaries (collectively "Iridium"). Iridium is the first global
wireless telecommunications business using a low-earth orbit satellite
communications network. Commercial voice service on the Iridium system began
November 1, 1998. Iridium is currently transitioning from a developmental stage
company to an operating company and, accordingly, has very little operating
history. This transition requires that Iridium attract a sufficient number of
customers that use Iridium's services at levels that will generate enough
revenue for Iridium to meet its financial obligations to a variety of parties,
including the Company. Iridium has experienced significant difficulties in
making this transition, including that the number of subscribers for the service
and revenue generated by Iridium have been substantially below Iridium's
expectations. Iridium operates in an essentially new market for wireless
communications services and there can be no assurance that Iridium will be
successful.
At July 3, 1999, the Company owned, directly and indirectly, approximately 18%
of the equity interests in Iridium as well as Iridium bonds with a face value of
approximately $157 million. The Company also holds equity investments and
receivables with a book value of approximately $32 million in several Iridium
gateway companies. the Company's equity investment in Iridium, as reflected in
its financial statements, is zero as a result of the Company recording its share
of Iridium losses. The Company recorded a special charge in the second quarter
of 1999 of $126 million to write down the value of its Iridium bonds to a level
which reflects the decline in value of Iridium's public high-yield debt. The
Company's investment in Iridium bonds and its equity investments in several
Iridium gateway companies are included in Other Assets. The Company accounts for
its investment in Iridium under the equity method of accounting due to its
financial influence on Iridium in the form of guarantees of Iridium's
indebtedness, its contract with Iridium for the operation and maintenance of the
global personal communications system and other financial commitments as more
fully discussed below. The following table summarizes the Company's equity and
bond investments in Iridium and investments in the Iridium Gateway companies as
of July 3, 1999, and the amounts owed to the Company by Iridium under several
contracts as of July 3, 1999:
- ----------------------------------------------------------------------
Investments:
Equity investment in Iridium $ ---
Bond investment in Iridium at:
Original carrying value 157
Less: second quarter 1999 write down (126)
-----
Adjusted carrying value 31
Equity investments in and notes receivables
from Iridium gateway companies 32
-----
Total $ 63
=====
Accounts Receivable:
Operations & maintenance contract $ 400
Other contracts 95
-----
Total $ 495
=====
- ----------------------------------------------------------------------
32
Iridium is in discussions with its creditors, including the Company, regarding a
financial restructuring of its indebtedness and the capitalization of Iridium.
The impact on the Company of an Iridium restructuring may become clearer in the
third quarter, and may necessitate an additional special charge at that time.
The Company believes that it will maintain a strong balance sheet despite any
additional charge in the third quarter that could arise in connection with an
Iridium restructuring. The Company believes that it can absorb the negative
impact of such a charge because of previously announced sales of several
businesses and assets that are expected to generate significant gains and cash
inflows in the third quarter.
The following table summarizes as of July 3, 1999: (1) the Company's bank
guarantees and other financial commitments for which it is obligated should
certain conditions or events occur and (2) contractual commitments to Iridium
and other obligations:
- --------------------------------------------------------------------------
Bank Guarantees and Other Financial Commitments:
Senior Secured Credit Agreement capital call $ 50
Senior Guaranteed Credit Agreement $750
Conditional Guarantee See Below
Contractual Commitments and Other Obligations:
Operations & Maintenance contract maximum
deferrable commitment $400
Amount deferred as of July 3, 1999 400
----
Remaining deferrable commitment $---
====
Obligations to subcontractors $ 66
====
Assets at risk and other estimated potential
contractual obligations $696
====
- --------------------------------------------------------------------------
Iridium's bank facilities are (1) an $800 million Senior Secured Credit
Agreement (the "Secured Credit Agreement") and (2) a $750 million Senior
Guaranteed Credit Agreement (the "Guaranteed Credit Agreement"). The Guaranteed
Credit Agreement is guaranteed by the Company. As of July 3, 1999, Iridium had
borrowed all of the funds available under the Guaranteed Credit Agreement. The
majority of this facility is scheduled to mature on December 31, 2000 and the
remainder is scheduled to mature on December 31, 2001.
The Secured Credit Agreement contains covenants that require Iridium to satisfy
certain minimum revenue and customer levels as of various dates. On March 29,
1999, Iridium announced that it would not meet its first quarter 1999 revenue
and customer requirements, and that it had received a sixty-day waiver, until
May 31, 1999, from the lenders under the Secured Credit Agreement. On May 13,
1999, Iridium announced that it did not expect to meet, on May 31, 1999, the
first quarter 1999 revenue and customer requirements previously waived. Iridium
announced on May 28, 1999, that it received a 30-day waiver, until June 30,
1999, of its revenue and customer requirements. On June 30, 1999, Iridium
announced that it received a further waiver through August 11, 1999 of these
requirements.
33
However this waiver could terminate earlier if Iridium pays or asks to borrow
funds to pay interest on its public debt.
The Company had also agreed under a Memorandum of Understanding to grant a
guarantee of up to an additional $350 million of Iridium debt for Iridium's use,
subject to certain conditions, most significantly non-payment by Iridium of
certain obligations owed to Motorola and compliance with the terms of the
Agreement Regarding Guarantee between Motorola and Iridium LLC. Motorola
believes such conditions have not been met. 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 have recently asserted that Iridium
failed to have the Company provide such guarantee as required, and that a
default under the Secured Credit Agreement occurred because of such failure. The
lenders have also asserted that the Company is obligated to provide them with
this $300 million guarantee. The Company believes that it is not obligated to
provide this $300 million guarantee to these lenders because it believes the
conditions to this obligation have not been met. Iridium has also stated that it
believes it is not obligated to have the Company provide this $300 million
guarantee to these lenders. If Iridium and the Company are correct, then no
default has occurred under the Secured Credit Agreement as a result of such
failure.
The Company has also agreed to permit Iridium to defer up to $400 million of
amounts owed under its operations and maintenance contracts with the Company. As
of July 3, 1999, Iridium had deferred $400 million of such payments. The
repayment by Iridium of these deferred payments is subordinated to repayment of
Iridium's Secured Credit Agreement, as is the repayment to the Company by
Iridium of any amounts the Company may pay to the lenders under its guarantees
and certain other obligations owed to the Company. Apart from the deferred
payments described above, approximately $95 million is owed to the Company by
Iridium, as of July 3, 1999.
There can be no assurance that (1) the lenders under the Secured Credit
Agreement will waive any default under that agreement or (2) such lenders will
revise the revenue and customer requirements for future periods so that Iridium
will remain in compliance with that agreement. If a default occurs under the
Secured Credit Agreement, the lenders could accelerate Iridium's obligations
under the Secured Credit Agreement and seek to foreclose on their security
interests in substantially all of Iridium's assets and require certain investors
in Iridium to comply with their capital call requirements. In the Company's
case, this would require an additional equity investment of approximately $50
million. If this investment were required, it would be subject to the same
accounting treatment as applied to the Company's prior equity investment in
Iridium.
If Iridium defaults under its Secured Credit Agreement, it will also be in
default under the Guaranteed Credit Agreement. If Iridium were to default under
the Guaranteed Credit Agreement, the banks providing loans under the Guaranteed
Credit Agreement could accelerate all the outstanding obligations under that
agreement and require the Company to satisfy its guarantee obligations as to
amounts previously drawn.
On July 15, 1999, Iridium announced that it would invoke, for a $90 million
interest payment due that day, a 30-day grace period permitted under the
indentures for its approximately $1.4 billion public high-yield debt.
34
Iridium's failure to make that interest payment by August 15, 1999 would result
in a default under the indentures relating to the public high-yield debt, the
Secured Credit Agreement and the Guaranteed Credit Agreement. These defaults
could result in defaults under other agreements.
The Company has several contracts with Iridium, primarily for the operation and
maintenance of the global personal communications system, under which aggregate
payments are scheduled to be approximately $3.2 billion. Through July 3, 1999,
the Company had earned and received payments of approximately $259 million under
these contracts. The Company has significant subcontracts for portions of the
system, for which it will generally remain obligated in the amount of $66
million as of July 3, 1999 even if Iridium is unable to satisfy the terms of
such contracts with the Company. In addition, the Company has investments in
assets related to these contracts, such as inventory, manufacturing equipment,
buildings and other potential obligations in connection with these contracts,
the value of which the company estimates to be $696 million as of July 3, 1999.
While the Company expects to be able to use a portion of these assets in
connection with other programs, the Company would still incur substantial costs
in winding down operations related to the Iridium program if Iridium were to
cease to perform under such agreements.
As Iridium continues its transition from a developmental stage company to an
operating company, it will require significant amounts of cash to fund its
operations. Iridium disclosed in its Form 10-Q for the quarter-ended March 31,
1999, that it expected that its aggregate cash requirements for 1999 would be
approximately $1.65 billion. If Iridium defaults under its credit agreements its
lenders may not waive such defaults. This could subject the entire amount
outstanding under its credit agreements to acceleration by the lenders and
pursuit of other remedies, including enforcement of security interests in
substantially all of the assets of Iridium. This could result in Iridium's
bankruptcy. If Iridium is not able to repay amounts due to lenders under
facilities guaranteed by the Company, the Company would be required to pay such
guaranteed amounts. Finally, if such events occur, Iridium would likely not be
able to repay in full the Company amounts theretofore deferred under its various
contracts with the Company and might be unable to pay amounts becoming due under
such contracts in the future.
In the context of an Iridium bankruptcy, it is possible that creditors and other
stakeholders in Iridium may seek to bring various claims against the Company,
with respect to payments previously made by Iridium to the Company, and
otherwise. As described herein under "Legal Proceedings," a number of purported
class action lawsuits alleging securities law violations have been filed naming
Iridium, certain current and former officers of Iridium and the Company as
defendants.
The loss of the value of its investment in Iridium and Iridium gateway
companies, any default by Iridium under its credit agreements and debt
instruments which results in the acceleration of Iridium debt or the Company
having to perform under its Iridium guarantee obligations, the failure of
Iridium to make contractual payments to the Company and other costs or liability
related to the Company's relationship with Iridium, collectively, would have a
material negative impact on the Company's consolidated financial position and
results of operations.
35
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 3, 1999 and June 27, 1998, the Company had net outstanding foreign
exchange contracts totaling $2.0 billion. The following table shows, in
millions, the five largest foreign exchange hedge positions at July 3, 1999 and
the corresponding positions at June 27, 1998:
July 3, June 27,
Buy (Sell) 1999 1998
- ------------------------------------------------
Japanese Yen (775) (569)
Euro (584) (611)
Chinese Renminbi (180) (45)
Australian Dollar (124) (37)
Korean Won (85) ---
At July 3, 1999 and June 27, 1998, outstanding foreign exchange contracts
primarily consisted of short-term forward contracts. Net deferred gains at July
3, 1999, and at June 27, 1998, on these forward contracts which hedge designated
firm commitments were not material.
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
36
instruments or investments. The Company does not have any derivatives to hedge
the value of its equity investments in affiliated companies.
The Company's research and development expenditures in the second quarter of
1999 were $811 million compared to $722 million a year ago. The Company
continues to believe that a strong commitment to research and development drives
long-term growth. Research and development expenditures are expected to increase
as a percentage of sales in 1999 versus 1998.
Return on average invested capital, based on the performance of the four
preceding quarters ending with July 3, 1999, was 3.6 percent, compared with
negative 3.8 percent based on the performance of the four preceding quarters
ending June 27, 1998. The Company's current ratio was 1.40 at July 3, 1999,
compared to 1.18 at December 31, 1998.
Year 2000:
- ---------
Motorola has been actively addressing Year 2000 issues since 1997. A Year 2000
Enterprise Council was formed and is responsible for coordinating and
facilitating activities across the Company. The Year 2000 Enterprise Council
reports to the Company's President and Chief Operating Officer and its progress
is reported to the Audit and Legal Committee of the Board of Directors. The
Board of Directors also receives periodic updates on the Company's Year 2000
program.
The Year 2000 issue refers to the risk that systems, products and equipment
having date-sensitive components will not recognize the Year 2000. Throughout
this disclosure the Company uses the generic phrase "year 2000 ready" to mean
that a system, product or piece of equipment will perform its intended functions
on or after January 1, 2000 the same as it did before January 1, 2000. The
Company also has a specific definition of Year 2000 Ready for Motorola products
described below.
The Six-Phase Year 2000 Program
Motorola developed the Six-Phase Year 2000 Program to ensure a thorough and
standard approach to addressing the Year 2000 issue across the Company.
The Program summarizes the tasks to be completed while leaving each business to
tailor actions specifically to its environment, to identify the goals of each
phase, and to schedule their targeted completion dates. The six-phases are
Preliminary (identify the issues, create awareness, and dedicate resources);
Discovery/Charter (inventory, categorize, and make initial cost estimates);
Scope (refine inventory and assess business impacts and risks); Conversion
Planning (determine specific implementation solutions through analysis,
formulate strategies, and develop project and test plans); Conversion (make
program changes, perform applications and acceptance testing and certification);
and Deployment and Post Implementation Review (deploy program and software
changes, evaluate and apply lessons learned).
The Company's Readiness
All of the Company's sectors and groups have completed Phases 1-4, all but one
of the groups also have substantially completed Phase 5 and all but two of the
Company's groups also have substantially completed Phase 6. All of the Company's
sectors and groups are expected to complete the Six-Phase
37
Program by the end of the third quarter of 1999. The work being completed in
1999 is being separately monitored and tracked with appropriate target
completion dates.
Contingency plans are substantially complete for all sectors and groups, and
those plans are focusing on matters not resolved through the Six-Phase Program
at this time that may have a material negative impact on Motorola's final "year
2000 readiness". Discussion of contingency planning is included below.
As part of the Company's overall program and to ensure adequate means to measure
progress, Motorola has established five functional categories to be reviewed by
each business as follows:
Products. While addressing all five functional categories, the Company has
placed a high priority on ensuring that Motorola products are Year 2000 Ready
and is completing a comprehensive review of the Year 2000 Readiness of Motorola
products. The results of these reviews are being made available to Motorola
customers and third parties through the use of a Motorola Year 2000 website and
are supplemented with additional written communications. The Motorola definition
of "Year 2000 Ready," which is the standard Motorola uses to determine the Year
2000 Readiness of Motorola products, is as follows:
Year 2000 Ready means the capability of a Motorola product, when used in
accordance with its associated documentation, to correctly process, provide
and/or receive date data in and between the years 1999 and 2000, including leap
year calculations, provided that all other products and systems (for example,
hardware, software and firmware) used with the Motorola product properly
exchange accurate date data with it.
Manufacturing. Some of the tools and equipment (hardware and software) used to
develop and manufacture Motorola products are date-sensitive. The Company
believes, based on the results of the Six-Phase Program to date and based on
assurances from its suppliers, that the critical tools and equipment used by it
to manufacture products will be "year 2000 ready" or will be made ready through
upgrades by the suppliers of the tools or equipment or by using alternate
sources of supplies. As a result, the Company does not expect significant
interruption to its manufacturing capabilities because of the failure of tools
and/or equipment.
Non-Manufacturing Business Applications. Throughout the business the Company is
fixing and testing all non-manufacturing business applications such as core
financial information and reporting, procurement, human resources/payroll,
factory applications, customer service, and revenue, and does not expect any
significant Year 2000 issues in this area.
Facilities and Infrastructure. The Company also is fixing and testing its
facilities and infrastructure (health, safety and environment systems,
buildings, security/alarms/doors, desktop computers, networks) to ensure they
are "year 2000 ready" and does not expect significant interruption to its
operations because of Year 2000 issues with its facilities or infrastructure.
Logistics. The Company has devoted significant resources to ensure that its
operations are not disrupted because of services or products supplied to the
Company. In addition, the Company has requested assurances from its
38
joint venture partners and alliance partners of their "year 2000 readiness."
Of critical importance to the Company's Year 2000 Readiness is the readiness of
suppliers and the products the Company procures from suppliers. Motorola has
many thousands of suppliers and has a comprehensive program to identify and
obtain Year 2000 information from its critical suppliers. The program includes
awareness letters, site visits, questionnaires, compliance agreements and
warranties as well as a review of suppliers' Year 2000 websites. If a supplier
is determined to entail a "high risk" of Year 2000 non-readiness, the Company is
developing contingency and alternate sourcing plans to minimize the Year 2000
risk.
As described in the Company's discussion of most reasonably likely worst case
scenarios, the Company is particularly concerned about energy and transportation
suppliers. Many of these suppliers are unwilling to provide assurances that they
will be "year 2000 ready."
Unique issues related to the readiness of the Company's major businesses are
discussed in more detail below.
Year 2000 Costs
Motorola estimates that the expected total aggregate costs for its Year 2000
activities from 1997 through 2000 will be in the range of $250 million to $300
million. These costs do not include estimates for potential litigation.
Approximately $135 million of the total estimated costs relate to internal
resources. Total costs incurred through July 3, 1999 were approximately $180
million, of which approximately $105 million were for external costs. Of the
remaining costs, the majority relate to installation of software upgrades of
certain infrastructure equipment, installing software upgrades to internal
semiconductor manufacturing equipment and assessing the Company's critical
suppliers. The Company does not believe the cost of addressing Year 2000 issues
will have a material adverse effect on the Company's consolidated results of
operations, liquidity or capital resources.
The Company reviews and updates data for costs incurred and forecasted costs
each quarter. As the Company continues to assess the last phases of the Year
2000 Program, estimated costs may change. These costs are based on management's
estimates, which were determined based on assumptions of future events, some
within the Company's control, but many outside of the Company's control. There
can be no guarantee that these estimates will be correct, and if actual costs
increased by a sizeable amount, the Company's actual results could be materially
adversely impacted.
Most Reasonably Likely Worst Case Scenarios for the Company and Company
Contingency Plans
The Company has and will continue to devote substantial resources to address its
Year 2000 issues. However, there can be no assurances that the Company's
products do not contain undetected Year 2000 issues. Further, there can be no
assurances that the Company's assessment of suppliers and vendors will be
accurate. Customers of Motorola could be impacted by Year 2000 issues causing
them to reduce purchases from the Company. In addition, many commentators
believe that there will be a significant amount of litigation arising out of
"year 2000 readiness" issues, especially for
39
product liability. Because of the unprecedented nature of this litigation, it is
impossible for the Company to predict the impact of such litigation although it
could be significant to the Company. In addition to the unique reasonably likely
worst case scenarios described by the specific businesses and potential
litigation, the Company believes its scenarios include: (i) corruption of data
contained in the Company's internal information systems; (ii) hardware failures;
(iii) the failure of infrastructure services provided by government agencies and
other third-party suppliers (including energy, water, and transport); and (iv)
health, environmental and safety issues relating to its facilities. If any of
these were to occur, the Company' operations could be interrupted, in some cases
for a sustained period of time. These interruptions could be more severe in
countries outside the U.S., where the Company does sizeable business.
The Company's contingency plans focus on customers, products, supplies and
internal operations. Each sector is establishing emergency operations centers at
key locations. These centers will be staffed ahead of the Year 2000 rollover and
well into the Year 2000. During critical times they will be staffed 24-hours a
day. The first priority of these centers is to ensure the performance of a
customer's network or system.
Critical facilities have been identified and the Company's plans prioritize
their continued operations. These sites will be supported by generators capable
of maintaining health, safety, communications and environmental operations if
locally provided power sources fail. These sites will have a number of means of
communicating including Intranet, pagers, cellular phones, and satellite phones.
The businesses are identifying key individuals in a variety of functions to be
on-site at the Company's facilities to monitor the rollover to the Year 2000.
Additionally, the Company is establishing rapid response teams that can be sent
to major customer locations when and if needed in connection with the rollover.
There are also plans to shift operations to different facilities if there are
interruptions to operations in particular areas, countries or regions.
The plans also include procedures to maintain and recover business operations
such as stockpiling critical supplies, identifying alternate supply sources,
inspecting critical functions, reporting operational status, communicating with
interdependent operations, and operating in contingency mode until a return to
normal.
The sectors and groups continue to perform various tests, including on
manufacturing production lines and internal networks. Each business will also be
testing its contingency plans during the third quarter of 1999. In addition, the
Company has planned a test of its overall contingency plans for the third
quarter of 1999.
Personal Communications Segment
The Personal Communications Segment includes both the Personal Communications
Sector (PCS) and the iDEN(R) subscriber business. PCS, which designs, develops,
manufactures and sells Motorola cellular telephones, paging subscriber products,
and paging infrastructure equipment has completed its Year 2000 product review.
40
All Motorola wireless telephones, cordless phones and accessories ever placed on
the market by Motorola either: (i) do not contain internal date storage,
processing, or display capabilities and thus are not impacted by the Year 2000
date change; or (ii) contain internal date storage, processing, or display
capabilities that are Year 2000 Ready. In addition, PCS has systems in place to
ensure that future telephones and accessories sold by the Company will be Year
2000 Ready.
Paging products currently being shipped are Year 2000 Ready. The paging business
has identified customer system upgrades required to enable certain
infrastructure equipment in Asia to be Year 2000 Ready. These upgrades are
scheduled to be complete by August 1999. Paging has posted on its website and
sent in printed form to inquiring customers lists of all its products that have
no internal calendars or clocks and are not materially impacted by the Year
2000, all products that have such clocks and calendars and are Year 2000 Ready,
and a third group of products that have reached the end of their supported life
and, therefore, have not been tested for Year 2000 Readiness. Certain
infrastructure products that require an upgrade to be Year 2000 Ready have been
listed on the website.
Paging's management believes the worst case scenario is that a mission critical
page may not be sent or received as a result of lack of Year 2000 Readiness of
messaging software, infrastructure or pagers and the Company is sued. Management
believes that its efforts at communicating to paging customers the potential for
such failures should reduce the likelihood of this occurring.
Network Solutions Segment
The Network Solutions segment includes the cellular infrastructure business, the
satellite communications business and iDEN infrastructure products.
The cellular infrastructure business designs and develops, manufactures,
installs and services wireless infrastructure equipment for cellular and
personal communications networks. Certain cellular infrastructure products
operate with date sensitivity. The business has developed appropriate hardware
modifications and new versions of software to address the Year 2000 issue. The
business has made upgrades (i.e., hardware modifications and/or new software
versions, as appropriate) available to most of its operator customers. The
business sells systems throughout the world and trained technicians are in the
process of installing these upgrades.
The cellular infrastructure business has communicated to customers and company
customer contacts "work-arounds" for certain systems that will not be upgraded.
A "work-around" gives the operator necessary procedures to keep the system
operating on and after January 1, 2000. If a customer does not follow the
recommended procedures it is likely that the system will not recognize certain
dates properly, affecting the accuracy of certain data. The business has
concluded that some of its systems are too old to either upgrade or provide a
work-around for Year 2000 issues. It has notified customers with outdated
systems. Additionally, a website provides Year 2000 information on certain
discontinued products. Some customers of discontinued products have been
notified that their system will not work and information has been provided on
needed upgrades and/or replacements. The business has sent out second notices
and has asked for confirmations back from these customers.
41
Management believes that its most reasonably likely worst case scenario related
to the Year 2000 issue is its inability to upgrade all systems before January 1,
2000 due to the significant number of customer locations to be visited and to
delays by customers in scheduling upgrades. As a result, system performance
could be affected and certain data routinely available from those systems could
be inaccurate on and after January 1, 2000 until upgraded. As a result, the
business could incur cost, and potentially be sued as the supplier of those
systems, although its efforts to identify its customers and provide software
solutions should reduce these risks.
The satellite business designs, develops, manufactures, integrates, deploys,
operates and maintains space-based telecommunication systems and related ground
system components. At present, the business consists of one operating system
known as the Iridium(R) System. This system contains date-sensitive functions.
The business has made all necessary hardware and/or software upgrades available
to customers by July 1, 1999. The business anticipates that it will need to
supply technicians to install any such upgrades, and does not presently
anticipate any difficulty in meeting any potential installation needs.
Management believes that the most reasonably likely worst case scenario related
to the Year 2000 issue is a temporary interruption of the Iridium System due to
the inability of the ground segment to communicate with the satellite
constellation. As a result, the satellite business would incur costs in
correcting such a failure. Management believes adequate efforts are in place to
identify potential hardware/software problems and to implement and test
solutions.
Some iDEN(R) infrastructure products operate with date sensitivity. The iDEN
system became Year 2000 Ready when a new system release was completed on June
30, 1999. While the business expects to deploy this release in a timely matter,
it will confront the same resource and installation issues facing the Company's
infrastructure businesses.
Commercial, Government and Industrial Solutions Segment
The segment, consisting of the Commercial, Government and Industrial Solutions
Sector ("CGISS"), manufactures and sells two-way voice and data products and
systems for a variety of worldwide applications. Principal customers for two-way
products include public safety agencies (police, fire, etc.), utilities, diverse
industrial companies, transportation companies and companies in various other
industries. Additionally, CGISS includes the System Solutions Group (SSG),
excluding its satellite business, that is engaged in the design, development,
and production of advanced electronic communications systems and products.
All two-way products currently shipping from factories are Year 2000 Ready with
a few minor exceptions. All customers buying exceptions are fully informed that
these products are not Year 2000 Ready before purchases are made and products
shipped. Some older products operate with date sensitivity, including legacy
Special Products (SPs) and "911 Systems." CGISS has notified or is in the
process of notifying customers of certain of its "911 Systems" in the U.S. that
their systems are not fully Year 2000 Ready. New software for these systems and
the code were available in December 1998 and a test installation of such
software was made in late
42
December 1998. Regular customer installations will continue through the end of
third quarter 1999. SPs are communication systems designed specifically for
particular customers. CGISS cannot assess whether those systems are Year 2000
Ready because the systems must be tested where they are located. CGISS is
contacting customers and developing solutions, usually software upgrades, to
make these systems Year 2000 Ready.
Management believes that the most reasonably likely worst case scenario
involving its business is the failure of a public safety system on January 1,
2000 (or thereafter). As a result, the two-way radio business could potentially
be sued as the supplier of those systems. Management believes that its efforts
to identify the customers of these systems and provide software solutions or
"work arounds" should reduce these risks. SSG has conducted a comprehensive
review of all products and systems sold under contracts and purchase orders
executed since January 1, 1990. Through that process it has been determined that
relatively few of SSG's products or systems contain date-sensitive functions
that are expected to be adversely affected by the Year 2000 issue. SSG is
addressing each of the few products or systems affected in one of four ways.
First, SSG has developed, or is in the process of developing, fixes for some of
the Year 2000 issues discovered and is offering those fixes to its customers.
Second, in some cases, SSG is working directly with customers who have funded
specific testing and corrective actions to products or systems they purchased or
are purchasing under contracts with SSG. Some of these customer-funded fixes are
not expected to be complete until the middle of 1999. Third, "work-arounds" have
been communicated to certain customers when a more elaborate fix is not
necessary for them to keep their products or systems operating on and after
January 1, 2000. Finally, SSG has concluded that some of its products and
systems are too old to either fix or provide a work-around for Year 2000
Readiness. SSG has notified (or made reasonable efforts to notify) customers of
those products or systems for which fixes or work-arounds will not be available.
SSG believes the most reasonably likely worst case scenario related to the Year
2000 issue is the failure of a product or system to operate for a short period
of time after January 1, 2000. As a result, SSG may be sued as a manufacturer of
products or systems that failed. Many of these products or systems were sold to
government customers. Management believes it generally does not have legal
liability to these customers.
Semiconductor Products Segment
The segment, consisting of the Semiconductor Product Sector ("SPS"), has
completed an extensive review of its products to determine if they are Year 2000
Ready. The vast majority of these products are Year 2000 Ready. A limited number
of products that contain a real-time clock function are identified as having a
potential Year 2000 issue with the manner in which years are tracked. In
addition, it is possible that an SPS semiconductor may experience "year 2000
readiness" issues due to the manner in which a customer has programmed the
semiconductor or due to the manner in which the semiconductor is incorporated
into a customer system or product. SPS is also making information available to
its customers on these potential Year 2000 readiness issues.
Literature on the Year 2000 issue references what is referred to as the
"embedded chip" Year 2000 issue or the "embedded systems" Year 2000 issue. (The
word "chip" is a short-hand reference for a semiconductor product.)
43
Many common electronic products contain "chips" or "systems" containing chips
that are incorporated or "embedded" into the product. If these "chips" or
"systems" experience Year 2000 readiness issues, due to the manner in which they
are programmed, the product may malfunction. Because this programming is
customer defined, the extent to which the malfunctioning of these products may
occur due to a Year 2000 Readiness issue with a SPS semiconductor is unknown at
this time.
With relatively few internal items from the global multi-phase approach
remaining to be fixed, validated, and solutions deployed throughout the
organization, SPS, in conjunction with the newly formed High Tech Consortium -
Year 2000 and Beyond, is focusing on assessing external critical suppliers,
including utilities and critical transportation. This effort is global in scope.
In addition, SPS is taking actions to make information available on the
potential Year 2000 issues with the real time clocks and the customer
programming of SPS semiconductor products. Finally, the business is reconfirming
the readiness of its environmental health and safety systems.
Integrated Electronic Systems Sector (IESS)
The Integrated Electronic Systems Sector (IESS) manufactures and sells
automotive and industrial electronics, energy storage products and systems,
electronic fluorescent ballasts and computer system products.
IESS has completed formal assessment of "Year 2000 Readiness" of its products
manufactured within the last eight years and its manufacturing facilities. Other
than embedded board and system products, and Global Positioning System
receivers, these products do not contain date-sensitive functions, excluding
customer provided software incorporated in such products, for which IESS does
not have sufficient information in most cases to conduct an evaluation of
whether such functions are included. Motorola has advised its customers that
responsibility for evaluating this software is that of the customer. The sector
is substantially complete with the Six-Phase Program. The remaining projects
relate to a few internal systems and pieces of manufacturing equipment that the
sector is working to ensure that will be ready.
In the case of Global Positioning System receivers, engineering analysis is
complete on the most current version, and the products are Year 2000 Ready. The
operation of such receivers is dependent on the proper functioning of the Global
Positioning satellite system maintained and operated by the Federal government,
and is outside of the control of Motorola. There is a second date-related issue
for these products, relating to the "1024 weeks" method of date calculation used
in the satellites, which will potentially impact the GPS in August 1999. The
products are believed to be Year 2000 Ready based on completed engineering
evaluation and simulator testing on all but some older products. Simulator
testing of older products will be undertaken when representative samples are
identified.
In the case of embedded boards, systems and software products that are
manufactured by the Motorola Computer Group (MCG), some of the older products do
not meet Motorola's definition of Year 2000 Ready. In many of these cases, MCG
has made fixes available to its customers to cure the problem. Although it is
difficult to measure any potential liability from non-Year 2000 Ready products,
MCG believes the risks are relatively small based on the following. Since
October 1, 1998, MCG has ceased shipping any
44
products that are not Year 2000 Ready without a waiver from the customer. Fixes
have been made available for products that may remain under warranty after 1999.
Many products which are outside the warranty period, have been updated over the
years with products that are Year 2000 Ready. Other potential liability may
arise in cases where it is not known in what applications the products are being
used. There is always the possibility that some products have been incorporated
by customers into critical use applications. All of the known cases are being
evaluated but Motorola believes that this is the customer's responsibility.
The business has reviewed the year 2000 readiness of its key suppliers.
Suppliers that are considered "high-risk" vendors because of Year 2000 issues
have been identified. The sector continues to assess these suppliers and has
developed contingency plans that may include the use of alternate suppliers to
minimize any potential risk.
Internet and Networking Group (ING)
ING manufactures and sells modems, data communication devices and equipment that
enables voice, video and data communications over private and public networks.
All data communications equipment and modems currently sold by ING are Year 2000
Ready. Some of the older products, including some network management and router
software products, do not meet Motorola's definition of Year 2000 Ready. In many
of these cases, ING has made fixes available to its customers. Some products
have also reached the end of their supported life and, therefore, have not been
tested for Year 2000 Readiness.
Management believes that the most reasonably likely worst case scenario
involving its business is the failure of a mission critical or financial
communications system on January 1, 2000 (or thereafter). As a result, ING could
potentially be sued as the supplier of the communications equipment. Management
believes that its efforts to notify its customers of products with issues and
provide software solutions should reduce these risks.
The Company has made forward-looking statements regarding its Year 2000 Program.
Those statements include: the Company's expectations about when it will be "Year
2000 Ready"; the Company's expectations about the impact of the Year 2000 issue
on its ability to continue to operate on and after January 1, 2000; the
readiness of its suppliers; the costs associated with the Year 2000 Program; and
worst case scenarios. The Company has described many of the risks associated
with those forward-looking statements above. However, the Company wishes to
caution the reader that there are many factors that could cause its actual
results to differ materially from those stated in the forward-looking
statements. This is especially the case because many aspects of its Year 2000
Program are outside its control such as the performance of many thousands of
third-party suppliers, customers and end-users. As a global company it operates
in many different countries, some of which may not be addressing the Year 2000
issues to the same extent as in the United States. As a result, there may be
unforeseen issues in different parts of the world. All of these factors make it
impossible for the Company to ensure that it will be able to resolve all Year
2000 issues in a timely manner to avoid materially adversely affecting its
operations or business or exposing the Company to third-party liability.
45
Euro Conversion:
- ---------------
For disclosure regarding the impact to the Company from the introduction of the
euro, see the information contained under the caption "Euro Conversion" on pages
F-13 and F-14 of the Company's Proxy Statement for its 1999 annual meeting of
stockholders.
Outlook:
- -------
The Company expects improving economic conditions throughout much of the world,
led by Asia and Europe. In addition, the successful results of the Company's
manufacturing consolidation, cost reduction and restructuring programs have set
the stage for improved long-term growth.
During the first half of 1999, the Company has entered into significant
alliances and partnerships that are expected to enhance its ability to provide
end-to-end solutions for its customers. While these relationships are not yet
benefiting its financial results, they give the Company the opportunity to
create new markets and gain leadership in providing integrated communications
solutions and embedded electronics solutions, the Company's two major focuses.
The Company is also committed to invest heavily in a future where wireless
Internet technology will change the way the world communicates, and where
embedded electronics create new possibilities for people everywhere.
Business Risks:
- --------------
Statements concerning the Company's expectations about the Company's renewal
plan, the completion of the SpectraPoint Wireless transaction, the outcome,
timing and impact of certain pending business and asset sales, the outcome and
impact of events related to Iridium LLC, Motorola's 1999 depreciation expense,
interest expense, tax rate, capital expenditures and research and development
expenditures, and the statements in "Review and Outlook" are forward-looking and
involve risks and uncertainties. The Company wishes to caution the reader that
the factors below and those in the Company's 1999 Proxy Statement on pages F-15
through F-18, in its 10-Q for the period ending April 3, 1999 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) the ability
of Motorola to complete its renewal plan in a timely manner and the continued
success of those efforts; (ii)continued improvement in the semiconductor
industry and the company's participation in that improvement; (iii) continued
gains in the digital wireless telephone market and market acceptance of new
products; (iv) continued improving economic conditions throughout much of the
world, particularly Asia; (v) the conclusion of pending sales of businesses and
assets which are subject to conditions, many of which are out of the Company's
control; (vi) the outcome of Iridium LLC's refinancing efforts and the impact on
the Company, including the Company's investment in Iridium LLC and the
Iridium(R) project, its contracts related to the Iridium project and its
satellite business; (vii) pricing pressures and demand for the Company's
products especially in light of the current economic conditions in parts of
Asia, Latin America and other emerging markets; (viii) the success of alliances
and agreements with other companies to develop new products and services; (ix)
product and technology development and commercialization risks, including for
newer digital products and Iridium products and services; and (x) unanticipated
impact of
46
Year 2000 issues, particularly the failure of products or services of major
suppliers to function properly in the Year 2000 and reduced purchases by
customers because of the adverse impact of Year 2000 issues on their businesses.
Iridium(R) is a registered trademark and service mark of Iridium LLC.
47
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: October 28, 1999 By: /s/ Anthony Knapp
- ----------------------- ---------------------
Anthony Knapp
Corporate Vice President and Controller
(Chief Accounting Officer and Duly
Authorized Officer of the Registrant)
48